Republic of the Philippines Frankfurter, arising out of a specific problem, certain requirements of its by-laws before new inherent
s of its by-laws before new inherent in his duty to settle her estate and
SUPREME COURT
Manila
EN BANC
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE
PERKINS, deceased. RENATO D.
TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-
appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-
appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for
oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal
of the domiciliary administrator, the County
Trust Company of New York, United States of
America, of the estate of the deceased Idonah
Slade Perkins, who died in New York City on
March 27, 1960, to surrender to the ancillary
administrator in the Philippines the stock
certificates owned by her in a Philippine
corporation, Benguet Consolidated, Inc., to
satisfy the legitimate claims of local creditors,
the lower court, then presided by the Honorable
Arsenio Santos, now retired, issued on May 18,
1964, an order of this tenor: "After considering
the motion of the ancillary administrator, dated
February 11, 1964, as well as the opposition filed
by the Benguet Consolidated, Inc., the Court
hereby (1) considers as lost for all purposes in
connection with the administration and
liquidation of the Philippine estate of Idonah
Slade Perkins the stock certificates covering the
33,002 shares of stock standing in her name in
the books of the Benguet Consolidated, Inc., (2)
orders said certificates cancelled, and (3) directs
said corporation to issue new certificates in lieu
thereof, the same to be delivered by said
corporation to either the incumbent ancillary
administrator or to the Probate Division of this
Court."1
From such an order, an appeal was taken to this
Court not by the domiciliary administrator, the
County Trust Company of New York, but by the
Philippine corporation, the Benguet
Consolidated, Inc. The appeal cannot possibly
prosper. The challenged order represents a
response and expresses a policy, to paraphrase
addressed to the attainment of specific ends by
the use of specific remedies, with full and ample
support from legal doctrines of weight and
significance.
The facts will explain why. As set forth in the
brief of appellant Benguet Consolidated, Inc.,
Idonah Slade Perkins, who died on March 27,
1960 in New York City, left among others, two
stock certificates covering 33,002 shares of
appellant, the certificates being in the possession
of the County Trust Company of New York, which
as noted, is the domiciliary administrator of the
estate of the deceased.2 Then came this portion
of the appellant's brief: "On August 12, 1960,
Prospero Sanidad instituted ancillary
administration proceedings in the Court of First
Instance of Manila; Lazaro A. Marquez was
appointed ancillary administrator, and on
January 22, 1963, he was substituted by the
appellee Renato D. Tayag. A dispute arose
between the domiciary administrator in New
York and the ancillary administrator in the
Philippines as to which of them was entitled to
the possession of the stock certificates in
question. On January 27, 1964, the Court of First
Instance of Manila ordered the domiciliary
administrator, County Trust Company, to
"produce and deposit" them with the ancillary
administrator or with the Clerk of Court. The
domiciliary administrator did not comply with
the order, and on February 11, 1964, the
ancillary administrator petitioned the court to
"issue an order declaring the certificate or
certificates of stocks covering the 33,002 shares
issued in the name of Idonah Slade Perkins by
Benguet Consolidated, Inc., be declared [or]
considered as lost."3
It is to be noted further that appellant Benguet
Consolidated, Inc. admits that "it is immaterial"
as far as it is concerned as to "who is entitled to
the possession of the stock certificates in
question; appellant opposed the petition of the
ancillary administrator because the said stock
certificates are in existence, they are today in the
possession of the domiciliary administrator, the
County Trust Company, in New York, U.S.A...."4
It is its view, therefore, that under the
circumstances, the stock certificates cannot be
declared or considered as lost. Moreover, it
would allege that there was a failure to observe
stock certificates could be issued. Hence, its
appeal.
As was made clear at the outset of this opinion,
the appeal lacks merit. The challenged order
constitutes an emphatic affirmation of judicial
authority sought to be emasculated by the wilful
conduct of the domiciliary administrator in
refusing to accord obedience to a court decree.
How, then, can this order be stigmatized as
illegal?
As is true of many problems confronting the
judiciary, such a response was called for by the
realities of the situation. What cannot be ignored
is that conduct bordering on wilful defiance, if it
had not actually reached it, cannot without
undue loss of judicial prestige, be condoned or
tolerated. For the law is not so lacking in
flexibility and resourcefulness as to preclude
such a solution, the more so as deeper reflection
would make clear its being buttressed by
indisputable principles and supported by the
strongest policy considerations.
It can truly be said then that the result arrived at
upheld and vindicated the honor of the judiciary
no less than that of the country. Through this
challenged order, there is thus dispelled the
atmosphere of contingent frustration brought
about by the persistence of the domiciliary
administrator to hold on to the stock certificates
after it had, as admitted, voluntarily submitted
itself to the jurisdiction of the lower court by
entering its appearance through counsel on June
27, 1963, and filing a petition for relief from a
previous order of March 15, 1963.
Thus did the lower court, in the order now on
appeal, impart vitality and effectiveness to what
was decreed. For without it, what it had been
decided would be set at naught and nullified.
Unless such a blatant disregard by the
domiciliary administrator, with residence
abroad, of what was previously ordained by a
court order could be thus remedied, it would
have entailed, insofar as this matter was
concerned, not a partial but a well-nigh complete
paralysis of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not
dispute the power of the appellee ancillary
administrator to gain control and possession of
all assets of the decedent within the jurisdiction
of the Philippines. Nor could it. Such a power is
satisfy the claims of local creditors.5 As Justice
Tuason speaking for this Court made clear, it is a
"general rule universally recognized" that
administration, whether principal or ancillary,
certainly "extends to the assets of a decedent
found within the state or country where it was
granted," the corollary being "that an
administrator appointed in one state or country
has no power over property in another state or
country."6
It is to be noted that the scope of the power of
the ancillary administrator was, in an earlier
case, set forth by Justice Malcolm. Thus: "It is
often necessary to have more than one
administration of an estate. When a person dies
intestate owning property in the country of his
domicile as well as in a foreign country,
administration is had in both countries. That
which is granted in the jurisdiction of decedent's
last domicile is termed the principal
administration, while any other administration is
termed the ancillary administration. The reason
for the latter is because a grant of administration
does not ex proprio vigore have any effect
beyond the limits of the country in which it is
granted. Hence, an administrator appointed in a
foreign state has no authority in the
[Philippines]. The ancillary administration is
proper, whenever a person dies, leaving in a
country other than that of his last domicile,
property to be administered in the nature of
assets of the deceased liable for his individual
debts or to be distributed among his heirs."7
It would follow then that the authority of the
probate court to require that ancillary
administrator's right to "the stock certificates
covering the 33,002 shares ... standing in her
name in the books of [appellant] Benguet
Consolidated, Inc...." be respected is equally
beyond question. For appellant is a Philippine
corporation owing full allegiance and subject to
the unrestricted jurisdiction of local courts. Its
shares of stock cannot therefore be considered in
any wise as immune from lawful court orders.
Our holding in Wells Fargo Bank and Union v.
Collector of Internal Revenue8 finds application.
"In the instant case, the actual situs of the shares
of stock is in the Philippines, the corporation
being domiciled [here]." To the force of the
above undeniable proposition, not even
appellant is insensible. It does not dispute it. Nor
could it successfully do so even if it were so
minded.
2. In the face of such incontrovertible doctrines
that argue in a rather conclusive fashion for the
legality of the challenged order, how does
appellant, Benguet Consolidated, Inc. propose to
carry the extremely heavy burden of persuasion
of precisely demonstrating the contrary? It
would assign as the basic error allegedly
committed by the lower court its "considering as
lost the stock certificates covering 33,002 shares
of Benguet belonging to the deceased Idonah
Slade Perkins, ..."9 More specifically, appellant
would stress that the "lower court could not
"consider as lost" the stock certificates in
question when, as a matter of fact, his Honor the
trial Judge knew, and does know, and it is
admitted by the appellee, that the said stock
certificates are in existence and are today in the
possession of the domiciliary administrator in
New York."10
There may be an element of fiction in the above
view of the lower court. That certainly does not
suffice to call for the reversal of the appealed
order. Since there is a refusal, persistently
adhered to by the domiciliary administrator in
New York, to deliver the shares of stocks of
appellant corporation owned by the decedent to
the ancillary administrator in the Philippines,
there was nothing unreasonable or arbitrary in
considering them as lost and requiring the
appellant to issue new certificates in lieu thereof.
Thereby, the task incumbent under the law on
the ancillary administrator could be discharged
and his responsibility fulfilled.
Any other view would result in the compliance to
a valid judicial order being made to depend on
the uncontrolled discretion of the party or entity,
in this case domiciled abroad, which thus far has
shown the utmost persistence in refusing to
yield obedience. Certainly, appellant would not
be heard to contend in all seriousness that a
judicial decree could be treated as a mere scrap
of paper, the court issuing it being powerless to
remedy its flagrant disregard.
It may be admitted of course that such alleged
loss as found by the lower court did not
correspond exactly with the facts. To be more
blunt, the quality of truth may be lacking in such
a conclusion arrived at. It is to be remembered
however, again to borrow from Frankfurter,
"that fictions which the law may rely upon in the
pursuit of legitimate ends have played an
important part in its development."11
Speaking of the common law in its earlier period,
Cardozo could state fictions "were devices to
advance the ends of justice, [even if] clumsy and
at times offensive."12 Some of them have
persisted even to the present, that eminent
jurist, noting "the quasi contract, the adopted
child, the constructive trust, all of flourishing
vitality, to attest the empire of "as if" today."13 He
likewise noted "a class of fictions of another
order, the fiction which is a working tool of
thought, but which at times hides itself from
view till reflection and analysis have brought it
to the light."14
What cannot be disputed, therefore, is the at
times indispensable role that fictions as such
played in the law. There should be then on the
part of the appellant a further refinement in the
catholicity of its condemnation of such judicial
technique. If ever an occasion did call for the
employment of a legal fiction to put an end to the
anomalous situation of a valid judicial order
being disregarded with apparent impunity, this
is it. What is thus most obvious is that this
particular alleged error does not carry
persuasion.
3. Appellant Benguet Consolidated, Inc. would
seek to bolster the above contention by its
invoking one of the provisions of its by-laws
which would set forth the procedure to be
followed in case of a lost, stolen or destroyed
stock certificate; it would stress that in the event
of a contest or the pendency of an action
regarding ownership of such certificate or
certificates of stock allegedly lost, stolen or
destroyed, the issuance of a new certificate or
certificates would await the "final decision by [a]
court regarding the ownership [thereof]."15
Such reliance is misplaced. In the first place,
there is no such occasion to apply such by-law. It
is admitted that the foreign domiciliary
administrator did not appeal from the order now
in question. Moreover, there is likewise the
express admission of appellant that as far as it is
concerned, "it is immaterial ... who is entitled to
the possession of the stock certificates ..." Even if
such were not the case, it would be a legal
absurdity to impart to such a provision
conclusiveness and finality. Assuming that a
contrariety exists between the above by-law and
the command of a court decree, the latter is to be
followed.
It is understandable, as Cardozo pointed out, that
the Constitution overrides a statute, to which,
however, the judiciary must yield deference,
when appropriately invoked and deemed
applicable. It would be most highly unorthodox,
however, if a corporate by-law would be
accorded such a high estate in the jural order
that a court must not only take note of it but
yield to its alleged controlling force.
The fear of appellant of a contingent liability
with which it could be saddled unless the
appealed order be set aside for its inconsistency
with one of its by-laws does not impress us. Its
obedience to a lawful court order certainly
constitutes a valid defense, assuming that such
apprehension of a possible court action against it
could possibly materialize. Thus far, nothing in
the circumstances as they have developed gives
substance to such a fear. Gossamer possibilities
of a future prejudice to appellant do not suffice
to nullify the lawful exercise of judicial authority.
4. What is more the view adopted by appellant
Benguet Consolidated, Inc. is fraught with
implications at war with the basic postulates of
corporate theory.
We start with the undeniable premise that, "a
corporation is an artificial being created by
operation of law...."16 It owes its life to the state,
its birth being purely dependent on its will. As
Berle so aptly stated: "Classically, a corporation
was conceived as an artificial person, owing its
existence through creation by a sovereign
power."17As a matter of fact, the statutory
language employed owes much to Chief Justice
Marshall, who in the Dartmouth College decision
defined a corporation precisely as "an artificial
being, invisible, intangible, and existing only in
contemplation of law."18
The well-known authority Fletcher could
summarize the matter thus: "A corporation is not
in fact and in reality a person, but the law treats
it as though it were a person by process of
fiction, or by regarding it as an artificial person
distinct and separate from its individual
stockholders.... It owes its existence to law. It is
an artificial person created by law for certain
specific purposes, the extent of whose existence,
powers and liberties is fixed by its
charter."19 Dean Pound's terse summary, a
juristic person, resulting from an association of
human beings granted legal personality by the
state, puts the matter neatly.20
There is thus a rejection of
Gierke's genossenchaft theory, the basic theme of
which to quote from Friedmann, "is the reality of
the group as a social and legal entity,
independent of state recognition and
concession."21 A corporation as known to
Philippine jurisprudence is a creature without
any existence until it has received the
imprimatur of the state according to law. It is
logically inconceivable therefore that it will have
rights and privileges of a higher priority than
that of its creator. More than that, it cannot
legitimately refuse to yield obedience to acts of
its state organs, certainly not excluding the
judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes
into being, following American law still of
persuasive authority in our jurisdiction, comes
more often within the ken of the judiciary than
the other two coordinate branches. It institutes
the appropriate court action to enforce its right.
Correlatively, it is not immune from judicial
control in those instances, where a duty under
the law as ascertained in an appropriate legal
proceeding is cast upon it.
To assert that it can choose which court order to
follow and which to disregard is to confer upon it
not autonomy which may be conceded but
license which cannot be tolerated. It is to argue
that it may, when so minded, overrule the state,
the source of its very existence; it is to contend
that what any of its governmental organs may
lawfully require could be ignored at will. So
extravagant a claim cannot possibly merit
approval.
5. One last point. In Viloria v. Administrator of
Veterans Affairs,22 it was shown that in a
guardianship proceedings then pending in a
lower court, the United States Veterans
Administration filed a motion for the refund of a
certain sum of money paid to the minor under
guardianship, alleging that the lower court had
previously granted its petition to consider the
deceased father as not entitled to guerilla
benefits according to a determination arrived at
by its main office in the United States. The
motion was denied. In seeking a reconsideration does not succeed. The deplorable consequences
of such order, the Administrator relied on an attendant on appellant prevailing attest to the
American federal statute making his decisions necessity of negative response from us. That is
"final and conclusive on all questions of law or what appellant will get.
fact" precluding any other American official to That is all then that this case presents. It is
examine the matter anew, "except a judge or obvious why the appeal cannot succeed. It is
judges of the United States always easy to conjure extreme and even
court."23 Reconsideration was denied, and the oppressive possibilities. That is not decisive. It
Administrator appealed. does not settle the issue. What carries weight
In an opinion by Justice J.B.L. Reyes, we and conviction is the result arrived at, the just
sustained the lower court. Thus: "We are of the solution obtained, grounded in the soundest of
opinion that the appeal should be rejected. The legal doctrines and distinguished by its
provisions of the U.S. Code, invoked by the correspondence with what a sense of realism
appellant, make the decisions of the U.S. requires. For through the appealed order, the
Veterans' Administrator final and conclusive imperative requirement of justice according to
when made on claims property submitted to him law is satisfied and national dignity and honor
for resolution; but they are not applicable to the maintained.
present case, where the Administrator is not WHEREFORE, the appealed order of the
acting as a judge but as a litigant. There is a great Honorable Arsenio Santos, the Judge of the Court
difference between actions against the of First Instance, dated May 18, 1964, is affirmed.
Administrator (which must be filed strictly in With costs against oppositor-appelant Benguet
accordance with the conditions that are imposed Consolidated, Inc.
by the Veterans' Act, including the exclusive Makalintal, Zaldivar and Capistrano, JJ., concur.
review by United States courts), and those Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and
actions where the Veterans' Administrator seeks Castro, JJ., concur in the result.
a remedy from our courts and submits to their
jurisdiction by filing actions therein. Our
attention has not been called to any law or treaty
that would make the findings of the Veterans'
Administrator, in actions where he is a party,
conclusive on our courts. That, in effect, would
deprive our tribunals of judicial discretion and
render them mere subordinate instrumentalities
of the Veterans' Administrator."
It is bad enough as the Viloria decision made
patent for our judiciary to accept as final and
conclusive, determinations made by foreign
governmental agencies. It is infinitely worse if
through the absence of any coercive power by
our courts over juridical persons within our
jurisdiction, the force and effectivity of their
orders could be made to depend on the whim or
caprice of alien entities. It is difficult to imagine
of a situation more offensive to the dignity of the
bench or the honor of the country.
Yet that would be the effect, even if unintended,
of the proposition to which appellant Benguet
Consolidated seems to be firmly committed as
shown by its failure to accept the validity of the
order complained of; it seeks its reversal.
Certainly we must at all pains see to it that it
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17295 July 30, 1962
ANG PUE & COMPANY, ET AL., plaintiffs-
appellants,
vs.
SECRETARY OF COMMERCE AND
INDUSTRY, defendant-appellee.
Felicisimo E. Escaran for plaintiffs-appellants.
Office of the Solicitor General for defendant-
appellee.
DIZON, J.:
Action for declaratory relief filed in the Court of
First Instance of Iloilo by Ang Pue & Company,
Ang Pue and Tan Siong against the Secretary of
Commerce and Industry to secure judgment
"declaring that plaintiffs could extend for five
years the term of the partnership pursuant to the
provisions of plaintiffs' Amendment to the
Article of Co-partnership."
The answer filed by the defendant alleged, in
substance, that the extension for another five
years of the term of the plaintiffs' partnership
would be in violation of the provisions of
Republic Act No. 1180.
It appears that on May 1, 1953, Ang Pue and Tan
Siong, both Chinese citizens, organized the
partnership Ang Pue & Company for a term of
five years from May 1, 1953, extendible by their
mutual consent. The purpose of the partnership
was "to maintain the business of general
merchandising, buying and selling at wholesale
and retail, particularly of lumber, hardware and
other construction materials for commerce,
either native or foreign." The corresponding
articles of partnership (Exhibit B) were
registered in the Office of the Securities &
Exchange Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was
enacted to regulate the retail business. It
provided, among other things, that, after its
enactment, a partnership not wholly formed by
Filipinos could continue to engage in the retail
business until the expiration of its term.
On April 15, 1958 — prior to the expiration of
the five-year term of the partnership Ang Pue &
Company, but after the enactment of the
Republic Act 1180, the partners already
mentioned amended the original articles of part
ownership (Exhibit B) so as to extend the term of WHEREFORE, the judgment appealed from is
life of the partnership to another five years. affirmed, with costs.
When the amended articles were presented for Bengzon, C.J., Padilla, Labrador, Concepcion,
registration in the Office of the Securities & Barrera, Paredes, Regala and Makalintal, JJ.,
Exchange Commission on April 16, 1958, concur.
registration was refused upon the ground that Bautista Angelo and Reyes, J.B.L., JJ., took no part.
the extension was in violation of the aforesaid
Act.
From the decision of the lower court dismissing
the action, with costs, the plaintiffs interposed
this appeal.
The question before us is too clear to require an
extended discussion. To organize a corporation
or a partnership that could claim a juridical
personality of its own and transact business as
such, is not a matter of absolute right but a
privilege which may be enjoyed only under such
terms as the State may deem necessary to
impose. That the State, through Congress, and in
the manner provided by law, had the right to
enact Republic Act No. 1180 and to provide
therein that only Filipinos and concerns wholly
owned by Filipinos may engage in the retail
business can not be seriously disputed. That this
provision was clearly intended to apply to
partnership already existing at the time of the
enactment of the law is clearly showing by its
provision giving them the right to continue
engaging in their retail business until the
expiration of their term or life.
To argue that because the original articles of
partnership provided that the partners could
extend the term of the partnership, the
provisions of Republic Act 1180 cannot be
adversely affect appellants herein, is to
erroneously assume that the aforesaid provision
constitute a property right of which the partners
can not be deprived without due process or
without their consent. The agreement contain
therein must be deemed subject to the law
existing at the time when the partners came to
agree regarding the extension. In the present
case, as already stated, when the partners
amended the articles of partnership, the
provisions of Republic Act 1180 were already in
force, and there can be not the slightest doubt
that the right claimed by appellants to extend the
original term of their partnership to another five
years would be in violation of the clear intent
and purpose of the law aforesaid.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 67125 August 24 1990
PHILIPPINE VETERANS BANK EMPLOYEES
UNION-NUBE, DOMINGO C. LOPEZ, HERMAN
B. PASILIAO FELIZARDO B. SARAPAT, LADY
LYDIA B. CORNISTA, ELIZABETH S. KARASIG,
EDUARDO C. NIEVERA, NORMAN T. BAYODA,
REGINO V. TAGUIAM, ROMULO G. GARCIA,
MANUEL A. LAMAN, EDUARDO SJ. BELMONTE,
HERNANI B. LIWANAG, EDUARDO P. CRUZ,
DANILO N. MENDOZA, ELSA J. SILVERIO,
REGINO V. TAGUIAM, JR., ALBERT G.
MALAPIT, MANUEL B. GARCIA, and the Bank
Employees listed in Annex "A" of this
Petition, petitioners,
vs.
THE PHILIPPINE VETERANS BANK Now
renamed PHILIPPINE MILITARY AND
VETERANS BANK, GENERAL FABIAN VER in
his capacity as Chairman of the Board of
Directors of the Philippine Veterans Bank,
and of the Board of Trustees of the Armed
Forces of the Philippines Retirement and
Separation Benefits System, and RAFAEL
ARNALDO in his capacity as President of the
Philippine Veterans Bank, respondents.
G.R. No. 82337 August 24,1990
SIMEON C. MEDALLA, GREGORIO
VENTURANZA, JOSE P. JUANILLO, RAMON P.
MIRANDA, ENRIQUE H.R. ABILA, PEDRO
ACIERTO, SILVINO AGUDO, SANTIAGO
FERNANDEZ, JUAN P. ROSETE, MAXIMO G.
AQUINO, GREGORIO C. DARROLES, ISMAEL T.
ESPIRITU, ERNESTO Y. GUEVARRA, MARIANO
F. INFANTE, VENERANDO E. MANZO, VICENTE
G. VILLADOLID, GUILLERMO A. CRUZ, JORGE
MARIANO, PASCUAL SARMIENTO, RAMON P.
MENDOZA, PEDRO GABRIEL, ANTONIO A. LIM,
MIGUEL T. MARCOS, TOMAS T. NUFABLE,
MARIANO ORTIZ, DOMINGO C. OCTAVO,
MANUEL R. RAMOS, LEONCIO MANALO,
DAYAN S. MAMACO, CORNELIO D. CAUNAR,
MAURO DE LA CRUZ, FIDEL T. VIZMANOS,
FELIPE L. VICENCIO, DAMIAN S. VITO CRUZ,
JUAN LOMBREDAS, MARINA BAUTISTA,
SEGUNDO M. ROSALES, CECLONDO CIEGO,
CECILIO MIRANDA, FERNANDO APOSTOL, incurred an outstanding liability of
ANICETO R. NARCA, CARLOS B. LASMARIAS, P540,835,860.79. This order was opposed by
RICARTE G. REYES, P.D. DELLOSON, LORETO the Union in a supplemental petition for
BANTONIO ERNESTO D. LLAGUNO, prohibition with preliminary injunction filed
CONSTANCIO SEBASTIAN, ELEUTERIO R. on September 25, 1985. On November
VALENZUELA, ISIDRO A. BATHAN, LEON G. 26,1985, the Veterans Federation of the
NOLLIDO, in representation of the remainder Philippines entered the picture and filed with
of the 510,000 veterans or their heirs, as leave of court a petition in intervention
defined in R.A. 3518, and the PHILIPPINE which, besides echoing the original petition
VETERANS BANK, petitioners, in opposing the liquidation, asserted the
vs. additional claim that it was in the process of
CENTRAL BANK OF THE PHILIPPINES, formulating plans for the rehabilitation and
LIQUIDATOR OF THE PHILIPPINE VETERANS eventual expansion of the Bank. This was
BANK, THE LIQUIDATION COURT (RTC, followed by an ancillary petition for the
BRANCH 39, MANILA), SECRETARY OF THE immediate payment of the wage or salary
BUDGET and THE NATIONAL TREASURER, increase ordered by the NLRC in its
respondents. resolution dated September 17,1985. On
March 26,1987, a writ of preliminary
CRUZ, J.: injunction was issued by this Court reading
The Philippine Veterans Bank was created in as follows:
1963 with the hope that it would ensure the NOW THEREFORE, effective immediately and
economic future and perhaps even prosperity until further orders from this Court, you
of the hundreds of thousands of war veterans (Respondent Central Bank of the Philippines,
who were to be its stockholders. For a while and PVB Liquidator), your agents,
the vision grew, but in time it dimmed and representatives, and/or any person or
finally faded as the Bank found itself persons acting upon your orders or in your
enmeshed in financial difficulties that place or stead, are hereby ENJOINED from
threatened its very survival. Now the dream liquidating the Phil. Veterans Bank and from
is in tatters. Efforts are at present being taking or pursuing any act or transaction in
taken to piece together its severed sinews but pursuance of such liquidation, including sales
it is doubtful if the Bank will ever be whole or other disposal of properties of whatever
again. kind, or disbursing PVB funds, except those
I incurred in the course of ordinary
The trouble began when on April 10, 1983, administration of the affairs of the bank,
the Bank was placed under receivership by including payment of accrued and unpaid
virtue of Resolution No. 334 of the Monetary claims of PVB Employees under the 1982-
Board of the Central Bank. The reason was 1985 CBA, all of which should be subject to
the precarious condition of the Bank. A year the prior approval of the respondent
later, on April 26, 1984, the Philippine liquidation court.
Veterans Bank Employees Union questioned On March 18,1988, an original petition for
the retrenchment and reorganization restitution and for extraordinary and
program of the Bank and, on the ground of equitable writs was filed by Simeon
security of tenure, prayed that the said Medalla et al. in their own right and "on
program be prohibited. In its petition, which behalf of the remaining 510,000 World War II
was docketed as G.R. No. 67125, the Union veterans or their heirs." It sought inter alia a
also asked for a temporary restraining order, judicial declaration that the petitioners were
which was issued on May 9, 1984. entitled to the ownership, possession and
Subsequently, while the case was pending, control of the Bank and an order restraining
the Monetary Board ordered the liquidation the Central Bank from disposing of the assets
of the Bank by Resolution No. 612 dated June of the Bank or making any disbursements
7, 1985, after finding that the Bank had therefrom except for ordinary administrative
expenses and for the payment of accrued
wages and other benefits of personnel as
approved by the liquidator court. This
petition was docketed as G.R. No. 82337 and
consolidated with G.R. No. 67125.
Earlier, on June 11, 1987, then Judge
Abelardo M. Dayrit of the Regional Trial
Court of Manila had ordered the payment of
the claims of the employees amounting to
P37,920,310.82. This was followed on
October 21, 1988, by another order issued by
the same court for the payment of retirement
benefits to two former board members of the
Bank, namely, Agustin Marking and Jaime S.
Mejia. Upon the representations of the
petitioners, however, we prevented
enforcement of this order with our
temporary restraining order dated January
12, 1989.
On December 15, 1988, the writ of
preliminary injunction dated March 26,1987,
was amended "to exclude from its coverage
the sale or disposal by the Central Bank or
the Bank Liquidator of the acquired assets of
the PVB." This was done in response to
petitions filed by several persons seeking to
redeem or repurchase the properties which
had earlier been purchased by the Bank
through foreclosure sales.1
On August 25, 1989, another ancillary petition
was filed for the immediate payment of
backwages of the Bank personnel on the regular
payroll as of June 1985 equivalent to five
months' gross salary. On May 25, 1990, the City
Government of Davao filed a motion to lift the
preliminary injunction dated March 26, 1987,
with respect to its deposit of P3,700,000, which
it wanted to withdraw to finance several
programs and projects. And on June 11, 1990,
Dolores V. Molina filed her own motion to
withdraw her deposit of P1,l00,000.00.
II
The Court has purposely delayed resolution of
these cases in the hope that it would not be
necessary to do so in view of the efforts being
taken by the Executive Department for the
rehabilitation of the Bank. The agency in charge
of this matter is the Special Presidential
Committee on the Philippine Veterans Bank,
which was created by Adm. Order No. 29 dated
July 10, 1987, and renewed by Adm. Order No.
62 dated February 23, 1988 and by Adm. Order Central Bank. Such authority is expressly
No. 90 dated September 2, 1988, to study the provided for in the Central Bank Act, as follows:
financial condition of the Bank and determine Sec. 25. Creation of the
the feasibility of its rehabilitation. However, appropriate departments. —
although we may assume that the Committee has In order to assure the
been assiduously pursuing its objectives and observance of this Act and of
while there are optimistic statements every now other pertinent laws, and of
and then that the Bank will be reopening soon, the rules and regulations of
that prospect does not really seem to be in sight the Monetary Board, the
yet. We have therefore decided to finally resolve Central Bank shall have
these cases, applying a judicial solution which, appropriate supervising and
when all is said and done, will still be less examining departments which
acceptable than a practical administrative shall be charged with the
settlement. supervision and periodic or
III special examinations of
The basic issue in these petitions is whether the banking institutions operating
Central Bank has the power to liquidate the in the Philippines, including
Philippine Veterans Bank. all Government credit
The petitioners dispute this authority. In G.R. No. institutions, including their
67125, they claim that as the Bank was created subsidiaries and affiliates of
by a special law, a contractual relationship now non-bank financial
exists between the Government and the intermediaries, and
stockholders of the Bank that cannot be subsidiaries and affiliates of
disturbed without violation of the impairment non-bank financial
clause. The acceptance of the benefits of that law intermediaries performing
by the petitioners had conferred a vested right quasi-banking functions: . . .
on them that cannot now be withdrawn without The supervising and/or
their consent as this would constitute a examining departments shall
deprivation of their property without due discharge their
process of law. Assuming that such benefits responsibilities in accordance
could be validly revoked, this cannot be done by with the instructions of the
the Central Bank only but by the legislature itself Monetary Board.
which conferred the franchise on the Bank in the The department heads and
first place. Moreover, the Central Bank cannot the examiners of the
exercise any authority over the Bank because the supervising and/or examining
latter is itself also a government bank with the departments are hereby
same status as the Development Bank of the authorized to administer
Philippines, the Land Bank of the Philippines, oaths to any director, officer,
and the Philippine National Bank. The Central or employee of any institution
Bank has no control over these government under their respective
lending institutions. supervision or subject to their
We sustain the position of the respondents that examination and to compel
these arguments are not well-taken. the presentation of all books,
The mere fact that the Bank was created by documents, papers or records
special law does not confer upon it extraordinary necessary in their judgment to
privileges over and above those granted similar ascertain the facts relative to
charters like the Development Bank of the the true condition of any
Philippines and the Land Bank of the Philippines. institution as well as the
As a lending institution, it is part of the banking books and records of persons
system and therefore covered by the regulatory and entities relative to or in
power exercised over such entities by the connection with the
operations, activities or
transactions of the institution
under examination.
No restraining order or
injunction shall be issued by
the court enjoining the
Central Bank from examining
any institution subject to
supervision or examination by
the Central Bank, unless there
is convincing proof that the
action of the Central Bank is
plainly arbitrary and made in
bad faith and the petitioner or
plaintiff files with the clerk or
judge of the court in which the
action is pending a bond
executed, in favor of the
Central Bank, in an amount to
be fixed by the court. The
restraining order or
injunction shall be refused or,
if granted, shall be dissolved
upon filing by the Central
Bank of a bond, which shall be
in the form of cash or Central
Bank cashier's check, in an
amount twice the amount of
the bond of the petitioner or
plaintiff conditioned that it
will pay the damages which
the petitioner or plaintiff may
suffer by the refusal or the
dissolution of the injunction.
The provisions of Rule 58 of
the New Rules of Court
insofar as they are applicable
and not inconsistent with the
provisions of this Section shall
govern the issuance and
dissolution of the restraining
order or injunction
contemplated in this Section.
SEC. 25-A. — The department
heads and the examiners of
the supervising and
examining departments, in
the conduct of the periodic or
special examination of
banking institutions may be
specifically authorized by the
Monetary Board to examine,
inquire or look into all
deposits of whatever nature
with banking institutions in
the Philippines including
investments in debt
instruments issued by the
Government of the
Philippines, its political
subdivisions and its
instrumentalities, after being
satisfied that there is
reasonable ground to believe
that a bank fraud or serious
irregularity has been or is
being committed and that it is
necessary to look into the
deposit to establish such
fraud or irregularity.
SEC. 28. Examination and fees.
— It shall be the duty of the
head of the appropriate
supervising and examining
department, personally or by
deputy, at least once in every
twelve months, and at such
other times as either he or the
Monetary Board may deem
expedient, to make an
examination of the books of
every banking institution
within the purview of this Act
and make a report on the
same to the Monetary Board.
Every such institution shall
afford to the head of the
appropriate supervising and
examining departments and
to his authorized deputies full
opportunity to examine its
books, cash and available
assets and general condition
at any time when requested
so to do by the Central
Bank:Provided, however, That
none of the reports and other
papers relative to such
examinations shall be open to
inspection by the public
except insofar as such
publicity is incidental to the
proceeding hereinafter
authorized or is necessary for
the prosecution of violations n
connection with the business
of such institutions. . . .
SEC. 28-A. Appointment of
conservator. — Whenever, on
the basis of a report
submitted by the appropriate
supervising or examining
department, the Monetary
Board finds that a bank or a
non-bank financial
intermediary performing
quasi-banking functions is in a
state of continuing inability or
unwillingness to maintain a
condition of liquidity deemed
adequate to protect the
interest of depositors and
creditors, the Monetary Board
may appoint a conservator to
take charge of the assets,
liabilities, and the
management of that
institution, collect all monies
and debts due said institution
and exercise all powers
necessary to preserve the
assets of the institution,
reorganize the management
thereof, and restore its
viability. He shall have the
power to overrule or revoke
the actions of the previous
management and board of
directors of the bank or non-
bank financial intermediary
performing quasi-banking
functions, any provision of
law to the contrary
notwithstanding, and such
other powers as the Monetary
Board shall deem necessary.
As much as practicable, the
conservator should not be
connected with the Central
Bank but should be competent
and knowledgeable in bank
operations and management. .
. . He shall report and be
responsible to the Monetary
Board until such time as the
Monetary Board is satisfied
that the institution can
continue to operate on its
own and the conservatorship
is no longer necessary. The
conservatorship shall likewise
be terminated should the
Monetary Board, on the basis
of the report of the
conservator or of its own
findings, determine that the
continuance in business of the
institution would involve
probable loss to its depositors
or creditors, in which case the
provision of Section 29 shall
apply.
SEC. 29. Proceedings upon
insolvency. — Whenever, upon
examination by the head of
the appropriate supervising
or examining department or
his examiners or agents into
the condition of any bank or
non-bank financial
intermediary performing
quasi-banking functions, it
shall be disclosed that the
condition of the same is one of
insolvency, or that its
continuance in business
would involve probable loss
to its depositors or creditors,
it shall be the duty of the
department head concerned
forthwith, in writing, to
inform the Monetary Board of
the facts. The Board may,
upon finding the statements
of the department head to be
true, forbid the institution to
do business in the Philippines
and designate an official of the
Central Bank or a person of
recognized competence in
banking or finance as receiver
to immediately take charge of
its assets and liabilities, as
expeditiously as possible
collect and gather all the
assets and administer the
same for the benefit of its
creditors, and represent the
bank personally or through
counsel as he may retain in all
actions or proceedings for or
against the institution,
exercising all the powers
necessary for these purposes
including, but not limited to,
bringing and foreclosing
mortgages in the name of the
bank or non-bank financial
intermediary performing
quasi-banking functions.
The Monetary Board shall
thereupon determine within
sixty days whether the
institution may be recognized
or otherwise placed in such a
condition so that it may be
permitted to resume business
with safety to its depositors
and creditors and the general
public and shall prescribe the
conditions under which such
resumption of business shall
take place as well as the time
for fulfillment of such
conditions. In such case, the
expenses and fees in the
collection and administration
of the assets of the institution
shall be determined by the
Board and shall be paid to the
Central Bank out of the assets
of such institution.
If the Monetary Board shall
determine and confirm within
the said period that the bank
or non-bank financial
intermediary performing
quasi-banking functions is
insolvent or cannot resume
business with safety to its
depositors, creditors and the
general public, it shall, if the
public interest requires, order
its liquidation, indicate the
manner of its liquidation and
approve a liquidation plan
which may, when warranted,
involve disposition of any or
all assets in consideration for
the assumption of equivalent
liabilities. The liquidator
designated as hereunder
provided shall, by the Solicitor
General, file a petition in the
regional trial court reciting
the proceedings which have
been taken and praying the
assistance of the court in the
liquidation of such institution.
The court shall have
jurisdiction in the same
proceedings to assist in the
adjudication of the disputed
claims against the bank or
non-bank financial
intermediary performing
quasi-banking functions and
in the enforcement of
individual liabilities of the
stockholders and do all that is
necessary to preserve the
assets of such institution and
to implement the liquidation
plan approved by the
Monetary Board. The
Monetary Board shall
designate an official of the
Central Bank or a person of
recognized competence in
banking or finance, as
liquidator who shall take over
and continue the functions of
the receiver previously
appointed by the Monetary
Board under this Section. The
liquidator shall, with all
convenient speed, convert the
assets of the banking
institution or non-bank
financial intermediary
performing quasi-banking
functions to money or sell,
assign or otherwise dispose of
the same to creditors and
other parties for the purpose
of paying the debts of such
institution and he may, in the
name of the bank or non-bank
financial intermediary
performing quasi- banking
functions and with the
assistance of counsel as he
may retain, institute such
actions as may be necessary
in the appropriate court to
collect and recover accounts
and assets of such institution
or defend any action filed
against the
institution: Provided, however,
That after having reasonably
established all claims against
the institution, the liquidator
may, with the approval of the
court, effect partial payments
of such claims for assets of the
institution in accordance with
their legal priority.
The assets of an institution
under receivership or
liquidation shall be deemed
in custodia legis in the hands
of the receiver or liquidator
and shall, from the moment of
such receivership or
liquidation, be exempt from
any order of garnishment,
levy, attachment, or
execution.
The provisions of any law to
the contrary notwithstanding,
the actions of the Monetary
Board under this Section,
Section 28-A, and the second
paragraph of Section 34 of
this Act shall be final and
executory, and can be set
aside by a court only if there
is convincing proof, after
hearing, that the action is
plainly arbitrary and made in
bad faith: Provided, That the
same is raised in an
appropriate pleading filed by
the stockholders of record
representing the majority of
the capital stock within ten
(10) days from the date the
receiver takes charge of the
assets and liabilities of the
bank or non-bank financial
intermediary performing
quasi-banking functions or, in
case of conservatorship or
liquidation, within ten (10)
days from receipt of notice by
the said majority stockholders
of said bank or non-bank
financial intermediary of the
order of its placement under
conservatorship or
liquidation. No restraining
order or injunction shall be
issued by any court enjoining
the Central Bank from
implementing its actions
under this Section and the
second paragraph of Section
34 of this Act in the absence of
any convincing proof that the
action of the Monetary Board
is plainly arbitrary and made
in bad faith and the petitioner
or plaintiff files a bond,
executed in favor of the
Central Bank, in an amount to
be fixed by the court. The
restraining order or
injunction shall be refused or,
if granted, shall be dissolved
upon filing by the Central
Bank of a bond, which shall be
in the form of cash or Central
Bank cashier's check, in an
amount twice the amount of
the bond of the petitioner or
plaintiff conditioned that it
will pay the damages which
the petitioner or plaintiff may
suffer by the refusal or the
dissolution of the injunction.
The provisions of Rule 58 of
the New Rules of Court
insofar as they are applicable
and not inconsistent with the
provisions of this Section shall
govern the issuance and
dissolution of the restraining
order or injunction
contemplated in this Section.
Insolvency, under this Act,
shall be understood to mean
that the realizable assets of a
bank or a non-bank financial
intermediary performing
quasi-banking functions as
determined by the Central
Bank are insufficient to meet
its liabilities.
The appointment of a would not follow that the relationship cannot be
conservator under Section 28-
A of this Act or the
appointment of a receiver or
liquidator under this Section
shall be vested exclusively
with the Monetary Board, the
provision of any law, general
or special, to the contrary
notwithstanding.
It is stressed that in Section 25 of the said Act,
the Department of Supervision and Examination
is charged with the supervision and periodic
examination of all banking institutions operating
in the Philippines, including all government
credit institutions. Assuming for the moment
that the Bank is owned or controlled by the
government, it is nevertheless not exempt from
but in fact expressly placed under the
jurisdiction of the Central Bank.
More to the point, R.A. No. 3518 itself, which
created the Philippine Veterans Bank, provides
in its Section 14 that the Bank shall be subject to
the authority of the Department of Supervision
and Examination.
The said Section 14 reads as follows:
Sec. 14. Inspection by
Department of Supervision and
Examination of the Central
Bank. — The Veterans Bank
shall be subject to inspection
by the Department of
Supervision and Examination
of the Central Bank in
accordance with Republic Act
Numbered Two hundred
sixty-five and Republic Act
Numbered Three hundred
thirty-seven.
The purpose of these provisions is to enable the
Central Bank, as the entity charged with the
responsibility of maintaining the stability of the
banking and monetary systems of the country, to
take the necessary steps against any banking
institution whose continued operation may
cause prejudice to its depositors and creditors,
and the general public as well.
Even if it be conceded that the charter of the
Rank constitutes a contract between the
Government and the stockholders of the Bank, it
altered without violating the impairment clause.
This is a too simplistic conclusion that loses sight
of the vulnerability of this "precious little
clause," as it is called, to the inherent powers of
the State when the public interest demands their
exercise. The clause, according to Corwin, "is
lately of negligible importance, and might well be
stricken from the Constitution. For most
practical purposes, in fact, it has been." 2
The undeniable fact is that the notion of public
interest has made such considerable inroads into
the constitutional guaranty that one could validly
say now that it has become the exception rather
than the rule. The impact of the modern society
upon hitherto private agreements has left the
clause in a shambles, as it were, making
practically every contract susceptible to change
on behalf of the public. The modern
understanding is that the contract is protected
by the guaranty only if it does not affect public
interest, but there is hardly any contract now
that does not somehow or other affect public
interest as not to come under the powers of the
State. Part of that understanding therefore is
that, conversely, the contract may be altered
validly if it involves the public interest, to which
private interests must "yield as a postulate of the
existing social order."
In the landmark case of Norman v.
Baltimore, 3 the U.S. Supreme Court stressed that
every contract involving the public interest
suffers a congenital infirmity, and that is its
susceptibility to change whenever required by
the public interest. The police power can be
validly asserted to make that change to meet any
one of the several great public needs, such as, in
that case, regulation of the value of money. In
upholding a legislative enactment providing for
the payment of existing debts dollar for dollar in
the current legal tender, as against contracts
calling for such payment in gold coin of specified
weight and fineness the decision stressed:
Contracts, however express,
cannot fetter the
constitutional authority of the
Congress. Contracts may
create rights of property, but
when contracts deal with a
subject matter which lies
within the control of the
Congress, they have a
congenital infirmity. Parties
cannot remove their
transactions from the reach of
dominant constitutional
power by making contracts
about them.
The need in the case at bar is no less compelling,
to wit, the preservation of the integrity and
stability of our banking system. Unless adequate
and determined efforts are taken by the
government against distressed and mismanaged
banks, public faith in the banking system is
certain to deteriorate to the prejudice of the
national economy itself, not to mention the
losses suffered by the bank depositors, creditors,
and stockholders, who all deserve the protection
of the government. The government cannot
simply cross its arms while the assets of a bank
are being depleted through mismanagement or
irregularities. It is the duty of the Central Bank in
such an event to step in and salvage the
remaining resources of the bank so that they
may not continue to be dissipated or plundered
by those entrusted with their management.
The petitioners' argument that by accepting the
stocks granted to them by the law, the same have
become their inalienable and irrevocable
property is clearly untenable. These
stockholdings do not enjoy any special immunity
over and above shares of stock in any other
corporation, which are always subject to the
vicissitudes of business. Their value may
appreciate or decline or the stocks may become
worthless altogether. Like any other property,
they do not have a fixed but a fluctuating price.
Certainly, the mere acceptance of these shares of
stock by the petitioners did not create any legal
assurance from the Government that their
original value would be preserved and that the
owners could not be deprived of such property
under any circumstance no matter how justified.
Nor is the charter subject to revocation only by
the legislature, as the petitioners also
erroneously contend. The mere circumstance
that the charter was granted directly by
Congress does not signify that only Congress can
modify or abrogate it by another enactment. In
fact, the charter itself says that the Bank shall be
subject to regulation by the Central Bank which
is empowered inter alia, by express provision of
law, to order its liquidation. Also, by its own
terms, the charter will automatically
become functus officio after fifty years and the
Bank itself will cease to exist unless its life is
extended by positive act of the legislature. It may
also be noted that quo warranto proceedings
may be filed against the Bank by the Solicitor
General on behalf of the Republic of the
Philippines pursuant to the Rules of Court on any
of the grounds enumerated in Rule 66 thereof.
All these can be done without the necessity of
direct legislative action and, no less importantly,
without violation of the legislative will.
There is also the practical difficulty of Congress
itself decreeing liquidation, presumably to be
made after examination of the financial condition
of the Bank. In effect, the legislature, through its
corresponding appropriate committees, will be
undertaking the function purposely assigned by
law to the Department of Examination and
Supervision of the Central Bank. This is an
intricate administrative function wisely
entrusted by Congress to the said body, from
which the petitioners would now recall it for its
direct exercise by the lawmaking body. Such a
procedure would bring us back to square one, so
to speak, and revoke the authority confided by
Congress to the Central Bank in recognition of its
established expertise in the regulation of banks.
Coming now to the ownership of the Bank, we
find it is not a government bank, as claimed by
the petitioners. The fact is that under Section
3(b) of its charter, while 51% of the capital stock
of the Bank was initially fully subscribed by the
Republic of the Philippines for and in behalf of
the veterans, their widows, orphans or
compulsory heirs, the corresponding shares of
stock were to be turned over within 5 years from
the organization by the Bank to the said
beneficiaries who would thereafter have the
right to vote such common shares. The balance
of about 49% was to be divided into preferred
shares which would be opened for subscription
by any recognized veteran, widow, orphans or
compulsory heirs of said veteran at the rate of
one preferred share per veteran, on the
condition that in case of failure of any particular
veteran to subscribe for any preferred share of
stock so offered to him within thirty (30) days
from the date of receipt of notice, said share of
stock shall be available for subscription to other
veterans in accordance with such rules or
regulations as may be promulgated by the Board
of Directors. Moreover, under Sec. 6(a), the
affairs of the Bank are managed by a board of
directors composed of eleven members, three of
whom are ex officio members, with the other
eight being elected annually by the stockholders
in the manner prescribed by the Corporation
Law. Significantly, Sec. 28 also provides as
follows:
Sec. 28. Articles of
incorporation. — This Act,
upon its approval, shall be
deemed and accepted to all
legal intents and purposes as
the statutory articles of
incorporation or Charter of
the Philippine Veterans' Bank;
and that, notwithstanding the
provisions of any existing law
to the contrary, said Bank
shall be deemed registered
and duly authorized to do
business and operate as a
commercial bank as of the
date of approval of this Act.
This point is important because the Constitution
provides in its Article IX-B, Section 2(1) that "the
Civil Service embraces all branches, subdivisions,
instrumentalities, and agencies of the
Government, including government-owned or
controlled corporations with original charters."
As the Bank is not owned or controlled by the
Government although it does have an original
charter in the form of R.A. No. 3518, it clearly
does not fall under the Civil Service and should
be regarded as an ordinary commercial
corporation. Section 28 of the said law so
provides. The consequence is that the relations
of the Bank with its employees should be
governed by the labor laws, under which in fact
they have already been paid some of their claims.
Applying the Labor Code, the Court rules that the
petitioners' claim for back wages must be
rejected. The reason is that the employees
making this claim have not been illegally
dismissed but lawfully separated as a result of
the liquidation of the Bank on orders of higher
authority. This move was not the decision of the
Bank; it was forced upon it by the resolution of
the Monetary Board of the Central Bank. Back
pay is awarded for work that could have been
performed by the employee except that he was
prevented from doing so because of his illegal
dismissal by the employer. It is clearly not due in
the case at bar to the employees whose services
were terminated as a result of the forcible
closure of the Bank.
As regards the claims of Marking and Mejia for
the payment of their retirement benefits, which
we restrained temporarily on January 12, 1989,
we find with the public respondents that such
payment is in order. We so hold, considering that
although the said retirees are members of the
board of directors, they are nevertheless covered
by the Retirement Plan of the Bank per the
following pertinent provisions:
Article II, Section 1. — The
following words and phrases,
as used herein shall have the
meaning indicated, unless a
different meaning is plainly
required by the text:
...
c) "Employee" means any
person who is employed by
the Bank on a regular and
permanent basis, including
officers; and such members of
the Board of Director and
other hired workers not
employed on a regular and
permanent basis but who,
because of their extended
service, would qualify under
the retirement categories
under Article IV hereof and
who for purposes of this Plan,
shall be deemed employees.
Article III, Section 1 —
Eligibility at Effective Date
 All employees as herein We agree with the Solicitor General that there is
defined shall automatically be a procedural flaw in the petition, in that-
eligible to participate in the The Rules of Court, the
Plan, as of its effective date. Judiciary Reorganization Act
(Emphasis supplied) of 1980 and the Interim Rules
However, for purposes of the application of of Court quite clearly
Article 110 of the Labor Code, the said directors delineate the jurisdiction of
must be considered managerial employees, or the Supreme Court in civil
officers, and so not entitled to the preference of cases as encompassing a
claims granted thereunder to workers in general review on appeal only on
or the rank-and-file employees. The claims of questions of law as well as
these workers must be accorded priority over all original petitions in certain
other claims, including those of the said special civil actions like
directors, and indeed even of the Government certiorari, prohibition and
itself." This provision, as amended by Republic mandamus.
Act No. 6715, reads as follows: The present petition does not
Article 110. Worker preference come under any of the above.
in case of bankruptcy. In the Obviously, the petition is not
event of bankruptcy or an appeal from the decision of
liquidation of an employer's any lower court or quasi-
business, his workers shall judicial body, as in fact, the
enjoy first preference as same is indeed an original
regards their unpaid wages petition for restitution. Also,
and other monetary claims, the present petition is
any provision of law to the certainly not one for
contrary certiorari, prohibition or
notwithstanding. Such unpaid mandamus because there is
wages and monetary claims no tribunal, board or officer
shall be paid in full before the that has acted without or in
claims of the Government and excess of jurisdiction or with
other creditors may be grave abuse of discretion, or
paid. (Amendments has neglected the
italicized). performance of an act which
Focusing now on G.R. No. 82337, the Court notes the law enjoins as a duty, and
that the petitioners therein are asking that the from-whose acts or
ownership and management of the Bank be negligence the petitioners
turned over to them in accordance with R.A. No. were supposed to have been
3518. They point out that the deficit incurred by aggrieved thereby. On the
the Bank when its liquidation was ordered by the basis alone of jurisdiction, the
Central Bank in 1985 is not imputable to them petition at bar should be
and suggest they can do better in rehabilitating dismissed.
the Bank, given the proper support from the A reading of the instant
Government. For this reason, they ask the Court petition would show,
to order inter alia the Central Bank to grant them however, that the same
the necessary loans and other facilities, the partakes of the nature of
Secretary of the Budget to certify as mandamus because it seeks
appropriated the amount needed to fully pay all judgment directing and
common and preferred shares of the Bank, and commanding the Secretary of
the National Treasurer to release such amounts Budget, the National
to the Bank. Treasurer, the CB, the
Monetary Board and the PVB
Liquidator to do certain Fernan (C.J.), Narvasa, Melencio-Herrera,
specific acts. Unfortunately, Gancayco, Pacalla, Bidin, Cortes, Griño-Aquino,
the facts hereof do not Medialdea and Regalado, concur.
present a case where such Gutierrez, Jr., J., in the results.
offices and officials are, by Paras, J., took no part.
law, mandated to do the Feliciano J., took no part.
adverted acts, even less, that Sarmiento, J., is on leave.
they have neglected to
perform them.
Moreover, from what has already been said of
the power of the Central Bank to regulate
commercial banks, and to order their liquidation
whenever warranted, it would seem that the
affairs of the Bank are best entrusted to the
liquidator court at this time rather than managed
directly by the petitioners. This is no reflection
on their competence and sincerity, not to
mention their genuine concern for the Bank, of
which they are the intended beneficiaries and
owners. It is only that, considering the expertise
of the Central Bank oh this matter, and the
familiarity of the liquidator court with the
ramifications of the problem at hand, we feel it is
advisable that they be allowed, as long as the
administration has not yet adopted its own
plans, to devise the proper steps to relieve the
Bank of its present difficulties.
III
The Court reiterates its hope that the
administrative authorities may still find a way to
rehabilitate the Bank even at this late hour. This
is still possible even with this decision, for all we
are saying here is that the Central Bank has the
power to liquidate the Bank under existing laws
and that, in the present circumstances, its
liquidation may be undertaken under the control
of the liquidator court in accordance with the
procedure prescribed by R.A. No. 265 and the
guidelines herein laid down. Such rehabilitation
may still be ordered by the President of the
Philippines if she sees fit, without violation of the
import of this decision or of the pertinent laws
here interpreted and applied.
WHEREFORE, judgment is hereby rendered: (a)
DISMISSING the petitions in G.R. Nos. 67125 and
82337; and (b) LIFTING the writ of preliminary
injunction dated March 26, 1987, and the
temporary restraining order dated January 21,
1989. Costs against the petitioners.
SO ORDERED.
Republic of the Philippines 2) WHEREAS, the DEFENDANTS bind 1962, a Notice of Sale of the "whole capital stocks Insurance, Inc., for P10,000.00, which was the
SUPREME COURT themselves, jointly and severally, and of the defendants JRS Business Corporation, the highest bid offered. Immediately after the sale,
Manila hereby promise to pay their business name, right of operation, the whole respondent Insurance Company took possession
EN BANC aforementioned obligation to the assets, furnitures and equipments, the total of the proper ties and started running the affairs
G.R. No. L-19891 July 31, 1964 PLAINTIFF at its business address at liabilities, and Net Worth, books of accounts, etc., and operating the business of the JRS Business
J.R.S. BUSINESS CORPORATION, J.R. DA SILVA 301-305 Banquero St., (Ground Floor), etc." of the petitioner corporation was, handed Corporation. Hence, the present appeal.
and A.J. BELTRAN, petitioners, Regina Building, Escolta, Manila, within down. On June 9, the petitioner, thru counsel, It would seem that the matters which need
vs. sixty (60) days from March 16, 1962 or presented an "Urgent Petition for Postponement determination are (1) whether the respondent
IMPERIAL INSURANCE, INC., MACARIO M. on or before May 14, 1962; of Auction Sale and for Release of Levy on the Judge acted without or in excess of his
OFILADA, Sheriff of Manila and 3) WHEREAS, in the event the Business Name and Right to Operate of jurisdiction or with grave abuse of discretion in
HON. AGUSTIN MONTESA, Judge of the Court DEFENDANTS FAIL to pay in full the Defendant JRS Business Corporation", stating promulgating the Order of June 21, 1962,
of First Instance of Manila, respondents. total amount of PESOS SIXTY ONE that petitioners were busy negotiating for a loan denying the motion for postponement of the
Felipe N. Aurea for petitioners. THOUSAND ONE HUNDRED SEVENTY with which to pay the judgment debt; that the scheduled sale at public auction, of the
Tañada, Teehankee and Carreon for respondent TWO & 32/100 (P61,172.32), judgment was for money only and, therefore, properties of petitioner; and (2) whether the
Imperial Insurance, Inc. Philippine Currency, for any reason plaintiff (respondent Insurance Company) was business name or trade name, franchise (right to
PAREDES, J.: whatsoever, on May 14, 1962, the not authorized to take over and appropriate for operate) and capital stocks of the petitioner are
Petitioner J. R. Da Silva, is the President of the PLAINTIFF shall be entitled, as a matter its own use, the business name of the properties or property rights which could be the
J.R.S. Business Corporation, an establishment of right, to move for the execution of defendants; that the right to operate under the subject of levy, execution and sale.
duly franchised by the Congress of the the decision to be rendered in the franchise, was not transferable and could not be The respondent Court's act of postponing the
Philippines, to conduct a messenger and delivery above-entitled case by this Honorable considered a personal or immovable, property, scheduled sale was within the discretion of
express service. On July 12, 1961, the respondent Court based on this COMPROMISE subject to levy and sale. On June 10, 1962, a respondent Judge, the exercise of which, one way
Imperial Insurance, Inc., presented with the CFI AGREEMENT. Supplemental Motion for Release of Execution, or the other, did not constitute grave abuse of
of Manila a complaint (Civ. Case No. 47520), for On March 17, 1962, the lower court rendered was filed by counsel of petitioner JRS Business discretion and/or excess of jurisdiction. There
sum of money against the petitioner corporation. judgment embodying the contents of the said Corporation, claiming that the capital stocks was a decision rendered and the corresponding
After the defendants therein have submitted compromise agreement, the dispositive portion thereof, could not be levied upon and sold under writ of execution was issued. Respondent Judge
their Answer, the parties entered into a of which reads — execution. Under date of June 20, 1962, had jurisdiction over the matter and erroneous
Compromise Agreement, assisted by their WHEREFORE, the Court hereby petitioner's counsel presented a pleading conclusions of law or fact, if any, committed in
respective counsels, the pertinent portions of approves the above-quoted captioned "Very Urgent Motion for the exercise of such jurisdiction are merely
which recite: compromise agreement and renders Postponement of Public Auction Sale and for errors of judgment, not correctible
1) WHEREAS, the DEFENDANTS admit judgment in accordance therewith, Ruling on Motion for Release of Levy on by certiorari (Villa Rey Transit v. Bello, et al., L-
and confess their joint and solidary enjoining the parties to comply the Business Name, Right to Operate and Capital 18957, April 23, 1963, and cases cited therein.)
indebtedness to the PLAINTIFF in the faithfully and strictly with the terms Stocks of JRS Business Corporation". The auction The corporation law, on forced sale of franchises,
full sum of PESOS SIXTY ONE and conditions thereof, without special sale was set for June 21, 1962. In said motion, provides —
THOUSAND ONE HUNDRED SEVENTY- pronouncement as to costs. petitioners alleged that the loan they had applied Any franchise granted to a corporation
TWO & 32/100 (P61,172.32), Wherefore, the parties respectfully for, was to be secured within the next ten (10) to collect tolls or to occupy, enjoy, or
Philippine Currency, itemized as pray that the foregoing stipulation of days, and they would be able to discharge the use public property or any portion of
follows: facts be admitted and approved by this judgment debt. Respondents opposed the said the public domain or any right of way
Honorable Court, without prejudice to motion and on June 21, 1962, the lower court over public property or the public
a) Principal P50,000.00
the parties adducing other evidence to denied the motion for postponement of the domain, and any rights and privileges
b) Interest at prove their case not covered by this auction sale. acquired under such franchise may be
5,706.14 stipulation of facts. 1äwphï1.ñët In the sale which was conducted in the premises levied upon and sold under execution,
12% per annum
On May 15, 1962, one day after the date fixed in of the JRS Business Corporation at 1341 Perez together with the property necessary
c) Liquidated the compromise agreement, within which the St., Paco, Manila, all the properties of said for the enjoyment, the exercise of the
damages at 7% 3,330.58 judgment debt would be paid, but was not, corporation contained in the Notices of Sale powers, and the receipt of the proceeds
per annum respondent Imperial Insurance Inc., filed a dated May 26, 1962, and June 2, 1962 (the latter of such franchise or right of way, in the
"Motion for the Insurance of a Writ of notice being for the whole capital stocks of the same manner and with like effect as
d) Costs of suit 135.60 Execution". On May 23, 1962, a Writ of Execution defendant, JRS Business Corporation, the any other property to satisfy any
was issued by respondent Sheriff of Manila and business name, right of operation, the whole judgment against the
e) Attorney's on May 26, 1962, Notices of Sale were sent out assets, furnitures and equipments, the total corporation: Provided, That the sale of
2,000.00
fees for the auction of the personal properties of the liabilities and Net Worth, books of accounts, etc., the franchise or right of way and the
petitioner J.R.S. Business Corporation. On June 2, etc.), were bought by respondent Imperial property necessary for the enjoyment,
 the exercise of the powers, and the
receipt of the proceeds of said franchise
or right of way is especially decreed and
ordered in the judgment: And provided,
further, That the sale shall not become
effective until confirmed by the court
after due notice. (Sec. 56, Corporation
Law.)
In the case of Gulf Refining Co. v. Cleveland Trust
Co., 108 So., 158, it was held —
The first question then for decision is
the meaning of the word "franchise" in
the statute.
"A franchise is a special
privilege conferred by
governmental authority, and
which does not belong to
citizens of the country
generally as a matter of
common right. ... Its meaning
depends more or less upon
the connection in which the
word is employed and the
property and corporation to
which it is applied. It may
have different significations.
"For practical purposes,
franchises, so far as relating to
corporations, are divisible
into (1) corporate or general
franchises; and (2) special or
secondary franchises. The
former is the franchise to
exist as a corporation, while
the latter are certain rights
and privileges conferred upon
existing corporations, such as
the right to use the streets of a
municipality to lay pipes or
tracks, erect poles or string
wires." 2 Fletcher's
Cyclopedia Corp. See. 1148;
14 C.J. p. 160; Adams v. Yazon
& M. V. R. Co., 24 So. 200, 317,
28 So. 956, 77 Miss. 253, 60
L.R.A. 33 et seq.
The primary franchise of a corporation
that is, the right to exist as such, is
vested "in the individuals who compose
the corporation and not in the
corporation itself" (14 C.J. pp. 160, 161;
Adams v. Railroad, supra; 2 Fletcher's
Cyclopedia Corp. Secs. 1153, 1158; 3
Thompson on Corporations 2d Ed.]
Secs. 2863, 2864),and cannot be
conveyed in the absence of a legislative
authority so to do (14A CJ. 543, 577; 1
Fletcher's Cyc. Corp. Sec. 1224;
Memphis & L.R.R. Co. v. Berry 5 S. Ct.
299, 112 U.S. 609, 28 L.E.d. 837;
Vicksburg Waterworks Co. v. Vicksburg,
26 S. Ct. 660, 202 U.S. 453, 50 L.E.d.
1102, 6 Ann. Cas. 253; Arthur v.
Commercial & Railroad Bank, 9 Smedes
& M. 394, 48 Am. Dec. 719), but the
specify or secondary franchises of a
corporation are vested in the
corporation and may ordinarily be
conveyed or mortgaged under a general
power granted to a corporation to
dispose of its property (Adams v.
Railroad,supra; 14A C.J. 542, 557; 3
Thompson on Corp. [2nd Ed.] Sec.
2909), except such special or secondary
franchises as are charged with a public
use (2 Fletcher's Cyc. Corp. see. 1225;
14A C.J. 544; 3 Thompson on Corp. [2d
Ed.] sec. 2908; Arthur v. Commercial &
R.R. Bank, supra; McAllister v. Plant, 54
Miss. 106).
The right to operate a messenger and express
delivery service, by virtue of a legislative
enactment, is admittedly a secondary franchise
(R.A. No. 3260, entitled "An Act granting the JRS
Business Corporation a franchise to conduct a
messenger and express service)" and, as such,
under our corporation law, is subject to levy and
sale on execution together and including all the
property necessary for the enjoyment thereof.
The law, however, indicates the procedure under
which the same (secondary franchise and the
properties necessary for its enjoyment) may be
sold under execution. Said franchise can be sold
under execution, when such sale is especially
decreed and ordered in the judgment and it
becomes effective only when the sale is
confirmed by the Court after due notice (Sec. 56,
Corp. Law). The compromise agreement and the
judgment based thereon, do not contain any
special decree or order making the franchise
answerable for the judgment debt. The same
thing may be stated with respect to petitioner's
trade name or business name and its capital
stock. Incidentally, the trade name or business
name corresponds to the initials of the President
of the petitioner corporation and there can be no
serious dispute regarding the fact that a trade
name or business name and capital stock are
necessarily included in the enjoyment of the
franchise. Like that of a franchise, the law
mandates, that property necessary for the
enjoyment of said franchise, can only be sold to
satisfy a judgment debt if the decision especially
so provides. As We have stated heretofore, no
such directive appears in the decision. Moreover,
a trade name or business name cannot be sold
separately from the franchise, and the capital
stock of the petitioner corporation or any other
corporation, for the matter, represents the
interest and is the property of stockholders in
the corporation, who can only be deprived
thereof in the manner provided by law (Therbee
v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re
Wells' Estate, 144 N.W. 174, 177, Wis. 294, cited
in 6 Words and Phrases, 109).
It, therefore, results that the inclusion of the
franchise, the trade name and/or business name
and the capital stock of the petitioner
corporation, in the sale of the properties of the
JRS Business Corporation, has no justification.
The sale of the properties of petitioner
corporation is set aside, in so far as it authorizes
the levy and sale of its franchise, trade name and
capital stocks. Without pronouncement as to
costs.
Bengzon, C.J., Padilla, Bautista Angelo,
Concepcion, Reyes, J.B.L., Regala and Makalintal,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4935 May 28, 1954
J. M. TUASON & CO., INC., represented by it
Managing PARTNER, GREGORIA ARANETA,
INC., plaintiff-appellee,
vs.
QUIRINO BOLAÑOS, defendant-appellant.
Araneta and Araneta for appellee.
Jose A. Buendia for appellant.
REYES, J.:
This is an action originally brought in the Court
of First Instance of Rizal, Quezon City Branch, to
recover possesion of registered land situated in
barrio Tatalon, Quezon City.
Plaintiff's complaint was amended three times
with respect to the extent and description of the
land sought to be recovered. The original
complaint described the land as a portion of a lot
registered in plaintiff's name under Transfer
Certificate of Title No. 37686 of the land record
of Rizal Province and as containing an area of 13
hectares more or less. But the complaint was
amended by reducing the area of 6 hectares,
more or less, after the defendant had indicated
the plaintiff's surveyors the portion of land
claimed and occupied by him. The second
amendment became necessary and was allowed
following the testimony of plaintiff's surveyors
that a portion of the area was embraced in
another certificate of title, which was plaintiff's
Transfer Certificate of Title No. 37677. And still
later, in the course of trial, after defendant's
surveyor and witness, Quirino Feria, had
testified that the area occupied and claimed by
defendant was about 13 hectares, as shown in
his Exhibit 1, plaintiff again, with the leave of
court, amended its complaint to make its
allegations conform to the evidence.
Defendant, in his answer, sets up prescription
and title in himself thru "open, continuous,
exclusive and public and notorious possession
(of land in dispute) under claim of ownership,
adverse to the entire world by defendant and his
predecessor in interest" from "time in-
memorial". The answer further alleges that
registration of the land in dispute was obtained
by plaintiff or its predecessors in interest thru
"fraud or error and without knowledge (of) or
interest either personal or thru publication to
defendant and/or predecessors in interest." The
answer therefore prays that the complaint be
dismissed with costs and plaintiff required to
reconvey the land to defendant or pay its value.
After trial, the lower court rendered judgment
for plaintiff, declaring defendant to be without
any right to the land in question and ordering
him to restore possession thereof to plaintiff and
to pay the latter a monthly rent of P132.62 from
January, 1940, until he vacates the land, and also
to pay the costs.
Appealing directly to this court because of the
value of the property involved, defendant makes
the following assignment or errors:
I. The trial court erred in not dismissing
the case on the ground that the case
was not brought by the real property in
interest.
II. The trial court erred in admitting the
third amended complaint.
III. The trial court erred in denying
defendant's motion to strike.
IV. The trial court erred in including in
its decision land not involved in the
litigation.
V. The trial court erred in holding that
the land in dispute is covered by
transfer certificates of Title Nos. 37686
and 37677.
Vl. The trial court erred in not finding
that the defendant is the true and
lawful owner of the land.
VII. The trial court erred in finding that
the defendant is liable to pay the
plaintiff the amount of P132.62
monthly from January, 1940, until he
vacates the premises.
VIII. The trial court erred in not
ordering the plaintiff to reconvey the
land in litigation to the defendant.
As to the first assigned error, there is nothing to
the contention that the present action is not
brought by the real party in interest, that is, by J.
M. Tuason and Co., Inc. What the Rules of Court
require is that an action be brought in the name
of, but not necessarily by, the real party in
interest. (Section 2, Rule 2.) In fact the practice is
for an attorney-at-law to bring the action, that is
to file the complaint, in the name of the plaintiff.
That practice appears to have been followed in
this case, since the complaint is signed by the law
firm of Araneta and Araneta, "counsel for
plaintiff" and commences with the statement
"comes now plaintiff, through its undersigned
counsel." It is true that the complaint also states
that the plaintiff is "represented herein by its
Managing Partner Gregorio Araneta, Inc.",
another corporation, but there is nothing against
one corporation being represented by another
person, natural or juridical, in a suit in court. The
contention that Gregorio Araneta, Inc. can not act
as managing partner for plaintiff on the theory
that it is illegal for two corporations to enter into
a partnership is without merit, for the true rule
is that "though a corporation has no power to
enter into a partnership, it may nevertheless
enter into a joint venture with another where the
nature of that venture is in line with the business
authorized by its charter." (Wyoming-Indiana Oil
Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2
Fletcher Cyc. of Corp., 1082.) There is nothing in
the record to indicate that the venture in which
plaintiff is represented by Gregorio Araneta, Inc.
as "its managing partner" is not in line with the
corporate business of either of them.
Errors II, III, and IV, referring to the admission of
the third amended complaint, may be answered
by mere reference to section 4 of Rule 17, Rules
of Court, which sanctions such amendment. It
reads:
Sec. 4. Amendment to conform to
evidence. — When issues not raised by
the pleadings are tried by express or
implied consent of the parties, they
shall be treated in all respects, as if they
had been raised in the pleadings. Such
amendment of the pleadings as may be
necessary to cause them to conform to
the evidence and to raise these issues
may be made upon motion of any party
at my time, even of the trial of these
issues. If evidence is objected to at the
trial on the ground that it is not within
the issues made by the pleadings, the
court may allow the pleadings to be
amended and shall be so freely when
the presentation of the merits of the
action will be subserved thereby and
the objecting party fails to satisfy the
court that the admission of such
evidence would prejudice him in
maintaining his action or defense upon
the merits. The court may grant a
continuance to enable the objecting
party to meet such evidence.
Under this provision amendment is not even
necessary for the purpose of rendering judgment
on issues proved though not alleged. Thus,
commenting on the provision, Chief Justice
Moran says in this Rules of Court:
Under this section, American courts
have, under the New Federal Rules of
Civil Procedure, ruled that where the
facts shown entitled plaintiff to relief
other than that asked for, no
amendment to the complaint is
necessary, especially where defendant
has himself raised the point on which
recovery is based, and that the
appellate court treat the pleadings as
amended to conform to the evidence,
although the pleadings were not
actually amended. (I Moran, Rules of
Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of
error II, III, and IV are without merit..
Let us now pass on the errors V and VI.
Admitting, though his attorney, at the early stage
of the trial, that the land in dispute "is that
described or represented in Exhibit A and in
Exhibit B enclosed in red pencil with the name
Quirino Bolaños," defendant later changed his
lawyer and also his theory and tried to prove
that the land in dispute was not covered by
plaintiff's certificate of title. The evidence,
however, is against defendant, for it clearly
establishes that plaintiff is the registered owner
of lot No. 4-B-3-C, situate in barrio Tatalon,
Quezon City, with an area of 5,297,429.3 square
meters, more or less, covered by transfer
certificate of title No. 37686 of the land records
of Rizal province, and of lot No. 4-B-4, situated in
the same barrio, having an area of 74,789 square
meters, more or less, covered by transfer
certificate of title No. 37677 of the land records
of the same province, both lots having been
originally registered on July 8, 1914 under
original certificate of title No. 735. The identity
of the lots was established by the testimony of
Antonio Manahan and Magno Faustino,
witnesses for plaintiff, and the identity of the
portion thereof claimed by defendant was
established by the testimony of his own witness,
Quirico Feria. The combined testimony of these
three witnesses clearly shows that the portion
claimed by defendant is made up of a part of lot
4-B-3-C and major on portion of lot 4-B-4, and is
well within the area covered by the two transfer
certificates of title already mentioned. This fact
also appears admitted in defendant's answer to
the third amended complaint.
As the land in dispute is covered by plaintiff's
Torrens certificate of title and was registered in
1914, the decree of registration can no longer be
impugned on the ground of fraud, error or lack of
notice to defendant, as more than one year has
already elapsed from the issuance and entry of
the decree. Neither court the decree be
collaterally attacked by any person claiming title
to, or interest in, the land prior to the
registration proceedings. (Soroñgonvs.
Makalintal,1 45 Off. Gaz., 3819.) Nor could title to
that land in derogation of that of plaintiff, the
registered owner, be acquired by prescription or
adverse possession. (Section 46, Act No. 496.)
Adverse, notorious and continuous possession
under claim of ownership for the period fixed by
law is ineffective against a Torrens title.
(Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off.
Gaz., Supp. 9, p. 43.) And it is likewise settled that
the right to secure possession under a decree of
registration does not prescribed. (Francisco vs.
Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent
decision of this Court on this point is that
rendered in the case of Jose Alcantara et al., vs.
Mariano et al., 92 Phil., 796. This disposes of the
alleged errors V and VI.
As to error VII, it is claimed that `there was no
evidence to sustain the finding that defendant
should be sentenced to pay plaintiff P132.62
monthly from January, 1940, until he vacates the
premises.' But it appears from the record that
that reasonable compensation for the use and
occupation of the premises, as stipulated at the
hearing was P10 a month for each hectare and
that the area occupied by defendant was 13.2619
hectares. The total rent to be paid for the area
occupied should therefore be P132.62 a month.
It is appears from the testimony of J. A. Araneta
and witness Emigdio Tanjuatco that as early as
1939 an action of ejectment had already been
filed against defendant. And it cannot be
supposed that defendant has been paying rents,
for he has been asserting all along that the
premises in question 'have always been since
time immemorial in open, continuous, exclusive
and public and notorious possession and under
claim of ownership adverse to the entire world
by defendant and his predecessors in interest.'
This assignment of error is thus clearly without
merit.
Error No. VIII is but a consequence of the other
errors alleged and needs for further
consideration.
During the pendency of this case in this Court
appellant, thru other counsel, has filed a motion
to dismiss alleging that there is pending before
the Court of First Instance of Rizal another action
between the same parties and for the same cause
and seeking to sustain that allegation with a copy
of the complaint filed in said action. But an
examination of that complaint reveals that
appellant's allegation is not correct, for the
pretended identity of parties and cause of action
in the two suits does not appear. That other case
is one for recovery of ownership, while the
present one is for recovery of possession. And
while appellant claims that he is also involved in
that order action because it is a class suit, the
complaint does not show that such is really the
case. On the contrary, it appears that the action
seeks relief for each individual plaintiff and not
relief for and on behalf of others. The motion for
dismissal is clearly without merit.
Wherefore, the judgment appealed from is
affirmed, with costs against the plaintiff.
Paras, C.J., Pablo, Bengzon, Montemayor, Jugo,
Bautista Angelo, Labrador, and Concepcion,
JJ., concur.
Republic of the Philippines nominees; that, on the other hand, the Filipino shall consist of nine who in turn nominated Mr. Charles Chamsay.
SUPREME COURT stockholders can nominate only six (6) individuals. As long as The chairman, Baldwin Young ruled the last two
Manila candidates and in the event they cannot agree on American-Standard shall own nominations out of order on the basis of section
THIRD DIVISION the six (6) nominees, they shall vote only among at least 30% of the 5 (a) of the Agreement, the consistent practice of
G.R. No. 75875 December 15, 1989 themselves to determine who the six (6) outstanding stock of the the parties during the past annual stockholders'
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID nominees will be, with cumulative voting to be Corporation, three of the nine meetings to nominate only nine persons as
P. WHITTINGHAM and CHARLES allowed but without interference from ASI. directors shall be designated nominees for the nine-member board of
CHAMSAY, petitioners, The antecedent facts can be summarized as by American-Standard, and directors, and the legal advice of Saniwares' legal
vs. follows: the other six shall be counsel. The following events then, transpired:
SANITARY WARES MANUFACTURING In 1961, Saniwares, a domestic corporation was designated by the other ... There were protests against
CORPORATOIN, ERNESTO V. LAGDAMEO, incorporated for the primary purpose of stockholders of the the action of the Chairman
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. manufacturing and marketing sanitary wares. Corporation. (pp. 51 & 53, and heated arguments
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, One of the incorporators, Mr. Baldwin Young Rollo of 75875) ensued. An appeal was made
BALDWIN YOUNG and AVELINO V. went abroad to look for foreign partners, At the request of ASI, the agreement contained by the ASI representative to
CRUZ, respondents. European or American who could help in its provisions designed to protect it as a minority the body of stockholders
G.R. No. 75951 December 15, 1989 expansion plans. On August 15, 1962, ASI, a group, including the grant of veto powers over a present that a vote be taken
SANITARY WARES MANUFACTURING foreign corporation domiciled in Delaware, number of corporate acts and the right to on the ruling of the Chairman.
CORPORATION, ERNESTO R. LAGDAMEO, United States entered into an Agreement with designate certain officers, such as a member of The Chairman, Baldwin
ENRIQUE B. LAGDAMEO, GEORGE FL .EE RAUL Saniwares and some Filipino investors whereby the Executive Committee whose vote was Young, declared the appeal
A. BONCAN, BALDWIN YOUNG and AVELINO V. ASI and the Filipino investors agreed to required for important corporate transactions. out of order and no vote on
CRUX, petitioners, participate in the ownership of an enterprise Later, the 30% capital stock of ASI was increased the ruling was taken. The
vs. which would engage primarily in the business of to 40%. The corporation was also registered Chairman then instructed the
THE COURT OF APPEALS, WOLFGANG manufacturing in the Philippines and selling here with the Board of Investments for availment of Corporate Secretary to cast all
AURBACH, JOHN GRIFFIN, DAVID P. and abroad vitreous china and sanitary wares. incentives with the condition that at least 60% of the votes present and
WHITTINGHAM, CHARLES CHAMSAY and The parties agreed that the business operations the capital stock of the corporation shall be represented by proxy equally
LUCIANO SALAZAR, respondents. in the Philippines shall be carried on by an owned by Philippine nationals. for the 6 nominees of the
G.R. Nos. 75975-76 December 15, 1989 incorporated enterprise and that the name of the The joint enterprise thus entered into by the Philippine Investors and the 3
LUCIANO E. SALAZAR, petitioner, corporation shall initially be "Sanitary Wares Filipino investors and the American corporation nominees of ASI, thus
vs. Manufacturing Corporation." prospered. Unfortunately, with the business effectively excluding the 2
SANITARY WARES MANUFACTURING The Agreement has the following provisions successes, there came a deterioration of the additional persons
CORPORATION, ERNESTO V. LAGDAMEO, relevant to the issues in these cases on the initially harmonious relations between the two nominated, namely, Luciano
ERNESTO R. LAGDAMEO, JR., ENRIQUE R. nomination and election of the directors of the groups. According to the Filipino group, a basic E. Salazar and Charles
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN, corporation: disagreement was due to their desire to expand Chamsay. The ASI
BALDWIN YOUNG, AVELINO V. CRUZ and the 3. Articles of Incorporation the export operations of the company to which representative, Mr. Jaqua
COURT OF APPEALS, respondents. (a) The Articles of ASI objected as it apparently had other protested the decision of the
Belo, Abiera & Associates for petitioners in 75875. Incorporation of the subsidiaries of joint joint venture groups in the Chairman and announced that
Sycip, Salazar, Hernandez & Gatmaitan for Corporation shall be countries where Philippine exports were all votes accruing to ASI
Luciano E. Salazar. substantially in the form contemplated. On March 8, 1983, the annual shares, a total of 1,329,695 (p.
annexed hereto as Exhibit A stockholders' meeting was held. The meeting 27, Rollo, AC-G.R. SP No.
GUTIERREZ, JR., J.: and, insofar as permitted was presided by Baldwin Young. The minutes 05617) were being
These consolidated petitions seek the review of under Philippine law, shall were taken by the Secretary, Avelino Cruz. After cumulatively voted for the
the amended decision of the Court of Appeals in specifically provide for disposing of the preliminary items in the agenda, three ASI nominees and
CA-G.R. SP Nos. 05604 and 05617 which set (1) the stockholders then proceeded to the election Charles Chamsay, and
aside the earlier decision dated June 5, 1986, of Cumulative of the members of the board of directors. The ASI instructed the Secretary to so
the then Intermediate Appellate Court and voting for group nominated three persons namely; vote. Luciano E. Salazar and
directed that in all subsequent elections for directors: Wolfgang Aurbach, John Griffin and David P. other proxy holders
directors of Sanitary Wares Manufacturing xxx xxx xxx Whittingham. The Philippine investors announced that all the votes
Corporation (Saniwares), American Standard 5. Management nominated six, namely; Ernesto Lagdameo, Sr., owned by and or represented
Inc. (ASI) cannot nominate more than three (3) (a) The management of the Raul A. Boncan, Ernesto R. Lagdameo, Jr., George by them 467,197 shares (p.
directors; that the Filipino stockholders shall not Corporation shall be vested in F. Lee, and Baldwin Young. Mr. Eduardo R, 27, Rollo, AC-G.R. SP No.
interfere in ASI's choice of its three (3) a Board of Directors, which Ceniza then nominated Mr. Luciano E. Salazar, 05617) were being voted
cumulatively in favor of
Luciano E. Salazar. The
Chairman, Baldwin Young,
nevertheless instructed the
Secretary to cast all votes
equally in favor of the three
ASI nominees, namely,
Wolfgang Aurbach, John
Griffin and David
Whittingham and the six
originally nominated by
Rogelio Vinluan, namely,
Ernesto Lagdameo, Sr., Raul
Boncan, Ernesto Lagdameo,
Jr., Enrique Lagdameo, George
F. Lee, and Baldwin Young.
The Secretary then certified
for the election of the
following Wolfgang Aurbach,
John Griffin, David
Whittingham Ernesto
Lagdameo, Sr., Ernesto
Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, Raul
A. Boncan, Baldwin Young.
The representative of ASI then
moved to recess the meeting
which was duly seconded.
There was also a motion to
adjourn (p. 28, Rollo, AC-G.R.
SP No. 05617). This motion to
adjourn was accepted by the
Chairman, Baldwin Young,
who announced that the
motion was carried and
declared the meeting
adjourned. Protests against
the adjournment were
registered and having been
ignored, Mr. Jaqua the ASI
representative, stated that the
meeting was not adjourned
but only recessed and that the
meeting would be reconvened
in the next room. The
Chairman then threatened to
have the stockholders who
did not agree to the decision
of the Chairman on the casting
of votes bodily thrown out.
The ASI Group, Luciano E.
Salazar and other
stockholders, allegedly
representing 53 or 54% of the
shares of Saniwares, decided
to continue the meeting at the
elevator lobby of the
American Standard Building.
The continued meeting was
presided by Luciano E.
Salazar, while Andres
Gatmaitan acted as Secretary.
On the basis of the cumulative
votes cast earlier in the
meeting, the ASI Group
nominated its four nominees;
Wolfgang Aurbach, John
Griffin, David Whittingham
and Charles Chamsay. Luciano
E. Salazar voted for himself,
thus the said five directors
were certified as elected
directors by the Acting
Secretary, Andres Gatmaitan,
with the explanation that
there was a tie among the
other six (6) nominees for the
four (4) remaining positions
of directors and that the body
decided not to break the tie.
(pp. 37-39, Rollo of 75975-76)
These incidents triggered off the filing of
separate petitions by the parties with the
Securities and Exchange Commission (SEC). The
first petition filed was for preliminary injunction
by Saniwares, Emesto V. Lagdameo, Baldwin
Young, Raul A. Bonean Ernesto R. Lagdameo, Jr.,
Enrique Lagdameo and George F. Lee against
Luciano Salazar and Charles Chamsay. The case
was denominated as SEC Case No. 2417. The
second petition was for quo warranto and
application for receivership by Wolfgang
Aurbach, John Griffin, David Whittingham,
Luciano E. Salazar and Charles Chamsay against
the group of Young and Lagdameo (petitioners in
SEC Case No. 2417) and Avelino F. Cruz. The case
was docketed as SEC Case No. 2718. Both sets of
parties except for Avelino Cruz claimed to be the
legitimate directors of the corporation.
The two petitions were consolidated and tried
jointly by a hearing officer who rendered a
decision upholding the election of the Lagdameo
Group and dismissing the quo warranto petition
of Salazar and Chamsay. The ASI Group and
Salazar appealed the decision to the SEC en banc
which affirmed the hearing officer's decision.
The SEC decision led to the filing of two separate
appeals with the Intermediate Appellate Court
by Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay (docketed as
AC-G.R. SP No. 05604) and by Luciano E. Salazar
(docketed as AC-G.R. SP No. 05617). The
petitions were consolidated and the appellate
court in its decision ordered the remand of the
case to the Securities and Exchange Commission
with the directive that a new stockholders'
meeting of Saniwares be ordered convoked as
soon as possible, under the supervision of the
Commission.
Upon a motion for reconsideration filed by the
appellees Lagdameo Group) the appellate court
(Court of Appeals) rendered the questioned
amended decision. Petitioners Wolfgang
Aurbach, John Griffin, David P. Whittingham and
Charles Chamsay in G.R. No. 75875 assign the
following errors:
I. THE COURT OF APPEALS, IN
EFFECT, UPHELD THE
ALLEGED ELECTION OF
PRIVATE RESPONDENTS AS
MEMBERS OF THE BOARD OF
DIRECTORS OF SANIWARES
WHEN IN FACT THERE WAS
NO ELECTION AT ALL.
II. THE COURT OF APPEALS
PROHIBITS THE
STOCKHOLDERS FROM
EXERCISING THEIR FULL
VOTING RIGHTS
REPRESENTED BY THE
NUMBER OF SHARES IN
SANIWARES, THUS
DEPRIVING PETITIONERS
AND THE CORPORATION
THEY REPRESENT OF THEIR
PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS
IMPOSES CONDITIONS AND
READS PROVISIONS INTO
THE AGREEMENT OF THE
PARTIES WHICH WERE NOT
THERE, WHICH ACTION IT
CANNOT LEGALLY DO. (p. 17,
Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-
76 assails the amended decision on the following
grounds:
11.1.
ThatAmendedDecisionwoulds
anctiontheCA'sdisregard of
binding contractual
agreements entered into by
stockholders and the
replacement of the conditions
of such agreements with
terms never contemplated by
the stockholders but merely
dictated by the CA .
11.2. The Amended decision
would likewise sanction the
deprivation of the property
rights of stockholders without
due process of law in order
that a favored group of
stockholders may be illegally
benefitted and guaranteed a
continuing monopoly of the
control of a corporation. (pp.
14-15, Rollo-75975-76)
On the other hand, the petitioners in G.R. No.
75951 contend that:
I
THE AMENDED DECISION OF
THE RESPONDENT COURT,
WHILE RECOGNIZING THAT
THE STOCKHOLDERS OF
SANIWARES ARE DIVIDED
INTO TWO BLOCKS, FAILS TO
FULLY ENFORCE THE BASIC
INTENT OF THE AGREEMENT
AND THE LAW.
II
THE AMENDED DECISION
DOES NOT CATEGORICALLY
RULE THAT PRIVATE
PETITIONERS HEREIN WERE
THE DULY ELECTED
DIRECTORS DURING THE 8
MARCH 1983 ANNUAL
STOCKHOLDERS MEETING OF
SANTWARES. (P. 24, Rollo-
75951)
The issues raised in the petitions are Evidence of written contrary to the evident Agreement with ASI in behalf
interrelated, hence, they are discussed jointly. agreements-When the terms intention of the parties, the of the Philippine nationals. He
The main issue hinges on who were the duly of an agreement have been latter shall prevail over the testified that ASI agreed to
elected directors of Saniwares for the year 1983 reduced to writing, it is to be former (Art. 1370, New Civil accept the role of minority
during its annual stockholders' meeting held on considered as containing all Code). The various vis-a-vis the Philippine
March 8, 1983. To answer this question the such terms, and therefore, stipulations of a contract shall National group of investors,
following factors should be determined: (1) the there can be, between the be interpreted together on the condition that the
nature of the business established by the parties parties and their successors in attributing to the doubtful Agreement should contain
whether it was a joint venture or a corporation interest, no evidence of the ones that sense which may provisions to protect ASI as
and (2) whether or not the ASI Group may vote terms of the agreement other result from all of them taken the minority.
their additional 10% equity during elections of than the contents of the jointly (Art. 1374, New Civil An examination of the
Saniwares' board of directors. writing, except in the Code). Moreover, in order to Agreement shows that certain
The rule is that whether the parties to a following cases: judge the intention of the provisions were included to
particular contract have thereby established (a) Where a mistake or contracting parties, their protect the interests of ASI as
among themselves a joint venture or some other imperfection of the writing, or contemporaneous and the minority. For example, the
relation depends upon their actual intention its failure to express the true subsequent acts shall be vote of 7 out of 9 directors is
which is determined in accordance with the rules intent and agreement of the principally considered. (Art. required in certain
governing the interpretation and construction of parties or the validity of the 1371, New Civil Code). (Part I, enumerated corporate acts
contracts. (Terminal Shares, Inc. v. Chicago, B. agreement is put in issue by Original Records, SEC Case [Sec. 3 (b) (ii) (a) of the
and Q.R. Co. (DC MO) 65 F Supp 678; Universal the pleadings. No. 2417) Agreement]. ASI is
Sales Corp. v. California Press Mfg. Co. 20 Cal. (b) When there is an intrinsic It has been ruled: contractually entitled to
2nd 751, 128 P 2nd 668) ambiguity in the writing. In an action at law, where designate a member of the
The ASI Group and petitioner Salazar (G.R. Nos. Contrary to ASI Group's stand, the Lagdameo and there is evidence tending to Executive Committee and the
75975-76) contend that the actual intention of Young Group pleaded in their Reply and Answer prove that the parties joined vote of this member is
the parties should be viewed strictly on the to Counterclaim in SEC Case No. 2417 that the their efforts in furtherance of required for certain
"Agreement" dated August 15,1962 wherein it is Agreement failed to express the true intent of the an enterprise for their joint transactions [Sec. 3 (b) (i)].
clearly stated that the parties' intention was to parties, to wit: profit, the question whether The Agreement also requires
form a corporation and not a joint venture. xxx xxx xxx they intended by their a 75% super-majority vote for
They specifically mention number 16 4. While certain provisions of agreement to create a joint the amendment of the articles
under Miscellaneous Provisions which states: the Agreement would make it adventure, or to assume some and by-laws of Saniwares
xxx xxx xxx appear that the parties other relation is a question of [Sec. 3 (a) (iv) and (b) (iii)].
c) nothing herein contained thereto disclaim being fact for the jury. (Binder v. ASI is also given the right to
shall be construed to partners or joint venturers Kessler v 200 App. Div. 40,192 designate the president and
constitute any of the parties such disclaimer is directed at N Y S 653; Pyroa v. Brownfield plant manager [Sec. 5 (6)].
hereto partners or joint third parties and is not (Tex. Civ. A.) 238 SW 725; The Agreement further
venturers in respect of any inconsistent with, and does Hoge v. George, 27 Wyo, 423, provides that the sales policy
transaction hereunder. (At P. not preclude, the existence of 200 P 96 33 C.J. p. 871) of Saniwares shall be that
66, Rollo-GR No. 75875) two distinct groups of In the instant cases, our examination of which is normally followed by
They object to the admission of other evidence stockholders in Saniwares one important provisions of the Agreement as well as ASI [Sec. 13 (a)] and that
which tends to show that the parties' agreement of which (the Philippine the testimonial evidence presented by the Saniwares should not export
was to establish a joint venture presented by the Investors) shall constitute the Lagdameo and Young Group shows that the "Standard" products
Lagdameo and Young Group on the ground that majority, and the other ASI parties agreed to establish a joint venture and otherwise than through ASI's
it contravenes the parol evidence rule under shall constitute the minority not a corporation. The history of the Export Marketing Services
section 7, Rule 130 of the Revised Rules of Court. stockholder. In any event, the organization of Saniwares and the unusual [Sec. 13 (6)]. Under the
According to them, the Lagdameo and Young evident intention of the arrangements which govern its policy making Agreement, ASI agreed to
Group never pleaded in their pleading that the Philippine Investors and ASI body are all consistent with a joint venture and provide technology and
"Agreement" failed to express the true intent of in entering into the not with an ordinary corporation. As stated by know-how to Saniwares and
the parties. Agreement is to enter into the SEC: the latter paid royalties for
The parol evidence Rule under Rule 130 ajoint venture enterprise, and According to the unrebutted the same. (At p. 2).
provides: if some words in the testimony of Mr. Baldwin xxx xxx xxx
Agreement appear to be Young, he negotiated the
 It is pertinent to note that the
provisions of the Agreement
requiring a 7 out of 9 votes of
the board of directors for
certain actions, in effect gave
ASI (which designates 3
directors under the
Agreement) an effective veto
power. Furthermore, the
grant to ASI of the right to
designate certain officers of
the corporation; the super-
majority voting requirements
for amendments of the
articles and by-laws; and most
significantly to the issues of
tms case, the provision that
ASI shall designate 3 out of
the 9 directors and the other
stockholders shall designate
the other 6, clearly indicate
that there are two distinct
groups in Saniwares, namely
ASI, which owns 40% of the
capital stock and the
Philippine National
stockholders who own the
balance of 60%, and that 2)
ASI is given certain
protections as the minority
stockholder.
Premises considered, we
believe that under the
Agreement there are two
groups of stockholders who
established a corporation
with provisions for a special
contractual relationship
between the parties, i.e., ASI
and the other stockholders.
(pp. 4-5)
Section 5 (a) of the agreement uses the word
"designated" and not "nominated" or "elected" in
the selection of the nine directors on a six to
three ratio. Each group is assured of a fixed
number of directors in the board.
Moreover, ASI in its communications referred to
the enterprise as joint venture. Baldwin Young
also testified that Section 16(c) of the Agreement
that "Nothing herein contained shall be
construed to constitute any of the parties hereto
partners or joint venturers in respect of any
transaction hereunder" was merely to obviate
the possibility of the enterprise being treated as
partnership for tax purposes and liabilities to
third parties.
Quite often, Filipino entrepreneurs in their
desire to develop the industrial and
manufacturing capacities of a local firm are
constrained to seek the technology and
marketing assistance of huge multinational
corporations of the developed world.
Arrangements are formalized where a foreign
group becomes a minority owner of a firm in
exchange for its manufacturing expertise, use of
its brand names, and other such assistance.
However, there is always a danger from such
arrangements. The foreign group may, from the
start, intend to establish its own sole or
monopolistic operations and merely uses the
joint venture arrangement to gain a foothold or
test the Philippine waters, so to speak. Or the
covetousness may come later. As the Philippine
firm enlarges its operations and becomes
profitable, the foreign group undermines the
local majority ownership and actively tries to
completely or predominantly take over the
entire company. This undermining of joint
ventures is not consistent with fair dealing to say
the least. To the extent that such subversive
actions can be lawfully prevented, the courts
should extend protection especially in industries
where constitutional and legal requirements
reserve controlling ownership to Filipino
citizens.
The Lagdameo Group stated in their appellees'
brief in the Court of Appeal
In fact, the Philippine
Corporation Code itself
recognizes the right of
stockholders to enter into
agreements regarding the
exercise of their voting rights.
Sec. 100. Agreements by
stockholders.-
xxx xxx xxx
2. An agreement between two or more
stockholders, if in writing and signed by the
parties thereto, may provide that in exercising
any voting rights, the shares held by them shall
be voted as therein provided, or as they may
agree, or as determined in accordance with a
procedure agreed upon by them.
Appellants contend that the above provision is
included in the Corporation Code's chapter on
close corporations and Saniwares cannot be a
close corporation because it has 95 stockholders.
Firstly, although Saniwares had 95 stockholders
at the time of the disputed stockholders meeting,
these 95 stockholders are not separate from
each other but are divisible into groups
representing a single Identifiable interest. For
example, ASI, its nominees and lawyers count for
13 of the 95 stockholders. The YoungYutivo
family count for another 13 stockholders, the
Chamsay family for 8 stockholders, the Santos
family for 9 stockholders, the Dy family for 7
stockholders, etc. If the members of one family
and/or business or interest group are
considered as one (which, it is respectfully
submitted, they should be for purposes of
determining how closely held Saniwares is there
were as of 8 March 1983, practically only 17
stockholders of Saniwares. (Please refer to
discussion in pp. 5 to 6 of appellees' Rejoinder
Memorandum dated 11 December 1984 and
Annex "A" thereof).
Secondly, even assuming that Saniwares is
technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is
that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares
is a public issue or a widely held corporation.
In the United States, many courts have taken a
realistic approach to joint venture corporations
and have not rigidly applied principles of
corporation law designed primarily for public
issue corporations. These courts have indicated
that express arrangements between corporate
joint ventures should be construed with less
emphasis on the ordinary rules of law usually
applied to corporate entities and with more
consideration given to the nature of the
agreement between the joint venturers (Please
see Wabash Ry v. American Refrigerator Transit
Co., 7 F 2d 335; Chicago, M & St. P. Ry v. Des
Moines Union Ry; 254 Ass'n. 247 US. 490';
Seaboard Airline Ry v. Atlantic Coast Line Ry;
240 N.C. 495,.82 S.E. 2d 771; Deboy v. Harris,
207 Md., 212,113 A 2d 903; Hathway v. Porter
Royalty Pool, Inc., 296 Mich. 90, 90, 295 N.W.
571; Beardsley v. Beardsley, 138 U.S. 262; "The
Legal Status of Joint Venture Corporations", 11
Vand Law Rev. p. 680,1958). These American
cases dealt with legal questions as to the extent
to which the requirements arising from the
corporate form of joint venture corporations
should control, and the courts ruled that
substantial justice lay with those litigants who
relied on the joint venture agreement rather
than the litigants who relied on the orthodox
principles of corporation law.
As correctly held by the SEC Hearing Officer:
It is said that participants in a joint
venture, in organizing the
joint venture deviate from the
traditional pattern of
corporation management. A
noted authority has pointed out that
just as in close corporations,
shareholders' agreements in joint
venture corporations often contain
provisions which do one or more of the
following: (1) require greater than
majority vote for shareholder and
director action; (2) give certain
shareholders or groups of shareholders
power to select a specified number of
directors; (3) give to the shareholders
control over the selection and retention
of employees; and (4) set up a
procedure for the settlement of
disputes by arbitration (See I O' Neal,
Close Corporations, 1971 ed., Section
1.06a, pp. 15-16) (Decision of SEC
Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of the
Corporation Code does not necessarily imply
that agreements regarding the exercise of voting
rights are allowed only in close corporations. As
Campos and Lopez-Campos explain:
Paragraph 2 refers to pooling and voting
agreements in particular. Does this provision
necessarily imply that these agreements can be
valid only in close corporations as defined by the
Code? Suppose that a corporation has twenty
five stockholders, and therefore cannot qualify as
a close corporation under section 96, can some
of them enter into an agreement to vote as a unit
in the election of directors? It is submitted that
there is no reason for denying stockholders of
corporations other than close ones the right to
enter into not voting or pooling agreements to
protect their interests, as long as they do not
intend to commit any wrong, or fraud on the
other stockholders not parties to the agreement.
Of course, voting or pooling agreements are
perhaps more useful and more often resorted to
in close corporations. But they may also be found
necessary even in widely held corporations.
Moreover, since the Code limits the legal
meaning of close corporations to those which
comply with the requisites laid down by section
96, it is entirely possible that a corporation
which is in fact a close corporation will not come
within the definition. In such case, its
stockholders should not be precluded from
entering into contracts like voting agreements if
these are otherwise valid. (Campos & Lopez-
Campos, op cit, p. 405)
In short, even assuming that sec. 5(a) of the
Agreement relating to the designation or
nomination of directors restricts the right of the
Agreement's signatories to vote for directors,
such contractual provision, as correctly held by
the SEC, is valid and binding upon the signatories
thereto, which include appellants. (Rollo No.
75951, pp. 90-94)
In regard to the question as to whether or not
the ASI group may vote their additional equity
during elections of Saniwares' board of directors,
the Court of Appeals correctly stated:
As in other joint venture companies, the extent of
ASI's participation in the management of the
corporation is spelled out in the Agreement.
Section 5(a) hereof says that three of the nine
directors shall be designated by ASI and the
remaining six by the other stockholders, i.e., the
Filipino stockholders. This allocation of board
seats is obviously in consonance with the
minority position of ASI.
Having entered into a well-defined contractual
relationship, it is imperative that the parties
should honor and adhere to their respective
rights and obligations thereunder. Appellants
seem to contend that any allocation of board
seats, even in joint venture corporations, are null
and void to the extent that such may interfere
with the stockholder's rights to cumulative
voting as provided in Section 24 of the
Corporation Code. This Court should not be
prepared to hold that any agreement which
curtails in any way cumulative voting should be
struck down, even if such agreement has been
freely entered into by experienced businessmen
and do not prejudice those who are not parties
thereto. It may well be that it would be more
cogent to hold, as the Securities and Exchange
Commission has held in the decision appealed
from, that cumulative voting rights may be
voluntarily waived by stockholders who enter
into special relationships with each other to
pursue and implement specific purposes, as in
joint venture relationships between foreign and
local stockholders, so long as such agreements
do not adversely affect third parties.
In any event, it is believed that we are not here
called upon to make a general rule on this
question. Rather, all that needs to be done is to
give life and effect to the particular contractual
rights and obligations which the parties have
assumed for themselves.
On the one hand, the clearly established minority
position of ASI and the contractual allocation of
board seats Cannot be disregarded. On the other
hand, the rights of the stockholders to
cumulative voting should also be protected.
In our decision sought to be reconsidered, we
opted to uphold the second over the first. Upon
further reflection, we feel that the proper and
just solution to give due consideration to both
factors suggests itself quite clearly. This Court
should recognize and uphold the division of the
stockholders into two groups, and at the same
time uphold the right of the stockholders within
each group to cumulative voting in the process of
determining who the group's nominees would
be. In practical terms, as suggested by appellant
Luciano E. Salazar himself, this means that if the
Filipino stockholders cannot agree who their six
nominees will be, a vote would have to be taken
among the Filipino stockholders only. During
this voting, each Filipino stockholder can
cumulate his votes. ASI, however, should not be
allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is
allowed to designate under the Agreement, and
may even be able to get a majority of the board
seats, a result which is clearly contrary to the
contractual intent of the parties.
Such a ruling will give effect to both the
allocation of the board seats and the
stockholder's right to cumulative voting.
Moreover, this ruling will also give due
consideration to the issue raised by the appellees
on possible violation or circumvention of the
Anti-Dummy Law (Com. Act No. 108, as
amended) and the nationalization requirements
of the Constitution and the laws if ASI is allowed
to nominate more than three directors. (Rollo-
75875, pp. 38-39)
The ASI Group and petitioner Salazar, now
reiterate their theory that the ASI Group has the
right to vote their additional equity pursuant to
Section 24 of the Corporation Code which gives
the stockholders of a corporation the right to
cumulate their votes in electing directors.
Petitioner Salazar adds that this right if granted
to the ASI Group would not necessarily mean a
violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:
And provided finally that the
election of aliens as members
of the board of directors or
governing body of
corporations or associations
engaging in partially
nationalized activities shall be
allowed in proportion to their
allowable participation or
share in the capital of such
entities. (amendments
introduced by Presidential
Decree 715, section 1,
promulgated May 28, 1975)
The ASI Group's argument is correct within the
context of Section 24 of the Corporation Code.
The point of query, however, is whether or not
that provision is applicable to a joint venture
with clearly defined agreements:
The legal concept of ajoint
venture is of common law
origin. It has no precise legal
definition but it has been
generally understood to mean
an organization formed for
some temporary purpose.
(Gates v. Megargel, 266 Fed.
811 [1920]) It is in fact hardly
distinguishable from the
partnership, since their
elements are similar
community of interest in the
business, sharing of profits
and losses, and a mutual right
of control. Blackner v. Mc
Dermott, 176 F. 2d. 498,
[1949]; Carboneau v.
Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick,
45 Cal. 2d. 183, 288 P. 2d. 12
289 P. 2d. 242 [1955]). The
main distinction cited by most
opinions in common law
jurisdictions is that the
partnership contemplates a
general business with some
degree of continuity, while the
joint venture is formed for the
execution of a single
transaction, and is thus of a
temporary nature. (Tufts v.
Mann 116 Cal. App. 170, 2 P.
2d. 500 [1931]; Harmon v.
Martin, 395 111. 595, 71 NE
2d. 74 [1947]; Gates v.
Megargel 266 Fed. 811
[1920]). This observation is
not entirely accurate in this
jurisdiction, since under the
Civil Code, a partnership may
be particular or universal, and
a particular partnership may
have for its object a specific
undertaking. (Art. 1783, Civil
Code). It would seem
therefore that under
Philippine law, a joint venture
is a form of partnership and
should thus be governed by
the law of partnerships. The
Supreme Court has however
recognized a distinction
between these two business
forms, and has held that
although a corporation cannot
enter into a partnership
contract, it may however
 engage in a joint venture with
others. (At p. 12, Tuazon v.
Bolanos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos
Comments, Notes and
Selected Cases, Corporation
Code 1981)
Moreover, the usual rules as regards the
construction and operations of contracts
generally apply to a contract of joint venture. (O'
Hara v. Harman 14 App. Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct
view would be that the resolution of the question
of whether or not the ASI Group may vote their
additional equity lies in the agreement of the
parties.
Necessarily, the appellate court was correct in
upholding the agreement of the parties as
regards the allocation of director seats under
Section 5 (a) of the "Agreement," and the right of
each group of stockholders to cumulative voting
in the process of determining who the group's
nominees would be under Section 3 (a) (1) of the
"Agreement." As pointed out by SEC, Section 5
(a) of the Agreement relates to the manner of
nominating the members of the board of
directors while Section 3 (a) (1) relates to the
manner of voting for these nominees.
This is the proper interpretation of the
Agreement of the parties as regards the election
of members of the board of directors.
To allow the ASI Group to vote their additional
equity to help elect even a Filipino director who
would be beholden to them would obliterate
their minority status as agreed upon by the
parties. As aptly stated by the appellate court:
... ASI, however, should not be
allowed to interfere in the
voting within the Filipino
group. Otherwise, ASI would
be able to designate more
than the three directors it is
allowed to designate under
the Agreement, and may even
be able to get a majority of the
board seats, a result which is
clearly contrary to the
contractual intent of the
parties.
Such a ruling will give effect
to both the allocation of the
board seats and the
stockholder's right to
cumulative voting. Moreover,
this ruling will also give due
consideration to the issue
raised by the appellees on
possible violation or
circumvention of the Anti-
Dummy Law (Com. Act No.
108, as amended) and the
nationalization requirements
of the Constitution and the
laws if ASI is allowed to
nominate more than three
directors. (At p. 39, Rollo,
75875)
Equally important as the consideration of the
contractual intent of the parties is the
consideration as regards the possible
domination by the foreign investors of the
enterprise in violation of the nationalization
requirements enshrined in the Constitution and
circumvention of the Anti-Dummy Act. In this
regard, petitioner Salazar's position is that the
Anti-Dummy Act allows the ASI group to elect
board directors in proportion to their share in
the capital of the entity. It is to be noted,
however, that the same law also limits the
election of aliens as members of the board of
directors in proportion to their allowance
participation of said entity. In the instant case,
the foreign Group ASI was limited to designate
three directors. This is the allowable
participation of the ASI Group. Hence, in future
dealings, this limitation of six to three board
seats should always be maintained as long as the
joint venture agreement exists considering that
in limiting 3 board seats in the 9-man board of
directors there are provisions already agreed
upon and embodied in the parties' Agreement to
protect the interests arising from the minority
status of the foreign investors.
With these findings, we the decisions of the SEC
Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs.
Wolfgang Aurbach, John Griffin, David P
Whittingham, Emesto V. Lagdameo, Baldwin
young, Raul A. Boncan, Emesto V. Lagdameo, Jr.,
Enrique Lagdameo, and George F. Lee as the duly
elected directors of Saniwares at the March
8,1983 annual stockholders' meeting.
On the other hand, the Lagdameo and Young MODIFIED in that Messrs. Wolfgang Aurbach
Group (petitioners in G.R. No. 75951) object to a John Griffin, David Whittingham Emesto V.
cumulative voting during the election of the Lagdameo, Baldwin Young, Raul A. Boncan,
board of directors of the enterprise as ruled by Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and
the appellate court and submits that the six (6) George F. Lee are declared as the duly elected
directors allotted the Filipino stockholders directors of Saniwares at the March 8,1983
should be selected by consensus pursuant to annual stockholders' meeting. In all other
section 5 (a) of the Agreement which uses the respects, the questioned decision is AFFIRMED.
word "designate" meaning "nominate, delegate Costs against the petitioners in G.R. Nos. 75975-
or appoint." 76 and G.R. No. 75875.
SO ORDERED.
They also stress the possibility that the ASI Fernan, C.J., (Chairman), Bidin and Cortes, JJ.,
Group might take control of the enterprise if the concur.
Filipino stockholders are allowed to select their Feliciano, J., took no part.
nominees separately and not as a common slot
determined by the majority of their group.
Section 5 (a) of the Agreement which uses the
word designates in the allocation of board
directors should not be interpreted in isolation.
This should be construed in relation to section 3
(a) (1) of the Agreement. As we stated earlier,
section 3(a) (1) relates to the manner of
voting for these nominees which is cumulative
voting while section 5(a) relates to the manner
of nominating the members of the board of
directors. The petitioners in G.R. No. 75951
agreed to this procedure, hence, they cannot now
impugn its legality.
The insinuation that the ASI Group may be able
to control the enterprise under the cumulative
voting procedure cannot, however, be ignored.
The validity of the cumulative voting procedure
is dependent on the directors thus elected being
genuine members of the Filipino group, not
voters whose interest is to increase the ASI share
in the management of Saniwares. The joint
venture character of the enterprise must always
be taken into account, so long as the company
exists under its original agreement. Cumulative
voting may not be used as a device to enable ASI
to achieve stealthily or indirectly what they
cannot accomplish openly. There are substantial
safeguards in the Agreement which are intended
to preserve the majority status of the Filipino
investors as well as to maintain the minority
status of the foreign investors group as earlier
discussed. They should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76
and G.R. No. 75875 are DISMISSED and the
petition in G.R. No. 75951 is partly GRANTED.
The amended decision of the Court of Appeals is
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 15574 September 17, 1919
SMITH, BELL & COMPANY (LTD.), petitioner,
vs.
JOAQUIN NATIVIDAD, Collector of Customs of
the port of Cebu, respondent.
Ross and Lawrence for petitioner.
Attorney-General Paredes for respondent.
MALCOLM, J.:
A writ of mandamus is prayed for by Smith, Bell
& Co. (Ltd.), against Joaquin Natividad, Collector
of Customs of the port of Cebu, Philippine
Islands, to compel him to issue a certificate of
Philippine registry to the petitioner for its motor
vessel Bato. The Attorney-General, acting as
counsel for respondent, demurs to the petition
on the general ground that it does not state facts
sufficient to constitute a cause of action. While
the facts are thus admitted, and while, moreover,
the pertinent provisions of law are clear and
understandable, and interpretative American
jurisprudence is found in abundance, yet the
issue submitted is not lightly to be resolved. The
question, flatly presented, is, whether Act. No.
2761 of the Philippine Legislature is valid — or,
more directly stated, whether the Government of
the Philippine Islands, through its Legislature,
can deny the registry of vessels in its coastwise
trade to corporations having alien stockholders.
FACTS.
Smith, Bell & Co., (Ltd.), is a corporation
organized and existing under the laws of the
Philippine Islands. A majority of its stockholders
are British subjects. It is the owner of a motor
vessel known as the Bato built for it in the
Philippine Islands in 1916, of more than fifteen
tons gross The Bato was brought to Cebu in the
present year for the purpose of transporting
plaintiff's merchandise between ports in the
Islands. Application was made at Cebu, the home
port of the vessel, to the Collector of Customs for
a certificate of Philippine registry. The Collector
refused to issue the certificate, giving as his
reason that all the stockholders of Smith, Bell &
Co., Ltd., were not citizens either of the United
States or of the Philippine Islands. The instant
action is the result.
LAW.
The Act of Congress of April 29, 1908, repealing
the Shipping Act of April 30, 1906 but reenacting
a portion of section 3 of this Law, and still in
force, provides in its section 1:
That until Congress shall have
authorized the registry as vessels of the
United States of vessels owned in the
Philippine Islands, the Government of
the Philippine Islands is hereby
authorized to adopt, from time to time,
and enforce regulations governing the
transportation of merchandise and
passengers between ports or places in
the Philippine Archipelago. (35 Stat. at
L., 70; Section 3912, U. S. Comp Stat.
[1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916,
commonly known as the Jones Law, still in force,
provides in section 3, (first paragraph, first
sentence), 6, 7, 8, 10, and 31, as follows.
SEC. 3. That no law shall be enacted in
said Islands which shall deprive any
person of life, liberty, or property
without due process of law, or deny to
any person therein the equal protection
of the laws. . . .
SEC. 6. That the laws now in force in the
Philippines shall continue in force and
effect, except as altered, amended, or
modified herein, until altered,
amended, or repealed by the legislative
authority herein provided or by Act of
Congress of the United States.
SEC. 7. That the legislative authority
herein provided shall have power,
when not inconsistent with this Act, by
due enactment to amend, alter modify,
or repeal any law, civil or criminal,
continued in force by this Act as it may
from time to time see fit
This power shall specifically extend
with the limitation herein provided as
to the tariff to all laws relating to
revenue provided as to the tariff to all
laws relating to revenue and taxation in
effect in the Philippines.
SEC. 8. That general legislative power,
except as otherwise herein provided, is
hereby granted to the Philippine
Legislature, authorized by this Act.
SEC. 10. That while this Act provides
that the Philippine government shall
have the authority to enact a tariff law
the trade relations between the islands
and the United States shall continue to
be governed exclusively by laws of the
Congress of the United States: Provided,
That tariff acts or acts amendatory to
the tariff of the Philippine Islands shall
not become law until they shall receive
the approval of the President of the
United States, nor shall any act of the
Philippine Legislature affecting
immigration or the currency or coinage
laws of the Philippines become a law
until it has been approved by the
President of the United States: Provided
further, That the President shall
approve or disapprove any act
mentioned in the foregoing proviso
within six months from and after its
enactment and submission for his
approval, and if not disapproved within
such time it shall become a law the
same as if it had been specifically
approved.
SEC. 31. That all laws or parts of laws
applicable to the Philippines not in
conflict with any of the provisions of
this Act are hereby continued in force
and effect." (39 Stat at L., 546.)
On February 23, 1918, the Philippine Legislature
enacted Act No. 2761. The first section of this law
amended section 1172 of the Administrative
Code to read as follows:
SEC. 1172. Certificate of Philippine
register. — Upon registration of a
vessel of domestic ownership, and of
more than fifteen tons gross, a
certificate of Philippine register shall
be issued for it. If the vessel is of
domestic ownership and of fifteen tons
gross or less, the taking of the
certificate of Philippine register shall
be optional with the owner.
"Domestic ownership," as used in this
section, means ownership vested in
some one or more of the following
classes of persons: (a) Citizens or
native inhabitants of the Philippine
Islands; (b) citizens of the United States
residing in the Philippine Islands;
(c) any corporation or company
composed wholly of citizens of the
Philippine Islands or of the United States
or of both, created under the laws of the
United States, or of any State thereof, or
of thereof, or the managing agent or
master of the vessel resides in the
Philippine Islands
Any vessel of more than fifteen gross
tons which on February eighth,
nineteen hundred and eighteen, had a
certificate of Philippine register under
existing law, shall likewise be deemed a
vessel of domestic ownership so long as
there shall not be any change in the
ownership thereof nor any transfer of
stock of the companies or corporations
owning such vessel to person not
included under the last preceding
paragraph.
Sections 2 and 3 of Act No. 2761 amended
sections 1176 and 1202 of the Administrative
Code to read as follows:
SEC. 1176. Investigation into character
of vessel. — No application for a
certificate of Philippine register shall be
approved until the collector of customs is
satisfied from an inspection of the
vessel that it is engaged or destined to
be engaged in legitimate trade and that
it is of domestic ownership as such
ownership is defined in section eleven
hundred and seventy-two of this Code.
The collector of customs may at any
time inspect a vessel or examine its
owner, master, crew, or passengers in
order to ascertain whether the vessel is
engaged in legitimate trade and is
entitled to have or retain the certificate
of Philippine register.
SEC. 1202. Limiting number of foreign
officers and engineers on board vessels.
— No Philippine vessel operating in the
coastwise trade or on the high seas
shall be permitted to have on board
more than one master or one mate and
one engineer who are not citizens of
the United States or of the Philippine
Islands, even if they hold licenses under
section one thousand one hundred and
 ninety-nine hereof. No other person
who is not a citizen of the United States
or of the Philippine Islands shall be an
officer or a member of the crew of such
vessel. Any such vessel which fails to
comply with the terms of this section
shall be required to pay an additional
tonnage tax of fifty centavos per net ton
per month during the continuance of
said failure.
ISSUES.
Predicated on these facts and provisions of law,
the issues as above stated recur, namely,
whether Act No 2761 of the Philippine
Legislature is valid in whole or in part —
whether the Government of the Philippine
Islands, through its Legislature, can deny the
registry of vessel in its coastwise trade to
corporations having alien stockholders .
OPINION.
1. Considered from a positive standpoint, there
can exist no measure of doubt as to the power of
the Philippine Legislature to enact Act No. 2761.
The Act of Congress of April 29, 1908, with its
specific delegation of authority to the
Government of the Philippine Islands to regulate
the transportation of merchandise and
passengers between ports or places therein, the
liberal construction given to the provisions of the
Philippine Bill, the Act of Congress of July 1,
1902, by the courts, and the grant by the Act of
Congress of August 29, 1916, of general
legislative power to the Philippine Legislature,
are certainly superabundant authority for such a
law. While the Act of the local legislature may in
a way be inconsistent with the Act of Congress
regulating the coasting trade of the Continental
United States, yet the general rule that only such
laws of the United States have force in the
Philippines as are expressly extended thereto,
and the abnegation of power by Congress in
favor of the Philippine Islands would leave no
starting point for convincing argument. As a
matter of fact, counsel for petitioner does not
assail legislative action from this direction
(See U. S. vs. Bull [1910], 15 Phil., 7;
Sinnot vs.Davenport [1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint
that counsel argues against the constitutionality
of Act No. 2761. The first paragraph of the
Philippine Bill of Rights of the Philippine Bill,
repeated again in the first paragraph of the
Philippine Bill of Rights as set forth in the Jones
Law, provides "That no law shall be enacted in
said Islands which shall deprive any person of
life, liberty, or property without due process of
law, or deny to any person therein the equal
protection of the laws." Counsel says that Act No.
2761 denies to Smith, Bell & Co., Ltd., the equal
protection of the laws because it, in effect,
prohibits the corporation from owning vessels,
and because classification of corporations based
on the citizenship of one or more of their
stockholders is capricious, and that Act No. 2761
deprives the corporation of its properly without
due process of law because by the passage of the
law company was automatically deprived of
every beneficial attribute of ownership in
the Batoand left with the naked title to a boat it
could not use .
The guaranties extended by the Congress of the
United States to the Philippine Islands have been
used in the same sense as like provisions found
in the United States Constitution. While the "due
process of law and equal protection of the laws"
clause of the Philippine Bill of Rights is couched
in slightly different words than the
corresponding clause of the Fourteenth
Amendment to the United States Constitution,
the first should be interpreted and given the
same force and effect as the latter. (Kepner vs.
U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga
[1907], 204 U. S.,.470; U. S. vs. Bull [1910], 15
Phil., 7.) The meaning of the Fourteenth
Amendment has been announced in classic
decisions of the United States Supreme Court.
Even at the expense of restating what is so well
known, these basic principles must again be set
down in order to serve as the basis of this
decision.
The guaranties of the Fourteenth Amendment
and so of the first paragraph of the Philippine Bill
of Rights, are universal in their application to all
person within the territorial jurisdiction, without
regard to any differences of race, color, or
nationality. The word "person" includes aliens.
(Yick Wo vs. Hopkins [1886], 118 U. S., 356;
Truax vs. Raich [1915], 239 U. S., 33.) Private
corporations, likewise, are "persons" within the
scope of the guaranties in so far as their property
is concerned. (Santa Clara County vs. Southern
Pac. R. R. Co. [1886], 118.U. S., 394; Pembina
Mining Co. vs. Pennsylvania [1888],.125 U. S., 181
Covington & L. Turnpike Road Co.vs. Sandford
[1896], 164 U. S., 578.) Classification with the
end in view of providing diversity of treatment
may be made among corporations, but must be
based upon some reasonable ground and not be
a mere arbitrary selection (Gulf, Colorado &
Santa Fe Railway Co. vs. Ellis [1897],.165 U. S.,
150.) Examples of laws held unconstitutional
because of unlawful discrimination against aliens
could be cited. Generally, these decisions relate
to statutes which had attempted arbitrarily to
forbid aliens to engage in ordinary kinds of
business to earn their living.
(State vs. Montgomery [1900], 94 Maine, 192,
peddling — but see. Commonwealth vs. Hana
[1907], 195 Mass., 262; Templar vs. Board of
Examiners of Barbers [1902], 131 Mich., 254,
barbers; Yick Wo vs.Hopkins [1886], 118 U.
S.,.356, discrimination against Chinese;
Truax vs. Raich [1915], 239 U. S., 33; In reParrott
[1880], 1 Fed , 481; Fraser vs. McConway &
Torley Co. [1897], 82 Fed , 257; Juniata
Limestone Co. vs.Fagley [1898], 187 Penn., 193,
all relating to the employment of aliens by
private corporations.)
A literal application of general principles to the
facts before us would, of course, cause the
inevitable deduction that Act No. 2761 is
unconstitutional by reason of its denial to a
corporation, some of whole members are
foreigners, of the equal protection of the laws.
Like all beneficient propositions, deeper
research discloses provisos. Examples of a denial
of rights to aliens notwithstanding the provisions
of the Fourteenth Amendment could be cited.
(Tragesser vs. Gray [1890], 73 Md., 250, licenses
to sell spirituous liquors denied to persons not
citizens of the United States;
Commonwealth vs. Hana [1907], 195 Mass , 262,
excluding aliens from the right to peddle;
Patsone vs. Commonwealth of Pennsylvania
[1914], 232 U. S. , 138, prohibiting the killing of
any wild bird or animal by any unnaturalized
foreign-born resident; Ex parte Gilleti [1915], 70
Fla., 442, discriminating in favor of citizens with
reference to the taking for private use of the
common property in fish and oysters found in
the public waters of the State; Heim vs. McCall
[1915], 239 U. S.,.175, and Crane vs. New York
[1915], 239 U. S., 195, limiting employment on
public works by, or for, the State or a
municipality to citizens of the United States.)
One of the exceptions to the general rule, most
persistent and far reaching in influence is, that
neither the Fourteenth Amendment to the United
States Constitution, broad and comprehensive as
it is, nor any other amendment, "was designed to
interfere with the power of the State, sometimes
termed its `police power,' to prescribe
regulations to promote the health, peace, morals,
education, and good order of the people, and
legislate so as to increase the industries of the
State, develop its resources and add to its wealth
and prosperity. From the very necessities of
society, legislation of a special character, having
these objects in view, must often be had in
certain districts." (Barbier vs. Connolly [1884],
113 U.S., 27; New Orleans Gas Co. vs.Lousiana
Light Co. [1885], 115 U.S., 650.) This is the same
police power which the United States Supreme
Court say "extends to so dealing with the
conditions which exist in the state as to bring out
of them the greatest welfare in of its people."
(Bacon vs. Walker [1907], 204 U.S., 311.) For
quite similar reasons, none of the provision of
the Philippine Organic Law could could have had
the effect of denying to the Government of the
Philippine Islands, acting through its Legislature,
the right to exercise that most essential,
insistent, and illimitable of powers, the sovereign
police power, in the promotion of the general
welfare and the public interest. (U. S. vs. Toribio
[1910], 15 Phil., 85; Churchill and
Tait vs. Rafferty [1915], 32 Phil., 580;
Rubi vs. Provincial Board of Mindoro [1919], 39
Phil., 660.) Another notable exception permits of
the regulation or distribution of the public
domain or the common property or resources of
the people of the State, so that use may be
limited to its citizens. (Ex parte Gilleti [1915], 70
Fla., 442; McCready vs. Virginia [1876], 94 U. S.,
391; Patsone vs.Commonwealth of Pennsylvania
[1914], 232U. S., 138.) Still another exception
permits of the limitation of employment in the
construction of public works by, or for, the State
or a municipality to citizens of the United States
or of the State. (Atkin vs. Kansas [1903],191 U. S.,
207; Heim vs. McCall [1915], 239 U.S., 175;
Cranevs. New York [1915], 239 U. S., 195.) Even
as to classification, it is admitted that a State may
classify with reference to the evil to be
prevented; the question is a practical one,
dependent upon experience.
(Patsone vs.Commonwealth of Pennsylvania
[1914], 232 U. S., 138.)
To justify that portion of Act no. 2761 which
permits corporations or companies to obtain a
certificate of Philippine registry only on
condition that they be composed wholly of
citizens of the Philippine Islands or of the United
States or both, as not infringing Philippine
Organic Law, it must be done under some one of
the exceptions here mentioned This must be
done, moreover, having particularly in mind
what is so often of controlling effect in this
jurisdiction — our local experience and our
peculiar local conditions.
To recall a few facts in geography, within the
confines of Philippine jurisdictional limits are
found more than three thousand islands.
Literally, and absolutely, steamship lines are, for
an Insular territory thus situated, the arteries of
commerce. If one be severed, the life-blood of the
nation is lost. If on the other hand these arteries
are protected, then the security of the country
and the promotion of the general welfare is
sustained. Time and again, with such conditions
confronting it, has the executive branch of the
Government of the Philippine Islands, always
later with the sanction of the judicial branch,
taken a firm stand with reference to the presence
of undesirable foreigners. The Government has
thus assumed to act for the all-sufficient and
primitive reason of the benefit and protection of
its own citizens and of the self-preservation and
integrity of its dominion. (In rePatterson [1902],
1 Phil., 93; Forbes vs. Chuoco, Tiaco and
Crossfield [1910], 16 Phil., 534;.228 U.S., 549; In
reMcCulloch Dick [1918], 38 Phil., 41.) Boats
owned by foreigners, particularly by such solid
and reputable firms as the instant claimant,
might indeed traverse the waters of the
Philippines for ages without doing any particular
harm. Again, some evilminded foreigner might
very easily take advantage of such lavish
hospitality to chart Philippine waters, to obtain
valuable information for unfriendly foreign
powers, to stir up insurrection, or to prejudice
Filipino or American commerce. Moreover,
under the Spanish portion of Philippine law, the
waters within the domestic jurisdiction are
deemed part of the national domain, open to
public use. (Book II, Tit. IV, Ch. I, Civil Code;
Spanish Law of Waters of August 3, 1866, arts 1,
2, 3.) Common carriers which in the Philippines
as in the United States and other countries are,
as Lord Hale said, "affected with a public
interest," can only be permitted to use these
public waters as a privilege and under such
conditions as to the representatives of the
people may seem wise. (See De Villata vs. Stanley
[1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania
([1913], 232 U.S., 138), a case herein before
mentioned, Justice Holmes delivering the opinion
of the United States Supreme Court said:
This statute makes it unlawful for any
unnaturalized foreign-born resident to
kill any wild bird or animal except in
defense of person or property, and `to
that end' makes it unlawful for such
foreign-born person to own or be
possessed of a shotgun or rifle; with a
penalty of $25 and a forfeiture of the
gun or guns. The plaintiff in error was
found guilty and was sentenced to pay
the abovementioned fine. The judgment
was affirmed on successive appeals.
(231 Pa., 46; 79 Atl., 928.) He brings the
case to this court on the ground that
the statute is contrary to the 14th
Amendment and also is in
contravention of the treaty between the
United States and Italy, to which latter
country the plaintiff in error belongs .
Under the 14th Amendment the
objection is twofold; unjustifiably
depriving the alien of property, and
discrimination against such aliens as a
class. But the former really depends
upon the latter, since it hardly can be
disputed that if the lawful object, the
protection of wild life
(Geer vs. Connecticut, 161 U.S., 519; 40
L. ed., 793; 16 Sup. Ct. Rep., 600),
warrants the discrimination, the,
means adopted for making it effective
also might be adopted. . . .
The discrimination undoubtedly
presents a more difficult question. But
we start with reference to the evil to be
prevented, and that if the class
discriminated against is or reasonably
might be considered to define those
from whom the evil mainly is to be
feared, it properly may be picked out. A
lack of abstract symmetry does not
matter. The question is a practical one,
dependent upon experience. . . .
The question therefore narrows itself
to whether this court can say that the
legislature of Pennsylvania was not
warranted in assuming as its premise
for the law that resident unnaturalized
aliens were the peculiar source of the
evil that it desired to prevent.
(Barrett vs. Indiana,. 229 U.S., 26, 29; 57
L. ed., 1050, 1052; 33 Sup. Ct. Rep.,
692.)
Obviously the question, so stated, is one
of local experience, on which this court
ought to be very slow to declare that
the state legislature was wrong in its
facts (Adams vs. Milwaukee, 228 U.S.,
572, 583; 57 L. ed., 971,.977; 33 Sup. Ct.
Rep., 610.) If we might trust popular
speech in some states it was right; but
it is enough that this court has no such
knowledge of local conditions as to be
able to say that it was manifestly
wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell
& Co. Ltd., a corporation having alien
stockholders, is entitled to the protection
afforded by the due-process of law and equal
protection of the laws clause of the Philippine
Bill of Rights, nevertheless, Act No. 2761 of the
Philippine Legislature, in denying to
corporations such as Smith, Bell &. Co. Ltd., the
right to register vessels in the Philippines
coastwise trade, does not belong to that vicious
species of class legislation which must always be
condemned, but does fall within authorized
exceptions, notably, within the purview of the
police power, and so does not offend against the
constitutional provision.
This opinion might well be brought to a close at
this point. It occurs to us, however, that the
legislative history of the United States and the
Philippine Islands, and, probably, the legislative
history of other countries, if we were to take the
time to search it out, might disclose similar
attempts at restriction on the right to enter the
coastwise trade, and might thus furnish valuable
aid by which to ascertain and, if possible,
effectuate legislative intention.
3. The power to regulate commerce,
expressly delegated to the Congress by
the Constitution, includes the power to
nationalize ships built and owned in
the United States by registries and
enrollments, and the recording of the
muniments of title of American vessels.
The Congress "may encourage or it may
entirely prohibit such commerce, and it
may regulate in any way it may see fit
between these two extremes."
(U.S. vs. Craig [1886], 28 Fed., 795;
Gibbons vs. Ogden [1824], 9 Wheat., 1;
The Passenger Cases [1849], 7 How.,
283.)
Acting within the purview of such power, the
first Congress of the United States had not been
long convened before it enacted on September 1,
1789, "An Act for Registering and Clearing
Vessels, Regulating the Coasting Trade, and for
other purposes." Section 1 of this law provided
that for any ship or vessel to obtain the benefits
of American registry, it must belong wholly to a
citizen or citizens of the United States "and no
other." (1 Stat. at L., 55.) That Act was shortly
after repealed, but the same idea was carried
into the Acts of Congress of December 31, 1792
and February 18, 1793. (1 Stat. at L., 287,
305.).Section 4 of the Act of 1792 provided that
in order to obtain the registry of any vessel, an
oath shall be taken and subscribed by the owner,
or by one of the owners thereof, before the
officer authorized to make such registry,
declaring, "that there is no subject or citizen of
any foreign prince or state, directly or indirectly,
by way of trust, confidence, or otherwise,
interested in such vessel, or in the profits or
issues thereof." Section 32 of the Act of 1793
even went so far as to say "that if any licensed
ship or vessel shall be transferred to any person
who is not at the time of such transfer a citizen of
and resident within the United States, ... every
such vessel with her tackle, apparel, and
furniture, and the cargo found on board her,
shall be forefeited." In case of alienation to a
foreigner, Chief Justice Marshall said that all the
privileges of an American bottom were ipso
facto forfeited. (U.S. vs. Willings and Francis
[1807], 4 Cranch, 48.) Even as late as 1873, the
Attorney-General of the United States was of the
opinion that under the provisions of the Act of
December 31, 1792, no vessel in which a
foreigner is directly or indirectly interested can
lawfully be registered as a vessel of the United.
States. (14 Op. Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest,
although possibly the Act of March 3, 1825, may
have affected them, until amended by the Act of
May 28, 1896 (29 Stat. at L., 188) which
extended the privileges of registry from vessels
wholly owned by a citizen or citizens of the
United States to corporations created under the
laws of any of the states thereof. The law, as
amended, made possible the deduction that a
vessel belonging to a domestic corporation was
entitled to registry or enrollment even though
some stock of the company be owned by aliens.
The right of ownership of stock in a corporation
was thereafter distinct from the right to hold the
property by the corporation
(Humphreys vs. McKissock [1890], 140 U.S., 304;
Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op.
Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the
new government found a substantive law in
operation in the Islands with a civil law history
which it wisely continued in force Article fifteen
of the Spanish Code of Commerce permitted any
foreigner to engage in Philippine trade if he had
legal capacity to do so under the laws of his
nation. When the Philippine Commission came to
enact the Customs Administrative Act (No. 355)
in 1902, it returned to the old American policy of
limiting the protection and flag of the United
States to vessels owned by citizens of the United
States or by native inhabitants of the Philippine
Islands (Sec. 117.) Two years later, the same
body reverted to the existing Congressional law
by permitting certification to be issued to a
citizen of the United States or to a corporation or
company created under the laws of the United
States or of any state thereof or of the Philippine
Islands (Act No. 1235, sec. 3.) The two
administration codes repeated the same
provisions with the necessary amplification of
inclusion of citizens or native inhabitants of the
Philippine Islands (Adm. Code of 1916, sec.
1345; Adm. Code of 1917, sec. 1172). And now
Act No. 2761 has returned to the restrictive idea
of the original Customs Administrative Act which
in turn was merely a reflection of the statutory
language of the first American Congress.
Provisions such as those in Act No. 2761, which
deny to foreigners the right to a certificate of
Philippine registry, are thus found not to be as
radical as a first reading would make them
appear.
Without any subterfuge, the apparent purpose of
the Philippine Legislature is seen to be to enact
an anti-alien shipping act. The ultimate purpose
of the Legislature is to encourage Philippine
ship-building. This, without doubt, has, likewise,
been the intention of the United States Congress
in passing navigation or tariff laws on different
occasions. The object of such a law, the United
States Supreme Court once said, was to
encourage American trade, navigation, and ship-
building by giving American ship-owners
exclusive privileges. (Old Dominion Steamship
Co. vs. Virginia [1905], 198 U.S., 299; Kent's
Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in
Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found
the following:
Licensing acts, in fact, in legislation, are
universally restraining acts; as, for
example, acts licensing gaming houses,
retailers of spirituous liquors, etc. The
act, in this instance, is distinctly of that
character, and forms part of an
extensive system, the object of which is
to encourage American shipping, and
place them on an equal footing with the
shipping of other nations. Almost every
commercial nation reserves to its own
subjects a monopoly of its coasting
trade; and a countervailing privilege in
favor of American shipping is
contemplated, in the whole legislation
of the United States on this subject. It is
not to give the vessel an American
character, that the license is granted;
that effect has been correctly attributed
to the act of her enrollment. But it is to
confer on her American privileges, as
contradistinguished from foreign; and
to preserve the. Government from
fraud by foreigners, in surreptitiously
intruding themselves into the American
commercial marine, as well as frauds
upon the revenue in the trade which will best carry legislative intention into
coastwise, that this whole system is effect.
projected. With full consciousness of the importance of the
The United States Congress in assuming its grave question, we nevertheless are clearly of the
responsibility of legislating wisely for a new opinion that the limitation of domestic
country did so imbued with a spirit of ownership for purposes of obtaining a certificate
Americanism. Domestic navigation and trade, it of Philippine registry in the coastwise trade to
decreed, could only be carried on by citizens of citizens of the Philippine Islands, and to citizens
the United States. If the representatives of the of the United States, does not violate the
American people acted in this patriotic manner provisions of paragraph 1 of section 3 of the Act
to advance the national policy, and if their action of Congress of August 29, 1916 No treaty right
was accepted without protest in the courts, who relied upon Act No. 2761 of the Philippine
can say that they did not enact such beneficial Legislature is held valid and constitutional .
laws under the all-pervading police power, with The petition for a writ of mandamus is denied,
the prime motive of safeguarding the country with costs against the petitioner. So ordered.
and of promoting its prosperity? Quite similarly, Arellano, C.J., Torres, Johnson, Araullo, Street,
the Philippine Legislature made up entirely of Avanceña and Moir, JJ., concur.
Filipinos, representing the mandate of the
Filipino people and the guardian of their rights,
acting under practically autonomous powers,
and imbued with a strong sense of Philippinism,
has desired for these Islands safety from foreign
interlopers, the use of the common property
exclusively by its citizens and the citizens of the
United States, and protection for the common
good of the people. Who can say, therefore,
especially can a court, that with all the facts and
circumstances affecting the Filipino people
before it, the Philippine Legislature has erred in
the enactment of Act No. 2761?
Surely, the members of the judiciary are not
expected to live apart from active life, in
monastic seclusion amidst dusty tomes and
ancient records, but, as keen spectators of
passing events and alive to the dictates of the
general — the national — welfare, can incline
the scales of their decisions in favor of that
solution which will most effectively promote the
public policy. All the presumption is in favor of
the constitutionally of the law and without good
and strong reasons, courts should not attempt to
nullify the action of the Legislature. "In
construing a statute enacted by the Philippine
Commission (Legislature), we deem it our duty
not to give it a construction which would be
repugnant to an Act of Congress, if the language
of the statute is fairly susceptible of another
construction not in conflict with the higher law."
(In re Guariña [1913], 24. Phil., 36; U.S. vs. Ten Yu
[1912], 24 Phil., 1.) That is the true construction
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19550 June 19, 1967
HARRY S. STONEHILL, ROBERT P. BROOKS,
JOHN J. BROOKS and KARL BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as
SECRETARY OF JUSTICE; JOSE LUKBAN, in his
capacity as Acting Director, National Bureau
of Investigation; SPECIAL PROSECUTORS
PEDRO D. CENZON, EFREN I. PLANA and
MANUEL VILLAREAL, JR. and ASST. FISCAL
MANASES G. REYES; JUDGE AMADO ROAN,
Municipal Court of Manila; JUDGE ROMAN
CANSINO, Municipal Court of Manila; JUDGE
HERMOGENES CALUAG, Court of First
Instance of Rizal-Quezon City Branch, and
JUDGE DAMIAN JIMENEZ, Municipal Court of
Quezon City, respondents.
Paredes, Poblador, Cruz and Nazareno and Meer,
Meer and Meer and Juan T. David for petitioners.
Office of the Solicitor General Arturo A. Alafriz,
Assistant Solicitor General Pacifico P. de Castro,
Assistant Solicitor General Frine C. Zaballero,
Solicitor Camilo D. Quiason and Solicitor C. Padua
for respondents.
CONCEPCION, C.J.:
Upon application of the officers of the
government named on the margin1 —
hereinafter referred to as Respondents-
Prosecutors — several judges2 — hereinafter
referred to as Respondents-Judges — issued, on
different dates,3 a total of 42 search warrants
against petitioners herein4 and/or the
corporations of which they were
officers,5 directed to the any peace officer, to
search the persons above-named and/or the
premises of their offices, warehouses and/or
residences, and to seize and take possession of
the following personal property to wit:
Books of accounts, financial records,
vouchers, correspondence, receipts,
ledgers, journals, portfolios, credit
journals, typewriters, and other
documents and/or papers showing all
business transactions including
disbursements receipts, balance sheets
and profit and loss statements and
Bobbins (cigarette wrappers).
as "the subject of the offense; stolen or
embezzled and proceeds or fruits of the offense,"
or "used or intended to be used as the means of
committing the offense," which is described in
the applications adverted to above as "violation
of Central Bank Laws, Tariff and Customs Laws,
Internal Revenue (Code) and the Revised Penal
Code."
Alleging that the aforementioned search
warrants are null and void, as contravening the
Constitution and the Rules of Court —
because, inter alia: (1) they do not describe with
particularity the documents, books and things to
be seized; (2) cash money, not mentioned in the
warrants, were actually seized; (3) the warrants
were issued to fish evidence against the
aforementioned petitioners in deportation cases
filed against them; (4) the searches and seizures
were made in an illegal manner; and (5) the
documents, papers and cash money seized were
not delivered to the courts that issued the
warrants, to be disposed of in accordance with
law — on March 20, 1962, said petitioners filed
with the Supreme Court this original action
for certiorari, prohibition, mandamusand
injunction, and prayed that, pending final
disposition of the present case, a writ of
preliminary injunction be issued restraining
Respondents-Prosecutors, their agents and /or
representatives from using the effects seized as
aforementioned or any copies thereof, in the
deportation cases already adverted to, and that,
in due course, thereafter, decision be rendered
quashing the contested search warrants and
declaring the same null and void, and
commanding the respondents, their agents or
representatives to return to petitioners herein,
in accordance with Section 3, Rule 67, of the
Rules of Court, the documents, papers, things
and cash moneys seized or confiscated under the
search warrants in question.
In their answer, respondents-prosecutors
alleged, 6 (1) that the contested search warrants
are valid and have been issued in accordance
with law; (2) that the defects of said warrants, if
any, were cured by petitioners' consent; and (3)
that, in any event, the effects seized are
admissible in evidence against herein
petitioners, regardless of the alleged illegality of
the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of
preliminary injunction prayed for in the petition.
However, by resolution dated June 29, 1962, the
writ was partially lifted or dissolved, insofar as
the papers, documents and things seized from
the offices of the corporations above mentioned
are concerned; but, the injunction was
maintained as regards the papers, documents
and things found and seized in the residences of
petitioners herein.7
Thus, the documents, papers, and things seized
under the alleged authority of the warrants in
question may be split into two (2) major groups,
namely: (a) those found and seized in the offices
of the aforementioned corporations, and (b)
those found and seized in the residences of
petitioners herein.
As regards the first group, we hold that
petitioners herein have no cause of action to
assail the legality of the contested warrants and
of the seizures made in pursuance thereof, for
the simple reason that said corporations have
their respective personalities, separate and
distinct from the personality of herein
petitioners, regardless of the amount of shares of
stock or of the interest of each of them in said
corporations, and whatever the offices they hold
therein may be.8 Indeed, it is well settled that the
legality of a seizure can be contested only by the
party whose rights have been impaired
thereby,9 and that the objection to an unlawful
search and seizure ispurely personal and cannot
be availed of by third parties. 10 Consequently,
petitioners herein may not validly object to the
use in evidence against them of the documents,
papers and things seized from the offices and
premises of the corporations adverted to above,
since the right to object to the admission of said
papers in evidence belongs exclusively to the
corporations, to whom the seized effects belong,
and may not be invoked by the corporate officers
in proceedings against them in their individual
capacity. 11 Indeed, it has been held:
. . . that the Government's action in
gaining possession of papers belonging
to the corporation did not relate to nor
did it affect the personal defendants. If
these papers were unlawfully seized
and thereby the constitutional rights of
or any one were invaded, they were the
rights of the corporation and not the
rights of the other defendants. Next, it is
clear that a question of the lawfulness
of a seizure can be raised onlyby
one whose rights have been invaded.
Certainly, such a seizure, if unlawful,
could not affect the constitutional
rights of defendants whose property
had not been seized or the privacy of
whose homes had not been disturbed;
nor could they claim for themselves the
benefits of the Fourth Amendment,
when its violation, if any, was with
reference to the rights
of another. Remus vs. United
States (C.C.A.)291 F. 501, 511. It
follows, therefore, that the question of
the admissibility of the evidence based
on an alleged unlawful search and
seizure does not extend to the personal
defendants but
embraces only thecorporation whose
property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United
States, [1925] 3 F. 2d. 786, 789,
Emphasis supplied.)
With respect to the documents, papers and
things seized in the residences of petitioners
herein, the aforementioned resolution of June 29,
1962, lifted the writ of preliminary injunction
previously issued by this Court, 12 thereby, in
effect, restraining herein Respondents-
Prosecutors from using them in evidence against
petitioners herein.
In connection with said documents, papers and
things, two (2) important questions need be
settled, namely: (1) whether the search warrants
in question, and the searches and seizures made
under the authority thereof, are valid or not, and
(2) if the answer to the preceding question is in
the negative, whether said documents, papers
and things may be used in evidence against
petitioners herein.1äwphï1.ñët
Petitioners maintain that the aforementioned
search warrants are in the nature of general
warrants and that accordingly, the seizures
effected upon the authority there of are null and
void. In this connection, the
Constitution 13 provides:
The right of the people to be secure in
their persons, houses, papers, and
effects against unreasonable searches
 and seizures shall not be violated, and
no warrants shall issue but upon
probable cause, to be determined by
the judge after examination under oath
or affirmation of the complainant and
the witnesses he may produce, and
particularly describing the place to be
searched, and the persons or things to
be seized.
Two points must be stressed in connection with
this constitutional mandate, namely: (1) that no
warrant shall issue but upon probable cause, to
be determined by the judge in the manner set
forth in said provision; and (2) that the warrant
shall particularly describe the things to be seized.
None of these requirements has been complied
with in the contested warrants. Indeed, the same
were issued upon applications stating that the
natural and juridical person therein named had
committed a "violation of Central Ban Laws,
Tariff and Customs Laws, Internal Revenue
(Code) and Revised Penal Code." In other words,
no specific offense had been alleged in said
applications. The averments thereof with respect
to the offense committed were abstract. As a
consequence, it was impossible for the judges
who issued the warrants to have found the
existence of probable cause, for the same
presupposes the introduction of competent
proof that the party against whom it is sought
has performed particular acts, or
committed specific omissions, violating a given
provision of our criminal laws. As a matter of
fact, the applications involved in this case do not
allege any specific acts performed by herein
petitioners. It would be the legal heresy, of the
highest order, to convict anybody of a "violation
of Central Bank Laws, Tariff and Customs Laws,
Internal Revenue (Code) and Revised Penal
Code," — as alleged in the aforementioned
applications — without reference to any
determinate provision of said laws or
To uphold the validity of the warrants in
question would be to wipe out completely one of
the most fundamental rights guaranteed in our
Constitution, for it would place the sanctity of
the domicile and the privacy of communication
and correspondence at the mercy of the whims
caprice or passion of peace officers. This is
precisely the evil sought to be remedied by the
constitutional provision above quoted — to
outlaw the so-called general warrants. It is not
difficult to imagine what would happen, in times
of keen political strife, when the party in power
feels that the minority is likely to wrest it, even
though by legal means.
Such is the seriousness of the irregularities
committed in connection with the disputed
search warrants, that this Court deemed it fit to
amend Section 3 of Rule 122 of the former Rules
of Court 14 by providing in its counterpart, under
the Revised Rules of Court 15 that "a search
warrant shall not issue but upon probable
causein connection with one specific offense." Not
satisfied with this qualification, the Court added
thereto a paragraph, directing that "no search
warrant shall issue for more than one specific
offense."
The grave violation of the Constitution made in
the application for the contested search warrants
was compounded by the description therein
made of the effects to be searched for and seized,
to wit:
Books of accounts, financial records,
vouchers, journals, correspondence,
receipts, ledgers, portfolios, credit
journals, typewriters, and other
documents and/or papers showing all
business transactions including
disbursement receipts, balance sheets
and related profit and loss statements.
Thus, the warrants authorized the search for and
seizure of records pertaining to all business
transactions of petitioners herein, regardless of
whether the transactions were legal or illegal.
The warrants sanctioned the seizure of all
records of the petitioners and the
aforementioned corporations, whatever their
nature, thus openly contravening the explicit
command of our Bill of Rights — that the things
to be seized be particularly described — as well
as tending to defeat its major objective: the
elimination of general warrants.
Relying upon Moncado vs. People's Court (80 Phil.
1), Respondents-Prosecutors maintain that, even
if the searches and seizures under consideration
were unconstitutional, the documents, papers
and things thus seized are admissible in evidence
against petitioners herein. Upon mature
deliberation, however, we are unanimously of
the opinion that the position taken in the
Moncado case must be abandoned. Said position
was in line with the American common law rule,
that the criminal should not be allowed to go free
merely "because the constable has
blundered," 16 upon the theory that the
constitutional prohibition against unreasonable
searches and seizures is protected by means
other than the exclusion of evidence unlawfully
obtained, 17 such as the common-law action for
damages against the searching officer, against
the party who procured the issuance of the
search warrant and against those assisting in the
execution of an illegal search, their criminal
punishment, resistance, without liability to an
unlawful seizure, and such other legal remedies
as may be provided by other laws.
However, most common law jurisdictions have
already given up this approach and eventually
adopted the exclusionary rule, realizing that this
is the only practical means of enforcing the
constitutional injunction against unreasonable
searches and seizures. In the language of Judge
Learned Hand:
As we understand it, the reason for the
exclusion of evidence competent as
such, which has been unlawfully
acquired, is that exclusion is the only
practical way of enforcing the
constitutional privilege. In earlier times
the action of trespass against the
offending official may have been
protection enough; but that is true no
longer. Only in case the prosecution
which itself controls the seizing
officials, knows that it cannot profit by
their wrong will that wrong be
repressed.18
In fact, over thirty (30) years before, the Federal
Supreme Court had already declared:
If letters and private documents can
thus be seized and held and used in
evidence against a citizen accused of an
offense, the protection of the 4th
Amendment, declaring his rights to be
secure against such searches and
seizures, is of no value, and, so far as
those thus placed are concerned, might
as well be stricken from the
Constitution. The efforts of the courts
and their officials to bring the guilty to
punishment, praiseworthy as they are,
are not to be aided by the sacrifice of
those great principles established by
years of endeavor and suffering which
have resulted in their embodiment in the
fundamental law of the land.19
This view was, not only reiterated, but, also,
broadened in subsequent decisions on the same
Federal Court. 20After reviewing previous
decisions thereon, said Court held, in Mapp vs.
Ohio (supra.):
. . . Today we once again examine the
Wolf's constitutional documentation of
the right of privacy free from
unreasonable state intrusion, and after
its dozen years on our books, are led by
it to close the only courtroom door
remaining open to evidence secured by
official lawlessness in flagrant abuse of
that basic right, reserved to all persons
as a specific guarantee against that very
same unlawful conduct. We hold that
all evidence obtained by searches and
seizures in violation of the Constitution
is, by that same authority, inadmissible
in a State.
Since the Fourth Amendment's right of
privacy has been declared enforceable
against the States through the Due
Process Clause of the Fourteenth, it is
enforceable against them by the same
sanction of exclusion as it used against
the Federal Government. Were it
otherwise, then just as without the
Weeks rule the assurance against
unreasonable federal searches and
seizures would be "a form of words,"
valueless and underserving of mention
in a perpetual charter of inestimable
human liberties, so too, without that
rule the freedom from state invasions of
privacy would be so ephemeral and so
neatly severed from its conceptual nexus
with the freedom from all brutish means
of coercing evidence as not to permit this
Court's high regard as a
freedom "implicit in the concept of
ordered liberty." At the time that the
Court held in Wolf that the amendment
was applicable to the States through
the Due Process Clause, the cases of
this Court as we have seen, had
steadfastly held that as to federal
officers the Fourth Amendment
included the exclusion of the evidence
seized in violation of its provisions.
Even Wolf "stoutly adhered" to that
proposition. The right to when
conceded operatively enforceable
against the States, was not susceptible
of destruction by avulsion of the
sanction upon which its protection and
enjoyment had always been deemed
dependent under the Boyd, Weeks and
Silverthorne Cases. Therefore, in
extending the substantive protections
of due process to all constitutionally
unreasonable searches — state or
federal — it was logically and
constitutionally necessarily that the
exclusion doctrine — an essential part
of the right to privacy — be also
insisted upon as an essential ingredient
of the right newly recognized by the
Wolf Case. In short, the admission of the
new constitutional Right by Wolf could
not tolerate denial of its most important
constitutional privilege, namely, the
exclusion of the evidence which an
accused had been forced to give by
reason of the unlawful seizure. To hold
otherwise is to grant the right but in
reality to withhold its privilege and
enjoyment. Only last year the Court
itself recognized that the purpose of the
exclusionary rule to "is to deter — to
compel respect for the constitutional
guaranty in the only effectively available
way — by removing the incentive to
disregard it" . . . .
The ignoble shortcut to conviction left
open to the State tends to destroy the
entire system of constitutional
restraints on which the liberties of the
people rest. Having once recognized
that the right to privacy embodied in
the Fourth Amendment is enforceable
against the States, and that the right to
be secure against rude invasions of
privacy by state officers is, therefore
constitutional in origin, we can no
longer permit that right to remain an
empty promise. Because it is
enforceable in the same manner and to
like effect as other basic rights secured
by its Due Process Clause, we can no
longer permit it to be revocable at the
whim of any police officer who, in the
name of law enforcement itself, chooses
to suspend its enjoyment. Our decision,
founded on reason and truth, gives to the
individual no more than that which the
Constitution guarantees him to the
police officer no less than that to which
honest law enforcement is entitled, and,
to the courts, that judicial integrity so
necessary in the true administration of
justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary,
not only to the letter, but also, to the spirit of the
constitutional injunction against unreasonable
searches and seizures. To be sure, if the
applicant for a search warrant has competent
evidence to establish probable cause of the
commission of a given crime by the party against
whom the warrant is intended, then there is no
reason why the applicant should not comply
with the requirements of the fundamental law.
Upon the other hand, if he has no such
competent evidence, then it is not possible for the
Judge to find that there is probable cause, and,
hence, no justification for the issuance of the
warrant. The only possible explanation (not
justification) for its issuance is the necessity
of fishing evidence of the commission of a crime.
But, then, this fishing expedition is indicative of
the absence of evidence to establish a probable
cause.
Moreover, the theory that the criminal
prosecution of those who secure an illegal search
warrant and/or make unreasonable searches or
seizures would suffice to protect the
constitutional guarantee under consideration,
overlooks the fact that violations thereof are, in
general, committed By agents of the party in
power, for, certainly, those belonging to the
minority could not possibly abuse a power they
do not have. Regardless of the handicap under
which the minority usually — but,
understandably — finds itself in prosecuting
agents of the majority, one must not lose sight of
the fact that the psychological and moral effect of
the possibility 21 of securing their conviction, is
watered down by the pardoning power of the
party for whose benefit the illegality had been
committed.
In their Motion for Reconsideration and
Amendment of the Resolution of this Court dated
June 29, 1962, petitioners allege that Rooms Nos.
81 and 91 of Carmen Apartments, House No.
2008, Dewey Boulevard, House No. 1436,
Colorado Street, and Room No. 304 of the Army-
Navy Club, should be included among the
premises considered in said Resolution as
residences of herein petitioners, Harry S.
Stonehill, Robert P. Brook, John J. Brooks and
Karl Beck, respectively, and that, furthermore,
the records, papers and other effects seized in
the offices of the corporations above referred to
include personal belongings of said petitioners
and other effects under their exclusive
possession and control, for the exclusion of
which they have a standing under the latest
rulings of the federal courts of federal courts of
the United States. 22
We note, however, that petitioners' theory,
regarding their alleged possession of and control
over the aforementioned records, papers and
effects, and the alleged "personal" nature
thereof, has Been Advanced, notin their petition
or amended petition herein, but in the Motion for
Reconsideration and Amendment of the
Resolution of June 29, 1962. In other words, said
theory would appear to be readjustment of that
followed in said petitions, to suit the approach
intimated in the Resolution sought to be
reconsidered and amended. Then, too, some of
the affidavits or copies of alleged affidavits
attached to said motion for reconsideration, or
submitted in support thereof, contain either
inconsistent allegations, or allegations
inconsistent with the theory now advanced by
petitioners herein.
Upon the other hand, we are not satisfied that
the allegations of said petitions said motion for
reconsideration, and the contents of the
aforementioned affidavits and other papers
submitted in support of said motion, have
sufficiently established the facts or conditions
contemplated in the cases relied upon by the
petitioners; to warrant application of the views
therein expressed, should we agree thereto. At
any rate, we do not deem it necessary to express
our opinion thereon, it being best to leave the
matter open for determination in appropriate
cases in the future.
We hold, therefore, that the doctrine adopted in
the Moncado case must be, as it is hereby,
abandoned; that the warrants for the search of
three (3) residences of herein petitioners, as
specified in the Resolution of June 29, 1962, are
null and void; that the searches and seizures
therein made are illegal; that the writ of
preliminary injunction heretofore issued, in
connection with the documents, papers and
other effects thus seized in said residences of
herein petitioners is hereby made permanent;
that the writs prayed for are granted, insofar as
the documents, papers and other effects so
seized in the aforementioned residences are
concerned; that the aforementioned motion for
Reconsideration and Amendment should be, as it
is hereby, denied; and that the petition herein is
dismissed and the writs prayed for denied, as
regards the documents, papers and other effects
seized in the twenty-nine (29) places, offices and
other premises enumerated in the same
Resolution, without special pronouncement as to
costs.
It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P.,
Zaldivar and Sanchez, JJ., concur.
CASTRO, J., concurring and dissenting:
From my analysis of the opinion written by Chief
Justice Roberto Concepcion and from the import
of the deliberations of the Court on this case, I
gather the following distinct conclusions:
1. All the search warrants served by the
National Bureau of Investigation in this
case are general warrants and are
therefore proscribed by, and in
violation of, paragraph 3 of section 1 of
Article III (Bill of Rights) of the
Constitution;
2. All the searches and seizures
conducted under the authority of the
said search warrants were
consequently illegal;
3. The non-exclusionary rule
enunciated in Moncado vs. People, 80
Phil. 1, should be, and is declared,
abandoned;
4. The search warrants served at the
three residences of the petitioners
are expressly declared null and void the
 searches and seizures therein made
are expressly declared illegal; and the
writ of preliminary injunction
heretofore issued against the use of the
documents, papers and effect seized in
the said residences is made permanent;
and
5. Reasoning that the petitioners have
not in their pleadings satisfactorily
demonstrated that they have legal
standing to move for the suppression of
the documents, papers and effects
seized in the places other than the
three residences adverted to above, the
opinion written by the Chief
Justice refrains fromexpressly declaring
as null and void the such warrants
served at such other places and as
illegal the searches and seizures made
therein, and leaves "the matter open for
determination in appropriate cases in
the future."
It is precisely the position taken by the Chief
Justice summarized in the immediately
preceding paragraph (numbered 5) with which I
am not in accord.
I do not share his reluctance or unwillingness to
expressly declare, at this time, the nullity of the
search warrants served at places other than the
three residences, and the illegibility of the
searches and seizures conducted under the
authority thereof. In my view even the
exacerbating passions and prejudices
inordinately generated by the environmental
political and moral developments of this case
should not deter this Court from forthrightly
laying down the law not only for this case but as
well for future cases and future
generations. All the search warrants, without
exception, in this case are admittedly general,
blanket and roving warrants and are therefore
admittedly and indisputably outlawed by the
Constitution; and the searches and seizures
made were therefore unlawful. That the
petitioners, let us assume in gratia argumente,
have no legal standing to ask for the suppression
of the papers, things and effects seized from
places other than their residences, to my mind,
cannot in any manner affect, alter or otherwise
modify the intrinsic nullity of the search
warrants and the intrinsic illegality of the
searches and seizures made thereunder.
Whether or not the petitioners possess legal
standing the said warrants are void and remain
void, and the searches and seizures were illegal
and remain illegal. No inference can be drawn
from the words of the Constitution that "legal
standing" or the lack of it is a determinant of the
nullity or validity of a search warrant or of the
lawfulness or illegality of a search or seizure.
On the question of legal standing, I am of the
conviction that, upon the pleadings submitted to
this Court the petitioners have the requisite legal
standing to move for the suppression and return
of the documents, papers and effects that were
seized from places other than their family
residences.
Our constitutional provision on searches and
seizures was derived almost verbatim from the
Fourth Amendment to the United States
Constitution. In the many years of judicial
construction and interpretation of the said
constitutional provision, our courts have
invariably regarded as doctrinal the
pronouncement made on the Fourth Amendment
by federal courts, especially the Federal Supreme
Court and the Federal Circuit Courts of Appeals.
The U.S. doctrines and pertinent cases on
standing to move for the suppression or return
of documents, papers and effects which are the
fruits of an unlawful search and seizure, may be
summarized as follows; (a) ownership of
documents, papers and effects gives "standing;"
(b) ownership and/or control or possession —
actual or constructive — of premises searched
gives "standing"; and (c) the "aggrieved person"
doctrine where the search warrant and the
sworn application for search warrant are
"primarily" directed solely and exclusively
against the "aggrieved person," gives "standing."
An examination of the search warrants in this
case will readily show that, excepting three, all
were directed against the petitioners personally.
In some of them, the petitioners were named
personally, followed by the designation, "the
President and/or General Manager" of the
particular corporation. The three warrants
excepted named three corporate defendants. But
the "office/house/warehouse/premises"
mentioned in the said three warrants were also
the same "office/house/warehouse/premises"
declared to be owned by or under the control of
the petitioners in all the other search warrants
directed against the petitioners and/or "the
President and/or General Manager" of the
particular corporation. (see pages 5-24 of
Petitioners' Reply of April 2, 1962). The searches
and seizures were to be made, and were actually
made, in the
"office/house/warehouse/premises" owned by
or under the control of the petitioners.
Ownership of matters seized gives "standing."
Ownership of the properties seized alone entitles
the petitioners to bring a motion to return and
suppress, and gives them standing as persons
aggrieved by an unlawful search and seizure
regardless of their location at the time of
seizure. Jones vs. United States, 362 U.S. 257, 261
(1960) (narcotics stored in the apartment of a
friend of the defendant); Henzel vs. United States,
296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal
and corporate papers of corporation of which the
defendant was president), United States vs.
Jeffers, 342 U.S. 48 (1951) (narcotics seized in an
apartment not belonging to the
defendant); Pielow vs. United States, 8 F. 2d 492,
493 (9th Cir. 1925) (books seized from the
defendant's sister but belonging to the
defendant); Cf. Villano vs. United States, 310 F. 2d
680, 683 (10th Cir. 1962) (papers seized in desk
neither owned by nor in exclusive possession of
the defendant).
In a very recent case (decided by the U.S.
Supreme Court on December 12, 1966), it was
held that under the constitutional provision
against unlawful searches and seizures, a person
places himself or his property within a
constitutionally protected area, be it his home or
his office, his hotel room or his automobile:
Where the argument falls is in its
misapprehension of the fundamental
nature and scope of Fourth
Amendment protection. What the
Fourth Amendment protects is the
security a man relies upon when
heplaces himself or his property within a
constitutionally protected area, be it his
home or his office, his hotel room or his
automobile. There he is protected from
unwarranted governmental intrusion.
And when he puts some thing in his
filing cabinet, in his desk drawer, or in
his pocket, he has the right to know it
will be secure from an unreasonable
search or an unreasonable seizure. So it
was that the Fourth Amendment could
not tolerate the warrantless search of
the hotel room in Jeffers, the purloining
of the petitioner's private papers
in Gouled, or the surreptitious
electronic surveilance in Silverman.
Countless other cases which have come
to this Court over the years have
involved a myriad of differing factual
contexts in which the protections of the
Fourth Amendment have been
appropriately invoked. No doubt, the
future will bring countless others. By
nothing we say here do we either
foresee or foreclose factual situations
to which the Fourth Amendment may
be applicable. (Hoffa vs. U.S., 87 S. Ct.
408 (December 12, 1966). See also U.S.
vs. Jeffers, 342 U.S. 48, 72 S. Ct. 93
(November 13, 1951). (Emphasis
supplied).
Control of premises searched gives "standing."
Independent of ownership or other personal
interest in the records and documents seized, the
petitioners have standing to move for return and
suppression by virtue of their proprietary or
leasehold interest in many of the premises
searched. These proprietary and leasehold
interests have been sufficiently set forth in their
motion for reconsideration and need not be
recounted here, except to emphasize that the
petitioners paid rent, directly or indirectly, for
practically all the premises searched (Room 91,
84 Carmen Apts; Room 304, Army & Navy Club;
Premises 2008, Dewey Boulevard; 1436
Colorado Street); maintained personal offices
within the corporate offices (IBMC, USTC); had
made improvements or furnished such offices; or
had paid for the filing cabinets in which the
papers were stored (Room 204, Army & Navy
Club); and individually, or through their
respective spouses, owned the controlling stock
of the corporations involved. The petitioners'
proprietary interest in most, if not all, of the
premises searched therefore independently
gives them standing to move for the return and
suppression of the books, papers and affects
seized therefrom.
In Jones vs. United States, supra, the U.S. Supreme
Court delineated the nature and extent of the
interest in the searched premises necessary to
maintain a motion to suppress. After reviewing
what it considered to be the unduly technical
standard of the then prevailing circuit court
decisions, the Supreme Court said (362 U.S. 266):
We do not lightly depart from this
course of decisions by the lower courts.
We are persuaded, however, that it is
unnecessarily and ill-advised to import
into the law surrounding the
constitutional right to be free from
unreasonable searches and seizures
subtle distinctions, developed and
refined by the common law in evolving
the body of private property law which,
more than almost any other branch of
law, has been shaped by distinctions
whose validity is largely historical.
Even in the area from which they
derive, due consideration has led to the
discarding of those distinctions in the
homeland of the common law. See
Occupiers' Liability Act, 1957, 5 and 6
Eliz. 2, c. 31, carrying out Law Reform
Committee, Third Report, Cmd. 9305.
Distinctions such as those between
"lessee", "licensee," "invitee," "guest,"
often only of gossamer strength, ought
not be determinative in fashioning
procedures ultimately referable to
constitutional safeguards. See
also Chapman vs. United States, 354 U.S.
610, 616-17 (1961).
It has never been held that a person with
requisite interest in the premises searched must
own the property seized in order to have
standing in a motion to return and suppress.
In Alioto vs. United States, 216 F. Supp. 48 (1963),
a Bookkeeper for several corporations from
whose apartment the corporate records were
seized successfully moved for their return.
In United States vs. Antonelli, Fireworks Co., 53 F.
Supp. 870, 873 (W D. N. Y. 1943), the
corporation's president successfully moved for
the return and suppression is to him of both
personal and corporate documents seized from
his home during the course of an illegal search:
The lawful possession by Antonelli of
documents and property, "either his
own or the corporation's was entitled to
protection against unreasonable search
and seizure. Under the circumstances
in the case at bar, the search and
seizure were unreasonable and
unlawful. The motion for the return of
seized article and the suppression of
the evidence so obtained should be
granted. (Emphasis supplied).
Time was when only a person who had property
in interest in either the place searched or the
articles seize had the necessary standing to
invoke the protection of the exclusionary rule.
But in MacDonald vs. Unite States, 335 U.S. 461
(1948), Justice Robert Jackson joined by Justice
Felix Frankfurter, advanced the view that "even a
guest may expect the shelter of the rooftree he is
under against criminal intrusion." This view
finally became the official view of the U.S.
Supreme Court and was articulated in United
States vs. Jeffers, 432 U.S 48 (1951). Nine years
later, in 1960, in Jones vs. Unite States, 362 U.S.
257, 267, the U.S. Supreme Court went a step
further. Jones was a mere guest in the apartment
unlawfully searched but the Court nonetheless
declared that the exclusionary rule protected
him as well. The concept of "person aggrieved by
an unlawful search and seizure" was enlarged to
include "anyone legitimately on premise where
the search occurs."
Shortly after the U.S. Supreme
Court's Jones decision the U.S. Court of Appeals
for the Fifth Circuit held that the defendant
organizer, sole stockholder and president of a
corporation had standing in a mail fraud
prosecution against him to demand the return
and suppression of corporate property. Henzel
vs. United States, 296 F 2d 650, 652 (5th Cir.
1961), supra. The court conclude that the
defendant had standing on two independent
grounds: First — he had a sufficient interest in
the property seized, and second — he had an
adequate interest in the premises searched (just
like in the case at bar). A postal inspector had
unlawfully searched the corporation' premises
and had seized most of the corporation's book
and records. Looking to Jones, the court
observed:
Jones clearly tells us, therefore, what is
not required qualify one as a "person
aggrieved by an unlawful search and
seizure." It tells us that appellant
should not have been precluded from
objecting to the Postal Inspector's
search and seizure of the corporation's
books and records merely because the
appellant did not show ownership or
possession of the books and records or
a substantial possessory interest in the
invade premises . . . (Henzel vs. United
States, 296 F. 2d at 651). .
Henzel was soon followed by Villano vs. United
States, 310 F. 2d 680, 683, (10th Cir. 1962).
In Villano, police officers seized two notebooks
from a desk in the defendant's place of
employment; the defendant did not claim
ownership of either; he asserted that several
employees (including himself) used the
notebooks. The Court held that the employee had
a protected interest and that there also was an
invasion of privacy.
Both Henzel andVillano considered also the fact
that the search and seizure were "directed at"
the moving defendant. Henzel vs. United States,
296 F. 2d at 682; Villano vs. United States, 310 F.
2d at 683.
In a case in which an attorney closed his law
office, placed his files in storage and went to
Puerto Rico, the Court of Appeals for the Eighth
Circuit recognized his standing to move to quash
as unreasonable search and seizure under the
Fourth Amendment of the U.S. Constitution a
grand jury subpoena duces tecum directed to the
custodian of his files. The Government
contended that the petitioner had no standing
because the books and papers were physically in
the possession of the custodian, and because the
subpoena was directed against the custodian.
The court rejected the contention, holding that
Schwimmer legally had such
possession, control and unrelinquished
personal rights in the books and papers
as not to enable the question of
unreasonable search and seizure to be
escaped through the mere procedural
device of compelling a third-party
naked possessor to produce and deliver
them. Schwimmer vs. United States, 232
F. 2d 855, 861 (8th Cir. 1956).
Aggrieved person doctrine where the search
warrant s primarily directed against said person
gives "standing."
The latest United States decision squarely in
point is United States vs. Birrell, 242 F. Supp. 191
(1965, U.S.D.C. S.D.N.Y.). The defendant had
stored with an attorney certain files and papers,
which attorney, by the name of Dunn, was not, at
the time of the seizing of the records, Birrell's
attorney. * Dunn, in turn, had stored most of the
records at his home in the country and on a farm
which, according to Dunn's affidavit, was under
his (Dunn's) "control and management." The
papers turned out to be private, personal and
business papers together with corporate books
and records of certain unnamed corporations in
which Birrell did not even claim ownership. (All
of these type records were seized in the case at
bar). Nevertheless, the search in Birrell was held
invalid by the court which held that even though
Birrell did not own the premises where the
records were stored, he had "standing" to move
for the return of all the papers and properties
seized. The court, relying on Jones vs.
U.S.,supra; U.S. vs. Antonelli Fireworks Co., 53 F.
Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S.,
supra; andSchwimmer vs. U.S., supra, pointed out
that
It is overwhelmingly established that
the searches here in question were
directed solely and exclusively against
Birrell. The only person suggested in
the papers as having violated the law
was Birrell. The first search warrant
described the records as having been
used "in committing a violation of Title
18, United States Code, Section 1341,
by the use of the mails by one Lowell M.
Birrell, . . ." The second search warrant
was captioned: "United States of
America vs. Lowell M. Birrell. (p. 198)
Possession (actual or constructive), no
less than ownership, gives standing to
move to suppress. Such was the rule
even before Jones. (p. 199)
If, as thus indicated Birrell had at least
constructive possession of the records
stored with Dunn, it matters not
whether he had any interest in the
premises searched. See also Jeffers v.
United States, 88 U.S. Appl. D.C. 58, 187
F. 2d 498 (1950), affirmed 432 U.S. 48,
72 S. Ct. 93, 96 L. Ed. 459 (1951).
The ruling in the Birrell case was reaffirmed on corporate papers will have to be left to the lower
motion for reargument; the United States did not courts which issued the void search warrants in
appeal from this decision. The factual situation ultimately effecting the suppression and/or
in Birrell is strikingly similar to the case of the return of the said documents.
present petitioners; as in Birrell, many personal And as unequivocally indicated by the
and corporate papers were seized from premises authorities above cited, the petitioners likewise
not petitioners' family residences; as have clear legal standing to move for the
in Birrell,the searches were "PRIMARILY suppression of purely corporate papers as
DIRECTED SOLETY AND EXCLUSIVELY" against "President and/or General Manager" of the
the petitioners. Still both types of documents corporations involved as specifically mentioned
were suppressed in Birrell because of the illegal in the void search warrants.
search. In the case at bar, the petitioners Finally, I must articulate my persuasion that
connection with the premises raided is much although the cases cited in my disquisition were
closer than in Birrell. criminal prosecutions, the great clauses of the
Thus, the petitioners have full standing to move constitutional proscription on illegal searches
for the quashing of all the warrants regardless and seizures do not withhold the mantle of their
whether these were directed against residences protection from cases not criminal in origin or
in the narrow sense of the word, as long as the nature.
documents were personal papers of the
petitioners or (to the extent that they were
corporate papers) were held by them in a
personal capacity or under their personal
control.
Prescinding a from the foregoing, this Court, at
all events, should order the return to the
petitioners all personaland private papers and
effects seized, no matter where these were
seized, whether from their residences or
corporate offices or any other place or places.
The uncontradicted sworn statements of the
petitioners in their, various pleadings submitted
to this Court indisputably show that amongst the
things seized from the corporate offices and
other places were personal and private papers
and effects belonging to the petitioners.
If there should be any categorization of the
documents, papers and things which where the
objects of the unlawful searches and seizures, I
submit that the grouping should be:
(a) personal or private papers of the petitioners
were they were unlawfully seized, be it their
family residences offices, warehouses and/or
premises owned and/or possessed (actually or
constructively) by them as shown in all the
search and in the sworn applications filed in
securing the void search warrants and (b)
purely corporate papers belonging to
corporations. Under such categorization or
grouping, the determination of which unlawfully
seized papers, documents and things
are personal/private of the petitioners or purely
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-15526 December 28, 1963
ENRIQUE J. L. RUIZ and JOSE V. HERRERA, in
their behalf and as minority stockholders of
the Allied Technologists, Inc., plaintiffs-
appellants,
vs.
THE SECRETARY OF NATIONAL DEFENSE,
COL. NICOLAS JIMENEZ, Head of the Engineer
Group, Office of the Secretary of National
Defense, THE FINANCE OFFICER of the
Department of National Defense, THE
AUDITOR of the Dept. of National Defense,
PABLO D. PANLILIO and ALLIED
TECHNOLOGISTS, INC., defendants-appellees.
Montenegro, Madayag, Viola and Hernandez for
plaintiffs-appellants.
Office of the Solicitor General for defendant-
appellee Secretary of National Defense.
Rosauro Alvarez for defendant-appellee Allied
Technologists, Inc.
L. D. Panlilio for defendant-appellee Pablo
Panlilio.
PAREDES, J.:
This is an appeal by plaintiffs Enrique J. L. Ruiz
and Jose V. Herrera from an Order of the Court of
First Instance of Manila, in Civil Case No. 26601,
dated February 25, 1959, dismissing plaintiffs'
complaint.
On September 11, 1950, a contract was executed
between the defendant Allied Technologists, Inc.
(corporation, for short), and the Republic of the
Philippines, for the construction of the Veterans
Memorial Hospital. Ruiz and Herrera were
stockholders and officers of the corporation. The
construction of the hospital was terminated in
1955. On August 20, 1954, and June 20, 1955,
Civil Cases Nos. 23778 and 26601, respectively,
were filed by same plaintiffs herein, making as
parties-defendants in both cases, the same
defendants herein, the Secretary of National
Defense, Col. Nicolas Jimenez (Engineer), the
Finance Officer, and the Auditor of the Dept. of
National Defense, Pablo D. Panlilio and Allied
Technologists, Inc. Civil Case No. 23778 was
dismissed by the CFI on October 12, 1954; and
the dismissal was affirmed by this Court on July
7, 1955, in G.R. No. L-8638. Civil Case No. 26601
was also dismissed on September 13, 1955. On
appeal, this Court reversed the order of
dismissal, under the impression that the real
controversy was confined merely between
defendant Panlilio and plaintiffs Ruiz and
Herrera over the 15% of the contract price,
which was retained by the Department of
National Defense. The retention of the 15% of
the contract price in the sum of P34,740.00 was
made to answer for any claim or lien that might
arise, in the course of the construction. The last
case, however, was remanded to the court of
origin, for further proceedings. Panlilio and the
corporation filed their amended answers, stating
that the amount retained by the Department of
National Defense was already paid to defendant
corporation, as sought for by the plaintiffs in
their complaint. In view of this development, the
trial court invited the parties to a conference, in
which the plaintiffs indicated their conformity, to
the dismissal of the complaint with respect to the
retention of the 15% of the contract price; but
insisted upon the hearing of the second question,
which sought the declaration and recognition of
plaintiffs Ruiz and Herrera, as two of the three
architects of the hospital. The trial court,
nevertheless, dismissed the complaint, for being
already academic and moot. Hence, this appeal
by plaintiffs-appellants, who alleged in their lone
assignment of error that "the lower court
grievously erred in ordering the dismissal of the
case, with costs against the plaintiffs".
Plaintiffs-appellants contend that the only
ground relied upon by the lower court to dismiss
the case without any trial is the allegation
contained in pars. 4 and (e) of the answers of the
appellees Panlilio and Allied Technologists, Inc.,
respectively; that the amount retained by the
Department of National Defense had already
been paid; that except for this bare allegation of
the appellees, no evidence was adduced to prove
the truth of the same; that even assuming, for the
sake of argument, that the same is true,
nevertheless the first part of the first cause of
action still remains, for which they had insisted
upon a hearing in order to establish their right to
be recognized as two of the three architects of
the hospital; that because the pleadings do not
show any ground which might legally justify the
action taken by the lower court, the latter should
not have ordered the dismissal of the entire case
but should have ordered only the striking out of
the moot portion of appellants' first cause of
action, citing Pacal v. Ramos, 81 Phil. 30, 33; 27
C.J.S. 209-210; Bush v. Murray, 205 N.Y.S. 21, 26,
209 App. Div. 563; Bearden v. Longino. 190 S.E.
12, 183 Ga. 819. Appellants further argue in their
brief that they base their cause of action on
article 21, New Civil Code.
The appeal has no merit. The order appealed
from, states —
Considering the manifestation of
counsel for plaintiffs that the latter
would insist on the hearing of the
above-entitled case for the purpose of
establishing their right to be
recognized as the architects of the
Veterans Hospital together with
defendant Pablo D. Panlilio, and it
appearing that plaintiffs' Amended
Complaint with Injunction prays,
among others, "That this Honorable
Court order defendants Secretary of
National Defense, Col. Nicolas Jimenez,
and the Finance Officer and Auditor of
the Department of National Defense to
pay the Allied Technologists, Inc., the
balance unpaid by virtue of the contract
executed on September 11, 1950
(Annex "C" hereof) for services
rendered under Title I and to be
rendered under Title II of said contract;
that paragraph 4 of defendant Pablo
Panlilio's Amended Answer to said
complaint alleges "That whatever
amounts were retained by the Dept. of
National Defense on the contract price,
which retention was authorized by the
contract, was paid by the Dept. of
National Defense to the Allied
Technologists Inc. as sought by the
plaintiffs; that paragraph (e) of the
ANSWER TO THE AMENDED
COMPLAINT of defendant Allied
Technologists, Inc., also alleges "That
whatever amounts were retained by
the Department of National Defense,
per the stipulations contained in the
contract, have already been paid by the
Allied Technologists, Inc. and,
therefore, the present action seeking to
compel the aforementioned
Department of National Defense to pay
to defendant Allied Technologists, Inc.
the amounts retained by the
Department of National Defense is
academic, groundless, unfounded and
malicious"; that the said allegations of
the separate answers of defendants
Pablo Panlilio and Allied Technologists,
Inc., are not and can not be denied by
plaintiffs, and that it is this Court's
understanding that defendant has no
objection to the dismissal of this case
— it is ordered that this case be, as it is
hereby DISMISSED, with costs against
plaintiffs.
A cursory reading of pars. 18 and 19 of the
amended complaint with injunction and prayers
(1) and (2) thereof, reveals that appellants' first
cause of action is composed of two parts, as
follows:
(a) A judicial declaration or recognition that
appellants Ruiz and Herrera, together with
appellee Panlilio, were the architects of the
Veterans Hospital; and
(b) An injunction restraining the appellee
government officials paying their co-appellee
Panlilio the sum retained by the former, as per
stipulation contained in the contract for the
construction of the hospital because "they will
not only be deprived of the monetary value of
the services legally due them, but that their
professional prestige and standing will be
seriously impaired".lawphil.net
As appellants admitted, they no longer consider
the Secretary and other officials of the
Department of National Defense, as parties-
defendants in the case, said officials can no
longer be compelled to recognize the appellants,
Ruiz and Herrera, as co-architects with appellee
Panlilio of the Veterans Hospital. And, as the
amount retained by the Department on the
contract price, which retention was authorized
by the contract, was, as sought by the appellants,
already paid to the Allied Technologists, Inc.,
there is nothing more for the trial court to
decide, even without first ruling on the special
defenses of appellees Panlilio and the
corporation.
Moreover, by discarding the Secretary and other
officials of the Department of National Defense,
as parties-defendants, appellants could not
expect the trial court to order them to recognize
and declare appellants as co-architects in the
construction of the hospital. And this must be so,
because the construction agreement expressly
provides that the architect being contracted by
the Government was appellee Pablo Panlilio. The
said agreement states that the same was entered
into by the government, party of the first part
and "Allied Technologists, Inc. . . . and Mr. Pablo
D. Panlilio, architect, hereinafter called the party
of the second part" and "The Allied
Technologists, Inc. for rendering engineering
services and Mr. Pablo D. Panlilio, architect, for
rendering architectural services". And the
contract was signed for the Government by
"Ramon Magsaysay, Secretary of National
Defense (party of the first part," and "Allied
Technologists, Inc., by Enrique J. L. Ruiz,
President, Contractor, Pablo D. Panlilio,
Architect".
Appellants maintain that their claim for
recognition is divisible and separable from their
allegations regarding the non-payment by the
government of a portion of the architectural fees;
thereby concluding that what the lower court
should have done, should have been merely to
order the striking out of the moot portion of
appellants' cause of action, and should have
proceeded with hearing their claim for
recognition. But the allegations in pars. 18 and
19 of the amended complaint, show otherwise.
There is an indivisible and single cause of action
which is primarily to prevent payment
exclusively to defendant Panlilio of the amount
of P34,740.00, which said appellants contend
should be paid to appellee Allied Technologists,
Inc.; the matter recognizing them together with
Pablo Panlilio as architects of the hospital, being
merely incidental thereto. The case of Pacal v.
Ramos, 81 Phil. 30, cited by appellants is not
applicable. In this case, the grounds for quo
warranto are separable from the grounds for
election irregularities which are distinct and
separate causes of action, entitling the petitioner
to separate and unrelated reliefs. These two
grounds were alleged under separate paragraphs
and they were two independent actions
improperly joined in one proceeding. In the case
at bar, in one paragraph (par. 19 of the amended
complaint), as first cause of action, the claim for
recognition is inseparably linked with their
allegations regarding alleged threatened said violation. The pleadings do not show that
payment of P34,740.00 to Panlilio alone, because damages were ever asked or alleged, in
"they will not only be deprived of the monetary connection with this case, predicated upon the
value of the services legally due them, but that article aforecited. And under the facts and
their professional prestige and standing will be circumstances obtaining in this case, one cannot
seriously impaired". When the very defendant plausibly sustain the contention that the failure
Allied Technologists, Inc. itself asserted in its or refusal to extend the recognition was an act
answer the amended complaint, that the amount contrary to morals, good customs or public
was paid to it, an assertion which was not at all policy.
denied, plaintiffs-appellants' cause of action IN VIEW HEREOF, the order appealed from is
under said par. 19 dissipated entirely. affirmed, with costs against plaintiffs-appellants.
There is a veiled insinuation that appellants, Bengzon, C.J., Padilla, Bautista Angelo, Labrador,
thesis would fall under the provisions of the Concepcion, Reyes, J.B.L., Barrera, Dizon, Regala
Rules on declaratory relief, because appellants and Makalintal, JJ., concur.
wanted merely a declaration of their rights in a
contract in which they were interested. The trial
court, however, was correct in refusing to make
such declaration, because it was not necessary
and proper under the circumstances (sec. 6, Rule
66). Appellants were not parties to the
construction agreement. The sole object the
appeal is only to secure for them a recognition,
that they were allegedly the co-architects of
Panlilio, in the construction of the hospital, so as
to enhance their professional prestige and not to
impair their standing. If this is the goal of
appellants, a judicial declaration to the effect
would seem unnecessary. Let us ponder over the
thought that a brilliant professional enjoys the
respect and esteem of his fellowmen, even
without any court declaration of such fact, and
that an incompetent one may summon all the
tribunals in the world, to proclaim his genius in
vain.
But appellants invoke Article 21 of the Civil Code,
which states —
Any person who willfully causes loss or
injury to another in a manner that is
contrary to morals, good customs or
public policy shall compensate the
latter for the damages.
contending that the word "injury" in the said
article, refers not only to any indeterminate right
or property, but also to honor or credit (I
Tolentino Civil Code, p. 67). It may be added,
however, that this article also envisions a
situation where a person has a legal right, and
such right is violated by another in a manner
contrary to morals, good customs or public
policy; it presupposes losses or injuries, material
or otherwise, which one may suffer as a result of
Republic of the Philippines 1. Bataan Shipyard and Engineering Co., Inc. 2.4. Minutes of the Regular and Special Meetings On July 15, 1986, the same Capt. Zabala issued a
SUPREME COURT (Engineering Island Shipyard and Mariveles of the Board of Directors from 1973 to 1986 Memorandum addressed to "Truck Owners and
Manila Shipyard) 2.5. Minutes of the Executive Committee Contractors," particularly a "Mr. Buddy Ondivilla
EN BANC 2. Baseco Quarry Meetings from 1973 to 1986 National Marine Corporation," advising of the
G.R. No. 75885 May 27, 1987 3. Philippine Jai-Alai Corporation 2.6. Existing contracts with amendment in part of their contracts with
BATAAN SHIPYARD & ENGINEERING CO., INC. 4. Fidelity Management Co., Inc. suppliers/contractors/others. BASECO in the sense that the stipulated charges
(BASECO), petitioner, 5. Romson Realty, Inc. 3. Yearly list of stockholders with their for use of the BASECO road network were made
vs. 6. Trident Management Co. corresponding share/stockholdings from 1973 payable "upon entry and not anymore subject to
PRESIDENTIAL COMMISSION ON GOOD 7. New Trident Management to 1986 duly certified by the Corporate monthly billing as was originally agreed upon." 4
GOVERNMENT, CHAIRMAN JOVITO SALONGA, 8. Bay Transport Secretary. d. Aborted Contract for
COMMISSIONER MARY CONCEPCION 9. And all affiliate companies of Alfredo "Bejo" 4. Audited Financial Statements such as Balance Improvement of Wharf at
BAUTISTA, COMMISSIONER RAMON DIAZ, Romualdez Sheet, Profit & Loss and others from 1973 to Engineer Island
COMMISSIONER RAUL R. DAZA, You are hereby ordered: December 31, 1985. On July 9, 1986, a PCGG fiscal agent, S.
COMMISSIONER QUINTIN S. DOROMAL, CAPT. 1. To implement this 5. Monthly Financial Statements for the current Berenguer, entered into a contract in behalf of
JORGE B. SIACUNCO, et al.,respondents. sequestration order with a year up to March 31, 1986. BASECO with Deltamarine Integrated Port
Apostol, Bernas, Gumaru, Ona and Associates for minimum disruption of these 6. Consolidated Cash Position Reports from Services, Inc., in virtue of which the latter
petitioner. companies' business January to April 15, 1986. undertook to introduce improvements costing
Vicente G. Sison for intervenor A.T. Abesamis. activities. 7. Inventory listings of assets up dated up to approximately P210,000.00 on the BASECO
2. To ensure the continuity of March 31, 1986. wharf at Engineer Island, allegedly then in poor
NARVASA, J.: these companies as going 8. Updated schedule of Accounts Receivable and condition, avowedly to "optimize its utilization
Challenged in this special civil action of certiorari concerns, the care and Accounts Payable. and in return maximize the revenue which
and prohibition by a private corporation known maintenance of these assets 9. Complete list of depository banks for all funds would flow into the government coffers," in
as the Bataan Shipyard and Engineering Co., Inc. until such time that the Office with the authorized signatories for withdrawals consideration of Deltamarine's being granted
are: (1) Executive Orders Numbered 1 and 2, of the President through the thereof. "priority in using the improved portion of the
promulgated by President Corazon C. Aquino on Commission on Good 10. Schedule of company investments and wharf ahead of anybody" and exemption "from
February 28, 1986 and March 12, 1986, Government should decide placements. 2 the payment of any charges for the use of wharf
respectively, and (2) the sequestration, takeover, otherwise. including the area where it may install its
and other orders issued, and acts done, in 3. To report to the The letter closed with the warning that if the bagging equipments" "until the improvement
accordance with said executive orders by the Commission on Good documents were not submitted within five days, remains in a condition suitable for port
Presidential Commission on Good Government Government periodically. the officers would be cited for "contempt in operations." 5It seems however that this contract
and/or its Commissioners and agents, affecting Further, you are authorized to pursuance with Presidential Executive Order was never consummated. Capt. Jorge B. Siacunco,
said corporation. request for Military/Security Nos. 1 and 2." "Head- (PCGG) BASECO Management Team,"
1. The Sequestration, Takeover, and Other Orders Support from the c. Orders Re Engineer Island advised Deltamarine by letter dated July 30,
Complained of Military/Police authorities, (1) Termin 1986 that "the new management is not in a
a. The Basic Sequestration and such other acts essential ation of position to honor the said contract" and thus
Order to the achievement of this Contract "whatever improvements * * (may be
The sequestration order which, in the view of the sequestration order. 1 for Security introduced) shall be deemed unauthorized * *
petitioner corporation, initiated all its misery b. Order for Production of Services and shall be at * * (Deltamarine's) own risk." 6
was issued on April 14, 1986 by Commissioner Documents A third order assailed by petitioner corporation, e. Order for Operation of
Mary Concepcion Bautista. It was addressed to On the strength of the above sequestration order, hereafter referred to simply as BASECO, is that Sesiman Rock Quarry,
three of the agents of the Commission, hereafter Mr. Jose M. Balde, acting for the PCGG, addressed issued on April 21, 1986 by a Capt. Flordelino B. Mariveles, Bataan
simply referred to as PCGG. It reads as follows: a letter dated April 18, 1986 to the President and Zabala, a member of the task force assigned to By Order dated June 20, 1986, Commissioner
RE: SEQUESTRATION ORDER other officers of petitioner firm, reiterating an carry out the basic sequestration order. He sent a Mary Bautista first directed a PCGG agent, Mayor
By virtue of the powers vested earlier request for the production of certain letter to BASECO's Vice-President for Melba O. Buenaventura, "to plan and implement
in the Presidential documents, to wit: Finance, 3 terminating the contract for security progress towards maximizing the continuous
Commission on Good 1. Stock Transfer Book services within the Engineer Island compound operation of the BASECO Sesiman Rock Quarry *
Government, by authority of 2. Legal documents, such as: between BASECO and "Anchor and FAIRWAYS" * by conventional methods;" but afterwards,
the President of the 2.1. Articles of Incorporation and "other civilian security agencies," CAPCOM Commissioner Bautista, in representation of the
Philippines, you are hereby 2.2. By-Laws military personnel having already been assigned PCGG, authorized another party, A.T. Abesamis,
directed to sequester the 2.3. Minutes of the Annual Stockholders Meeting to the area, to operate the quarry, located at Mariveles,
following companies. from 1973 to 1986 (2) Change of Mode of Payment of Entry Charges
Bataan, an agreement to this effect having been
executed by them on September 17, 1986. 7
f. Order to Dispose of Scrap,
etc.
By another Order of Commissioner Bautista, this
time dated June 26, 1986, Mayor Buenaventura
was also "authorized to clean and beautify the
Company's compound," and in this connection,
to dispose of or sell "metal scraps" and other
materials, equipment and machineries no longer
usable, subject to specified guidelines and
safeguards including audit and verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner
Ramon A. Diaz decreed the provisional takeover
by the PCGG of BASECO, "the Philippine
Dockyard Corporation and all their affiliated
companies." 9 Diaz invoked the provisions of
Section 3 (c) of Executive Order No. 1,
empowering the Commission —
* * To provisionally takeover
in the public interest or to
prevent its disposal or
dissipation, business
enterprises and properties
taken over by the government
of the Marcos Administration
or by entities or persons close
to former President Marcos,
until the transactions leading
to such acquisition by the
latter can be disposed of by
the appropriate authorities.
A management team was designated to
implement the order, headed by Capt. Siacunco,
and was given the following powers:
1. Conducts all aspects of
operation of the subject
companies;
2. Installs key officers, hires
and terminates personnel as
necessary;
3. Enters into contracts
related to management and
operation of the companies;
4. Ensures that the assets of
the companies are not
dissipated and used
effectively and efficiently;
revenues are duly accounted
for; and disburses funds only
as may be necessary;
5. Does actions including
among others, seeking of
military support as may be
necessary, that will ensure
compliance to this order;
6. Holds itself fully
accountable to the
Presidential Commission on
Good Government on all
aspects related to this take-
over order.
h. Terminat
ion of
Services of
BASECO
Officers
Thereafter, Capt. Siacunco, sent letters to Hilario
M. Ruiz, Manuel S. Mendoza, Moises M. Valdez,
Gilberto Pasimanero, and Benito R. Cuesta I,
advising of the termination of their services by
the PCGG. 10
2. Petitioner's Plea and
Postulates
It is the foregoing specific orders and acts of the
PCGG and its members and agents which, to
repeat, petitioner BASECO would have this Court
nullify. More particularly, BASECO prays that this
Court-
1) declare unconstitutional and void Executive
Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14,
1986, and all other orders subsequently issued
and acts done on the basis thereof, inclusive of
the takeover order of July 14, 1986 and the
termination of the services of the BASECO
executives. 11
a. Re Executive Orders No. 1
and 2, and the Sequestration
and Takeover Orders
While BASECO concedes that "sequestration
without resorting to judicial action, might be
made within the context of Executive Orders Nos.
1 and 2 before March 25, 1986 when the Freedom
Constitution was promulgated, under the
principle that the law promulgated by the ruler
under a revolutionary regime is the law of the
land, it ceased to be acceptable when the same
ruler opted to promulgate the Freedom
Constitution on March 25, 1986 wherein under
Section I of the same, Article IV (Bill of Rights) of
the 1973 Constitution was adopted providing,
among others, that "No person shall be deprived
of life, liberty and property without due process
of law." (Const., Art. I V, Sec. 1)." 12
It declares that its objection to the
constitutionality of the Executive Orders "as well
as the Sequestration Order * * and Takeover
Order * * issued purportedly under the authority
of said Executive Orders, rests on four
fundamental considerations: First, no notice and
hearing was accorded * * (it) before its
properties and business were taken
over; Second, the PCGG is not a court, but a
purely investigative agency and therefore not
competent to act as prosecutor and judge in the
same cause; Third, there is nothing in the
issuances which envisions any proceeding,
process or remedy by which petitioner may
expeditiously challenge the validity of the
takeover after the same has been effected;
and Fourthly, being directed against specified
persons, and in disregard of the constitutional
presumption of innocence and general rules and
procedures, they constitute a Bill of
Attainder." 13
b. Re Order to Produce
Documents
It argues that the order to produce corporate
records from 1973 to 1986, which it has
apparently already complied with, was issued
without court authority and infringed its
constitutional right against self-incrimination,
and unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right
of Ownership and Management
BASECO further contends that the PCGG had
unduly interfered with its right of dominion and
management of its business affairs by —
1) terminating its contract for security services
with Fairways & Anchor, without the consent
and against the will of the contracting parties;
and amending the mode of payment of entry fees
stipulated in its Lease Contract with National
Stevedoring & Lighterage Corporation, these acts
being in violation of the non-impairment clause
of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to
enter into an "anomalous contract" with
Deltamarine Integrated Port Services, Inc., giving
the latter free use of BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba
Buenaventura, to manage and operate its rock
quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose
of its metal scrap, equipment, machinery and
other materials; 18
5) authorizing the takeover of BASECO,
Philippine Dockyard Corporation, and all their
affiliated companies;
6) terminating the services of BASECO
executives: President Hilario M. Ruiz; EVP
Manuel S. Mendoza; GM Moises M. Valdez;
Finance Mgr. Gilberto Pasimanero; Legal Dept.
Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel
to take, steal, carry away from petitioner's
premises at Mariveles * * rolls of cable wires,
worth P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer
Island to retrieve gold bars supposed to have
been buried therein. 22
3. Doubts, Misconceptions regarding
Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the
matter of sequestration, takeover and freeze
orders have been engendered by
misapprehension, or incomplete comprehension
if not indeed downright ignorance of the law
governing these remedies. It is needful that these
misconceptions and doubts be dispelled so that
uninformed and useless debates about them may
be avoided, and arguments tainted b sophistry or
intellectual dishonesty be quickly exposed and
discarded. Towards this end, this opinion will
essay an exposition of the law on the matter. In
the process many of the objections raised by
BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly
meant to carry out the explicit command of the
Provisional Constitution, ordained by
Proclamation No. 3, 23 that the President-in the
exercise of legislative power which she was
authorized to continue to wield "(until a
legislature is elected and convened under a new
Constitution" — "shall give priority to measures
to achieve the mandate of the people," among
others to (r)ecover ill-gotten properties amassed
by the leaders and supporters of the previous
regime and protect the interest of the people
through orders of sequestration or freezing of
assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need
to recover all ill-gotten wealth," and postulates
that "vast resources of the government have
been amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and
close associates both here and abroad." 25 Upon
these premises, the Presidential Commission on
Good Government was created, 26 "charged with
the task of assisting the President in regard to
(certain specified) matters," among which was
precisely-
* * The recovery of all in-
gotten wealth accumulated by
former President Ferdinand E.
Marcos, his immediate family,
relatives, subordinates and
close associates, whether
located in the Philippines or
abroad, including the takeover
or sequestration of all
business enterprises and
entities owned or controlled
by them, during his
administration, directly or
through nominees, by taking
undue advantage of their
public office and/or using
their powers, authority,
influence, connections or
relationship. 27
In relation to the takeover or sequestration that it
was authorized to undertake in the fulfillment of
its mission, the PCGG was granted "power and
authority" to do the following particular acts, to
wit:
1. To sequester or place or
cause to be placed under its
control or possession any
building or office wherein any
ill-gotten wealth or properties
may be found, and any
records pertaining thereto, in
order to prevent their
destruction, concealment or
disappearance which would
frustrate or hamper the
investigation or otherwise
prevent the Commission from
accomplishing its task.
2. To provisionally take over in
the public interest or to
prevent the disposal or
dissipation, business
enterprises and properties
taken over by the government
of the Marcos Administration
or by entities or persons close
to former President Marcos,
until the transactions leading
to such acquisition by the
latter can be disposed of by
the appropriate authorities.
3. To enjoin or restrain any
actual or threatened
commission of acts by any
person or entity that may
render moot and academic, or
frustrate or otherwise make
ineffectual the efforts of the
Commission to carry out its
task under this order. 28
So that it might ascertain the facts germane to its
objectives, it was granted power to conduct
investigations; require submission of evidence
by subpoenae ad testificandum and duces
tecum; administer oaths; punish for
contempt. 29 It was given power also to
promulgate such rules and regulations as may be
necessary to carry out the purposes of * * (its
creation). 30
c. Executive
Order No. 2
Executive Order No. 2 gives additional and more
specific data and directions respecting "the
recovery of ill-gotten properties amassed by the
leaders and supporters of the previous regime."
It declares that:
1) * * the Government of the
Philippines is in possession of
evidence showing that there
are assets and properties
purportedly pertaining to
former Ferdinand E. Marcos,
and/or his wife Mrs. Imelda
Romualdez Marcos, their
close relatives, subordinates,
business associates, dummies,
agents or nominees which had
been or were acquired by
them directly or indirectly,
through or as a result of the
improper or illegal use of
funds or properties owned by
the government of the
Philippines or any of its
branches, instrumentalities,
enterprises, banks or financial
institutions, or by taking
undue advantage of their
office, authority, influence,
connections or relationship,
resulting in their unjust
enrichment and causing grave
damage and prejudice to the
Filipino people and the
Republic of the Philippines:"
and
2) * * said assets and
properties are in the form of
bank accounts, deposits, trust
accounts, shares of stocks,
buildings, shopping centers,
condominiums, mansions,
residences, estates, and other
kinds of real and personal
properties in the Philippines
and in various countries of the
world." 31
Upon these premises, the President-
1) froze "all assets and
properties in the Philippines
in which former President
Marcos and/or his wife, Mrs.
Imelda Romualdez Marcos,
their close relatives,
subordinates, business
associates, dummies, agents,
or nominees have any interest
or participation;
2) prohibited former
President Ferdinand Marcos
and/or his wife * *, their close
relatives, subordinates,
business associates, duties,
agents, or nominees
from transferring, conveying,
encumbering, concealing or
dissipating said assets or
properties in the Philippines
and abroad, pending the
outcome of appropriate
proceedings in the Philippines
to determine whether any
such assets or properties
were acquired by them
through or as a result of
improper or illegal use of or
the conversion of funds
belonging to the Government
of the Philippines or any of its
branches, instrumentalities,
enterprises, banks or financial
institutions, or by taking
undue advantage of their
official position, authority,
relationship, connection or
influence to unjustly enrich
themselves at the expense and
to the grave damage and
prejudice of the Filipino
people and the Republic of the
Philippines;
3) prohibited "any person
from transferring, conveying,
encumbering or otherwise
depleting or concealing such
assets and properties or from
assisting or taking part in
their transfer, encumbrance,
concealment or dissipation
under pain of such penalties
as are prescribed by law;" and
4) required "all persons in the
Philippines holding such
assets or properties, whether
located in the Philippines or
abroad, in their names as
nominees, agents or trustees,
to make full disclosure of the
same to the Commission on
Good Government within
thirty (30) days from
publication of * (the)
Executive Order, * *. 32
d. Executive
Order No.
14
A third executive order is relevant: Executive
Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of
the Solicitor General and other government
agencies, * * to file and prosecute all cases
investigated by it * * as may be warranted by its
findings." 34 All such cases, whether civil or
criminal, are to be filed "with
the Sandiganbayan which shall have exclusive
and original jurisdiction thereof." 35 Executive
Order No. 14 also pertinently provides that civil
suits for restitution, reparation of damages, or
indemnification for consequential damages,
forfeiture proceedings provided for under
Republic Act No. 1379, or any other civil actions
under the Civil Code or other existing laws, in
connection with * * (said Executive Orders
Numbered 1 and 2) may be filed separately from
and proceed independently of any criminal
proceedings and may be proved by a
preponderance of evidence;" and that, moreover,
the "technical rules of procedure and evidence
shall not be strictly applied to* * (said)civil
cases." 36
5. Contemplated Situations
The situations envisaged and sought to be
governed are self-evident, these being:
1) that "(i)ll-gotten properties
(were) amassed by the
leaders and supporters of the
previous regime";37
a) more particularly, that ill-
gotten wealth (was)
accumulated by former
President Ferdinand E.
Marcos, his immediate family,
relatives, subordinates and
close associates, * * located in
the Philippines or abroad, * *
(and) business enterprises
and entities (came to be)
owned or controlled by them,
during * * (the Marcos)
administration, directly or
through nominees, by taking
undue advantage of their
public office and/or using
their powers, authority,
influence, Connections or
relationship; 38
b) otherwise stated, that
"there are assets and
properties purportedly
pertaining to former
President Ferdinand E.
Marcos, and/or his wife Mrs.
Imelda Romualdez Marcos,
their close relatives,
subordinates, business
associates, dummies, agents
or nominees which had been
or were acquired by them
directly or indirectly, through
or as a result of the improper
or illegal use of funds or
properties owned by the
Government of the
Philippines or any of its
branches, instrumentalities,
enterprises, banks or financial
institutions, or by taking
undue advantage of their
office, authority, influence,
connections or relationship,
resulting in their unjust
enrichment and causing grave
damage and prejudice to the
Filipino people and the
Republic of the
Philippines"; 39
c) that "said assets and
properties are in the form of
bank accounts. deposits, trust.
accounts, shares of stocks,
buildings, shopping centers,
condominiums, mansions,
residences, estates, and other
kinds of real and personal
properties in the Philippines
and in various countries of the
world;" 40and
2) that certain "business
enterprises and properties
(were) taken over by the
government of the Marcos
Administration or by entities
or persons close to former
President Marcos. 41
6. Government's Right and Duty to Recover All
Ill-gotten Wealth
There can be no debate about the validity and
eminent propriety of the Government's plan "to
recover all ill-gotten wealth."
Neither can there be any debate about the
proposition that assuming the above described
factual premises of the Executive Orders and
Proclamation No. 3 to be true, to be
demonstrable by competent evidence, the
recovery from Marcos, his family and his
dominions of the assets and properties involved,
is not only a right but a duty on the part of
Government.
But however plain and valid that right and duty
may be, still a balance must be sought with the
equally compelling necessity that a proper
respect be accorded and adequate protection
assured, the fundamental rights of private
property and free enterprise which are deemed
pillars of a free society such as ours, and to
which all members of that society may without
exception lay claim.
* * Democracy, as a way of life
enshrined in the Constitution,
embraces as its necessary
components freedom of
conscience, freedom of
expression, and freedom in
the pursuit of
happiness. Along with these
freedoms are included
economic freedom and
freedom of enterprisewithin
reasonable bounds and under
proper control. * * Evincing
much concern for the
protection of property, the
Constitution distinctly
recognizes the preferred
position which real estate has
occupied in law for
ages. Property is bound up
with every aspect of social life
in a democracy as democracy
is conceived in the
Constitution. The Constitution
realizes the indispensable role
which property, owned in
reasonable quantities and
used legitimately, plays in the
stimulation to economic effort
and the formation and growth
of a solid social middle class
that is said to be the bulwark
of democracy and the
backbone of every
progressive and happy
country. 42
a. Need of Evidentiary
Substantiation in Proper Suit
Consequently, the factual premises of the
Executive Orders cannot simply be assumed.
They will have to be duly established by
adequate proof in each case, in a proper judicial
proceeding, so that the recovery of the ill-gotten
wealth may be validly and properly adjudged
and consummated; although there are some who
maintain that the fact-that an immense fortune,
and "vast resources of the government have
been amassed by former President Ferdinand E.
Marcos, his immediate family, relatives, and
close associates both here and abroad," and they
have resorted to all sorts of clever schemes and
manipulations to disguise and hide their illicit
acquisitions-is within the realm of judicial notice,
being of so extensive notoriety as to dispense
with proof thereof, Be this as it may, the
requirement of evidentiary substantiation has
been expressly acknowledged, and the
procedure to be followed explicitly laid down, in
Executive Order No. 14.
b. Need of Provisional
Measures to Collect and
Conserve Assets Pending Suits
Nor may it be gainsaid that pending the
institution of the suits for the recovery of such
"ill-gotten wealth" as the evidence at hand may
reveal, there is an obvious and imperative need
for preliminary, provisional measures to prevent
the concealment, disappearance, destruction,
dissipation, or loss of the assets and properties
subject of the suits, or to restrain or foil acts that
may render moot and academic, or effectively
hamper, delay, or negate efforts to recover the
same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed
three (3) provisional remedies. These are: (1)
sequestration; (2) freeze orders; and (3)
provisional takeover.
Sequestration and freezing are remedies
applicable generally to unearthed instances of
"ill-gotten wealth." The remedy of "provisional
takeover" is peculiar to cases where "business
enterprises and properties (were) taken over by
the government of the Marcos Administration or
by entities or persons close to former President
Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the
PCGG to sequester property claimed to be "ill-
gotten" means to place or cause to be placed
under its possession or control said property, or
any building or office wherein any such property
and any records pertaining thereto may be
found, including "business enterprises and
entities,"-for the purpose of preventing the
destruction, concealment or dissipation of, and
otherwise conserving and preserving, the same-
until it can be determined, through appropriate
judicial proceedings, whether the property was
in truth will- gotten," i.e., acquired through or as
a result of improper or illegal use of or the
conversion of funds belonging to the
Government or any of its branches,
instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of
official position, authority relationship,
connection or influence, resulting in unjust
enrichment of the ostensible owner and grave
damage and prejudice to the State. 44 And this,
too, is the sense in which the term is commonly
understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having
possession or control of property alleged to
constitute "ill-gotten wealth" "from transferring,
conveying, encumbering or otherwise depleting
or concealing such property, or from assisting or
taking part in its transfer, encumbrance,
concealment, or dissipation." 46 In other words, it
commands the possessor to hold the property
and conserve it subject to the orders and
disposition of the authority decreeing such
freezing. In this sense, it is akin to a garnishment
by which the possessor or ostensible owner of
property is enjoined not to deliver, transfer, or
otherwise dispose of any effects or credits in his
possession or control, and thus becomes in a
sense an involuntary depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional
takeover," the law acknowledges the apparent
distinction between "ill gotten" "business
enterprises and entities" (going concerns,
businesses in actual operation), generally, as to
which the remedy of sequestration applies, it
being necessarily inferred that the remedy
entails no interference, or the least possible
interference with the actual management and
operations thereof; and "business enterprises
which were taken over by the government
government of the Marcos Administration or by
entities or persons close to him," in particular, as
to which a "provisional takeover" is authorized,
"in the public interest or to prevent disposal or
dissipation of the enterprises." 48 Such a
"provisional takeover" imports something more
than sequestration or freezing, more than the
placing of the business under physical
possession and control, albeit without or with
the least possible interference with the
management and carrying on of the business
itself. In a "provisional takeover," what is taken
into custody is not only the physical assets of the
business enterprise or entity, but the business
operation as well. It is in fine the assumption of
control not only over things, but over operations
or on- going activities. But, to repeat, such a
"provisional takeover" is allowed only as regards
"business enterprises * * taken over by the
government of the Marcos Administration or by
entities or persons close to former President
Marcos."
d. No Divestment of Title Over
Property Seized
It may perhaps be well at this point to stress
once again the provisional, contingent character
of the remedies just described. Indeed the law
plainly qualifies the remedy of take-over by the
adjective, "provisional." These remedies may be
resorted to only for a particular exigency: to
prevent in the public interest the disappearance
or dissipation of property or business, and
conserve it pending adjudgment in appropriate
proceedings of the primary issue of whether or
not the acquisition of title or other right thereto
by the apparent owner was attended by some
vitiating anomaly. None of the remedies is meant
to deprive the owner or possessor of his title or
any right to the property sequestered, frozen or
taken over and vest it in the sequestering agency,
the Government or other person. This can be
done only for the causes and by the processes
laid down by law.
That this is the sense in which the power to
sequester, freeze or provisionally take over is to
be understood and exercised, the language of the
executive orders in question leaves no doubt.
Executive Order No. 1 declares that the
sequestration of property the acquisition of
which is suspect shall last "until the transactions
leading to such acquisition * * can be disposed of
by the appropriate authorities." 49 Executive
Order No. 2 declares that the assets or properties
therein mentioned shall remain frozen "pending
the outcome of appropriate proceedings in the
Philippines to determine whether any such assets
or properties were acquired" by illegal
means. Executive Order No. 14 makes clear that
judicial proceedings are essential for the
resolution of the basic issue of whether or not
particular assets are "ill-gotten," and resultant
recovery thereof by the Government is
warranted.
e. State of Seizure Not To Be
Indefinitely Maintained; The
Constitutional Command
There is thus no cause for the apprehension
voiced by BASECO 50 that sequestration, freezing
or provisional takeover is designed to be an end
in itself, that it is the device through which
persons may be deprived of their property
branded as "ill-gotten," that it is intended to
bring about a permanent, rather than a passing,
transitional state of affairs. That this is not so is
quite explicitly declared by the governing rules.
Be this as it may, the 1987 Constitution should
allay any lingering fears about the duration of
these provisional remedies. Section 26 of its
Transitory Provisions, 51 lays down the relevant
rule in plain terms, apart from extending
ratification or confirmation (although not really
necessary) to the institution by presidential fiat
of the remedy of sequestration and freeze
orders:
SEC. 26. The authority to issue
sequestration or freeze orders
under Proclamation No. 3
dated March 25, 1986 in
relation to the recovery of ill-
gotten wealth shag remain
operative for not more
than eighteen months after the
ratification of this
Constitution. However, in the
national interest, as certified
by the President, the Congress
may extend said period.
A sequestration or freeze
order shall be issued only
upon showing of a prima
facie case. The order and the
list of the sequestered or
frozen properties shall
forthwith be registered with
the proper court. For orders
issued before the ratification
of this Constitution, the
corresponding judicial action
or proceeding shall be filed
within six months from its
ratification. For those issued
after such ratification, the
judicial action or proceeding
shall be commenced within six
months from the issuance
thereof.
The sequestration or freeze
order is deemed automatically
lifted if no judicial action or
proceeding is commenced as
herein provided. 52
f. Kinship to Attachment
Receivership
As thus described, sequestration, freezing and
provisional takeover are akin to the provisional
remedy of preliminary attachment, or
receivership. 53 By attachment, a sheriff seizes
property of a defendant in a civil suit so that it
may stand as security for the satisfaction of any
judgment that may be obtained, and not
disposed of, or dissipated, or lost intentionally or
otherwise, pending the action. 54 By receivership,
property, real or personal, which is subject of
litigation, is placed in the possession and control
of a receiver appointed by the Court, who shall
conserve it pending final determination of the
title or right of possession over it. 55 All these
remedies — sequestration, freezing, provisional,
takeover, attachment and receivership — are
provisional, temporary, designed for-particular
exigencies, attended by no character of
permanency or finality, and always subject to the
control of the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or
freeze or takeover orders are not issued by a
court is of no moment. The Solicitor General
draws attention to the writ of distraint and levy
which since 1936 the Commissioner of Internal
Revenue has been by law authorized to issue
against property of a delinquent
taxpayer. 56 BASECO itself declares that it has not
manifested "a rigid insistence on sequestration
as a purely judicial remedy * * (as it feels) that
the law should not be ossified to a point that
makes it insensitive to change." What it insists
on, what it pronounces to be its "unyielding
position, is that any change in procedure, or the
institution of a new one, should conform to due
process and the other prescriptions of the Bill of
Rights of the Constitution." 57 It is, to be sure, a
proposition on which there can be no
disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and
receivership, as well as delivery of personal
property in replevinsuits, sequestration and
provisional takeover writs may issue ex
parte. 58 And as in preliminary attachment,
receivership, and delivery of personality, no
objection of any significance may be raised to
the ex parte issuance of an order of
sequestration, freezing or takeover, given its
fundamental character of temporariness or
conditionality; and taking account specially of
the constitutionally expressed "mandate of the
people to recover ill-gotten properties amassed
by the leaders and supporters of the previous
regime and protect the interest of the
people;" 59 as well as the obvious need to avoid
alerting suspected possessors of "ill-gotten
wealth" and thereby cause that disappearance or
loss of property precisely sought to be
prevented, and the fact, just as self-evident, that
"any transfer, disposition, concealment or
disappearance of said assets and properties
would frustrate, obstruct or hamper the efforts
of the Government" at the just recovery
thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case
of attachment and receivership, there exist a
prima facie factual foundation, at least, for the
sequestration, freeze or takeover order, and
adequate and fair opportunity to contest it and
endeavor to cause its negation or nullification. 61
Both are assured under the executive orders in
question and the rules and regulations
promulgated by the PCGG.
a. Prima Facie Evidence as circumstance of the case. The
Basis for Orders resolution of the commission
Executive Order No. 14 enjoins that there be may be appealed by the party
"due regard to the requirements of fairness and concerned to the Office of the
due process." 62Executive Order No. 2 declares President of the Philippines
that with respect to claims on allegedly "ill- within fifteen (15) days from
gotten" assets and properties, "it is the position receipt thereof.
of the new democratic government that Parenthetically, even if the requirement for
President Marcos * * (and other parties affected) a prima facie showing of "ill- gotten wealth" were
be afforded fair opportunity to contest these not expressly imposed by some rule or
claims before appropriate Philippine regulation as a condition to warrant the
authorities." 63 Section 7 of the Commission's sequestration or freezing of property
Rules and Regulations provides that contemplated in the executive orders in
sequestration or freeze (and takeover) orders question, it would nevertheless be exigible in
issue upon the authority of at least two this jurisdiction in which the Rule of Law
commissioners, based on the affirmation or prevails and official acts which are devoid of
complaint of an interested party, or motu rational basis in fact or law, or are whimsical and
proprio when the Commission has reasonable capricious, are condemned and struck down. 66
grounds to believe that the issuance thereof is 9. Constitutional Sanction of Remedies
warranted. 64 A similar requirement is now If any doubt should still persist in the face of the
found in Section 26, Art. XVIII of the 1987 foregoing considerations as to the validity and
Constitution, which requires that a propriety of sequestration, freeze and takeover
"sequestration or freeze order shall be issued orders, it should be dispelled by the fact that
only upon showing of a prima facie case." 65 these particular remedies and the authority of
b. Opportunity to Contest the PCGG to issue them have received
And Sections 5 and 6 of the same Rules and constitutional approbation and sanction. As
Regulations lay down the procedure by which a already mentioned, the Provisional or "Freedom"
party may seek to set aside a writ of Constitution recognizes the power and duty of
sequestration or freeze order, viz: the President to enact "measures to achieve the
SECTION 5. Who may mandate of the people to * * * (recover ill- gotten
contend.-The person against properties amassed by the leaders and
whom a writ of sequestration supporters of the previous regime and protect
or freeze or hold order is the interest of the people through orders of
directed may request the sequestration or freezing of assets or
lifting thereof in writing, accounts." And as also already adverted to,
either personally or through Section 26, Article XVIII of the 1987
counsel within five (5) days Constitution 67 treats of, and ratifies the
from receipt of the writ or "authority to issue sequestration or freeze
order, or in the case of a hold orders under Proclamation No. 3 dated March
order, from date of knowledge 25, 1986."
thereof. The institution of these provisional remedies is
SECTION 6. Procedure for also premised upon the State's inherent police
review of writ or order.-After power, regarded, as t lie power of promoting the
due hearing or motu proprio public welfare by restraining and regulating the
for good cause shown, the use of liberty and property," 68 and as "the most
Commission may lift the writ essential, insistent and illimitable of powers * *
or order unconditionally or in the promotion of general welfare and the
subject to such conditions as public interest," 69 and said to be co-extensive
it may deem necessary, taking with self-protection and * * not inaptly termed
into consideration the (also) the'law of overruling necessity." "70
evidence and the 10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from
what has thus far been said that the PCGG is not,
and was never intended to act as, a judge. Its
general function is to conduct investigations in
order to collect evidenceestablishing instances of
"ill-gotten wealth;" issue sequestration, and such
orders as may be warranted by the evidence thus
collected and as may be necessary to preserve
and conserve the assets of which it takes custody
and control and prevent their disappearance,
loss or dissipation; and eventually file and
prosecute in the proper court of competent
jurisdiction all cases investigated by it as may be
warranted by its findings. It does not try and
decide, or hear and determine, or adjudicate
with any character of finality or compulsion,
cases involving the essential issue of whether or
not property should be forfeited and transferred
to the State because "ill-gotten" within the
meaning of the Constitution and the executive
orders. This function is reserved to the
designated court, in this case, the
Sandiganbayan. 71 There can therefore be no
serious regard accorded to the accusation,
leveled by BASECO, 72 that the PCGG plays the
perfidious role of prosecutor and judge at the
same time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions,
and upon the facts disclosed by the record,
hereafter to be discussed, the petition cannot
succeed. The writs of certiorari and prohibition
prayed for will not be issued.
The facts show that the corporation known as
BASECO was owned or controlled by President
Marcos "during his administration, through
nominees, by taking undue advantage of his
public office and/or using his powers, authority,
or influence, " and that it was by and through the
same means, that BASECO had taken over the
business and/or assets of the National Shipyard
and Engineering Co., Inc., and other government-
owned or controlled entities.
12. Organization and Stock Distribution of
BASECO
BASECO describes itself in its petition as "a
shiprepair and shipbuilding company * *
incorporated as a domestic private corporation *
* (on Aug. 30, 1972) by a consortium of Filipino
shipowners and shipping executives. Its main
office is at Engineer Island, Port Area, Manila,
where its Engineer Island Shipyard is housed, of two (2) years from date of turnover of the the Engineer Island Shops, including all the
11. Trident 7,412 shares
and its main shipyard is located at Mariveles shipyard to BASECO. 76 equipment of the Bataan National Shipyards
Management
Bataan." 73 Its Articles of Incorporation disclose 14. Subsequent Reduction of Price; Intervention of (BNS) which were excluded from the sale of NBS
that its authorized capital stock is Marcos to BASECO but retained by BASECO and all other
12. United Phil. Lines 1,240 shares
P60,000,000.00 divided into 60,000 shares, of Unaccountably, the price of P52,000,000.00 was selected equipment and machineries of NASSCO
which 12,000 shares with a value of reduced by more than one-half, to at J. Panganiban Smelting Plant." In the same
13. Renato M. 8 shares
P12,000,000.00 have been subscribed, and on P24,311,550.00, about eight (8) months later. A deed, NASSCO committed itself to cooperate with
Tanseco
said subscription, the aggregate sum of document to this effect was executed on October BASECO for the acquisition from the National
P3,035,000.00 has been paid by the 9, 1973, entitled "Memorandum Agreement," and Government or other appropriate Government
14. Fidel Ventura 8 shares
incorporators. 74 The same articles Identify the was signed for NASSCO by Arturo Pacificador, as entity of Engineer Island. Consideration for the
incorporators, numbering fifteen (15), as Presiding Officer of the Board of Directors, and sale was set at P5,000,000.00; a down payment
15. Metro Bay 136,370 shares
follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3) David R. Ines, as General Manager. 77 This of P1,000,000.00 appears to have been made,
Drydock
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) agreement bore, at the top right corner of the and the balance was stipulated to be paid at 7%
Generoso Tanseco, (6) Emilio T. Yap, (7) Antonio first page, the word "APPROVED" in the interest per annum in equal semi annual
16. Manuel Jacela 1 share
M. Ezpeleta, (8) Zacarias Amante, (9) Severino de handwriting of President Marcos, followed by his installments over a term of nine (9) years, to
la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, usual full signature. The document recited that a commence after a grace period of two (2) years.
17. Jonathan G. Lu 1 share
(12) Octavio Posadas, (13) Manuel S. Mendoza, down payment of P5,862,310.00 had been made Mr. Arturo Pacificador again signed for NASSCO,
(14) Magiliw Torres, and (15) Rodolfo Torres. by BASECO, and the balance of P19,449,240.00 together with the general manager, Mr. David R.
18. Jose J. Tanchanco 1 share
By 1986, however, of these fifteen (15) was payable in equal semi-annual installments Ines.
incorporators, six (6) had ceased to be over nine (9) years after a grace period of two 17. Loans Obtained
19. Dioscoro Papa 128 shares
stockholders, namely: (1) Generoso Tanseco, (2) (2) years, with interest at 7% per annum. It further appears that on May 27, 1975 BASECO
Antonio Ezpeleta, (3) Zacarias Amante, (4) 15. Acquisition of 300 Hectares from Export obtained a loan from the NDC, taken from "the
20. Edward T. 4 shares
Octavio Posadas, (5) Magiliw Torres, and (6) Processing Zone Authority last available Japanese war damage fund of
Marcelo
Rodolfo Torres. As of this year, 1986, there were On October 1, 1974, BASECO acquired three $19,000,000.00," to pay for "Japanese made
twenty (20) stockholders listed in BASECO's hundred (300) hectares of land in Mariveles heavy equipment (brand new)." 80 On September
TOTAL 218,819
Stock and Transfer Book. 75 Their names and the from the Export Processing Zone Authority for 3, 1975, it got another loan also from the NDC in
shares.
number of shares respectively held by them are the price of P10,047,940.00 of which, as set out the amount of P30,000,000.00 (id.). And on
as follows: 13 Acquisition of NASSCO by BASECO in the document of sale, P2,000.000.00 was paid January 28, 1976, it got still another loan, this
Barely six months after its incorporation, upon its execution, and the balance stipulated to time from the GSIS, in the sum of
1. Jose A. Rojas 1,248 shares
BASECO acquired from National Shipyard & Steel be payable in installments. 78 P12,400,000.00. 81 The claim has been made that
Corporation, or NASSCO, a government-owned 16. Acquisition of Other Assets of NASSCO; not a single centavo has been paid on these
2. Severino G. de la 1,248 shares
or controlled corporation, the latter's shipyard at Intervention of Marcos loans. 82
Cruz
Mariveles, Bataan, known as the Bataan National Some nine months afterwards, or on July 15, 18. Reports to President Marcos
Shipyard (BNS), and — except for NASSCO's 1975, to be precise, BASECO, again with the In September, 1977, two (2) reports were
3. Emilio T. Yap 2,508 shares
Engineer Island Shops and certain equipment of intervention of President Marcos, acquired submitted to President Marcos regarding
the BNS, consigned for future negotiation — all ownership of the rest of the assets of NASSCO BASECO. The first was contained in a letter dated
4. Jose Fernandez 1,248 shares
its structures, buildings, shops, quarters, houses, which had not been included in the first two (2) September 5, 1977 of Hilario M. Ruiz, BASECO
plants, equipment and facilities, in stock or in purchase documents. This was accomplished by president. 83 The second was embodied in a
5. Jose Francisco 128 shares
transit. This it did in virtue of a "Contract of a deed entitled "Contract of Purchase and confidential memorandum dated September 16,
Purchase and Sale with Chattel Mortgage" Sale," 79which, like the Memorandum of 1977 of Capt. A.T. Romualdez. 84 They further
6. Manuel S. Mendoza 96 shares
executed on February 13, 1973. The price was Agreement dated October 9, 1973 supra also disclose the fine hand of Marcos in the affairs of
P52,000,000.00. As partial payment thereof, bore at the upper right-hand corner of its first BASECO, and that of a Romualdez, a relative by
7. Anthony P. Lee 1,248 shares
BASECO delivered to NASSCO a cash bond of page, the handwritten notation of President affinity.
P11,400,000.00, convertible into cash within Marcos reading, "APPROVED, July 29, 1973," and a. BASECO President's Report
8. Hilario M. Ruiz 32 shares
twenty-four (24) hours from completion of the underneath it, his usual full signature. In his letter of September 5, 1977, BASECO
inventory undertaken pursuant to the contract. Transferred to BASECO were NASSCO's President Ruiz reported to Marcos that there had
9. Constante L. 8 shares
The balance of P41,600,000.00, with interest at "ownership and all its titles, rights and interests been "no orders or demands for ship
Fariñas
seven percent (7%) per annum, compounded over all equipment and facilities including construction" for some time and expressed the
semi-annually, was stipulated to be paid in equal structures, buildings, shops, quarters, houses, fear that if that state of affairs persisted, BASECO
10. Fidelity 65,882 shares
semi-annual installments over a term of nine (9) plants and expendable or semi-expendable would not be able to pay its debts to the
Management, Inc.
years, payment to commence after a grace period assets, located at the Engineer Island, known as Government, which at the time stood at the not
inconsiderable amount of P165,854,000.00. 85 He
suggested that, to "save the situation," there be
a "spin-off (of their) shipbuilding activities which
shall be handled exclusively by an entirely new
corporation to be created;" and towards this end,
he informed Marcos that BASECO was —
* * inviting
NDC and LUSTEVECO to
participate by converting the
NDC shipbuilding loan to
BASECO amounting to
P341.165M and assuming and
converting a portion of
BASECO's shipbuilding loans
from REPACOM amounting to
P52.2M or a total of P83.365M
as NDC's equity contribution
in the new corporation.
LUSTEVECO will participate
by absorbing and converting a
portion of the REPACOM loan
of Bay Shipyard and Drydock,
Inc., amounting to
P32.538M.86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President
was submitted eleven (11) days later. It opened
with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and
Re-assessment of a BASECO re-structure and
Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced
great difficulties in meeting its loan obligations
due chiefly to the fact that "orders to build ships
as expected * * did not materialize."
He advised that five stockholders had "waived
and/or assigned their holdings inblank," these
being: (1) Jose A. Rojas, (2) Severino de la Cruz,
(3) Rodolfo Torres, (4) Magiliw Torres, and (5)
Anthony P. Lee. Pointing out that "Mr. Magiliw
Torres * * is already dead and Mr. Jose A. Rojas
had a major heart attack," he made the following
quite revealing, and it may be added, quite
cynical and indurate recommendation, to wit:
* * (that) their replacements
(be effected) so we can
register their names in the
stock book prior to the
implementation of your
instructions to pass a board
resolution to legalize the
transfers under SEC
regulations;
2. By getting their
replacements, the families
cannot question us later
on; and
3. We will owe no further
favors from them. 87
He also transmitted to Marcos, together with the
report, the following documents: 88
1. Stock certificates indorsed
and assigned in blank with
assignments and waivers; 89
2. The articles of
incorporation, the amended
articles, and the by-laws of
BASECO;
3. Deed of Sales, wherein
NASSCO sold to BASECO four
(4) parcels of land in
"Engineer Island", Port Area,
Manila;
4. Transfer Certificate of Title
No. 124822 in the name of
BASECO, covering "Engineer
Island";
5. Contract dated October 9,
1973, between NASSCO and
equipment at Mariveles,
Bataan;
6. Contract dated July 16,
1975, between NASSCO and
BASECO re-structure and
equipment at Engineer Island,
Port Area Manila;
7. Contract dated October 1,
1974, between EPZA and
BASECO re 300 hectares of
land at Mariveles, Bataan;
8. List of BASECO's fixed
assets;
9. Loan Agreement dated
September 3, 1975, BASECO's
loan from NDC of
P30,000,000.00;
10. BASECO-REPACOM
Agreement dated May 27,
1975;
11. GSIS loan to BASECO
dated January 28, 1976 of
P12,400,000.00 for the
housing facilities for
BASECO's rank-and-file
employees. 90
Capt. Romualdez also recommended that
BASECO's loans be restructured "until such
period when BASECO will have enough orders
for ships in order for the company to meet loan
obligations," and that —
An LOI may be issued to
government agencies using
floating equipment, that a
linkage scheme be applied to
a certain percent of BASECO's
net profit as part of BASECO's
amortization payments
tomake it justifiable for you,
Sir. 91
It is noteworthy that Capt. A.T. Romualdez does
not appear to be a stockholder or officer of
BASECO, yet he has presented a report on
BASECO to President Marcos, and his report
demonstrates intimate familiarity with the firm's
affairs and problems.
19. Marcos' Response to
Reports
President Marcos lost no time in acting on his
subordinates' recommendations, particularly as
regards the "spin-off" and the "linkage scheme"
relative to "BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed
a Memorandum to Secretary Geronimo Velasco
of the Philippine National Oil Company and
Chairman Constante Fariñas of the National
Development Company, directing them "to
participate in the formation of a new corporation
resulting from the spin-off of the shipbuilding
component of BASECO along the following
guidelines:
a. Equity participation of
government shall be through
LUSTEVECO and NDC in the
amount of P115,903,000
consisting of the
following obligations of
BASECO which are hereby
authorized to be converted to
equity of the said new
corporation, to wit:
1. NDC
P83,865,00
0
(P31.165M
loan &
P52.2M
Reparation
)
2.
LUSTEVEC
O
P32,538,00
0
(Reparatio
n)
b. Equity participation of
government shall be in the
form of non- voting shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied
with by his subordinates. Twenty-two (22) days
after receiving their president's memorandum,
Messrs. Hilario M. Ruiz, Constante L. Fariñas and
Geronimo Z. Velasco, in representation of their
respective corporations, executed a PRE-
INCORPORATION AGREEMENT dated October
20, 1977. 93 In it, they undertook to form a
shipbuilding corporation to be known as "PHIL-
ASIA SHIPBUILDING CORPORATION," to bring to
realization their president's instructions. It
would seem that the new corporation ultimately
formed was actually named "Philippine
Dockyard Corporation (PDC)." 94
b. Letter of Instructions No.
670
Mr. Marcos did not forget Capt. Romualdez'
recommendation for a letter of instructions. On
February 14, 1978, he issued Letter of
Instructions No. 670 addressed to the
Reparations Commission REPACOM the
Philippine National Oil Company (PNOC), the
Luzon Stevedoring Company (LUSTEVECO), and
the National Development Company (NDC).
What is commanded therein is summarized by
the Solicitor General, with pithy and not
inaccurate observations as to the effects thereof
(in italics), as follows:
 * * 1) the shipbuilding
equipment procured by
BASECO through reparations
be transferred to NDC subject
to reimbursement by NDC to
BASECO (of) the amount of s
allegedly representing the
handling and incidental
expenses incurred by BASECO
in the installation of said
equipment (so instead of NDC
getting paid on its loan to
BASECO, it was made to pay
BASECO instead the amount of
P18.285M); 2) the
shipbuilding equipment
procured from reparations
through EPZA, now in the
possession of BASECO and
BSDI (Bay Shipyard &
Drydocking, Inc.) be
transferred to LUSTEVECO
through PNOC; and 3) the
shipbuilding equipment
(thus) transferred be invested
by LUSTEVECO, acting
through PNOC and NDC, as
the government's equity
participation in a shipbuilding
corporation to be established
in partnership with the
private sector.
xxx xxx xxx
And so, through a simple
letter of instruction and
memorandum, BASECO's loan
obligation to NDC and
REPACOM * * in the total
amount of P83.365M and
BSD's REPACOM loan of
P32.438M were wiped out
and converted into non-voting
preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the
context of the proceedings at bar, the actuality of
the control by President Marcos of BASECO has
been sufficiently shown.
Other evidence submitted to the Court by the
Solicitor General proves that President Marcos
not only exercised control over BASECO, but also
that he actually owns well nigh one hundred
percent of its outstanding stock.
It will be recalled that according to petitioner-
itself, as of April 23, 1986, there were 218,819
shares of stock outstanding, ostensibly owned by
twenty (20) stockholders. 96 Four of these
twenty are juridical persons: (1)Metro Bay
Drydock, recorded as holding 136,370 shares;
(2) Fidelity Management, Inc., 65,882 shares;
(3)Trident Management, 7,412 shares; and (4)
United Phil. Lines, 1,240 shares. The first three
corporations, among themselves, own an
aggregate of 209,664 shares of BASECO stock, or
95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's
attention to the intriguing circumstance that
found in Malacanang shortly after the sudden
flight of President Marcos, were certificates
corresponding to more thanninety-five percent
(95%) of all the outstanding shares of stock of
BASECO, endorsed in blank, together with deeds
of assignment of practically all the outstanding
shares of stock of the three (3) corporations
above mentioned (which hold 95.82% of all
BASECO stock), signed by the owners thereof
although not notarized. 97
More specifically, found in Malacanang (and now
in the custody of the PCGG) were:
1) the deeds of assignment
of all 600 outstanding shares
of Fidelity Management Inc. —
which supposedly owns as
aforesaid 65,882 shares of
BASECO stock;
2) the deeds of assignment
of 2,499,995 of the 2,500,000
outstanding shares of Metro
Bay Drydock Corporation —
which allegedly owns
136,370 shares of BASECO
stock;
3) the deeds of assignment
of 800 outstanding shares of
Trident Management Co.,
Inc. — which allegedly owns
7,412 shares of BASECO stock,
assigned in blank; 98 and
4) stock certificates
corresponding to 207,725 out
of the 218,819 outstanding
shares of BASECO stock; that
is, all but 5 % — all endorsed
in blank. 99
While the petitioner's counsel was quick to
dispute this asserted fact, assuring this Court
that the BASECO stockholders were still in
possession of their respective stock certificates
and had "never endorsed * * them in blank or to
anyone else," 100 that denial is exposed by his
own prior and subsequent recorded statements
as a mere gesture of defiance rather than a
verifiable factual declaration.
By resolution dated September 25, 1986, this
Court granted BASECO's counsel a period of 10
days "to SUBMIT, as undertaken by him, * * the
certificates of stock issued to the stockholders of
* * BASECO as of April 23, 1986, as listed in
Annex 'P' of the petition.' 101 Counsel thereafter
moved for extension; and in his motion dated
October 2, 1986, he declared inter alia that "said
certificates of stock are in the possession of third
parties, among whom being the respondents
themselves * * andpetitioner is still endeavoring
to secure copies thereof from them." 102 On the
same day he filed another motion praying that he
be allowed "to secure copies of the Certificates of
Stock in the name of Metro Bay Drydock, Inc.,
and of all other Certificates, of Stock of
petitioner's stockholders in possession of
respondents." 103
In a Manifestation dated October 10,
1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated
motion to secure copies of the stock certificates
"confirms the fact that stockholders of petitioner
corporation are not in possession of * * (their)
certificates of stock," and the reason, according
to him, was "that 95% of said shares * * have
been endorsed in blank and found in Malacañang
after the former President and his family fled the
country." To this manifestation BASECO's
counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's
stockholders had not really assigned their
stock. 105
In view of the parties' conflicting declarations,
this Court resolved on November 27, 1986
among other things "to require * * the petitioner
* * to depositupon proper receipt with Clerk of
Court Juanito Ranjo the originals of the stock
certificates alleged to be in its possession or
accessible to it, mentioned and described in
Annex 'P' of its petition, (and other pleadings) * *
within ten (10) days from notice." 106 In a
motion filed on December 5, 1986, 107BASECO's
counsel made the statement, quite surprising in
the premises, that "it will negotiate with the
owners (of the BASECO stock in question) to
allow petitioner to borrow from them, if
available, the certificates referred to" but that "it
needs a more sufficient time therefor" (sic).
BASECO's counsel however eventually had to
confess inability to produce the originals of the
stock certificates, putting up the feeble excuse
that while he had "requested the stockholders to
allow * * (him) to borrow said certificates, * *
some of * * (them) claimed that they had
delivered the certificates to third parties by way
of pledge and/or to secure performance of
obligations, while others allegedly have
entrusted them to third parties in view of last
national emergency." 108 He has conveniently
omitted, nor has he offered to give the details of
the transactions adverted to by him, or to explain
why he had not impressed on the supposed
stockholders the primordial importance of
convincing this Court of their present custody of
the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to
some sort of arrangement so that the originals of
their certificates might at the very least be
exhibited to the Court. Under the circumstances,
the Court can only conclude that he could not get
the originals from the stockholders for the
simple reason that, as the Solicitor General
maintains, said stockholders in truth no longer
have them in their possession, these having
already been assigned in blank to then President
Marcos.
21. Facts Justify Issuance of Sequestration and
Takeover Orders
In the light of the affirmative showing by the
Government that, prima facie at least, the
stockholders and directors of BASECO as of April,
1986 109 were mere "dummies," nominees
or alter egos of President Marcos; at any rate,
that they are no longer owners of any shares of
stock in the corporation, the conclusion cannot
be avoided that said stockholders and directors
have no basis and no standing whatever to cause
the filing and prosecution of the instant
proceeding; and to grant relief to BASECO, as
prayed for in the petition, would in effect be to of guilt in the amassing or acquisition of "ill- * * corporations are not production of the corporate
restore the assets, properties and business gotten wealth" is to be handed down by a judicial entitled to all of the books and papers for that
sequestered and taken over by the PCGG to tribunal, in this case, the Sandiganbayan, upon constitutional protections purpose. The defense
persons who are "dummies," nominees or alter complaint filed and prosecuted by the PCGG. In which private individuals amounts to this, that an
egosof the former president. the second place, no punishment is inflicted by have. * * They are not at all officer of the corporation
From the standpoint of the PCGG, the facts the executive orders, as the merest glance at within the privilege against which is charged with a
herein stated at some length do indeed show that their provisions will immediately make self-incrimination, although criminal violation of the
the private corporation known as BASECO was apparent. In no sense, therefore, may the this court more than once has statute may plead the
"owned or controlled by former President executive orders be regarded as a bill of said that the privilege runs criminality of such
Ferdinand E. Marcos * * during his attainder. very closely with the 4th corporation as a refusal to
administration, * * through nominees, by taking 23. No Violation of Right against Self- Amendment's Search and produce its books. To state
advantage of * * (his) public office and/or using * Incrimination and Unreasonable Searches and Seizure provisions. It is also this proposition is to answer
* (his) powers, authority, influence * *," and that Seizures settled that an officer of the it. While an individual may
NASSCO and other property of the government BASECO also contends that its right against self company cannot refuse to lawfully refuse to answer
had been taken over by BASECO; and the incrimination and unreasonable searches and produce its records in its incriminating questions unless
situation justified the sequestration as well as seizures had been transgressed by the Order of possession upon the plea that protected by an immunity
the provisional takeover of the corporation in April 18, 1986 which required it "to produce they will either incriminate statute, it does not follow that
the public interest, in accordance with the terms corporate records from 1973 to 1986 under pain him or may incriminate a corporation, vested with
of Executive Orders No. 1 and 2, pending the of contempt of the Commission if it fails to do it." (Oklahoma Press special privileges and
filing of the requisite actions with the so." The order was issued upon the authority of Publishing Co. v. Walling, 327 franchises may refuse to show
Sandiganbayan to cause divestment of title Section 3 (e) of Executive Order No. 1, treating of U.S. 186; emphasis, the its hand when charged with an
thereto from Marcos, and its adjudication in the PCGG's power to "issue subpoenas requiring Solicitor General's). abuse of such
favor of the Republic pursuant to Executive * * the production of such books, papers, * * The corporation is a privileges. (Wilson v. United
Order No. 14. contracts, records, statements of accounts and creature of the state. It is States, 55 Law Ed., 771, 780
As already earlier stated, this Court agrees that other documents as may be material to the presumed to be incorporated [emphasis, the Solicitor
this assessment of the facts is correct; investigation conducted by the Commission, " for the benefit of the public. It General's])
accordingly, it sustains the acts of sequestration and paragraph (3), Executive Order No. 2 dealing received certain special At any rate, Executive Order No. 14-A, amending
and takeover by the PCGG as being in accord with its power to "require all persons in the privileges and franchises, and Section 4 of Executive Order No. 14 assures
with the law, and, in view of what has thus far Philippines holding * * (alleged "ill-gotten") holds them subject to the laws protection to individuals required to produce
been set out in this opinion, pronounces to be assets or properties, whether located in the of the state and the limitations evidence before the PCGG against any possible
without merit the theory that said acts, and the Philippines or abroad, in their names as of its charter. Its powers are violation of his right against self-incrimination. It
executive orders pursuant to which they were nominees, agents or trustees, to make full limited by law. It can make no gives them immunity from prosecution on the
done, are fatally defective in not according to the disclosure of the same * *." The contention lacks contract not authorized by its basis of testimony or information he is
parties affected prior notice and hearing, or an merit. charter. Its rights to act as a compelled to present. As amended, said Section 4
adequate remedy to impugn, set aside or It is elementary that the right against self- corporation are only now provides that —
otherwise obtain relief therefrom, or that the incrimination has no application to juridical preserved to it so long as it xxx xxx xxx
PCGG had acted as prosecutor and judge at the persons. obeys the laws of its creation. The witness may not refuse to
same time. While an individual may There is a reserve right in the comply with the order on the
22. Executive Orders Not a Bill of Attainder lawfully refuse to answer legislature to investigate its basis of his privilege against
Neither will this Court sustain the theory that the incriminating questions contracts and find out self-incrimination; but no
executive orders in question are a bill of unless protected by an whether it has exceeded its testimony or other
attainder. 110 "A bill of attainder is a legislative immunity statute, it does not powers. It would be a strange information compelled under
act which inflicts punishment without judicial follow that a corporation, anomaly to hold that a state, the order (or any information
trial." 111 "Its essence is the substitution of a vested with special privileges having chartered a directly or indirectly derived
legislative for a judicial determination of and franchises, may refuse to corporation to make use of from such testimony, or other
guilt." 112 show its hand when charged certain franchises, could not, information) may be used
In the first place, nothing in the executive orders with an abuse in the exercise of sovereignty, against the witness in any
can be reasonably construed as a determination ofsuchprivileges * * 113 inquire how these franchises criminal case, except a
or declaration of guilt. On the contrary, the Relevant jurisprudence is also cited by the had been employed, and prosecution for perjury,
executive orders, inclusive of Executive Order Solicitor General. 114 whether they had been giving a false statement, or
No. 14, make it perfectly clear that any judgment abused, and demand the
 otherwise failing to comply
with the order.
The constitutional safeguard against
unreasonable searches and seizures finds no
application to the case at bar either. There has
been no search undertaken by any agent or
representative of the PCGG, and of course no
seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of,
that respecting the scope and extent of the
powers that may be wielded by the PCGG with
regard to the properties or businesses placed
under sequestration or provisionally taken over.
Obviously, it is not a question to which an
answer can be easily given, much less one which
will suffice for every conceivable situation.
a. PCGG May Not Exercise Acts
of Ownership
One thing is certain, and should be stated at the
outset: the PCGG cannot exercise acts of
dominion over property sequestered, frozen or
provisionally taken over. AS already earlier
stressed with no little insistence, the act of
sequestration; freezing or provisional takeover
of property does not import or bring about a
divestment of title over said property; does not
make the PCGG the owner thereof. In relation to
the property sequestered, frozen or
provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not
perform acts of strict ownership; and this is
specially true in the situations contemplated by
the sequestration rules where, unlike cases of
receivership, for example, no court exercises
effective supervision or can upon due application
and hearing, grant authority for the performance
of acts of dominion.
Equally evident is that the resort to the
provisional remedies in question should entail
the least possible interference with business
operations or activities so that, in the event that
the accusation of the business enterprise being
"ill gotten" be not proven, it may be returned to
its rightful owner as far as possible in the same
condition as it was at the time of sequestration.
b. PCGG Has Only Powers of
Administration
The PCGG may thus exercise only powers of
administration over the property or business
sequestered or provisionally taken over, much
like a court-appointed receiver, 115 such as to
bring and defend actions in its own name;
receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and
things as may be necessary to fulfill its mission
as conservator and administrator. In this context,
it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or
entity that may render moot and academic, or
frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or
indirect contempt in accordance with the Rules
of Court; and seek and secure the assistance of
any office, agency or instrumentality of the
government. 116 In the case of sequestered
businesses generally (i.e., going concerns,
businesses in current operation), as in the case
of sequestered objects, its essential role, as
already discussed, is that of conservator,
caretaker, "watchdog" or overseer. It is not that
of manager, or innovator, much less an owner.
c. Powers over Business
Enterprises Taken Over by
Marcos or Entities or Persons
Close to him; Limitations
Thereon
Now, in the special instance of a business
enterprise shown by evidence to have been
"taken over by the government of the Marcos
Administration or by entities or persons close to
former President Marcos," 117 the PCGG is given
power and authority, as already adverted to, to
"provisionally take (it) over in the public interest
or to prevent * * (its) disposal or dissipation;"
and since the term is obviously employed in
reference to going concerns, or business
enterprises in operation, something more than
mere physical custody is connoted; the PCGG
may in this case exercise some measure of
control in the operation, running, or
management of the business itself. But even in
this special situation, the intrusion into
management should be restricted to the
minimum degree necessary to accomplish the
legislative will, which is "to prevent the disposal
or dissipation" of the business enterprise. There
should be no hasty, indiscriminate, unreasoned
replacement or substitution of management
officials or change of policies, particularly in
respect of viable establishments. In fact, such a
replacement or substitution should be avoided if
at all possible, and undertaken only when
justified by demonstrably tenable grounds and in
line with the stated objectives of the PCGG. And it
goes without saying that where replacement of
management officers may be called for, the
greatest prudence, circumspection, care and
attention - should accompany that undertaking
to the end that truly competent, experienced and
honest managers may be recruited. There should
be no role to be played in this area by rank
amateurs, no matter how wen meaning. The road
to hell, it has been said, is paved with good
intentions. The business is not to be
experimented or played around with, not run
into the ground, not driven to bankruptcy, not
fleeced, not ruined. Sight should never be lost
sight of the ultimate objective of the whole
exercise, which is to turn over the business to
the Republic, once judicially established to be
"ill-gotten." Reason dictates that it is only under
these conditions and circumstances that the
supervision, administration and control of
business enterprises provisionally taken over
may legitimately be exercised.
d. Voting of Sequestered Stock;
Conditions Therefor
So, too, it is within the parameters of these
conditions and circumstances that the PCGG may
properly exercise the prerogative to vote
sequestered stock of corporations, granted to it
by the President of the Philippines through a
Memorandum dated June 26, 1986. That
Memorandum authorizes the PCGG, "pending the
outcome of proceedings to determine the
ownership of * * (sequestered) shares of stock,"
"to vote such shares of stock as it may have
sequestered in corporations at all stockholders'
meetings called for the election of directors,
declaration of dividends, amendment of the
Articles of Incorporation, etc." The Memorandum
should be construed in such a manner as to be
consistent with, and not contradictory of the
Executive Orders earlier promulgated on the
same matter. There should be no exercise of the
right to vote simply because the right exists, or
because the stocks sequestered constitute the
controlling or a substantial part of the corporate
voting power. The stock is not to be voted to
replace directors, or revise the articles or by-
laws, or otherwise bring about substantial
changes in policy, program or practice of the
corporation except for demonstrably weighty
and defensible grounds, and always in the
context of the stated purposes of sequestration
or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate
assets. Directors are not to be voted out simply
because the power to do so exists. Substitution of
directors is not to be done without reason or
rhyme, should indeed be shunned if at an
possible, and undertaken only when essential to
prevent disappearance or wastage of corporate
property, and always under such circumstances
as assure that the replacements are truly
possessed of competence, experience and
probity.
In the case at bar, there was adequate
justification to vote the incumbent directors out
of office and elect others in their stead because
the evidence showed prima facie that the former
were just tools of President Marcos and were no
longer owners of any stock in the firm, if they
ever were at all. This is why, in its Resolution of
October 28, 1986; 118 this Court declared that
—
Petitioner has failed to make
out a case of grave abuse or
excess of jurisdiction in
respondents' calling and
holding of a stockholders'
meeting for the election of
directors as authorized by the
Memorandum of the
President * * (to the PCGG)
dated June 26, 1986,
particularly, where as in this
case, the government can,
through its designated
directors, properly exercise
control and management over
what appear to be properties
and assets owned and
belonging to the government
itself and over which the
persons who appear in this
case on behalf of BASECO
have failed to show any right
or even any shareholding in
said corporation.
It must however be emphasized that the conduct
of the PCGG nominees in the BASECO Board in
the management of the company's affairs should
henceforth be guided and governed by the norms
herein laid down. They should never for a
moment allow themselves to forget that they are
conservators, not owners of the business; they
are fiduciaries, trustees, of whom the highest
degree of diligence and rectitude is, in the
premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by
BASECO, i.e., the cancellation or revision, and the
execution of certain contracts, inclusive of the
termination of the employment of some of its
executives, 119 this Court cannot, in the present
state of the evidence on record, pass upon them.
It is not necessary to do so. The issues arising
therefrom may and will be left for initial
determination in the appropriate action. But the
Court will state that absent any showing of any
important cause therefor, it will not normally
substitute its judgment for that of the PCGG in
these individual transactions. It is clear however,
that as things now stand, the petitioner cannot
be said to have established the correctness of its
submission that the acts of the PCGG in question
were done without or in excess of its powers, or
with grave abuse of discretion.
WHEREFORE, the petition is dismissed. The
temporary restraining order issued on October
14, 1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ.,
concur.
Separate Opinions
TEEHANKEE, CJ., concurring:
I fully concur with the masterly opinion of Mr.
Justice Narvasa. In the process of disposing of the
issues raised by petitioner BASECO in the case at
bar, it comprehensively discusses the laws and
principles governing the Presidential
Commission on Good Government (PCGG) and
defines the scope and extent of its powers in the
discharge of its monumental task of recovering
the "ill-gotten wealth, accumulated by former
President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close
associates, whether located in the Philippines or
abroad (and) business enterprises and entities
owned or controlled by them during I . . .(the
Marcos) administration, directly or through
nominees, by taking undue advantage of their
public office and/or using their powers,
authority, influence, connections or
relationship." 1
The Court is unanimous insofar as the judgment
at bar upholds the imperative need of recovering
the ill-gotten properties amassed by the previous
regime, which "deserves the fullest support of
the judiciary and all sectors of society." 2 To
quote the pungent language of Mr. Justice Cruz,
"(T)here is no question that all lawful efforts
should be taken to recover the tremendous
wealth plundered from the people by the past
regime in the most execrable thievery
perpetrated in all history. No right-thinking
Filipino can quarrel with this necessary
objective, and on this score I am happy to concur
with theponencia." 3
The Court is likewise unanimous in its judgment
dismissing the petition to declare
unconstitutional and void Executive Orders Nos.
1 and 2 to annul the sequestration order of April
14, 1986. For indeed, the 1987 Constitution
overwhelmingly adopted by the people at the
February 2, 1987 plebiscite expressly recognized
in Article XVIII, section 26 thereof 4 the vital
functions of respondent PCGG to achieve the
mandate of the people to recover such ill-gotten
wealth and properties as ordained by
Proclamation No. 3 promulgated on March 25,
1986.
The Court is likewise unanimous as to the
general rule set forth in the main opinion that
"the PCGG cannot exercise acts of dominion over
property sequestered, frozen or provisionally
taken over" and "(T)he PCGG may thus exercise
only powers of administration over the property
or business sequestered or provisionally taken
over, much like a court-appointed receiver, such
as to bring and defend actions in its own name;
receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and
things as may be necessary to fulfill its mission
as conservator and administrator. In this context,
it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or
entity that may render moot and academic, or
frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or
indirect contempt in accordance with the Rules
of Court; and seek and secure the assistance of
any office, agency or instrumentality of the
government. In the case of sequestered
businesses generally (i.e. going concerns,
business in current operation), as in the case of
sequestered objects, its essential role, as already
discussed, is that of conservator, caretaker,
'watchdog' or overseer. It is not that of manager,
or innovator, much less an owner." 5
Now, the case at bar involves one where the
third and most encompassing and rarely invoked
of provisional remedies, 6 the provisional
takeover of the Baseco properties and business
operations has been availed of by the PCGG,
simply because the evidence on hand, not
only prima facie but convincingly with
substantial and documentary evidence of record
establishes that the corporation known as
petitioner BASECO "was owned or controlled by
President Marcos 'during his administration,
through nominees, by taking undue advantage of
his public office and/or using his powers,
authority, or influence;' and that it was by and
through the same means, that BASECO had taken
over the business and/or assets of the
[government-owned] National Shipyard and
Engineering Co., Inc., and other government-
owned or controlled entities." The documentary
evidence shows that petitioner BASECO (read
Ferdinand E. Marcos) in successive transactions
all directed and approved by the former
President-in an orgy of what according to the
PCGG's then chairman, Jovito Salonga, in his
statement before the 1986 Constitutional
Commission, "Mr. Ople once called 'organized
pillage' "-gobbled up the government
corporation National Shipyard & Steel
Corporation NASSCO its shipyard at Mariveles,
300 hectares of land in Mariveles from the
Export Processing Zone Authority, Engineer
Island itself in Manila and its complex of
equipment and facilities including structures,
buildings, shops, quarters, houses, plants and
expendable or semi-expendable assets and
obtained huge loans of $19,000,000.00 from the
last available Japanese war damage fund,
P30,000,000.00 from the NDC and
P12,400,000.00 from the GSIS. The sordid details
are set forth in detail in Paragraphs 1 1 to 20 of
the main opinion. They include confidential
reports from then BASECO president Hilario M.
Ruiz and the deposed President's brother-in-
law, then Captain (later Commodore) Alfredo
Romualdez, who although not on record as an
officer or stockholder of BASECO reported
directly to the deposed President on its affairs
and made the recommendations, all approved by
the latter, for the gobbling up by BASECO of all
the choice government assets and properties.
All this evidence has been placed of record in the
case at bar. And petitioner has had all the time
and opportunity to refute it, submittals to the
contrary notwithstanding, but has dismally failed
to do so. To cite one glaring instance: as stated in
the main opinion, the evidence submitted to this
Court by the Solicitor General "proves that
President Marcos not only exercised control over
BASECO, but also that he actually owns well nigh
one hundred percent of its outstanding stock." It
cites the fact that three corporations, evidently
front or dummy corporations, among twenty
shareholders, in name, of BASECO, namely Metro
Bay Drydock, Fidelity Management, Inc. and
Trident Management hold 209,664 shares or
95.82%, of BASECO's outstanding stock. Now,
the Solicitor General points out further than
BASECO certificates "corresponding to more
than ninety-five percent (95%) of all the
outstanding shares of stock of BASECO, endorsed
in blank, together with deeds of assignment of
practically all the outstanding shares of stock of
the three (3) corporations above mentioned
(which hold 95.82% of all BASECO stock), signed
by the owners thereof although not
notarized" 7 were found in Malacañang shortly
after the deposed President's sudden flight from
the country on the night of February 25, 1986.
Thus, the main opinion's unavoidable conclusion
that "(W)hile the petitioner's counsel was quick
to dispute this asserted fact, assuring this Court
that the BASECO stockholders were still in
possession of their respective stock certificates
and had 'never endorsed * * * them in blank or to
anyone else,' that denial is exposed by his own
prior and subsequent recorded statements as a
mere gesture of defiance rattler than a verifiable
factual declaration . . . . Under the circumstances,
the Court can only conclude that he could not get
the originals from the stockholders for the
simple reason that as the Solicitor General
maintains, said stockholders in truth no longer
have them in their possession, these having
already been assigned in blank to President
Marcos."8
With this strong unrebutted evidence of record
in this Court, Justice Melencio-Herrera, joined by
Justice Feliciano, expressly concurs with the
main opinion upholding the commission's take-
over, stating that "(I) have no objection to
according the right to vote sequestered stock in
case of a takeover of business actually belonging
to the government or whose capitalization comes
from public funds but which, somehow, landed in
the hands of private persons, as in the case of
BASECO." They merely qualify their concurrence
with the injunction that such takeovers be
exercised with "caution and prudence" pending
the determination of "the true and real
ownership" of the sequestered shares. Suffice it
to say in this regard that each case has to be
judged from the pertinent facts and
circumstances and that the main opinion
emphasizes sufficiently that it is only in the
special instances specified in the governing laws
grounded on the superior national interest and
welfare and the practical necessity of preserving
the property and preventing its loss or
disposition that the provisional remedy of
provisional take-over is exercised.
Here, according to the dissenting opinion, "the
PCGG concludes that sequestered property is ill-
gotten wealth and proceeds to exercise acts of
ownership over said properties . . . . and adds
that "the fact of ownership must be established
in a proper suit before a court of justice"-which
this Court has preempted with its finding that "in
the context of the proceedings at bar, the
actuality of the control by President Marcos of
BASECO has been sufficiently shown."
But BASECO who has instituted this action to set
aside the sequestration and take-over orders of
respondent commission has chosen to raise
these very issues in this Court. We cannot
ostrich-like hide our head in the sand and say
that it has not yet been established in the proper
court that what the PCGG has taken over here
are government properties, as a matter of record
and public notice and knowledge, like the
NASSCO, its Engineer Island and Mariveles
Shipyard and entire complex, which have been
pillaged and placed in the name of the dummy or
front company named BASECO but from all the
documentary evidence of record shown by its
street certificates all found in Malacanang should
in reality read "Ferdinand E. Marcos" and/or his
brother-in-law. Such take-over can in no way be
termed "lawless usurpation," for the government
does not commit any act of usurpation in taking
over its own properties that have been channeled
to dummies, who are called upon to prove in the
proper court action what they have failed to do
in this Court, that they have lawfully acquired
ownership of said properties, contrary to the
documentary evidence of record, which they
must likewise explain away. This Court, in the
exercise of its jurisdiction on certiorari and as
the guardian of the Constitution and protector of
the people's basic constitutional rights, has
entertained many petitions on the part of parties
claiming to be adversely affected by
sequestration and other orders of the PCGG, This
Court set the criterion that such orders should
issue only upon showing of a prima facie case,
which criterion was adopted in the 1987
Constitution. The Court's judgment cannot be
faulted if much more than a prima facie has been
shown in this case, which the faceless figures
claiming to represent BASECO have failed to
refute or disprove despite all the opportunity to
do so.
The record plainly shows that petitioner BASECO
which is but a mere shell to mask its real owner
did not and could not explain how and why they
received such favored and preferred treatment
with tailored Letters of Instruction and
handwritten personal approval of the deposed
President that handed it on a silver platter the
whole complex and properties of NASSCO and
Engineer Island and the Mariveles Shipyard.
It certainly would be the height of absurdity and
helplessness if this government could not here
and now take over the possession and custody
of its very own properties and assets that had
been stolen from it and which it had pledged to
recover for the benefit and in the greater interest
of the Filipino people, whom the past regime had
saddled with a huge $27-billion foreign debt that
has since ballooned to $28.5-billion.
Thus, the main opinion correctly concludes that
"(I)n the light of the affirmative showing by the
Government that,prima facie at least, the
stockholders and directors of BASECO as of April,
1986 were mere 'dummies,' nominees or alter
egos of President Marcos; at any rate, that they
are no longer owners of any shares of stock in
the corporation, the conclusion cannot be
avoided that said stockholders and directors
have no basis and no standing whatever to cause
the filing and prosecution of the instant
proceeding; and to grant relief to BASECO, as
prayed for in the petition, would in effect be to
restore the assets, properties and business
sequestered and taken over by the PCGG to
persons who are 'dummies' nominees or alter
egos of the former President." 9
And Justice Padilla in his separate concurrence
"called a spade a spade," citing the street
certificates representing 95 % of BASECO's
outstanding stock found in Malacañang after Mr.
Marcos' hasty flight in February, 1986 and the
extent of the control he exercised over policy
decisions affecting BASECO and concluding that
"Consequently, even ahead of judicial
proceedings, I am convinced that the Republic of
the Philippines, thru the PCGG, has the right and
even the duty to take over full control and
supervision of BASECO."
Indeed, the provisional remedies available to
respondent commission are rooted in the police
power of the State, the most pervasive and the
least limitable of the powers of Government
since it represents "the power of sovereignty, the
power to govern men and things within the
limits of its domain." 10 Police power has been
defined as the power inherent in the State "to
prescribe regulations to promote the health,
morals, education, good order or safety, and
general welfare of the people." 11Police power
rests upon public necessity and upon the right of
the State and of the public to self-
protection. 12 "Salus populi suprema est lex" or
"the welfare of the people is the Supreme
Law." 13 For this reason, it is co-extensive with
the necessities of the case and the safeguards of
public interest. 14Its scope expands and
contracts with changing needs. 15 "It may be
said in a general way that the police power
extends to all the great public needs. It may be
put forth in aid of what is sanctioned by usage, or
held by the prevailing morality or strong and
preponderant opinion to be greatly and
immediately necessary to the public
welfare." 16 That the public interest or the
general welfare is subserved by sequestering the
purported ill-gotten assets and properties and
taking over stolen properties of the government
channeled to dummy or front companies is
stating the obvious. The recovery of these ill-
gotten assets and properties would greatly aid
our financially crippled government and hasten
our national economic recovery, not to mention
the fact that they rightfully belong to the people.
While as a measure of self-protection, if, in the
interest of general welfare, police power may be
exercised to protect citizens and their businesses
in financial and economic matters, it may
similarly be exercised to protect the government
itself against potential financial loss and the
possible disruption of governmental
functions. 17 Police power as the power of self-
protection on the part of the community bears
the same relation to the community that the
principle of self-defense bears to the
individual. 18 Truly, it may be said that even
more than self- defense, the recovery of ill-gotten
wealth and of the government's own properties
involves the material and moral survival of the
nation, marked as the past regime was by the
obliteration of any line between private funds
and the public treasury and abuse of unlimited
power and elimination of any accountability in
public office, as the evidence of record amply
shows.
It should be mentioned that the tracking down of
the deposed President's actual ownership of the
BASECO shares was fortuitously facilitated by
the recovery of the street certificates in
Malacañang after his hasty flight from the
country last year. This is not generally the case.
For example, in the ongoing case filed by the
government to recover from the Marcoses
valuable real estate holdings in New York and
the Lindenmere estate in Long Island, former
PCGG chairman Jovito Salonga has revealed that
their names "do not appear on any title to the
property. Every building in New York is titled in
the name of a Netherlands Antilles corporation,
which in turn is purportedly owned by three
Panamanian corporations, with bearer shares.
This means that the shares of this corporation
can change hands any time, since they can be
transferred, under the law of Panama, without
previous registration on the books of the
corporation. One of the first documents that we
discovered shortly after the February revolution
was a declaration of trust handwritten by Mr.
Joseph Bernstein on April 4, 1982 on a Manila
Peninsula Hotel stationery stating that he would
act as a trustee for the benefit of President
Ferdinand Marcos and would act solely pursuant
to the instructions of Marcos with respect to the
Crown Building in New York." 19
This is just to stress the difficulties of the tasks
confronting respondent PCGG, which
nevertheless has so far commendably produced
unprecedented positive results. As stated by
then chairman Salonga:
PCGG has turned over to the
Office of the President around
2 billion pesos in cash, free of
any lien. It has also delivered
to the President-as a result of
a compromise settlement-
around 200 land titles
involving vast tracks of land
in Metro Manila, Rizal,
Laguna, Cavite, and Bataan,
worth several billion pesos.
These lands are now available
for low-cost housing projects
for the benefit of the poor and
the dispossessed amongst our
people.
In the legal custody of the
Commission as a result of
sequestration proceedings,
are expensive jewelry
amounting to 310 million
pesos, 42 aircraft amounting
to 718 million pesos, vessels
amounting to 748 million
pesos, and shares of stock
amounting to around 215
million pesos.
But, as I said, the bulk of the
ill-gotten wealth is located
abroad, not in the Philippines.
Through the efforts of the
PCGG, we have caused the
freezing or sequestration of
properties, deposits, and
securities probably worth
many billions of pesos in New
York, New Jersey, Hawaii,
California, and more
importantly-in Switzerland.
Due to favorable
developments in Switzerland,
we may expect, according to
our Swiss lawyers, the first
deliveries of the Swiss
deposits in the foreseeable
future, perhaps in less than a
year's time. In New York,
PCGG through its lawyers who
render their services free of
cost to the Philippine
government, succeeded in
getting injunctive relief
against Mr. and Mrs. Marcos
and their nominees and
agents. There is now an offer
for settlement that is being
studied and explored by our
lawyers there.
If we succeed in recovering
not an (since this is
impossible) but a substantial
part of the ill-gotten wealth
here and in various countries
of the world — something the
revolutionary governments of
China, Ethiopia, Iran and
Nicaragua were not able to
accomplish at all with respect
to properties outside their
territorial boundaries — the
Presidential Commission on
Good Government, which has
undertaken the difficult and
thankless task of trying to
undo what had been done so
secretly and effectively in the
last twenty years, shall have
more than justified its
existence. 20
The misdeeds of some PCGG volunteers and
personnel cited in the dissenting opinion do not
detract at an from the PCGG's accomplishments,
just as no one would do away with newspapers
because of some undesirable elements. The point
is that all such misdeeds have been subject to
public exposure and as stated in the dissent
itself, the erring PCGG representatives have been
forthwith dismissed and replaced.
The magnitude of the tasks that confront
respondent PCGG with its limited resources and
staff support and volunteers should be
appreciated, together with the assistance that
foreign governments and lawyers have
spontaneously given the commission.
A word about the PCGG's firing of the BASECO
lawyers who filed the present petition
challenging its questioned orders, filing a motion
to withdraw the petition, after it had put in eight
of its representatives as directors of the BASECO
board of directors. This was entirely proper and
in accordance with the Court's Resolution of
October 28, 1986, which denied BASECO's
motion for the issuance of a restraining order
against such take-over and declared that "the
government can, through its designated
directors, properly exercise control and
management over what appear to be properties
and assets owned and belonging to the
government itself and over which the persons who
appear in this case on behalf of BASECO have
failed to show any eight or even any shareholding
in said corporation." In other words, these
dummies or fronts cannot seek to question the
government's right to recover the very
properties and assets that have been stolen from
it by using the very same stolen properties and
funds derived therefrom. If they wish to pursue
their own empty claim, they must do it on their
own, after first establishing that they indeed
have a lawful right and/or shareholding in
BASECO.
Under the 1987 Constitution, the PCGG is called
upon to file the judicial proceedings for
forfeiture and recovery of the sequestered or
frozen properties covered by its orders issued
before the ratification of the Constitution on
February 2, 1987, within six months from such
ratification, or by August 2, 1987. (For those
orders issued after such ratification, the judicial
action or proceeding must be commenced within
six months from the issuance thereof.) The PCGG
has not really been given much time, considering
the magnitude of its tasks. It is entitled to some
forbearance, in availing of the maximum time
granted it for the filing of the corresponding
judicial action with the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice
Narvasa maintains and upholds the valid
distinction between acts of conservation and
preservation of assets and acts of ownership.
Sequestration, freeze and temporary take-over
encompass the first type of acts. They do not
include the second type of acts which are
reserved only to the rightful owner of the assets
or business sequestered or temporarily taken
over.
The removal and election of members of the
board of directors of a corporate enterprise is, to
me, a clear act of ownership on the part of the
shareholders of the corporation. Under ordinary
circumstances, I would deny the PCGG the
authority to change and elect the members of
BASECO's Board of Directors. However, under
the facts as disclosed by the records, it appears
that the certificates of stock representing about
ninety-five (95%) per cent of the total ownership
in BASECO's capital stock were found endorsed
in blank in Malacanang (presumably in the
possession and control of Mr. Marcos) at the
time he and his family fled in February 1986.
This circumstance let alone the extent of the
control Mr. Marcos exercised, while in power,
over policy decisions affecting BASECO, entirely
satisfies my mind that BASECO was owned and
controlled by Mr. Marcos. This is calling a spade
a spade. I am also entirely satisfied in my mind
that Mr. Marcos could not have acquired the
ownership of BASECO out of his lawfully-gotten
wealth.
Consequently, even ahead of judicial
proceedings, I am convinced that the Republic of
the Philippines, through the PCGG, has the right
and even the duty to take-over full control and
supervision of BASECO.
MELENCIO-HERRERA, J., concurring:
I would like to qualify my concurrence in so far
as the voting of sequestered stork is concerned.
The voting of sequestered stock is, to my mind,
an exercise of an attribute of ownership. It goes
beyond the purpose of a writ of sequestration,
which is essentially to preserve the property in
litigation (Article 2005, Civil Code).
Sequestration is in the nature of a judicial
deposit (ibid.).
I have no objection to according the right to vote
sequestered stock in case of a take-over of
business actually belonging to the government
or whose capitalization comes from public funds
but which, somehow, landed in the hands of
private persons, as in the case of BASECO. To my
mind, however, caution and prudence should be
exercised in the case of sequestered shares of an
on-going private business enterprise, specially
the sensitive ones, since the true and real
ownership of said shares is yet to be determined
and proven more conclusively by the Courts.
It would be more in keeping with legal norms if
forfeiture proceedings provided for under
Republic Act No. 1379 be filed in Court and the
PCGG seek judicial appointment as a receiver or
administrator, in which case, it would be
empowered to vote sequestered shares under its
custody (Section 55, Corporation Code). Thereby,
the assets in litigation are brought within the
Court's jurisdiction and the presence of an
impartial Judge, as a requisite of due process, is
assured. For, even in its historical context,
sequestration is a judicial matter that is best
handled by the Courts.
I consider it imperative that sequestration
measures be buttressed by judicial proceedings
the soonest possible in order to settle the matter
of ownership of sequestered shares and to
determine whether or not they are legally owned
by the stockholders of record or are "ill-gotten
wealth" subject to forfeiture in favor of the State.
Sequestration alone, being actually an ancillary
remedy to a principal action, should not be made
the basis for the exercise of acts of dominion for
an indefinite period of time.
Sequestration is an extraordinary, harsh, and
severe remedy. It should be confined to its lawful
parameters and exercised, with due regard, in
the words of its enabling laws, to the
requirements of fairness, due process (Executive
Order No. 14, palay 7, 1986), and Justice
(Executive Order No. 2, March 12, 1986).
Feliciano, J., concur.
GUTIERREZ, JR., J., concurring and dissenting:
I concur, in part, in the erudite opinion penned
for the Court by my distinguished colleague Mr.
Justice Andres R. Narvasa. I agree insofar as it
states the principles which must govern PCGG
sequestrations and emphasizes the limitations in
the exercise of its broad grant of powers.
I concur in the general propositions embodied in
or implied from the majority opinion, among
them:
(1) The efforts of Government to recover ill-
gotten properties amassed by the previous
regime deserve the fullest support of the
judiciary and all sectors of society. I believe,
however, that a nation professing adherence to
the rule of law and fealty to democratic
processes must adopt ways and means which are
always within the bounds of lawfully granted
authority and which meet the tests of due
process and other Bill of Rights protections.
(2) Sequestration is intended to prevent the
destruction, concealment, or dissipation of ill-
gotten wealth. The object is conservation and
preservation. Any exercise of power beyond
these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are
granted by law and not proscribed by the
Constitution. The remedies it enforces are
provisional and contingent. Whether or not
sequestered property is indeed ill-gotten must
be-determined by a court of justice. The PCGG
has absolutely no power to divest title over
sequestered property or to act as if its findings
are final.
(4) The PCGG does not own sequestered
property. It cannot and must not exercise acts of
ownership. To quote the majority opinion, "one
thing is certain ..., the PCGG cannot exercise acts
of dominion."
(5) The provisional takeover in a sequestration
should not be indefinitely maintained. It is the
duty of the PCGG to immediately file appropriate
criminal or civil cases once the evidence has
been gathered.
It is the difference between what the Court says
and what the PCGG does which constrains me to
dissent. Even as the Court emphasizes principles
of due process and fair play, it has unfortunately
validated ultra vires acts violative of those very
same principles. While we stress the rules which
must govern the PCGG in the exercise of its
powers, the Court has failed to stop or check acts
which go beyond the power of sequestration
given by law to the PCGG.
We are all agreed in the Court that the PCGG is
not a judge. It is an investigator and prosecutor.
Sequestration is only a preliminary or ancillary
remedy. There must be a principal and
independent suit filed in court to establish the
true ownership of sequestered properties. The
factual premise that a sequestered property was
ill-gotten by former President Marcos, his family,
relatives, subordinates, and close
associates cannot be assumed. The fact of
ownership must be established in a proper suit
before a court of justice.
But what has the Court, in effect, ruled?
Pages 21 to 33 of the majority opinion are
dedicated to a statement of facts
which conclusively and indubitably shows that
BASECO is owned by President Marcos-and that
it was acquired and vastly enlarged by the
former President's taking undue advantage of his
public office and using his powers, authority, or
influence.
There has been no court hearing, no trial, and no
presentation of evidence. All that we have is
what the PCGG has given us. The petitioner has
not even been allowed to see the evidence, much
less refute it.
What the PCGG has gathered in the course of its
seizures and investigations may be gospel truth.
However, that truth must be properly
established in a trial court, not unilaterally
determined by the PCGG or declared by this
Court in a special proceeding which only asks us
to set aside or enjoin an illegal exercise of power.
After this decision, there is nothing more for a
trial court to ascertain. Certainly, no lower court
would dare to arrive at findings contrary to this
Court's conclusions, no matter how insistent we
may be in labelling such conclusions as "prima
facie." To me, this is the basic flaw in PCGG
procedures that the Court is, today, unwittingly
legitimating. Even before the institution of a
court case, the PCGG concludes that sequestered
property is ill-gotten wealth and proceeds to
exercise acts of ownership over said properties.
It treats sequestered property as its own even
before the oppositor-owners have been divested
of their titles.
The Court declares that a state of seizure is not
to be indefinitely maintained. This means that
court proceedings to either forfeit the
sequestered properties or clear the names and
titles of the petitioners must be filed as soon as
possible.
This case is a good example of disregard or
avoidance of this requirement. With the kind of
evidence which the PCGG professes to possess,
the forfeiture case could have been filed
simultaneously with the issuance of
sequestration orders or shortly thereafter.
And yet, the records show that the PCGG appears
to concentrate more on the means rather than
the ends, in running the BASECO, taking over the
board of directors and management, getting rid
of security guards, disposing of scrap, entering
into new contracts and otherwise behaving as if
it were already the owner. At this late date and
with all the evidence PCGG claims to have, no
court case has been filed.
Among the interesting items elicited during the
oral arguments or found in the records of this
petition are:
(1) Upon sequestering BASECO, some PCGG
personnel lost no time in digging up paved
premises with jack hammers in a frantic search
for buried gold bars.
(2) Two top PCGG volunteers charged each other
with stealing properties under their custody. The
PCGG had to step in, dismiss the erring
representatives, and replace them with new
ones.
(3) The petitioner claims that the lower bid of a
rock quarry operator was accepted even as a
higher and more favorable bid was offered.
When the questionable deal was brought to our
attention, the awardee allegedly raised his bid to
the level of the better offer. The successful
bidder later submitted a comment in
intervention explaining his side. Whoever is
telling the truth, the fact remains that multi-
million peso contracts involving the operations
of sequestered companies should be entered into
under the supervision of a court, not freely
executed by the PCGG even when the petitioner-
owners question the propriety and integrity of
those transactions.
(4) The PCGG replaced eight out of eleven
members of the BASECO board of directors with
its own men. Upon taking over full control of the
corporation, the newly installed board reversed
the efforts of the former owners to protect their
interests. The new board fired the BASECO
lawyers who instituted the instant petition. It
then filed a motion to withdraw this very same
petition we are now deciding. In other words, the
"new owners" did not want the Supreme Court
to continue poking into the legality of their acts.
They moved to abort the petition filed with us.
Any suspicion of impropriety would have been
avoided if the PCGG had filed the required court
proceedings and exercised its acts of
management and control under court
supervision. The requirements of due process
would have been met.
One other matter I wish to discuss in this
separate opinion is PCGG's selection of eight out
of the eleven members of the BASECO board of
directors.
The election of the members of a board of
directors is distinctly and unqualifiedly an act of
ownership. When stockholders of a corporation
elect or remove members of a board of directors,
they exercise their right of ownership in the
company they own, By no stretch of the
imagination can the revamp of a board of
directors be considered as a mere act of
conserving assets or preventing the dissipation
of sequestered assets. The broad powers of a
sequestrator are more than enough to protect
sequestered assets. There is no need and no legal
basis to reach out further and exercise ultimate
acts of ownership.
Under the powers which PCGG has assumed and
wields, it can amend the articles and by-laws of a
sequestered corporation, decrease the capital
stock, or sell substantially all corporate assets
without any effective check from the owners not
yet divested of their titles or from a court of
justice. The PCGG is tasked to preserve assets but
when it exercises the acts of an owner, it could
also very well destroy. I hope that the case of
the Philippine Daily Express, a major newspaper
closed by the PCGG, is an isolated example.
Otherwise, banks, merchandizing firms,
investment institutions, and other sensitive
businesses will find themselves in a similar
quandary.
I join the PCGG and all right thinking Filipinos in
condemning the totalitarian acts which made
possible the accumulation of ill-gotten wealth. I,
however, dissent when authoritarian and ultra
vires methods are used to recover that stolen
wealth. One wrong cannot be corrected by the
employment of another wrong.
I, therefore, vote to grant the petition. Pending
the filing of an appropriate case in court, the
PCGG must be enjoined from exercising any and
all acts of ownership over the sequestered firm.
Bidin and Cortes, JJ., concur and dissent.
CRUZ, J., dissenting:
My brother Narvasa has written a truly
outstanding decision that bespeaks a penetrating
and analytical mind and a masterly grasp of the
serious problem we are asked to resolve. He
deserves and I offer him my sincere admiration.
There is no question that all lawful efforts should
be taken to recover the tremendous wealth
plundered from the people by the past regime in
the most execrable thievery perpetrated in all
history. No right-thinking Filipino can quarrel
with this necessary objective, and on this score I
am happy to concur with the ponencia.
But for all my full agreement with the basic
thesis of the majority, I regret I find myself
unable to support its conclusions in favor Of the
respondent PCGG. My view is that these
conclusions clash with the implacable principles
of the free society. foremost among which is due
process. This demands our reverent regard.
Due process protects the life, liberty and
property of every person, whoever he may be.
Even the most despicable criminal is entitled to
this protection. Granting this distinction to
Marcos, we are still not justified in depriving him
of this guaranty on the mere justification that he
appears to own the BASECO shares.
I am convinced and so submit that the PCGG
cannot at this time take over the BASECO
without any court order and exercise thereover
acts of ownership without court supervision.
Voting the shares is an act of ownership.
Reorganizing the board of directors is an act of
ownership. Such acts are clearly unauthorized.
As the majority opinion itself stresses, the PCGG
is merely an administrator whose authority is
limited to preventing the sequestered properties
from being dissipated or clandestinely
transferred.
The court action prescribed in the Constitution is
not inadequate and is available to the PCGG. The
advantage of this remedy is that, unlike the ad
libitum measures now being take it
is authorized and at the same time alsolimited by
the fundamental law. I see no reason why it
should not now be employed by the PCGG, to
remove all doubts regarding the legality of its
acts and all suspicions concerning its motives.
Separate Opinions
TEEHANKEE, CJ., concurring:
I fully concur with the masterly opinion of Mr.
Justice Narvasa. In the process of disposing of the
issues raised by petitioner BASECO in the case at
bar, it comprehensively discusses the laws and
principles governing the Presidential
Commission on Good Government (PCGG) and
defines the scope and extent of its powers in the
discharge of its monumental task of recovering
the "ill-gotten wealth, accumulated by former
President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close
associates, whether located in the Philippines or
abroad (and) business enterprises and entities
owned or controlled by them during I . . .(the
Marcos) administration, directly or through
nominees, by taking undue advantage of their
public office and/or using their powers,
authority, influence, connections or
relationship." 1
The Court is unanimous insofar as the judgment
at bar upholds the imperative need of recovering
the ill-gotten properties amassed by the previous
regime, which "deserves the fullest support of
the judiciary and all sectors of society." 2 To
quote the pungent language of Mr. Justice Cruz,
"(T)here is no question that all lawful efforts
should be taken to recover the tremendous
wealth plundered from the people by the past
regime in the most execrable thievery
perpetrated in all history. No right-thinking
Filipino can quarrel with this necessary
objective, and on this score I am happy to concur
with the ponencia." 3
The Court is likewise unanimous in its judgment
dismissing the petition to declare
unconstitutional and void Executive Orders Nos.
1 and 2 to annul the sequestration order of April
14, 1986. For indeed, the 1987 Constitution
overwhelmingly adopted by the people at the
February 2, 1987 plebiscite expressly recognized
in Article XVIII, section 26 thereof 4 the vital
functions of respondent PCGG to achieve the
mandate of the people to recover such ill-gotten
wealth and properties as ordained by
Proclamation No. 3 promulgated on March 25,
1986.
The Court is likewise unanimous as to the
general rule set forth in the main opinion that
"the PCGG cannot exercise acts of dominion over
property sequestered, frozen or provisionally
taken over" and "(T)he PCGG may thus exercise
only powers of administration over the property
or business sequestered or provisionally taken
over, much like a court-appointed receiver, such
as to bring and defend actions in its own name;
receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and
things as may be necessary to fulfill its mission
as conservator and administrator. In this context,
it may in addition enjoin or restrain any actual or
threatened commission of acts by any person or
entity that may render moot and academic, or
frustrate or otherwise make ineffectual its
efforts to carry out its task; punish for direct or
indirect contempt in accordance with the Rules
of Court; and seek and secure the assistance of
any office, agency or instrumentality of the
government. In the case of sequestered
businesses generally (i.e. going concerns,
business in current operation), as in the case of
sequestered objects, its essential role, as already
discussed, is that of conservator, caretaker,
'watchdog' or overseer. It is not that of manager,
or innovator, much less an owner." 5
Now, the case at bar involves one where the
third and most encompassing and rarely invoked
of provisional remedies, 6 the provisional
takeover of the Baseco properties and business
operations has been availed of by the PCGG,
simply because the evidence on hand, not
only prima facie but convincingly with
substantial and documentary evidence of record
establishes that the corporation known as
petitioner BASECO "was owned or controlled by
President Marcos 'during his administration,
through nominees, by taking undue advantage of
his public office and/or using his powers,
authority, or influence;' and that it was by and
through the same means, that BASECO had taken
over the business and/or assets of the
[government-owned] National Shipyard and
Engineering Co., Inc., and other government-
owned or controlled entities." The documentary
evidence shows that petitioner BASECO (read
Ferdinand E. Marcos) in successive transactions
all directed and approved by the former
President-in an orgy of what according to the
PCGG's then chairman, Jovito Salonga, in his
statement before the 1986 Constitutional
Commission, "Mr. Ople once called 'organized
pillage' "-gobbled up the government
corporation National Shipyard & Steel
Corporation NASSCO its shipyard at Mariveles,
300 hectares of land in Mariveles from the
Export Processing Zone Authority, Engineer
Island itself in Manila and its complex of
equipment and facilities including structures,
buildings, shops, quarters, houses, plants and
expendable or semi-expendable assets and
obtained huge loans of $19,000,000.00 from the
last available Japanese war damage fund,
P30,000,000.00 from the NDC and
P12,400,000.00 from the GSIS. The sordid details
are set forth in detail in Paragraphs 1 1 to 20 of
the main opinion. They include confidential
reports from then BASECO president Hilario M.
Ruiz and the deposed President's brother-in-
law, then Captain (later Commodore) Alfredo
Romualdez, who although not on record as an
officer or stockholder of BASECO reported
directly to the deposed President on its affairs
and made the recommendations, all approved by
the latter, for the gobbling up by BASECO of all
the choice government assets and properties.
All this evidence has been placed of record in the
case at bar. And petitioner has had all the time
and opportunity to refute it, submittals to the
contrary notwithstanding, but has dismally failed
to do so. To cite one glaring instance: as stated in
the main opinion, the evidence submitted to this
Court by the Solicitor General "proves that
President Marcos not only exercised control over
BASECO, but also that he actually owns well nigh
one hundred percent of its outstanding stock." It
cites the fact that three corporations, evidently
front or dummy corporations, among twenty
shareholders, in name, of BASECO, namely Metro
Bay Drydock, Fidelity Management, Inc. and
Trident Management hold 209,664 shares or
95.82%, of BASECO's outstanding stock. Now,
the Solicitor General points out further than
BASECO certificates "corresponding to more
than ninety-five percent (95%) of all the
outstanding shares of stock of BASECO, endorsed
in blank, together with deeds of assignment of
practically all the outstanding shares of stock of
the three (3) corporations above mentioned
(which hold 95.82% of all BASECO stock), signed
by the owners thereof although not
notarized" 7 were found in Malacañang shortly
after the deposed President's sudden flight from
the country on the night of February 25, 1986.
Thus, the main opinion's unavoidable conclusion
that "(W)hile the petitioner's counsel was quick
to dispute this asserted fact, assuring this Court
that the BASECO stockholders were still in
possession of their respective stock certificates
and had 'never endorsed * * * them in blank or to
anyone else,' that denial is exposed by his own
prior and subsequent recorded statements as a
mere gesture of defiance rattler than a verifiable
factual declaration . . . . Under the circumstances,
the Court can only conclude that he could not get
the originals from the stockholders for the
simple reason that as the Solicitor General
maintains, said stockholders in truth no longer
have them in their possession, these having
already been assigned in blank to President
Marcos."8
With this strong unrebutted evidence of record
in this Court, Justice Melencio-Herrera, joined by
Justice Feliciano, expressly concurs with the
main opinion upholding the commission's take-
over, stating that "(I) have no objection to
according the right to vote sequestered stock in
case of a takeover of business actually belonging
to the government or whose capitalization comes
from public funds but which, somehow, landed in
the hands of private persons, as in the case of
BASECO." They merely qualify their concurrence
with the injunction that such takeovers be
exercised with "caution and prudence" pending
the determination of "the true and real
ownership" of the sequestered shares. Suffice it
to say in this regard that each case has to be
judged from the pertinent facts and
circumstances and that the main opinion
emphasizes sufficiently that it is only in the
special instances specified in the governing laws
grounded on the superior national interest and
welfare and the practical necessity of preserving
the property and preventing its loss or
disposition that the provisional remedy of
provisional take-over is exercised.
Here, according to the dissenting opinion, "the
PCGG concludes that sequestered property is ill-
gotten wealth and proceeds to exercise acts of
ownership over said properties . . . . and adds
that "the fact of ownership must be established
in a proper suit before a court of justice"-which
this Court has preempted with its finding that "in
the context of the proceedings at bar, the
actuality of the control by President Marcos of
BASECO has been sufficiently shown."
But BASECO who has instituted this action to set
aside the sequestration and take-over orders of
respondent commission has chosen to raise
these very issues in this Court. We cannot
ostrich-like hide our head in the sand and say
that it has not yet been established in the proper
court that what the PCGG has taken over here
are government properties, as a matter of record
and public notice and knowledge, like the
NASSCO, its Engineer Island and Mariveles
Shipyard and entire complex, which have been
pillaged and placed in the name of the dummy or
front company named BASECO but from all the
documentary evidence of record shown by its
street certificates all found in Malacanang should
in reality read "Ferdinand E. Marcos" and/or his
brother-in-law. Such take-over can in no way be
termed "lawless usurpation," for the government
does not commit any act of usurpation in taking
over its own properties that have been channeled
to dummies, who are called upon to prove in the
proper court action what they have failed to do
in this Court, that they have lawfully acquired
ownership of said properties, contrary to the
documentary evidence of record, which they
must likewise explain away. This Court, in the
exercise of its jurisdiction on certiorari and as
the guardian of the Constitution and protector of
the people's basic constitutional rights, has
entertained many petitions on the part of parties
claiming to be adversely affected by
sequestration and other orders of the PCGG, This
Court set the criterion that such orders should
issue only upon showing of a prima facie case,
which criterion was adopted in the 1987
Constitution. The Court's judgment cannot be
faulted if much more than a prima facie has been
shown in this case, which the faceless figures
claiming to represent BASECO have failed to
refute or disprove despite all the opportunity to
do so.
The record plainly shows that petitioner BASECO
which is but a mere shell to mask its real owner
did not and could not explain how and why they
received such favored and preferred treatment
with tailored Letters of Instruction and
handwritten personal approval of the deposed
President that handed it on a silver platter the
whole complex and properties of NASSCO and
Engineer Island and the Mariveles Shipyard.
It certainly would be the height of absurdity and
helplessness if this government could not here
and now take over the possession and custody
of its very own properties and assets that had
been stolen from it and which it had pledged to
recover for the benefit and in the greater interest
of the Filipino people, whom the past regime had
saddled with a huge $27-billion foreign debt that
has since ballooned to $28.5-billion.
Thus, the main opinion correctly concludes that
"(I)n the light of the affirmative showing by the
Government that,prima facie at least, the
stockholders and directors of BASECO as of April,
1986 were mere 'dummies,' nominees or alter
egos of President Marcos; at any rate, that they
are no longer owners of any shares of stock in
the corporation, the conclusion cannot be
avoided that said stockholders and directors
have no basis and no standing whatever to cause
the filing and prosecution of the instant
proceeding; and to grant relief to BASECO, as
prayed for in the petition, would in effect be to
restore the assets, properties and business
sequestered and taken over by the PCGG to
persons who are 'dummies' nominees or alter
egos of the former President." 9
And Justice Padilla in his separate concurrence
"called a spade a spade," citing the street
certificates representing 95 % of BASECO's
outstanding stock found in Malacañang after Mr.
Marcos' hasty flight in February, 1986 and the
extent of the control he exercised over policy
decisions affecting BASECO and concluding that
"Consequently, even ahead of judicial
proceedings, I am convinced that the Republic of
the Philippines, thru the PCGG, has the right and
even the duty to take over full control and
supervision of BASECO."
Indeed, the provisional remedies available to
respondent commission are rooted in the police
power of the State, the most pervasive and the
least limitable of the powers of Government
since it represents "the power of sovereignty, the
power to govern men and things within the
limits of its domain." 10 Police power has been
defined as the power inherent in the State "to
prescribe regulations to promote the health,
morals, education, good order or safety, and
general welfare of the people." 11Police power
rests upon public necessity and upon the right of
the State and of the public to self-
protection. 12 "Salus populi suprema est lex" or
"the welfare of the people is the Supreme
Law." 13 For this reason, it is co-extensive with
the necessities of the case and the safeguards of
public interest. 14Its scope expands and
contracts with changing needs. 15 "It may be
said in a general way that the police power
extends to all the great public needs. It may be
put forth in aid of what is sanctioned by usage, or
held by the prevailing morality or strong and
preponderant opinion to be greatly and
immediately necessary to the public
welfare." 16 That the public interest or the
general welfare is subserved by sequestering the
purported ill-gotten assets and properties and
taking over stolen properties of the government
channeled to dummy or front companies is
stating the obvious. The recovery of these ill-
gotten assets and properties would greatly aid
our financially crippled government and hasten
our national economic recovery, not to mention
the fact that they rightfully belong to the people.
While as a measure of self-protection, if, in the
interest of general welfare, police power may be
exercised to protect citizens and their businesses
in financial and economic matters, it may
similarly be exercised to protect the government
itself against potential financial loss and the
possible disruption of governmental
functions. 17 Police power as the power of self-
protection on the part of the community bears
the same relation to the community that the
principle of self-defense bears to the
individual. 18 Truly, it may be said that even
more than self- defense, the recovery of ill-gotten
wealth and of the government's own properties
involves the material and moral survival of the
nation, marked as the past regime was by the
obliteration of any line between private funds
and the public treasury and abuse of unlimited
power and elimination of any accountability in
public office, as the evidence of record amply
shows.
It should be mentioned that the tracking down of
the deposed President's actual ownership of the
BASECO shares was fortuitously facilitated by
the recovery of the street certificates in
Malacañang after his hasty flight from the
country last year. This is not generally the case.
For example, in the ongoing case filed by the
government to recover from the Marcoses
valuable real estate holdings in New York and
the Lindenmere estate in Long Island, former
PCGG chairman Jovito Salonga has revealed that
their names "do not appear on any title to the
property. Every building in New York is titled in
the name of a Netherlands Antilles corporation,
which in turn is purportedly owned by three
Panamanian corporations, with bearer shares.
This means that the shares of this corporation
can change hands any time, since they can be
transferred, under the law of Panama, without
previous registration on the books of the
corporation. One of the first documents that we
discovered shortly after the February revolution
was a declaration of trust handwritten by Mr.
Joseph Bernstein on April 4, 1982 on a Manila
Peninsula Hotel stationery stating that he would
act as a trustee for the benefit of President
Ferdinand Marcos and would act solely pursuant
to the instructions of Marcos with respect to the
Crown Building in New York." 19
This is just to stress the difficulties of the tasks
confronting respondent PCGG, which
nevertheless has so far commendably produced
unprecedented positive results. As stated by
then chairman Salonga:
PCGG has turned over to the
Office of the President around
2 billion pesos in cash, free of
any lien. It has also delivered
to the President-as a result of
a compromise settlement-
around 200 land titles
involving vast tracks of land
in Metro Manila, Rizal,
Laguna, Cavite, and Bataan,
worth several billion pesos.
These lands are now available
for low-cost housing projects
for the benefit of the poor and
the dispossessed amongst our
people.
In the legal custody of the
Commission as a result of
sequestration proceedings,
are expensive jewelry
amounting to 310 million
pesos, 42 aircraft amounting
to 718 million pesos, vessels
amounting to 748 million
pesos, and shares of stock
amounting to around 215
million pesos.
But, as I said, the bulk of the
ill-gotten wealth is located
abroad, not in the Philippines.
Through the efforts of the
PCGG, we have caused the
freezing or sequestration of
properties, deposits, and
securities probably worth
many billions of pesos in New
York, New Jersey, Hawaii,
California, and more
importantly-in Switzerland.
Due to favorable
developments in Switzerland,
we may expect, according to
our Swiss lawyers, the first
deliveries of the Swiss
deposits in the foreseeable
future, perhaps in less than a
year's time. In New York,
PCGG through its lawyers who
render their services free of
cost to the Philippine
government, succeeded in
getting injunctive relief
against Mr. and Mrs. Marcos
and their nominees and
agents. There is now an offer
for settlement that is being
studied and explored by our
lawyers there.
If we succeed in recovering
not an (since this is
impossible) but a substantial
part of the ill-gotten wealth
here and in various countries
of the world-something the
revolutionary governments of
China, Ethiopia, Iran and
Nicaragua were not able to
accomplish at all with respect
to properties outside their
territorial boundaries-the
Presidential Commission on
Good Government, which has
undertaken the difficult and
thankless task of trying to
undo what had been done so
secretly and effectively in the
last twenty years, shall have
more than justified its
existence. 20
The misdeeds of some PCGG volunteers and
personnel cited in the dissenting opinion do not
detract at an from the PCGG's accomplishments,
just as no one would do away with newspapers
because of some undesirable elements. The point
is that all such misdeeds have been subject to
public exposure and as stated in the dissent
itself, the erring PCGG representatives have been
forthwith dismissed and replaced.
The magnitude of the tasks that confront
respondent PCGG with its limited resources and
staff support and volunteers should be
appreciated, together with the assistance that
foreign governments and lawyers have
spontaneously given the commission.
A word about the PCGG's firing of the BASECO
lawyers who filed the present petition
challenging its questioned orders, filing a motion
to withdraw the petition, after it had put in eight
of its representatives as directors of the BASECO
board of directors. This was entirely proper and
in accordance with the Court's Resolution of
October 28, 1986, which denied BASECO's
motion for the issuance of a restraining order
against such take-over and declared that "the
government can, through its designated
directors, properly exercise control and
management over what appear to be properties
and assets owned and belonging to the
government itself and over which the persons who
appear in this case on behalf of BASECO have
failed to show any eight or even any shareholding
in said corporation." In other words, these
dummies or fronts cannot seek to question the
government's right to recover the very
properties and assets that have been stolen from
it by using the very same stolen properties and
funds derived therefrom. If they wish to pursue
their own empty claim, they must do it on their
own, after first establishing that they indeed
have a lawful right and/or shareholding in
BASECO.
Under the 1987 Constitution, the PCGG is called
upon to file the judicial proceedings for
forfeiture and recovery of the sequestered or
frozen properties covered by its orders issued
before the ratification of the Constitution on
February 2, 1987, within six months from such
ratification, or by August 2, 1987. (For those
orders issued after such ratification, the judicial
action or proceeding must be commenced within
six months from the issuance thereof.) The PCGG
has not really been given much time, considering
the magnitude of its tasks. It is entitled to some
forbearance, in availing of the maximum time
granted it for the filing of the corresponding
judicial action with the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice
Narvasa maintains and upholds the valid
distinction between acts of conservation and
preservation of assets and acts of ownership.
Sequestration, freeze and temporary take-over
encompass the first type of acts. They do not
include the second type of acts which are
reserved only to the rightful owner of the assets
or business sequestered or temporarily taken
over.
The removal and election of members of the
board of directors of a corporate enterprise is, to
me, a clear act of ownership on the part of the
shareholders of the corporation. Under ordinary
circumstances, I would deny the PCGG the
authority to change and elect the members of
BASECO's Board of Directors. However, under
the facts as disclosed by the records, it appears
that the certificates of stock representing about
ninety-five (95%) per cent of the total ownership
in BASECO's capital stock were found endorsed
in blank in Malacanang (presumably in the
possession and control of Mr. Marcos) at the
time he and his family fled in February 1986.
This circumstance let alone the extent of the
control Mr. Marcos exercised, while in power,
over policy decisions affecting BASECO, entirely
satisfies my mind that BASECO was owned and
controlled by Mr. Marcos. This is calling a spade
a spade. I am also entirely satisfied in my mind
that Mr. Marcos could not have acquired the
ownership of BASECO out of his lawfully-gotten
wealth.
Consequently, even ahead of judicial
proceedings, I am convinced that the Republic of
the Philippines, through the PCGG, has the right
and even the duty to take-over full control and
supervision of BASECO.
MELENCIO-HERRERA, J., concurring:
I would like to qualify my concurrence in so far
as the voting of sequestered stork is concerned.
The voting of sequestered stock is, to my mind,
an exercise of an attribute of ownership. It goes
beyond the purpose of a writ of sequestration,
which is essentially to preserve the property in
litigation (Article 2005, Civil Code).
Sequestration is in the nature of a judicial
deposit (ibid.).
I have no objection to according the right to vote
sequestered stock in case of a take-over of
business actually belonging to the government
or whose capitalization comes from public funds
but which, somehow, landed in the hands of
private persons, as in the case of BASECO. To my
mind, however, caution and prudence should be
exercised in the case of sequestered shares of an
on-going private business enterprise, specially
the sensitive ones, since the true and real
ownership of said shares is yet to be determined
and proven more conclusively by the Courts.
It would be more in keeping with legal norms if
forfeiture proceedings provided for under
Republic Act No. 1379 be filed in Court and the
PCGG seek judicial appointment as a receiver or
administrator, in which case, it would be
empowered to vote sequestered shares under its
custody (Section 55, Corporation Code). Thereby,
the assets in litigation are brought within the
Court's jurisdiction and the presence of an
impartial Judge, as a requisite of due process, is
assured. For, even in its historical context,
sequestration is a judicial matter that is best
handled by the Courts.
I consider it imperative that sequestration
measures be buttressed by judicial proceedings
the soonest possible in order to settle the matter
of ownership of sequestered shares and to
determine whether or not they are legally owned
by the stockholders of record or are "ill-gotten
wealth" subject to forfeiture in favor of the State.
Sequestration alone, being actually an ancillary
remedy to a principal action, should not be made
the basis for the exercise of acts of dominion for
an indefinite period of time.
Sequestration is an extraordinary, harsh, and
severe remedy. It should be confined to its lawful
parameters and exercised, with due regard, in
the words of its enabling laws, to the
requirements of fairness, due process (Executive
Order No. 14, palay 7, 1986), and Justice
(Executive Order No. 2, March 12, 1986).
Feliciano, J., concur.
GUTIERREZ, JR., J., concurring and dissenting:
I concur, in part, in the erudite opinion penned
for the Court by my distinguished colleague Mr.
Justice Andres R. Narvasa. I agree insofar as it
states the principles which must govern PCGG
sequestrations and emphasizes the limitations in
the exercise of its broad grant of powers.
I concur in the general propositions embodied in
or implied from the majority opinion, among
them:
(1) The efforts of Government to recover ill-
gotten properties amassed by the previous
regime deserve the fullest support of the
judiciary and all sectors of society. I believe,
however, that a nation professing adherence to
the rule of law and fealty to democratic
processes must adopt ways and means which are
always within the bounds of lawfully granted
authority and which meet the tests of due
process and other Bill of Rights protections.
(2) Sequestration is intended to prevent the
destruction, concealment, or dissipation of ill-
gotten wealth. The object is conservation and
preservation. Any exercise of power beyond
these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are
granted by law and not proscribed by the
Constitution. The remedies it enforces are
provisional and contingent. Whether or not
sequestered property is indeed ill-gotten must
be-determined by a court of justice. The PCGG
has absolutely no power to divest title over
sequestered property or to act as if its findings
are final.
(4) The PCGG does not own sequestered
property. It cannot and must not exercise acts of
ownership. To quote the majority opinion, "one
thing is certain ..., the PCGG cannot exercise acts
of dominion."
(5) The provisional takeover in a sequestration
should not be indefinitely maintained. It is the
duty of the PCGG to immediately file appropriate
criminal or civil cases once the evidence has
been gathered.
It is the difference between what the Court says
and what the PCGG does which constrains me to
dissent. Even as the Court emphasizes principles
of due process and fair play, it has unfortunately
validated ultra vires acts violative of those very
same principles. While we stress the rules which
must govern the PCGG in the exercise of its
powers, the Court has failed to stop or check acts
which go beyond the power of sequestration
given by law to the PCGG.
We are all agreed in the Court that the PCGG is
not a judge. It is an investigator and prosecutor.
Sequestration is only a preliminary or ancillary
remedy. There must be a principal and
independent suit filed in court to establish the
true ownership of sequestered properties. The
factual premise that a sequestered property was
ill-gotten by former President Marcos, his family,
relatives, subordinates, and close
associates cannot be assumed. The fact of
ownership must be established in a proper suit
before a court of justice.
But what has the Court, in effect, ruled?
Pages 21 to 33 of the majority opinion are
dedicated to a statement of facts
which conclusively and indubitably shows that
BASECO is owned by President Marcos-and that
it was acquired and vastly enlarged by the
former President's taking undue advantage of his
public office and using his powers, authority, or
influence.
There has been no court hearing, no trial, and no
presentation of evidence. All that we have is
what the PCGG has given us. The petitioner has
not even been allowed to see the evidence, much
less refute it.
What the PCGG has gathered in the course of its
seizures and investigations may be gospel truth.
However, that truth must be properly
established in a trial court, not unilaterally
determined by the PCGG or declared by this
Court in a special proceeding which only asks us
to set aside or enjoin an illegal exercise of power.
After this decision, there is nothing more for a
trial court to ascertain. Certainly, no lower court
would dare to arrive at findings contrary to this
Court's conclusions, no matter how insistent we
may be in labelling such conclusions as "prima
facie." To me, this is the basic flaw in PCGG
procedures that the Court is, today, unwittingly
legitimating. Even before the institution of a
court case, the PCGG concludes that sequestered
property is ill-gotten wealth and proceeds to
exercise acts of ownership over said properties.
It treats sequestered property as its own even
before the oppositor-owners have been divested
of their titles.
The Court declares that a state of seizure is not
to be indefinitely maintained. This means that
court proceedings to either forfeit the
sequestered properties or clear the names and
titles of the petitioners must be filed as soon as
possible.
This case is a good example of disregard or
avoidance of this requirement. With the kind of
evidence which the PCGG professes to possess,
the forfeiture case could have been filed
simultaneously with the issuance of
sequestration orders or shortly thereafter.
And yet, the records show that the PCGG appears
to concentrate more on the means rather than
the ends, in running the BASECO, taking over the
board of directors and management, getting rid
of security guards, disposing of scrap, entering
into new contracts and otherwise behaving as if
it were already the owner. At this late date and
with all the evidence PCGG claims to have, no
court case has been filed.
Among the interesting items elicited during the
oral arguments or found in the records of this
petition are:
(1) Upon sequestering BASECO, some PCGG
personnel lost no time in digging up paved
premises with jack hammers in a frantic search
for buried gold bars.
(2) Two top PCGG volunteers charged each other
with stealing properties under their custody. The
PCGG had to step in, dismiss the erring
representatives, and replace them with new
ones.
(3) The petitioner claims that the lower bid of a
rock quarry operator was accepted even as a
higher and more favorable bid was offered.
When the questionable deal was brought to our
attention, the awardee allegedly raised his bid to
the level of the better offer. The successful
bidder later submitted a comment in
intervention explaining his side. Whoever is
telling the truth, the fact remains that multi-
million peso contracts involving the operations
of sequestered companies should be entered into
under the supervision of a court, not freely
executed by the PCGG even when the petitioner-
owners question the propriety and integrity of
those transactions.
(4) The PCGG replaced eight out of eleven
members of the BASECO board of directors with
its own men. Upon taking over full control of the
corporation, the newly installed board reversed
the efforts of the former owners to protect their
interests. The new board fired the BASECO
lawyers who instituted the instant petition. It
then filed a motion to withdraw this very same
petition we are now deciding. In other words, the
"new owners" did not want the Supreme Court
to continue poking into the legality of their acts.
They moved to abort the petition filed with us.
Any suspicion of impropriety would have been
avoided if the PCGG had filed the required court
proceedings and exercised its acts of
management and control under court
supervision. The requirements of due process
would have been met.
One other matter I wish to discuss in this
separate opinion is PCGG's selection of eight out
of the eleven members of the BASECO board of
directors.
The election of the members of a board of
directors is distinctly and unqualifiedly an act of
ownership. When stockholders of a corporation
elect or remove members of a board of directors,
they exercise their right of ownership in the
company they own, By no stretch of the
imagination can the revamp of a board of
directors be considered as a mere act of
conserving assets or preventing the dissipation
of sequestered assets. The broad powers of a
sequestrator are more than enough to protect
sequestered assets. There is no need and no legal
basis to reach out further and exercise ultimate
acts of ownership.
Under the powers which PCGG has assumed and
wields, it can amend the articles and by-laws of a
sequestered corporation, decrease the capital
stock, or sell substantially all corporate assets
without any effective check from the owners not
yet divested of their titles or from a court of
justice. The PCGG is tasked to preserve assets but
when it exercises the acts of an owner, it could
also very well destroy. I hope that the case of
the Philippine Daily Express, a major newspaper
closed by the PCGG, is an isolated example.
Otherwise, banks, merchandizing firms,
investment institutions, and other sensitive
businesses will find themselves in a similar
quandary.
I join the PCGG and all right thinking Filipinos in
condemning the totalitarian acts which made
possible the accumulation of ill-gotten wealth. I,
however, dissent when authoritarian and ultra advantage of this remedy is that, unlike the ad
vires methods are used to recover that stolen libitum measures now being take it
wealth. One wrong cannot be corrected by the is authorized and at the same time alsolimited by
employment of another wrong. the fundamental law. I see no reason why it
I, therefore, vote to grant the petition. Pending should not now be employed by the PCGG, to
the filing of an appropriate case in court, the remove all doubts regarding the legality of its
PCGG must be enjoined from exercising any and acts and all suspicions concerning its motives.
all acts of ownership over the sequestered firm.
Bidin and Cortes, JJ., concur and dissent.
CRUZ, J., dissenting:
My brother Narvasa has written a truly
outstanding decision that bespeaks a penetrating
and analytical mind and a masterly grasp of the
serious problem we are asked to resolve. He
deserves and I offer him my sincere admiration.
There is no question that all lawful efforts should
be taken to recover the tremendous wealth
plundered from the people by the past regime in
the most execrable thievery perpetrated in all
history. No right-thinking Filipino can quarrel
with this necessary objective, and on this score I
am happy to concur with the ponencia.
But for all my full agreement with the basic
thesis of the majority, I regret I find myself
unable to support its conclusions in favor Of the
respondent PCGG. My view is that these
conclusions clash with the implacable principles
of the free society. foremost among which is due
process. This demands our reverent regard.
Due process protects the life, liberty and
property of every person, whoever he may be.
Even the most despicable criminal is entitled to
this protection. Granting this distinction to
Marcos, we are still not justified in depriving him
of this guaranty on the mere justification that he
appears to own the BASECO shares.
I am convinced and so submit that the PCGG
cannot at this time take over the BASECO
without any court order and exercise thereover
acts of ownership without court supervision.
Voting the shares is an act of ownership.
Reorganizing the board of directors is an act of
ownership. Such acts are clearly unauthorized.
As the majority opinion itself stresses, the PCGG
is merely an administrator whose authority is
limited to preventing the sequestered properties
from being dissipated or clandestinely
transferred.
The court action prescribed in the Constitution is
not inadequate and is available to the PCGG. The
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22619 December 2, 1924
NATIONAL COAL COMPANY, plaintiff-appellee,
vs.
THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.
JOHNSON, J.:
This action was brought in the Court of First
Instance of the City of Manila on the 17th day of
July, 1923, for the purpose of recovering the sum
of P12,044.68, alleged to have been paid under
protest by the plaintiff company to the
defendant, as specific tax on 24,089.3 tons of
coal. Said company is a corporation created by
Act No. 2705 of the Philippine Legislature for the
purpose of developing the coal industry in the
Philippine Islands and is actually engaged in coal
mining on reserved lands belonging to the
Government. It claimed exemption from taxes
under the provision of sections 14 and 15 of Act
No. 2719, and prayed for a judgment ordering
the defendant to refund to the plaintiff said sum
of P12,044.68, with legal interest from the date
of the presentation of the complaint, and costs
against the defendant.
The defendant answered denying generally and
specifically all the material allegations of the
complaint, except the legal existence and
personality of the plaintiff. As a special defense,
the defendant alleged (a) that the sum of
P12,044.68 was paid by the plaintiff without
protests, and (b) that said sum was due and
owing from the plaintiff to the Government of
the Philippine Islands under the provisions of
section 1496 of the Administrative Code and
prayed that the complaint be dismissed, with
costs against the plaintiff.
Upon the issue thus presented, the case was
brought on for trial. After a consideration of the
evidence adduced by both parties, the Honorable
Pedro Conception, judge, held that the words
"lands owned by any person, etc.," in section 15
of Act No. 2719 should be understood to mean
"lands held in lease or usufruct," in harmony with
the other provision of said Act; that the coal
lands possessed by the plaintiff, belonging to the
Government, fell within the provisions of section
15 of Act No. 2719; and that a tax of P0.04 per
ton of 1,016 kilos on each ton of coal extracted
therefrom, as provided in said section, was the
only tax which should be collected from the
plaintiff; and sentenced the defendant to refund
to the plaintiff the sum of P11,081.11 which is
the difference between the amount collected
under section 1496 of the Administrative Code
and the amount which should have been
collected under the provisions of said section 15
of Act No. 2719. From that sentence the
defendant appealed, and now makes the
following assignments of error:
I. The court below erred in holding that section
15 of Act No. 2719 does not refer to coal lands
owned by persons and corporations.
II. The court below erred in holding that the
plaintiff was not subject to the tax prescribed in
section 1496 of the Administrative Code.
The question confronting us in this appeal is
whether the plaintiff is subject to the taxes under
section 15 of Act No. 2719, or to the specific
taxes under section 1496 of the Administrative
Code.
The plaintiff corporation was created on the 10th
day of March, 1917, by Act No. 2705, for the
purpose of developing the coal industry in the
Philippine Island, in harmony with the general
plan of the Government to encourage the
development of the natural resources of the
country, and to provided facilities therefor. By
said Act, the company was granted the general
powers of a corporation "and such other powers
as may be necessary to enable it to prosecute the
business of developing coal deposits in the
Philippine Island and of mining, extracting,
transporting and selling the coal contained in
said deposits." (Sec. 2, Act No. 2705.) By the
same law (Act No. 2705) the Government of the
Philippine Islands is made the majority
stockholder, evidently in order to insure proper
government supervision and control, and thus to
place the Government in a position to render all
possible encouragement, assistance and help in
the prosecution and furtherance of the
company's business.
On May 14, 1917, two months after the passage
of Act No. 2705, creating the National Coal
Company, the Philippine Legislature passed Act
No. 2719 "to provide for the leasing and
development of coal lands in the Philippine
Islands." On October 18, 1917, upon petition of
the National Coal Company, the Governor-
General, by Proclamation No. 39, withdrew
"from settlement, entry, sale or other disposition,
all coal-bearing public lands within the Province
of Zamboanga, Department of Mindanao and
Sulu, and the Island of Polillo, Province of
Tayabas." Almost immediately after the issuance
of said proclamation the National Coal Company
took possession of the coal lands within the said
reservation, with an area of about 400 hectares,
without any further formality, contract or lease.
Of the 30,000 shares of stock issued by the
company, the Government of the Philippine
Islands is the owner of 29,809 shares, that is, of
99 1/3 per centum of the whole capital stock.
If we understand the theory of the plaintiff-
appellee, it is, that it claims to be the owner of
the land from which it has mined the coal in
question and is therefore subject to the
provisions of section 15 of Act No. 2719 and not
to the provisions of the section 1496 of the
Administrative Code. That contention of the
plaintiff leads us to an examination of the
evidence upon the question of the ownership of
the land from which the coal in question was
mined. Was the plaintiff the owner of the land
from which the coal in question was mined? If
the evidence shows the affirmative, then the
judgment should be affirmed. If the evidence
shows that the land does not belong to the
plaintiff, then the judgment should be reversed,
unless the plaintiff's rights fall under section 3 of
said Act.
The only witness presented by the plaintiff upon
the question of the ownership of the land in
question was Mr. Dalmacio Costas, who stated
that he was a member of the board of directors
of the plaintiff corporation; that the plaintiff
corporation took possession of the land in
question by virtue of the proclamation of the
Governor-General, known as Proclamation No.
39 of the year 1917; that no document had been
issued in favor of the plaintiff corporation; that
said corporation had received no permission
from the Secretary of Agriculture and Natural
Resources; that it took possession of said lands
covering an area of about 400 hectares, from
which the coal in question was mined, solely, by
virtue of said proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by
Francis Burton Harrison, then Governor-General,
on the 18th day of October, 1917, and provided:
"Pursuant to the provision of section 71 of Act
No. 926, I hereby withdraw from settlement,
entry, sale, or other disposition, all coal-bearing
public lands within the Province of Zamboanga,
Department of Mindanao and Sulu, and the
Island of Polillo, Province of Tayabas." It will be
noted that said proclamation only provided that
all coal-bearing public lands within said province
and island should be withdrawn from
settlement, entry, sale, or other disposition.
There is nothing in said proclamation which
authorizes the plaintiff or any other person to
enter upon said reversations and to mine coal,
and no provision of law has been called to our
attention, by virtue of which the plaintiff was
entitled to enter upon any of the lands so
reserved by said proclamation without first
obtaining permission therefor.
The plaintiff is a private corporation. The mere
fact that the Government happens to the
majority stockholder does not make it a public
corporation. Act No. 2705, as amended by Act
No. 2822, makes it subject to all of the provisions
of the Corporation Law, in so far as they are not
inconsistent with said Act (No. 2705). No
provisions of Act No. 2705 are found to be
inconsistent with the provisions of the
Corporation Law. As a private corporation, it has
no greater rights, powers or privileges than any
other corporation which might be organized for
the same purpose under the Corporation Law,
and certainly it was not the intention of the
Legislature to give it a preference or right or
privilege over other legitimate private
corporations in the mining of coal. While it is
true that said proclamation No. 39 withdrew
"from settlement, entry, sale, or other disposition
of coal-bearing public lands within the Province
of Zamboanga . . . and the Island of Polillo," it
made no provision for the occupation and
operation by the plaintiff, to the exclusion of
other persons or corporations who might, under
proper permission, enter upon the operate coal
mines.
On the 14th day of May, 1917, and before the
issuance of said proclamation, the Legislature of
the Philippine Island in "an Act for the leasing
and development of coal lands in the Philippine
Islands" (Act No. 2719), made liberal provision.
Section 1 of said Act provides: "Coal-bearing
lands of the public domain in the Philippine
Island shall not be disposed of in any manner
except as provided in this Act," thereby giving a
clear indication that no "coal-bearing lands of the
public domain" had been disposed of by virtue of
said proclamation.
Neither is there any provision in Act No. 2705
creating the National Coal Company, nor in the
amendments thereof found in Act No. 2822,
which authorizes the National Coal Company to
enter upon any of the reserved coal lands
without first having obtained permission from
the Secretary of Agriculture and Natural
Resources.lawphi1.net
The following propositions are fully sustained by
the facts and the law:
(1) The National Coal Company is an ordinary
private corporation organized under Act No.
2705, and has no greater powers nor privileges
than the ordinary private corporation, except
those mentioned, perhaps, in section 10 of Act
No. 2719, and they do not change the situation
here.
(2) It mined on public lands between the month
of July, 1920, and the months of March, 1922,
24,089.3 tons of coal.
(3) Upon demand of the Collector of Internal
Revenue it paid a tax of P0.50 a ton, as taxes
under the provisions of article 1946 of the
Administrative Code on the 15th day of
December, 1922.
(4) It is admitted that it is neither the owner nor
the lessee of the lands upon which said coal was
mined.
(5) The proclamation of Francis Burton Harrison,
Governor-General, of the 18th day of October,
1917, by authority of section 1 of Act No. 926,
withdrawing from settlement, entry, sale, or
other dispositon all coal-bearing public lands
within the Province of Zamboanga and the Island
of Polillo, was not a reservation for the benefit of
the National Coal Company, but for any person
or corporation of the Philippine Islands or of the
United States.
(6) That the National Coal Company entered
upon said land and mined said coal, so far as the
record shows, without any lease or other
authority from either the Secretary of
Agriculture and Natural Resources or any person
having the power to grant a leave or authority.
From all of the foregoing facts we find that the
issue is well defined between the plaintiff and
the defendant. The plaintiff contends that it was
liable only to pay the internal revenue and other
fees and taxes provided for under section 15 of
Act No. 2719; while the defendant contends,
under the facts of record, the plaintiff is obliged
to pay the internal revenue duty provided for in
section 1496 of the Administrative Code. That
being the issue, an examination of the provisions
of Act No. 2719 becomes necessary.
An examination of said Act (No. 2719) discloses
the following facts important for consideration
here:
First. All "coal-bearing lands of the public
domain in the Philippine Islands shall not be
disposed of in any manner except as provided in
this Act." Second. Provisions for leasing by the
Secretary of Agriculture and Natural Resources
of "unreserved, unappropriated coal-bearing
public lands," and the obligation to the
Government which shall be imposed by said
Secretary upon the lessee.lawphi1.net
Third. The internal revenue duty and tax which
must be paid upon coal-bearing lands owned by
any person, firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719
provides an internal revenue duty and tax upon
unreserved, unappropriated coal-bearing public
lands which may be leased by the Secretary of
Agriculture and Natural Resources; and, second,
that said Act (No. 2719) provides an internal
revenue duty and tax imposed upon any person,
firm, association or corporation, who may be the
owner of "coal-bearing lands." A reading of said
Act clearly shows that the tax imposed thereby is
imposed upon two classes of persons only —
lessees and owners.
The lower court had some trouble in
determining what was the correct interpretation
of section 15 of said Act, by reason of what he
believed to be some difference in the
interpretation of the language used in Spanish
and English. While there is some ground for
confusion in the use of the language in Spanish
and English, we are persuaded, considering all
the provisions of said Act, that said section 15
has reference only to persons, firms, associations
or corporations which had already, prior to the
existence of said Act, become the owners of coal
lands. Section 15 cannot certainty refer to
"holders or lessees of coal lands' for the reason
that practically all of the other provisions of said
Act has reference to lessees or holders. If section
15 means that the persons, firms, associations, or
corporation mentioned therein are holders or
lessees of coal lands only, it is difficult to
understand why the internal revenue duty and
tax in said section was made different from the
obligations mentioned in section 3 of said Act,
imposed upon lessees or holders.
From all of the foregoing, it seems to be made
plain that the plaintiff is neither a lessee nor an
owner of coal-bearing lands, and is, therefore,
not subject to any other provisions of Act No.
2719. But, is the plaintiff subject to the
provisions of section 1496 of the Administrative
Code?
Section 1496 of the Administrative Code
provides that "on all coal and coke there shall be
collected, per metric ton, fifty centavos." Said
section (1496) is a part of article, 6 which
provides for specific taxes. Said article provides
for a specific internal revenue tax upon all things
manufactured or produced in the Philippine
Islands for domestic sale or consumption, and
upon things imported from the United States or
foreign countries. It having been demonstrated
that the plaintiff has produced coal in the
Philippine Islands and is not a lessee or owner of
the land from which the coal was produced, we
are clearly of the opinion, and so hold, that it is
subject to pay the internal revenue tax under the
provisions of section 1496 of the Administrative
Code, and is not subject to the payment of the
internal revenue tax under section 15 of Act No.
2719, nor to any other provisions of said Act.
Therefore, the judgment appealed from is hereby
revoked, and the defendant is hereby relieved
from all responsibility under the complaint. And,
without any finding as to costs, it is so ordered.
Street, Malcolm, Avanceña, Villamor, Ostrand and
Romualdez, JJ., concur.
Republic of the Philippines 2007 (1/2) of the fines imposed and collected through Be it enacted by the National
Supreme Court x------------------------------------- its efforts for violations of the laws related Assembly of the Philippines:
Manila ----------------------x thereto. As originally worded, Sections 4 and 5 of
DECISION Act No. 1285 provide: Section 1. Section four of Act
EN BANC Numbered Twelve hundred
AUSTRIA-MARTINEZ, J.: SEC. 4. The said and eighty-five as amended by
society is authorized to Act Numbered Thirty five
PHILIPPINE SOCIETY G.R. No. 169752 Before the Court is a special civil action appoint not to exceed five hundred and forty-eight, is
FOR for Certiorari and Prohibition under Rule 65 of agents in the City of Manila, hereby further amended so as
THE PREVENTION OF the Rules of Court, in relation to Section 2 of Rule and not to exceed two in each to read as follows:
CRUELTY TO ANIMALS, 64, filed by the petitioner assailing Office Order of the provinces of the
Petitioners, Members: No. 2005-021[1] dated September 14, 2005 Philippine Islands who shall Sec. 4. The
issued by the respondents which constituted the have all the power and said society
PUNO, C.J. audit team, as well as its September 23, 2005 authority of a police officer to is
QUISUMBING, Letter[2] informing the petitioner that make arrests for violation of authorized
YNARES- respondents audit team shall conduct an audit the laws enacted for the to appoint
SANTIAGO, survey on the petitioner for a detailed audit of its prevention of cruelty to not to
SANDOVAL- accounts, operations, and financial animals and the protection of exceed ten
GUTIERREZ, transactions. No temporary restraining order animals, and to serve any agents in
CARPIO, was issued. process in connection with the City of
AUSTRIA- the execution of such laws; Manila, and
MARTINEZ, The petitioner was incorporated as a juridical and in addition thereto, all the not to
CORONA, entity over one hundred years ago by virtue of police force of the Philippine exceed one
- versus - CARPIO- Act No. 1285, enacted on January 19, 1905, by Islands, wherever organized, in each
MORALES, the Philippine Commission. The petitioner, at the shall, as occasion requires, municipalit
AZCUNA, time it was created, was composed of animal assist said society, its y of the
TINGA, aficionados and animal propagandists. The members or agents, in the Philippines
CHICO-NAZARIO, objects of the petitioner, as stated in Section 2 of enforcement of all such laws. who shall
GARCIA, its charter, shall be to enforce laws relating to have the
VELASCO, JR., cruelty inflicted upon animals or the protection SEC. 5. One-half of all authority to
NACHURA, and of animals in the Philippine Islands, and the fines imposed and collected denounce
REYES, JJ. generally, to do and perform all things which through the efforts of said to regular
COMMISSION ON may tend in any way to alleviate the suffering of society, its members or its peace
AUDIT, animals and promote their welfare.[3] agents, for violations of the officers any
DIR. RODULFO J. laws enacted for the violation of
ARIESGA At the time of the enactment of Act No. 1285, the prevention of cruelty to the laws
(in his official capacity original Corporation Law, Act No. 1459, was not animals and for their enacted for
as Director yet in existence. Act No. 1285 antedated both the protection, shall belong to said the
of the Commission on Corporation Law and the constitution of the society and shall be used to prevention
Audit), MS. Securities and Exchange Commission. Important promote its objects. of cruelty
MERLE M. VALENTIN Promulgated: to note is that the nature of the petitioner as a to animals
and MS. corporate entity is distinguished from (emphasis supplied) and the
SUSAN GUARDIAN (in the sociedad anonimasunder the Spanish Code of protection
their official Commerce. Subsequently, however, the power to make of animals
capacities as Team arrests as well as the privilege to retain a portion and to
Leader and Team For the purpose of enhancing its powers in of the fines collected for violation of animal- cooperate
Member, respectively, promoting animal welfare and enforcing laws for related laws were recalled by virtue of with said
of the audit the protection of animals, the petitioner was Commonwealth Act (C.A.) No. 148,[4] which peace
Team of the initially imbued under its charter with the power reads, in its entirety, thus: officers in
Commission on Audit), to apprehend violators of animal welfare laws. In the
Respondents. September 25, addition, the petitioner was to share one-half prosecutio
 n of
transgress
ors of such
laws.
Sec. 2. The full amount of the
fines collected for violation of
the laws against cruelty to
animals and for the protection
of animals, shall accrue to the
general fund of the
Municipality where the
offense was committed.
Sec. 3. This Act shall take
effect upon its approval.
Approved, November 8,
1936. (Emphasis supplied)
Immediately thereafter, then President Manuel
L. Quezon issued Executive Order (E.O.) No. 63
dated November 12, 1936, portions of which
provide:
Whereas, during the first
regular session of the National
Assembly, Commonwealth Act
Numbered One Hundred
Forty Eight was enacted
depriving the agents of the
Society for the Prevention of
Cruelty to Animals of their
power to arrest persons who
have violated the laws
prohibiting cruelty to
animals thereby correcting a
serious defect in one of the
laws existing in our statute
books.
xxxx
Whereas, the cruel treatment
of animals is an offense against
the State, penalized under our
statutes, which the
Government is duty bound to
enforce;
Now, therefore, I, Manuel
L. Quezon, President of the
Philippines, pursuant to the
authority conferred upon me
by the Constitution, hereby
decree, order, and direct the
Commissioner of Public
Safety, the Provost Marshal
General as head of the
Constabulary Division of the
Philippine Army, every Mayor
of a chartered city, and every
municipal president to detail
and organize special members
of the police force, local,
national, and the Constabulary
to watch, capture, and
prosecute offenders against
the laws enacted to prevent
cruelty to animals. (Emphasis
supplied)
On December 1, 2003, an audit team from
respondent Commission on Audit (COA) visited
the office of the petitioner to conduct an audit
survey pursuant to COA Office Order No. 2003-
051 dated November 18, 2003[5] addressed to
the petitioner. The petitioner demurred on the
ground that it was a private entity not under the
jurisdiction of COA, citing Section 2(1) of Article
IX of the Constitution which specifies the general
jurisdiction of the COA, viz:
Section 1. General
Jurisdiction. The Commission
on Audit shall have the power,
authority, and duty to
examine, audit, and settle all
accounts pertaining to the
revenue and receipts of, and
expenditures or uses of funds
and property, owned or held in
trust by, or pertaining to the
Government, or any of its
subdivisions, agencies, or
instrumentalities, including
government-owned and
controlled corporations with
original charters, and on a
post-audit basis: (a)
constitutional bodies,
commissions and officers that
have been granted fiscal
autonomy under the
Constitution; (b) autonomous
state colleges and
universities; (c) other
government-owned or
controlled corporations and
their subsidiaries; and (d) such
non-governmental entities
receiving subsidy or equity,
directly or indirectly, from or
through the government,
which are required by law or
the granting institution to
submit to such audit as a
condition of subsidy or
equity. However, where the
internal control system of the
audited agencies is
inadequate, the Commission
may adopt such measures,
including temporary or
special pre-audit, as are
necessary and appropriate to
correct the deficiencies. It
shall keep the general
accounts of the Government,
and for such period as may be
provided by law, preserve the
vouchers and other
supporting papers pertaining
thereto. (Emphasis supplied)
Petitioner explained thus:
a. Although the petitioner was
created by special legislation, this
necessarily came about because in
January 1905 there was as yet
neither a Corporation Law or any
other general law under which it
may be organized and
incorporated, nor a Securities and
Exchange Commission which
would have passed upon its
organization and incorporation.
b. That Executive Order No. 63,
issued during the Commonwealth
period, effectively deprived the
petitioner of its power to make
arrests, and that the petitioner lost
its operational funding,
underscore the fact that it
exercises no governmental
function. In fine, the government
itself, by its overt acts, confirmed
petitioners status as a private
juridical entity.
The COA General Counsel issued a
Memorandum[6] dated May 6, 2004, asserting
that the petitioner was subject to its audit
authority. In a letter dated May 17,
2004,[7]respondent COA informed the petitioner
of the result of the evaluation, furnishing it with
a copy of said Memorandum dated May 6,
2004 of the General Counsel.
Petitioner thereafter filed with the respondent
COA a Request for Re-evaluation datedMay 19,
2004,[8] insisting that it was a private domestic
corporation.
Acting on the said request, the General Counsel
of respondent COA, in a Memorandum dated July
13, 2004,[9] affirmed her earlier opinion that the
petitioner was a government entity that was
subject to the audit jurisdiction of respondent
COA. In a letter datedSeptember 14, 2004, the
respondent COA informed the petitioner of the
result of the re-evaluation, maintaining its
position that the petitioner was subject to its
audit jurisdiction, and requested an initial
conference with the respondents.
In a Memorandum dated September 16, 2004,
Director Delfin Aguilar reported to COA Assistant
Commissioner Juanito Espino, Corporate
Government Sector, that the audit survey was
not conducted due to the refusal of the petitioner
because the latter maintained that it was a
private corporation.
Petitioner received on September 27, 2005 the
subject COA Office Order 2005-021
datedSeptember 14, 2005 and the COA Letter
dated September 23, 2005.
Hence, herein Petition on the following grounds:
 A. Insurance System, which should have been the
case had the employees been considered
RESPONDENT COMMISSION government employees; fifth, the petitioner does
ON AUDIT COMMITTED not receive any form of financial assistance from
GRAVE ABUSE OF the government, since C.A. No. 148, amending
DISCRETION AMOUNTING TO Section 5 of Act No. 1285, states that the full
LACK OR EXCESS OF amount of the fines, collected for violation of the
JURISDICTION WHEN IT laws against cruelty to animals and for the
RULED THAT PETITIONER IS protection of animals, shall accrue to the general
SUBJECT TO ITS AUDIT fund of the Municipality where the offense was
AUTHORITY. committed; sixth, C.A. No. 148 effectively
deprived the petitioner of its powers to make
B. arrests and serve processes as these functions
were placed in the hands of the police
PETITIONER IS ENTITLED TO force; seventh, no government appointee or
THE RELIEF SOUGHT, THERE representative sits on the board of trustees of
BEING NO APPEAL, NOR ANY the petitioner; eighth, a reading of the provisions
PLAIN, SPEEDY AND of its charter (Act No. 1285) fails to show that
ADEQUATE REMEDY IN THE any act or decision of the petitioner is subject to
ORDINARY COURSE OF LAW the approval of or control by any government
AVAILABLE TO IT.[10] agency, except to the extent that it is governed
The essential question before this Court is by the law on private corporations in general;
whether the petitioner qualifies as a government and finally, ninth, the Committee on Animal
agency that may be subject to audit by Welfare, under the Animal Welfare Act of 1998,
respondent COA. includes members from both the private and the
public sectors.
Petitioner argues: first, even though it was
created by special legislation in 1905 as there The respondents contend that since the
was no general law then existing under which it petitioner is a body politic created by virtue of a
may be organized or incorporated, it exercises special legislation and endowed with a
no governmental functions because these have governmental purpose, then, indubitably, the
been revoked by C.A. No. 148 and E.O. No. COA may audit the financial activities of the
63; second, nowhere in its charter is it indicated latter. Respondents in effect divide their
that it is a public corporation, unlike, for contentions into six strains: first, the test to
instance, C.A. No. 111 which created the Boy determine whether an entity is a government
Scouts of the Philippines, defined its powers and corporation lies in the manner of its creation,
purposes, and specifically stated that it was An and, since the petitioner was created by virtue of
Act to Create a Public Corporation in which, even a special charter, it is thus a government
as amended by Presidential Decree No. 460, the corporation subject to respondents auditing
law still adverted to the Boy Scouts of the power; second, the petitioner exercises sovereign
Philippines as a public corporation, all of which powers, that is, it is tasked to enforce the laws
are not obtaining in the charter of the for the protection and welfare of animals which
petitioner; third, if it were a government body, ultimately redound to the public good and
there would have been no need for the State to welfare, and, therefore, it is deemed to be a
grant it tax exemptions under Republic Act No. government instrumentality as defined under
1178, and the fact that it was so exempted the Administrative Code of 1987, the purpose of
strengthens its position that it is a private which is connected with the administration of
institution; fourth, the employees of the government, as purportedly affirmed by
petitioner are registered and covered by the American jurisprudence; third, by virtue of
Social Security System at the latters initiative Section 23,[11] Title II, Book III of the same Code,
and not through the Government Service the Office of the President exercises supervision
or control over the petitioner; fourth, under the
same Code, the requirement under its special
charter for the petitioner to render a report to
the Civil Governor, whose functions have been
inherited by the Office of the President, clearly
reflects the nature of the petitioner as a
government instrumentality; fifth, despite the
passage of the Corporation Code, the law
creating the petitioner had not been abolished,
nor had it been re-incorporated under any
general corporation law; and finally,sixth,
Republic Act No. 8485, otherwise known as the
Animal Welfare Act of 1998, designates the
petitioner as a member of its Committee on
Animal Welfare which is attached to the
Department of Agriculture.
In view of the phrase One-half of all the fines
imposed and collected through the efforts of said
society, the Court, in a Resolution dated January
30, 2007, required the Office of the Solicitor
General (OSG) and the parties to comment on: a)
petitioner's authority to impose fines and the
validity of the provisions of Act No. 1285 and
Commonwealth Act No. 148 considering that
there are no standard measures provided for in
the aforecitedlaws as to the manner of
implementation, the specific violations of the
law, the person/s authorized to impose fine and
in what amount; and, b) the effect of the 1935
and 1987 Constitutions on whether petitioner
continues to exist or should organize as a private
corporation under the Corporation
Code, B.P. Blg. 68 as amended.
Petitioner and the OSG filed their respective
Comments. Respondents filed a Manifestation
stating that since they were being represented
by the OSG which filed its Comment, they opted
to dispense with the filing of a separate one and
adopt for the purpose that of the OSG.
The petitioner avers that it does not have the
authority to impose fines for violation of animal
welfare laws; it only enjoyed the privilege of
sharing in the fines imposed and collected from
its efforts in the enforcement of animal welfare
laws; such privilege, however, was subsequently
abolished by C.A. No. 148; that it continues to
exist as a private corporation since it was
created by the Philippine Commission before
theeffectivity of the Corporation law, Act No.
1459; and the 1935 and 1987 Constitutions.
The OSG submits that Act No. 1285 and its
amendatory laws did not give petitioner the
authority to impose fines for violation of
laws[12] relating to the prevention of cruelty to
animals and the protection of animals; that even
prior to the amendment of Act No. 1285,
petitioner was only entitled to share in the fines
imposed; C.A. No. 148 abolished that privilege to
share in the fines collected; that petitioner is a
public corporation and has continued to exist
since Act No. 1285; petitioner was not repealed
by the 1935 and 1987 Constitutions which
contain transitory provisions maintaining all
laws issued not inconsistent therewith until
amended, modified or repealed.
The petition is impressed with merit.
The arguments of the parties, interlaced as they
are, can be disposed of in five points.
First, the Court agrees with the petitioner that
the charter test cannot be applied.
Essentially, the charter test as it stands today
provides:
[T]he test to determine
whether a corporation is
government owned or
controlled, or private in
nature is simple. Is it created
by its own charter for the
exercise of a public function, or
by incorporation under the
general corporation law?
Those with special charters are
government corporations
subject to its provisions, and its
employees are under the
jurisdiction of the Civil
Service Commission, and are
compulsory members of the
Government Service
Insurance System.
xxx (Emphasis supplied)[13]
The petitioner is correct in stating that the
charter test is predicated, at best, on the legal
regime established by the 1935 Constitution,
Section 7, Article XIII, which states:
Sec. 7. The National Assembly
shall not, except by general
law, provide for the
formation, organization, or
regulation of private
corporations, unless such
corporations are owned or
controlled by the Government
or any subdivision or
instrumentality thereof.[14]
The foregoing proscription has been carried over
to the 1973 and the 1987 Constitutions.Section
16 of Article XII of the present Constitution
provides:
Sec. 16. The
Congress shall not, except by
general law, provide for the
formation, organization, or
regulation of private
corporations. Government-
owned or controlled
corporations may be created
or established by special
charters in the interest of the
common good and subject to
the test of economic viability.
Section 16 is essentially a re-enactment of
Section 7 of Article XVI of the 1935 Constitution
and Section 4 of Article XIV of the 1973
Constitution.
During the formulation of the 1935 Constitution,
the Committee on Franchises recommended the
foregoing proscription to prevent the pressure of
special interests upon the lawmaking body in the
creation of corporations or in the regulation of
the same. To permit the lawmaking body by
special law to provide for the organization,
formation, or regulation of private corporations
would be in effect to offer to it the temptation in
many cases to favor certain groups, to the
prejudice of others or to the prejudice of the
interests of the country.[15]
And since the underpinnings of the charter test
had been introduced by the 1935 Constitution
and not earlier, it follows that the test cannot
apply to the petitioner, which was incorporated
by virtue of Act No. 1285, enacted on January 19,
1905. Settled is the rule that laws in general have
no retroactive effect, unless the contrary is
provided.[16] All statutes are to be construed as
having only a prospective operation, unless the
purpose and intention of the legislature to give
them a retrospective effect is expressly declared
or is necessarily implied from the language
used. In case of doubt, the doubt must be
resolved against the retrospective effect.[17]
There are a few exceptions. Statutes can be given
retroactive effect in the following cases: (1)
when the law itself so expressly provides; (2) in
case of remedial statutes; (3) in case of curative
statutes; (4) in case of laws interpreting others;
and (5) in case of laws creating new
rights.[18] None of the exceptions is present in the
instant case.
The general principle of prospectivity of the law
likewise applies to Act No. 1459, otherwise
known as the Corporation Law, which had been
enacted by virtue of the plenary powers of the
Philippine Commission on March 1, 1906, a little
over a year afterJanuary 19, 1905, the time the
petitioner emerged as a juridical entity. Even the
Corporation Law respects the rights and powers
of juridical entities organized beforehand,viz:
SEC. 75. Any corporation
or sociedad anonima formed,
organized, and existing under
the
laws of the Philippine Islands
and lawfully transacting busin
ess in the Philippine Islands
on the date of the passage of
this Act, shall be subject to the
provisions hereof so far as
such
provisions may be applicable
and shall
be entitled at its option either
to continue business as such
corporation or to reform and
organize under and by virtue
of the provisions of this Act,
transferring all corporate
interests to the new
corporation which, if a stock
corporation, is authorized to
issue its shares of stock at par
to the stockholders or
members of the old
corporation according to their
interests. (Emphasis
supplied).
As pointed out by the OSG, both the 1935 and
1987 Constitutions contain transitory provisions
maintaining all laws issued not inconsistent
therewith until amended, modified or
repealed.[19]
In a legal regime where the charter test doctrine
cannot be applied, the mere fact that a
corporation has been created by virtue of a
special law does not necessarily qualify it as a
public corporation.
What then is the nature of the petitioner as a
corporate entity? What legal regime governs its
rights, powers, and duties?
As stated, at the time the petitioner was formed,
the applicable law was the Philippine Bill of
1902, and, emphatically, as also stated above, no
proscription similar to the charter test can be
found therein.
The textual foundation of the charter test, which
placed a limitation on the power of the
legislature, first appeared in the 1935
Constitution. However, the petitioner was
incorporated in 1905 by virtue of Act No. 1258, a
law antedating the Corporation Law (Act No.
1459) by a year, and the 1935 Constitution, by
thirty years. There being neither a general law
on the formation and organization of private
corporations nor a restriction on the legislature
to create private corporations by direct
legislation, the Philippine Commission at that
moment in history was well within its powers in
1905 to constitute the petitioner as a private
juridical entity.
Time and again the Court must caution even the
most brilliant scholars of the law and all
constitutional historians on the danger of
imposing legal concepts of a later date on facts of
an earlier date.[20]
The amendments introduced by C.A. No. 148
made it clear that the petitioner was a private
corporation and not an agency of the
government. This was evident in Executive Order
No. 63, issued by then President of the
Philippines Manuel L. Quezon, declaring that the
revocation of the powers of the petitioner to
appoint agents with powers of arrest corrected a
serious defect in one of the laws existing in the
statute books.
As a curative statute, and based on the doctrines
so far discussed, C.A. No. 148 has to be given
retroactive effect, thereby freeing all doubt as to
which class of corporations the petitioner
belongs, that is, it is a quasi-public corporation, a
kind of private domestic corporation, which the
Court will further elaborate on under
the fourth point.
Second, a reading of petitioners charter shows
that it is not subject to control or supervision by
any agency of the State, unlike government-
owned and -controlled corporations. No
government representative sits on the board of
trustees of the petitioner.Like all private
corporations, the successors of its members are
determined voluntarily and solely by the
petitioner in accordance with its by-laws, and
may exercise those powers generally accorded to
private corporations, such as the powers to hold
property, to sue and be sued, to use a common
seal, and so forth. It may adopt by-laws for its
internal operations: the petitioner shall be
managed or operated by its officers in
accordance with its by-laws in force. The
pertinent provisions of the charter provide:
Section 1. Anna
L. Ide, Kate S. Wright, John L.
Chamberlain, William F.
Tucker, Mary S.
Fergusson, Amasa S. Crossfiel
d, Spencer Cosby, Sealy
B. Rossiter, Richard P. Strong,
Jose Robles Lahesa, Josefina R.
de Luzuriaga, and such other
persons as may be associated
with them in conformity with
this act, and their successors,
are hereby constituted and
created a body politic and
corporate at law, under the
name and style of The
Philippines Society for the
Prevention of Cruelty to
Animals.
As incorporated by
this Act, said society shall
have the power to add to its
organization such and as
many members as it desires,
to provide for and choose
such officers as it may deem
advisable,
and in such manner as it may
wish, and to remove members
as it shall provide.
It shall have the
right to sue and be sued, to
use a common seal, to
receive legacies anddonations,
to conduct social enterprises
for the purpose of obtaining
funds, to levy dues upon
itsmembers and provide for
their collection to hold real
and personal estate such as
may be necessary for the
accomplishment of the
purposes of the society, and to
adopt such by-laws for its
government as may not be
inconsistent with law or this
charter.
xxxx
Sec. 3. The said
society shall be operated
under the direction of its
officers, in accordance with its
by-laws in force, and this
charter.
xxxx
Sec. 6. The principal
office of the society shall be
kept in the city of Manila, and
the society shall have full
power to locate and establish
branch offices of the society
wherever it may deem
advisable in the Philippine
Islands, such branch offices to
be under the supervision and
control of the principal office.
Third. The employees of the petitioner are
registered and covered by the Social Security
System at the latters initiative, and not through
the Government Service Insurance System,
which should be the case if the employees are
considered government employees. This is
another indication of petitioners nature as a
private entity. Section 1 of Republic Act No.
1161, as amended by Republic Act No. 8282,
otherwise known as the Social Security Act of
1997, defines the employer:
Employer Any
person, natural or juridical,
domestic or foreign, who
carries on in the Philippines
any trade, business, industry,
undertaking or activity of any
kind and uses the services of
another person who is under
his orders as regards the
employment, except the
Government and any of its
political subdivisions, branches
or instrumentalities, including
corporations owned or
controlled by the Government:
Provided, That a self-
employed person shall be
both employee and employer
at the same time. (Emphasis
supplied)
Fourth. The respondents contend that the
petitioner is a body politic because its primary
purpose is to secure the protection and welfare
of animals which, in turn, redounds to the public
good.
This argument, is, at best, specious. The fact that
a certain juridical entity is impressed with public
interest does not, by that circumstance alone,
make the entity a public corporation, inasmuch
as a corporation may be private although its
charter contains provisions of a public character,
incorporated solely for the public good. This
class of corporations may be considered quasi-
public corporations, which are private
corporations that render public service, supply
public wants,[21] or pursue other eleemosynary
objectives. While purposely organized for the
gain or benefit of its members, they are required
by law to discharge functions for the public
benefit. Examples of these corporations are
utility,[22] railroad, warehouse, telegraph,
telephone, water supply corporations and
transportation companies.[23] It must be stressed
that a quasi-public corporation is a species of
private corporations, but the qualifying factor
is the type of service the former renders to the
public: if it performs a public service, then it
becomes a quasi-public corporation.[24]
Authorities are of the view that the purpose
alone of the corporation cannot be taken as a
safe guide, for the fact is that almost all
corporations are nowadays created to promote
the interest, good, or convenience of the public. A
bank, for example, is a private corporation; yet, it
is created for a public benefit. Private schools
and universities are likewise private
corporations; and yet, they are rendering public
service. Private hospitals and wards are charged
with heavy social responsibilities. More so with
all common carriers. On the other hand, there
may exist a public corporation even if it is
endowed with gifts or donations from private
individuals.
The true criterion, therefore, to determine
whether a corporation is public or private is
found in the totality of the relation of the
corporation to the State. If the corporation is
created by the State as the latters own agency or
instrumentality to help it in carrying out its
governmental functions, then that corporation is
considered public; otherwise, it is
private. Applying the above test, provinces,
chartered cities, and barangays can best
exemplify public corporations. They are created
by the State as its own device and agency for the
accomplishment of parts of its own public
works.[25]
It is clear that the amendments introduced by
C.A. No. 148 revoked the powers of the petitioner
to arrest offenders of animal welfare laws and
the power to serve processes in connection
therewith.
Fifth. The respondents argue that since the
charter of the petitioner requires the latter to
render periodic reports to the Civil Governor,
whose functions have been inherited by the
President, the petitioner is, therefore, a
government instrumentality.
This contention is inconclusive. By virtue of the
fiction that all corporations owe their very
existence and powers to the State, the
reportorial requirement is applicable to all
corporations of whatever nature, whether they
are public, quasi-public, or private
corporationsas creatures of the State, there is a
reserved right in the legislature to investigate
the activities of a corporation to determine
whether it acted within its powers.In other
words, the reportorial requirement is the
principal means by which the State may see to it
that its creature acted according to the powers
and functions conferred upon it.These principles
were extensively discussed in Bataan Shipyard &
Engineering Co., Inc. v. Presidential Commission
on Good Government.[26] Here, the Court, in
holding that the subject corporation could not
invoke the right against self-incrimination
whenever the State demanded the production of
its corporate books and papers, extensively
discussed the purpose of reportorial
requirements, viz:
x x x The corporation is a
creature of the state. It is
presumed to be incorporated
for the benefit of the public. It
 received certain special corporation subject to the jurisdiction of the
privileges and franchises, and Securities and Exchange Commission. The
holds them subject to the laws respondents are ENJOINED from investigating,
of the state and the limitations examining and auditing the petitioner's fiscal
of its charter. Its powers are and financial affairs.
limited by law. It can make no
contract not authorized by its SO ORDERED.
charter. Its rights to act as a
corporation are only
preserved to it so long as it
obeys the laws of its creation.
There is a reserve[d] right in
the legislature to investigate
its contracts and find out
whether it has exceeded its
powers. It would be a strange
anomaly to hold that a state,
having chartered a
corporation to make use of
certain franchises, could not, in
the exercise of sovereignty,
inquire how these franchises
had been employed, and
whether they had been abused,
and demand the production of
the corporate books and
papers for that purpose. The
defense amounts to this, that
an officer of the corporation
which is charged with a
criminal violation of the
statute may plead the
criminality of such
corporation as a refusal to
produce its books. To state
this proposition is to answer
it.While an individual may
lawfully refuse to answer
incriminating questions unless
protected by an immunity
statute, it does not follow that
a corporation vested with
special privileges and
franchises may refuse to show
its hand when charged with an
abuse of such privileges.
(Wilson v. United States, 55
Law Ed., 771, 780.)[27]

WHEREFORE, the petition is GRANTED.

Petitioner is DECLARED a private domestic
Republic of the Philippines throughout the country formed pursuant to the As an offshoot of the immediately cited ruling, xxx xxx xxx
SUPREME COURT provisions of Presidential Decree No. 198, as the CSC. issued Resolution No. 90-575, the
Manila amended by Presidential Decrees Nos. 768 and dispositive portion of which reads: NOW, THEREFORE, in view of all the
1479, otherwise known as the "Provincial Water foregoing, the Commission resolved to
EN BANC Utilities Act of 1973." NOW THEREFORE, in view of all the rule, as it hereby rules, that the
foregoing, the Commission resolved, as implementation of CSC. Resolution No.
G.R. No. 95237-38 September 13, 1991 Presidential Decree No. 198 was issued by the it hereby resolves to rule that Local 575 dated June 27, 1990 be deferred in
then President Ferdinand E. Marcos by virtue of Water Districts, being quasi-public the meantime pending clarification
his legislative power under Proclamation No. corporations created by law to perform from the Supreme Court are regards its
DAVAO CITY WATER DISTRICT, CAGAYAN DE 1081. It authorized the different local legislative public services and supply public conflicting decisions in the cases
ORO CITY WATER DISTRICT, METRO CEBU bodies to form and create their respective water wants, the matter of hiring and firing of of Tanjay Water District v.
WATER DISTRICT, ZAMBOANGA CITY WATER districts through a resolution they will pass its officers and employees should be Gabaton and Metro Iloilo Water District
DISTRICT, LEYTE METRO WATER DISTRICT, subject to the guidelines, rules and regulations governed by the Civil Service Law, rules v. National Labor Relations
BUTUAN CITY WATER DISTRICT, CAMARINES therein laid down. The decree further created and regulations. Henceforth, all Commission. (p. 26, Rollo)
NORTE WATER DISTRICT, LAGUNA WATER and formed the "Local Water Utilities appointments of personnel of the
DISTRICT, DUMAGUETE CITY WATER Administration" (LWUA), a national agency different local water districts in the
DISTRICT, LA UNION WATER DISTRICT, In the meanwhile, there exists a divergence of
attached to the National Economic and country shall be submitted to the opinions between COA on one hand, and the
BAYBAY WATER DISTRICT, METRO Development Authority (NEDA), and granted Commission for appropriate action.
LINGAYEN WATER DISTRICT, URDANETA (LWUA), on the other hand, with respect to the
with regulatory power necessary to optimize (Rollo. p. 22). authority of COA to audit the different water
WATER DISTRICT, COTABATO CITY WATER public service from water utilities operations.
DISTRICT, MARAWI WATER DISTRICT, districts.
TAGUM WATER DISTRICT, DIGOS WATER However, on May 16, 1990, in G.R. No. 85760,
DISTRICT, BISLIG WATER DISTRICT, and The respondents, on the other hand, are the Civil entitled "Metro Iloilo Water District v. National COA opined that the audit of the water districts
MECAUAYAN WATER DISTRICT, petitioners, Service Commission (CSC) and the Commission Labor Relations Commission, et al.," the Third is simply an act of discharging the visitorial
vs. on Audit (COA), both government agencies and Division of this Court ruled in a minute power vested in them by law (letter of COA to
CIVIL SERVICE COMMISSION, and represented in this case by the Solicitor General. resolution: LWUA dated August 13, 1985, pp. 29-30, Rollo).
COMMISSION ON AUDIT, respondents.
On April 17, 1989, this Court ruled in the case xxx xxx xxx On the other hand, LWUA maintained that only
Rodolfo S. De Jesus for petitioners. of Tanjay Water District v. Gabaton, et al. (G.R. those water districts with subsidies from the
Evalyn H. Itaas-Fetalino, Rogelio C. Limare and No. 63742, 172 SCRA 253): Considering that PD 198 is a general government fall within the COA's jurisdiction
Daisy B. Garcia-Tingzon for CSC. legislation empowering and/or and only to the extent of the amount of such
Significantly, Article IX (B), Section 2(1) authorizing government agencies and subsidies, pursuant to the provision of the
of the 1987 Constitution provides that entities to create water districts, said Government Auditing Code of the Phils.
the Civil Service embraces all branches, PD 198 cannot be considered as the
subdivisions, instrumentalities, and charter itself creating the Water It is to be observed that just like the question of
agencies of the government, including District. Public respondent NLRC did whether the employees of the water districts
MEDIALDEA, J.:p government-owned and controlled not commit any grave abuse of falls under the coverage of the Civil Service Law,
corporations with original charters. discretion in holding that the operative the conflict between the water districts and the
Whether or not the Local Water Districts formed Inasmuch as PD No. 198, as amended, is act, that created the Metro Iloilo Water COA is also dependent on the final determination
and created pursuant to the provisions of the original charter of the petitioner, District was the resolution of the of whether or not water districts are
Presidential Decree No. 198, as amended, are Tanjay Water District, and respondent Sangguniang Panglunsod of Iloilo City. government-owned or controlled corporations
government-owned or controlled corporations Tarlac Water District and all water Hence, the employees of Water with original charter. The reason behind this is
with original charter falling under the Civil districts in the country, they come Districts are not covered by Civil Sec. 2(1), Article IX-D of the 1987 constitution
Service Law and/or covered by the visitorial under the coverage of the Civil Service Service Laws as the latter do (sic) not which reads:
power of the Commission on Audit is the issue Law, rules and regulations. (Sec. 35, have original charters.
which the petitioners entreat this Court, en banc, Art. VIII and Sec. 37, Art. IX of PD No.
to shed light on. 807). Sec. 2(1) The Commission on Audit
In adherence to the just cited ruling, the CSC shall have the power, authority, and
suspended the implementation of Resolution No. duty to examine, audit, and settle all
Petitioners are among the more than five 90-575 by issuing Resolution No. 90-770 which accounts pertaining to the revenue and
hundred (500) water districts existing reads: receipts of, and expenditures or uses of
 funds and property, owned or held in
trust by, or pertaining to the
Government, or any of its subdivisions,
agencies or instrumentalities, including
government-owned or controlled
corporations with original charters, and
on a post audit basis. (emphasis
supplied)
Petitioners' main argument is that they are
private corporations without original charter,
hence they are outside the jurisdiction of
respondents CSC and COA. Reliance is made on
the Metro Iloilo case which declared petitioners
as quasi-public corporations created by virtue of
PD 198, a general legislation which cannot be
considered as the charter itself creating the
water districts. Holding on to this ruling,
petitioners contend that they are private
corporations which are only regarded as quasi-
public or semi-public because they serve public
interest and convenience and that since PD 198
is a general legislation, the operative act which
created a water district is not the said decree but
the resolution of the sanggunian concerned.
After a fair consideration of the parties'
arguments coupled with a careful study of the
applicable laws as well as the constitutional
provisions involved, We rule against the
petitioners and reiterate Our ruling in Tanjay
case declaring water districts government-
owned or controlled corporations with original
charter.
As early as Baguio Water District v. Trajano, et
al., (G.R. No. 65428, February 20, 1984, 127
SCRA 730), We already ruled that a water district
is a corporation created pursuant to a special law
— P.D. No. 198, as amended, and as such its
officers and employees are covered by the Civil
Service Law.
In another case (Hagonoy Water District v. NLRC,
G.R. No. 81490, August 31, 1988, 165 SCRA 272),
We ruled once again that local water districts are
quasi-public corporations whose employees
belong to the Civil Service. The Court's
pronoucement in this case, as extensively quoted
in the Tanjay case, supra, partly reads:
"The only question here is whether or
not local water districts are
governmkent owned or controlled
corporations whose employees are
subject to the provisions of the Civil
Service Law. The Labor Arbiter
asserted jurisdiction over the alleged
illegal dismissal of private respondent
Villanueva by relying on Section 25 of
Presidential decree No. 198, known as
the Provincial Water Utilities Act of
1973" which went onto effect in 25 May
1973, and which provides as follows:
Exemption from Civil Service.
— The district and its
employees, being engaged in a
proprietary function, are
hereby exempt from the
provisions of the Civil Service
Law. Collective Bargaining
shall be available only to
personnel below supervisory
levels: Provided, however,
That the total of all salaries,
wages emoluments, benefits
or other compensation paid to
all employees in any month
shall not exceed fifty percent
(50%) of average net monthy
revenue. Said net revenue
representing income from
water sales and sewerage
service charges, less pro-rata
share of debt service and
expenses for fuel or energy
for pumping during the
preceding fiscal year.
The Labor Arbiter failed to take into
accout the provisions of Presidential
Decree No. 1479, which went into effect
on 11 June 1978, P.D. No. 1479, wiped
away Section 25 of PD 198 quoted
above, and Section 26 of PD 198 was
renumbered as Section 25 in the
following manner:
Section 26 of the same decree PD 198 is
hereby amended to read as Section 25
as follows:
Section 25. Authorization. — The
district may exercise all the powers
which are expressly granted by this
Title or which are necessarily implied
from or incidental to the powers and
purposes herein stated. For the
purpose of carrying out the objectives
of this Act, a district is hereby granted
the power of eminent domain, the
exercise thereof shall, however, be
subject to review by the
Administration.
Thus, Section 25 of PD 198 exempting
the employees of water districts from
the application of the Civil Service Law
was removed from the statute books:
xxx xxx xxx
We grant the petition for the following
reasons:
1. Section 25 of PD No. 198 was
repealed by Section 3 of PD No. 1479;
Section 26 of PD No. 198 was amended
ro read as Sec. 25 by Sec. 4 of PD No.
1479. The amendatory decree took
effect on June 11, 1978.
xxx xxx xxx
3. The BWD is a corporation created
pursuant to a special law — PD No.
198, as amended. As such its officers
and employees are part of the Civil
Service (Sec. 1, Art. XII-B, [1973]
Constitution; PD No. 868).
Ascertained from a consideration of the whole
statute, PD 198 is a special law applicable only to
the different water districts created pursuant
thereto. In all its essential terms, it is obvious
that it pertains to a special purpose which is
intended to meet a particular set of conditions
and cirmcumstances. The fact that said decree
generally applies to all water districts
throughout the country does not change the fact
that PD 198 is a special law. Accordingly, this
Court's resolution in Metro Iloilo case declaring
PD 198 as a general legislation is hereby
abandoned.
By "government-owned or controlled
corporation with original charter," We mean
government owned or controlled corporation
created by a special law and not under the
Corporation Code of the Philippines. Thus, in the
case ofLumanta v. NLRC (G.R. No. 82819,
February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service
Corporation (NASECO) v. National Labor
Relations Commission, G.R. No 69870,
promulgated on 29 November 1988,
quoting extensively from the
deliberations of 1986 Constitutional
Commission in respect of the intent and
meaning of the new phrase "with
original character," in effect held
that government-owned and controlled
corporations with original charter refer
to corporations chartered by special law
as distinguished from corporations
organized under our general
incorporation statute — the
Corporations Code. In NASECO, the
company involved had been organized
under the general incorporation statute
and was a sbusidiary of the National
Investment Development Corporation
(NIDC) which in turn was a subsidiary
of the Philippine National Bank, a bank
chartered by a special statute. Thus,
government-owned or controlled
corporations like NASECO are
effectively, excluded from the scope of
the Civil Service. (emphasis supplied)
From the foregoing pronouncement, it is clear
that what has been excluded from the coverage
of the CSC are those corporations created
pursuant to the Corporation Code. Significantly,
petitioners are not created under the said code,
but on the contrary, they were created pursuant
to a special law and are governed primarily by its
provision.
No consideration may thus be given to
petitioners' contention that the operative act
which created the water districts are the
resolutions of the respective local sanggunians
and that consequently, PD 198, as amended,
cannot be considered as their charter.
It is to be noted that PD 198, as amended is the
source of authorization and power to form and
maintain a district. Section 6 of said decree
provides:
Sec. 6. Formation of District. — This Act
is the source of authorization and
power to form and maintain a district.
Once formed, a district is subject to the
provisions of this Act and not under the
jurisdiction of any political subdivision,
....
Moreover, it must be observed that PD 198,
contains all the essential terms necessary to
constitute a charter creating a juridical person.
For example, Section 6(a) provides for the name
that will be used by a water district, thus:
Sec. 6. . . . To form a district, the
legislative body of any city,
municipality or province shall enact a
resolution containing the following:
a) The name of the local water district,
which shall include the name of the
city, municipality, or province, or
region thereof, served by said system,
followed by the words "Water District."
It also prescribes for the numbers and
qualifications of the members of the Board of
Directors:
Sec. 8. Number and Qualification. — The
Board of Directors of a district shall be
composed of five citizens of the
Philippines who are of voting age and
residents within the district. One
member shall be a representative of
civic-oriented service clubs, one
member of representative of
professional associations, one member
a representative of business,
commercial or financial organizations,
one member a representative of
educational institutions and one
member a representative of women's
organization. No public official shall
serve as director. Provided, however,
that if the district has availed of the
financial assistance of the
Administration, the Administration
may appoint any of its personnel to sit
in the board of directors with all the
rights and privileges appertaining to a
regular member for such period as the
indebtedness remains unpaid in which
case the board shall be composed of six
members; (as amended by PDs Nos.
768 and 1479).
the manner of their appointment and
nominations;
Sec. 9. Appointment. — Board members
shall be appointed by the appointing
authority. Said appointments shall be
made from a list of nominees, if any,
submitted pursuant to Section 10. If no
nominations are submitted, the
appointing authority shall appoint any
qualified person of the category to the
vacant position;
Sec.10. Nominations. — On or before
October 1 of each even numbered year,
the secretary of the district shall
contact each known organization,
association, or institution being
represented by the director whose
term will expire on December 31 and
solicit nominations from these
organizations to fill the position for the
ensuing term. One nomination may be
submitted in writing by each such
organization to the Secretary of the
district on or before November 1 of
such year: This list of nominees shall be
transmitted by the Secretary of the
district to the office of the appointing
authority on or before November 15 of
such year and he shall make his
appointment from the list submitted on
or before December 15. In the event the
appointing authority fails to make his
appointments on or before December
15, selection shall be made from said
list of nominees by majority vote of the
seated directors of the district
constituting a quorum. Initial
nominations for all five seats of the
board shall be solicited by the
legislative body or bodies at the time of
adoption of the resolution forming the
district. Thirty days thereafter, a list of
nominees shall be submitted to the
provincial governor in the event the
resolution forming the district is by a
provincial board, or the mayor of the
city or municipality in the event the
resolution forming the adoption of the
district is by the city or municipal
board of councilors, who shall select
the initial directors therefrom within
15 days after receipt of such
nominations;
their terms of office:
Sec. 11. Term of Office. — Of the five
initial directors of each newly formed
district, two shall be appointed for a
maximum term of two years, two for a
maximum term of four years, and one
for a maximum term of six years. Terms
of office of all directors in a given
district shall be such that the term of at
least one director, but not more then
two, shall expire on December 31 of
each even-numbered year. Regular
terms of office after the initial terms
shall be for six years commencing on
January 1 of odd-numbered years.
Directors may be removed for cause
only, subject to review and approval of
the Administration; (as amended by PD
768).
the manner of filling up vacancies:
Sec. 12. Vacancies. — In the event of a
vacancy in the board of directors
occurring more than six months before
expiration of any director's term, the
remaining directors shall within 30
days, serve notice to or request the
secretary of the district for
nominations and within 30 days,
thereafter a list of nominees shall be
submitted to the appointing authority
for his appointment of a replacement
director from the list of nominees. In
the absence of such nominations, the
appointing authority shall make such
appointment. If within 30 days after
submission to him of a list of nominees
the appointing authority fails to make
an appointment, the vacancy shall be
filled from such list by a majority vote
of the remaining members of the Board
of Directors constituting a quorum.
Vacancies occurring within the last six
months of an unexpired term shall also
be filled by the Board in the above
manner. The director thus appointed
shall serve the unexpired term only; (as
amended by PD 768).
and the compensation and personal liability of
the members of the Board of Directors:
Sec. 13. Compensation. — Each director
shall receive a per diem, to be
determined by the board, for each
meeting of the board actually attended
by him, but no director shag receive per
diems in any given month in excess of
the equivalent of the total per diems of
four meetings in any given month. No
director shall receive other
compensation for services to the
district.
 Any per diem in excess of P50.00 shall
be subject to approval of the
Administration (as amended by PD
768).
Sec. 14. Personal Liability. — No
director may be held to be personally
liable for any action of the district.
Noteworthy, the above quoted provisions of PD
198, as amended, are similar to those which are
actually contained in other corporate charters.
The conclusion is inescapable that the said
decree is in truth and in fact the charter of the
different water districts for it clearly defines the
latter's primary purpose and its basic
organizational set-up. In other words, PD 198, as
amended, is the very law which gives a water
district juridical personality. While it is true that
a resolution of a local sanggunian is still
necessary for the final creation of a district, this
Court is of the opinion that said resolution
cannot be considered as its charter, the same
being intended only to implement the provisions
of said decree. In passing a resolution forming a
water district, the local sanggunian is entrusted
with no authority or discretion to grant a charter
for the creation of a private corporation. It is
merely given the authority for the formation of a
water district, on a local option basis, to be
exercised under and in pursuance of PD 198.
More than the aforequoted provisions, what is of
important interest in the case at bar is Section 3,
par. (b) of the same decree which reads:
Sec. 3(b). Appointing authority. — The
person empowered to appoint the
members of the Board of Directors of a
local water district, depending upon the
geographic coverage and population
make-up of the particular district. In
the event that more than seventy-five
percent of the total active water service
connections of a local water districts
are within the boundary of any city or
municipality, the appointing authority
shall be the mayor of that city or
municipality, as the case may be;
otherwise, the appointing authority
shall be the governor of the province
within which the district is
located: Provided, That if the existing
waterworks system in the city or
municipality established as a water
district under this Decree is operated
and managed by the province, initial
appointment shall be extended by the
governor of the province. Subsequent
appointments shall be as specified
herein.
If portions of more than one province
are included within the boundary of the
district, and the appointing authority is
to be the governors then the power to
appoint shall rotate between the
governors involved with the initial
appointments made by the governor in
whose province the greatest number of
service connections exists (as amended
by PD 768).
The above-quoted section definitely sets to
naught petitioners' contention that they are
private corporations. It is clear therefrom that
the power to appoint the members who will
comprise the Board of Directors belongs to the
local executives of the local subdivision units
where such districts are located. In contrast, the
members of the Board of Directors or trustees of
a private corporation are elected from among the
members and stockholders thereof. It would not
be amiss to emphasize at this point that a private
corporation is created for the private purpose,
benefit, aim and end of its members or
stockholders. Necessarily, said members or
stockholders should be given a free hand to
choose those who will compose the governing
body of their corporation. But this is not the case
here and this clearly indicates that petitioners
are definitely not private corporations.
The foregoing disquisition notwithstanding, We
are, however, not unaware of the serious
repercussion this may bring to the thousands of
water districts' employees throughout the
country who stand to be affected because they
do not have the necessary civil service
eligibilities. As these employees are equally concerned forming and maintaining a local water
protected by the constitutional guarantee to district. Thus, Section 2 of P.D. 198, among
security of tenure, We find it necessary to rule others, provides:
for the protection of such right which cannot be
impaired by a subsequent ruling of this Court. Sec. 2. Declaration of Policy — . . . To
Thus, those employees who have already encourage the formulation of such local
acquired their permanent employment status at water districts and the transfer thereto
the time of the promulgation of this decision of existing water supply and waste
cannot be removed by the mere reason that they water disposal facilities, this Decree
lack the necessary civil service eligibilities. provides by general act the authority for
the formation thereof, on a local option
ACCORDINGLY, the petition is hereby basis. . . . (Emphasis supplied)
DISMISSED. Petitioners are declared
"government-owned or controlled corporations Implementing the above policy, Title II of P.D.
with original charter" which fall under the 198 provides:
jurisdiction of the public respondents CSC and
COA.
TITLE II. LOCAL WATER DISTRICT
LAW
SO ORDERED.
CHAPTER I. — Title
Fernan, C.J., Narvasa, Melencio-Herrera, Cruz, Sec. 4. Title. — The provisions
Paras, Padilla, Griño-Aquino, Regalado and
of this Title shall be known
Davide, Jr., JJ., concur. and referred to as the "Local
Gutierrez, Jr., Feliciano and Sarmiento, JJ., are on
Water District Law."
leave.
CHAPTER II. Purpose and
Separate Opinions Formation
BIDIN, J., dissenting: Sec. 5. Purpose. — Local water
districts may be formed
I regret I have to register my dissent in this case. pursuant to this Title for the
I agree with the main ponencia that P.D. 198, as purposes of (a) acquiring,
amended, authorizes the different local installing, improving,
legislative bodies (Sanggunian) to form and maintaining and operating
create their respective water districts through a water supply and distribution
Resolution which they will pass subject to the systems for domestic,
guidelines, rules and regulations therein laid industrial, municipal and
down. The issue, therefore, to be resolved is agricultural uses for residents
whether the local water districts so created are and lands within the
government-owned or controlled corporations boundaries of such districts,
with original charters embraced by the Civil (b) providing, maintaining
Service as contemplated by Art. IX-B, Sec. 2[1] of and operating wastewater
the 1987 Constitution. collection, treatment and
disposal facilities, and (c)
P.D. 198 is a general legislation which authorizes conducting such other
the formation of water districts. However, the functions and operations
operative act which creates a water district is not incidental to water resource
said decree but the resolution of the Sanggunian development, utilization and
disposal within such districts,
as are necessary or incidental
to said purpose.
Sec. 6. Formation of District.
— This Act is the source of
authorization and power to
form and maintain a district.
For purposes of this Act, a
district shall be considered as
a quasi-public
corporation performing public
service and supplying public
wants. As such, a district shall
exercise the powers, rights and
privileges given to private
corporations under existing
laws, in addition to the
powers granted in, and
subject to such restrictions
imposed, under this Act.
xxx xxx xxx
Sec. 7. Filing of Resolution.— A
certifted copy of the resolution
or resolutions forming a
district shall be forwarded to
the office of the Secretary of
the Administration. If found by
the Administration to
conform to the requirements
of Section 6 and the policy
objectives in Section 2, the
resolution shall be duly
filed. The district shall be
deemed duly formed and
existing upon the date of such
filing. A certified copy of said
resolution showing the filing
stamp of the Administration
shall be maintained in the
office of the district. Upon
such filing, the local
government or governments
concerned shall lose
ownership, supervision and
control or any right
whatsoever over the district
except as provided herein.
(Emphasis supplied)
It is apparent that insofar as the control over the district (Sec. 7, PD water supply and waste water
formation of local water districts are 198). disposal facilities, this Decree
concerned, P.D. 198 is not an original provides by general act the
charter but a general act authorizing In view of the foregoing, I vote to Grant authority for the formation
the formation of water districts on local the petition and to declare petitioners thereof, on a local option basis.
option basis (Sec. 2, P.D. 198) similar to as quasi-public corporations . . . (Emphasis supplied)
the Corporation Code. What is performing public service without
chartered, formed and created under original charters and therefore not Implementing the above policy, Title II
P.D. 198 as a government corporation embraced by the Civil Service. of P.D. 198 provides:
is the "Local Water Utilities
Administration" attached to the Office
of the President as follows: TITLE II. LOCAL WATER
DISTRICT LAW
CHAPTER I. — Title
Sec. 49. Charter. — There is Separate Opinions
hereby chartered, created and
formed a government BIDIN, J., dissenting: Sec. 4. Title. — The
corporation to be known as provisions of this
the "Local Water Utilities Title shall be known
I regret I have to register my dissent in and referred to as
Administration which is this case. I agree with the main
hereby attached to the Office the "Local Water
ponencia that P.D. 198, as amended, District Law."
of the President. The authorizes the different local legislative
provisions of this title shall be bodies (Sanggunian) to form and create
and constitute the charter of their respective water districts through CHAPTER II.
the Administration. a Resolution which they will pass Purpose and
Formation
subject to the guidelines, rules and
On the other hand, local water districts regulations therein laid down. The
are formed by resolutions of the issue, therefore, to be resolved is Sec. 5. Purpose. —
respective Provincial, City and whether the local water districts so Local water districts
Municipal councils (Sec. 7, P.D. 198) created are government-owned or may be formed
filed with the Local Water Utilities controlled corporations with original pursuant to this
Administration, a government charters embraced by the Civil Service Title for the
corporation chartered under Section as contemplated by Art. IX-B, Sec. 2[1] purposes of (a)
49, P.D. 198 and attached to the Office of the 1987 Constitution. acquiring, installing,
of the President. Consequently, without improving,
the requisite resolution of the P.D. 198 is a general legislation which maintaining and
Sanggunian concerned forming the authorizes the formation of water operating water
water district having been filed with districts. However, the operative act supply and
the Local Water Utility Administration, which creates a water district is not distribution systems
no water district is formed. What gives said decree but the resolution of the for domestic,
the water districts juridical personality Sanggunian concerned forming and industrial, municipal
is the resolution of the respective maintaining a local water district. Thus, and agricultural uses
Sanggunian forming the district and Section 2 of P.D. 198, among others, for residents and
filed with the Local Water Utilities provides: lands within the
Administration. Once formed, a water boundaries of such
district is subject to the provisions of districts, (b)
P.D. 198 and no longer under the Sec. 2. Declaration of Policy — providing,
. . . To encourage the
jurisdiction of any political maintaining and
administration which shall thereafter formulation of such local operating
water districts and the
lose ownership, supervision and wastewater
transfer thereto of existing collection, treatment
and disposal district shall be Administration" attached to jurisdiction of any political
facilities, and (c) forwarded to the the Office of the President as administration which shall
conducting such office of the follows: thereafter lose ownership,
other functions and Secretary of the supervision and control over
operations Administration. If Sec. 49. Charter. — the district (Sec. 7, PD 198).
incidental to water found by the There is hereby
resource Administration to chartered, created In view of the foregoing, I vote
development, conform to the and formed a to Grant the petition and to
utilization and requirements of government declare petitioners as quasi-
disposal within such Section 6 and the corporation to be public corporations
districts, as are policy objectives in known as the "Local performing public service
necessary or Section 2, the Water Utilities without original charters and
incidental to said resolution shall be Administration therefore not embraced by
purpose. duly filed. The which is hereby the Civil Service.
district shall be attached to the
Sec. 6. Formation of deemed duly formed Office of the
District. — This Act is and existing upon the President. The
the source of date of such filing. A provisions of this
authorization and certified copy of said title shall be and
power to form and resolution showing constitute the
maintain a district. the filing stamp of charter of the
For purposes of this the Administration Administration.
Act, a district shall be maintained
shall be considered in the office of the
district. Upon such On the other hand, local water
as a quasi-public districts are formed by
corporation perform filing, the local
government or resolutions of the respective
ing public service Provincial, City and Municipal
and supplying public governments
concerned shall lose councils (Sec. 7, P.D. 198) filed
wants. As such, a with the Local Water Utilities
district shall exercise ownership,
supervision and Administration, a government
the powers, rights corporation chartered under
and privileges given control or any right
whatsoever over the Section 49, P.D. 198 and
to private attached to the Office of the
corporations under district except as
provided herein. President. Consequently,
existing laws, in without the requisite
addition to the (Emphasis supplied)
resolution of the Sanggunian
powers granted in, concerned forming the water
and subject to such It is apparent that insofar as district having been filed with
restrictions the formation of local water the Local Water Utility
imposed, under this districts are concerned, P.D. Administration, no water
Act. 198 is not an original charter district is formed. What gives
but a general act authorizing the water districts juridical
xxx xxx x the formation of water personality is the resolution
xx districts on local option basis of the respective Sanggunian
(Sec. 2, P.D. 198) similar to forming the district and filed
the Corporation Code. What is with the Local Water Utilities
Sec. 7. Filing of chartered, formed and created
Resolution.— A Administration. Once formed,
under P.D. 198 as a a water district is subject to
certifted copy of the government corporation is
resolution or the provisions of P.D. 198 and
the "Local Water Utilities no longer under the
resolutions forming a
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-6776 May 21, 1955
THE REGISTER OF DEEDS OF
RIZAL, petitioner-appellee,
vs.
UNG SIU SI TEMPLE, respondent-appellant.
Alejo F. Candido for appellant.
Office of the Solicitor General Querube C.
Makalintal and Solicitor Felix V. Makasiar for
appellee.
REYES, J.B.L., J.:
The Register of Deeds for the province of Rizal
refused to accept for record a deed of donation
executed in due form on January 22, 1953, by
Jesus Dy, a Filipino citizen, conveying a parcel of
residential land, in Caloocan, Rizal, known as lot
No. 2, block 48-D, PSD-4212, G.L.R.O. Record No.
11267, in favor of the unregistered religious
organization "Ung Siu Si Temple", operating
through three trustees all of Chinese nationality.
The donation was duly accepted by Yu Juan, of
Chinese nationality, founder and deaconess of
the Temple, acting in representation and in
behalf of the latter and its trustees.
The refusal of the Registrar was elevated en
Consultato the IVth Branch of the Court of First
Instance of Manila. On March 14, 1953, the Court
upheld the action of the Rizal Register of Deeds,
saying:
The question raised by the Register of
Deeds in the above transcribed
consulta is whether a deed of donation
of a parcel of land executed in favor of a
religious organization whose founder,
trustees and administrator are Chinese
citizens should be registered or not.
It appearing from the record of the
Consulta that UNG SIU SI TEMPLE is a
religious organization whose
deaconess, founder, trustees and
administrator are all Chinese citizens,
this Court is of the opinion and so hold
that in view of the provisions of the
sections 1 and 5 of Article XIII of the
Constitution of the Philippines limiting
the acquisition of land in the
Philippines to its citizens, or to
corporations or associations at least
sixty per centum of the capital stock of
which is owned by such citizens
adopted after the enactment of said Act
No. 271, and the decision of the
Supreme Court in the case of Krivenko
vs. the Register of Deeds of Manila, the
deed of donation in question should not
be admitted for admitted for
registration. (Printed Rec. App. pp 17-
18).
Not satisfied with the ruling of the Court of First
Instance, counsel for the donee Uy Siu Si Temple
has appealed to this Court, claiming: (1) that the
acquisition of the land in question, for religious
purposes, is authorized and permitted by Act No.
271 of the old Philippine Commission, providing
as follows:
SECTION 1. It shall be lawful for all
religious associations, of whatever sort
or denomination, whether incorporated
in the Philippine Islands or in the name
of other country, or not incorporated at
all, to hold land in the Philippine
Islands upon which to build churches,
parsonages, or educational or
charitable institutions.
SEC. 2. Such religious institutions, if not
incorporated, shall hold the land in the
name of three Trustees for the use of
such associations; . . .. (Printed Rec.
App. p. 5.)
and (2) that the refusal of the Register of Deeds As to the complaint that the disqualification
violates the freedom of religion clause of our under article XIII is violative of the freedom of
Constitution [Art. III, Sec. 1(7)]. religion guaranteed by Article III of the
Constitution, we are by no means convinced (nor
We are of the opinion that the Court below has has it been shown) that land tenure is
correctly held that in view of the absolute terms indispensable to the free exercise and enjoyment
of section 5, Title XIII, of the Constitution, the of religious profession or worship; or that one
may not worship the Deity according to the
provisions of Act No. 271 of the old Philippine
Commission must be deemed repealed since the dictates of his own conscience unless upon land
Constitution was enacted, in so far as held in fee simple.
incompatible therewith. In providing that, —
The resolution appealed from is affirmed, with
costs against appellant.
Save in cases of hereditary succession,
no private agricultural land shall be
transferred or assigned except to Pablo, Acting C.J., Bengzon, Montemayor, Reyes, A.,
individuals, corporations or Bautista Angelo, Labrador, and Concepcion,
associations qualified to acquire or JJ., concur.
hold lands of the public domain in the
Philippines,
the Constitution makes no exception in favor of
religious associations. Neither is there any such
saving found in sections 1 and 2 of Article XIII,
restricting the acquisition of public agricultural
lands and other natural resources to
"corporations or associations at least sixty per
centum of the capital of which is owned by such
citizens" (of the Philippines).
The fact that the appellant religious organization
has no capital stock does not suffice to escape
the Constitutional inhibition, since it is admitted
that its members are of foreign nationality. The
purpose of the sixty per centum requirement is
obviously to ensure that corporations or
associations allowed to acquire agricultural land
or to exploit natural resources shall be
controlled by Filipinos; and the spirit of the
Constitution demands that in the absence of
capital stock, the controlling membership should
be composed of Filipino citizens.
To permit religious associations controlled by
non-Filipinos to acquire agricultural lands would
be to drive the opening wedge to revive alien
religious land holdings in this country. We can
not ignore the historical fact that complaints
against land holdings of that kind were among
the factors that sparked the revolution of 1896.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-6055 June 12, 1953
THE PEOPLE OF THE PHILIPPINES, plaintiff-
appellee,
vs.
WILLIAM H. QUASHA, defendant-appellant.
Jose P. Laurel for appellant and William H. Quasha
in his own behalf.
Office of the Solicitor General Juan R. Liwag and
Assistant Solicitor General Francisco Carreon for
appellee.
REYES, J.:
William H. Quasha, a member of the Philippine
bar, was charged in the Court of First Instance of
Manila with the crime of falsification of a public
and commercial document in that, having been
entrusted with the preparation and registration
of the article of incorporation of the Pacific
Airways Corporation, a domestic corporation
organized for the purpose of engaging in
business as a common carrier, he caused it to
appear in said article of incorporation that one
Arsenio Baylon, a Filipino citizen, had subscribed
to and was the owner of 60.005 per cent of the
subscribed capital stock of the corporation when
in reality, as the accused well knew, such was not
the case, the truth being that the owner of the
portion of the capital stock subscribed to by
Baylon and the money paid thereon were
American citizen whose name did not appear in
the article of incorporation, and that the purpose
for making this false statement was to
circumvent the constitutional mandate that no
corporation shall be authorize to operate as a
public utility in the Philippines unless 60 per
cent of its capital stock is owned by Filipinos.
Found guilty after trial and sentenced to a term
of imprisonment and a fine, the accused has
appealed to this Court.
The essential facts are not in dispute. On
November 4,1946, the Pacific Airways
Corporation registered its articles of
incorporation with the Securities and Exchanged
Commission. The article were prepared and the
registration was effected by the accused, who
was in fact the organizer of the corporation. The
article stated that the primary purpose of the
corporation was to carry on the business of a
common carrier by air, land or water; that its
capital stock was P1,000,000, represented by
9,000 preferred and 100,000 common shares,
each preferred share being of the par value of
p100 and entitled to 1/3 vote and each common
share, of the par value of P1 and entitled to one
vote; that the amount capital stock actually
subscribed was P200,000, and the names of the
subscribers were Arsenio Baylon, Eruin E.
Shannahan, Albert W. Onstott, James O'Bannon,
Denzel J. Cavin, and William H. Quasha, the first
being a Filipino and the other five all Americans;
that Baylon's subscription was for 1,145
preferred shares, of the total value of P114,500,
and for 6,500 common shares, of the total par
value of P6,500, while the aggregate
subscriptions of the American subscribers were
for 200 preferred shares, of the total par value of
P20,000, and 59,000 common shares, of the total
par value of P59,000; and that Baylon and the
American subscribers had already paid 25 per
cent of their respective subscriptions. Ostensibly
the owner of, or subscriber to, 60.005 per cent of
the subscribed capital stock of the corporation,
Baylon nevertheless did not have the controlling
vote because of the difference in voting power
between the preferred shares and the common
shares. Still, with the capital structure as it was,
the article of incorporation were accepted for
registration and a certificate of incorporation
was issued by the Securities and Exchange
Commission.
There is no question that Baylon actually
subscribed to 60.005 per cent of the subscribed
capital stock of the corporation. But it is
admitted that the money paid on his subscription
did not belong to him but to the Americans
subscribers to the corporate stock. In
explanation, the accused testified, without
contradiction, that in the process of organization
Baylon was made a trustee for the American
incorporators, and that the reason for making
Baylon such trustee was as follows:
Q. According to this article of
incorporation Arsenio Baylon
subscribed to 1,135 preferred shares
with a total value of P1,135. Do you
know how that came to be?
A. Yes.
The people who were desirous of forming the
corporation, whose names are listed on page 7 of
this certified copy came to my house, Messrs.
Shannahan, Onstott, O'Bannon, Caven, Perry and
Anastasakas one evening. There was
considerable difficulty to get them all together at
one time because they were pilots. They had
difficulty in deciding what their respective share
holdings would be. Onstott had invested a
certain amount of money in airplane surplus
property and they had obtained a considerable
amount of money on those planes and as I recall
they were desirous of getting a corporation
formed right away. And they wanted to have
their respective shares holdings resolved at a
latter date. They stated that they could get
together that they feel that they had no time to
settle their respective share holdings. We
discussed the matter and finally it was decided
that the best way to handle the things was not to
put the shares in the name of anyone of the
interested parties and to have someone act as
trustee for their respective shares holdings. So
we looked around for a trustee. And he said
"There are a lot of people whom I trust." He said,
"Is there someone around whom we could get
right away?" I said, "There is Arsenio. He was my
boy during the liberation and he cared for me
when i was sick and i said i consider him my
friend." I said. They all knew Arsenio. He is a very
kind man and that was what was done. That is
how it came about.
Defendant is accused under article 172
paragraph 1, in connection with article 171,
paragraph 4, of the Revised Penal Code, which
read:
ART. 171. Falsification by public officer,
employee, or notary or ecclesiastic
minister. — The penalty ofprision
mayor and a fine not to exceed 5,000
pesos shall be imposed upon any public
officer, employee, or notary who, taking
advantage of his official position, shall
falsify a document by committing any
of the following acts:
xxx xxx xxx
4. Making untruthful statements in a
narration of facts.
ART. 172. Falsification by private
individuals and use of falsified
documents. — The penalty of prision
correccional in its medium and
maximum period and a fine of not more
than 5,000 pesos shall be imposed
upon:
xxx xxx xxx
1. Any private individual who shall
commit any of the falsifications
enumerated in the next preceding
article in any public or official
document or letter of exchange or any
other kind of commercial document.
Commenting on the above provision, Justice
Albert, in his well-known work on the Revised
Penal Code ( new edition, pp. 407-408),
observes, on the authority of U.S. vs. Reyes, (1
Phil., 341), that the perversion of truth in the
narration of facts must be made with the
wrongful intent of injuring a third person; and
on the authority ofU.S. vs. Lopez (15 Phil., 515),
the same author further maintains that even if
such wrongful intent is proven, still the
untruthful statement will not constitute the
crime of falsification if there is no legal
obligation on the part of the narrator to disclose
the truth. Wrongful intent to injure a third
person and obligation on the part of the narrator
to disclose the truth are thus essential to a
conviction for a crime of falsification under the
above article of the Revised Penal Code.
Now, as we see it, the falsification imputed in the
accused in the present case consists in not
disclosing in the articles of incorporation that
Baylon was a mere trustee ( or dummy as the
prosecution chooses to call him) of his American
co-incorporators, thus giving the impression that
Baylon was the owner of the shares subscribed
to by him which, as above stated, amount to
60.005 per cent of the sub-scribed capital stock.
This, in the opinion of the trial court, is a
malicious perversion of the truth made with the
wrongful intent circumventing section 8, Article
XIV of the Constitution, which provides that " no
franchise, certificate, or any other form of
authorization for the operation of a public utility
shall be granted except to citizens of the
Philippines or to corporation or other entities
organized under the law of the Philippines,
sixty per centum of the capital of which is owned
by citizens of the Philippines . . . ." Plausible
though it may appear at first glance, this opinion
loses validity once it is noted that it is predicated
on the erroneous assumption that the
constitutional provision just quoted was meant
to prohibit the mere formation of a public utility
corporation without 60 per cent of its capital
being owned by the Filipinos, a mistaken belief
which has induced the lower court to that the
accused was under obligation to disclose the
whole truth about the nationality of the
subscribed capital stock of the corporation by
revealing that Baylon was a mere trustee or
dummy of his American co-incorporators, and
that in not making such disclosure defendant's
intention was to circumvent the Constitution to
the detriment of the public interests. Contrary to
the lower court's assumption, the Constitution
does not prohibit the mere formationof a public
utility corporation without the required
formation of Filipino capital. What it does
prohibit is the granting of a franchise or other
form of authorization for the operation of a
public utility to a corporation already in
existence but without the requisite proportion of
Filipino capital. This is obvious from the context,
for the constitutional provision in question
qualifies the terms " franchise", "certificate", or
"any other form of authorization" with the
phrase "for the operation of a public utility,"
thereby making it clear that the franchise meant
is not the "primary franchise" that invest a body
of men with corporate existence but the
"secondary franchise" or the privilege to operate
as a public utility after the corporation has
already come into being.
If the Constitution does not prohibit the mere
formation of a public utility corporation with the
alien capital, then how can the accused be
charged with having wrongfully intended to
circumvent that fundamental law by not
revealing in the articles of incorporation that
Baylon was a mere trustee of his American co-
incorporation and that for that reason the
subscribed capital stock of the corporation was
wholly American? For the mere formation of the
corporation such revelation was not essential,
and the Corporation Law does not require it.
Defendant was, therefore, under no obligation to
make it. In the absence of such obligation and of
the allege wrongful intent, defendant cannot be
legally convicted of the crime with which he is
charged.
It is urged, however, that the formation of the
corporation with 60 per cent of its subscribed
capital stock appearing in the name of Baylon
was an indispensable preparatory step to the
subversion of the constitutional prohibition and
the laws implementing the policy expressed
therein. This view is not correct. For a
corporation to be entitled to operate a public
utility it is not necessary that it be organized
with 60 per cent of its capital owned by Filipinos
from the start. A corporation formed with capital
that is entirely alien may subsequently change
the nationality of its capital through transfer of
shares to Filipino citizens. conversely, a
corporation originally formed with Filipino
capital may subsequently change the national
status of said capital through transfer of shares
to foreigners. What need is there then for a
corporation that intends to operate a public In view of the foregoing, the judgment appealed
utility to have, at the time of its formation, 60 per from is reversed and the defendant William H.
cent of its capital owned by Filipinos alone? That Quasha acquitted, with costs de oficio.
condition may anytime be attained thru the
necessary transfer of stocks. The moment for Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo,
determining whether a corporation is entitled to Bautista Angelo, and Labrador, JJ., concur.
operate as a public utility is when it applies for a
franchise, certificate, or any other form of
authorization for that purpose. And that can be
done after the corporation has already come into
being and not while it is still being formed. And
at that moment, the corporation must show that
it has complied not only with the requirement of
the Constitution as to the nationality of its
capital, but also with the requirements of the
Civil Aviation Law if it is a common carrier by air,
the Revised Administrative Code if it is a
common carrier by water, and the Public Service
Law if it is a common carrier by land or other
kind of public service.
Equally untenable is the suggestion that
defendant should at least be held guilty of an
"impossible crime" under article 59 of the
Revised Penal Code. It not being possible to
suppose that defendant had intended to commit
a crime for the simple reason that the alleged
constitutional prohibition which he is charged
for having tried to circumvent does not exist,
conviction under that article is out of the
question.
The foregoing consideration can not but lead to
the conclusion that the defendant can not be held
guilty of the crime charged. The majority of the
court, however, are also of the opinion that, even
supposing that the act imputed to the defendant
constituted falsification at the time it was
perpetrated, still with the approval of the Party
Amendment to the Constitution in March, 1947,
which placed Americans on the same footing as
Filipino citizens with respect to the right to
operate public utilities in the Philippines, thus
doing away with the prohibition in section 8,
Article XIV of the Constitution in so far as
American citizens are concerned, the said act has
ceased to be an offense within the meaning of the
law, so that defendant can no longer be held
criminally liable therefor.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2294 May 25, 1951
FILIPINAS COMPAÑIA DE
SEGUROS, petitioner,
vs.
CHRISTERN, HUENEFELD and CO.,
INC., respondent.
Ramirez and Ortigas for petitioner.
Ewald Huenefeld for respondent.
PARAS, C.J.:
On October 1, 1941, the respondent corporation,
Christern Huenefeld, & Co., Inc., after payment of
corresponding premium, obtained from the
petitioner ,Filipinas Cia. de Seguros, fire policy
No. 29333 in the sum of P1000,000, covering
merchandise contained in a building located at
No. 711 Roman Street, Binondo Manila. On
February 27, 1942, or during the Japanese
military occupation, the building and insured
merchandise were burned. In due time the
respondent submitted to the petitioner its claim
under the policy. The salvage goods were sold at
public auction and, after deducting their value,
the total loss suffered by the respondent was
fixed at P92,650. The petitioner refused to pay
the claim on the ground that the policy in favor
of the respondent had ceased to be in force on
the date the United States declared war against
Germany, the respondent Corporation (though
organized under and by virtue of the laws of the
Philippines) being controlled by the German
subjects and the petitioner being a company
under American jurisdiction when said policy
was issued on October 1, 1941. The petitioner,
however, in pursuance of the order of the
Director of Bureau of Financing, Philippine
Executive Commission, dated April 9, 1943, paid
to the respondent the sum of P92,650 on April
19, 1943.
The present action was filed on August 6, 1946,
in the Court of First Instance of Manila for the
purpose of recovering from the respondent the
sum of P92,650 above mentioned. The theory of
the petitioner is that the insured merchandise
were burned up after the policy issued in 1941 in
favor of the respondent corporation has ceased
to be effective because of the outbreak of the war
between the United States and Germany on
December 10, 1941, and that the payment made
by the petitioner to the respondent corporation
during the Japanese military occupation was
under pressure. After trial, the Court of First
Instance of Manila dismissed the action without
pronouncement as to costs. Upon appeal to the
Court of Appeals, the judgment of the Court of
First Instance of Manila was affirmed, with costs.
The case is now before us on appeal
by certiorari from the decision of the Court of
Appeals.
The Court of Appeals overruled the contention of
the petitioner that the respondent corporation
became an enemy when the United States
declared war against Germany, relying on
English and American cases which held that a
corporation is a citizen of the country or state by
and under the laws of which it was created or
organized. It rejected the theory that nationality
of private corporation is determine by the
character or citizenship of its controlling
stockholders.
There is no question that majority of the
stockholders of the respondent corporation were
German subjects. This being so, we have to rule
that said respondent became an enemy
corporation upon the outbreak of the war
between the United States and Germany. The
English and American cases relied upon by the
Court of Appeals have lost their force in view of
the latest decision of the Supreme Court of the
United States in Clark vs.Uebersee Finanz
Korporation, decided on December 8, 1947, 92
Law. Ed. Advance Opinions, No. 4, pp. 148-153, in
which the controls test has been adopted. In
"Enemy Corporation" by Martin Domke, a paper
presented to the Second International
Conference of the Legal Profession held at the
Hague (Netherlands) in August. 1948 the
following enlightening passages appear:
Since World War I, the determination of
enemy nationality of corporations has
been discussion in many countries,
belligerent and neutral. A corporation
was subject to enemy legislation when
it was controlled by enemies, namely
managed under the influence of
individuals or corporations, themselves
considered as enemies. It was the
English courts which first
the Daimler case applied this new
concept of "piercing the corporate veil,"
which was adopted by the peace of
Treaties of 1919 and the Mixed Arbitral
established after the First World War.
The United States of America did not
adopt the control test during the First
World War. Courts refused to
recognized the concept whereby
American-registered corporations
could be considered as enemies and
thus subject to domestic legislation and
administrative measures regarding
enemy property.
World War II revived the problem
again. It was known that German and
other enemy interests were cloaked by
domestic corporation structure. It was
not only by legal ownership of shares
that a material influence could be
exercised on the management of the
corporation but also by long term loans
and other factual situations. For that
reason, legislation on enemy property
enacted in various countries during
World War II adopted by statutory
provisions to the control test and
determined, to various degrees, the
incidents of control. Court decisions
were rendered on the basis of such
newly enacted statutory provisions in
determining enemy character of
domestic corporation.
The United States did not, in the
amendments of the Trading with the
Enemy Act during the last war, include
as did other legislations the
applications of the control test and
again, as in World War I, courts refused
to apply this concept whereby the
enemy character of an American or
neutral-registered corporation is
determined by the enemy nationality of
the controlling stockholders.
Measures of blocking foreign funds, the
so called freezing regulations, and
other administrative practice in the
treatment of foreign-owned property in
the United States allowed to large
degree the determination of enemy
interest in domestic corporations and
thus the application of the control test.
Court decisions sanctioned such
administrative practice enacted under
the First War Powers Act of 1941, and
more recently, on December 8, 1947,
the Supreme Court of the United States
definitely approved of the control
theory. In Clark vs. Uebersee Finanz
Korporation, A. G., dealing with a Swiss
corporation allegedly controlled by
German interest, the Court: "The
property of all foreign interest was
placed within the reach of the vesting
power (of the Alien Property
Custodian) not to appropriate friendly
or neutral assets but to reach enemy
interest which masqueraded under
those innocent fronts. . . . The power of
seizure and vesting was extended to all
property of any foreign country or
national so that no innocent appearing
device could become a Trojan horse."
It becomes unnecessary, therefore, to dwell at
length on the authorities cited in support of the
appealed decision. However, we may add that,
in Haw Pia vs. China Banking Corporation,* 45 Off
Gaz., (Supp. 9) 299, we already held that China
Banking Corporation came within the meaning of
the word "enemy" as used in the Trading with
the Enemy Acts of civilized countries not only
because it was incorporated under the laws of an
enemy country but because it was controlled by
enemies.
The Philippine Insurance Law (Act No. 2427, as
amended,) in section 8, provides that "anyone
except a public enemy may be insured." It stands
to reason that an insurance policy ceases to be
allowable as soon as an insured becomes a public
enemy.
Effect of war, generally. — All
intercourse between citizens of
belligerent powers which is
inconsistent with a state of war is
prohibited by the law of nations. Such
prohibition includes all negotiations,
commerce, or trading with the enemy;
all acts which will increase, or tend to
increase, its income or resources; all
acts of voluntary submission to it; or
receiving its protection; also all acts
concerning the transmission of money
or goods; and all contracts relating
thereto are thereby nullified. It further
prohibits insurance upon trade with or
by the enemy, upon the life or lives of
aliens engaged in service with the
enemy; this for the reason that the
subjects of one country cannot be
permitted to lend their assistance to
protect by insurance the commerce or
property of belligerent, alien subjects,
or to do anything detrimental too their
country's interest. The purpose of war
is to cripple the power and exhaust the
resources of the enemy, and it is
inconsistent that one country should
destroy its enemy's property and repay
in insurance the value of what has been
so destroyed, or that it should in such
manner increase the resources of the
enemy, or render it aid, and the
commencement of war determines, for
like reasons, all trading intercourse
with the enemy, which prior thereto
may have been lawful. All individuals
therefore, who compose the belligerent
powers, exist, as to each other, in a
state of utter exclusion, and are public
enemies. (6 Couch, Cyc. of Ins. Law, pp.
5352-5353.)
In the case of an ordinary fire policy,
which grants insurance only from year,
or for some other specified term it is
plain that when the parties become
alien enemies, the contractual tie is
broken and the contractual rights of the
parties, so far as not vested. lost. (Vance,
the Law on Insurance, Sec. 44, p. 112.)
The respondent having become an enemy
corporation on December 10, 1941, the
insurance policy issued in its favor on October 1,
1941, by the petitioner (a Philippine
corporation) had ceased to be valid and
enforcible, and since the insured goods were
burned after December 10, 1941, and during the
war, the respondent was not entitled to any
indemnity under said policy from the petitioner.
However, elementary rules of justice (in the
absence of specific provision in the Insurance
Law) require that the premium paid by the
respondent for the period covered by its policy
from December 11, 1941, should be returned by
the petitioner.
The Court of Appeals, in deciding the case, stated
that the main issue hinges on the question of
whether the policy in question became null and
void upon the declaration of war between the
United States and Germany on December 10,
1941, and its judgment in favor of the
respondent corporation was predicated on its
conclusion that the policy did not cease to be in
force. The Court of Appeals necessarily assumed
that, even if the payment by the petitioner to the
respondent was involuntary, its action is not
tenable in view of the ruling on the validity of the
policy. As a matter of fact, the Court of Appeals
held that "any intimidation resorted to by the
appellee was not unjust but the exercise of its
lawful right to claim for and received the
payment of the insurance policy," and that the
ruling of the Bureau of Financing to the effect
that "the appellee was entitled to payment from
the appellant was, well founded." Factually, there
can be no doubt that the Director of the Bureau
of Financing, in ordering the petitioner to pay the
claim of the respondent, merely obeyed the
instruction of the Japanese Military
Administration, as may be seen from the
following: "In view of the findings and conclusion
of this office contained in its decision on
Administrative Case dated February 9, 1943
copy of which was sent to your office and the
concurrence therein of the Financial Department
of the Japanese Military Administration,
and following the instruction of said
authority, you are hereby ordered to pay the
claim of Messrs. Christern, Huenefeld & Co., Inc.
The payment of said claim, however, should be
made by means of crossed check." (Emphasis
supplied.)
It results that the petitioner is entitled to recover
what paid to the respondent under the
circumstances on this case. However, the
petitioner will be entitled to recover only the
equivalent, in actual Philippines currency of
P92,650 paid on April 19, 1943, in accordance
with the rate fixed in the Ballantyne scale.
Wherefore, the appealed decision is hereby
reversed and the respondent corporation is
ordered to pay to the petitioner the sum of
P77,208.33, Philippine currency, less the amount
of the premium, in Philippine currency, that
should be returned by the petitioner for the
unexpired term of the policy in question,
beginning December 11, 1941. Without costs. So
ordered.
Feria, Pablo, Bengzon, Tuason, Montemayor, Jugo
and Bautista Angelo, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-8451 December 20, 1957
THE ROMAN CATHOLIC APOSTOLIC
ADMINISTRATOR OF DAVAO, INC., petitioner,
vs.
THE LAND REGISTRATION COMMISSION and
THE REGISTER OF DEEDS OF DAVAO
CITY, respondents.
Teodoro Padilla, for petitioner.
Office of the Solicitor General Ambrosio Padilla,
Assistant Solicitor General Jose G. Bautista and
Troadio T. Quianzon, Jr., for respondents.
FELIX, J.:
This is a petition for mandamus filed by the
Roman Catholic Apostolic Administrator of
Davao seeking the reversal of a resolution by the
Land Registration Commissioner in L.R.C.
Consulta No. 14. The facts of the case are as
follows:
On October 4, 1954, Mateo L. Rodis, a Filipino
citizen and resident of the City of Davao,
executed a deed of sale of a parcel of land located
in the same city covered by Transfer Certificate
No. 2263, in favor of the Roman Catholic
Apostolic Administrator of Davao Inc., s
corporation sole organized and existing in
accordance with Philippine Laws, with Msgr.
Clovis Thibault, a Canadian citizen, as actual
incumbent. When the deed of sale was presented
to Register of Deeds of Davao for registration,
the latter.
having in mind a previous resolution of
the Fourth Branch of the Court of First
Instance of Manila wherein the
Carmelite Nuns of Davao were made to
prepare an affidavit to the effect that 60
per cent of the members of their
corporation were Filipino citizens
when they sought to register in favor of
their congregation of deed of donation
of a parcel of land—
required said corporation sole to submit a
similar affidavit declaring that 60 per cent of the
members thereof were Filipino citizens.
The vendee in the letter dated June 28, 1954,
expressed willingness to submit an affidavit,
both not in the same tenor as that made the
Progress of the Carmelite Nuns because the two
cases were not similar, for whereas the
congregation of the Carmelite Nuns had five
incorporators, the corporation sole has only one;
that according to their articles of incorporation,
the organization of the Carmelite Nuns became
the owner of properties donated to it, whereas
the case at bar, the totality of the Catholic
population of Davao would become the owner of
the property bought to be registered.
As the Register of Deeds entertained some
doubts as to the registerability if the document,
the matter was referred to the Land Registration
Commissioner en consulta for resolution in
accordance with section 4 of Republic Act No.
1151. Proper hearing on the matter was
conducted by the Commissioner and after the
petitioner corporation had filed its
memorandum, a resolution was rendered on
September 21, 1954, holding that in view of the
provisions of Section 1 and 5 of Article XIII of the
Philippine Constitution, the vendee was not
qualified to acquire private lands in the
Philippines in the absence of proof that at least
60 per centum of the capital, property, or assets
of the Roman Catholic Apostolic Administrator of
Davao, Inc., was actually owned or controlled by
Filipino citizens, there being no question that the
present incumbent of the corporation sole was a
Canadian citizen. It was also the opinion of the
Land Registration Commissioner that section
159 of the corporation Law relied upon by the
vendee was rendered operative by the
aforementioned provisions of the Constitution
with respect to real estate, unless the precise
condition set therein — that at least 60 per cent
of its capital is owned by Filipino citizens — be
present, and, therefore, ordered the Registered
Deeds of Davao to deny registration of the deed
of sale in the absence of proof of compliance with
such condition.
After the motion to reconsider said resolution
was denied, an action for mandamus was
instituted with this Court by said corporation
sole, alleging that under the Corporation Law as
well as the settled jurisprudence on the matter,
the deed of sale executed by Mateo L. Rodis in
favor of petitioner is actually a deed of sale in
favor of the Catholic Church which is qualified to
acquire private agricultural lands for the
establishment and maintenance of places of
worship, and prayed that judgment be rendered
reserving and setting aside the resolution of the
Land Registration Commissioner in question. In
its resolution of November 15, 1954, this Court
gave due course to this petition providing that
the procedure prescribed for appeals from the
Public Service Commission of the Securities and
Exchange Commissions (Rule 43), be followed.
Section 5 of Article XIII of the Philippine
Constitution reads as follows:
SEC. 5. Save in cases of hereditary
succession, no private agricultural
land shall be transferred or assigned
except to individuals, corporations, or
associations qualified to acquire or hold
lands of the public domain in the
Philippines.
Section 1 of the same Article also provides the
following:
SECTION 1. All agricultural, timber, and mineral
lands of the public domain, water, minerals, coal,
petroleum, and other mineral oils, all forces of
potential energy, and other natural resources of
the Philippines belong to the State, and their
disposition, exploitation, development, or
utilization shall be limited to cititzens of the
Philippines, or to corporations or associations at
least sixty per centum of the capital of which is
owned by such citizens, SUBJECT TO ANY
EXISTING RIGHT, grant, lease, or concession AT
THE TIME OF THE INAUGURATION OF THE
GOVERNMENT ESTABLISHED UNDER
CONSTITUTION. Natural resources, with the
exception of public agricultural land, shall not be
alienated, and no license, concession, or leases
for the exploitation, development, or utilization
of any of the natural resources shall be granted
for a period exceeding twenty-five years,
renewable for another twenty-five years, except
as to water rights for irrigation, water supply,
fisheries, or industrial uses other than the
development of water power, in which cases
other than the development and limit of the
grant.
In virtue of the foregoing mandates of the
Constitution, who are considered "qualified" to
acquire and hold agricultural lands in the
Philippines? What is the effect of these
constitutional prohibition of the right of a
religious corporation recognized by our
Corporation Law and registered as a corporation
sole, to possess, acquire and register real estates
in its name when the Head, Manager,
Administrator or actual incumbent is an alien?
Petitioner consistently maintained that a
corporation sole, irrespective of the citizenship
of its incumbent, is not prohibited or disqualified
to acquire and hold real properties. The
Corporation Law and the Canon Law are explicit
in their provisions that a corporation sole or
"ordinary" is not the owner of the of the
properties that he may acquire but merely the
administrator thereof. The Canon Law also
specified that church temporalities are owned by
the Catholic Church as a "moral person" or by the
diocess as minor "moral persons" with the
ordinary or bishop as administrator.
And elaborating on the composition of the
Catholic Church in the Philippines, petitioner
explained that as a religious society or
organization, it is made up of 2 elements or
divisions — the clergy or religious members and
the faithful or lay members. The 1948 figures of
the Bureau of Census showed that there were
277,551 Catholics in Davao and aliens residing
therein numbered 3,465. Ever granting that all
these foreigners are Catholics, petitioner
contends that Filipino citizens form more than
80 per cent of the entire Catholics population of
that area. As to its clergy and religious
composition, counsel for petitioner presented
the Catholic Directory of the Philippines for 1954
(Annex A) which revealed that as of that year,
Filipino clergy and women novices comprise
already 60.5 per cent of the group. It was,
therefore, allowed that the constitutional
requirement was fully met and satisfied.
Respondents, on the other hand, averred that
although it might be true that petitioner is not
the owner of the land purchased, yet he has
control over the same, with full power to
administer, take possession of, alienate, transfer,
encumber, sell or dispose of any or all lands and
their improvements registered in the name of
the corporation sole and can collect, receive,
demand or sue for all money or values of any
kind that may be kind that may become due or
owing to said corporation, and vested with
authority to enter into agreements with any
persons, concerns or entities in connection with
said real properties, or in other words, actually
exercising all rights of ownership over the
properties. It was their stand that the theory that
properties registered in the name of the
corporation sole are held in true for the benefit
of the Catholic population of a place, as of Davao
in the case at bar should be sustained because a
conglomeration of persons cannot just be
pointed out as the cestui que trust or recipient of
the benefits from the property allegedly
administered in their behalf. Neither can it be
said that the mass of people referred to as such
beneficiary exercise ant right of ownership over
the same. This set-up, respondents argued, falls
short of a trust. The respondents instead tried to
prove that in reality, the beneficiary of
ecclesiastical properties are not members or
faithful of the church but someone else, by
quoting a portion a portion of the ought of
fidelity subscribed by a bishop upon his
elevation to the episcopacy wherein he promises
to render to the Pontificial Father or his
successors an account of his pastoral office and
of all things appertaining to the state of this
church.
Respondents likewise advanced the opinion that
in construing the constitutional provision calling
for 60 per cent of Filipino citizenship, the
criterion of the properties or assets thereof.
In solving the problem thus submitted to our
consideration, We can say the following: A
corporation sole is a special form of corporation
usually associated with the clergy. Conceived and
introduced into the common law by sheer
necessity, this legal creation which was referred
to as "that unhappy freak of English law" was
designed to facilitate the exercise of the
functions of ownership carried on by the clerics
for and on behalf of the church which was
regarded as the property owner (See I Couvier's
Law Dictionary, p. 682-683).
A corporation sole consists of one person only,
and his successors (who will always be one at a
time), in some particular station, who are
incorporated by law in order to give them some
legal capacities and advantages, particularly that
of perpetuity, which in their natural persons they
could not have had. In this sense, the king is a
sole corporation; so is a bishop, or dens, distinct
from their several chapters (Reid vs. Barry, 93
Fla. 849, 112 So. 846).
The provisions of our Corporation law on
religious corporations are illuminating and
sustain the stand of petitioner. Section 154
thereof provides:
SEC. 154. — For the administration of
the temporalities of any religious
denomination, society or church and
the management of the estates and the
properties thereof, it shall be lawful for
the bishop, chief priest, or presiding
either of any such religious
denomination, society or church to
become a corporation sole, unless
inconsistent wit the rules, regulations
or discipline of his religious
denomination, society or church or
forbidden by competent authority
thereof.
See also the pertinent provisions of the
succeeding sections of the same Corporation Law
copied hereunder:
SEC. 155. In order to become a
corporation sole the bishop, chief
priest, or presiding elder of any
religious denomination, society or
church must file with the Securities and
Exchange Commissioner articles of
incorporation setting forth the
following facts:
xxx xxx xxx.
(3) That as such bishop, chief priest, or
presiding elder he is charged with the
administration of the temporalities and
the management of the estates and
properties of his religious
denomination, society, or church within
its territorial jurisdiction, describing it;
xxx xxx xxx.
(As amended by Commonwealth Act
No. 287).
SEC. 157. From and after the filing with
the Securities and Exchange
Commissioner of the said articles of
incorporation, which verified by
affidavit or affirmation as aforesaid and
accompanied by the copy of the
commission, certificate of election, or
letters of appointment of the bishop,
chief priest, or presiding elder, duly
certified as prescribed in the section
immediately preceding such the bishop,
chief priest, or presiding elder, as the
case may be, shall become a
corporation sole and all temporalities,
estates, and properties the religious
denomination, society, or church
therefore administered or managed by
him as such bishop, chief priest, or
presiding elder, shall be held in trust by
him as a corporation sole, for the use,
purpose, behalf, and sole benefit of his
religious denomination, society, or
church, including hospitals, schools,
colleges, orphan, asylums, parsonages,
and cemeteries thereof. For the filing of
such articles of incorporation, the
Securities and Exchange Commissioner
shall collect twenty-five pesos. (As
amended by Commonwealth Act. No.
287); and.
SEC. 163. The right to administer all
temporalities and all property held or
owned by a religious order or society,
or by the diocese, synod, or district
organization of any religious
denomination or church shall, on its
incorporation, pass to the corporation
and shall be held in trust for the use,
purpose behalf, and benefit of the
religious society, or order so
incorporated or of the church of which
the diocese, or district organization is
an organized and constituent part.
The Cannon Law contains similar provisions
regarding the duties of the corporation sole or
ordinary as administrator of the church
properties, as follows:
Al Ordinario local pertenence vigilar
diligentemente sobre
la administracion de todos los bienes
eclesiasticos que se hallan en su
territorio y no estuvieren sustraidos de
su jurisdiccion, salvs las prescriciones
legitimas que le concedan mas
aamplios derechos.
Teniendo en cuenta los derechos y las
legitimas costumbres y circunstancias,
procuraran los Ordinarios regular todo
lo concerniente a la administracion de
los bienes eclesciasticos, dando las
oportunas instucciones particularles
dentro del narco del derecho comun.
(Title XXVIII, Codigo de Derecho
Canonico, Lib. III, Canon 1519).1
That leaves no room for doubt that the bishops
or archbishops, as the case may be, as
corporation's sole are merely administrators of
the church properties that come to their
possession, in which they hold in trust for the
church. It can also be said that while it is true
that church properties could be administered by
a natural persons, problems regarding
succession to said properties can not be avoided
to rise upon his death. Through this legal fiction,
however, church properties acquired by the
incumbent of a corporation sole pass, by
operation of law, upon his death not his personal
heirs but to his successor in office. It could be
seen, therefore, that a corporation sole is created
not only to administer the temporalities of the
church or religious society where he belongs but
also to hold and transmit the same to his
successor in said office. If the ownership or title
to the properties do not pass to the
administrators, who are the owners of church
properties?.
Bouscaren and Elis, S.J., authorities on cannon
law, on their treatise comment:
In matters regarding property
belonging to the Universal Church and
to the Apostolic See, the Supreme
Pontiff exercises his office of supreme
administrator through the Roman
Curia; in matters regarding other
church property, through the
administrators of the individual moral
persons in the Church according to that
norms, laid down in the Code of Cannon
Law. This does not mean, however, that
the Roman Pontiff is the owner of all the
church property; but merely that he is
the supreme guardian (Bouscaren and
Ellis, Cannon Law, A Text and
Commentary, p. 764).
and this Court, citing Campes y Pulido,
Legislacion y Jurisprudencia Canonica, ruled in
the case of Trinidad vs. Roman Catholic
Archbishop of Manila, 63 Phil. 881, that:
The second question to be decided is in
whom the ownership of the properties
constituting the endowment of the
ecclesiastical or collative chaplaincies is
vested.
Canonists entertain different opinions
as to the persons in whom the
ownership of the ecclesiastical
properties is vested, with respect to
which we shall, for our purpose,
confine ourselves to stating with
Donoso that, while many doctors cited
by Fagnano believe that it resides in the
Roman Pontiff as Head of the Universal
Church, it is more probable that
ownership, strictly speaking, does not
reside in the latter, and, consequently,
ecclesiastical properties are owned by
the churches, institutions and
canonically established private
corporations to which said properties
have been donated.
Considering that nowhere can We find any
provision conferring ownership of church
properties on the Pope although he appears to
be the supreme administrator or guardian of his
flock, nor on the corporation sole or heads of
dioceses as they are admittedly
mere administrators of said properties,
ownership of these temporalities logically fall
and develop upon the church, diocese or
congregation acquiring the same. Although this
question of ownership of ecclesiastical
properties has off and on been mentioned in
several decisions of the Court yet in no instance
was the subject of citizenship of this religious
society been passed upon.
We are not unaware of the opinion expressed by
the late Justice Perfecto in his dissent in the case
of Agustines vs. Court of First Instance of
Bulacan, 80 Phil. 565, to the effect that "the
Roman Catholic Archbishop of Manila is only a
branch of a universal church by the Pope, with
permanent residence in Rome, Italy". There is no
question that the Roman Catholic Church
existing in the Philippines is a tributary and part
of the international religious organization, for
the word "Roman" clearly expresses its unity
with and recognizes the authority of the Pope in
Rome. However, lest We become hasty in
drawing conclusions, We have to analyze and
take note of the nature of the government
established in the Vatican City, of which it was
said:
GOVERNMENT. In the Roman Catholic
Church supreme authority and
jurisdiction over clergy and laity alike
as held by the pope who (since the
Middle Ages) is elected by the cardinals
assembled in conclave, and holds office
until his death or legitimate abdication.
. . While the pope is obviously
independent of the laws made, and the
officials appointed, by himself or his
predecessors, he usually exercises his
administrative authority according to
the code of canon law and through the
congregations, tribunals and offices of
the Curia Romana. In their respective
territories (called generally dioceses)
and over their respective subjects, the
patriarchs, metropolitans or
archbishops and bishops exercise a
jurisdiction which is called ordinary (as
attached by law to an office given to a
person. . . (Collier's Encyclopedia, Vol.
17, p. 93).
While it is true and We have to concede that in
the profession of their faith, the Roman Pontiff is
the supreme head; that in the religious matters,
in the exercise of their belief, the Catholic
congregation of the faithful throughout the
world seeks the guidance and direction of their
Spiritual Father in the Vatican, yet it cannot be
said that there is a merger of personalities
resultant therein. Neither can it be said that the
political and civil rights of the faithful, inherent
or acquired under the laws of their country, are
affected by that relationship with the Pope. The
fact that the Roman Catholic Church in almost
every country springs from that society that saw
its beginning in Europe and the fact that the
clergy of this faith derive their authorities and
receive orders from the Holy See do not give or
bestow the citizenship of the Pope upon these
branches. Citizenship is a political right which
cannot be acquired by a sort of "radiation". We
have to realize that although there is a fraternity
among all the catholic countries and the dioceses
therein all over the globe, the universality that
the word "catholic" implies, merely characterize
their faith, a uniformity in the practice and the
interpretation of their dogma and in the exercise
of their belief, but certainly they are separate
and independent from one another in
jurisdiction, governed by different laws under
which they are incorporated, and entirely
independent on the others in the management
and ownership of their temporalities. To allow
theory that the Roman Catholic Churches all over
the world follow the citizenship of their Supreme
Head, the Pontifical Father, would lead to the
absurdity of finding the citizens of a country who
embrace the Catholic faith and become members
of that religious society, likewise citizens of the
Vatican or of Italy. And this is more so if We
consider that the Pope himself may be an Italian
or national of any other country of the world.
The same thing be said with regard to the
nationality or citizenship of the corporation sole
created under the laws of the Philippines, which
is not altered by the change of citizenship of the
incumbent bishops or head of said corporation
sole.
We must therefore, declare that although a
branch of the Universal Roman Catholic
Apostolic Church, every Roman Catholic Church
in different countries, if it exercises its mission
and is lawfully incorporated in accordance with
the laws of the country where it is located, is
considered an entity or person with all the rights
and privileges granted to such artificial being
under the laws of that country, separate and
distinct from the personality of the Roman
Pontiff or the Holy See, without prejudice to its
religious relations with the latter which are
governed by the Canon Law or their rules and
regulations.
We certainly are conscious of the fact that
whatever conclusion We may draw on this
matter will have a far reaching influence, nor can
We overlook the pages of history that arouse
indignation and criticisms against church
landholdings. This nurtured feeling that
snowbailed into a strong nationalistic sentiment
manifested itself when the provisions on natural
to be embodied in the Philippine Constitution
were framed, but all that has been said on this
regard referred more particularly to
landholdings of religious corporations known as
"Friar Estates" which have already bee acquired
by our government, and not to properties held
by corporations sole which, We repeat, are
properties held in trust for the benefit of the
faithful residing within its territorial jurisdiction.
Though that same feeling probably precipitated
and influenced to a large extent the doctrine laid
down in the celebrated Krivenco decision, We
have to take this matter in the light of legal
provisions and jurisprudence actually obtaining,
irrespective of sentiments.
The question now left for our determination is
whether the Universal Roman Catholic Apostolic
Church in the Philippines, or better still, the
corporation sole named the Roman Catholic
Apostolic Administrator of Davao, Inc., is
qualified to acquire private agricultural lands in
the Philippines pursuant to the provisions of
Article XIII of the Constitution.
We see from sections 1 and 5 of said Article
quoted before, that only persons or corporations
qualified to acquire hold lands of the public
domain in the Philippines may acquire or be
assigned and hold private agricultural lands.
Consequently, the decisive factor in the present
controversy hinges on the proposition or
whether or not the petitioner in this case can
acquire agricultural lands of the public domain.
From the data secured from the Securities and
Exchange Commission, We find that the Roman
Catholic Bishop of Zamboanga was incorporated
(as a corporation sole) in September, 1912,
principally to administer its temporalities and
manage its properties. Probably due to the
ravages of the last war, its articles of
incorporation were reconstructed in the
Securities and Exchange Commission on April 8,
1948. At first, this corporation sole administered
all the temporalities of the church existing or
located in the island of Mindanao. Later on,
however, new dioceses were formed and new
corporations sole were created to correspond
with the territorial jurisdiction of the new
dioceses, one of them being petitioner herein, the
Roman Catholic Apostolic Administrator of
Davao, Inc., which was registered with the
Securities and Exchange Commission on
September 12, 1950, and succeeded in the
administrative for all the "temporalities" of the
Roman Catholic Church existing in Davao.
According to our Corporation Law, Public Act No.
1549, approved April 1, 1906, a corporation sole.
is organized and composed of a single
individual, the head of any religious
society or church, for the
ADMINISTRATION of the temporalities
of such society or church. By
"temporalities" is meant estate and
properties not used exclusively for
religious worship. The successor in
office of such religious head or chief
priest incorporated as a corporation
sole shall become the corporation sole
on ascension to office, and shall be
permitted to transact business as such
on filing with the Securities and
Exchange Commission a copy of his
commission, certificate of election or
letter of appointment duly certified by
any notary public or clerk of court of
record (Guevara's The Philippine
Corporation Law, p. 223).
The Corporation Law also contains the following
provisions:
SECTION 159. Any corporation sole
may purchase and hold real estate and
personal; property for its church,
charitable, benevolent, or educational
purposes, and may receive bequests or
gifts of such purposes. Such
corporation may mortgage or sell real
property held by it upon obtaining an
order for that purpose from the Court
of First Instance of the province in
which the property is situated; but
before making the order proof must be
made to the satisfaction of the Court
that notice of the application for leave
to mortgage or sell has been given by
publication or otherwise in such
manner and for such time as said Court
or the Judge thereof may have directed,
and that it is to the interest of the
corporation that leave to mortgage or
sell must be made by petition, duly
verified by the bishop, chief priest, or
presiding elder acting as corporation
sole, and may be opposed by any
member of the religious denomination,
society or church represented by the
corporation sole: Provided, however,
That in cases where the rules,
regulations, and discipline of the
religious denomination, society or
church concerned represented by such
corporation sole regulate the methods
of acquiring, holding, selling and
mortgaging real estate and personal
property, such rules, regulations, and
discipline shall control and the
intervention of the Courts shall not be
necessary.
It can, therefore, be noticed that the power of a
corporation sole to purchase real property, like
the power exercised in the case at bar, it is not
restricted although the power to sell or
mortgage sometimes is, depending upon the
rules, regulations, and discipline of the church
concerned represented by said corporation sole.
If corporations sole can purchase and sell real
estate for its church, charitable, benevolent, or
educational purposes, can they register said real
properties? As provided by law, lands held in
trust for specific purposes me be subject of
registration (section 69, Act 496), and the
capacity of a corporation sole, like petitioner
herein, to register lands belonging to it is
acknowledged, and title thereto may be issued in
its name (Bishop of Nueva Segovia vs. Insular
Government, 26 Phil. 300-1913). Indeed it is
absurd that while the corporations sole that
might be in need of acquiring lands for the
erection of temples where the faithful can pray,
or schools and cemeteries which they are
expressly authorized by law to acquire in
connection with the propagation of the Roman
Catholic Apostolic faith or in furtherance of their
freedom of religion they could not register said
properties in their name. As professor Javier J.
Nepomuceno very well says "Man in his search
for the immortal and imponderable, has, even
before the dawn of recorded history, erected
temples to the Unknown God, and there is no
doubt that he will continue to do so for all time
to come, as long as he continues 'imploring the
aid of Divine Providence'" (Nepomuceno's
Corporation Sole, VI Ateneo Law Journal, No. 1, p.
41, September, 1956). Under the circumstances
of this case, We might safely state that even
before the establishment of the Philippine
Commonwealth and of the Republic of the
Philippines every corporation sole then
organized and registered had by express
provision of law the necessary power and
qualification to purchase in its name private
lands located in the territory in which it
exercised its functions or ministry and for which
it was created, independently of the nationality
of its incumbent unique and single member and
head, the bishop of the dioceses. It can be also
maintained without fear of being gainsaid that
the Roman Catholic Apostolic Church in the
Philippines has no nationality and that the
framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
corporations sole when they provided that 60
per centum of the capital thereof be owned by
Filipino citizens.
There could be no controversy as to the fact that
a duly registered corporation sole is an artificial
being having the right of succession and the
power, attributes, and properties expressly
authorized by law or incident to its existence
(section 1, Corporation Law). In outlining the
general powers of a corporation. Public Act. No.
1459 provides among others:
SEC. 13. Every corporation has the
power:
(5) To purchase, hold, convey, sell,
lease, lot, mortgage, encumber, and
otherwise deal with such real and
 personal property as the purpose for
which the corporation was formed may
permit, and the transaction of the
lawful business of the corporation may
reasonably and necessarily require,
unless otherwise prescribed in this Act:
...
In implementation of the same and specially
made applicable to a form of corporation
recognized by the same law, Section 159
aforequoted expressly allowed the corporation
sole to purchase and hold real as well as
personal properties necessary for the promotion
of the objects for which said corporation sole is
created. Respondent Land Registration
Commissioner, however, maintained that since
the Philippine Constitution is a later enactment
than public Act No. 1459, the provisions of
Section 159 in amplification of Section 13
thereof, as regard real properties, should be
considered repealed by the former.
There is a reason to believe that when the
specific provision of the Constitution invoked by
respondent Commissioner was under
consideration, the framers of the same did not
have in mind or overlooked this particular form
of corporation. It is undeniable that the
naturalization and conservation of our national
resources was one of the dominating objectives
of the Convention and in drafting the present
Article XII of the Constitution, the delegates were
goaded by the desire (1) to insure their
conservation for Filipino posterity; (2) to serve
as an instrument of national defense, helping
prevent the extension into the country of foreign
control through peaceful economic penetration;
and (3) to prevent making the Philippines a
source of international conflicts with the
consequent danger to its internal security and
independence (See The Framing of the
Philippine Constitution by Professor Jose M.
Aruego, a Delegate to the Constitutional
Convention, Vol. II. P. 592-604). In the same book
Delegate Aruego, explaining the reason behind
the first consideration, wrote:
At the time of the framing of Philippine
Constitution, Filipino capital had been
to be rather shy. Filipinos hesitated s a
general rule to invest a considerable
sum of their capital for the
development, exploitation and
utilization of the natural resources of
the country. They had not as yet been
so used to corporate as the peoples of
the west. This general apathy, the
delegates knew, would mean the
retardation of the development of the
natural resources, unless foreign
capital would be encouraged to come
and help in that development. They
knew that the naturalization of the
natural resources would certainly not
encourage theINVESTMENT OF
FOREIGN CAPITAL into them. But there
was a general feeling in the Convention
that it was better to have such a
development retarded or even
postpone together until such time
when the Filipinos would be ready and
willing to undertake it rather than
permit the natural resources to be
placed under the ownership or control
of foreigners in order that they might
be immediately be developed, with the
Filipinos of the future serving not as
owners but utmost as tenants or
workers under foreign masters. By all
means, the delegates believed, the
natural resources should be conserved
for Filipino posterity.
It could be distilled from the foregoing that the
farmers of the Constitution intended said
provisions as barrier for foreigners or
corporations financed by such foreigners to
acquire, exploit and develop our natural
resources, saving these undeveloped wealth for
our people to clear and enrich when they are
already prepared and capable of doing so. But
that is not the case of corporations sole in the
Philippines, for, We repeat, they are mere
administrators of the "temporalities" or
properties titled in their name and for the
benefit of the members of their respective
religion composed of an overwhelming majority
of Filipinos. No mention nor allusion whatsoever
is made in the Constitution as to the prohibition
against or the liability of the Roman Catholic
Church in the Philippines to acquire and hold
agricultural lands. Although there were some
discussions on landholdings, they were mostly
confined in the inclusion of the provision
allowing the Government to break big landed
estates to put an end to absentee landlordism.
But let us suppose, for the sake of argument, that
the above referred to inhibitory clause of Section
1 of Article XIII of the constitution does have
bearing on the petitioner's case; even so the
clause requiring that at least 60 per centum of
the capital of the corporation be owned by
Filipinos is subordinated to the petitioner's
aforesaid right already existing at the time of the
inauguration of the Commonwealth and the
Republic of the Philippines. In the language of
Mr. Justice Jose P. Laurel (a delegate to the
Constitutional Convention), in his concurring
opinion of the case of Gold Creek mining
Corporation, petitioner vs. Eulogio Rodriguez,
Secretary of Agriculture and Commerce, and
Quirico Abadilla, Director of the Bureau of Mines,
respondent, 66 Phil. 259:
The saving clause in the section
involved of the Constitution was
originally embodied in the report
submitted by the Committee on
Naturalization and Preservation of
Land and Other Natural Resources to
the Constitutional Convention on
September 17, 1954. It was later
inserted in the first draft of the
Constitution as section 13 of Article XIII
thereof, and finally incorporated as we
find it now. Slight have been the
changes undergone by the proviso from
the time when it comes out of the
committee until it was finally adopted.
When first submitted and as inserted to
the first draft of the Constitution it
reads: 'subject to any right, grant, lease,
or concession existing in respect
thereto on the date of the adoption of
the Constitution'. As finally adopted,
the proviso reads: 'subject to any
existing right, grant, lease, or
concession at the time of the
inauguration of the Government
established under this Constitution'.
This recognition is not mere
graciousness but springs form the just
character of the government
established. The framers of the
Constitution were not obscured by the
rhetoric of democracy or swayed to
hostility by an intense spirit of
nationalism. They well knew that
conservation of our natural resources
did not mean destruction or
annihilation of acquired property
rights. Withal, they erected a
government neither episodic nor
stationary but well-nigh conservative
in the protection of property rights.
This notwithstanding nationalistic and
socialistic traits discoverable upon
even a sudden dip into a variety of the
provisions embodied in the instrument.
The writer of this decision wishes to state at this
juncture that during the deliberation of this case
he submitted to the consideration of the Court
the question that may be termed the "vested
right saving clause" contained in Section 1,
Article XII of the Constitution, but some of the
members of this Court either did not agree with
the theory of the writer, or were not ready to
take a definite stand on the particular point I am
now to discuss deferring our ruling on such
debatable question for a better occasion,
inasmuch as the determination thereof is not
absolutely necessary for the solution of the
problem involved in this case. In his desire to
face the issues squarely, the writer will
endeavor, at least as a disgression, to explain and
develop his theory, not as a lucubration of the
Court, but of his own, for he deems it better and
convenient to go over the cycle of reasons that
are linked to one another and that step by step
lead Us to conclude as We do in the dispositive
part of this decision.
It will be noticed that Section 1 of Article XIII of
the Constitution provides, among other things,
that "all agricultural lands of the public domain
and their disposition shall be limited to citizens
of the Philippines or tocorporations at least 60
per centum of the capital of which is owned by
such citizens, SUBJECT TO ANY EXISTING RIGHT
AT THE TIME OF THE INAUGURATION OF THE
GOVERNMENT ESTABLISHED UNDER THIS
CONSTITUTION."
As recounted by Mr. Justice Laurel in the
aforementioned case of Gold Creek Mining
Corporation vs. Rodriguez et al., 66 Phil. 259,
"this recognition (in the clause already quoted),
is not mere graciousness but springs from the just
character of the government established. The
farmers of the Constitution were not obscured by
the rhetoric of democracy or swayed to hostility by
an intense spirit of nationalism. They well knew
that conservation of our natural resources did not
mean destruction or annihilation of ACQUIRED
PROPERTY RIGHTS".
But respondents' counsel may argue that the
preexisting right of acquisition of public or
private lands by a corporation which does not
fulfill this 60 per cent requisite, refers to
purchases of the Constitution and not to later
transactions. This argument would imply that
even assuming that petitioner had at the time of
the enactment of the Constitution the right to
purchase real property or right could not be
exercised after the effectivity of our Constitution,
because said power or right of corporations sole,
like the herein petitioner, conferred in virtue of
the aforequoted provisions of the Corporation
Law, could no longer be exercised in view of the
requisite therein prescribed that at least 60 per
centum of the capital of the corporation had to
be Filipino. It has been shown before that: (1)
the corporation sole, unlike the ordinary
corporations which are formed by no less than 5
incorporators, is composed of only one persons,
usually the head or bishop of the diocese, a unit
which is not subject to expansion for the purpose
of determining any percentage whatsoever; (2)
the corporation sole is only
the administrator and not the owner of the
temporalities located in the territory comprised
by said corporation sole; (3) such temporalities
are administered for and on behalf of the faithful
residing in the diocese or territory of the
corporation sole; and (4) the latter, as such, has
no nationality and the citizenship of the
incumbent Ordinary has nothing to do with the
operation, management or administration of the
corporation sole, nor effects the citizenship of
the faithful connected with their respective
dioceses or corporation sole.
In view of these peculiarities of the corporation
sole, it would seem obvious that when the
specific provision of the Constitution invoked by
respondent Commissioner (section 1, Art. XIII),
was under consideration, the framers of the
same did not have in mind or overlooked this
particular form of corporation. If this were so, as
the facts and circumstances already indicated
tend to prove it to be so, then the inescapable
conclusion would be that this requirement of at
least 60 per cent of Filipino capital was never
intended to apply to corporations sole, and the
existence or not a vested right becomes
unquestionably immaterial.
But let us assumed that the questioned proviso is
material. yet We might say that a reading of said
Section 1 will show that it does not refer to any
actual acquisition of land up to the right,
qualification or power to acquireand hold private
real property. The population of the Philippines,
Catholic to a high percentage, is ever increasing.
In the practice of religion of their faithful the
corporation sole may be in need of more temples
where to pray, more schools where the children
of the congregation could be taught in the
principles of their religion, more hospitals where
their sick could be treated, more hallow or
consecrated grounds or cemeteries where
Catholics could be buried, many more than those
actually existing at the time of the enactment of
our Constitution. This being the case, could it be
logically maintained that because the
corporation sole which, by express provision of
law, has the power to hold and acquire real
estate and personal property of its churches,
charitable benevolent, or educational purposes
(section 159, Corporation Law) it has to stop its
growth and restrain its necessities just because
the corporation sole is a non-stock corporation
composed of only one person who in his unity
does not admit of any percentage, especially
when that person is not the owner but merely an
administrator of the temporalities of the
corporation sole? The writer leaves the answer
to whoever may read and consider this portion
of the decision.
Anyway, as stated before, this question is not a
decisive factor in disposing the case, for even if
We were to disregard such saving clause of the
Constitution, which reads: subject to any existing
right, grant, etc., at the same time of the
inauguration of the Government established under
this Constitution, yet We would have, under the
evidence on record, sufficient grounds to uphold
petitioner's contention on this matter.
In this case of the Register of Deeds of Rizal vs.
Ung Sui Si Temple, 2 G.R. No. L-6776,
promulgated May 21, 1955, wherein this
question was considered from a different angle,
this Court through Mr. Justice J.B.L. Reyes, said:
The fact that the appellant religious
organization has no capital stock does
not suffice to escape the Constitutional
inhibition, since it is admitted that its
members are of foreign nationality. The
purpose of the sixty per centum
requirement is obviously to ensure that
corporation or associations allowed to
acquire agricultural land or to exploit
natural resources shall be controlled by
Filipinos; and the spirit of the
Constitution demands that in the
absence of capital stock, the controlling
membership should be composed of
Filipino citizens.
In that case respondent-appellant Ung Siu Si
Temple was not a corporation sole but a
corporation aggregate, i.e., an unregistered
organization operating through 3 trustees, all of
Chinese nationality, and that is why this Court
laid down the doctrine just quoted. With regard
to petitioner, which likewise is a non-stock
corporation, the case is different, because it is a
registered corporation sole, evidently of no
nationality and registered mainly to administer
the temporalities and manage the properties
belonging to the faithful of said church residing
in Davao. But even if we were to go over the
record to inquire into the composing
membership to determine whether the
citizenship requirement is satisfied or not, we
would find undeniable proof that the members of
the Roman Catholic Apostolic faith within the
territory of Davao are predominantly Filipino
citizens. As indicated before, petitioner has
presented evidence to establish that the clergy
and lay members of this religion fully covers the
percentage of Filipino citizens required by the
Constitution. These facts are not controverted by
respondents and our conclusion in this point is
sensibly obvious.
Dissenting Opinion—Discussed. — After having
developed our theory in the case and arrived at
the findings and conclusions already expressed
in this decision. We now deem it proper to
analyze and delve into the basic foundation on
which the dissenting opinion stands up. Being
aware of the transcendental and far-reaching
effects that Our ruling on the matter might have,
this case was thoroughly considered from all
points of view, the Court sparing no effort to
solve the delicate problems involved herein.
At the deliberations had to attain this end, two
ways were open to a prompt dispatch of the
case: (1) the reversal of the doctrine We laid
down in the celebrated Krivenko case by
excluding urban lots and properties from the
group of the term "private agricultural lands" use
in this section 5, Article XIII of the Constitution;
and (2) by driving Our reasons to a point that
might indirectly cause the appointment of
Filipino bishops or Ordinary to head the
corporations sole created to administer the
temporalities of the Roman Catholic Church in
the Philippines. With regard to the first way, a
great majority of the members of this Court were
not yet prepared nor agreeable to follow that
course, for reasons that are obvious. As to the
second way, it seems to be misleading because
the nationality of the head of a diocese
constituted as a corporation sole has no material
bearing on the functions of the latter, which are
limited to the administration of the temporalities
of the Roman Catholic Apostolic Church in the
Philippines.
Upon going over the grounds on which the
dissenting opinion is based, it may be noticed
that its author lingered on the outskirts of the
issues, thus throwing the main points in
controversy out of focus. Of course We fully
agree, as stated by Professor Aruego, that the
framers of our Constitution had at heart to
insure the conservation of the natural resources
of Our motherland of Filipino posterity; to serve
them as an instrument of national defense,
helping prevent the extension into the country
of foreign control through peaceful economic
penetration; and to prevent making the
Philippines a source of international conflicts
with the consequent danger to its internal
security and independence. But all these
precautions adopted by the Delegates to Our
Constitutional Assembly could have not been
intended for or directed against cases like the
one at bar. The emphasis and wonderings on the
statement that once the capacity of a corporation
sole to acquire private agricultural lands is
admitted there will be no limit to the areas that it
may hold and that this will pave the way for the
"revival or revitalization of religious
landholdings that proved so troublesome in our
past", cannot even furnish the "penumbra" of a
threat to the future of the Filipino people. In the
first place, the right of Filipino citizens, including
those of foreign extraction, and Philippine
corporations, to acquire private lands is not
subject to any restriction or limit as to quantity
or area, and We certainly do not see any wrong
in that. The right of Filipino citizens and
corporations to acquire public agricultural lands
is already limited by law. In the second place,
corporations sole cannot be considered as aliens
because they have no nationality at all.
Corporations sole are, under the law, mere
administrators of the temporalities of the Roman
Catholic Church in the Philippines. In the third
place, every corporation, be it aggregate or sole,
is only entitled to purchase, convey, sell, lease,
let, mortgage, encumber and otherwise deal with
real properties when it is pursuant to or in
consonance with the purposes for which the
corporation was formed, and when the
transactions of the lawful business of the
corporation reasonably and necessarily require
such dealing — section 13-(5) of the Corporation
Law, Public Act No. 1459 — and considering
these provisions in conjunction with Section 159
of the same law which provides that a
corporation sole may only "purchase and hold
real estate and personal properties for its
church, charitable, benevolent or educational
purposes", the above mentioned fear of
revitalization of religious landholdings in the
Philippines is absolutely dispelled. The fact that
the law thus expressly authorizes the
corporations sole to receive bequests or gifts of
real properties (which were the main source that
the friars had to acquire their big haciendas
during the Spanish regime), is a clear indication
that the requisite that bequests or gifts of real
estate be for charitable, benevolent, or
educational purposes, was, in the opinion of the
legislators, considered sufficient and adequate
protection against the revitalization of religious
landholdings.
Finally, and as previously stated, We have reason
to believe that when the Delegates to the
Constitutional Convention drafted and approved
Article XIII of the Constitution they do not have
in mind the corporation sole. We come to this
finding because the Constitutional Assembly,
composed as it was by a great number of
eminent lawyers and jurists, was like any other
legislative body empowered to enact either the
Constitution of the country or any public statute,
presumed to know the conditions existing as to
particular subject matter when it enacted a
statute (Board of Commerce of Orange Country
vs. Bain, 92 S.E. 176; N. C. 377).
Immemorial customs are presumed to
have been always in the mind of the
Legislature in enacting legislation. (In
re Kruger's Estate, 121 A. 109; 277 P.
326).
The Legislative is presumed to have a
knowledge of the state of the law on the
subjects upon which it legislates.
(Clover Valley Land and Stock Co. vs.
Lamb et al., 187, p. 723,726.)
The Court in construing a statute, will
assume that the legislature acted with
full knowledge of the prior legislation
on the subject and its construction by
the courts. (Johns vs. Town of Sheridan,
89 N. E. 899, 44 Ind. App. 620.).
The Legislature is presumed to have
been familiar with the subject with
which it was dealing . . . . (Landers vs.
Commonwealth, 101 S. E. 778, 781.).
The Legislature is presumed to know
principles of statutory construction.
(People vs. Lowell, 230 N. W. 202, 250
Mich. 349, followed in P. vs.
Woodworth, 230 N.W. 211, 250 Mich.
436.).
It is not to be presumed that a
provision was inserted in a constitution
or statute without reason, or that a
result was intended inconsistent with
the judgment of men of common sense
guided by reason" (Mitchell vs. Lawden,
123 N.E. 566, 288 Ill. 326.) See City of
Decatur vs. German, 142 N. E. 252, 310
Ill. 591, and may other authorities that
can be cited in support hereof.
Consequently, the Constitutional Assembly must
have known:
1. That a corporation sole is organized
by and composed of a single individual,
the head of any religious society or
church operating within the zone, area
or jurisdiction covered by said
corporation sole (Article 155, Public
Act No. 1459);
2. That a corporation sole is a non-stock
corporation;
3. That the Ordinary ( the corporation
sole proper) does not own the
temporalities which he merely
administers;
4. That under the law the nationality of
said Ordinary or of any administrator
has absolutely no bearing on the
nationality of the person desiring to
acquire real property in the Philippines
by purchase or other lawful means
other than by hereditary succession,
who according to the Constitution must
be a Filipino (sections 1 and 5, Article
XIII).
5. That section 159 of the Corporation
Law expressly authorized the
corporation sole to purchase and
holdreal estate for its church,
charitable, benevolent or educational
purposes, and to receive bequests or
giftsfor such purposes;
6. That in approving our Magna Carta
the Delegates to the Constitutional
Convention, almost all of whom were
Roman Catholics, could not have
intended to curtail the propagation of
the Roman Catholic faith or the
expansion of the activities of their
church, knowing pretty well that with
the growth of our population more
places of worship, more schools where
our youth could be taught and trained;
more hallow grounds where to bury
our dead would be needed in the
course of time.
Long before the enactment of our Constitution
the law authorized the corporations sole even to
receive bequests or gifts of real estates and this
Court could not, without any clear and specific
provision of the Constitution, declare that any
real property donated, let as say this year, could
no longer be registered in the name of the
corporation sole to which it was conveyed. That
would be an absurdity that should not receive
our sanction on the pretext that corporations
sole which have no nationality and are non-stock
corporations composed of only one person in the
capacity of administrator, have to establish first
that at least sixty per centum of their capital
belong to Filipino citizens. The new Civil Code
even provides:
 ART. 10. — In case of doubt in
the interpretation or application of laws,
it is presumed that the lawmaking body
intended right and justice to prevail.
Moreover, under the laws of the Philippines, the
administrator of the properties of a Filipino can
acquire, in the name of the latter, private lands
without any limitation whatsoever, and that is so
because the properties thus acquired are not for
and would not belong to the administrator but to
the Filipino whom he represents. But the
dissenting Justice inquires: If the Ordinary is
only the administrator, for whom does he
administer? And who can alter or overrule his
acts? We will forthwith proceed to answer these
questions. The corporations sole by reason of
their peculiar constitution and form of operation
have no designed owner of its temporalities,
although by the terms of the law it can be safely
implied that the Ordinary holds them in trust for
the benefit of the Roman Catholic faithful to their
respective locality or diocese. Borrowing the
very words of the law, We may say that the
temporalities of every corporation sole are
held in trust for the use, purpose, behalf and
benefit of the religious society, or order so
incorporated or of the church to which the
diocese, synod, or district organization is an
organized and constituent part (section 163 of
the Corporation Law).
In connection with the powers of the Ordinary
over the temporalities of the corporation sole, let
us see now what is the meaning and scope of the
word "control". According to the Merriam-
Webster's New International Dictionary, 2nd ed.,
p. 580, on of the acceptations of the word
"control" is:
4. To exercise restraining or directing
influence over; to dominate; regulate;
hence, to hold from action; to curb;
subject; also, Obs. — to overpower.
SYN: restrain, rule, govern, guide,
direct; check, subdue.
It is true that under section 159 of the
Corporation Law, the intervention of the courts
is not necessary, tomortgage or sell real property
held by the corporation sole where the rules,
regulations and discipline of the religious
denomination, society or church concerned
presented by such corporation sole regulates the
methods of acquiring, holding, selling and
mortgaging real estate, and that the Roman
Catholic faithful residing in the jurisdiction of the
corporation sole has no say either in the manner
of acquiring or of selling real property. It may be
also admitted that the faithful of the diocese
cannot govern or overrule the acts of the
Ordinary, but all this does not mean that the
latter can administer the temporalities of the
corporation sole without check or restraint. We
must not forget that when a corporation sole is
incorporated under Philippine laws, the head
and only member thereof subjects himself to the
jurisdiction of the Philippine courts of justice and
these tribunals can thus entertain grievances
arising out of or with respect to the temporalities
of the church which came into the possession of
the corporation sole as administrator. It may be
alleged that the courts cannot intervene as to the
matters of doctrine or teachings of the Roman
Catholic Church. That is correct, but the courts
may step in, at the instance of the faithful for
whom the temporalities are being held in trust,
to check undue exercise by the corporation sole
of its power as administrator to insure that they
are used for the purpose or purposes for which
the corporation sole was created.
American authorities have these to say:
It has been held that the courts have
jurisdiction over an action brought by
persons claiming to be members of a
church, who allege a wrongful and
fraudulent diversion of the church
property to uses foreign to the purposes
of the church, since no ecclesiastical
question is involved and equity will
protect from wrongful diversion of the
property (Hendryx vs. Peoples United
Church, 42 Wash. 336, 4 L.R.A. — n.s. —
1154).
The courts of the State have no general
jurisdiction and control over the
officers of such corporations in respect
to the performance of their official
duties; but as in respect to the property
which they hold for the corporation, they
stand in position of TRUSTEES and the
courts may exercise the same
supervision as in other cases of
trust (Ramsey vs. Hicks, 174 Ind. 428,
91 N.E. 344, 92 N.E. 164, 30 L.R.A. —
n.s. — 665; Hendryx vs. Peoples United
Church, supra.).
Courts of the state do not interfere with
the administration of church rules or
discipline unless civil rights become
involved and which must be protected
(Morris St., Baptist Church vs. Dart, 67
S.C. 338, 45 S.E. 753, and others). (All
cited in Vol. II, Cooley's Constitutional
Limitations, p. 960-964.).
If the Constitutional Assembly was aware of all
the facts above enumerated and of the provisions
of law relative to existing conditions as to
management and operation of corporations sole
in the Philippines, and if, on the other hand,
almost all of the Delegates thereto embraced the
Roman Catholic faith, can it be imagined even for
an instant that when Article XIII of the
Constitution was approved the framers thereof
intended to prevent or curtail from then on the
acquisition sole, either by purchase or donation,
of real properties that they might need for the
propagation of the faith and for there religious
and Christian activities such as the moral
education of the youth, the care, attention and
treatment of the sick and the burial of the dead
of the Roman Catholic faithful residing in the
jurisdiction of the respective corporations sole?
The mere indulgence in said thought would
impress upon Us a feeling of apprehension and
absurdity. And that is precisely the leit motiv
that permeates the whole fabric of the dissenting
opinion.
It seems from the foregoing that the main
problem We are confronted with in this appeal,
hinges around the necessity of a proper and
adequate interpretation of sections 1 and 5 of
Article XIII of the Constitution. Let Us then be
guided by the principles of statutory
construction laid down by the authorities on the
matter:
The most important single factor in
determining the intention of the people
from whom the constitution emanated
is the language in which it is expressed.
The words employed are to be taken in
their natural sense, except that legal or
technical terms are to be given their
technical meaning. The imperfections
of language as a vehicle for conveying
meanings result in ambiguities that
must be resolved by result to
extraneous aids for discovering the
intent of the framers. Among the more
important of these are a consideration
of the history of the times when the
provision was adopted and of the
purposes aimed at in its adoption. The
debates of constitutional convention,
contemporaneous construction, and
practical construction by the legislative
and executive departments, especially
if long continued, may be resorted to
resolve, but not to create, ambiguities. .
. . Consideration of the consequences
flowing from alternative constructions
of doubtful provisions constitutes an
important interpretative device. . . . The
purposes of many of the broadly phrased
constitutional limitations were the
promotion of policies that do not lend
themselves to definite and specific
formulation. The courts have had to
define those policies and have often
drawn on natural law and natural
rights theories in doing so. The
interpretation of constitutions tends to
respond to changing conceptions of
political and social values. The extent to
which these extraneous aids affect the
judicial construction of constitutions
cannot be formulated in precise rules,
but their influence cannot be ignored in
describing the essentials of the process
(Rottschaeffer on Constitutional Law,
1939 ed., p. 18-19).
There are times that when even the
literal expression of legislation may be
inconsistent with the general objectives
of policy behind it, and on the basis of
equity or spirit of the statute the courts
rationalize a restricted meaning of the
latter. A restricted interpretation is
usually applied where the effect of
literal interpretation will make for
injustice and absurdity or, in the words
of one court, the language must be so
unreasonable 'as to shock general
common sense'. (Vol. 3, Sutherland on
Statutory Construction, 3rd ed., 150.).
A constitution is not intended to be a
limitation on the development of a
country nor an obstruction to its
progress and foreign relations
(Moscow Fire Ins. Co. of Moscow,
Russia vs. Bank of New York and Trust
Co., 294 N. Y. S.648; 56 N.E. 2d. 745,
293 N.Y. 749).
Although the meaning or principles of a
constitution remain fixed and
unchanged from the time of its
adoption, a constitution must be
construed as if intended to stand for a
great length of time, and it is
progressive and not static. Accordingly,
it should not receive too narrow or
literal an interpretation but rather the
meaning given it should be applied in
such manner as to meet new or
changed conditions as they arise (U.S.
vs. Lassic, 313 U.S. 299, 85 L. Ed., 1368).
Effect should be given to the purpose
indicated by a fair interpretation of the
language used and that construction
which effectuates, rather than that
which destroys a plain intent or
purpose of a constitutional provision, is
not only favored but will be adopted
(State ex rel. Randolph Country vs.
Walden, 206 S.W. 2d 979).
It is quite generally held that in arriving
at the intent and purpose the
construction should be broad or liberal
or equitable, as the better method of
ascertaining that intent, rather than
technical (Great Southern Life Ins. Co.
vs. City of Austin, 243 S.W. 778).
All these authorities uphold our conviction that
the framers of the Constitution had not in mind
the corporations sole, nor intended to apply
them the provisions of section 1 and 5 of said
Article XIII when they passed and approved the
same. And if it were so as We think it is, herein
petitioner, the Roman Catholic Apostolic
Administrator of Davao, Inc., could not be
deprived of the right to acquire by purchase or
donation real properties for charitable,
benevolent and educational purposes, nor of the
right to register the same in its name with the
Register of Deeds of Davao, an indispensable
requisite prescribed by the Land Registration Act
for lands covered by the Torrens system.
We leave as the last theme for discussion the
much debated question above referred to as "the
vested right saving clause" contained in section
1, Article XIII of the Constitution. The dissenting
Justice hurls upon the personal opinion
expressed on the matter by the writer of the
decision the most pointed darts of his severe
criticism. We think, however, that this strong
dissent should have been spared, because as
clearly indicated before, some members of this
Court either did not agree with the theory of the
writer or were not ready to take a definite stand
on that particular point, so that there being no
majority opinion thereon there was no need of
any dissension therefrom. But as the criticism
has been made the writer deems it necessary to
say a few words of explanation.
The writer fully agrees with the dissenting
Justice that ordinarily "a capacity to acquire
(property) in futuro, is not in itself a vested or
existing property right that the Constitution
protects from impairment. For a property right
to be vested (or acquired) there must be a
transition from the potential or contingent to
the actual, and the proprietary interest must
have attached to a thing; it must have become
'fixed and established'" (Balboa vs. Farrales, 51
Phil. 498). But the case at bar has to be
considered as an exception to the rule because
among the rights granted by section 159 of the
Corporation Law was the right to receive
bequests or gifts of real properties for charitable,
benevolent and educational purposes. And this
right to receive such bequests or gifts (which
implies donations in futuro), is not a mere
potentiality that could be impaired without any
specific provision in the Constitution to that
effect, especially when the impairment would
disturbingly affect the propagation of the
religious faith of the immense majority of the
Filipino people and the curtailment of the
activities of their Church. That is why the writer
gave us a basis of his contention what Professor
Aruego said in his book "The Framing of the
Philippine Constitution" and the enlightening
opinion of Mr. Justice Jose P. Laurel, another
Delegate to the Constitutional Convention, in his
concurring opinion in the case of Goldcreek
Mining Co. vs. Eulogio Rodriguez et al., 66 Phil.
259. Anyway the majority of the Court did not
deem necessary to pass upon said "vested right
saving clause" for the final determination of this
case.
JUDGMENT
Wherefore, the resolution of the respondent
Land Registration Commission of September 21,
1954, holding that in view of the provisions of
sections 1 and 5 of Article XIII of the Philippine
Constitution the vendee (petitioner) is not
qualified to acquire lands in the Philippines in
the absence of proof that at least 60 per centum
of the capital, properties or assets of the Roman
Catholic Apostolic Administrator of Davao, Inc. is
actually owned or controlled by Filipino citizens,
and denying the registration of the deed of sale
in the absence of proof of compliance with such
requisite, is hereby reversed. Consequently, the
respondent Register of Deeds of the City of
Davao is ordered to register the deed of sale
executed by Mateo L. Rodis in favor of the Roman
Catholic Apostolic Administrator of Davao, Inc.,
which is the subject of the present litigation. No
pronouncement is made as to costs. It is so
ordered.
Bautista Angelo and Endencia, JJ., concur.
Paras, C.J., and Bengzon, J., concur in the result.
LABRADOR, J., concurring:
The case at bar squarely present this important
legal question: Has the bishop or ordinary of the
Roman Catholic Church who is not a Filipino
citizen, as corporation sole, the right to register
land, belonging to the Church over which he
presides, in view of the Krivenko decision? Mr.
Justice Felix sustains the affirmative view while
Mr. Justice J. B. L. Reyes, the negative. As the
undersigned understands it, the reason given for
this last view is that the constitutional provision
prohibiting land ownership by foreigners also
extends to control because this lies within the
scope and purpose of the prohibition.
To our way of thinking, the question at issue
depends for its resolution upon another, namely,
who is the owner of the land or property of the
Church sought to be registered? Under the Canon
Law the parish and the diocese have the right to
acquire and own property.
SEC. 1. La Iglesia catolica y la Sede
Apostolica, libre e independientemente
de la potestad civil, tiene derecho
innato de adquirir, retener y
administrar bienes temporales para el
logro de sus propios fines.
SEC. 2. Tambien las iglesias particulares
y demas personas morales erigidas por
la autoridad eclesiastica en persona
juridica, tienen derecho, a tenor de los
sagrados canones, de adquirir, retener
y administrar bienes temporales.
(Canon 1495) (Codigo de Derecho
 Canonico por Miguelez-Alonzo-
Cabreros, 4a ed., p. 562.).
The Canon Law further states that Church
property belongs to the non-collegiate moral
person called the parish, or to the diocese.
In canon law the ownership of
ecclesiastical goods belongs to each
separate juridical person in the Church
(C. 1499). The property of St. John's
Church does not belong to the Pope, the
bishop, the pastor, or even to the
people of the parish. It belongs to the
non-collegiate moral person called the
parish, which has been lawfully
erected. It is not like a stock company.
The civil law does not recognize this
canonical principle; it insists on an act
of civil incorporation or some other
legal device. (Ready Answers in Canon
Law by Rev. P.J. Lydon, DD., 3rd ed.,
1948, p. 576.).
Parish. 3. A portion or subdivision of a
diocese committed to the spiritual
jurisdiction or care of a priest or
minister, called rector or pastor. In the
Protestant Episcopal Church, it is a
territorial division usually following
civil bounds, as those of a town. In the
Roman Catholic Church, it is usually
territorial, but whenever, as in some
parts of the United States there are
different rites and languages, the
boundaries and jurisdiction are
determined by right or language; as, a
Ruthenian or Polish parish. "5. The
inhabitants or members of a parish,
collectively.
Diocese. 3. Eccl. The circuit or extent of
a bishop's jurisdiction; the district in
which a bishop has authority.
(Webster's New International
Dictionary).
We are aware of the fact that some writers
believe that ownership of ecclesiastical
properties resides in the Roman Catholic Pontiff
as Head of the Universal Church, but the better
opinion seems to be that they do belong to the
parishes and diocese as above indicated.
Canonists entertain different opinions
as to the person in whom the
ownership of the ecclesiastical
properties is vested, with respect to
which we shall, for our purpose,
confine ourselves to stating with
Donoso that, while many doctors cited
by Fagnano believe that it resides in the
Roman Pontiff as Head of the Universal
Church, it is more probable that
ownership, strictly speaking, does not
reside in the latter and, consequently,
ecclesiastical properties are owned by
the churches, institutions and
canonically established private
corporations to which said properties
have been donated. (3 Campos y Pulido,
Legislacion y Jurisprudencia Canonica,
P. 420, cited in Trinidad vs. Roman
Catholic Archbishop of Manila, 63 Phil.,
881, 888-889.).
The property in question, therefore, appears to
belong to the parish or the diocese of Davao. But
the Roman Catholics of Davao are not organized
as a juridical person, either under the Canon law
or under the Civil Law. Neither is there any
provision in either for their organization as a
juridical person. Registration of the property in
the name of the Roman Catholics of Davao is,
therefore, impossible.
As under the Civil Law, however, the
organization of parishes and dioceses as juridical
persons is not expressly provided for, the
corporation law has set up the fiction known as
the "corporation sole."
It tolerates the corporation sole
wherever and as long as the state law
does not permit the legal incorporation
of the parish or diocese. The bishop
officially is the legal owner. (Ready
Answers in Canon Law, supra, p. 577.) .
and authorizes it to purchase and hold real
estate for the Church.
SEC. 159. Any corporation sole may
purchase and hold real estate and
personal property for its church,
charitable, benevolent, or educational
purposes, and may receive bequests or
gifts for such purposes. Such
corporation may mortgage or sell real
property held by it upon obtaining an
order for that purpose from the Court
of First Instance of the province in
which the property is situated; but
before making the order proof must be
made to the satisfaction of the court
that notice of the application for leave
to mortgage or sell has been given by
publication or otherwise in such
manner and for such time as said court
or the judge thereof may have directed,
and that it is to the interest of the
corporation that leave to mortgage or
sell should be granted. The application
for leave to mortgage or sell must be
made by petition, duly verified by the
bishop, chief priest, or presiding elder,
acting as corporation sole, and may be
opposed by any member of the
religious denomination, society, or
church represented by the corporation
sole: Provided, however, That in cases
when the rules, regulations and
discipline of the religious
denomination, society or church
concerned represented by such
corporation sole regulate the methods
of acquiring, holding, selling, and
mortgaging real estate and personal
property, such rules, regulations, and
discipline shall control and the
intervention of the courts shall not be
necessary. (The Corporation Law.)
And in accordance with the above section,
temporalities of the Church or of parish or a
diocese are allowed to be registered in the name
of the corporation sole for purposes of
administration and in trust for the real owners.
The mere fact that the Corporation Law
authorizes the corporation sole to acquire and
hold real estate or other property does not make
the latter the real owner thereof, as his tenure of
Church property is merely for the purposes of
administration. As stated above, the bishop is
only the legal (technical) owner or trustee, the
parish or diocese being the beneficial owner, or
cestui que trust.
Having arrived at the conclusion that the
property in question belongs actually either to
the parish or to the dioceses of Davao, the next
question that possess for solution is, In case of
said property, whose nationality must be
considered for the purpose of determining the
applicability of the constitutional provision
limiting ownership of land to Filipinos, that of
the bishop or chief priest who registers as
corporation sole, or that of the constituents of
the parish or diocese who are the beneficial
owners of the land? We believe that of a latter
must be considered, and not that of the priest
clothed with the corporate fiction and
denominated as the corporation sole. The
corporation sole is a mere contrivance to enable
a church to acquire, own and manage properties
belonging to the church. It is only a means to an
end. The constitutional provision could not have
been meant to apply to the means through which
and by which property may be owned or
acquired, but to the ultimate owner of the
property. Hence, the citizenship of the priest
forming the corporation sole should be no
impediment if the parish or diocese which owns
the property is qualified to own and possess the
property.
We can take judicial notice of the fact that a great
majority of the constituents of the parish or
diocese of Davao are Roman Catholics. The
affidavit demanded is therefore, a mere
formality.
The dissenting opinion sustains the proposition
that control, not actual ownership, is the factor
that determines whether the constitutional
prohibition against alien ownership of lands
should or should not apply. We may assume the
correctness of the proposition that the Holy See
exercises control cannot be real and actual but
merely theoretical. In any case, the constitutional
prohibition is limited by its terms to ownership
and ownership alone. And should the
corporation sole abuse its powers and authority
in relation to the administration or disposal of
the property contrary to the wishes of the
constituents of the parish or the diocese, the act
may always be questioned as ultra vires.
We agree, therefore, with the reversal of the
order.
Montemayor and Reyes, A., JJ., concur.
REYES, J.B.L., dissenting:
I regret not being able to assent to the opinion of
Mr. Justice Felix. The decision of the Supreme
Court in this case will be of far reaching results,
for once the capacity of corporations sole to
acquire public and private agricultural lands is
admitted, there will be no limit to the areas they
may hold until the Legislature implements
section 3 of Article XIII of the Constitution,
empowering it to set a limit to the size of private
agricultural land that may be held; and even then
it can only be done without prejudice to rights
acquired prior to the enactment of such law. In
other words, even if a limitative law is adopted, it
will not affect the landholdings acquired before
the law become effective, no matter how vast the
estate should be.
The Constitutional restrictions to the acquisition
of agricultural land are well known:
SECTION 1. All agricultural, timber, and
mineral lands of the public domain,
waters, minerals, coal, petroleum, and
other mineral oils, all forces of
potential energy, and other natural
resources of the Philippines belong to
the State, and their disposition,
exploitation, development, or
utilization shall be limited to citizens of
the Philippines, or to corporations or
associations at least sixty per centum of
the capital of which is owned by such
citizens, subject to any existing right,
grant, lease, or concession at the time
of the inauguration of the Government
established under this Constitution.
Natural resources, with the exception
of public agricultural land, shall not be
alienated, and no license, concession, or
lease for the exploitation, development,
or utilization of any of the natural
resources shall be granted for a period
exceeding twenty-five years, renewable
for another twenty-five years, except as
to water rights for irrigation, water
supply fisheries, or industrial uses
other than the development of water
power, in which cases beneficial use
may be the measure and the limit of the
grant. (Article XII, Constitution of the
Phil.).
SEC. 5. Save in cases of hereditary
succession, no private agricultural land
shall be transferred or assigned except
to individuals, corporations, or
associations qualified to acquire or
hold lands of the public domain in the
Philippines. (Art. XII, Constitution of
the Phil.).
In requiring corporations or associations to have
sixty per cent (60%) of their capital owned by
Filipino citizens, the constitution manifestly
disregarded the corporate fiction, i.e., the
juridical personality of such corporations or
associations. It went behind the corporate entity
and looked at the natural persons that composed
it, and demanded that a clear majority in interest
(60%) should be Filipino. To me this was done to
ensure that the control of its properties (not
merely the beneficial ownership thereof)
remained in Filipino hands. (Aruego, Framing of
the Constitution, Vol. 2. pp. 604, 606.) .
The nationalization of the natural
resources of the country was intended
(1) to insure their conservation for
Filipino posterity; (2) to serve as an
instrument of national defense, helping
prevent the extension into the country
of foreign control through peaceful
economic penetration; and (3) to
prevent making the Philippines a
source of international conflicts with
the consequent danger to its internal
security and independence. . . .
The convention permitted aliens to
acquire an interest in the natural
resources of the country and in private
agricultural lands as component
elements of corporations or
associations. The maximum limit of
interest that they could hold in a
corporation or association would be
only forty per centum of the capital.
Accordingly the control of the
corporation or association would
remain in Filipino hands.
In its report the committee on
nationalization and preservation of
lands and other natural resources
recommended that the maximum limit
of interest that aliens could hold in a
corporation or association should be
only twenty-five per centum of the
capital. The purpose of the committee
was to enable Filipino-controlled
corporations or associations, if
necessary, to interest aliens to join
their technical or managerial staff by
giving them a part interest in the same.
The sub-committee of seven embodied
this recommendation in the first draft
of the Constitution; but in the revised
article on General Provisions, it raised
the amount to forty per centum.
(emphasis supplied.)
It was in recognition of this basic rule that we
held in Register of Deeds vs. Ung Siu Si Temple,
51 Off. Gaz. p. 2866, that if the association had no
capital, its controlling membership must be
composed of Filipinos. Becauseownership
divorced from control is not true ownership.
From these premises it can be deduced that the
preliminary question to be decide by the court is
the following: what and who exercises the power
of control in the corporation sole known as "The
Roman Catholic Apostolic Administrator of
Davao, Inc."?.
Under section 155 of the Corporation Law, the
bishop, or other religious head, as corporation
sole, is "charged with the administration of the
temporalities of his church." It becomes then
pertinent to inquire: if he is only an
administrator, for whom does he administer?
And who can alter or overrule his acts?
If his acts as administrator can not be
overridden, or altered, except by himself, then
obviously the control of the corporation and its
temporalities is in the bishop himself, and he
must be a Filipino citizen. If, on the other hand,
the final say as to management, exploitation,
encumbrance or disposition of the temporalities
resides in another individual or body of
individuals, then the control resides there. To
possess constitutional capacity to acquire
agricultural land or other natural resources, that
body making the final decision for the
corporation must have at least 60 per cent
Filipino membership.
By this test, the body of members professing the
Catholic faith in the diocese of Davao does not
constitute the controlling membership. For
under the rules of the Roman Catholic Church
the faithful can not control the acts of the
Ordinary; they cannot override his decision, just
as they do not elect or remove him. Only his
hierarchical superiors can do that; the control is
from above, not from below. Hence, the fact that
90 per cent (or even 100 per cent) of the faithful
in the diocese should be composed of Filipino
citizens is totally devoid of significance from the
standpoint of the constitutional restrictions in
question (see Codex, Canons 1518 and 1530,
paragraph 1, No. 3).
Moreover, I do not think that the body of Catholic
faithful in the Davao diocese can be taken, for the
purpose here under consideration, as the Church
represented by the Ordinary of Davao. That body
does not constitute an entity or unit separate and
apart from the rest of the faithful throughout the
world that compose the Roman Catholic Church
that has always claimed ecumenical (universal)
character. There is nom Catholic Church of
Davao district and independent of the Catholic
Church of Manila, Lipa or Rome. All those
professing Catholic faith are members of only
one single church or religious group. Thus the
Iglesia Filipina Independiente is not part of the
Catholic Church, precisely because of its
independence.
If, the, the Catholic Church of Davao is part and
parcel of the universal Catholic Church, it can not
be considered separate and apart from it in this
case. And if considered with it, obviously the
condition of 60 per cent Filipino membership is
not satisfied when all the Catholic faithful in the
world are taken into account.
The unity and singleness of the various diocese
of the church appears expressly recognized in
section 163 of the Corporation Law, which
provides that the corporation (sole) shall hold
the temporalities, not for the diocese; but for the
benefit "of the church of which the diocese — is
an organized or constituent part."
SEC. 163. The right to administer all
temporalities and all property held or
owned by a religious order or society,
or by the diocese synod, or district
organization of any religious
denomination or church shall, on its
incorporation, pass to the corporation
and shall be held in trust for the use
purpose, behalf, and benefit of the
religious society or order so
incorporated or of the church of which
the diocese, synod, or district
organization is an organized and
constituent part.
So that, even from the standpoint of beneficial
ownership, the dioceses of Davao can not be
viewed as a group legally isolated from the
Catholic Church as a whole.
Nor does court control over the acts of the
corporation sole constitute a guarantee of
Filipino control that would satisfy the purposes
of the constitution, for the reason that under
section 159 (last proviso) of the Corporation law,
the court intervention is dispensed with where
the rules and discipline of the church already
regulate the acquisition and disposition of real
estate and personal property.
Provided however, that in cases where
the rules, regulations and discipline of
the religious denomination, society, or
church concerned represented by such
corporation sole regulate the methods
of acquiring, holding, selling, and
mortgaging real estate and personal
property, such rules, regulations, and
discipline shall control and the
intervention of the courts shall not be
necessary. (emphasis supplied.)
It is argued that a distinction must be drawn
between the lands to be devoted to purely
religious purposes and the lands held in ordinary
ownership. But where in the Constitution is such
a distinction drawn? Under it, capacity to acquire
agricultural land for the erection of a church is
capacity to acquire agricultural lands for any
lawful purpose, whether it be for convents or
schools or seminaries or haciendas for their
support or land to be held solely for enjoyment
of the revenue. Once the capacity to acquire is
granted, the way is paved for the revitalization of
religious landholdings that proved so
troublesome in our past. I cannot conceive that
the Constitution intended to revive them.
It is also argued that, before the Constitution was
adopted, the corporations sole had, by express
statute, the right to acquire agricultural land; and
that the Constitution was not intended to destroy
such "acquired property rights." If followed, the
argument destroys the constitutional
restrictions. All aliens had a capacity to acquire
agricultural land before the Constitution came
into effect, because no prohibition existed
previously. Must their right to acquire and hold
agricultural land be conceded in spite of the
Constitution?.
That the law should have expressly conferred (3) That in the absence of evidence on these
capacity to acquire land upon corporations sole points, the order appealed from, denying
was not due any special predilection for them; it registration of the conveyance, should be
was exclusively due to the principle that affirmed.
corporation, as artificial entities, have no
inherent rights, but only those granted by the Concepcion, J., concur.
sovereign. Unless conferred, the corporate right
would not exist.
Furthermore, a capacity to acquire in futuro, is
not in itself a vested existing property right that
the Constitution protects from impairment. For a
property right to be vested (or acquired) there
must be a transition from thepotential, or
contingent, to the actual, and the proprietary
interest must have attached to a thing, it must
have become "fixed or established "(Balboa vs.
Farrales, 51 Phil. 498). If mere potentialities
cannot be impaired, then the law would become
unchangeable, for every variation in it will
reduce some one's legal ability to do or not to do.
Already in Benguet Consolidated vs. Pineda, 3 52
Off. Gaz. 1961, we have ruled that no one has a
vested right in statutory privileges or
exemptions. And in the concurring opinion in
Gold Creek Mining Corp. vs. Rodriguez, 66 Phil.
259 (cited by Justice Felix), Mr. Justice Laurel
squarely declared that "contingency or
expectation is neither property right." (cas. cit.,
p. 269.) Finally, the point is also made that the
Ordinary, as religious corporation sole, has no
citizenship, and is not an alien. The answer is
that under the Constitution of the Republic, it is
not enough that the acquirer of agricultural land
be not an alien; he must be a Filipino or
controlled by Filipinos.
Wherefore, I am constrained to conclude:
(1) That the capacity of religious corporations
sole to acquire agricultural land depends upon
60 per cent Filipino membership of the group or
body exercising control of the
corporation;lawphi1.net
(2) That if control of any such corporation
should be vested in a single person, then such
person must be a Filipino citizen;1awphi1.net
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-55289 June 29, 1982
REPUBLIC OF THE PHILIPPINES, represented
by the Director of Lands, petitioner-appellant,
vs.
JUDGE CANDIDO P. VILLANUEVA, of the Court
of First Instance of Bulacan, Malolos Branch
VII, and IGLESIA NI CRISTO, as a corporation
sole, represented by ERAÑO G. MANALO, as
Executive Minister,respondents-appellees.
AQUINO, J.:
Like L-49623, Manila Electric Company vs. Judge
Castro-Bartolome, this case involves the
prohibition in section 11, Article XIV of the
Constitution that "no private corporation or
association may hold alienable lands of the
public domain except by lease not to exceed one
thousand hectares in area".
Lots Nos. 568 and 569, located at Barrio Dampol,
Plaridel, Bulacan, with an area of 313 square
meters and an assessed value of P1,350 were
acquired by the Iglesia Ni Cristo on January 9,
1953 from Andres Perez in exchange for a lot
with an area of 247 square meters owned by the
said church (Exh. D).
The said lots were already possessed by Perez in
1933. They are not included in any military
reservation. They are inside an area which was
certified as alienable or disposable by the Bureau
of Forestry in 1927. The lots are planted to
santol and mango trees and banana plants. A
chapel exists on the said land. The land had been
declared for realty tax purposes. Realty taxes had
been paid therefor (Exh. N).
On September 13, 1977, the Iglesia Ni Cristo, a
corporation sole, duly existing under Philippine
laws, filed with the Court of First Instance of
Bulacan an application for the registration of the
two lots. It alleged that it and its predecessors-
in-interest had possessed the land for more than
thirty years. It invoked section 48(b) of the
Public Land Law, which provides:
Chapter VIII.—Judicial
confirmation of imperfect or
incomplete titles.
xxx xxx xxx
SEC. 48. The following-
described citizens of the
Philippines, occupying lands of
the public domain or claiming
to own any such lands or an
interest therein, but whose
titles have not been perfected
or completed, may apply to
the Court of First Instance of
the province where the land is
located for confirmation of
their claims and the issuance
of a certificate of title
therefore, under the Land
Register Act, to wit:
xxx xxx xxx
(b) Those who by themselves
or through their
predecessors-in-interest have
been in open, continuous,
exclusive, and notorious
possession and occupation of
agricultural lands of the
public domain, under a bona
fide claim of acquisition of
ownership, for at least thirty
years immediately preceding
the filing of the application for
confirmation of title except
when prevented by war or
force majeure. These shall be
conclusively presumed to
have performed all the
conditions essential to a
Government grant and shall
be entitled to a certificate of
title under the provisions of
this chapter." (As amended by
Republic Act No. 1942,
approved on June 22, 1957.)
The Republic of the Philippines, through the
Direct/r of Lands, opposed the application on the
grounds that applicant, as a private corporation,
is disqualified to hold alienable lands of the
public domain, that the land applied for is public
land not susceptible of private appropriation and
that the applicant and its predecessors-in-
interest have not been in the open, continuous,
exclusive and notorious possession of the land
since June 12, 1945.
After hearing, the trial court ordered the
registration of the two lots, as described in Plan
Ap-04-001344 (Exh. E), in the name of the Iglesia
Ni Cristo, a corporation sole, represented by
Executive Minister Eraño G. Manalo, with office
at the corner of Central and Don Mariano Marcos
Avenues, Quezon City, From that decision, the
Republic of the Philippines appealed to this
Court under Republic Act No. 5440. The appeal
should be sustained.
As correctly contended by the Solicitor General,
the Iglesia Ni Cristo, as a corporation sole or a
juridical person, is disqualified to acquire or hold
alienable lands of the public domain, like the two
lots in question, because of the constitutional
prohibition already mentioned and because the
said church is not entitled to avail itself of the
benefits of section 48(b) which applies only to
Filipino citizens or natural persons. A
corporation sole (an "unhappy freak of English
law") has no nationality (Roman Catholic
Apostolic Adm. of Davao, Inc. vs. Land
Registration Commission, 102 Phil. 596. See
Register of Deeds vs. Ung Siu Si Temple, 97 Phil.
58 and sec. 49 of the Public Land Law).
The contention in the comments of the Iglesia Ni
Cristo (its lawyer did not file any brief) that the
two lots are private lands, following the rule laid
down in Susi vs. Razon and Director of Lands, 48
Phil. 424, is not correct. What was considered
private land in the Susi case was a parcel of land
possessed by a Filipino citizen since time
immemorial, as in Cariño vs. Insular
Government, 212 U.S. 449, 53 L. ed. 594, 41 Phil.
935 and 7 Phil. 132. The lots sought to be
registered in this case do not fall within that
category. They are still public lands. A land
registration proceeding under section 48(b)
"presupposes that the land is public" (Mindanao
vs. Director of Lands, L-19535, July 10, 1967, 20
SCRA 641, 644).
As held in Oh Cho vs. Director of Lands, 75 Phil.
890, "all lands that were not acquired from the
Government, either by purchase or by grant,
belong to the public domain. An exception to the
rule would be any land that should have been in
the possession of an occupant and of his
predecessors-in-interest since time immemorial,
for such possession would justify the
presumption that the land had never been part
of the public domain or that it had been a private
property even before the Spanish conquest. "
In Uy Un vs. Perez, 71 Phil. 508, it was noted that
the right of an occupant of public agricultural
land to obtain a confirmation of his title under
section 48(b) of the Public Land Law is a
"derecho dominical incoativo"and that before the
issuance of the certificate of title the occupant is
not in the juridical sense the true owner of the
land since it still pertains to the State.
The lower court's judgment is reversed and set
aside. The application for registration of the
Iglesia Ni Cristo is dismissed with costs against
said applicant.
SO ORDERED.
Barredo, Makasiar, Guerrero, Melencio-Herrera,
Escolin, Vasquez, Relova and Gutierrez, Jr., JJ.,
concur.
Concepcion, Jr., J., is on leave.
Plana, J., took no part.
Separate Opinions
ABAD SANTOS, J., concurring:
In the result for the same reasons I have already
given in Manila Electric Co. vs. Judge Floreliana
Castro-Bartolome, G.R. No. L-49623.
DE CASTRO, J., dissenting:
Justice Teehankee cites in his dissenting opinion
the case of Herico vs. Dar, 1 the decision in which
I am theponente, as reiterating a supposedly
well-established doctrine that lands of the public
domain which, by reason of possession and
cultivation for such a length of time, a grant by
the State to the occupant is presumed, and the
land thereby ceases to form part of the public
domain, but is segregated therefrom as to be no
longer subject to the authority of the Director of
Lands to dispose under the public land laws or
statutes. He would thus consider said land as no
longer public land but "private" lands and
therefore, not within the prohibition of the New
Constitution against corporations from acquiring
public lands which provides that "no private
corporation or association may hold alienable
lands of the public domain except by lease not to
exceed one thousand hectares." 2
I cannot subscribe to the view that the land as
above described has become private land, even
before title thereto, which is, as of this stage, said
to be still "an incomplete or imperfect title," has
been fully vested on the occupant, through the
prescribed procedure known as judicial
confirmation of incomplete or imperfect
title. 3 This is the only legal method by which full
and absolute title to the land may be granted, to
convert the land into a truly private land. To
secure such judicial title, only the courts can be
resorted to. The Director of Lands has lost
authority over the land, insofar as its disposition
is concerned. His authority is limited to another
form of disposition of public land, referred to as
administrative legalization, resulting in the
issuance of free patents, also based on
possession, in which case, as in the issuance of
homestead and sales patents, the land involved
in undoubtedly public land. The possessor of a
piece of public land would have the option to
acquire title thereto through judicial
confirmation or administrative legalization. The
difference is that in the latter case, the area
disposable to a citizen-applicant by the Director
of Lands is limited to 24 hectares. There is no
limit to the area subject to judicial confirmation
of incomplete or imperfect title, except possibly
the limit fixed for a State grant under old Spanish
laws and decrees, which certainly is much larger
than that set for free patents.
It is because of the divestiture of authority of the
Director of Lands to dispose of the land subject
to judicial confirmation of incomplete and
imperfect title that some statements are found in
many cases, such as those cited by Justice
Teehankee, to the effect that such land has
ceased to be public land. What these statements,
however, really mean is that the land referred to
no longer forms part of the mass of public
domain still disposable by the Director of Lands,
under the authority granted him by the public
land statutes. It, however, would not follow that
the land covered by Section 48 of the Public Land
Act has itself become private land. The fact that
its disposition is provided for in the aforecited
Act which deals with "public land" gives rise to
the very strong implication, if not a positive
conclusion, that the land referred to is still public
land. Only when the court adjudicates the land to
the applicant for confirmation of title would the
land become privately owned land, for in the
same proceeding, the court may declare it public
land, depending on the evidence.
The discussion of the question of whether the
land involved is still public or already private
land is, however, entirely pointless, or an Idle
exercise, if We consider the provision of Section
14, Article XIV of the Constitution which appears
to have been lost sight of, which provides that
"save in cases of hereditary succession, no
private lands shall be transferred or conveyed
except to individuals, corporations, or
associations qualified to acquire or hold lands of
the public domain. " As previously stated, by
express provision of the Constitution, no
corporation or association may hold alienable
lands of the public domain, except by lease, not
to exceed 1,000 hectares in area. 4 Hence, even if
the land involved in the present case is
considered private land, the cited section
prohibits its acquisition by the Meralco or Iglesia
which admittedly are "corporations or
association" within the meaning of the aforecited
provision of the New Constitution. This
observation should end all arguments on the
issue of whether the land in question is public or
private land. Although it may further be
observed that supposing a corporation has been
in possession of a piece of public land from the
very beginning, may it apply for judicial
confirmation of the land in question to acquire
title to it as owner after possessing the land for
the requisite length of time? The answer is
believed obvious-it may not. If its possession is
not from the beginning but has commenced only
upon the transfer to it by the prior possessor,
may the corporation apply? The answer is just as
obvious with more reason, it may not.
This separate opinion should have had no need
to be written because the majority opinion
written by Justice Aquino is already well-
reasoned out and supported by applicable
authorities. I •as impelled to write it only
because in the dissenting opinion of Justice
Teehankee, the case of Herico vs. Dar (supra)
which is myponencia was cited in support of his
position. This separate opinion then is more to
show and explain that whatever has been stated
by me in the Dar case should be interpreted in
the light of what I have said in his separate
opinion, which I believe, does not strengthen
Justice Teehankee's position a bit.
FERNANDO, C.J., dissenting:
It is with regret that unlike in the case of Meralco
v. Judge Castro-Bartolome, 1 where I had a brief
concurrence and dissent, I am constrained to
dissent in the ably-written opinion of Justice
Aquino. I join him in according the utmost
respect and deference to this provision in the
Constitution: "No private corporation or
association may hold alienable lands of the
public domain except by lease not to exceed one
thousand hectares in area; ... ." 2 If the matter
before us be viewed solely from the standpoint
of respondent appellee Iglesia ni Cristo being a
corporation sole, then I would have no hesitancy
in sustaining the conclusion that if the land be
considered public, its registration would have to
be denied. For me, that is not the decisive
consideration. It is my view that the Bill of Rights
provision on religious freedom which bans the
enactment of any law prohibiting its free
exercise, the "enjoyment of religious profession
and worship, without discrimination or
preference, [being] forever ... allowed." 3 This is
not the first time the Court has occasion to
recognize the high estate that freedom of religion
occupies in our hierarchy of values. Even as
against the fundamental objectives,
constitutionally enshrined, of social justice and
protection to labor, the claim of such free
exercise and enjoyment was recognized in the
leading case of Victoriano v. Elizalde Rope
Workers' Union. 4 Here the Iglesia ni Cristo, as a
corporation sole, seeks the registration. The area
involved in the two parcels of land in question is
313 square meters. As admitted in the opinion of
the Court, a chapel is therein located. It is that
basic consideration that leads me to conclude
that the balancing process, which finds
application in constitutional law adjudication,
equally requires that when two provisions in the
Constitution may be relevant to a certain factual
situation calls for the affirmance of the decision
of respondent Judge allowing the
registration. 5 There is for me another obstacle to
a partial concurrence. The right of the Roman
Catholic Apostolic Administrator of Davao to
register land purchased from a Filipino citizen
was recognized in The Roman Catholic Apostolic
Administrator of Davao v. Land Registration. 6As I
view it, therefore, the decision of respondent
Judge is equally entitled to affirmance on equal
protection grounds. 7 Hence this brief dissent.
TEEHANKEE, C.J., dissenting:
Involved in these two cases are the applications
of petitioner Meralco, a nationalized domestic
corporation, in the first case and respondent
Iglesia ni Cristo, a religious corporation sole, in
the second case (both admittedly Filipino
corporations qualified to hold and
own private lands), for judicial confirmation of
their titles to small parcels of land, residential in
character as distinguished from strictly
agricultural land, acquired by them by purchase
or exchange from private persons publicly
recognized as the private owners (who have been
in the open, continuous, exclusive and notorious
possession and occupation of the lands under a
bona fide claim of ownership for at least thirty
[30] years immediately preceding the filing of
the applications).
This dissent is based on the failure of the
majority to adhere to established doctrine since
the 1909 case ofCariño and the 1925 case
of Susi down to the 1980 case of Herico, infra,
pursuant to the Public Land Act, as amended,
that where a possessor has held the open,
exclusive and unchallenged possession of
alienable public land for the statutory period
provided by law (30 years now under
amendatory Rep. Act No. 1942 approved on June
22, 1957), the law itself mandates that the
possessor "shall be conclusively presumed to have
performed all the conditions essential to a
Government grant and shall be entitled to a
certificate of title" and" by legal fiction [the land]
has already ceased to be of the public domain and
has become private property." Accordingly, the
prohibition of the 1973 Constitution and of the
Public Land Act against private corporations
holding lands of the public domain has no
applicability in the present cases. What Meralco
and Iglesia have acquired from their
predecessors-in-interest had already ceased to
be of the public domain and had become private
property at the time of the sale to them and
therefore their applications for confirmation of
title by virtue of their predecessors-in-interest'
vested right and title may be duly granted.
The land covered by the Meralco application of
November 26, 1976 consists of two (2) small lots
with a total area of 165 square meters located at
Tanay, Rizal with an assessed value of P3,270.00.
This land was possessed by Olimpia Ramos
before World War II which broke out in the
Pacific in 1941. Olimpia Ramos sold the land on
July 3, 1947 to the spouses Rafael Piguing and
Minerva Inocencio who constructed a house
thereon. But because the Meralco had installed
the "anchor guy" of its steel posts on the land,
the Piguing spouses sold the land to the Meralco
on August 13, 1976. The land had been declared
for realty tax purposes since 1945 and realty taxes
were regularly paid thereon. It is residential in
character as distinguished from strictly
agricultural land. It is likewise established that it
is not included in any military reservation and
that since 1927 it had been certified as part of
the alienable or disposable portion of the public
domain.
The Land covered by the Iglesia application of
September 3, 1977 likewise consists of two (2)
small lots located in Barrio Dampol, Plaridel,
Bulacan with a total area of 313 square meters
and with an assessed value of P1,350.00. The
land was acquired by the Iglesia on January 9,
1953 from Andres Perez in exchange for a lot
owned by the Iglesia with an area of 247 square
meters. The land was already possessed by Perez
in 1933. Admittedly also it is not included in any
military reservation and is inside an area which
was certified since 1927 as part of the alienable
or disposable portion of the public domain. A
chapel of the Iglesia stands on the said land. It
had been duly declared for realty tax purposes in
the name of the Iglesia and realty taxes
were regularly paid thereon.
Respondent judge in the Meralco case sustained
the Republic's opposition and dismissed the
application, holding that under both the
provisions of the new Constitution and the
Public Land Act, Meralco, being a corporation
and not a natural person, is not qualified to apply
for the registration of title over the public land.
On the other hand, in the Iglesia case, the
Republic presented no evidence in support of its
opposition but expressly "submitted the case for
decision on the basis of the evidence submitted
by the applicant." Respondent judge in the case
accordingly granted the application for
registration of the land in the name of the Iglesia,
holding that it had been "satisfactorily
established that applicant [Iglesia] and its
predecessors-in-interest have been in open,
continuous, public and adverse possession of the
land ... under a bona fide claim of ownership for
more than thirty (30) years prior to the filing of
the application" and is therefore entitled to the
registration applied for under the Public Land
Act, as amended.
Both decisions are now with the Court for
review. I hold that both applications for
registration should be granted by virtue of the
prevailing principle as enunciated since the 1925
case of Susi vs. Razon and Director of Lands 1and
reaffirmed in a long line of cases down to the
1980 case of Herico vs. Dar 2 that the lands in
question ceased, ipso jure, or by operation of law,
to be lands of the public domain upon
completion of the statutory period of open,
continuous, exclusive, notorious and
unchallenged possession thereof by the
applicants' predecessors-in-interest who were
qualified natural persons and entitled to
registration by right of acquisitive prescription
under the provisions of the Public Land Act, and
that accordingly the judgment in the Meralco
case should be reversed and a new judgment
entered granting Meralco's application, while the
judgment in the Iglesia case should stand
affirmed. The principal issue at bar may thus be
stated:
It is expressly provided in section 48, par. (b) of
the Public Land Act (Commonwealth Act No. 141,
as amended by Rep. Act No. 1942, approved on
June 22, 1957) that citizens of the Philippines
who are natural persons who have occupied
lands of the public domain but whose titles have
not been perfected or completed may apply to
the corresponding court of first instance for
confirmation of their claims and the issuance of
the certificate of title therefor under the Land
Registration Act in cases where they "by
themselves or through their predecessors-in-
interest have been in the open, continuous,
exclusive, and notorious possession and
occupation of agricultural lands of the public
domain, under a bona fide claim of acquisition of
ownership, for at least thirty years immediately
preceding the filing of the application for
confirmation of title except when prevented by
war or force majeure. These shall be conclusively
presumed to have performed all the conditions
essential to a Government grant and shall be
entitled to a certificate of title under the
provisions of this chapter." 3 In such cases, is the
landipso jure or by operation of law converted
into private land upon completion of the 30th
year of continuous and unchallenged occupation
of the land such that thereafter as such private
land, it may be duly transferred to and owned by
private corporations or does such land, as held
by respondent judge in the Meralco case, remain
part of the public domain and does not become
private land until after actual judicial
confirmation proceedings and the formal court
order for the issuance of the certificate of title?
1. This issue has been squarely resolved by this
Court since the 1925 case of Susi vs. Razon (and a
long line of cases, infra). It is established doctrine
as first held therein that an open, continuous,
adverse and public possession of a land of the
public domain for the period provided in the
Public Land Act provision in force at the time
(from July 26, 1894 in Susi under the old law) by
a private individual personally and through his
predecessors confers an effective title on said
possessor, whereby the land ceases to be land of
the public domain and becomes private
property.
(At that time in 1925 in the Susi case, such
possession was required "from July 26, 1894" as
then provided for in section 45 (b) of the old
Public Land Act No. 2874, amending Act No. 926;
whereas at present as provided for in the
corresponding section 48, par. (b) of the later
and subsisting Public Land Act, Commonwealth
Act No. 141, as amended by Rep. Act No.
1942 approved on June 22, 1957, in force since
1957, the period of open and unchallenged
possession was reduced to "at least thirty years
immediately preceding the filing of the application
for confirmation of title, equivalent to the period
of acquisitive prescription. This is admitted in the
main opinion of Mr. Justice Aquino, wherein it is
stated that "(I)n the Susi case, this Court applied
section 45 (b) of Act No. 2874
which corresponds to what is now section 48(b).
It was held that the long possession of the land
under a bona fide claim of ownership since July
26, 1894 gave rise to the conclusive
presumption that the occupant hadcomplied with
all the conditions essential to a Government grant
and was thus entitled to a certificate of
title." 4The text of the corresponding section
48(b), as amended by Rep. Act 1942 referred to
is reproduced verbatim in Mr. Justice Aquino's
opinion 5 and quotes the reduced statutory
period of open and unchallenged possession of
"at leastthirty years immediately preceding the
filing of the application. ")
Accordingly, the Court held that Susi, as the
rightful possessor of the public land for the
statutory period, acquired the same by operation
of law as a grant from the Government, "not only a
right to a grant," and the land thereby "already
ceased to be of the public domain and had become
private property at least by presumption" as
expressly provided in the Act. Therefore, any
supposed sale by the Director of Lands of the
same land to another person was void and of no
effect and Susi as the rightful possessor could
recover the land as his private property from the
supposed vendee who did not acquire any right
thereto since it had ceased to be land of the
public domain. The Court thus specifically held
therein, as applied to the specific facts of the
case, that:
... In favor of Valentin Susi,
there is, moreover,
the presumption juris et de
jure, established in paragraph
(b) of section 45 of Act No.
2874, amending Act No. 926,
that all the necessary
requirements for a grant by
the Government were complied
with, for he has been in actual
and physical possession,
personally and through his
predecessors, of an
agricultural land of the public
domain, openly, continuously,
exclusively and publicly since
July 26, 1894, with a right to a
certificate of title to said land
under the provisions of
Chapter VIII of said Act. So
that when Angela Razon
applied for the grant in her
favor, Valentin Susi
had already acquired, by
operation of law not only a
right to a grant, but a grant of
the Government, for it is not
necessary that certificate of
title should be issued in order
that said grant may be
sanctioned by the courts, an
application therefor is
sufficient, under the
provisions of section 47 of Act
No. 2874. If by a legal
fiction, Valentin Susi had
acquired the land in question
by a grant of the State, it had
already ceased to be of the
public domain and had become
private property, at least by
presumption, of Valentin
Susi, beyond the control of the
Director of
Lands. Consequently, in
selling the land in question to
Angela Razon, the Director of
Lands disposed of a land over
which he had no longer any
title or control, and the sale
thus made was void and of no
effect, and Angela Razon did
not thereby acquire any
right. 6
2. The above-quoted ruling in Susi has been
affirmed and reaffirmed by this Court in a long
unbroken line of cases, as follows:
In Mesina vs. Vda. de Sonza, 7 the Court held that
"(I)n the case of Susi vs. Razon, et al., 48 Phil. 424,
it was observed that where all the necessary
requirements for a grant by the Government are
complied with through actual physical
possession openly, continuously, and publicly,
with a right to a certificate of title to said land
under the provisions of Chapter VIII of Act No.
2874, amending Act No. 926 (carried over as
Chapter VIII of Commonwealth Act No. 141), the
possessor is deemed to have already acquired by
operation of law not only a right to a grant, but a
grant of the Government, for it is not necessary
that a certificate of title be issued in order that
said grant may be sanctioned by the courts — an
application therefor being sufficient under the
provisions of Section 47 of Act No. 2874
(reproduced as Section 50, Commonwealth Act
No. 141)," and "(C)onsidering that this case was
dismissed by the trial court merely on a motion
to dismiss on the ground that plaintiff's action is
already barred by the statute of limitations,
which apparently is predicated on the theory
that a decree of registration can no longer be
impugned on the ground of fraud one year after
the issuance and entry of the decree, which
theory does not apply here because the property
involved is allegedly private in nature and has
ceased to be part of the public domain, we are of
the opinion that the trial court erred in
dismissing the case outright without giving
plaintiff a chance to prove his claim."
In Lacaste vs. Director of Lands, 8 the Court
stressed that by force of possession, the land in
question became private property on the
strength of the Susi doctrine.
In Manarpaac us. Cabanatan, 9 the Court quoted
with favor the text of the above-quoted ruling of
Susi, and its ratio decidendi thus:
The Director of Lands
contends that the land in
question being of the public
domain, the plaintiff-appellee
cannot maintain an action to
recover possession thereof.
If, as above stated, that land,
the possession of which is in
dispute, had already
become, by operation of law,
private property, there is
lacking only the judicial
sanction of his title Valentin
Susi has the right to bring an
action to recover the
possession thereof and hold it.
In Miguel us. Court of Appeals, 10 the Court again
held that where possession has been continuous,
uninterrupted, open, adverse and in the concept
of an owner, there is a presumption juris et de
jure that all necessary condition for a grant by
the State have been complied with and he would
have been by force of law entitled to the
registration of his title to the land
(citing Pamintuan vs. Insular Government, 8 Phil.
485 and Susi vs. Razon, 48 Phil. 424).
In the latest 1980 case of Herico vs. Dar, 11 " the
Court once more reiterated the Susi doctrine that
"(A)nother obvious error of the respondent
Court is in holding that after one year from the
issuance of the Torrens Title, the same can no
longer be reopened to be declared null and void,
and has become absolute and indefeasible. ...
Secondly, under the provisions of Republic Act
No. 1942, which the respondent court held to be
inapplicable to the petitioner's case, with the
latter's proven occupation and cultivation for
more than 30 years since 1914, by himself and by
his predecessors-in-interest, title over the land
has vested on petitioner as to segregate the land
from the mass of public land. Thereafter, it is no
longer disposable under the Public Land Act as
by free patent. This is as provided in Republic
Act No. 1942, which took effect on June 22, 1957,
amending Section 48-b of Commonwealth Act
No. 141 which provides: ... As interpreted in
several cases when the conditions as specified in
the foregoing provision are complied with,
the possessor is deemed to have acquired, by
operation of law, a right to a grant, a government
grant without the necessity of a certificate of title
being issued. The land, therefore, ceases to be of
the public domain, and beyond the authority of
the Director of Lands to dispose of. The
application for confirmation is a mere formality,
the lack of which does not affect the legal
sufficiency of the title as would be evidenced by
the patent and the Torrens title to be issued
upon the strength of said patent."
3. In fine, since under the Court's settled
doctrine, the acquisitive prescription of alienable
or disposable public lands provided for now in
section 48, par. (b) of the Public Land Act takes
place by operation of law and the public land is
converted to and becomes private property upon
as showing of open and unchallenged possession
under bona fide claim of ownership by the
applicants' predecessors-in-interest for
the statutory period of thirty years immediately
preceding the filing of the application and "it is
not necessary that a certificate of title should be
issued in order that said grant may be
sanctioned by the court" which right is expressly
backed up by theconclusive presumption or
presumption juris et de jure of the statute that
the possessor has "performed all the conditions
essential to a Government grant," the applicant
Meralco cannot be said to be barred as a
corporation from filing the application for
registration of the private property duly acquired
by it.
4. It should be noted that respondent judge's
decision in the Meralco case expressly finds as
established factsthat the Meralco's predecessors-
in- interest had possessed and occupied as
owners the land in question for at least over 35
years; Olimpia Ramos having possessed the same
since the last world war in 1941 and then having
sold the same on July 3, 1947 to the Piguing
spouses who built a house thereon and
continuously possessed the same until they sold
the same in turn to the Meralco on August 13,
1976, 12 Meralco's predecessors-in-interest had
therefore acquired by operation of the Public
Land Act a Government grant to the property, as
well as acquired ownership thereof by right
of acquisitive prescription over the land which
thereby became private property. The very
definition of prescription as a mode of acquiring
ownership as set forth in Art. 1106 of the Civil
Code provides that "By prescription one acquires
ownership and other real rights through lapse of
time in the manner and under the conditions laid
down by law." The law does I not provide that
one acquires ownership of a land by
prescription only after his title thereto is
judicially confirmed. To this same effect is the
ruling in Cariño vs. Insular
Government, 13 wherein the U.S. Supreme Court
speaking through Justice Holmes held that:
It is true that the language of
articles 4 and 5 attributes title
to those 'who may prove'
possession for the necessary
time and we do not overlook
the argument that this means
may prove in registration
proceedings. It may be that an
English conveyancer would
have recommended an
application under the
foregoing decree, but
certainly it was not calculated
to convey to the mind of an
Igorot chief the notion that
ancient family possessions
were in danger, if he had read
every word of it. The words
'may prove' (acrediten), as
well, or better, in view of the
other provisions, might
be taken to mean when called
upon to do so in any
litigation. There are
indications that registration
was expected from all, but
none sufficient to show that,
for want of it, ownership
actually gained would be lost.
The effect of the
proof, wherever made,
was not to confer title, but
simply to establish it, as
already conferred by the
decree, if not by earlier law.
To the same effect is the Court's ruling
in Legarda and Prieto vs. Saleeby, 31 Phil. 590,
that "an owner does not obtain title by virtue of
certificate but rather obtains his certificate by
virtue of the fact that he has a fee simple title."
5. Since the public land became private property
upon completion of the 30th year of continuous,
exclusive, and unchallenged possession of the
applicant Meralco's predecessors-in-interest,
particularly the Piguing spouses who sold the
private land to the Meralco, there is no
justification for denying the Meralco's
application for registration of its duly acquired
title to the land. Meralco's predecessors-in-
interest had acquired ownership of the land by
acquisitive prescription as provided by the
Public Land Act and by the Civil Code. The land
became private property and Meralco duly
acquired it by right of purchase. To deny
Meralco's application to register the property
because it is not a natural person is unjustified
because neither the new constitutional ban
under the 1973 Constitution against private
corporations owning lands of the public domain
or the Public Land Act's limitation on the right of
application for confirmation of imperfect title to
lands of the public domain can be invoked any
longer as the land had long ceased to be public
land but had become private property. Meralco's
application in effect seeks confirmation of the
acquisition of ownership of the land which had
become private property of its predecessors-in-
interest, the Piguing spouses who thru their
open and unchallenged possession of the land for
over thirty years acquired title thereto by
acquisitive prescription and by conclusive
presumption of the Public Land Act itself. There
is no legal nor constitutional obstacle to such
title being transferred to the Meralco by right of
purchase and traditio — for it is not claimed that
there is any legal prohibition against the Piguing
spouses transferring the ownership of the land
to others (whether natural persons or
corporations) such as the applicant Meralco,
even before the formal issuance of the certificate
of title to them.
6. To uphold respondent judge's denial of
Meralco's application on the technicality that the
Public Land Act allows only citizens of the
Philippines who are natural persons to apply for
confirmation of their title would be impractical
and would just give rise to multiplicity of court
actions. Assuming that there was a technical
error in not having filed the application for
registration in the name of the Piguing spouses
as the original owners and vendors, still it is
conceded that there is no prohibition against
their sale of the land to the applicant Meralco
and neither is there any prohibition against the
application being refiled with retroactive effect
in the name of the original owners and vendors
(as such natural persons) with the end result of
their application being granted, because of their
indisputable acquisition of ownership by
operation of law and the conclusive presumption
therein provided in their favor. It should not be
necessary to go through all the rituals at the
great cost of refiling of all such applications in
their names and adding to the overcrowded
court dockets when the Court can after all these
years dispose of it here and now. (See Francisco
vs. City of Davao 14 )
The ends of justice would best be served,
therefore, by considering the applications for
confirmation as amended to conform to the
evidence, i.e. as filed in the names of the original
persons who as natural persons are duly
qualified to apply for formal confirmation of the
title that they had acquired by conclusive
presumption and mandate of the Public Land Act
and who thereafter duly sold to the herein
corporations (both admittedly Filipino
corporations duly qualified to hold and own
private lands) and granting the applications for
confirmation of title to the private lands so
acquired and sold or exchanged.
7. All that has been said here applies of course
with equal force to the Iglesia case, save that as
already stated at the beginning hereof, the Iglesia
application was granted because the Republic
presented no evidence in support of its
opposition and respondent judge held in effect
that the property had ceased to be land of the
public domain and had become private property,
the title to which could be duly issued in the
name of the Iglesia as the transferee of its
predecessors-in-interest.
8. It should bear emphasis that what are
involved here are small parcels of land, of 165
square meters in the Meralco case used for
installation of an "anchor guy" for its steel posts
in connection with its tasks as a nationalized
domestic corporation to furnish electrical service
to the consumer public, and of 313 square
meters in the Iglesia case used as the site of its
church built thereon to minister to the religious
needs of its members. In no way, may the letter,
intent and spirit of the prohibition of the 1973
Constitution against corporations "holding
alienable lands of the public domain except by
lease not to exceed one thousand hectares in
area" (which is beamed against the undue
control and exploitation of our public lands and
natural resources by corporations, Filipino and
foreign-controlled) be deemed violated or
disregarded by the granting of the applications
at bar. The two corporations in truth and in fact
do not hold the small parcels of land at bar for
their own use or benefit but for the sole use and
benefit of the public.
9. With reference to the separate concurring
opinion of Mr. Justice De Castro wherein he
would blunt the "supposedly (sic) well-
established doctrine" (at page 1) from the 1909
case of Cariño and the 1925 case of Susidown to
the 1980 case of Herico (supra, at pages 5 to 11)
and support the contrary pronouncement in Mr.
Justice Aquino's main opinion that "as between
the State and the Meralco, the said land is still
public land. It would cease to be public land only
upon the issuance of the certificate of title to any
Filipino citizen claiming it under section 48(b)
[of the Public Land Act]" (at page 5), suffice it to
cite his own pronouncement
in Herico(reiterating the well-established and
prevailing doctrine which this Court has not
overturned, as it cannot overturn the mandate of
the statute that the unchallenged possessor for
at least 30 years is "conclusively presumed to
have performed all the conditions essential to a
government grant") wherein Mr. Justice De
Castro categorically reiterated for the Court that
"As interpreted in several cases
.....the possessor is deemed to have acquired, by
operation of law, a right to a grant, a government
grant, without the necessity of a certificate of title
being issued. The land, therefore, ceases to be of
the public domain, and beyond the authority of
the Director of Lands to dispose of. The
application for confirmation is a mere formality,
the lack of which does not affect the legal
sufficiency of the title as would be evidenced by
the patent and the Torrens title to be issued upon
the strength of said patent. "
It only remains to point out, in order to avoid
misapprehension or confusion, that Mr. Justice
De Castro's seemingly querulous statement that
"the discussion of the question of whether the
land involved is still public oralready private
land, is however, entirely pointless or an Idle
exercise, if We consider the provision of Section
14, Article XIV of the Constitution which appears
to have been lost sight of, which provides that
'save in cases of hereditary succession,
no private lands shall be transferred or conveyed
except to individuals, corporations, or
associations qualified to acquire or hold lands of
the domain'" (at page 2) that "hence, even if the
land involved in the present case is
considered private land, the cited section
prohibits its acquisition by the Meralco or Iglesia
which admittedly are 'corporations' or
associations within the meaning of the aforecited
provision of the New Constitution. The
observation should end all arguments on the
issue of whether the land in question is public or
private land" (idem) might mislead one to the
wrong conclusion that corporations with 60%
Filipino ownership may not own private lands
when the express provisions of Art. XIV, section
9 15 and section 14 as quoted by himself as well
as the counterpart provisions of the 1935
Constitution have always expressly permitted
Filipino-owned corporations to own private
lands, and the only change effected in the 1973
Constitution is section 11 which now prohibits
even such Filipino corporations to own or hold
lands of the public domain except by lease not to
exceed 1,000 hectares in area.
ACCORDINGLY, I vote for reversal of respondent
court's judgment in the Meralco case and for the
entry of a new judgment granting Meralco's
application and for affirmance of judgment in the
second case granting the Iglesia application.
Separate Opinions
ABAD SANTOS, J., concurring:
In the result for the same reasons I have already
given in Manila Electric Co. vs. Judge Floreliana
Castro-Bartolome, G.R. No. L-49623.
DE CASTRO, J., dissenting:
Justice Teehankee cites in his dissenting opinion
the case of Herico vs. Dar, 1 the decision in which
I am theponente, as reiterating a supposedly
well-established doctrine that lands of the public
domain which, by reason of possession and
cultivation for such a length of time, a grant by
the State to the occupant is presumed, and the
land thereby ceases to form part of the public
domain, but is segregated therefrom as to be no
longer subject to the authority of the Director of
Lands to dispose under the public land laws or
statutes. He would thus consider said land as no
longer public land but "private" lands and
therefore, not within the prohibition of the New
Constitution against corporations from acquiring
public lands which provides that "no private
corporation or association may hold alienable
lands of the public domain except by lease not to
exceed one thousand hectares." 2
I cannot subscribe to the view that the land as
above described has become private land, even
before title thereto, which is, as of this stage, said
to be still "an incomplete or imperfect title," has
been fully vested on the occupant, through the
prescribed procedure known as judicial
confirmation of incomplete or imperfect
title. 3 This is the only legal method by which full
and absolute title to the land may be granted, to
convert the land into a truly private land. To
secure such judicial title, only the courts can be
resorted to. The Director of Lands has lost
authority over the land, insofar as its disposition
is concerned. His authority is limited to another
form of disposition of public land, referred to as
administrative legalization, resulting in the
issuance of free patents, also based on
possession, in which case, as in the issuance of
homestead and sales patents, the land involved
in undoubtedly public land. The possessor of a
piece of public land would have the option to
acquire title thereto through judicial
confirmation or administrative legalization. The
difference is that in the latter case, the area
disposable to a citizen-applicant by the Director
of Lands is limited to 24 hectares. There is no
limit to the area subject to judicial confirmation
of incomplete or imperfect title, except possibly
the limit fixed for a State grant under old Spanish
laws and decrees, which certainly is much larger
than that set for free patents.
It is because of the divestiture of authority of the
Director of Lands to dispose of the land subject
to judicial confirmation of incomplete and
imperfect title that some statements are found in
many cases, such as those cited by Justice
Teehankee, to the effect that such land has
ceased to be public land. What these statements,
however, really mean is that the land referred to
no longer forms part of the mass of public
domain still disposable by the Director of Lands,
under the authority granted him by the public
land statutes. It, however, would not follow that
the land covered by Section 48 of the Public Land
Act has itself become private land. The fact that
its disposition is provided for in the aforecited
Act which deals with "public land" gives rise to
the very strong implication, if not a positive
conclusion, that the land referred to is still public
land. Only when the court adjudicates the land to
the applicant for confirmation of title would the
land become privately owned land, for in the
same proceeding, the court may declare it public
land, depending on the evidence.
The discussion of the question of whether the
land involved is still public or already private
land is, however, entirely pointless, or an Idle
exercise, if We consider the provision of Section
14, Article XIV of the Constitution which appears
to have been lost sight of, which provides that
"save in cases of hereditary succession, no
private lands shall be transferred or conveyed
except to individuals, corporations, or
associations qualified to acquire or hold lands of
the public domain. " As previously stated, by
express provision of the Constitution, no
corporation or association may hold alienable
lands of the public domain, except by lease, not
to exceed 1,000 hectares in area. 4 Hence, even if
the land involved in the present case is
considered private land, the cited section
prohibits its acquisition by the Meralco or Iglesia
which admittedly are "corporations or
association" within the meaning of the aforecited
provision of the New Constitution. This
observation should end all arguments on the
issue of whether the land in question is public or
private land. Although it may further be
observed that supposing a corporation has been
in possession of a piece of public land from the
very beginning, may it apply for judicial
confirmation of the land in question to acquire
title to it as owner after possessing the land for
the requisite length of time? The answer is
believed obvious-it may not. If its possession is
not from the beginning but has commenced only
upon the transfer to it by the prior possessor,
may the corporation apply? The answer is just as
obvious with more reason, it may not.
This separate opinion should have had no need
to be written because the majority opinion
written by Justice Aquino is already well-
reasoned out and supported by applicable
authorities. I was impelled to write it only
because in the dissenting opinion of Justice
Teehankee, the case of Herico vs. Dar (supra)
which is myponencia was cited in support of his
position. This separate opinion then is more to
show and explain that whatever has been stated
by me in the Dar case should be interpreted in
the light of what I have said in his separate
opinion, which I believe, does not strengthen
Justice Teehankee's position a bit.
FERNANDO, C.J., dissenting:
It is with regret that unlike in the case of Meralco
v. Judge Castro-Bartolome, 1 where I had a brief
concurrence and dissent, I am constrained to
dissent in the ably-written opinion of Justice
Aquino. I join him in according the utmost
respect and deference to this provision in the
Constitution: "No private corporation or
association may hold alienable lands of the
public domain except by lease not to exceed one
thousand hectares in area; ... ." 2 If the matter
before us be viewed solely from the standpoint
of respondent appellee Iglesia ni Cristo being a
corporation sole, then I would have no hesitancy
in sustaining the conclusion that if the land be
considered public, its registration would have to
be denied. For me, that is not the decisive
consideration. It is my view that the Bill of Rights
provision on religious freedom which bans the
enactment of any law prohibiting its free
exercise, the "enjoyment of religious profession
and worship, without discrimination or
preference, [being] forever ... allowed." 3 This is
not the first time the Court has occasion to
recognize the high estate that freedom of religion
occupies in our hierarchy of values. Even as
against the fundamental objectives,
constitutionally enshrined, of social justice and
protection to labor, the claim of such free
exercise and enjoyment was recognized in the
leading case of Victoriano v. Elizalde Rope
Workers' Union. 4 Here the Iglesia ni Cristo, as a
corporation sole, seeks the registration. The area
involved in the two parcels of land in question is
313 square meters. As admitted in the opinion of
the Court, a chapel is therein located. It is that
basic consideration that leads me to conclude
that the balancing process, which finds
application in constitutional law adjudication,
equally requires that when two provisions in the
Constitution may be relevant to a certain factual
situation calls for the affirmance of the decision
of respondent Judge allowing the
registration. 5 There is for me another obstacle to
a partial concurrence. The right of the Roman
Catholic Apostolic Administrator of Davao to
register land purchased from a Filipino citizen
was recognized in The Roman Catholic Apostolic
Administrator of Davao v. Land Registration. 6As I
view it, therefore, the decision of respondent
Judge is equally entitled to affirmance on equal
protection grounds. 7 Hence this brief dissent.
TEEHANKEE, C.J., dissenting:
Involved in these two cases are the applications
of petitioner Meralco, a nationalized domestic
corporation, in the first case and respondent
Iglesia ni Cristo, a religious corporation sole, in
the second case (both admittedly Filipino
corporations qualified to hold and
own private lands), for judicial confirmation of
their titles to small parcels of land, residential in
character as distinguished from strictly
agricultural land, acquired by them by purchase
or exchange from private persons publicly
recognized as the private owners (who have been
in the open, continuous, exclusive and notorious
possession and occupation of the lands under a
bona fide claim of ownership for at least thirty
[30] years immediately preceding the filing of
the applications).
This dissent is based on the failure of the
majority to adhere to established doctrine since
the 1909 case ofCariño and the 1925 case
of Susi down to the 1980 case of Herico, infra,
pursuant to the Public Land Act, as amended,
that where a possessor has held the open,
exclusive and unchallenged possession of
alienable public land for the statutory period
provided by law (30 years now under
amendatory Rep. Act No. 1942 approved on June
22, 1957), the law itself mandates that the
possessor "shall be conclusively presumed to have
performed all the conditions essential to a
Government grant and shall be entitled to a
certificate of title" and" by legal fiction [the land]
has already ceased to be of the public domain and
has become private property." Accordingly, the
prohibition of the 1973 Constitution and of the
Public Land Act against private corporations
holding lands of the public domain has no
applicability in the present cases. What Meralco
and Iglesia have acquired from their
predecessors-in-interest had already ceased to
be of the public domain and had become private
property at the time of the sale to them and
therefore their applications for confirmation of
title by virtue of their predecessors-in-interest'
vested right and title may be duly granted.
The land covered by the Meralco application of
November 26, 1976 consists of two (2) small lots
with a total area of 165 square meters located at
Tanay, Rizal with an assessed value of P3,270.00.
This land was possessed by Olimpia Ramos
before World War II which broke out in the
Pacific in 1941. Olimpia Ramos sold the land on
July 3, 1947 to the spouses Rafael Piguing and
Minerva Inocencio who constructed a house
thereon. But because the Meralco had installed
the "anchor guy" of its steel posts on the land,
the Piguing spouses sold the land to the Meralco
on August 13, 1976. The land had been declared
for realty tax purposes since 1945 and realty taxes
were regularly paid thereon. It is residential in
character as distinguished from strictly
agricultural land. It is likewise established that it
is not included in any military reservation and
that since 1927 it had been certified as part of
the alienable or disposable portion of the public
domain.
The Land covered by the Iglesia application of
September 3, 1977 likewise consists of two (2)
small lots located in Barrio Dampol, Plaridel,
Bulacan with a total area of 313 square meters
and with an assessed value of P1,350.00. The
land was acquired by the Iglesia on January 9,
1953 from Andres Perez in exchange for a lot
owned by the Iglesia with an area of 247 square
meters. The land was already possessed by Perez
in 1933. Admittedly also it is not included in any
military reservation and is inside an area which
was certified since 1927 as part of the alienable
or disposable portion of the public domain. A
chapel of the Iglesia stands on the said land. It
had been duly declared for realty tax purposes in
the name of the Iglesia and realty taxes
were regularly paid thereon.
Respondent judge in the Meralco case sustained
the Republic's opposition and dismissed the
application, holding that under both the
provisions of the new Constitution and the
Public Land Act, Meralco, being a corporation
and not a natural person, is not qualified to apply
for the registration of title over the public land.
On the other hand, in the Iglesia case, the
Republic presented no evidence in support of its
opposition but expressly "submitted the case for
decision on the basis of the evidence submitted
by the applicant." Respondent judge in the case
accordingly granted the application for
registration of the land in the name of the Iglesia,
holding that it had been "satisfactorily
established that applicant [Iglesia] and its
predecessors-in-interest have been in open,
continuous, public and adverse possession of the
land ... under a bona fide claim of ownership for
more than thirty (30) years prior to the filing of
the application" and is therefore entitled to the
registration applied for under the Public Land
Act, as amended.
Both decisions are now with the Court for
review. I hold that both applications for
registration should be granted by virtue of the
prevailing principle as enunciated since the 1925
case of Susi vs. Razon and Director of Lands 1and
reaffirmed in a long line of cases down to the
1980 case of Herico vs. Dar 2 that the lands in
question ceased, ipso jure, or by operation of law,
to be lands of the public domain upon
completion of the statutory period of open,
continuous, exclusive, notorious and
unchallenged possession thereof by the
applicants' predecessors-in-interest who were
qualified natural persons and entitled to
registration by right of acquisitive prescription
under the provisions of the Public Land Act, and
that accordingly the judgment in the Meralco
case should be reversed and a new judgment
entered granting Meralco's application, while the
judgment in the Iglesia case should stand
affirmed. The principal issue at bar may thus be
stated:
It is expressly provided in section 48, par. (b) of
the Public Land Act (Commonwealth Act No. 141,
as amended by Rep. Act No. 1942, approved on
June 22, 1957) that citizens of the Philippines
who are natural persons who have occupied
lands of the public domain but whose titles have
not been perfected or completed may apply to
the corresponding court of first instance for
confirmation of their claims and the issuance of
the certificate of title therefor under the Land
Registration Act in cases where they "by
themselves or through their predecessors-in-
interest have been in the open, continuous,
exclusive, and notorious possession and
occupation of agricultural lands of the public
domain, under a bona fide claim of acquisition of
ownership, for at least thirty years immediately
preceding the filing of the application for
confirmation of title except when prevented by
war or force majeure. These shall be conclusively
presumed to have performed all the conditions
essential to a Government grant and shall be
entitled to a certificate of title under the
provisions of this chapter." 3 In such cases, is the
landipso jure or by operation of law converted
into private land upon completion of the 30th
year of continuous and unchallenged occupation
of the land such that thereafter as such private
land, it may be duly transferred to and owned by
private corporations or does such land, as held
by respondent judge in the Meralco case, remain
part of the public domain and does not become
private land until after actual judicial
confirmation proceedings and the formal court
order for the issuance of the certificate of title?
1. This issue has been squarely resolved by this
Court since the 1925 case of Susi vs. Razon (and a
long line of cases, infra). It is established doctrine
as first held therein that an open, continuous,
adverse and public possession of a land of the
public domain for the period provided in the
Public Land Act provision in force at the time
(from July 26, 1894 in Susi under the old law) by
a private individual personally and through his
predecessors confers an effective title on said
possessor, whereby the land ceases to be land of
the public domain and becomes private
property.
(At that time in 1925 in the Susi case, such
possession was required "from July 26, 1894" as
then provided for in section 45 (b) of the old
Public Land Act No. 2874, amending Act No. 926;
whereas at present as provided for in the
corresponding section 48, par. (b) of the later
and subsisting Public Land Act, Commonwealth
Act No. 141, as amended by Rep. Act No.
1942 approved on June 22, 1957, in force since
1957, the period of open and unchallenged
possession was reduced to "at least thirty years
immediately preceding the filing of the application
for confirmation of title, equivalent to the period
of acquisitive prescription. This is admitted in the
main opinion of Mr. Justice Aquino, wherein it is
stated that "(I)n the Susi case, this Court applied
section 45 (b) of Act No. 2874
which corresponds to what is now section 48(b).
It was held that the long possession of the land
under a bona fide claim of ownership since July
26, 1894 gave rise to the conclusive
presumption that the occupant hadcomplied with
all the conditions essential to a Government grant
and was thus entitled to a certificate of
title." 4The text of the corresponding section
48(b), as amended by Rep. Act 1942 referred to
is reproduced verbatim in Mr. Justice Aquino's
opinion 5 and quotes the reduced statutory
period of open and unchallenged possession of
"at leastthirty years immediately preceding the
filing of the application. ")
Accordingly, the Court held that Susi, as the
rightful possessor of the public land for the
statutory period, acquired the same by operation
of law as a grant from the Government, "not only a
right to a grant," and the land thereby "already
ceased to be of the public domain and had become
private property at least by presumption" as
expressly provided in the Act. Therefore, any
supposed sale by the Director of Lands of the
same land to another person was void and of no
effect and Susi as the rightful possessor could
recover the land as his private property from the
supposed vendee who did not acquire any right
thereto since it had ceased to be land of the
public domain. The Court thus specifically held
therein, as applied to the specific facts of the
case, that:
... In favor of Valentin Susi,
there is, moreover,
the presumption juris et de
jure, established in paragraph
(b) of section 45 of Act No.
2874, amending Act No. 926,
that all the necessary
requirements for a grant by
the Government were complied
with, for he has been in actual
and physical possession,
personally and through his
predecessors, of an
agricultural land of the public
domain, openly, continuously,
exclusively and publicly since
July 26, 1894, with a right to a
certificate of title to said land
under the provisions of
Chapter VIII of said Act. So
that when Angela Razon
applied for the grant in her
favor, Valentin Susi
had already acquired, by
operation of law not only a
right to a grant, but a grant of
the Government, for it is not
necessary that certificate of
title should be issued in order
that said grant may be
sanctioned by the courts, an
application therefor is
sufficient, under the
provisions of section 47 of Act
No. 2874. If by a legal
fiction, Valentin Susi had
acquired the land in question
by a grant of the State, it had
already ceased to be of the
public domain and had become
private property, at least by
presumption, of Valentin
Susi, beyond the control of the
Director of
Lands. Consequently, in
selling the land in question to
Angela Razon, the Director of
Lands disposed of a land over
which he had no longer any
title or control, and the sale
thus made was void and of no
effect, and Angela Razon did
not thereby acquire any
right. 6
2. The above-quoted ruling in Susi has been
affirmed and reaffirmed by this Court in a long
unbroken line of cases, as follows:
In Mesina vs. Vda. de Sonza, 7 the Court held that
"(I)n the case of Susi vs. Razon, et al., 48 Phil. 424,
it was observed that where all the necessary
requirements for a grant by the Government are
complied with through actual physical
possession openly, continuously, and publicly,
with a right to a certificate of title to said land
under the provisions of Chapter VIII of Act No.
2874, amending Act No. 926 (carried over as
Chapter VIII of Commonwealth Act No. 141), the
possessor is deemed to have already acquired by
operation of law not only a right to a grant, but a
grant of the Government, for it is not necessary
that a certificate of title be issued in order that
said grant may be sanctioned by the courts — an
application therefor being sufficient under the
provisions of Section 47 of Act No. 2874
(reproduced as Section 50, Commonwealth Act
No. 141)," and "(C)onsidering that this case was
dismissed by the trial court merely on a motion
to dismiss on the ground that plaintiff's action is
already barred by the statute of limitations,
which apparently is predicated on the theory
that a decree of registration can no longer be
impugned on the ground of fraud one year after
the issuance and entry of the decree, which
theory does not apply here because the property
involved is allegedly private in nature and has
ceased to be part of the public domain, we are of
the opinion that the trial court erred in
dismissing the case outright without giving
plaintiff a chance to prove his claim."
In Lacaste vs. Director of Lands, 8 the Court
stressed that by force of possession, the land in
question became private property on the
strength of the Susi doctrine.
In Manarpaac us. Cabanatan, 9 the Court quoted
with favor the text of the above-quoted ruling of
Susi, and its ratio decidendi thus:
The Director of Lands
contends that the land in
question being of the public
domain, the plaintiff-appellee
cannot maintain an action to
recover possession thereof.
If, as above stated, that land,
the possession of which is in
dispute, had already
become, by operation of law,
private property, there is
lacking only the judicial
sanction of his title Valentin
Susi has the right to bring an
action to recover the
possession thereof and hold it.
In Miguel us. Court of Appeals, 10 the Court again
held that where possession has been continuous,
uninterrupted, open, adverse and in the concept
of an owner, there is a presumption juris et de
jure that all necessary condition for a grant by
the State have been complied with and he would
have been by force of law entitled to the
registration of his title to the land
(citing Pamintuan vs. Insular Government, 8 Phil.
485 and Susi vs. Razon, 48 Phil. 424).
In the latest 1980 case of Herico vs. Dar, 11 " the
Court once more reiterated the Susi doctrine that
"(A)nother obvious error of the respondent
Court is in holding that after one year from the
issuance of the Torrens Title, the same can no
longer be reopened to be declared null and void,
and has become absolute and indefeasible. ...
Secondly, under the provisions of Republic Act
No. 1942, which the respondent court held to be
inapplicable to the petitioner's case, with the
latter's proven occupation and cultivation for
more than 30 years since 1914, by himself and by
his predecessors-in-interest, title over the land
has vested on petitioner as to segregate the land
from the mass of public land. Thereafter, it is no
longer disposable under the Public Land Act as
by free patent. This is as provided in Republic
Act No. 1942, which took effect on June 22, 1957,
amending Section 48-b of Commonwealth Act
No. 141 which provides: ... As interpreted in
several cases when the conditions as specified in
the foregoing provision are complied with,
the possessor is deemed to have acquired, by
operation of law, a right to a grant, a government
grant without the necessity of a certificate of title
being issued. The land, therefore, ceases to be of
the public domain, and beyond the authority of
the Director of Lands to dispose of. The
application for confirmation is a mere formality,
the lack of which does not affect the legal
sufficiency of the title as would be evidenced by
the patent and the Torrens title to be issued
upon the strength of said patent."
3. In fine, since under the Court's settled
doctrine, the acquisitive prescription of alienable
or disposable public lands provided for now in
section 48, par. (b) of the Public Land Act takes
place by operation of law and the public land is
converted to and becomes private property upon
as showing of open and unchallenged possession
under bona fide claim of ownership by the
applicants' predecessors-in-interest for
the statutory period of thirty years immediately
preceding the filing of the application and "it is
not necessary that a certificate of title should be
issued in order that said grant may be
sanctioned by the court" which right is expressly
backed up by theconclusive presumption or
presumption juris et de jure of the statute that
the possessor has "performed all the conditions
essential to a Government grant," the applicant
Meralco cannot be said to be barred as a
corporation from filing the application for
registration of the private property duly acquired
by it.
4. It should be noted that respondent judge's
decision in the Meralco case expressly finds as
established factsthat the Meralco's predecessors-
in- interest had possessed and occupied as
owners the land in question for at least over 35
years; Olimpia Ramos having possessed the same
since the last world war in 1941 and then having
sold the same on July 3, 1947 to the Piguing
spouses who built a house thereon and
continuously possessed the same until they sold
the same in turn to the Meralco on August 13,
1976, 12 Meralco's predecessors-in-interest had
therefore acquired by operation of the Public
Land Act a Government grant to the property, as
well as acquired ownership thereof by right
of acquisitive prescription over the land which
thereby became private property. The very
definition of prescription as a mode of acquiring
ownership as set forth in Art. 1106 of the Civil
Code provides that "By prescription one acquires
ownership and other real rights through lapse of
time in the manner and under the conditions laid
down by law." The law does I not provide that
one acquires ownership of a land by
prescription only after his title thereto is
judicially confirmed. To this same effect is the
ruling in Cariño vs. Insular
Government, 13 wherein the U.S. Supreme Court
speaking through Justice Holmes held that:
It is true that the language of
articles 4 and 5 attributes title
to those 'who may prove'
possession for the necessary
time and we do not overlook
the argument that this means
may prove in registration
proceedings. It may be that an
English conveyancer would
have recommended an
application under the
foregoing decree, but
certainly it was not calculated
to convey to the mind of an
Igorot chief the notion that
ancient family possessions
were in danger, if he had read
every word of it. The words
'may prove' (acrediten), as
well, or better, in view of the
other provisions, might
be taken to mean when called
upon to do so in any
litigation. There are
indications that registration
was expected from all, but
none sufficient to show that,
for want of it, ownership
actually gained would be lost.
The effect of the
proof, wherever made,
was not to confer title, but
simply to establish it, as
already conferred by the
decree, if not by earlier law.
To the same effect is the Court's ruling
in Legarda and Prieto vs. Saleeby, 31 Phil. 590,
that "an owner does not obtain title by virtue of
certificate but rather obtains his certificate by
virtue of the fact that he has a fee simple title."
5. Since the public land became private property
upon completion of the 30th year of continuous,
exclusive, and unchallenged possession of the
applicant Meralco's predecessors-in-interest,
particularly the Piguing spouses who sold the
private land to the Meralco, there is no
justification for denying the Meralco's
application for registration of its duly acquired
title to the land. Meralco's predecessors-in-
interest had acquired ownership of the land by
acquisitive prescription as provided by the
Public Land Act and by the Civil Code. The land
became private property and Meralco duly
acquired it by right of purchase. To deny
Meralco's application to register the property
because it is not a natural person is unjustified
because neither the new constitutional ban
under the 1973 Constitution against private
corporations owning lands of the public domain
or the Public Land Act's limitation on the right of
application for confirmation of imperfect title to
lands of the public domain can be invoked any
longer as the land had long ceased to be public
land but had become private property. Meralco's
application in effect seeks confirmation of the
acquisition of ownership of the land which had
become private property of its predecessors-in-
interest, the Piguing spouses who thru their
open and unchallenged possession of the land for
over thirty years acquired title thereto by
acquisitive prescription and by conclusive
presumption of the Public Land Act itself. There
is no legal nor constitutional obstacle to such
title being transferred to the Meralco by right of
purchase and traditio — for it is not claimed that
there is any legal prohibition against the Piguing
spouses transferring the ownership of the land
to others (whether natural persons or
corporations) such as the applicant Meralco,
even before the formal issuance of the certificate
of title to them.
6. To uphold respondent judge's denial of
Meralco's application on the technicality that the
Public Land Act allows only citizens of the
Philippines who are natural persons to apply for
confirmation of their title would be impractical
and would just give rise to multiplicity of court
actions. Assuming that there was a technical
error in not having filed the application for
registration in the name of the Piguing spouses
as the original owners and vendors, still it is
conceded that there is no prohibition against
their sale of the land to the applicant Meralco
and neither is there any prohibition against the
application being refiled with retroactive effect
in the name of the original owners and vendors
(as such natural persons) with the end result of
their application being granted, because of their
indisputable acquisition of ownership by
operation of law and the conclusive presumption
therein provided in their favor. It should not be
necessary to go through all the rituals at the
great cost of refiling of all such applications in
their names and adding to the overcrowded
court dockets when the Court can after all these
years dispose of it here and now. (See Francisco
vs. City of Davao 14 )
The ends of justice would best be served,
therefore, by considering the applications for
confirmation as amended to conform to the
evidence, i.e. as filed in the names of the original
persons who as natural persons are duly
qualified to apply for formal confirmation of the
title that they had acquired by conclusive
presumption and mandate of the Public Land Act
and who thereafter duly sold to the herein
corporations (both admittedly Filipino
corporations duly qualified to hold and own
private lands) and granting the applications for
confirmation of title to the private lands so
acquired and sold or exchanged.
7. All that has been said here applies of course
with equal force to the Iglesia case, save that as
already stated at the beginning hereof, the Iglesia
application was granted because the Republic
presented no evidence in support of its
opposition and respondent judge held in effect
that the property had ceased to be land of the
public domain and had become private property,
the title to which could be duly issued in the
name of the Iglesia as the transferee of its
predecessors-in-interest.
8. It should bear emphasis that what are
involved here are small parcels of land, of 165
square meters in the Meralco case used for
installation of an "anchor guy" for its steel posts
in connection with its tasks as a nationalized
domestic corporation to furnish electrical service
to the consumer public, and of 313 square
meters in the Iglesia case used as the site of its
church built thereon to minister to the religious
needs of its members. In no way, may the letter,
intent and spirit of the prohibition of the 1973
Constitution against corporations "holding
alienable lands of the public domain except by
lease not to exceed one thousand hectares in
area" (which is beamed against the undue
control and exploitation of our public lands and
natural resources by corporations, Filipino and
foreign-controlled) be deemed violated or
disregarded by the granting of the applications
at bar. The two corporations in truth and in fact
do not hold the small parcels of land at bar for except to individuals, corporations, or
their own use or benefit but for the sole use and associations qualified to acquire or hold lands of
benefit of the public. the domain'" (at page 2) that "hence, even if the
land involved in the present case is
9. With reference to the separate concurring considered private land, the cited section
opinion of Mr. Justice De Castro wherein he prohibits its acquisition by the Meralco or Iglesia
would blunt the "supposedly (sic) well- which admittedly are 'corporations' or
established doctrine" (at page 1) from the 1909 associations within the meaning of the aforecited
case of Cariño and the 1925 case of Susidown to provision of the New Constitution. The
the 1980 case of Herico (supra, at pages 5 to 11) observation should end all arguments on the
and support the contrary pronouncement in Mr. issue of whether the land in question is public or
Justice Aquino's main opinion that "as between private land" (idem) might mislead one to the
the State and the Meralco, the said land is still wrong conclusion that corporations with 60%
public land. It would cease to be public land only Filipino ownership may not own private lands
upon the issuance of the certificate of title to any when the express provisions of Art. XIV, section
Filipino citizen claiming it under section 48(b) 9 15 and section 14 as quoted by himself as well
[of the Public Land Act]" (at page 5), suffice it to as the counterpart provisions of the 1935
cite his own pronouncement Constitution have always expressly permitted
in Herico(reiterating the well-established and Filipino-owned corporations to own private
lands, and the only change effected in the 1973
prevailing doctrine which this Court has not
overturned, as it cannot overturn the mandate of Constitution is section 11 which now prohibits
even such Filipino corporations to own or hold
the statute that the unchallenged possessor for
at least 30 years is "conclusively presumed to lands of the public domain except by lease not to
exceed 1,000 hectares in area.
have performed all the conditions essential to a
government grant") wherein Mr. Justice De
Castro categorically reiterated for the Court that ACCORDINGLY, I vote for reversal of respondent
"As interpreted in several cases court's judgment in the Meralco case and for the
.....the possessor is deemed to have acquired, by entry of a new judgment granting Meralco's
operation of law, a right to a grant, a government application and for affirmance of judgment in the
grant, without the necessity of a certificate of title second case granting the Iglesia application.
being issued. The land, therefore, ceases to be of
the public domain, and beyond the authority of
the Director of Lands to dispose of. The
application for confirmation is a mere formality,
the lack of which does not affect the legal
sufficiency of the title as would be evidenced by
the patent and the Torrens title to be issued upon
the strength of said patent. "
It only remains to point out, in order to avoid
misapprehension or confusion, that Mr. Justice
De Castro's seemingly querulous statement that
"the discussion of the question of whether the
land involved is still public oralready private
land, is however, entirely pointless or an Idle
exercise, if We consider the provision of Section
14, Article XIV of the Constitution which appears
to have been lost sight of, which provides that
'save in cases of hereditary succession,
no private lands shall be transferred or conveyed
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-12719 May 31, 1962
THE COLLECTOR OF INTERNAL
REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE
CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
This is a petition to review the decision of the
Court of Tax Appeals, reversing the decision of
the Collector of Internal Revenue, assessing
against and demanding from the "Club Filipino,
Inc. de Cebu", the sum of P12,068.84 as fixed and
percentage taxes, surcharge and compromise
penalty, allegedly due from it as a keeper of bar
and restaurant.
As found by the Court of Tax Appeals, the "Club
Filipino, Inc. de Cebu," (Club, for short), is a civic
corporation organized under the laws of the
Philippines with an original authorized capital
stock of P22,000.00, which was subsequently
increased to P200,000.00, among others, to it
"proporcionar, operar, y mantener un campo de
golf, tenis, gimnesio (gymnasiums), juego de
bolos (bowling alleys), mesas de billar y pool, y
toda clase de juegos no prohibidos por leyes
generales y ordenanzas generales; y desarollar y
cultivar deportes de toda clase y denominacion
cualquiera para el recreo y entrenamiento
saludable de sus miembros y accionistas" (sec. 2,
Escritura de Incorporacion del Club Filipino, Inc.
Exh. A). Neither in the articles or by-laws is there
a provision relative to dividends and their
distribution, although it is covenanted that upon
its dissolution, the Club's remaining assets, after
paying debts, shall be donated to a charitable
Philippine Institution in Cebu (Art. 27, Estatutos
del Club, Exh. A-a.).
The Club owns and operates a club house, a
bowling alley, a golf course (on a lot leased from
the government), and a bar-restaurant where it
sells wines and liquors, soft drinks, meals and
short orders to its members and their guests.
The bar-restaurant was a necessary incident to
the operation of the club and its golf-course. The
club is operated mainly with funds derived from
membership fees and dues. Whatever profits it
had, were used to defray its overhead expenses
and to improve its golf-course. In 1951. as a
result of a capital surplus, arising from the re-
valuation of its real properties, the value or price
of which increased, the Club declared stock
dividends; but no actual cash dividends were
distributed to the stockholders. In 1952, a BIR
agent discovered that the Club has never paid
percentage tax on the gross receipts of its bar
and restaurant, although it secured B-4, B-9(a)
and B-7 licenses. In a letter dated December 22,
1852, the Collector of Internal Revenue assessed
against and demanded from the Club, the
following sums: —
As percentage tax on its
gross receipts
during the tax years 1946
to 1951 P9,599.07
Surcharge therein 2,399.77
As fixed tax for the years
70.00
1946 to 1952
Compromise penalty 500.00
The Club wrote the Collector, requesting for the
cancellation of the assessment. The request
having been denied, the Club filed the instant
petition for review.
The dominant issues involved in this case are
twofold:
1. Whether the respondent Club is liable for the
payment of the sum of 12,068.84, as fixed and
percentage taxes and surcharges prescribed in
sections 182, 183 and 191 of the Tax Code, under
which the assessment was made, in connection
with the operation of its bar and restaurant,
during the periods mentioned above; and
2. Whether it is liable for the payment of the sum
of P500.00 as compromise penalty.
Section 182, of the Tax Code states, "Unless
otherwise provided, every person engaging in a
business on which the percentage tax is imposed
shall pay in full a fixed annual tax of ten pesos for
each calendar year or fraction thereof in which
such person shall engage in said business."
Section 183 provides in general that "the
percentage taxes on business shall be payable at
the end of each calendar quarter in the amount
lawfully due on the business transacted during
each quarter; etc." And section 191, same Tax
Code, provides "Percentage tax . . . Keepers of
restaurants, refreshment parlors and other
eating places shall pay a tax three per centum,
and keepers of bar and cafes where wines or
liquors are served five per centum of their gross
receipts . . .". It has been held that the liability for
fixed and percentage taxes, as provided by these
sections, does not ipso facto attach by mere
reason of the operation of a bar and restaurant.
For the liability to attach, the operator thereof
must be engaged in the business as a barkeeper
and restaurateur. The plain and ordinary
meaning ofbusiness is restricted to activities or
affairs where profit is the purpose or livelihood
is the motive, and the term business when used
without qualification, should be construed in its
plain and ordinary meaning, restricted to
activities for profit or livelihood (The Coll. of Int.
Rev. v. Manila Lodge No. 761 of the BPOE [Manila
Elks Club] & Court of Tax Appeals, G.R. No. L-
11176, June 29, 1959, giving full definitions of
the word "business"; Coll. of Int. Rev. v. Sweeney,
et al. [International Club of Iloilo, Inc.], G.R. No. L-
12178, Aug. 21, 1959, the facts of which are
similar to the ones at bar; Manila Polo Club v. B.
L. Meer, etc., No. L-10854, Jan. 27, 1960).
Having found as a fact that the Club was
organized to develop and cultivate sports of all
class and denomination, for the healthful
recreation and entertainment of its stockholders
and members; that upon its dissolution, its
remaining assets, after paying debts, shall be
donated to a charitable Philippine Institution in
Cebu; that it is operated mainly with funds
derived from membership fees and dues; that
the Club's bar and restaurant catered only to its
members and their guests; that there was in fact
no cash dividend distribution to its stockholders
and that whatever was derived on retail from its
bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-
course (cost-plus-expenses-basis), it stands to
reason that the Club is not engaged in the
business of an operator of bar and restaurant
(same authorities, cited above).
It is conceded that the Club derived profit from
the operation of its bar and restaurant, but such
fact does not necessarily convert it into a profit-
making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its
purposes and the profits derived therefrom are
necessarily incidental to the primary object of
developing and cultivating sports for the
healthful recreation and entertainment of the
stockholders and members. That a Club makes
some profit, does not make it a profit-making
Club. As has been remarked a club should always
strive, whenever possible, to have surplus (Jesus
Sacred Heart College v. Collector of Int. Rev., G.R.
No. L-6807, May 24, 1954; Collector of Int. Rev. v.
Sinco Educational Corp., G.R. No. L-9276, Oct. 23,
1956).1äwphï1.ñët
It is claimed that unlike the two cases just cited
(supra), which are non-stock, the appellee Club
is a stock corporation. This is unmeritorious. The
facts that the capital stock of the respondent
Club is divided into shares, does not detract from
the finding of the trial court that it is not engaged
in the business of operator of bar and restaurant.
What is determinative of whether or not the Club
is engaged in such business is its object or
purpose, as stated in its articles and by-laws. It is
a familiar rule that the actual purpose is not
controlled by the corporate form or by the
commercial aspect of the business prosecuted,
but may be shown by extrinsic evidence,
including the by-laws and the method of
operation. From the extrinsic evidence adduced,
the Tax Court concluded that the Club is not
engaged in the business as a barkeeper and
restaurateur.

Moreover, for a stock corporation to exist, two

requisites must be complied with, to wit: (1) a
capital stock divided into shares and (2) an
authority to distribute to the holders of such
shares, dividends or allotments of the surplus
profits on the basis of the shares held (sec. 3, Act
No. 1459). In the case at bar, nowhere in its
articles of incorporation or by-laws could be
found an authority for the distribution of its
dividends or surplus profits. Strictly speaking, it
cannot, therefore, be considered a stock
corporation, within the contemplation of the
corporation law.

A tax is a burden, and, as such, it should not be

deemed imposed upon fraternal, civic, non-
profit, nonstock organizations, unless the intent
to the contrary is manifest and patent" (Collector
v. BPOE Elks Club, et al.,supra), which is not the
case in the present appeal.

Having arrived at the conclusion that respondent

Club is not engaged in the business as an
operator of a bar and restaurant, and therefore,
not liable for fixed and percentage taxes, it
follows that it is not liable for any penalty, much
less of a compromise penalty.

WHEREFORE, the decision appealed from is

affirmed without costs.

Padilla, Bautista Angelo, Labrador, Concepcion,

Reyes, J.B.L., Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.
Republic of the Philippines "Edgardo D. Pabalan, et al., vs.
SUPREME COURT Spouses Florentino
Manila Manalastas, et al.," is
dismissed for lack of merits;
SECOND DIVISION
In Civil Case No. 8278-P, the
complaint filed by Manuel R.
G.R. No. 91889 August 27, 1993
Dulay Enterprises, Inc. for
cancellation of title of Manuel
MANUEL R. DULAY ENTERPRISES, INC., A. Torres, Jr. (TCT No. 24799
VIRGILIO E. DULAY AND NEPOMUCENO of the Register of Deeds of
REDOVAN, petitioners, Pasay City) and reconveyance,
vs. is dismissed for lack or merit,
THE HONORABLE COURT OF APPEALS,
and,
EDGARDO D. PABALAN, MANUEL A. TORRES,
JR., MARIA THERESA V. VELOSO AND
In Civil Case No. 8198-P,
CASTRENSE C. VELOSO, respondents.
defendants Manuel R. Dulay
Enterprises, Inc. and Virgilio
Virgilio E. Dulay for petitioners. E. Dulay are ordered to
surrender and deliver
Torres, Tobias, Azura & Jocson for private possession of the parcel of
respondents. land, together with all the
improvements thereon,
described in Transfer
Certificate of Title No. 24799
of the Register of Deeds of
NOCON, J.: Pasay City, in favor of therein
plaintiffs Manuel A. Torres, Jr.
This is a petition for review on certiorari to as owner and Edgardo D.
annul and set aside the decision 1 of the Court of Pabalan as real estate
Appeals affirming the decision2 of the Regional administrator of said Manuel
Trial Court of Pasay, Branch 114 Civil Cases Nos. A. Torres, Jr.; to account for
8198-P, and 2880-P, the dispositive portion of and return to said plaintiffs
which reads, as follows: the rentals from dwelling unit
No. 8-A of the apartment
Wherefore, in view of all the building (Dulay Apartment)
from June 1980 up to the
foregoing considerations, in
this Court hereby renders present, to indemnify
plaintiffs, jointly and
judgment, as follows:
severally, expenses of
litigation in the amount of
In Civil Case No. 2880-P, the
P4,000.00 and attorney's fees
petition filed by Manuel R. in the sum of P6,000.00, for all
Dulay Enterprises, Inc. and the three (3) cases. Co-
Virgilio E. Dulay for defendant Nepomuceno
annulment or declaration of Redovan is ordered to pay the
nullity of the decision of the current and subsequent
Metropolitan Trial Court, rentals on the premises leased
Branch 46, Pasay City, in its by him to plaintiffs.
Civil Case No. 38-81 entitled
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. 8Subsequently, 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 the corporation after having knowledge of the
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
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.
Narvasa, C.J., Padilla and Regalado, JJ., concur.
Puno, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-4900 August 31, 1953
FINANCING CORPORATION OF THE
PHILIPPINES and J. AMADO
ARANETA, petitioners,
vs.
HON. JOSE TEODORO, Judge of the Court of
First Instance of Negros Occidental, Branch II,
and ENCARNACION LIZARES VDA. DE
PANLILIO, respondents.
Vicente Hilado for petitioners.
Antonio Barredo for respondents.
MONTEMAYOR, J.:
In civil case No. 1924 of the Court of First
Instance of Negros Occidental, Asuncion Lopez
Vda. de Lizares, Encarnacion Lizares Vda. de
Panlilio and Efigenia Vda. de Paredes, in their
own behalf and in behalf of the other minority
stockholders of the Financing Corporation of the
Philippines, filed a complaint against the said
corporation and J. Amado Araneta, its president
and general manager, claiming among other
things alleged gross mismanagement and
fraudulent conduct of the corporate affairs of the
defendant corporation by J. Amado Araneta, and
asking that the corporation be dissolved; that J.
Amado Araneta be declared personally
accountable for the amounts of the unauthorized
and fraudulent disbursements and disposition of
assets made by him, and that he be required to
account for said assets, and that pending trial
and disposition of the case on its merits a
receiver be appointed to take possession of the
books, records and assets of the defendant
corporation preparatory to its dissolution and
liquidation and distribution of the assets. Over
the strong objection of the defendants, the trial
court presided by respondent Judge Jose
Teodoro, granted the petition for the
appointment of a receiver and designated Mr.
Alfredo Yulo as such receiver with a bond of
P50,000. Failing to secure a reconsideration of
the order appointing a receiver, the defendants
in said case, Financing Corporation of the
Philippines and J. Amado Araneta, as petitioners,
have filed the present petition for certiorari with
preliminary injunction to revoke and set aside
the order. Acting upon that part of the petition
asking for a writ of preliminary injunction, a
majority of the court granted the same upon the
filing of a bond by the petitioners in the sum of
P50,000.
The main contention of the petitioners in
opposing the appointment of a receiver in this
case is that said appointment is merely an
auxiliary remedy; that the principal remedy
sought by the respondents in the action in
Negros Occidental was the dissolution of the
Financing Corporation of the Philippines; that
according to the law a suit for the dissolution of a
corporation can be brought and maintained only
by the State through its legal counsel, and that
respondents, much less the minority
stockholders of said corporation, have no right
or personality to maintain the action for
dissolution, and that inasmuch as said action
cannot be maintained legally by the respondents,
then the auxiliary remedy for the appointment of
a receiver has no basis.
True it is that the general rule is that the
minority stockholders of a corporation cannot
sue and demand its dissolution. However, there
are cases that hold that even minority
stockholders may ask for dissolution, this, under
the theory that such minority members, if unable
to obtain redress and protection of their rights
within the corporation, must not and should not
be left without redress and remedy. This was
what probably prompted this Court to state in
the case of Hall, et al. vs. Judge Piccio,* G.R. No. L-
2598 (47 Off. Gaz. No. 12 Supp., p. 200) that even
the existence of a de jure corporation may be
terminated in a private suit for its dissolution by
the stockholders without the intervention of the
State. It was therein further held that although
there might be some room for argument on the
right of minority stockholders to ask for
dissolution,-that question does not affect the
court's jurisdiction over the case, and that the
remedy by the party dissatisfied was to appeal
from the decision of the trial court. We repeat
that although as a rule, minority stockholders of
a corporation may not ask for its dissolution in a
private suit, and that such action should be
brought by the Government through its legal
officer in a quo warranto case, at their instance
and request, there might be exceptional cases
wherein the intervention of the State, for one
reason or another, cannot be obtained, as when
the State is not interested because the complaint
is strictly a matter between the stockholders and
does not involve, in the opinion of the legal
officer of the Government, any of the acts or
omissions warranting quo warranto proceedings,
in which minority stockholders are entitled to
have such dissolution. When such action or
private suit is brought by them, the trial court
had jurisdiction and may or may not grant the
prayer, depending upon the facts and
circumstances attending it. The trial court's
decision is of course subject to review by the
appellate tribunal. Having such jurisdiction, the
appointment of a receiver pendente lite is left to
the sound discretion of the trial court. As was
said in the case of Angeles vs. Santos (64 Phil.,
697), the action having been properly brought
and the trial court having entertained the same,
it was within the power of said court upon
proper showing to appoint a receiverpendente
lite for the corporation; that although the
appointment of a receiver upon application of
the minority stockholders is a power to be
exercised with great caution, nevertheless, it
should be exercised necessary in order not to
entirely ignore and disregard the rights of said
minority stockholders, especially when said
minority stockholders are unable to obtain
redress and protection of their rights within the
corporation itself.
In that civil case No. 1924 of Negros Occidental
court, allegations of mismanagement and
misconduct by its President and Manager were
made, specially in connection with the petition
for the appointment of a receiver. in order to
have an idea of the seriousness of said
allegations, we reproduce a pertinent portion of
the order of respondent Judge Teodoro dated
June 23, 1951, subject of these certiorari
proceedings:
Considering plaintiffs' complaint and
verified motion for appointment of a
receiver together, as they have been
treated jointly in the opposition of the
defendants, the grounds of the prayer
for receivership may be briefly stated
to be: (1) imminent danger of
insolvency; (2) fraud and
mismanagement, such as, particularly,
(a) wrongful and unauthorized
diversion from corporate purposes and
use for personal benefit of defendant
Araneta, for the benefit of the
corporations under his control and of
which he is majority stockholder
and/or for the benefit of his relatives,
personal friends and the political
organization to which he is affiliated of
approximately over one and a half
million pesos of the funds of the
defendant corporation in the form of
uncollected allowances and loans,
either without or with uncollected
interest, and either unsecured or
insufficiently secured, and sometimes
with a securities appearing in favor of
defendant Araneta as if the funds
advanced or loaned were his own; (b)
unauthorized and profitless pledging of
securities owned by defendant
corporation to secure obligations
amounting to P588,645.34 of another
corporation controlled by defendant
Araneta; (c) unauthorized and
profitless using of the name of the
defendant corporation in the shipping
of sugar belonging to other
corporations controlled by defendant
Araneta to the benefit of said
corporations in the amount of at least
P104,343.36; (d) refusal by defendant
Araneta to endorse to the defendant
corporation shares of stock and other
securities belonging to it but which are
still in his name; (e) negligent failure to
endorse other shares of stock
belonging to defendant corporation but
 still in the names of the respective petition for the appointment of a receiver, he
vendors; and (f) illegal and neither exceeded his jurisdiction nor abused his
unauthorized transfer and deposit in discretion in appointing a receiver. The petition
the United States of America of for certiorari is hereby denied, with costs. The
6,426,281 shares of the Atok-Big writ of preliminary injunction heretofore issued
Wedge Mining Company; (3) violations is hereby ordered dissolved.
of the corporation law and the by-laws
of the corporation such as (a) refusal to Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Reyes,
allow minority stockholders to examine Jugo, Bautista Angelo, and Labrador, JJ., concur.
the books and records of the
corporation; (b) failure to call and hold
stockholders' and directors' meetings;
(c) virtual disregard and ignoring of the
board of directors by defendant
Araneta who has been and is
conducting the affairs of the
corporation under his absolute control
and for his personal benefit and for the
benefit of the corporations controlled
by him, to the prejudice and in
disregard of the rights of the plaintiffs
and other minority stockholders; and
(d) irregularity in the keeping and (e)
errors and omissions in the books and
failure of the same to reflect the real
and actual transactions of the
defendant corporations; (4) failure to
achieve the fundamental purpose of the
corporation; (5) if administration,
possession and control of the affairs,
books, etc. of defendant corporation are
left in the hands of the defendant
Araneta and the present corporate
officials, under his power and influence,
the remaining assets of the corporation
are in danger of being further
dissipated, wasted or lost and of
becoming ultimately unavailable for
distribution among its stockholders;
and (6) the best means to protect and
preserve the assets of defendant
corporation is the appointment of a
receiver.

In conclusion, we hold that the trial court

through respondent Judge Teodoro had
jurisdiction and properly entertained the
original case; that he also had jurisdiction to
appoint a receiver pendente lite, and considering
the allegations made in connection with the
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO.,
INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of
First Instance of Manila absolving the defendant
from the plaintiff's complaint.
Manuel Tabora is the registered owner of four
parcels of land situated in the barrio of Linao,
town of Aparri, Province of Cagayan, as
evidenced by transfer certificate of title No. 217
of the land records of Cagayan, a copy of which is
in evidence as Exhibit 1. To guarantee the
payment of a loan in the sum of P8,000, Manuel
Tabora, on August 14, 1929, executed in favor of
the Philippine National Bank a first mortgage on
the four parcels of land above-mentioned. A
second mortgage in favor of the same bank was
in April of 1930 executed by Tabora over the
same lands to guarantee the payment of another
loan amounting to P7,000. A third mortgage on
the same lands was executed on April 16, 1930
in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These
mortgages were registered and annotations
thereof appear at the back of transfer certificate
of title No. 217.
On May 31, 1930, Tabora executed a public
document entitled "Escritura de Transpaso de
Propiedad Inmueble" (Exhibit A) by virtue of
which the four parcels of land owned by him was
sold to the plaintiff company, said to under
process of incorporation, in consideration of one
peso (P1) subject to the mortgages in favor of the
Philippine National Bank and Severina Buzon
and, to the condition that the certificate of title to
said lands shall not be transferred to the name of
the plaintiff company until the latter has fully
and completely paid Tabora's indebtedness to
the Philippine National Bank.
The plaintiff company filed its article
incorporation with the Bureau of Commerce and
Industry on October 22, 1930 (Exhibit 2). A year
later, on October 28, 1931, the board of directors
of said company adopted a resolution (Exhibit G)
authorizing its president, Jose Ventura, to sell the
four parcels of lands in question to Teodoro
Sandiko for P42,000. Exhibits B, C and D were
thereafter made and executed. Exhibit B is a
deed of sale executed before a notary public by
the terms of which the plaintiff sold ceded and
transferred to the defendant all its right, titles,
and interest in and to the four parcels of land
described in transfer certificate in turn obligated
himself to shoulder the three mortgages
hereinbefore referred to. Exhibit C is a
promisory note for P25,300. drawn by the
defendant in favor of the plaintiff, payable after
one year from the date thereof. Exhibit D is a
deed of mortgage executed before a notary
public in accordance with which the four parcels
of land were given a security for the payment of
the promissory note, Exhibit C. All these three
instrument were dated February 15, 1932.
The defendant having failed to pay the sum
stated in the promissory note, plaintiff, on
January 25, 1934, brought this action in the
Court of First Instance of Manila praying that
judgment be rendered against the defendant for
the sum of P25,300, with interest at legal rate
from the date of the filing of the complaint, and
the costs of the suits. After trial, the court below,
on December 18, 1934, rendered judgment
absolving the defendant, with costs against the
plaintiff. Plaintiff presented a motion for new
trial on January 14, 1935, which motion was
denied by the trial court on January 19 of the
same year. After due exception and notice,
plaintiff has appealed to this court and makes an
assignment of various errors.
In dismissing the complaint against the
defendant, the court below, reached the
conclusion that Exhibit B is invalid because of
vice in consent and repugnancy to law. While we
do not agree with this conclusion, we have
however voted to affirm the judgment appealed
from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan
fishing Development Co., Inc., plaintiff herein,
was affected on May 31, 1930 (Exhibit A) and the
actual incorporation of said company was
affected later on October 22, 1930 (Exhibit 2). In
other words, the transfer was made almost five
months before the incorporation of the company.
Unquestionably, a duly organized corporation
has the power to purchase and hold such real
property as the purposes for which such
corporation was formed may permit and for this
purpose may enter into such contracts as may be
necessary (sec. 13, pars. 5 and 9, and sec. 14, Act
No. 1459). But before a corporation may be said
to be lawfully organized, many things have to be
done. Among other things, the law requires the
filing of articles of incorporation (secs. 6 et seq.,
Act. No. 1459). Although there is a presumption
that all the requirements of law have been
complied with (sec. 334, par. 31 Code of Civil
Procedure), in the case before us it can not be
denied that the plaintiff was not yet incorporated
when it entered into a contract of sale, Exhibit A.
The contract itself referred to the plaintiff as
"una sociedad en vias de incorporacion." It was
not even a de facto corporation at the time. Not
being in legal existence then, it did not possess
juridical capacity to enter into the contract.
Corporations are creatures of the law,
and can only come into existence in the
manner prescribed by law. As has
already been stated, general law
authorizing the formation of
corporations are general offers to any
persons who may bring themselves
within their provisions; and if
conditions precedent are prescribed in
the statute, or certain acts are required
to be done, they are terms of the offer,
and must be complied with
substantially before legal corporate
existence can be acquired. (14 C. J., sec.
111, p. 118.)
That a corporation should have a full
and complete organization and
existence as an entity before it can
enter into any kind of a contract or
transact any business, would seem to
be self evident. . . . A corporation, until
organized, has no being, franchises or
faculties. Nor do those engaged in
bringing it into being have any power
to bind it by contract, unless so
authorized by the charter there is not a
corporation nor does it possess
franchise or faculties for it or others to
exercise, until it acquires a complete
existence. (Gent vs. Manufacturers and
Merchant's Mutual Insurance Company,
107 Ill., 652, 658.)
Boiled down to its naked reality, the contract
here (Exhibit A) was entered into not between
Manuel Tabora and a non-existent corporation
but between the Manuel Tabora as owner of the
four parcels of lands on the one hand and the
same Manuel Tabora, his wife and others, as
mere promoters of a corporations on the other
hand. For reasons that are self-evident, these
promoters could not have acted as agent for a
projected corporation since that which no legal
existence could have no agent. A corporation,
until organized, has no life and therefore no
faculties. It is, as it were, a child in ventre sa mere.
This is not saying that under no circumstances
may the acts of promoters of a corporation be
ratified by the corporation if and when
subsequently organized. There are, of course,
exceptions (Fletcher Cyc. of Corps., permanent
edition, 1931, vol. I, secs. 207 et seq.), but under
the peculiar facts and circumstances of the
present case we decline to extend the doctrine of
ratification which would result in the
commission of injustice or fraud to the candid
and unwary.(Massachusetts rule, Abbott vs.
Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L.
R. A., 586; 15 Am. St. Rep., 193; citing English
cases; Koppel vs. Massachusetts Brick Co., 192
Mass., 223; 78 N. E., 128; Holyoke Envelope Co.,
vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E.,
54.) It should be observed that Manuel Tabora the Cagayan Fishing Development Company, Inc.,
was the registered owner of the four parcels of which transfer is evidenced by Exhibit A, was
land, which he succeeded in mortgaging to the subject to a condition precedent (condicion
Philippine National Bank so that he might have suspensiva), namely, the payment of the
the necessary funds with which to convert and mortgage debt of said Tabora to the Philippine
develop them into fishery. He appeared to have National Bank, and that this condition not having
met with financial reverses. He formed a been complied with by the Cagayan Fishing
corporation composed of himself, his wife, and a Development Company, Inc., the transfer was
few others. From the articles of incorporation, ineffective. (Art. 1114, Civil Code; Wise & Co. vs.
Exhibit 2, it appears that out of the P48,700, Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p.
amount of capital stock subscribed, P45,000 was 141.) However, having arrived at the conclusion
subscribed by Manuel Tabora himself and P500 that the transfer by Manuel Tabora to the
by his wife, Rufina Q. de Tabora; and out of the Cagayan Fishing Development Company, Inc. was
P43,300, amount paid on subscription, P42,100 null because at the time it was affected the
is made to appear as paid by Tabora and P200 by corporation was non-existent, we deem it
his wife. Both Tabora and His wife were unnecessary to discuss this point.lawphil.net
directors and the latter was treasurer as well. In
fact, to this day, the lands remain inscribed in The decision of the lower court is accordingly
Tabora's name. The defendant always regarded affirmed, with costs against the appellant. So
Tabora as the owner of the lands. He dealt with Ordered.
Tabora directly. Jose Ventura, president of the
plaintiff corporation, intervened only to sign the
contract, Exhibit B, in behalf of the plaintiff. Even Villa-Real, Abad Santos, Imperial, Diaz and
the Philippine National Bank, mortgagee of the Concepcion, JJ., concur.
four parcels of land, always treated Tabora as the
owner of the same. (See Exhibits E and F.) Two
civil suits (Nos. 1931 and 38641) were brought
against Tabora in the Court of First Instance of
Manila and in both cases a writ of attachment
against the four parcels of land was issued. The
Philippine National Bank threatened to foreclose
its mortgages. Tabora approached the defendant
Sandiko and succeeded in the making him sign
Exhibits B, C, and D and in making him, among
other things, assume the payment of Tabora's
indebtedness to the Philippine National Bank.
The promisory note, Exhibit C, was made payable
to the plaintiff company so that it may not
attached by Tabora's creditors, two of whom had
obtained writs of attachment against the four
parcels of land.

If the plaintiff corporation could not and did not

acquire the four parcels of land here involved, it
follows that it did not possess any resultant right
to dispose of them by sale to the defendant,
Teodoro Sandiko.

Some of the members of this court are also of the

opinion that the transfer from Manuel Tabora to
Republic of the Philippines Morong, Rizal, from enforcing in any way the
SUPREME COURT cancellation and revocation of petitioner's
Manila franchise and certificate of public convenience
during the pendency of this appeal. By resolution
EN BANC of March 12, 1963, this Court denied the petition
for injunction, for lack of merit.
G.R. No. L-20993 September 28, 1968
Case G. R. L-21221 is likewise a petition of the
Rizal Light & Ice Co., Inc. to review and set aside
RIZAL LIGHT & ICE CO., INC., petitioner, the decision of the Commission dated March 13,
vs. 1963 in PSC Case No. 62-5143 granting a
THE MUNICIPALITY OF MORONG, RIZAL and certificate of public convenience and necessity to
THE PUBLIC SERVICE respondent Morong Electric Co., Inc. 2 to operate
COMMISSION, respondents. an electric light, heat and power service in the
municipality of Morong, Rizal. In the petition
---------------------------- Rizal Light & Ice Co., Inc. also prayed for the
issuance of a writ of preliminary injunction ex
G.R. No. L-21221 September 28, 1968 parte suspending the effectivity of said decision.
Per resolution of this Court, dated May 6, 1963,
said petition for injunction was denied.
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE PUBLIC SERVICE COMMISSION and The facts, as they appear in the records of both
cases, are as follows:
MORONG ELECTRIC CO., INC., respondents.
Petitioner Rizal Light & Ice Co., Inc. is a domestic
Amado A. Amador, Jr. for petitioner.
Atilano C. Bautista and Pompeyo F. Olivas for corporation with business address at Morong,
Rizal. On August 15, 1949, it was granted by the
respondents.
Commission a certificate of public convenience
and necessity for the installation, operation and
maintenance of an electric light, heat and power
service in the municipality of Morong, Rizal.
ZALDIVAR, J.:
In an order dated December 19, 1956, the
Commission required the petitioner to appear
These two cases, being interrelated, are decided before it on February 18, 1957 to show cause
together. why it should not be penalized for violation of
the conditions of its certificate of public
Case G.R. No. L-20993 is a petition of the Rizal convenience and the regulations of the
Commission, and for failure to comply with the
Light & Ice Co., Inc. to review and set aside the
orders of respondent Public Service directives to raise its service voltage and
maintain them within the limits prescribed in the
Commission, 1 dated August 20, 1962, and
February 15, 1963, in PSC Case No. 39716, Revised Order No. 1 of the Commission, and to
acquire and install a kilowattmeter to indcate the
cancelling and revoking the certificate of public
convenience and necessity and forfeiting the load in kilowatts at any particular time of the
generating unit. 3
franchise of said petitioner. In the same petition,
the petitioner prayed for the issuance of a writ of
preliminary injunction ex parte suspending the For failure of the petitioner to appear at the
effectivity of said orders and/or enjoining hearing on February 18, 1957, the Commission
respondents Commission and/or Municipality of ordered the cancellation and revocation of
petitioner's certificate of public convenience and
necessity and the forfeiture of its franchise.
Petitioner moved for reconsideration of said
order on the ground that its manager, Juan D.
Francisco, was not aware of said hearing.
Respondent municipality opposed the motion
alleging that petitioner has not rendered efficient
and satisfactory service and has not complied
with the requirements of the Commission for the
improvement of its service. The motion was set
for hearing and Mr. Pedro S. Talavera, Chief,
Industrial Division of the Commission, was
authorized to conduct the hearing for the
reception of the evidence of the parties. 4
Finding that the failure of the petitioner to
appear at the hearing set for February 18, 1957
— the sole basis of the revocation of petitioner's
certificate — was really due to the illness of its
manager, Juan D. Francisco, the Commission set
aside its order of revocation. Respondent
municipality moved for reconsideration of this
order of reinstatement of the certificate, but the
motion was denied.
In a petition dated June 25, 1958, filed in the
same case, respondent municipality formally
asked the Commission to revoke petitioner's
certificate of public convenience and to forfeit its
franchise on the ground, among other things,
that it failed to comply with the conditions of
said certificate and franchise. Said petition was
set for hearing jointly with the order to show
cause. The hearings had been postponed several
times.
Meanwhile, inspections had been made of
petitioner's electric plant and installations by the
engineers of the Commission, as follows: April
15, 1958 by Engineer Antonio M. Alli; September
18, 1959, July 12-13, 1960, and June 21-24, 1961,
by Engineer Meliton S. Martinez. The inspection
on June 21-24, 1961 was made upon the request
of the petitioner who manifested during the
hearing on December 15, 1960 that
improvements have been made on its service
since the inspection on July 12-13, 1960, and
that, on the basis of the inspection report to be
submitted, it would agree to the submission of
the case for decision without further hearing.
When the case was called for hearing on July 5,
1961, petitioner failed to appear. Respondent
municipality was then allowed to present its
documentary evidence, and thereafter the case
was submitted for decision.
On July 7, 1961, petitioner filed a motion to
reopen the case upon the ground that it had not
been furnished with a copy of the report of the
June 21-24, 1961 inspection for it to reply as
previously agreed. In an order dated August 25,
1961, petitioner was granted a period of ten (10)
days within which to submit its written reply to
said inspection report, on condition that should
it fail to do so within the said period the case
would be considered submitted for decision.
Petitioner failed to file the reply. In consonance
with the order of August 25, 1961, therefore, the
Commission proceeded to decide the case. On
July 29, 1962 petitioner's electric plant was
burned.
In its decision, dated August 20, 1962, the
Commission, on the basis of the inspection
reports of its aforenamed engineers, found that
the petitioner had failed to comply with the
directives contained in its letters dated May 21,
1954 and September 4, 1954, and had violated
the conditions of its certificate of public
convenience as well as the rules and regulations
of the Commission. The Commission concluded
that the petitioner "cannot render the efficient,
adequate and satisfactory electric service
required by its certificate and that it is against
public interest to allow it to continue its
operation." Accordingly, it ordered the
cancellation and revocation of petitioner's
certificate of public convenience and the
forfeiture of its franchise.
On September 18, 1962, petitioner moved for
reconsideration of the decision, alleging that
before its electric plant was burned on July 29,
1962, its service was greatly improved and that
it had still existing investment which the
Commission should protect. But eight days
before said motion for reconsideration was filed,
or on September 10, 1962, Morong Electric,
having been granted a municipal franchise on
May 6, 1962 by respondent municipality to
install, operate and maintain an electric heat,
light and power service in said municipality —
approved by the Provincial Board of Rizal on
August 31, 1962 — filed with the Commission an
application for a certificate of public convenience
and necessity for said service. Said application
was entitled "Morong Electric Co., Inc.,
Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of
Morong Electric, alleging among other things,
that it is a holder of a certificate of public
convenience to operate an electric light, heat and
power service in the same municipality of
Morong, Rizal, and that the approval of said
application would not promote public
convenience, but would only cause ruinous and
wasteful competition. Although the opposition is
dated October 6, 1962, it was actually received
by the Commission on November 8, 1962, or
twenty four days after the order of general
default was issued in open court when the
application was first called for hearing on
October 15, 1962. On November 12, 1962,
however, the petitioner filed a motion to lift said
order of default. But before said motion could be
resolved, petitioner filed another motion, dated
January 4, 1963, this time asking for the
dismissal of the application upon the ground that
applicant Morong Electric had no legal
personality when it filed its application on
September 10, 1962, because its certificate of
incorporation was issued by the Securities and
Exchange Commission only on October 17, 1962.
This motion to dismiss was denied by the
Commission in a formal order issued on January
17, 1963 on the premise that applicant Morong
Electric was a de facto corporation.
Consequently, the case was heard on the merits
and both parties presented their respective
evidence. On the basis of the evidence adduced,
the Commission, in its decision dated March 13,
1963, found that there was an absence of electric
service in the municipality of Morong and that
applicant Morong Electric, a Filipino-owned
corporation duly organized and existing under
the laws of the Philippines, has the financial
capacity to maintain said service. These
circumstances, considered together with the
denial of the motion for reconsideration filed by
petitioner in Case No. 39715 on February, 15,
1963, such that as far as the Commission was
concerned the certificate of the petitioner was
already declared revoked and cancelled, the
Commission approved the application of Morong
Electric and ordered the issuance in its favor of
the corresponding certificate of public
convenience and necessity.1awphîl.nèt
On March 8, 1963, petitioner filed with this Court
a petition to review the decision in Case No.
39715 (now G. R. No. L-20993). Then on April
26, 1963, petitioner also filed a petition to
review the decision in Case No. 62-5143 (now G.
R. No. L-21221).
In questioning the decision of the Commission in
Case No. 39715, petitioner contends: (1) that the
Commission acted without or in excess of its
jurisdiction when it delegated the hearing of the
case and the reception of evidence to Mr. Pedro
S. Talavera who is not allowed by law to hear the
same; (2) that the cancellation of petitioner's
certificate of public convenience was
unwarranted because no sufficient evidence was
adduced against the petitioner and that
petitioner was not able to present evidence in its
defense; (3) that the Commission failed to give
protection to petitioner's investment; and (4)
that the Commission erred in imposing the
extreme penalty of revocation of the certificate.
In questioning the decision in Case No. 62-5143,
petitioner contends: (1) that the Commission
erred in denying petitioner's motion to dismiss
and proceeding with the hearing of the
application of the Morong Electric; (2) that the
Commission erred in granting Morong Electric a
certificate of public convenience and necessity
since it is not financially capable to render the
service; (3) that the Commission erred when it
made findings of facts that are not supported by
the evidence adduced by the parties at the trial;
and (4) that the Commission erred when it did
not give to petitioner protection to its
investment — a reiteration of the third
assignment of error in the other case.1awphîl.nèt
We shall now discuss the appeals in these two
cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner
contends that while Mr. Pedro S. Talavera, who
conducted the hearings of the case below, is a
division chief, he is not a lawyer. As such, under
Section 32 of Commonwealth Act No. 146, as
amended, the Commission should not have
delegated to him the authority to conduct the
hearings for the reception of evidence of the
parties.
We find that, really, Mr. Talavera is not a
lawyer. 5 Under the second paragraph of Section
32 of Commonwealth Act No. 146, as
amended, 6 the Commission can only authorize a
division chief to hear and investigate a case filed
before it if he is a lawyer. However, the
petitioner is raising this question for the first
time in this appeal. The record discloses that
petitioner never made any objection to the
authority of Mr. Talavera to hear the case and to
receive the evidence of the parties. On the
contrary, we find that petitioner had appeared
and submitted evidence at the hearings
conducted by Mr. Talavera, particularly the
hearings relative to the motion for
reconsideration of the order of February 18,
1957 cancelling and revoking its certificate. We
also find that, through counsel, petitioner had
entered into agreements with Mr. Talavera, as
hearing officer, and the counsel for respondent
municipality, regarding procedure in order to
abbreviate the proceedings. 7 It is only after the
decision in the case turned out to be adverse to it
that petitioner questioned the proceedings held
before Mr. Talavera.
This Court in several cases has ruled that
objection to the delegation of authority to hear a
case filed before the Commission and to receive
the evidence in connection therewith is a
procedural, not a jurisdictional point, and is
waived by failure to interpose timely the
objection and the case had been decided by the
Commission. 8 Since petitioner has never raised
any objection to the authority of Mr. Talavera
before the Commission, it should be deemed to
have waived such procedural defect, and
consonant with the precedents on the matter,
petitioner's claim that the Commission acted
without or in excess of jurisdiction in so
authorizing Mr. Talavera should be dismissed. 9
2. Anent the second assigned error, the gist of
petitioner's contention is that the evidence —
consisting of inspection reports — upon which
the Commission based its decision is insufficient
and untrustworthy in that (1) the authors of said
reports had not been put to test by way of cross-
examination; (2) the reports constitute only one
side of the picture as petitioner was not able to
present evidence in its defense; (3) judicial
notice was not taken of the testimony of Mr.
Harry B. Bernardino, former mayor of
respondent municipality, in PSC Case No. 625143
(the other case, G. R. No. L-21221) to the effect
that the petitioner had improved its service
before its electric power plant was burned on
July 29, 1962 — which testimony contradicts the
inspection reports; and (4) the Commission
acted both as prosecutor and judge — passing
judgment over the very same evidence presented
by it as prosecutor — a situation "not conducive
to the arrival at just and equitable decisions."
Settled is the rule that in reviewing the decision
of the Public Service Commission this Court is
not required to examine the proof de novo and
determine for itself whether or not the
preponderance of evidence really justifies the
decision. The only function of this Court is to
determine whether or not there is evidence
before the Commission upon which its decision
might reasonably be based. This Court will not
substitute its discretion for that of the
Commission on questions of fact and will not
interfere in the latter's decision unless it clearly
appears that there is no evidence to support
it. 10 Inasmuch as the only function of this Court
in reviewing the decision of the Commission is to
determine whether there is sufficient evidence
before the Commission upon which its decision
can reasonably be based, as it is not required to
examine the proof de novo, the evidence that
should be made the basis of this Court's
determination should be only those presented in
this case before the Commission. What then was
the evidence presented before the Commission
and made the basis of its decision subject of the
present appeal? As stated earlier, the
Commission based its decision on the inspection
reports submitted by its engineers who
conducted the inspection of petitioner's electric
service upon orders of the Commission. 11 Said
inspection reports specify in detail the
deficiencies incurred, and violations committed,
by the petitioner resulting in the inadequacy of
its service. We consider that said reports are
sufficient to serve reasonably as bases of the
decision in question. It should be emphasized, in
this connection that said reports, are not mere
documentary proofs presented for the
consideration of the Commission, but are the
results of the Commission's own observations
and investigations which it can rightfully take
into consideration, 12 particularly in this case
where the petitioner had not presented any
evidence in its defense, and speaking of
petitioner's failure to present evidence, as well
as its failure to cross-examine the authors of the
inspection reports, petitioner should not
complain because it had waived not only its right
to cross-examine but also its right to present
evidence. Quoted hereunder are the pertinent
portions of the transcripts of the proceedings
where the petitioner, through counsel,
manifested in clear language said waiver and its
decision to abide by the last inspection report of
Engineer Martinez:
Proceedings of December 15, 1960
COMMISSION:
It appears at the last hearing of this case on
September 23, 1960, that an engineer of this
Commission has been ordered to make an
inspection of all electric services in the province
of Rizal and on that date the engineer of this
Commission is still undertaking that inspection
and it appears that the said engineer had actually
made that inspection on July 12 and 13, 1960.
The engineer has submitted his report on
November 18, 1960 which is attached to the
records of this case.
ATTY. LUQUE (Councel for Petitioner):
... (W)e respectfully state that while the report is,
as I see it attached to the records, clear and very
thorough, it was made sometime July of this year
and I understand from the respondent that there
is some improvement since this report was made
... we respectfully request that an up-to-date
inspection be made ... . An inspector of this
Commission can be sent to the plant and
considering that the engineer of this
Commission, Engineer Meliton Martinez, is very
acquainted to the points involved we pray that
his report will be used by us for the reason that
he is a technical man and he knows well as he
has done a good job and I think our proposition
would expedite the matter. We sincerely believe
that the inspection report will be the best
evidence to decide this matter.
xxx xxx xxx
ATTY. LUQUE:
... This is a very important matter and to show
the good faith of respondent in this case we will
not even cross-examine the engineer when he
makes a new report. We will agree to the
findings and, your honor please, considering as
we have manifested before that Engineer
Martinez is an experienced engineer of this
Commission and the points reported by Engineer
Martinez on the situation of the plant now will
prevent the necessity of having a hearing, of us
bringing new evidence and complainant bringing
new evidence. ... .
xxx xxx xxx
COMMISSION (to Atty. Luque):
Q Does the Commission
understand from the counsel for
applicant that if the motion is granted
he will submit this order to show cause
for decision without any further
hearing and the decision will be based
on the report of the engineer of this
Commission?
A We respectfully reply in this
manner that we be allowed or be given
an opportunity just to read the report
and 99%, we will agree that the report
will be the basis of that decision. We
just want to find out the contents of the
report, however, we request that we be
furnished with a copy of the report
before the hearing so that we will just
make a manifestation that we will
agree.
COMMISSION (to Atty. Luque):
Q In order to prevent the delay of
the disposition of this case the
Commission will allow counsel for the
applicant to submit his written reply to
the report that the engineer of this
Commission. Will he submit this case
without further hearing upon the
receipt of that written reply?
A Yes, your honor.
Proceedings of August 25, 1961
ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration
of this case we are respectfully move (sic) that
instead of our witnesses testifying under oath
that we will submit a written reply under oath
together with the memorandum within fifteen
(15) days and we will furnish a copy and upon
our submission of said written reply under oath
and memorandum we consider this case
submitted. This suggestion is to abbreviate the
necessity of presenting witnesses here which
may prolong the resolution of this case.
ATTY. OLIVAS (Counsel for respondent
municipality):
I object on the ground that there is no resolution
by this Commission on the action to reopen the
case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for
opposition we respectfully submit to this
Commission our motion to submit a written
reply together with a memorandum. Also as
stated to expedite the case and to avoid further
hearing we will just submit our written reply.
According to our records we are furnished with a
copy of the report of July 17, 1961. We submit
your honor.
xxx xxx xxx
COMMISSION:
To give applicant a chance to have a day in court
the Commission grants the request of applicant
that it be given 10 days within which to submit a
written reply on the report of the engineer of the
Commission who inspected the electric service,
in the municipality of Morong, Rizal, and after
the submission of the said written reply within
10 days from today this case will be considered
submitted for decision.
The above-quoted manifestation of counsel for
the petitioner, specifically the statement
referring to the inspection report of Engineer
Martinez as the "best evidence to decide this
matter," can serve as an argument against
petitioner's claim that the Commision should
have taken into consideration the testimony of
Mr. Bernardino. But the primary reasons why the
Commission could not have taken judicial
cognizance of said testimony are: first, it is not a
proper subject of judicial notice, as it is not a
"known" fact — that is, well established and
authoritatively settled, without qualification and
contention; 13 second, it was given in a
subsequent and distinct case after the
petitioner's motion for reconsideration was
heard by the Commission en banc and submitted
for decision, 14 and third, it was not brought to
the attention of the Commission in this case
through an appropriate pleading. 15
Regarding the contention of petitioner that the
Commission had acted both as prosecutor and
judge, it should be considered that there are two
matters that had to be decided in this case,
namely, the order to show cause dated
December 19, 1956, and the petition or
complaint by respondent municipality dated
June 25, 1958. Both matters were heard jointly,
and the record shows that respondent
municipality had been allowed to present its
evidence to substantiate its complaint. It can not
be said, therefore, that in this case the
Commission had acted as prosecutor and judge.
But even assuming, for the sake of argument,
that there was a commingling of the prosecuting
and investigating functions, this exercise of dual
function is authorized by Section 17(a) of
Commonwealth Act No. 146, as amended, under
which the Commission has power "to investigate,
upon its own initiative or upon complaint in
writing, any matter concerning any public
service as regards matters under its jurisdiction;
to, require any public service to furnish safe,
adequate, and proper service as the public
interest may require and warrant; to enforce
compliance with any standard, rule, regulation,
order or other requirement of this Act or of the
Commission ... ." Thus, in the case of Collector of
Internal Revenue vs. Estate of F. P. Buan, L-11438,
July 31, 1958, this Court held that the power of
the Commission to cancel and revoke a
certificate of public convenience and necessity
may be exercised by it even without a formal
charge filed by any interested party, with the
only limitation that the holder of the certificate
should be given his day in court.
It may not be amiss to add that when
prosecuting and investigating duties are
delegated by statute to an administrative body,
as in the case of the Public Service Commission,
said body may take steps it believes appropriate
for the proper exercise of said duties,
particularly in the manner of informing itself
whether there is probable violation of the law
and/or its rules and regulations. It may initiate
an investigation, file a complaint, and then try
the charge as preferred. So long as the
respondent is given a day in court, there can be
no denial of due process, and objections to said
procedure cannot be sustained.
3. In its third assignment of error, petitioner
invokes the "protection-of-investment rule"
enunciated by this Court in Batangas
Transportation Co. vs. Orlanes 16 in this wise:
The Government having taken over the
control and supervision of all public
utilities, so long as an operator under a
prior license complies with the terms
and conditions of his license and
reasonable rules and regulations for its
operation and meets the reasonable
demands of the public, it is the duty of
the Commission to protect rather than
to destroy his investment by the
granting of the second license to
another person for the same thing over
the same route of travel. The granting
of such a license does not serve its
convenience or promote the interests
of the public.
The above-quoted rule, however, is not absolute,
for nobody has exclusive right to secure a
franchise or a certificate of public
convenience. 17 Where, as in the present case, it
has been shown by ample evidence that the
petitioner, despite ample time and opportunity
given to it by the Commission, had failed to
render adequate, sufficient and satisfactory
service and had violated the important
conditions of its certificate as well as the
directives and the rules and regulations of the
Commission, the rule cannot apply. To apply that
rule unqualifiedly is to encourage violation or
disregard of the terms and conditions of the
certificate and the Commission's directives and
regulations, and would close the door to other
applicants who could establish, operate and
provide adequate, efficient and satisfactory
service for the benefit and convenience of the
inhabitants. It should be emphasized that the
paramount consideration should always be the
public interest and public convenience. The duty
of the Commission to protect investment of a
public utility operator refers only to operators of
good standing — those who comply with the
laws, rules and regulations — and not to
operators who are unconcerned with the public
interest and whose investments have failed or
deteriorated because of their own fault. 18
4. The last assignment of error assails the
propriety of the penalty imposed by the
Commission on the petitioner — that is, the
revocation of the certificate and the forfeiture of
the franchise. Petitioner contends that the
imposition of a fine would have been sufficient,
as had been done by the Commission in cases of
a similar nature.
It should be observed that Section 16(n) of
Commonwealth Act No. 146, as amended,
confers upon the Commission ample power and
discretion to order the cancellation and
revocation of any certificate of public
convenience issued to an operator who has
violated, or has willfully and contumaciously
refused to comply with, any order, rule or
regulation of the Commission or any provision of
law. What matters is that there is evidence to
support the action of the Commission. In the
instant case, as shown by the evidence, the
contumacious refusal of the petitioner since
1954 to comply with the directives, rules and
regulations of the Commission, its violation of
the conditions of its certificate and its
incapability to comply with its commitment as
shown by its inadequate service, were the
circumstances that warranted the action of the
Commission in not merely imposing a fine but in
revoking altogether petitioner's certificate. To
allow petitioner to continue its operation would
be to sacrifice public interest and convenience in
favor of private interest.
A grant of a certificate of public
convenience confers no property rights
but is a mere license or privilege, and
such privilege is forfeited when the
grantee fails to comply with his
commitments behind which lies the
paramount interest of the public, for
public necessity cannot be made to
wait, nor sacrificed for private
convenience. (Collector of Internal
Revenue v. Estate of F. P. Buan, et al., L-
11438 and Santiago Sambrano, et al. v.
PSC, et al., L-11439 & L-11542-46, July
31, 1958)
(T)he Public Service Commission, ... has
the power to specify and define the
terms and conditions upon which the
public utility shall be operated, and to
make reasonable rules and regulations
for its operation and the compensation
which the utility shall receive for its
services to the public, and for any
failure to comply with such rules and
regulations or the violation of any of
the terms and conditions for which the
license was granted, the Commission
has ample power to enforce the
provisions of the license or even to
revoke it, for any failure or neglect to
comply with any of its terms and
provisions. (Batangas Trans. Co. v.
Orlanes, 52 Phil. 455, 460; emphasis
supplied)
Presumably, the petitioner has in mind Section
21 of Commonwealth Act No. 146, as amended,
which provides that a public utility operator
violating or failing to comply with the terms and
conditions of any certificate, or any orders,
decisions or regulations of the Commission, shall
be subject to a fine and that the Commission is
authorized and empowered to impose such fine,
after due notice and hearing. It should be noted,
however, that the last sentence of said section
states that the remedy provided therein "shall
not be a bar to, or affect any other remedy
provided in this Act but shall be cumulative and
additional to such remedy or remedies." In other
words, the imposition of a fine may only be one
of the remedies which the Commission may
resort to, in its discretion. But that remedy is not
exclusive of, or has preference over, the other
remedies. And this Court will not substitute its
discretion for that of the Commission, as long as
there is evidence to support the exercise of that
discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at
the outset that before any certificate may be
granted, authorizing the operation of a public
service, three requisites must be complied with,
namely: (1) the applicant must be a citizen of the
Philippines or of the United States, or a
corporation or co-partnership, association or
joint-stock company constituted and organized
under the laws of the Philippines, sixty per
centum at least of the stock or paid-up capital of
which belongs entirely to citizens of the
Philippines or of the United States; 19 (2) the
applicant must be financially capable of
undertaking the proposed service and meeting
the responsibilities incident to its
operation; 20 and (3) the applicant must prove
that the operation of the public service proposed
and the authorization to do business will
promote the public interest in a proper and
suitable manner. 21
As stated earlier, in the decision appealed from,
the Commission found that Morong Electric is a
corporation duly organized and existing under
the laws of the Philippines, the stockholders of
which are Filipino citizens, that it is financially
capable of operating an electric light, heat and
power service, and that at the time the decision
was rendered there was absence of electric
service in Morong, Rizal. While the petitioner
does not dispute the need of an electric service in
Morong, Rizal, 22 it claims, in effect, that Morong
Electric should not have been granted the
certificate of public convenience and necessity
because (1) it did not have a corporate
personality at the time it was granted a franchise
and when it applied for said certificate; (2) it is
not financially capable of undertaking an electric
service, and (3) petitioner was rendering
efficient service before its electric plant was
burned, and therefore, being a prior operator its
investment should be protected and no new
party should be granted a franchise and
certificate of public convenience and necessity to
operate an electric service in the same locality.
1. The bulk of petitioner's arguments assailing
the personality of Morong Electric dwells on the
proposition that since a franchise is a
contract, 23 at least two competent parties are
necessary to the execution thereof, and parties
are not competent except when they are in being.
Hence, it is contended that until a corporation
has come into being, in this jurisdiction, by the
issuance of a certificate of incorporation by the
Securities and Exchange Commission (SEC) it
cannot enter into any contract as a corporation.
The certificate of incorporation of the Morong
Electric was issued by the SEC on October 17,
1962, so only from that date, not before, did it
acquire juridical personality and legal existence.
Petitioner concludes that the franchise granted
to Morong Electric on May 6, 1962 when it was
not yet in esse is null and void and cannot be the
subject of the Commission's consideration. On
the other hand, Morong Electric argues, and to
which argument the Commission agrees, that it
was a de facto corporation at the time the
franchise was granted and, as such, it was not
incapacitated to enter into any contract or to
apply for and accept a franchise. Not having been
incapacitated, Morong Electric maintains that the
franchise granted to it is valid and the approval
or disapproval thereof can be properly
determined by the Commission.
Petitioner's contention that Morong Electric did
not yet have a legal personality on May 6, 1962
when a municipal franchise was granted to it is
correct. The juridical personality and legal
existence of Morong Electric began only on
October 17, 1962 when its certificate of
incorporation was issued by the SEC. 24 Before
that date, or pending the issuance of said
certificate of incorporation, the incorporators
cannot be considered as de
factocorporation. 25 But the fact that Morong
Electric had no corporate existence on the day
the franchise was granted in its name does not
render the franchise invalid, because later
Morong Electric obtained its certificate of
incorporation and then accepted the franchise in
accordance with the terms and conditions
thereof. This view is sustained by eminent
American authorities. Thus, McQuiuin says:
The fact that a company is not
completely incorporated at the time the
grant is made to it by a municipality to
use the streets does not, in most
jurisdictions, affect the validity of the
grant. But such grant cannot take effect
until the corporation is organized. And
in Illinois it has been decided that the
ordinance granting the franchise may
be presented before the corporation
grantee is fully organized, where the
organization is completed before the
passage and acceptance. (McQuillin,
Municipal Corporations, 3rd Ed., Vol.
12, Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect
until the grantee corporation is
organized, the franchise may,
nevertheless, be applied for before the
company is fully organized.
A grant of a street franchise is valid
although the corporation is not created
until afterwards. (Fletcher, Cyclopedia
Corp. Permanent Edition, Rev. Vol. 6-A,
Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary
franchise the authorities are numerous
in support of the proposition that an
ordinance granting a privilege to a
corporation is not void because the
beneficiary of the ordinance is not fully
organized at the time of the
introduction of the ordinance. It is
enough that organization is complete
prior to the passage and acceptance of
the ordinance. The reason is that a
privilege of this character is a mere
license to the corporation until it
accepts the grant and complies with its
terms and conditions. (Thompson on
Corporations, Vol. 4, 3rd Ed., Sec.
2929) 26
The incorporation of Morong Electric on October
17, 1962 and its acceptance of the franchise as
shown by its action in prosecuting the
application filed with the Commission for the
approval of said franchise, not only perfected a
contract between the respondent municipality
and Morong Electric but also cured the
deficiency pointed out by the petitioner in the
application of Morong EIectric. Thus, the
Commission did not err in denying petitioner's
motion to dismiss said application and in
proceeding to hear the same. The efficacy of the
franchise, however, arose only upon its approval
by the Commission on March 13, 1963. The
reason is that —
Under Act No. 667, as amended by Act
No. 1022, a municipal council has the
power to grant electric franchises,
subject to the approval of the provincial
board and the President. However,
under Section 16(b) of Commonwealth
Act No. 146, as amended, the Public
Service Commission is empowered "to
approve, subject to constitutional
limitations any franchise or privilege
granted under the provisions of Act No.
667, as amended by Act No. 1022, by
any political subdivision of the
Philippines when, in the judgment of
the Commission, such franchise or
privilege will properly conserve the
public interests and the Commission
shall in so approving impose such
conditions as to construction,
equipment, maintenance, service, or
operation as the public interests and
convenience may reasonably require,
and to issue certificates of public
convenience and necessity when such
is required or provided by any law or
franchise." Thus, the efficacy of a
municipal electric franchise arises,
therefore, only after the approval of the
Public Service Commission. (Almendras
vs. Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the
validity of the franchise granted to Morong
Electric is not incompatible with the holding of
this Court in Cagayan Fishing Development Co.,
Inc. vs. Teodoro Sandiko 27upon which the
petitioner leans heavily in support of its position.
In said case this Court held that a corporation
should have a full and complete organization and
existence as an entity before it can enter into any
kind of a contract or transact any business. It
should be pointed out, however, that this Court
did not say in that case that the rule is absolute
or that under no circumstances may the acts of
promoters of a corporation be ratified or
accepted by the corporation if and when
subsequently organized. Of course, there are
exceptions. It will be noted that American courts
generally hold that a contract made by the
promoters of a corporation on its behalf may be
adopted, accepted or ratified by the corporation
when organized. 28
2. The validity of the franchise and the corporate
personality of Morong Electric to accept the
same having been shown, the next question to be
resolved is whether said company has the
financial qualification to operate an electric light,
heat and power service. Petitioner challenges the
financial capability of Morong Electric, by
pointing out the inconsistencies in the testimony
of Mr. Jose P. Ingal, president of said company,
regarding its assets and the amount of its initial
investment for the electric plant. In this
connection it should be stated that on the basis
of the evidence presented on the matter, the
Commission has found the Morong Electric to be
"financially qualified to install, maintain and
operate the proposed electric light, heat and
power service." This is essentially a factual
determination which, in a number of cases, this
Court has said it will not disturb unless patently
unsupported by evidence. An examination of the
record of this case readily shows that the
testimony of Mr. Ingal and the documents he
presented to establish the financial capability of
Morong Electric provide reasonable grounds for
the above finding of the Commission.
It is now a very well-settled rule in this
jurisdiction that the findings and
conclusions of fact made by the Public
Service Commission, after weighing the
evidence adduced by the parties in a
public service case, will not be
disturbed by the Supreme Court unless
those findings and conclusions appear
not to be reasonably supported by
evidence. (La Mallorca and Pampanga
Bus Co. vs. Mercado, L-19120,
November 29, 1965)
For purposes of appeal, what is decisive
is that said testimonial evidence
provides reasonable support for the
Public Service Commission's findings of
financial capacity on the part of
applicants, rendering such findings
beyond our power to disturb. (Del Pilar
Transit vs. Silva, L-21547, July 15,
1966)
It may be worthwhile to mention in this
connection that per inspection report dated
January 20, 1964 29 of Mr. Meliton Martinez of
the Commission, who inspected the electric
service of Morong on January 15-16, 1964,
Morong Electric "is serving electric service to the
entire area covered by its approved plan and has
constructed its line in accordance with the plans
and specifications approved by the Commission."
By reason thereof, it was recommended that the
requests of Morong Electric (1) for the
withdrawal of its deposit in the amount of
P1,000.00 with the Treasurer of the Philippines,
and (2) for the approval of Resolution No. 160 of
the Municipal Council of Morong, Rizal,
exempting the operator from making the
additional P9,000.00 deposit mentioned in its
petition, dated September 16, 1963, be granted.
This report removes any doubt as to the financial
capability of Morong Electric to operate and
maintain an electric light, heat and power
service.
3. With the financial qualification of Morong
Electric beyond doubt, the remaining question to
be resolved is whether, or not, the findings of
fact of the Commission regarding petitioner's
service are supported by evidence. It is the
contention of the petitioner that the Commission
made some findings of fact prejudicial to its
position but which do not find support from the
evidence presented in this case. Specifically,
petitioner refers to the statements or findings
that its service had "turned from bad to worse,"
that it miserably failed to comply with the oft-
repeated promises to bring about the needed Pampanga Bus Co., Inc. vs. Mercado, L-
improvement, that its equipment is 19120, November 29, 1965 citing
unserviceable, and that it has no longer any plant Pangasinan Trans. Co., Inc. vs. Dela
site and, therefore, has discredited itself. Cruz, 96 Phil. 278)
Petitioner further states that such statements are
not only devoid of evidentiary support but For that matter, petitioner's pretension that it
contrary to the testimony of its witness, Mr. has a prior right to the operation of an electric
Harry Bernardino, who testified that petitioner service in Morong, Rizal, is not tenable; and its
was rendering efficient and satisfactory service plea for protection of its investment, as in the
before its electric plant was burned on July 29, previous case, cannot be entertained.
1962.
WHEREFORE, the two decisions of the Public
On the face of the decision appealed from, it is Service Commission, appealed from, should be,
obvious that the Commission in describing the
as they are hereby affirmed, with costs in the two
kind of service petitioner was rendering before cases against petitioner Rizal Light & Ice Co., Inc.
its certificate was ordered revoked and It is so ordered.
cancelled, took judicial notice of the records of
the previous case (PSC Case No. 39715) where
the quality of petitioner's service had been Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Sanchez, Castro, Angeles and Fernando, JJ., concur.
squarely put in issue. It will be noted that the
findings of the Commission were made
notwithstanding the fact that the
aforementioned testimony of Mr. Bernardino
had been emphasized and pointed out in
petitioner's Memorandum to the
Commission. 30 The implication is simple: that as
between the testimony of Mr. Bernardino and
the inspection reports of the engineers of the
Commission, which served as the basis of the
revocation order, the Commission gave credence
to the latter. Naturally, whatever conclusion or
finding of fact that the Commission arrived at
regarding the quality of petitioner's service are
not borne out by the evidence presented in this
case but by evidence in the previous case. 31 In
this connection, we repeat, the conclusion,
arrived at by the Commission after weighing the
conflicting evidence in the two related cases, is a
conclusion of fact which this Court will not
disturb.
And it has been held time and again
that where the Commission has
reached a conclusion of fact after
weighing the conflicting evidence, that
conclusion must be respected, and the
Supreme Court will not interfere unless
it clearly appears that there is no
evidence to support the decision of the
Commission. (La Mallorca and
FIRST DIVISION
June 30, 1987
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE
CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and
ALBERTO V. ARELLANO, respondents.
CRUZ, J.:
We gave limited due course to this petition on
the question of the solidary liability of the
petitioners with their co-defendants in the lower
court 1 because of the challenge to the following
paragraph in the dispositive portion of the
decision of the respondent court: *
1. Defendants are hereby ordered to
jointly and severally pay the plaintiff
the amount of P50,000.00 for the
preparation of the project study and his
technical services that led to the
organization of the defendant
corporation, plus P10,000.00 attorney's
fees; 2
The petitioners claim that this order has no
support in fact and law because they had no
contract whatsoever with the private respondent
regarding the above-mentioned services. Their
position is that as mere subsequent investors in
the corporation that was later created, they
should not be held solidarily liable with the
Filipinas Orient Airways, a separate juridical
entity, and with Barretto and Garcia, their co-
defendants in the lower court, **who were the
ones who requested the said services from the
private respondent. 3
We are not concerned here with the petitioners'
co-defendants, who have not appealed the
decision of the respondent court and may, for
this reason, be presumed to have accepted the
same. For purposes of resolving this case before
us, it is not necessary to determine whether it is
the promoters of the proposed corporation, or
the corporation itself after its organization, that
shall be responsible for the expenses incurred in
connection with such organization.
The only question we have to decide now is
whether or not the petitioners themselves
are also and personallyliable for such expenses
and, if so, to what extent.
The reasons for the said order are given by the
respondent court in its decision in this wise:
As to the 4th assigned error we hold
that as to the remuneration due the
plaintiff for the preparation of the
project study and the pre-
organizational services in the amount
of P50,000.00, not only the defendant
corporation but the other defendants
including defendants Caram should be
jointly and severally liable for this
amount. As we above related it was
upon the request of defendants
Barretto and Garcia that plaintiff
handled the preparation of the project
study which project study was
presented to defendant Caram so the
latter was convinced to invest in the
proposed airlines. The project study
was revised for purposes of
presentation to financiers and the
banks. It was on the basis of this study
that defendant corporation was
actually organized and rendered
operational. Defendants Garcia and
Caram, and Barretto became members
of the Board and/or officers of
defendant corporation. Thus, not only
the defendant corporation but all the
other defendants who were involved in
the preparatory stages of the
incorporation, who caused the
preparation and/or benefited from the
project study and the technical services
of plaintiff must be liable. 4
It would appear from the above justification that
the petitioners were not really involved in the
initial steps that finally led to the incorporation
of the Filipinas Orient Airways. Elsewhere in the
decision, Barretto was described as "the moving
spirit." The finding of the respondent court is
that the project study was undertaken by the
private respondent at the request of Barretto
and Garcia who, upon its completion, presented
it to the petitioners to induce them to invest in
the proposed airline. The study could have been
presented to other prospective investors. At any
rate, the airline was eventually organized on the
basis of the project study with the petitioners as
major stockholders and, together with Barretto
and Garcia, as principal officers.
The following portion of the decision in question
is also worth considering:
... Since defendant Barretto was the
moving spirit in the pre-organization
work of defendant corporation based
on his experience and expertise, hence
he was logically compensated in the
amount of P200,000.00 shares of stock
not as industrial partner but more for
his technical services that brought to
fruition the defendant corporation. By
the same token, We find no reason why
the plaintiff should not be similarly
compensated not only for having
actively participated in the preparation
of the project study for several months
and its subsequent revision but also in
his having been involved in the pre-
organization of the defendant
corporation, in the preparation of the
franchise, in inviting the interest of the
financiers and in the training and
screening of personnel. We agree that
for these special services of the plaintiff
the amount of P50,000.00 as
compensation is reasonable. 5
The above finding bolsters the conclusion that
the petitioners were not involved in the initial
stages of the organization of the airline, which
were being directed by Barretto as the main
promoter. It was he who was putting all the
pieces together, so to speak. The petitioners
were merely among the financiers whose
interest was to be invited and who were in fact
persuaded, on the strength of the project study,
to invest in the proposed airline.
Significantly, there was no showing that the
Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical
personality, to justify making the petitioners, as
principal stockholders thereof, responsible for
its obligations. As a bona fide corporation, the
Filipinas Orient Airways should alone be liable
for its corporate acts as duly authorized by its
officers and directors.
In the light of these circumstances, we hold that
the petitioners cannot be held personally liable
for the compensation claimed by the private
respondent for the services performed by him in
the organization of the corporation. To repeat,
the petitioners did not contract such services. It
was only the results of such services that
Barretto and Garcia presented to them and
which persuaded them to invest in the proposed
airline. The most that can be said is that they
benefited from such services, but that surely is
no justification to hold them personally liable
therefor. Otherwise, all the other stockholders of
the corporation, including those who came in
later, and regardless of the amount of their share
holdings, would be equally and personally liable
also with the petitioners for the claims of the
private respondent.
The petition is rather hazy and seems to be
flawed by an ambiguous ambivalence. Our
impression is that it is opposed to the imposition
of solidary responsibility upon the Carams but
seems to be willing, in a vague, unexpressed offer
of compromise, to accept joint liability. While it
is true that it does here and there disclaim total
liability, the thrust of the petition seems to be
against the imposition of solidary liability only
rather than against any liability at all, which is
what it should have categorically argued.
Categorically, the Court holds that the
petitioners are not liable at all, jointly or jointly
and severally, under the first paragraph of the
dispositive portion of the challenged decision. So
holding, we find it unnecessary to examine at
this time the rules on solidary obligations, which
the parties-needlessly, as it turns out have
belabored unto death.

WHEREFORE, the petition is granted. The

petitioners are declared not liable under the
challenged decision, which is hereby modified
accordingly. It is so ordered.

Yap (Chairman), Narvasa, Melencio-Herrera,

Feliciano and Sarmiento, JJ., concur.
Gancayco, J., took no part.
 Republic of the Philippines
Very respectfully,
SUPREME COURT
Manila
(Sgd.)
Signature of subscriber
EN BANC
G.R. No. L-5003 June 27, 1953
NAZARIO TRILLANA, administrator-appellee,
vs.
QUEZON COLLEGE, INC., claimant-appellant.
Singson, Barnes, Yap and Blanco for appellant.
Delgado, Flores & Macapagal for appellee.
PARAS, J.:
Damasa Crisostomo sent the following letter to
the Board of Trustees of the Quezon College:
June 1, 1948
The BOARD OF TRUSTEES
Quezon College
Manila
Gentlemen:
Please enter my subscription to
dalawang daan (200) shares of your
capital stock with a par value of P100
each. Enclosed you will find (Babayaran
kong lahat pagkatapos na ako ay
makapag-pahuli ng isda) pesos as my
initial payment and the balance payable
in accordance with law and the rules
and regulations of the Quezon College. I
hereby agree to shoulder the expenses
connected with said shares of stock. I
further submit myself to all lawful
demands, decisions or directives of the
Board of Trustees of the Quezon
College and all its duly constituted
officers or authorities (ang nasa itaas
ay binasa at ipinaliwanag sa akin sa
wikang tagalog na aking nalalaman).
DAMASA CRISOSTOMO
Nilagdaan sa aming harapan:
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO
Damasa Crisostomo died on October 26, 1948. As
no payment appears to have been made on the
subscription mentioned in the foregoing letter,
the Quezon College, Inc. presented a claim before
the Court of First Instance of Bulacan in her
testate proceeding, for the collection of the sum
of P20,000, representing the value of the
subscription to the capital stock of the Quezon
College, Inc. This claim was opposed by the
administrator of the estate, and the Court of First
Instance of Bulacan, after hearing issued an
order dismissing the claim of the Quezon College,
Inc. on the ground that the subscription in
question was neither registered in nor
authorized by the Securities and Exchange
Commission. From this order the Quezon
College, Inc. has appealed.
It is not necessary for us to discuss at length
appellant's various assignments of error relating
to the propriety of the ground relief upon by the
trial court, since, as pointed out in the brief for
the administrator and appellee, there are other
decisive considerations which, though not
touched by the lower court, amply sustained the
appealed order.
It appears that the application sent by Damasa
Crisostomo to the Quezon College, Inc. was
written on a general form indicating that an
applicant will enclose an amount as initial
payment and will pay the balance in accordance
with law and the regulations of the College. On
the other hand, in the letter actually sent by
Damasa Crisostomo, the latter (who requested
that her subscription for 200 shares be entered)
not only did not enclose any initial payment but
stated that "babayaran kong lahat pagkatapos na
ako ay makapagpahuli ng isda." There is nothing In the case of Taylor vs. Uy Tieng Piao, et al. (43
in the record to show that the Quezon College, Phil., 873, 879), this Court already held that "a
Inc. accepted the term of payment suggested by condition, facultative as to the debtor, is
Damasa Crisostomo, or that if there was any obnoxious to the first sentence contained in
acceptance the same came to her knowledge article 1115 and renders the whole obligation
during her lifetime. As the application of Damasa void."
Crisostomo is obviously at variance with the
terms evidenced in the form letter issued by the Wherefore, the appealed order is affirmed, and it
Quezon College, Inc., there was absolute is so ordered with costs against appellant.
necessity on the part of the College to express its
agreement to Damasa's offer in order to bind the
latter. Conversely, said acceptance was essential, Tuason, Padilla and Reyes, JJ., concur in the result.
because it would be unfair to immediately
obligate the Quezon College, Inc. under Damasa's
promise to pay the price of the subscription after
she had caused fish to be caught. In other words,
the relation between Damasa Crisostomo and the
Quezon College, Inc. had only thus reached the
preliminary stage whereby the latter offered its
stock for subscription on the terms stated in the
form letter, and Damasa applied for subscription
fixing her own plan of payment, — a relation, in
the absence as in the present case of acceptance
by the Quezon College, Inc. of the counter offer of
Damasa Crisostomo, that had not ripened into an
enforceable contract.
Indeed, the need for express acceptance on the
part of the Quezon College, Inc. becomes the
more imperative, in view of the proposal of
Damasa Crisostomo to pay the value of the
subscription after she has harvested fish, a
condition obviously dependent upon her sole
will and, therefore, facultative in nature,
rendering the obligation void, under article 1115
of the old Civil Code which provides as follows:
"If the fulfillment of the condition should depend
upon the exclusive will of the debtor, the
conditional obligation shall be void. If it should
depend upon chance, or upon the will of a third
person, the obligation shall produce all its effects
in accordance with the provisions of this code." It
cannot be argued that the condition solely is
void, because it would have served to create the
obligation to pay, unlike a case, exemplified
by Osmeña vs. Rama (14 Phil., 99), wherein only
the potestative condition was held void because
it referred merely to the fulfillment of an already
existing indebtedness.
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. Nos. L-48195 and 48196 May 1,
1942
SOFRONIO T. BAYLA, ET AL., petitioners,
vs.
SILANG TRAFFIC CO., INC., respondent.
SILANG TRAFFIC CO., petitioner, vs.
SOFRONIO BAYLA, ET AL., respondents.
E. A. Beltran for petitioners.
Conrado V. Sanchez, Melchor C. Benitez, and
Enrique M. Fernando for respondent.
OZAETA, J.:
Petitioners in G.R. No. 48195 instituted this
action in the Court of First Instance of Cavite
against the respondent Silang Traffic Co., Inc.
(cross-petitioner in G.R. No. 48196), to recover
certain sums of money which they had paid
severally to the corporation on account of shares
of stock they individually agreed to take and pay
for under certain specified terms and conditions,
of which the following referring to the petitioner
Josefa Naval, is typical:
AGREEMENT FOR INSTALLMENT SALE
OF SHARES IN THE "SILANG TRAFFIC
COMPANY, INC.,"
Silang, Cavite, P. I.
THIS AGREEMENT, made and entered
into between Mrs. Josefa Naval, of legal
age, married and resident of the
Municipality of Silang, Province of
Cavite, Philippine Islands, party of the
First Part, hereinafter called the
subscriber, and the "Silang Traffic
Company, Inc.," a corporation duly
organized and existing by virtue of and
under the laws of the Philippine
Islands, with its principal office in the
Municipality of Silang, Province of
Cavite, Philippine Islands, party of the
Second Part, hereinafter called the
seller,
WITNESSETH:
That the subscriber promises to pay
personally or by his duly authorized
agent to the seller at the Municipality of
Silang, Province of Cavite, Philippine
Islands, the sum of one thousand five
hundred pesos (P1,500), Philippine
currency, as purchase price of FIFTEEN
(15) shares of capital stock, said
purchase price to be paid as follows, to
wit: five (5%) per cent upon the
execution of the contract, the receipt
whereof is hereby acknowledged and
confessed, and the remainder in
installments of five per cent, payable
within the first month of each and
every quarter thereafter, commencing
on the 1st day of July, 1935, with
interest on deferred payments at the
rate of SIX (6%) per cent per annum
until paid.
That the said subscriber further agrees
that if he fails to pay any of said
installment when due, or to perform
any of the aforesaid conditions, or if
said shares shall be attached or levied
upon by creditors of the said
subscriber, then the said shares are to
revert to the seller and the payments
already made are to be forfeited in
favor of said seller, and the latter may
then take possession, without resorting
to court proceedings.
The said seller upon receiving full
payment, at the time and manner
hereinbefore specified, agrees to
execute and deliver to said subscriber,
or to his heirs and assigns, the
certificate of title of said shares, free
and clear of all encumbrances.
In testimony whereof, the parties have
hereunto set their hands in the
Municipality of Silang, Province of
Cavite, Philippine Islands, this 30th day
of March, 1935.
(Sgd.) JOSEFA NAVAL
SILANG TRAFFIC COMPANY, INC.
Subscriber
By (Sgd.) LINO GOMEZ
President.
(Exhibit 1. Notarial acknowledgment
omitted.)
The agreements signed by the other petitioners
were of the same date (March 30, 1935) and in
identical terms as the foregoing except as to the
number of shares and the corresponding
purchase price. The petitioners agreed to
purchase the following number of shares and, up
to April 30, 1937, had paid the following sums on
account thereof:
Sofronio T. Bayla....... 8 shares
Venancio Toledo........ 8 shares
Josefa Naval.............. 15 shares
Paz Toledo................ 15 shares
Petitioners' action for the recovery of the sums
above mentioned is based on a resolution by the
board of directors of the respondent corporation
on August 1, 1937, of the following tenor:
A mocion sel Sr. Marcos Caparas y
secundado por el Sr. Alejandro Bayla,
que para el bien de la corporacion y la
pronta terminacion del asunto civil No.
3125 titulado "Vicente F. Villanueva et
al. vs. Lino Gomez et al.," en el Juzgado
de Primera Instancia de Cavite, donde
se gasto y se gastara no poca cantidad
de la Corporacion, se resolvio y se
aprobo por la Junta Directiva los
siguientes:
(a) Que se dejara sin efecto lo aprobado
por la Junta Directiva el 3 de marzo,
1935, art. 11, sec. 162, sobre las
cobranzas que se haran por el
Secretario Tesorero de la Corporacion a
los accionistas que habian tomado o
suscrito nuevas acciones y que se
permitia a estos pagar 20% del valor de
las acciones suscritas en un año, con
interes de 6% y el pago o jornal que se
hara por trimestre.
(b) Se dejara sin efecto, en vista de que
aun no esta pagado todo el valor de las
123 acciones, tomadas de las acciones
no expedidas (unissued stock) de la
Corporacion y que fueron suscritas por
los siguienes:
Lino Gomez..................... 10 Accione
Venancio Toledo............. 8 Acciones
P360 Melchor P. Benitez........ 17 Accione
375 Isaias Videña................. 14 Accione
675 Esteban Velasco............ 10 Accione
675 Numeriano S. Aldaba.... 15 Accione
Inocencio Cruz................. 8 Acciones
Josefa Naval .................. 15 Accione
Sofronio Bayla................. 8 Acciones
Dionisio Dungca............. 3 Acciones
y devolver a las personas arriba descritas toda la
cantidad que estas habian pagado por las 123
acciones.
(c) Que se dejara sin efecto lo aprobado
por la Junta Directiva el 3 marzo, 1935,
art. V. sec. 165, sobre el cambio o
trueque de las 31 acciones del Treasury
Stock, contra las 32 acciones del Sr.
Numeriano Aldaba, en la corporacion
Northern Luzon Transportation Co. y
que se devuelva al Sr. Numeriano
Aldaba las 32 acciones mencionadas
despues que el haya devuelto el
certificado de las 31 acciones de la
Silang Traffic Co., Inc.
(d) Permitir al Tesorero de la
Corporacion para que devuelva a las
personas arriba indicadas, las
cantidades pagadas por las 123
acciones. (Exhibit A-1.)
The respondent corporation set up the following
defenses: (1) That the above-quoted resolution is
not applicable to the petitioners Sofronio T.
Bayla, Josefa Naval, and Paz Toledo because on
the date thereof "their subscribed shares of stock
had already automatically reverted to the
defendant, and the installments paid by them
had already been forfeited"; and (2) that said
resolution of August 1, 1937, was revoked and
cancelled by a subsequent resolution of the
board of directors of the defendant corporation
dated August 22, 1937.
The trial court absolved the defendant from the
complaint and declared canceled (forfeited) in
favor of the defendant the shares of stock in
question. It held that the resolution of August 1,
1937, was null and void, citingVelasco vs.
Poizat (37 Phil., 802), wherein this Court held
that "a corporation has no legal capacity to
release an original subscriber to its capital stock
from the obligation to pay for shares; and any
agreement to this effect is invalid" Plaintiffs
below appealed to the Court of Appeals, which
modified of the trial court as follows:
That part of the judgment dismissing
plaintiff's complaint is affirmed, but
that part thereof declaring their
subscription canceled is reversed.
Defendant is directed to grant plaintiffs
30 days after final judgment within
which to pay the arrears on their
subscription. Without pronouncement
as to costs.
Both parties appealed to this Court by petition
and cross-petition for certiorari. Petitioners
insist that they have the right to recover the
amounts involved under the resolution of August
1, 1937, while the respondent and cross-
petitioner on its part contends that said amounts
have been automatically forfeited and the shares
of stock have reverted to the corporation under
the agreement hereinabove quoted.
The parties litigant, the trial court, and the Court
of Appeals have interpreted or considered the
said agreement as a contract of subscription to
the capital stock of the respondent corporation.
It should be noted, however, that said agreement
is entitled "Agreement for Installment Sale of
Shares in the Silang Traffic Company, Inc.,"; that
while the purchaser is designated as
"subscriber," the corporation is described as
"seller"; that the agreement was entered into on
March 30, 1935, long after the incorporation and
organization of the corporation, which took place
in 1927; and that the price of the stock was
payable in quarterly installments spread over a
period of five years. It also appears that in civil
case No. 3125 of the Court of First Instance of
Cavite mentioned in the resolution of August 1,
1937, the right of the corporation to sell the
shares of stock to the person named in said
resolution (including herein petitioners) was
impugned by the plaintiffs in said case, who
claimed a preferred right to buy said shares.
Whether a particular contract is a subscription
or a sale of stock is a matter of construction and
depends upon its terms and the intention of the
parties (4 Fletcher, Cyclopedia of Corporation
[permanent edition], 29, cited in Salmon, Dexter
& Co. vs. Unson (47 Phil. 649, 652). In the Unson
case just cited, this Court held that a subscription
to stock in an existing corporation is, as between
the subscriber and the corporation, simply a
contract of purchase and sale.
It seems clear from the terms of the contracts in
question that they are contracts of sale and not
of subscription. The lower courts erred in
overlooking the distinction between subscription
and purchase "A subscription, properly speaking,
is the mutual agreement of the subscribers to
take and pay for the stock of a corporation, while
a purchase is an independent agreement
between the individual and the corporation to
buy shares of stock from it at stipulated price."
(18 C. J. S., 760.) In some particulars the rules
governing subscriptions and sales of shares are
different. For instance, the provisions of our
Corporation Law regarding calls for unpaid
subscription and assessment of stock (sections
37-50) do not apply to a purchase of stock.
Likewise the rule that corporation has no legal
capacity to release an original subscriber to its
capital stock from the obligation to pay for his
shares, is inapplicable to a contract of purchase
of shares.
The next question to determine is whether under
the contract between the parties the failure of
the purchaser to pay any of the quarterly
installments on the purchase price automatically
gave rise to the forfeiture of the amounts already
paid and the reversion of the shares to the
corporation. The contract provides for interest of
the rate of six per centum per annum on
deferred payments. It is also provides that if the
purchaser fails to pay any of said installments
when due, the said shares are to revert to the
seller and the payments already made are to be
forfeited in favor of said seller. The respondent
corporation contends that when the petitioners
failed to pay the installment which fell due on or
before July 31, 1937, forfeiture automatically
took place, that is to say, without the necessity of
any demand from the corporation, and that
therefore the resolution of August 1, 1937,
authorizing the refund of the installments
already paid was inapplicable to the petitioners,
who had already lost any and all rights under
said contract. The contention is, we think,
untenable. The provision regarding interest on
deferred payments would not have been inserted
if it had been the intention of the parties to
provide for automatic forfeiture and cancelation
of the contract. Moreover, the contract did not
expressly provide that the failure of the
purchaser to pay any installment would give rise
to forfeiture and cancelation without the
necessity of any demand from the seller; and
under article 1100 of the Civil Code persons
obliged to deliver or do something are not in
default until the moment the creditor demands
of them judicially or extrajudicially the
fulfillment of their obligation, unless (1) the
obligation or the law expressly provides that
demand shall not be necessary in order that
default may arise, (2) by reason of the nature
and circumstances of the obligation it shall
appear that the designation of the time at which
that thing was to be delivered or the service
rendered was the principal inducement to the
creation of the obligation.
Is the resolution of August 1, 1937, valid? The
contract in question being one of purchase and
not subscription as we have heretofore pointed
out, we see no legal impediment to its rescission
by agreement of the parties. According to the
resolution of August 1, 1937, the recission was
made for the good of the corporation and in
order to terminate the then pending civil case
involving the validity of the sale of the shares in
question among others. To that rescission the
herein petitioners apparently agreed, as shown
by their demand for the refund of the amounts
they had paid as provided in said resolution. It
appears from the record that said civil case was
subsequently dismissed, and that the purchasers
of shares of stock, other than the herein
petitioners, who were mentioned in said
resolution were able to benefit by said
resolution. It would be an unjust discrimination
to deny the same benefit to the herein
petitioners.
We may add that there is no intimation in this
case that the corporation was insolvent, or that
the right of any creditor of the same was in any
way prejudiced by the rescission.
The attempted revocation of said rescission by
the resolution of August 22, 1937, was invalid, it
not having been agreed to by the petitioners.

Wherefore, the judgment of the court of appeals

is hereby reversed and another judgment will be
entered against the defendant Silang Traffic Co.,
Inc., ordering it to pay to the plaintiffs Sofronio T.
Bayla, Venancio Toledo, Josefa Naval, and Paz
Toledo, the sums of P360, P375, P675, and P675,
respectively, with legal interest on each of said
sums from May 28, 1938, the date of the filing of
the complaint, until the date of payment, and
with costs in the three instances. So ordered.

Yulo, C.J., Moran, Paras and Bocobo, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-11528 March 15, 1918
MIGUEL VELASCO, assignee of The Philippine
Chemical Product Co. (Ltd.), plaintiff-
appellant,
vs.
JEAN M. POIZAT, defendant-appellee.
Vicente Rodriguez for appellant.
A. J. Burke for appellee.
STREET, J.:
From the amended complaint filed in this cause
upon February 5, 1915, it appears that the
plaintiff, as assignee in insolvency of "The
Philippine Chemical Product Company" (Ltd.) is
seeking to recover of the defendant, Jean M.
Poizat, the sum of P1,500, upon a subscription
made by him to the corporate stock of said
company. It appears that the corporation in
question was originally organized by several
residents of the city of Manila, where the
company had its principal place of business, with
a capital of P50,000, divided into 500 shares. The
defendant subscribed for 20 shares of the stock
of the company, an paid in upon his subscription
the sum of P500, the par value of 5 shares . The
action was brought to recover the amount
subscribed upon the remaining shares.
It appears that the defendant was a stock holder
in the company from the inception of the
enterprise, and for sometime acted as its
treasurer and manager. While serving in this
capacity he called in and collected all
subscriptions to the capital stock of the
company, except the aforesaid 15 shares
subscribed by himself and another 15 shares
owned by Jose R. Infante.
Upon July 13, 1914, a meeting of the board of
directors of the company was held at which a
majority of the stock was presented. Up[on this
occasion two resolutions, important to be here
noted, were adopted. The first was a proposal
that the directors, or shareholders, of the
company should make good by new
subscriptions, in proportion to their respective
holdings, 15 shares which had been surrendered
by Infante. It seems that this shareholder had
already paid 25 per cent of his subscription upon
20 shares, leaving 15 shares unpaid for, and an
understanding had been reached by him and the
management by which he was to be released
from the obligation of his subscription, it being
understood that what he had already paid should
not be refunded. Accordingly the directors
present at this meeting subscribed P1,200
toward taking up his shares, leaving a deficiency
of P300 to be recovered by voluntary
subscriptions from stockholders not present at
the meeting.
The other proposition was o the effect that Juan
[Jean] M. Poizat, who was absent, should be
required to pay the amount of his subscription
upon the 15 shares for which he was still
indebted to the company. The resolution further
provided that, in case he should refuse to make
such payment, the management of the
corporation should be authorized to undertake
judicial proceedings against him. When
notification of this resolution reached Poizat
through the mail it evoked from him a
manifestation of surprise and pain, which found
expression in a letter written by him in reply,
dated July 27, 1914, and addressed to Velasco, as
treasurer and administrator. In this letter Poizat
states that he had been given to understand by
some member of the board of directors that he
was to be relieved from his subscription upon
the terms conceded to Infante; and he added:
My desire to be relieved from the
payment of the remaining 75 per cent
arises from the poor opinion which I
entertain of the business and the faint
hope of ever recovering any money
invested. In consequence, I prefer to
lose the whole of the 25 per cent I have
already paid rather than to continue
investing more money in what I
consider to be ruinous proposition.
Within a short while the unfavorable opinion
entertained by Poizat as to the prospect of the
company was found to be fully justified, as the
company soon went into voluntary insolvency,
Velasco being named as the assignee. He
qualified at once by giving bond, and was duly
inducted into the office of assignee upon
November 25, 1914, by virtue of a formal
transfer executed by the clerk in pursuance of
section 32 of Act No. 1956.
The answer of the defendant consisted of a
general denial and a so-called special defense,
consisting of a concatenation of statements more
appropriate for a demurrer than as material for a
special defense. The principal contention is that
the call made by the board of directors of the
company on July 13, 1914 , was not made
pursuant to the requirements of sections 37 and
38 of the Corporation Law (Act No. 1459), and in
particular that the action was instituted before
the expiration of the 30 days specified in section
38.
At the hearing of the Court of First Instance,
judgment was rendered in favor of the
defendant, and the complaint was dismissed.
From this action the plaintiff has appealed.
We think that Poizat is liable upon this
subscription. A stock subscription is a contract
between the corporation on one side, and the
subscriber on the other, and courts will enforce
it for or against either. It is a rule, accepted by
the Supreme Court of the United States, that a
subscription for shares of stock does not require
an express promise to pay the amount
subscribed, as the law implies a promise to pay
on the part of the subscriber. (7 Ruling Case Law,
sec. 191.) Section 36 of the Corporation Law
clearly recognizes that a stock subscription is
subsisting liability from the time the
subscription is made, since it requires the
subscriber to pay interest quarterly from that
date unless he is relieved from such liability by
the by-laws of the corporation. The subscriber is
as much bound to pay the amount of the share
subscribed by him as he would be to pay any
other debt, and the right of the company to
demand payment is no less incontestable.
The provisions of the Corporation Law (Act No.
1459) given recognition of two remedies for the
enforcement of stock subscriptions. The first and
most special remedy given by the statute
consists in permitting the corporation to put up
the unpaid stock for sale and dispose of it for the
account of the delinquent subscriber. In this case
the provisions of section 38 to 48, inclusive , of
the Corporation Law are applicable and must be
followed. The other remedy is by action in court,
concerning which we find in section 49 the
following provision:
Nothing in this Act shall prevent the
directors from collecting, by action in
any court of proper jurisdiction, the
amount due on any unpaid
subscription, together with accrued
interest and costs and expenses
incurred.
It is generally accepted doctrine that the
statutory right to sell the subscriber's stock is
merely a remedy in addition to that which
proceeds by action in court; and it has been held
that the ordinary legal remedy by action exists
even though no express mention thereof is made
in the statute. (Instone vs. Frankfort Bridge Co., 2
Bibb [Ky.], 576; 5 Am. Dec., 638.)
No attempt is made in the Corporation Law to
define the precise conditions under which an
action may be maintained upon a stock
subscription, as such conditions should be
determined with reference to the rules
governing contract liability in general; and
where it appears as in this case that a matured
stock subscription is unpaid, none of the
provisions contained in section 38 to 48,
inclusive, of Act No. 1459 can be permitted to
obstruct or impede the action to recover
thereon. By virtue of the first subsection of
section 36 of the Insolvency Law (Act No. 1956)
the assignee of the insolvent corporation
succeeds to all the corporate rights of action
vested in the corporation prior to its insolvency;
and the assignee therefore has the same freedom
with respect to suing upon the stock
subscription as the directors themselves would
have had under section 49 above cited.
But there is another reason why the present
plaintiff must prevail in this case, even supposing
that the failure of the directors to comply with
the requirements of the provisions of sections 38
to 48, inclusive, of Act No. 1459 might have been
an obstacle to a recovery by the corporation
itself. That reason is this: When insolvency
supervenes upon a corporation and the court
assumes jurisdiction to wind up, all unpaid stock
subscriptions become payable on demand, and
are at once recoverable in an action instituted by
the assignee or receiver appointed by the court.
This rule apparently had origin in a recognition
of the principle that a court of equity, having
jurisdiction of the insolvency proceedings, could,
if necessary, make the call itself, in its capacity as
successor to the powers exercised by the board
of directors of the defunct company. Later a
further rule gained recognition to the effect that
the receiver or assignee, in an action instituted
by proper authority, could himself proceed to
collect the subscription without the necessity of
any prior call whatever. This conclusion is well
supported by reference to the following
authorities:
. . . a court of equity may enforce
payment of the stock subscriptions,
although there have been no calls for
them by the company. (Hatch vs. Dana,
101 U. S., 205.)
It is again insisted that the plaintiffs
cannot recover because the suit was
not preceded by a call or assessment
against no right of action accrues. In a
suit by a solvent going corporation to
collect a subscription, and in certain
suits provided by the statute this would
be true; but it is now quite well settled
that when the corporation becomes
insolvent, with proceedings instituted
by creditors to wind up and distribute
its assets, no call or assessment is
necessary before the institution of suits
to collect unpaid balances on
subscription. (Ross-Meehan Shoe F.
Co. vs. Southern Malleable Iron Co., 72
Fed., 957, 960;see
also Henry vs. Vermillion etc. R. R. Co.,
17 Ohio, 187, and Thompson on
Corporations 2d ed., vol. 3, sec. 2697.)
It evidently cannot be permitted that a
subscriber should escape from his lawful
obligation by reason of the failure of the officers
of the corporation to perform their duty in
making a call; and when the original model of
making the call becomes impracticable, the
obligation must be treated as due upon demand.
If the corporation must be treated still an active
entity, and this action should be dismissed for
irregularity in the making of the call, other steps
could be taken by the board to cure the defect
and another action could be brought; but where
the company is being wound up, no such
procedure would be practicable. The better
doctrine is that when insolvency supervenes all
unpaid subscriptions become at once due and
enforceable.
The printed bill of exceptions in this cause does
not contain the original complaint, nor does it
state who was plaintiff therein or the date when
the action was instituted. It may, however, be
gathered from the papers transmitted to this
court that the action was originally instituted in
the name of the Philippine Chemical Product Co.
(Ltd.), prior to its insolvency, and that later the
assignee was substituted as plaintiff and then
filed the amended complaint, with the
permission of the court. Now, if we concede that
no right of action existed when the original
complaint was filed, a right of action certainly
existed when the assignee filed his amended
complaint; and as the bill of exceptions fails to
show that any exception was taken to the action
of the court in allowing the amended complaint
to be filed, no objection would be here
entertained on the ground that the action was
prematurely brought.
The circumstance that the board of directors in (P1,500), with interest from July 13, 1014, and
their meeting of July 13, 1914, resolved to costs of both instances. So ordered.
release Infante from his obligation upon a
subscription for 15 shares is no wise prejudicial Arellano, C.J., Torres, Johnson, Carson, Araullo,
to the right of the corporation or its assignee to Malcolm, Avanceña and Fisher, JJ., concur.
recover from Poizat upon a subscription made
by him. In releasing Infante the board
transcended its powers, and he no doubt still
remained liable on such of his shares as were not
taken up and paid for by other persons.
The general doctrine is that the
corporation has no legal capacity to
release an original subscriber to its
capital stock from the obligation of
paying for his shares, in whole or in
part, . . . (10 Cyc., 450.)
The suggestion contained in Poizat's letter of July
27, 1914, to the effect that he understood that he
was to be relieved upon the same terms as
Infante is, for the same reason, of no merit as
matter of defense, even if an agreement to that
effect had been duly proved.
From what has been said it is manifest that the
defendant is liable for P1,500, the amount of his
subscription upon the unpaid shares. Under
section 36 of the Corporation Law he is also
liable for interest at the lawful rate from the date
of his subscription, unless relieved from this
liability by the by-laws of the company. These
by-laws have not been introduced in evidence
and there is no proof showing the exact date
upon which the subscription was made, though it
is alleged in the original complaint that the
company was organized upon March 23, 1914.
This allegation is not admitted in the agreed
statement of facts. The defendant, however,
inferentially admits in his letter of July 27, 1914,
that his subscription had been made prior to July
13, 1914. It resulted that in our opinion he
should be held liable for interest from that date.
The judgment of the lower court is therefore
reversed, and judgment will be rendered in favor
of the plaintiff and against the defendant for the
sum of one thousand five hundred pesos
Republic of the Philippines legal standpoint" 1 but apparently unable to
SUPREME COURT "close its eyes to the equity of the
Manila case" 2 dismissed nine (9) cases filed by it,
seeking "to recover from the defendant lumber
EN BANC producers [Bitulok Sawmill, Inc.; Dingalan
Lumber Co., Inc., Sierra Madre Lumber Co., Inc.;
Nasipit Lumber Co., Inc.; Woodworks, Inc.;
G.R. Nos. L-24177-85 June 29, 1968 Gonzalo Puyat; Tomas B. Morato; Findlay Millar
Lumber Co., Inc.; Insular Lumber Co., Inc.;
PHILIPPINE NATIONAL BANK, plaintiff- Anakan Lumber Co., Inc.; and Cantilan Lumber
appellee, Co., Inc.] the balance of their stock subscriptions
vs. to the Philippine Lumber Distributing Agency,
BITULOK SAWMILL, INC., DINGALAN LUMBER Inc." 3 In essence then, the crucial question posed
CO., INC., SIERRA MADRE LUMBER CO., INC., by this appeal from such a decision of the lower
NASIPIT LUMBER CO., INC., WOODWORKS, court is adherence to the rule of law. Otherwise
INC., GONZALO PUYAT, TOMAS B. MORATO, stated, would non-compliance with a plain
FINDLAY MILLAR LUMBER CO., INC., ET AL., statutory command, considering the
INSULAR LUMBER CO., ANAKAN LUMBER CO., persuasiveness of the plea that defendants-
AND CANTILAN LUMBER CO., INC., defendants- appellees would "not have subscribed to [the]
appellees. capital stock" of the Philippine Lumber
Distributing Agency "were it not for the
Tomas Besa, Simplicio N. Angeles and Jose B. assurance of the [then] President of the Republic
Galang for plaintiff-appellee. of the Philippines that the Government would
Bausa, Ampil and Suarez for defendant-appellant back [it] up by investing P9.00 for every
Woodworks, Inc. peso" 4 subscribed, a condition which was not
Pacifico de Ocampo for defendant-appellant fulfilled, such commitment not having been
Anakan Lumber Co. complied with, be justified? The answer must be
Ross, Selph, Salcedo, Del Rosario, Bito and Misa for in the negative.
defendant-appellant Insular Lumber Co.
Garin, Boquiren and Tamesis for defendant- It cannot be otherwise even if an element of
appellant Nasipit Lumber Co., Inc. unfairness and injustice could be predicated, as
Feria, Manglapus and Associates for defendant- the lower court, in a rather sympathetic mood,
appellant Gonzalo Puyat. did find in the plaintiff bank, as creditor,
Sycip, Salazar and Associates for defendant- compelling defendant lumber producers under
appellant Cantilan Lumber Co., Inc. the above circumstances to pay the balance of
Ozaeta, Gibbs and Ozaeta for defendant-appellant their subscriptions. For a plain and statutory
Findlay Millar Lumber Co., Inc. command, if applicable, must be respected. The
Dominador Alafriz for defendant-appellant rule of law cannot be satisfied with anything less.
Bitulok Sawmill, Inc. The appeal must be sustained.
De la Costa and De la Costa for defendant-
appellant Tomas B. Morato. In these various suits decided jointly, the
Philippine National Bank, as creditor, and
FERNANDO, J.: therefore the real party in interest, was allowed
by the lower court to substitute the receiver of
the Philippine Lumber Distributing Agency in
In the face of a statutory norm, which, as
interpreted in a uniform line of decisions by this these respective actions for the recovery from
defendant lumber producers the balance of their
Court, speaks unequivocally and is free from
doubt, the lower court with full recognition that stock subscriptions. The amount sought to be
collected from defendants-appellees Bitulok
the case for the plaintiff creditor, Philippine
National Bank, "is meritorious strictly from the Sawmill, Inc., Dingalan Lumber Co., Inc., and
Sierra Madre Lumber Co., Inc., is P5,000.00,
defendants-appellees having made a partial
payment of P15,000.00 of their total subscription
worth P20,000.00; from defendant-appellee
Nasipit Lumber Co., Inc., the sum of P10,000.00,
defendant-appellee having made a partial
payment of P10,000.00 of its total subscription
worth P20,000.00; from defendant-appellee
Woodworks, Inc., the sum of P10,886.00,
defendant-appellee having made a partial
payment of P9,114.00 of its total subscription
worth P20,000.00; from defendant-appellee
Gonzalo Puyat the sum of P10,000.00, defendant-
appellee having made a partial payment of
P10,000.00 of his total subscription worth
P20,000.00; from defendant-appellee Tomas
Morato the sum of P10,000.00, defendant-
appellee having made a partial payment of
P10,000.00 of his total subscription worth
P20,000.00; from defendant-appellee Findlay
Millar Lumber Co., Inc., the sum of P10,000.00,
defendant-appellee having made a partial
payment of P10,000.00 of its total subscription
worth P20,000.00; from defendant-appellee
Insular Lumber Co., Inc., the sum of P5,000.00,
defendant-appellee having made a partial
payment of P15,000.00 of its total subscription
worth P20,000.00; from defendant-appellee
Anakan Lumber Co., Inc., the sum of P15,000.00,
defendant-appellee having made a partial
payment of P5,000.00 of its total subscription
worth P20,000.00; and from defendant-appellee
Cantilan Lumber Co., Inc., the sum of P7,500.00,
defendant-appellee having made a partial
payment of P2,500.00 of its total subscription
worth P10,000.00, plus interest at the legal rate
from the filing of the suits and the costs of the
suits in all the nine (9) cases.
The Philippine Lumber Distributing Agency, Inc.,
according to the lower court, "was organized
sometime in the early part of 1947 upon the
initiative and insistence of the late President
Manuel Roxas of the Republic of the Philippines
who for the purpose, had called several
conferences between him and the subscribers
and organizers of the Philippine Lumber
Distributing Agency, Inc." 5 The purpose was
praiseworthy, to insure a steady supply of
lumber, which could be sold at reasonable prices
to enable the war sufferers to rehabilitate their
devastated homes. The decision continues: "He
convinced the lumber producers to form a
lumber cooperative and to pool their sources
together in order to wrest, particularly, the retail
trade from aliens who were acting as middlemen
in the distribution of lumber. At the beginning,
the lumber producers were reluctant to organize
the cooperative agency as they believed that it
would not be easy to eliminate from the retail
trade the alien middlemen who had been in this
business from time immemorial, but because the
late President Roxas made it clear that such a
cooperative agency would not be successful
without a substantial working capital which the
lumber producers could not entirely shoulder,
and as an inducement he promised and agreed to
finance the agency by making the Government
invest P9.00 by way of counterpart for every
peso that the members would invest therein,...." 6
This was the assurance relied upon according to
the decision, which stated that the amount thus
contributed by such lumber producers was not
enough for the operation of its business
especially having in mind the primary purpose of
putting an end to alien domination in the retail
trade of lumber products. Nor was there any
appropriation by the legislature of the
counterpart fund to be put up by the
Government, namely, P9.00 for every peso
invested by defendant lumber producers.
Accordingly, "the late President Roxas instructed
the Hon. Emilio Abello, then Executive Secretary
and Chairman of the Board of Directors of the
Philippine National Bank, for the latter to grant
said agency an overdraft in the original sum of
P250,000.00 which was later increased to
P350,000.00, which was approved by said Board
of Directors of the Philippine National Bank on
July 28, 1947, payable on or before April 30,
1958, with interest at the rate of 6% per annum,
and secured by the chattel mortgages on the
stock of lumber of said agency." 7 The Philippine
Government did not invest the P9.00 for every
peso coming from defendant lumber producers.
The loan extended to the Philippine Lumber
Distributing Agency by the Philippine National
Bank was not paid. Hence, these suits.
For the lower court, the above facts sufficed for
their dismissal. To its mind "it is grossly unfair
and unjust for the plaintiff bank now to compel
the lumber producers to pay the balance of their
subscriptions .... Indeed, when the late President
Roxas made representations to the plaintiff bank,
thru the Hon. Emilio Abello, who was then the
Executive Secretary and Chairman of its Board of
Directors, to grant said overdraft to the agency, it
was the only way by which President Roxas
could make good his commitment that the
Government would invest in said agency to the
extent already mentioned because, according to
said late President Roxas, the legislature had not
appropriated any amount for such counterpart.
Consequently, viewing from all considerations of
equity in the case, the Court finds that plaintiff
bank should not collect any more from the
defendants the balance of their subscriptions to
the capital stock of the Philippine Lumber
Distributing Agency, Inc." 8
Even with the case for defendant lumber
producers being put forth in its strongest
possible light in the appealed decision, the
plaintiff creditor, the Philippine National Bank,
should have been the prevailing party. On the
law as it stands, the judgment reached by the
lower court cannot be sustained. The appeal, as
earlier made clear, possesses merit.
In Philippine Trust Co. v. Rivera, 9 citing the
leading case of Velasco v. Poizat, 10 this Court
held: "It is established doctrine that
subscriptions to the capital of a corporation
constitute a fund to which creditors have a right
to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to
realize assets for the payment of its debt.... A
corporation has no power to release an original
subscriber to its capital stock from the obligation
of paying for his shares, without a valuable
consideration for such release; and as against
creditors a reduction of the capital stock can take
place only in the manner and under the
conditions prescribed by the statute or the
charter or the articles of incorporation.
Moreover, strict compliance with the statutory
regulations is necessary...." The Poizat doctrine
found acceptance in later cases. 11 One of the the most persuasive equitable considerations. To
latest cases, Lingayen Gulf Electric Power v. repeat, such is not the case here. For at no time
Baltazar, 12 Speaks to this effect: "In the case did President Roxas ever give defendant lumber
of Velasco v. Poizat, 13 the corporation involved producers to understand that the failure of the
was insolvent, in which case all unpaid stock Government for any reason to put up the
subscriptions become payable on demand and counterpart fund could terminate their statutory
are immediately recoverable in an action liability.
instituted by the assignee."
Such is not the law. Unfortunately, the lower
It would be unwarranted to ascribe to the late court was of a different mind. That is not to pay
President Roxas the view that the payment of the homage to the rule of law. Its decision then, one
stock subscriptions, as thus required by law, it is to be repeated influenced by what it
could be condoned in the event that the considered to be the "equity of the case", is not
counterpart fund to be invested by the legally impeccable.
Government would not be available. Even if such
were the case, however, and such a promise
WHEREFORE, the decision of the lower court is
were in fact made, to further the laudable reversed and the cases remanded to the lower
purpose to which the proposed corporation
court for judgment according to law, with full
would be devoted and the possibility that the consideration of the legal defenses raised by
lumber producers would lose money in the
defendants-appellees, Bitulok Sawmill, Inc.;
process, still the plain and specific wording of Dingalan Lumber Co., Inc.; Sierra Madre Lumber
the applicable legal provision as interpreted by Co., Inc.; Nasipit Lumber Co., Inc.; Woodworks,
this Court must be controlling. It is a well-settled Inc.; Gonzalo Puyat; Tomas B. Morato; Findlay
principle that with all the vast powers lodged in Millar Lumber Co., Inc.; Anakan Lumber Co., Inc.;
the Executive, he is still devoid of the prerogative and Cantilan Lumber Co., Inc. No pronouncement
of suspending the operation of any statute or any as to costs.
of its terms.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
The emphatic and categorical language of an Zaldivar, Sanchez and Angeles, JJ., concur.
American decision cited by the late Justice Castro, J., took no part.
Laurel, in People v. Vera, 14 comes to mind: "By
the twentieth article of the declaration of rights
in the constitution of this commonwealth, it is
declared that the power of suspending the laws,
or the execution of the laws, ought never to be
exercised but by the legislature, or by authority
derived from it, to be exercised in such particular
cases only as the legislature shall expressly
provide for...." Nor could it be otherwise
considering that the Constitution specifically
enjoins the President to see to it that all laws be
faithfully executed. 15 There may be a discretion
as to what a particular legal provision requires;
there can be none whatsoever as to the
enforcement and application thereof once its
meaning has been ascertained. What it decrees
must be followed; what it commands must be
obeyed. It must be respected, the wishes of the
President, to the contrary notwithstanding, even
if impelled by the most worthy of motives and
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-30646 January 30, 1929
THE GOVERNMENT OF THE PHILIPPINE
ISLANDS, petitioner,
vs.
THE MANILA RAILROAD COMPANY and JOSE
PAEZ as Manager of said
Company, respondents.
Attorney-General Jaranilla for petitioner.
Jose Abreu for respondents.
JOHNSON, J.:
This is a petition in the Supreme Court of the
extraordinary legal writ of mandamus presented
by the Government of the Philippine Islands,
praying that the writ be issued to compel the
Manila Railroad Company and Jose Paez, as its
manager, to provide and equip the telegraph
poles of said company between the municipality
of Paniqui, Province of Tarlac, and the
Municipality of San Fernando, Province of La
Union, with crosspieces for six telegraph wires
belonging to the Government, which, it is alleged,
are necessary for public service between said
municipalities.
The only question raised by the petition is
whether the dependant company is required to
provide and equip its telegraph poles with
crosspieces to carry six telegraph wires of the
Government, or whether it is only required to
furnish poles with crosspieces sufficient to carry
four wires only.
It is admitted that the present poles and
crosspieces between said municipalities are
sufficient to carry four telegraph wires and that
they do now carry four telegraph wires, by virtue
of an agreement between the respondents and
the Bureau of the Posts of the Philippine
Government. It is admitted that the poles and not
sufficient to carry six telegraph wires.
The petitioner relies upon the provisions of
section 84 of act No. 1459. Act No. 1459 is the
General Corporation Law and was adopted by
the United States Philippine Commission on
March 1, 1906. (Vol. 5, Pub. Laws, pp. 224-268.)
Section 84 of the said Act provides:
The railroad corporation shall establish
along the whole length of the road a
telegraph line for the use of the
railroad. The posts of this line may be
used for Government wires and shall be
of sufficient length and strength and
equipped with sufficient crosspiece to
carry the number of wires which the
Government may consider necessary
for the public service. The
establishment, protection, and
maintenance of the wires and stations
necessary for the public service shall be
at the cost of the Government. (Vol. 5, P.
L., p. 247.)
The plaintiff contends that under said section 84
the defendant company is required to erect and
maintain posts for its telegraph wires, of
sufficient length and strength, and equipped with
sufficient crosspieces to carry the number of
wires which the Government may consider
necessary for the public service, and that six
wires are now necessary for the public service.
The respondents answered by a general and
special defense. In their special defense they
contend that section 84 of Act No. 1459 has been
repealed by section 1, paragraph 8 of Act No.
1510 of the United States Philippine Commission
(vol. 5, P. L., pp. 350-358), and that under the
provisions of said Act No. 1510 the Government
is entitled to place on the poles of the company
four wires only. Act No. 1510 is the charter of the
Manila Railroad Company. It was adopted by the
United States Philippine Commission on July 7,
1906. Section 1, paragraph 8, of said Act No.
1510 provides:
8. The grantee (the Manila Railroad
Company) shall have the right to
construct and operate telegraph,
telephone, and electrical transmission
lines over said railways for the use of
the railways and their business, and
also, with the approval of the Secretary
of War, for public service and
commercial purposes but these latter
privileges shall be subject to the
following provisions:
In the construction of telegraph or
telephone lines along the right of way
the grantee (the Manila Railroad
Company) shall erect and maintain
poles with sufficient space thereon to
permit the Philippine Government, at
the expense of said Government, to
place, operate, and maintain four wires
for telegraph, telephone, and electrical
transmission for any Government
purposes between the termini of the
lines of railways main or branch; and
the Philippine Government reserves to
itself the right to construct, maintain,
and operate telegraph, telephone, or
electrical transmission lines over the
right of way of said railways for
commercial military, or government
purposes, without unreasonably
interfering with the construction,
maintenance, and operation by the
grantee of its railways, telegraph,
telephone, and electrical transmission
lines.
To answer the question above stated, it becomes
necessary to determine whether section 84 of
Act No. 1459 is applicable to the Manila Railroad
Company, or whether the manila Railroad
Company is governed by section 1, paragraph 8,
of Act No. 1510. As has been said, Act No. 1459 is
a general law applicable to corporations
generally, while Act No. 1510 is the charter of the
Manila Railroad Company and constitute a
contract between it and the Government.
Inasmuch as Act No. 1510 is the charter of
Manila Railroad Company and constitute a
contract between it and the Governmemnt, it
would seem that the company is governd by its
contract and not by the provisions of any general
law upon questions covered by said contract.
From a reading of the said charter or contract it
would be seen that there is no indication that the
Government intended to impose upon said
company any other conditions as obligations not
expressly found in said charter or contract. If
that is true, then certainly the Government
cannot impose upon said company any
conditions or obligations found in any general
law, which does not expressly modify said
contract.
Section 84 of the Corporation Law (Act No.
1459) was intended to apply to all railways in
the Philippine Islands which did not have a
special charter contract. Act No. 1510 applies
only to the Manila Railroad Company, one of the
respondents, and being a special charter of said
company, its adoption had the effect of
superseding the provisions of the general
Corporation Law which are applicable to
railraods in general. The special charter (Act No.
1510) had the effect of superseding the general
Corporation Law upon all matters covered by
said special charter. Said Act, inasmuch as it
contained a special provision relating to the
erection of telegraph and telephone poles, and
the number of wires which the Government
might place thereon, superseded the general law
upon that question.
Act No. 1510 is a special charter of the
respondent company. It constitutes a contract
between the respondent company and the state;
and the state and the grantee of a charter are
equally bound by its provisions. For the state to
impose an obligation or a duty upon the
respondent company, which is not expressly
provided for in the charter (Act No. 1510), would
amount to a violation of said contract between
the state and the respondent company. The
provisions of Act No. 1459 relating to the
number of wires which the Government may
place upon the poles of the company are
different and more enerous than the provisions
of the charter upon the same question.
Therefore, to allow the plaintiff to require of the
respondent company a compliance with said
section 84 of Act No. 1459, would be to require
of the respondent company and the performance
of an obligation which is not imposed upon it by
its charter. The charter of a corporation is a
contract between three parties: (a) it is a
contract between the state and the corporation
to which the charter is granted; (b) it is a contact
between the stockholders and the state and (c) it
is also a contract between the corporation and
its stockholders. (Cook on Corporations, vol. 2,
sec. 494 and cases cited.)

The question is not whether Act No. 1510

repealed Act No. 1459; but whether, after the
adoption of Act No. 1510, the respondents are
obliged to comply with the special provision
above mentioned, contained in Act No. 1459. We
must answer that question in the native. Both
laws are still in force, unless otherwise repealed.
Act No. 1510 is applicable to respondents upon
the question before us, while Act No. 1459 is not
applicable.

The petitioner, in view of all the foregoing facts

and the law applicable thereto, has not shown
itself entitled to the remedy prayed for. The
prayer of the petition must, therefore, be denied.
And without any finding as to costs, it is so
ordered.

Street, Malcolm, Villamor, Ostrand, Johns,

Romualdez and Villa-Real, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 96674 June 26, 1992
RURAL BANK OF SALINAS, INC., MANUEL
SALUD, LUZVIMINDA TRIAS and FRANCISCO
TRIAS,petitioners,
vs.
COURT OF APPEALS*, SECURITIES AND
EXCHANGE COMMISSION, MELANIA A.
GUERRERO, LUZ ANDICO, WILHEMINA G.
ROSALES, FRANCISCO M. GUERRERO, JR., and
FRANCISCO GUERRERO , SR., respondents.
PARAS, J.:
The basic controversy in this case is whether or
not the respondent court erred in sustaining the
Securities and Exchange Commission when it
compelled by Mandamus the Rural Bank of
Salinas to register in its stock and transfer book
the transfer of 473 shares of stock to private
respondents. Petitioners maintain that the
Petition forMandamus should have been denied
upon the following grounds.
(1) Mandamus cannot be a remedy cognizable by
the Securities and Exchange Commission when
the purpose is to register certificates of stock in
the names of claimants who are not yet
stockholders of a corporation:
(2) There exist valid reasons for refusing to
register the transfer of the subject of stock,
namely:
(a) a pending controversy
over the ownership of the
certificates of stock with the
Regional Trial Court;
(b) claims that the Deeds of
Assignment covering the
subject certificates of stock
were fictitious and antedated;
and
(c) claims on a resultant
possible deprivation of
inheritance share in relation
with a conflicting claim over
the subject certificates of
stock.
The facts are not disputed.
On June 10, 1979, Clemente G. Guerrero,
President of the Rural Bank of Salinas, Inc.,
executed a Special Power of Attorney in favor of
his wife, private respondent Melania Guerrero,
giving and granting the latter full power and
authority to sell or otherwise dispose of and/or
mortgage 473 shares of stock of the Bank
registered in his name (represented by the
Bank's stock certificates nos. 26, 49 and 65), to
execute the proper documents therefor, and to
receive and sign receipts for the dispositions.
On February 27, 1980, and pursuant to said
Special Power of Attorney, private respondent
Melania Guerrero, as Attorney-in-Fact, executed
a Deed of Assignment for 472 shares out of the
473 shares, in favor of private respondents Luz
Andico (457 shares), Wilhelmina Rosales (10
shares) and Francisco Guerrero, Jr. (5 shares).
Almost four months later, or two (2) days before
the death of Clemente Guerrero on June 24,
1980, private respondent Melania Guerrero,
pursuant to the same Special Power of Attorney,
executed a Deed of Assignmentfor the remaining
one (1) share of stock in favor of private
respondent Francisco Guerrero, Sr.
Subsequently, private respondent Melania
Guerrero presented to petitioner Rural Bank of
Salinas the two (2) Deeds of Assignment for
registration with a request for the transfer in the
Bank's stock and transfer book of the 473 shares
of stock so assigned, the cancellation of stock
certificates in the name of Clemente G. Guerrero,
and the issuance of new stock certificates
covering the transferred shares of stocks in the
name of the new owners thereof. However,
petitioner Bank denied the request of
respondent Melania Guerrero.
On December 5, 1980, private respondent
Melania Guerrero filed with the Securities and
Exchange Commission" (SEC) an action
for mandamus against petitioners Rural Bank of
Salinas, its President and Corporate Secretary.
The case was docketed as SEC Case No. 1979.
Petitioners filed their Answer with counterclaim
on December 19, 1980 alleging the upon the
death of Clemente G. Guerrero, his 473 shares of
stock became the property of his estate, and his
property and that of his widow should first be
settled and liquidated in accordance with law
before any distribution can be effected so that
petitioners may not be a party to any scheme to
evade payment of estate or inheritance tax and
in order to avoid liability to any third persons or
creditors of the late Clemente G. Guerrero.
On January 29, 1981, a motion for intervention
was filed by Maripol Guerrero, a legally adopted
daughter of the late Clemente G. Guerrero and
private respondent Melania Guerrero, who
stated therein that on November 26, 1980
(almost two weeks before the filing of the
petition for Mandamus) a Petition for the
administration of the estate of the late Clemente
G. Guerrero had been filed with the Regional
Trial Court, Pasig, Branch XI, docketed as Special
Proceedings No. 9400. Maripol Guerrero further
claimed that the Deeds of Assignment for the
subject shares of stock are fictitious and
antedated; that said conveyances are donations
since the considerations therefor are below the
book value of the shares, the assignees/private
respondents being close relatives of private
respondent Melania Guerrero; and that the
transfer of the shares in question to
assignees/private respondents, other than
private respondent Melania Guerrero, would
deprive her (Maripol Guerrero) of her rightful
share in the inheritance. The SEC hearing officer
denied the Motion for Intervention for lack of
merit. On appeal, the SEC En Banc affirmed the
decision of the hearing officer.
Intervenor Guerrero filed a complaint before the
then Court of First Instance of Rizal, Quezon City
Branch, against private respondents for the
annulment of the Deeds of Assignment, docketed
as Civil Case No. Q-32050. Petitioners, on the
other hand, filed a Motion to Dismiss and/or to
Suspend Hearing of SEC Case No. 1979 until after
the question of whether the subject Deeds of
Assignment are fictitious, void or simulated is
resolved in Civil Case No. Q-32050. The SEC
Hearing Officer denied said motion.
On December 10, 1984, the SEC Hearing Officer
rendered a Decision granting the writ
of Mandamus prayed for by the private
respondents and directing petitioners to cancel
stock certificates nos. 26, 49 and 65 of the Bank,
all in the name of Clemente G. Guerrero, and to
issue new certificates in the names of private
respondents, except Melania Guerrero. The
dispositive, portion of the decision reads:
WHEREFORE, judgment is
hereby rendered in favor of
the petitioners and against
the respondents, directing the
latter, particularly the
corporate secretary of
respondent Rural Bank of
Salinas, Inc., to register in the
latter's Stock and Transfer
Book the transfer of 473
shares of stock of respondent
Bank and to cancel Stock
Certificates Nos. 26, 45 and 65
and issue new Stock
Certificates covering the
transferred shares in favor of
petitioners, as follows:
1. Luz Andico 457 shares
2. Wilhelmina Rosales 10
shares
 3. Francisco Guerrero, Jr. 5
shares
4. Francisco Guerrero, Sr. 1
share
and to pay to the above-
named petitioners, the
dividends for said shares
corresponding to the years
1981, 1982, 1983 and 1984
without interest.
No pronouncement as to
costs.
SO ORDERED. (p. 88, Rollo)
On appeal, the SEC En Banc affirmed the decision
of the Hearing Officer. Petitioner filed a petition
for review with the Court of Appeals but said
Court likewise affirmed the decision of the SEC.
We rule in favor of the respondents.
Section 5 (b) of P.D. No. 902-A grants to the SEC
the original and exclusive jurisdiction to hear
and decide cases involving intracorporate
controversies. An intracorporate controversy
has been defined as one which arises between a
stockholder and the corporation. There is no
distinction, qualification, nor any exception
whatsoever (Rivera vs. Florendo, 144 SCRA 643
[1986]). The case at bar involves shares of stock,
their registration, cancellation and issuances
thereof by petitioner Rural Bank of Salinas. It is
therefore within the power of respondent SEC to
adjudicate.
Respondent SEC correctly ruled in favor of the
registering of the shares of stock in question in
private respondent's names. Such ruling finds
support under Section 63 of the Corporation
Code, to wit:
Sec. 63. . . . Shares of stock so
issued are personal property
and may be transferred by
delivery of the certificate or
certificates indorsed by the
owner or his attorney-in-fact
or other person legally
authorized to make the
transfer. No transfer,
however, shall be valid, except
as between the parties, until
the transfer is recorded in the
books of the corporation . . .
In the case of Fleisher vs. Botica Nolasco,
47 Phil. 583, the Court interpreted Sec.
63 in his wise:
Said Section (Sec. 35 of Act
1459 [now Sec. 63 of the
Corporation Code])
contemplates no restriction as
to whom the stocks may be
transferred. It does not
suggest that any
discrimination may be created
by the corporation in favor of,
or against a certain purchaser.
The owner of shares, as
owner of personal property, is
at liberty, under said section
to dispose them in favor of
whomever he pleases,
without limitation in this
respect, than the general
provisions of law. . . .
The only limitation imposed by Section
63 of the Corporation Code is when the
corporation holds any unpaid claim
against the shares intended to be
transferred, which is absent here.
A corporation, either by its board, its by-laws, or
the act of its officers, cannot create restrictions
in stock transfers, because:
. . . Restrictions in the traffic of
stock must have their source
in legislative enactment, as
the corporation itself cannot
create such impediment. By-
laws are intended merely for cause, it may be compelled to
the protection of the do so by mandamus. (See.
corporation, and prescribe 5518, 12 Fletcher 394)
regulation, not restriction;
they are always subject to the For the petitioner Rural Bank of Salinas to refuse
charter of the corporation. registration of the transferred shares in its stock
The corporation, in the and transfer book, which duty is ministerial on
absence of such power,
its part, is to render nugatory and ineffectual the
cannot ordinarily inquire into spirit and intent of Section 63 of the Corporation
or pass upon the legality of
Code. Thus, respondent Court of Appeals did not
the transactions by which its err in upholding the Decision of respondent SEC
stock passes from one person
affirming the Decision of its Hearing Officer
to another, nor can it question directing the registration of the 473 shares in the
the consideration upon which stock and transfer book in the names of private
a sale is based. . . . (Tomson on respondents. At all events, the registration is
Corporation Sec. 4137, cited in without prejudice to the proceedings in court to
Fleisher vs. Nolasco, Supra).
determine the validity of the Deeds of
Assignment of the shares of stock in question.
The right of a transferee/assignee to have stocks
transferred to his name is an inherent right WHEREFORE, the petition is DISMISSED for lack
flowing from his ownership of the stocks. Thus: of merit.
Whenever a corporation SO ORDERED.
refuses to transfer and
register stock in cases like the
present, mandamuswill lie to Narvasa, C.J., Padilla and Regalado, JJ., concur.
compel the officers of the
corporation to transfer said Nocon, J., is on leave.
stock in the books of the
corporation" (26, Cyc. 347,
Hyer vs. Bryan, 19 Phil. 138;
Fleisher vs. Botica Nolasco, 47
Phil. 583, 594).
The corporation's obligation to register is
ministerial.
In transferring stock, the
secretary of a corporation acts
in purely ministerial capacity,
and does not try to decide the
question of ownership.
(Fletcher, Sec. 5528, page
434).
The duty of the corporation to
transfer is a ministerial one
and if it refuses to make such
transaction without good
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 41570 September 6, 1934
RED LINE TRANSPORTATION CO., petitioner-
appellant,
vs.
RURAL TRANSIT CO., LTD., respondent-
appellee.
L. D. Lockwood for appellant.
Ohnick and Opisso for appellee.
BUTTE, J.:
This case is before us on a petition for review of
an order of the Public Service Commission
entered December 21, 1932, granting to the
Rural Transit Company, Ltd., a certificate of
public convenience to operate a transportation
service between Ilagan in the Province of Isabela
and Tuguegarao in the Province of Cagayan, and
additional trips in its existing express service
between Manila Tuguegarao.
On June 4, 1932, the Rural Transit Company, Ltd.,
a Philippine corporation, filed with the Public
Company Service Commission an application in
which it is stated in substance that it is the
holder of a certificate or public convenience to
operate a passenger bus service between Manila
and Tuguegarao; that it is the only operator of
direct service between said points and the
present authorized schedule of only one trip
daily is not sufficient; that it will be also to the
public convenience to grant the applicant a
certificate for a new service between Tuguegarao
and Ilagan.
On July 22, 1932, the appellant, Red Line
Transportation Company, filed an opposition to
the said application alleging in substance that as
to the service between Tuguegarao and Ilagan,
the oppositor already holds a certificate of public
convenience and is rendering adequate and
satisfactory service; that the granting of the
application of the Rural Transit Company, Ltd.,
would not serve public convenience but would
constitute a ruinous competition for the
oppositor over said route.
After testimony was taken, the commission, on
December 21, 1932, approved the application of
the Rural Transit Company, Ltd., and ordered
that the certificate of public convenience applied
for be "issued to the applicant Rural Transit
Company, Ltd.," with the condition, among
others, that "all the other terms and conditions of
the various certificates of public convenience of
the herein applicant and herein incorporated are
made a part hereof."
On January 14, 1933, the oppositor Red Line
Transportation Company filed a motion for
rehearing and reconsideration in which it called
the commission's attention to the fact that there
was pending in the Court of First Instance of
Manila case N. 42343, an application for the
voluntary dissolution of the corporation, Rural
Transit Company, Ltd. Said motion for
reconsideration was set down for hearing on
March 24, 1933. On March 23, 1933, the Rural
Transit Company, Ltd., the applicant, filed a
motion for postponement. This motion was
verified by M. Olsen who swears "that he was the
secretary of the Rural Transit Company, Ltd., in
the above entitled case." Upon the hearing of the
motion for reconsideration, the commission
admitted without objection the following
documents filed in said case No. 42343 in the
Court of First Instance of Manila for the
dissolution of the Rural Transit Company, Ltd.
the petition for dissolution dated July 6, 1932,
the decision of the said Court of First Instance of
Manila, dated February 28, 1933, decreeing the
dissolution of the Rural Transit Company, Ltd.
At the trial of this case before the Public Service
Commission an issue was raised as to who was
the real party in interest making the application,
whether the Rural Transit Company, Ltd., as
appeared on the face of the application, or the
Bachrach Motor Company, Inc., using name of
the Rural Transit Company, Ltd., as a trade name.
The evidence given by the applicant's secretary,
Olsen, is certainly very dubious and confusing, as
may be seen from the following:
Q. Will you please answer the
question whether it is the Bachrach
Motor Company operating under the
trade name of the Rural Transit
Company, Limited, or whether it is the
Rural Transit Company, Limited in its
own name this application was filed?
A. The Bachrach Motor Company
is the principal stockholder.
Q. Please answer the question.
ESPELETA. Objecion porque la
pregunta ya ha sido contestada.
JUEZ. Puede contestar.
A. I do not know what the legal
construction or relationship existing
between the two.
JUDGE. I do not know what is in your
mind by not telling the real applicant in
this case?
A. It is the Rural Transit
Company, Ltd.
JUDGE. As an entity by itself and not by
the Bachrach Motor Company?
A. I do not know. I have not given
that phase of the matter much thought,
as in previous occassion had not
necessitated.
JUDGE. In filing this application, you
filed it for the operator on that line? Is
it not!
A. Yes, sir.
JUDGE. Who is that operator?
A. The Rural Transit Company,
Ltd.
JUDGE. By itself, or as a commercial
name of the Bachrach Motor Company?
A. I cannot say.
ESPELETA. The Rural Transit
Company, Ltd., is a corporation duly
established in accordance with the laws
of the Philippine Islands.
JUDGE. According to the records of this
commission the Bachrach Motor
Company is the owner of the
certificates and the Rural Transit
Company, Ltd., is operating without any
certificate.
JUDGE. If you filed this application for
the Rural Transit Company, Ltd., and
afterwards it is found out that the Rural
Transit Company, Ltd., is not an
operator, everything will be turned
down.
JUDGE. My question was, when you
filed this application you evidently
made it for the operator?
A. Yes, sir.
JUDGE. Who was that operator you had
in mind?
A. According to the status of the
ownership of the certificates of the
former Rural Transit Company, the
operator was the operator authorized
in case No. 23217 to whom all of the
assets of the former Rural Transit
Company were sold.
JUDGE. Bachrach Motor Company?
 A. All actions have been
prosecuted in the name of the Rural
Transit Company, Ltd.
JUDGE. You mean the Bachrach Motor
Company, Inc., doing business under
the name of the Rural Transit Company,
Ltd.?
A. Yes, sir.
LOCKWOOD. I move that this case be
dismissed, your Honor, on the ground
that this application was made in the
name of one party but the real owner is
another party.
ESPELETA. We object to that petition.
JUDGE. I will have that in mind when I
decide the case. If I agree with you
everything would be finished.
The Bachrach Motor Company, Inc., entered no
appearance and ostensibly took no part in the
hearing of the application of the Rural Transit
Company, Ltd. It may be a matter of some
surprise that the commission did not on its own
motion order the amendment of the application
by substituting the Bachrach Motor Company,
Inc., as the applicant. However, the hearing
proceeded on the application as filed and the
decision of December 2, 1932, was rendered in
favor of the Rural Transit Company, Ltd., and the
certificate ordered to be issued in its name, in
the face of the evidence that the said corporation
was not the real party in interest. In its said
decision, the commission undertook to meet the
objection by referring to its resolution of
November 26, 1932, entered in another case.
This resolution in case No. 23217 concludes as
follows:
Premises considered we hereby
authorize the Bachrach Motor Co., Inc.,
to continue using the name of "Rural
Transit Co., Ltd.," as its trade name in
all the applications, motions or other
petitions to be filed in this commission Rural Transit Co., Ltd., the said order last
in connection with said business and mentioned is set aside and vacated on the
that this authority is given retroactive ground that the Rural Transit Company, Ltd., is
effect as of the date, of filing of the not the real party in interest and its application
application in this case, to wit, April 29, was fictitious.
1930.
In view of the dissolution of the Rural Transit
We know of no law that empowers the Public Company, Ltd. by judicial decree of February 28,
Service Commission or any court in this 1933, we do not see how we can assess costs
jurisdiction to authorize one corporation to against said respondent, Rural Transit Company,
assume the name of another corporation as a Ltd.
trade name. Both the Rural Transit Company,
Ltd., and the Bachrach Motor Co., Inc., are
Malcolm, Villa-Real, Imperial and Goddard,
Philippine corporations and the very law of their JJ., concur.
creation and continued existence requires each
to adopt and certify a distinctive name. The
incorporators "constitute a body politic and
corporate under the name stated in the
certificate." (Section 11, Act No. 1459, as
amended.) A corporation has the power "of
succession by its corporate name." (Section
13, ibid.) The name of a corporation is therefore
essential to its existence. It cannot change its
name except in the manner provided by the
statute. By that name alone is it authorized to
transact business. The law gives a corporation no
express or implied authority to assume another
name that is unappropriated: still less that of
another corporation, which is expressly set apart
for it and protected by the law. If any
corporation could assume at pleasure as an
unregistered trade name the name of another
corporation, this practice would result in
confusion and open the door to frauds and
evasions and difficulties of administration and
supervision. The policy of the law expressed in
our corporation statute and the Code of
Commerce is clearly against such a practice. (Cf.
Scarsdale Pub. Co. Colonial Press vs. Carter, 116
New York Supplement, 731; Svenska Nat. F. i.
C. vs. Swedish Nat. Assn., 205 Illinois [Appellate
Courts], 428, 434.)
The order of the commission of November 26,
1932, authorizing the Bachrach Motor Co.,
Incorporated, to assume the name of the Rural
Transit Co., Ltd. likewise in corporated, as its
trade name being void, and accepting the order
of December 21, 1932, at its face as granting a
certificate of public convenience to the applicant
Republic of the Philippines originally presented before
SUPREME COURT the Security and Exchange
Manila Commissioner and
acknowledged before Notary
EN BANC Public Mr. E. D. Ignacio on
June 1, 1953 state that the
name of the corporation was
'The Yek Tong Lin Fire and
Marine Insurance Co., Ltd.' On
G.R. No. L-26370 July 31, 1970 May 26, 1961 the articles of
incorporation were amended
PHILIPPINE FIRST INSURANCE COMPANY, pursuant to a certificate of the
INC., plaintiff-appellant, Board of Directors dated
vs. March 8, 1961 changing the
MARIA CARMEN HARTIGAN, CGH, and O. name of the corporation to
ENGKEE, defendants-appellees. 'Philippine First Insurance
Co., Inc.'.
Bausa, Ampil & Suarez for plaintiff-appellant.
The complaint alleges that the
plaintiff Philippine First
Nicasio E. Martin for defendants-appellees. Insurance Co., Inc., doing
business under the name of
'The Yek Tong Lin Fire and
Marine Insurance Co., Lt.'
signed as co-maker together
BARREDO, J.:
with defendant Maria Carmen
Hartigan, CGH, a promissory
Appeal from the decision dated 6 October 1962 note for P5,000.00 in favor of
of the Court of First Instance of Manila — the China Banking
dismissing the action in its Civil Case No. 48925 Corporation payable within
— brought by the herein plaintiff-appellant 30 days after the date of the
Philippine First Insurance Co., Inc. to the Court of promissory note with the
Appeals which could, upon finding that the said usual banking interest; that
appeal raises purely questions of law, declared the plaintiff agreed to act as
itself without jurisdiction to entertain the same such co-maker of the
and, in its resolution dated 15 July 1966, promissory note upon the
certified the records thereof to this Court for application of the defendant
proper determination. Maria Carmen Hartigan, CGH,
who together with Antonio F.
The antecedent facts are set forth in the Chua and Chang Ka Fu, signed
pertinent portions of the resolution of the Court an indemnity agreement in
of Appeals referred to as follows: favor of the plaintiff,
undertaking jointly and
According to the complaint, severally, to pay the plaintiff
plaintiff was originally damages, losses or expenses
organized as an insurance of whatever kind or nature,
corporation under the name including attorney's fees and
of 'The Yek Tong Lin Fire and legal costs, which the plaintiff
Marine Insurance Co., Ltd.' may sustain as a result of the
The articles of incorporation execution by the plaintiff and
co-maker of Maria Carmen
Hartigan, CGH, of the
promissory note above-
referred to; that as a result of
the execution of the
promissory note by the
plaintiff and Maria Carmen
Hartigan, CGH, the China
Banking Corporation
delivered to the defendant
Maria Carmen Hartigan, CGH,
the sum of P5,000.00 which
said defendant failed to pay in
full, such that on August 31,
1961 the same was. renewed
and as of November 27, 1961
there was due on account of
the promissory note the sum
of P4,559.50 including
interest. The complaint ends
with a prayer for judgment
against the defendants, jointly
and severally, for the sum of
P4,559.50 with interest at the
rate of 12% per annum from
November 23, 1961 plus
P911.90 by way of attorney's
fees and costs.
Although O. Engkee was made
as party defendant in the
caption of the complaint, his
name is not mentioned in the
body of said complaint.
However, his name Appears in
the Annex A attached to the
complaint which is the
counter indemnity agreement
supposed to have been signed
according to the complaint by
Maria Carmen Hartigan, CGH,
Antonio F. Chua and Chang Ka
Fu.
In their answer the
defendants deny the
allegation that the plaintiff
formerly conducted business
under the name and style of
'The Yek Tong Lin Fire and
Marine Insurance Co., Ltd.'
They admit the execution of
the indemnity agreement but
they claim that they signed
said agreement in favor of the
Yek Tong Lin Fire and Marine
Insurance Co., Ltd.' and not in
favor of the plaintiff. They
likewise admit that they failed
to pay the promissory note
when it fell due but they
allege that since their
obligation with the China
Banking Corporation based on
the promissory note still
subsists, the surety who co-
signed the promissory note is
not entitled to collect the
value thereof from the
defendants otherwise they
will be liable for double
amount of their obligation,
there being no allegation that
the surety has paid the
obligation to the creditor.
By way of special defense,
defendants claim that there is
no privity of contract between
the plaintiff and the
defendants and consequently,
the plaintiff has no cause of
action against them,
considering that the
complaint does not allege that
the plaintiff and the 'Yek Tong
Lin Fire and Marine Insurance
Co., Ltd.' are one and the same
or that the plaintiff has
acquired the rights of the
latter. The parties after the
admission of Exhibit A which
is the amended articles of
incorporation and Exhibit 1
which is a demand letter
dated August 16, 1962 signed
by the manager of the loans
and discount department of
the China Banking
Corporation showing that the
 promissory note up to said
date in the sum of P4,500.00
was still unpaid, submitted
the case for decision based on
the pleadings.
Under date of 6 October 1962, the Court of First
Instance of Manila rendered the decision
appealed. It dismissed the action with costs
against the plaintiff Philippine First Insurance
Co., Inc., reasoning as follows:
... With these undisputed facts
in mind, the parties correctly
concluded that the issues for
resolution by this Court are as
follows:
(a) Whether or not the
plaintiff is the real party in
interest that may validly sue
on the indemnity agreement
signed by the defendants and
the Yek Tong Lin Fire &
Marine Insurance Co., Ltd.
(Annex A to plaintiff's
complaint ); and
(b) Whether or not a suit for
indemnity or reimbursement
may under said indemnity
agreement prosper without
plaintiff having yet paid the
amount due under said
promissory note.
In the first place, the change
of name of the Yek Tong Lin
Fire & Marine Insurance Co.,
Ltd. to the Philippines First
Insurance Co., Inc. is of
dubious validity. Such change
of name in effect dissolved the
original corporation by a
process of dissolution not
authorized by our corporation
law (see Secs. 62 and 67,
inclusive, of our Corporation
Law). Moreover, said change
of name, amounting to a
dissolution of the Yek Tong
Lin Fire & Marine Insurance
Co., Ltd., does not appear to
have been effected with the
written note or assent of
stockholders representing at
least two-thirds of the
subscribed capital stock of the
corporation, a voting
proportion required not only
for the dissolution of a
corporation but also for any
amendment of its articles of
incorporation (Secs. 18 and
62, Corporation Law).
Furthermore, such change of
corporate name appears to be
against public policy and may
be effected only by express
authority of law (Red Line
Transportation Co. v. Rural
Transit Co., Ltd., 60 Phil. 549,
555; Cincinnati Cooperage Co.,
Ltd. vs. Vate, 26 SW 538, 539;
Pilsen Brewing Co. vs.
Wallace, 125 NE 714), but
there is nothing in our
corporation law authorizing
the change of corporate name
in this jurisdiction.
In the second place, assuming
that the change of name of the
Yek Tong Lin Fire & Marine
Insurance Co. Ltd., to
Philippines pine First
Insurance Co., Inc., as
accomplished on March 8,
1961, is valid, that would
mean that the original
corporation, the Yek Tong Lin
Fire & Marine Insurance Co.,
Ltd., became dissolved and of
no further existence since
March 8, 1961, so that on May
15, 1961, the date the
indemnity agreement, Annex
A, was executed, said original
corporation bad no more
power to enter into any
agreement with the
defendants, and the
agreement entered into by it
was ineffective for lack of
capacity of said dissolved
corporation to enter into said
agreement. At any rate, even if
we hold that said change of
name is valid, the fact remains
that there is no evidence
showing that the new entity,
the Philippine First Insurance
Co., Inc. has with the consent
of the original parties,
assumed the obligations or
was assigned the rights of
action in the original
corporation, the Yek Tong Lin
Fire & Marine Insurance Co.,
Ltd. In other words, there is
no evidence of conventional
subrogation of the Plaintiffs in
the rights of the Yek Tong Lin
Fire & Marine Insurance Co.,
Ltd. under said indemnity
agreement (Arts. 1300, 1301,
New Civil Code). without such
subrogation assignment of
rights, the herein plaintiff has
no cause of action against the
defendants, and is, therefore,
not the right party in interest
as plaintiff.
Last, but not least, assuming
that the said change of name
was legal and operated to
dissolve the original
corporation, the dissolved
corporation, must pursuant to
Sec. 77 of our corporation law,
be deemed as continuing as a
body corporate for three (3)
years from March 8, 1961 for
the purpose of prosecuting
and defending suits. It is,
therefore, the Yek Tong Lin
Fire & Marine Insurance Co.,
Ltd. that is the proper party to
sue the defendants under said
indemnity agreement up to
March 8, 1964.
Having arrived at the
foregoing conclusions, this
Court need not squarely pass
upon issue (b) formulated
above.
WHEREFORE, plaintiff's
action is hereby dismissed,
with costs against the
plaintiff.
In due time, the Philippine First Insurance
Company, Inc. moved for reconsideration of the
decision aforesaid, but said motion was denied
on December 3, 1962 in an order worded thus:
The motion for
reconsideration, dated
November 8, 1962, raises no
new issue that we failed to
consider in rendering our
decision of October 6, 1962.
However, it gives us an
opportunity to amplify our
decision as regards the
question of change of name of
a corporation in this
jurisdiction.
We find nothing in our
Corporation Law authorizing
a change of name of a
corporation organized
pursuant to its provisions.
Sec. 18 of the Corporation
Law authorizes, in our
opinion, amendment to the
Articles of Incorporation of a
corporation only as to matters
other than its corporate name.
Once a corporation is
organized in this jurisdiction
by the execution and
registration of its Articles of
Incorporation, it shall
continue to exist under its Jurisprudence. On the retain changed by mere amendment
corporate name for the contrary, the annotations in former of its Articles of Incorporation
lifetime of its corporate favor of plaintiff's view rights, and as to its corporate name. A
existence fixed in its Articles appear to have been based on sometimes change of corporate name
of Incorporation, unless decisions in cases where the its former would serve no useful
sooner legally dissolved (Sec. statute itself expressly name also, purpose, but on the contrary
11, Corp. Law). Significantly, authorizes change of ... it never would most probably cause
change of name is not one of corporate name by appears to confusion. Only a dubious
the methods of dissolution of amendment of its Articles of be such an purpose could inspire a
corporations expressly Incorporation. The correct act as the change of a corporate. name
authorized by our rule in harmony with the corporatio which, unlike a natural
Corporation Law. Also provisions of our Corporation n could do person's name, was chosen by
significant is the fact that the Law is well expressed in an by itself, the incorporators themselves;
power to change its corporate English case as follows: but and our Courts should not
name is not one of the general required lend their assistance to the
powers conferred on After a the same accomplishment of dubious
corporations in this company power as purposes.
jurisdiction (Sec. 13, Corp. has been created the
Law). The enumeration of completely corporatio WHEREFORE, we hereby deny
corporate powers made in our register n. (Reg. v. plaintiff's motion for
Corporation Law implies the without Registrar reconsideration, dated
exclusion of all others defect or of Joint November 8, 1962, for lack of
(Thomas v. West Jersey R. Co., omission, Stock Cos merit.
101 U.S. 71, 25 L. ed. 950). It so as to be 10 Q.B.
is obvious, in this connection, incorporat 839, 59
that change of name is not one E.C.L. 839). In this appeal appellant contends that —
ed by the
of the powers necessary to the name set
exercise of the powers forth in the The contrary view appears to I
conferred on corporations by deed of represent the minority
said Sec. 13 (see Sec. 14, Corp. settlement, doctrine, judging from the THE TRIAL COURT ERRED IN
Law). such annotations on decided cases HOLDING THAT IN THIS
incorporat on the matter. JURISDICTION, THERE IS
To rule that Sec. 18 of our ed NOTHING IN OUR
Corporation Law authorizes company The movant invokes as CORPORATION LAW
the change of name of a has not the persuasive precedent the AUTHORIZING THE CHANGE
corporation by amendment of power to action of the Securities OF CORPORATE NAME;
its Articles of Incorporation is change its Commissioner in tacitly
to indulge in judicial name ... approving the Amended, II
legislation. We have examined Although Articles of Incorporation on
the cases cited in Volume 13 the King by May 26, 1961. We regret that
of American Jurisprudence in his THE TRIAL COURT ERRED IN
we cannot in good conscience DECLARING THAT A CHANGE
support of the proposition prerogative lend approval to this action of
that the general power to might OF CORPORATE NAME
the Securities and Exchange APPEARS TO BE AGAINST
alter or amend the charter of incorporat Commissioner. We find no
a corporation necessarily e by a new PUBLIC POLICY;
justification, legal, moral, or
includes the power to alter name, and practical, for adhering to the
the name of a corporation, the newly view taken by the Securities III
and find no justification for named and Exchange Commissioner
said conclusion arrived at by corporatio that the name of a corporation THE TRIAL COURT ERRED IN
the editors of American n might in the Philippines may be HOLDING THAT A CHANGE
 OF CORPORATE NAME HAS
THE LEGAL EFFECT OF
DISSOLVING THE ORIGINAL
CORPORATION:
IV
THE TRIAL COURT ERRED IN
HOLDING THAT THE CHANGE
OF NAME OF THE YEK TONG
LIN FIRE & MARINE
INSURANCE CO., LTD. IS OF
DUBIOUS VALIDITY;
V nonstock corporation or, if it
THE TRIAL COURT ERRED IN
HOLDING THAT THE
APPELLANT HEREIN IS NOT
THE RIGHT PARTY INTEREST
TO SUE DEFENDANTS-
APPELLEES;
IV
THE TRIAL COURT FINALLY
ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above
assignments of error are well taken. The whole
case, however, revolves around only one
question. May a Philippine corporation change
its name and still retain its original personality
and individuality as such?
The answer is not difficult to find. True, under
Section 6 of the Corporation Law, the first thing
required to be stated in the Articles of
Incorporation of any corn corporation is its
name, but it is only one among many matters
equally if not more important, that must be
stated therein. Thus, it is also required, for
example, to state the number and names of and
residences of the incorporators and the
residence or location of the principal office of the
corporation, its term of existence, the amount of
its capital stock and the number of shares into
which it is divided, etc., etc.
On the other hand, Section 18 explicitly permits
the articles of incorporation to be amended thus:
Sec. 18. — Any corporation
may for legitimate corporate
purpose or purposes, amend
its articles of incorporation by
a majority vote of its board of
directors or trustees and the
vote or written assent of two-
thirds of its members, if it be a
be a stock corporation, by the
vote or written assent of the
stockholders representing at
least two-thirds of the
subscribed capital stock of the
corporation Provided, however
, That if such amendment to
the articles of incorporation
should consist in extending
the corporate existence or in
any change in the rights of
holders of shares of any class,
or would authorize shares
with preferences in any
respect superior to those of
outstanding shares of any
class, or would restrict the
rights of any stockholder, then
any stockholder who did not
vote for such corporate action
may, within forty days after
the date upon which such
action was authorized, object
thereto in writing and
demand Payment for his
shares. If, after such a demand
by a stockholder, the
corporation and the
stockholder cannot agree
upon the value of his share or
shares at the time such
corporate action was
authorized, such values all be
ascertained by three
disinterested persons, one of
whom shall be named by the
stockholder, another by the
corporation, and the third by
the two thus chosen. The
findings of the appraisers
shall be final, and if their
award is not paid by the
corporation within thirty days
after it is made, it may be
recovered in an action by the
stockholder against the
corporation. Upon payment
by the corporation to the
stockholder of the agreed or
awarded price of his share or
shares, the stockholder shall
forthwith transfer and assign
the share or shares held by
him as directed by the
corporation:Provided, howeve
r, That their own shares of
stock purchased or otherwise
acquired by banks, trust
companies, and insurance
companies, should be
disposed of within six months
after acquiring title thereto.
Unless and until such
amendment to the articles of
incorporation shall have been
abandoned or the action
rescinded, the stockholder
making such demand in
writing shall cease to be a
stockholder and shall have no
rights with respect to such
shares, except the right to
receive payment therefor as
aforesaid.
A stockholder shall not be
entitled to payment for his
shares under the provisions of
this section unless the value
of the corporate assets which
would remain after such
payment would be at least
equal to the aggregate amount
of its debts and liabilities and
the aggregate par value
and/or issued value of the
remaining subscribed capital
stock.
A copy of the articles of
incorporation as amended,
duly certified to be correct by
the president and the
secretary of the corporation
and a majority of the board of
directors or trustees, shall be
filed with the Securities and
Exchange Commissioner, who
shall attach the same to the
original articles of
incorporation, on file in his
office. From the time of filing
such copy of the amended
articles of incorporation, the
corporation shall have the
same powers and it and the
members and stockholders
thereof shall thereafter be
subject to the same liabilities
as if such amendment had
been embraced in the original
articles of
incorporation: Provided,
however, That should the
amendment consist in
extending the corporate life,
the extension shall not exceed
50 years in any one
instance. Provided, further,
That the original articles and
amended articles together
shall contain all provisions
required by law to be set out
in the articles of
incorporation: And provided,
further, That nothing in this
section shall be construed to
authorize any corporation to
increase or diminish its
capital stock or so as to effect
any rights or actions which
accrued to others between the
time of filing the original
articles of incorporation and
 the filing of the amended
articles.
The Securities and, Exchange Commissioner shall
be entitled to collect and receive the sum of ten
pesos for filing said copy of the amended articles
of incorporation. Provided, however, That when
the amendment consists in extending the term of
corporate existence, the Securities and Exchange
Commissioner shall be entitled to collect and
receive for the filing of its amended articles of
incorporation the same fees collectible under
existing law for the filing of articles of
incorporation. The Securities & Exchange
Commissioner shall not hereafter file any
amendment to the articles of incorporation of
any bank, banking institution, or building and
loan association unless accompanied by a
certificate of the Monetary Board (of the Central
Bank) to the effect that such amendment is in
accordance with law. (As further amended by Act
No. 3610, Sec. 2 and Sec. 9. R.A. No. 337 and R.A.
No. 3531.)
It can be gleaned at once that this section does
not only authorize corporations to amend their
charter; it also lays down the procedure for such
amendment; and, what is more relevant to the
present discussion, it contains provisos
restricting the power to amend when it comes to
the term of their existence and the increase or
decrease of the capital stock. There is no
prohibition therein against the change of name.
The inference is clear that such a change is
allowed, for if the legislature had intended to
enjoin corporations from changing names, it
would have expressly stated so in this section or
in any other provision of the law.
No doubt, "(the) name (of a corporation) is
peculiarly important as necessary to the very
existence of a corporation. The general rule as to
corporations is that each corporation shall have
a name by which it is to sue and be sued and do
all legal acts. The name of a corporation in this
respect designates the corporation in the same
manner as the name of an individual designates
the person."1 Since an individual has the right to
change his name under certain conditions, there
is no compelling reason why a corporation may
not enjoy the same right. There is nothing
sacrosanct in a name when it comes to artificial
beings. The sentimental considerations which
individuals attach to their names are not present
in corporations and partnerships. Of course, as in
the case of an individual, such change may not be
made exclusively. by the corporation's own act. It
has to follow the procedure prescribed by law
for the purpose; and this is what is important
and indispensably prescribed — strict adherence
to such procedure.
Local well known corporation law commentators
are unanimous in the view that a corporation
may change its name by merely amending its
charter in the manner prescribed by
law.2 American authorities which have
persuasive force here in this regard because our
corporation law is of American origin, the same
being a sort of codification of American
corporate law,3 are of the same opinion.
A general power to alter or
amend the charter of a
corporation necessarily
includes the power to alter
the name of the
corporation. Ft. Pitt Bldg., etc.,
Assoc. v. Model Plan Bldg., etc.,
Assoc., 159 Pa. St. 308, 28 Atl.
215; In re Fidelity Mut. Aid
Assoc., 12 W.N.C. (Pa.) 271;
Excelsior Oil Co., 3 Pa. Co. Ct.
184; Wetherill Steel Casting
Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of
Rhode Island, c 176, sec. 7,
relating to an increase of the
capital stock of a corporation,
it is provided that 'such
agreement may be amended
in any other particular,
excepting as provided in the
following section', which
relates to a decrease of the
capital stock This section has
been held to authorize a
change in the name of a
corporation. Armington v.
Palmer, 21 R.I. 109, 42 Atl.
308, 43, L.R.A. 95, 79 Am. St.
Rep. 786. (Vol. 19, American
and English Annotated Cases,
p. 1239.)
Fletcher, a standard authority on American an
corporation law also says:
Statutes are to be found in the
various jurisdictions dealing
with the matter of change in
corporate names. Such
statutes have been subjected
to judicial construction and
have, in the main, been upheld
as constitutional. In direct
terms or by necessary
implication, they authorize
corporations new names and
prescribe the mode of
procedure for that purpose.
The same steps must be taken
under some statutes to effect
a change in a corporate name,
as when any other
amendment of the corporate
charter is sought .... When the
general law thus deals with
the subject, a corporation can
change its name only in the
manner provided. (6 Fletcher,
Cyclopedia of the Law of
Private Corporations, 1968
Revised Volume, pp. 212-
213.) (Emphasis supplied)
The learned trial judge held that the above-
quoted proposition are not supported by the
weight of authority because they are based on
decisions in cases where the statutes expressly
authorize change of corporate name by
amendment of the articles of incorporation. We
have carefully examined these authorities and
We are satisfied of their relevance. Even Lord
Denman who has been quoted by His Honor
from In Reg. v. Registrar of Joint Stock Cos. 10,
Q.B., 59 E.C.L. maintains merely that the change
of its name never appears to be such an act as
the corporation could do for itself, but required
;the same Power as created a corporation." What
seems to have been overlooked, therefore, is that
the procedure prescribes by Section 18 of our
Corporation Law for the amendment of
corporate charters is practically identical with
that for the incorporation itself of a corporation.
In the appealed order of dismissal, the trial court,
made the observation that, according to this
Court in Red Line Transportation Co. v. Rural
Transit Co., Ltd., 60 Phil, 549, 555, change of
name of a corporation is against public policy.
We must clarify that such is not the import of
Our said decision. What this Court held in that
case is simply that:
We know of no law that
empowers the Public Service
Commission or any court in
this jurisdiction to authorize
one corporation to assume
the name of another
corporation as a trade name.
Both the Rural Transit
Company, Ltd., and the
Bachrach Motor Co., Inc., are
Philippine corporations and
the very law of their creation
and continued existence
requires each to adopt and
certify a distinctive name. The
incorporators 'constitute a
body politic and
corporate under the name
stated in the certificate.'
(Section 11, Act No. 1459, as
amended.) A corporation has
the power 'of succession by its
corporate name.' (Section
13, ibid.) The name of a
corporation is therefore
essential to its existence. It
cannot change its name
except in the manner
provided by the statute. By
that name alone is it
authorized to transact
 business. The law gives a
corporation no express or
implied authority to assume
another name that is
unappropriated; still less that
of another corporation, which
is expressly set apart for it
and protected by the law. If
any corporation could assume
at pleasure as an unregistered
trade name the name of
another corporation, this
practice would result in
confusion and open the door
to frauds and evasions and
difficulties of administration
and supervision. The policy of
the law as expressed our
corporation statute and the
Code of Commerce is clearly
against such a practice. (Cf.
Scarsdale Pub. Co. — Colonial
Press vs. Carter, 116 New
York Supplement, 731;
Svenska Nat. F. i. C. vs.
Swedish Nat. Assn., 205
Illinois [Appellate Courts],
428, 434.)
In other words, what We have held to be
contrary to public policy is the use by one
corporation of the name of another corporation
as its trade name. We are certain no one will
disagree that such an act can only "result in
confusion and open the door to frauds and
evasions and difficulties of administration and
supervision." Surely, the Red Line case was not
one of change of name.
Neither can We share the posture of His Honor
that the change of name of a corporation results
in its dissolution. There is unanimity of
authorities to the contrary.
An authorized change in the
name of a corporation has no
more effect upon its identity
as a corporation than a
change of name of a natural
person has upon his identity.
It does not affect the rights of
the corporation or lessen or
add to its obligations. After a
corporation has effected a
change in its name it should
sue and be sued in its new
name .... (13 Am. Jur. 276-277,
citing cases.)
A mere change in the name of
a corporation, either by the
legislature or by the
corporators or stockholders
under legislative authority,
does not, generally speaking,
affect the identity of the
corporation, nor in any way
affect the rights, privileges, or
obligations previously
acquired or incurred by it.
Indeed, it has been said that a
change of name by a
corporation has no more
effect upon the identity of the
corporation than a change of
name by a natural person has
upon the identity of such
person. The corporation, upon
such change in its name, is in
no sense a new corporation,
nor the successor of the
original one, but remains and
continues to be the original
corporation. It is the same
corporation with a different
name, and its character is in
no respect changed. ... (6
Fletcher, Cyclopedia of the
Law of Private Corporations,
224-225, citing cases.)
The change in the name of a
corporation has no more
effect upon its identity as a
corporation than a change of
name of a natural person has
upon his identity. It does not
affect the rights of the
corporation, or lessen or add
to its obligations.
England. — Doe v. Norton, 11
M. & W. 913, 7 Jur. 751, 12 L. J.
Exch. 418.
United States. — Metropolitan
Nat. Bank v. Claggett, 141 U.S.
520, 12 S. Ct. 60, 35 U.S. (L.
ed.) 841.
Alabama. — Lomb v. Pioneer
Sav., etc., Co., 106 Ala. 591, 17
So. 670; North Birmingham
Lumber Co. v. Sims, 157 Ala.
595, 48 So. 84.
Connecticut. — Trinity Church
v. Hall, 22 Com. 125.
Illinois. — Mt. Palatine
Academy v. Kleinschnitz 28 III,
133; St. Louis etc. R. Co. v.
Miller, 43 Ill. 199; Reading v.
Wedder, 66 III. 80.
Indiana. — Rosenthal v.
Madison etc., Plank Road Co.,
10 Ind. 358.
Kentucky. — Cahill v. Bigger, 8
B. Mon. 211; Wilhite v.
Convent of Good Shepherd, 177
Ky. 251, 78 S. W. 138.
Maryland. — Phinney v.
Sheppard & Enoch Pratt
Hospital, 88 Md. 633, 42 Atl.
58, writ of error dismissed,
177 U.S. 170, 20 S. Ct. 573, 44
U.S. (L. ed.) 720.
Missouri. — Dean v. La Motte
Lead Co., 59 Mo. 523.
Nebraska. — Carlon v. City
Sav. Bank, 82 Neb. 582, 188 N.
W. 334. New York First Soc of
M.E. Church v. Brownell, 5 Hun
464.
Pennsylvania. — Com. v.
Pittsburgh, 41 Pa. St. 278.
South Carolina. — South
Carolina Mut Ins. Co. v.
Price 67 S.C. 207, 45 S.E. 173.
Virginia. — Wilson v.
Chesapeake etc., R. Co., 21
Gratt 654; Wright-Caesar
Tobacco Co. v. Hoen,105 Va.
327, 54 S.E. 309.
Washington. — King v.
Ilwaco R. etc., Co., 1 Wash.
127. 23 Pac. 924.
Wisconsin. — Racine Country
Bank v. Ayers, 12 Wis. 512.
The fact that the corporation
by its old name makes a
format transfer of its property
to the corporation by its new
name does not of itself show
that the change in name has
affected a change in the
identity of the
corporation. Palfrey v.
Association for Relief, etc., 110
La. 452, 34 So. 600. The fact
that a corporation organized
as a state bank afterwards
becomes a national bank by
complying with the provisions
of the National Banking Act,
and changes its name
accordingly, has no effect on
its right to sue upon
obligations or liabilities
incurred to it by its former
name. Michigan Ins. Bank v.
Eldred 143 U.S. 293, 12 S. Ct.
450, 36 U.S. (L. ed.) 162.
A deed of land to a church by
a particular name has been
held not to be affected by the
fact that the church
 afterwards took a different
name. Cahill v. Bigger, 8 B.
Mon (ky) 211.
A change in the name of a
corporation is not a thereafter be subject to the same liabilities as if
divestiture of title or such a
change as requires a regular
transfer of title to property,
whether real or personal,
from the corporation under
one name to the same
corporation under another
name. McCloskey v.
Doherty, 97 Ky. 300, 30 S. W.
649. (19 American and
English Annotated Cases
1242-1243.)
As was very aptly said
in Pacific Bank v. De Ro 37 Cal.
538, "The changing of the
name of a corporation is no
more the creation of a
corporation than the changing
of the name of a natural
person is the begetting of a
natural person. The act, in
both cases, would seem to be
what the language which we
use to designate it imports —
a change of name, and not a
change of being.
Having arrived at the above conclusion, We have
agree with appellant's pose that the lower court
also erred in holding that it is not the right party
in interest to sue defendants-appellees.4 As
correctly pointed out by appellant, the approval
by the stockholders of the amendment of its
articles of incorporation changing the name "The
Yek Tong Lin Fire & Marine Insurance Co., Ltd."
to "Philippine First Insurance Co., Inc." on March
8, 1961, did not automatically change the name
of said corporation on that date. To be effective,
Section 18 of the Corporation Law, earlier
quoted, requires that "a copy of the articles of
incorporation as amended, duly certified to be
correct by the president and the secretary of the
corporation and a majority of the board of
directors or trustees, shall be filed with the
Securities & Exchange Commissioner", and it
is only from the time of such filing, that "the
corporation shall have the same powers and it
and the members and stockholders thereof shall
such amendment had been embraced in the
original articles of incorporation." It goes
without saying then that appellant rightly acted
in its old name when on May 15, 1961, it entered
into the indemnity agreement, Annex A, with the
defendant-appellees; for only after the filing of
the amended articles of incorporation with the
Securities & Exchange Commission on May 26,
1961, did appellant legally acquire its new name;
and it was perfectly right for it to file the present
case In that new name on December 6, 1961.
Such is, but the logical effect of the change of
name of the corporation upon its actions.
Actions brought by a
corporation after it has
changed its name should be
brought under the new name
although for the enforcement
of rights existing at the time
the change was made. Lomb v.
Pioneer Sav., etc., Co., 106 Ala.
591, 17 So. 670: Newlan v.
Lombard University, 62 III.
195;Thomas v. Visitor of
Frederick County School, 7 Gill
& J (Md.) 388; Delaware, etc.,
R. Co. v. Trick, 23 N. J. L.
321; Northumberland Country
Bank v. Eyer, 60 Pa. St.
436; Wilson v. Chesapeake etc.,
R. Co., 21 Gratt (Va.) 654.
The change in the name of the
corporation does not affect its
right to bring an action on a
note given to the corporation
under its former
name. Cumberland College v.
Ish, 22. Cal. 641; Northwestern
College v. Schwagler, 37 Ia.
577. (19 American and
English Annotated Cases
1243.)
In consequence, We hold that the lower court
erred in dismissing appellant's complaint. We
take this opportunity, however, to express the
Court's feeling that it is apparent that appellee's
position is more technical than otherwise.
Nowhere in the record is it seriously pretended
that the indebtedness sued upon has already
been paid. If appellees entertained any fear that
they might again be made liable to Yek Tong Lin
Fire & Marine Insurance Co. Ltd., or to someone
else in its behalf, a cursory examination of the
records of the Securities & Exchange
Commission would have sufficed to clear up the
fact that Yek Tong Lin had just changed its name
but it had not ceased to be their creditor.
Everyone should realize that when the time of
the courts is utilized for cases which do not
involve substantial questions and the claim of
one of the parties, therein is based on pure
technicality that can at most delay only the
ultimate outcome necessarily adverse to such
party because it has no real cause on the merits,
grave injustice is committed to numberless
litigants whose meritorious cases cannot be
given all the needed time by the courts. We
address this appeal once more to all members of
the bar, in particular, since it is their bounden
duty to the profession and to our country and
people at large to help ease as fast as possible
the clogged dockets of the courts. Let us not wait
until the people resort to other means to secure
speedy, just and inexpensive determination of
their cases.
WHEREFORE, judgment of the lower court is
reversed, and this case is remanded to the trial
court for further proceedings consistent
herewith With costs against appellees.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Zaldivar, Castro, Fernando, Teehankee and
Villamor, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-28351 July 28, 1977
UNIVERSAL MILLS CORPORATION, petitioner,
vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.
Emigdio G. Tanjuatco for petitioner.
Picazo, Santayana, Reyes, Tayao & Alfonso for
respondent.
BARREDO, J.:
Appeal from the order of the Securities and
Exchange Commission in S.E.C. Case No. 1079,
entitled In the Matter of the Universal Textile
Mills, Inc. vs. Universal Mills Corporation, a
petition to have appellant change its corporate
name on the ground that such name is
"confusingly and deceptively similar" to that of
appellee, which petition the Commission
granted.
According to the order, "the Universal Textile
Mills, Inc. was organ on December 29, 1953, as a
textile manufacturing firm for which it was
issued a certificate of registration on January 8,
1954. The Universal Mills Corporation, on the
other hand, was registered in this Commission
on October 27, 1954, under its original name,
Universal Hosiery Mills Corporation, having as
its primary purpose the "manufacture and
production of hosieries and wearing apparel of
all kinds." On May 24, 1963, it filed an
amendment to its articles of incorporation
changing its name to Universal Mills
Corporation, its present name, for which this
Commission issued the certificate of approval on
June 10, 1963.
The immediate cause of this present complaint,
however, was the occurrence of a fire which
gutted respondent's spinning mills in Pasig,
Rizal. Petitioner alleged that as a result of this
fire and because of the similarity of respondent's
name to that of herein complainant, the news
items appearing in the various metropolitan
newspapers carrying reports on the fire created
uncertainty and confusion among its bankers,
friends, stockholders and customers prompting
petitioner to make announcements, clarifying
the real Identity of the corporation whose
property was burned. Petitioner presented
documentary and testimonial evidence in
support of this allegation.
On the other hand,
respondent's position is that
the names of the two
corporations are not similar
and even if there be some
similarity, it is not confusing
or deceptive; that the only
reason that respondent
changed its name was because
it expanded its business to
include the manufacture of
fabrics of all kinds; and that
the word 'textile' in
petitioner's name is dominant
and prominent enough to
distinguish the two. It further
argues that petitioner failed to
present evidence of confusion
or deception in the ordinary
course of business; that the
only supposed confusion
proved by complainant arose
out of an extraordinary
occurrence — a disastrous
fire. (pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the
jurisprudence on the matter,
it appears necessary under
the circumstances to enjoin
the respondent Universal
Mills Corporation from
further using its present
corporate name. Judging from
what has already happened,
confusion is not only
apparent, but possible. It does
not matter that the instance of
confusion between the two
corporate names was
occasioned only by a fire or an
extraordinary occurrence. It is
precisely the duty of this
Commission to prevent such
confusion at all times and
under all circumstances not
only for the purpose of
protecting the corporations
involved but more so for the
protection of the public.
In today's modern business
life where people go by
tradenames and corporate
images, the corporate name
becomes the more important.
This Commission cannot close
its eyes to the fact that usually
it is the sound of all the other
words composing the names
of business corporations that
sticks to the mind of those
who deal with them. The
word "textile" in Universal
Textile Mills, Inc.' can not
possibly assure the exclusion
of all other entities with
similar names from the mind
of the public especially so, if
the business they are engaged
in are the same, like in the
instant case.
This Commission further
takes cognizance of the fact
that when respondent filed
the amendment changing its
name to Universal Mills
Corporation, it
correspondingly filed a been engaged for more than a decade ahead of
written undertaking dated
June 5, 1963 and signed by its
President, Mr. Mariano Cokiat,
promising to change its name
in the event that there is
another person, firm or entity
who has obtained a prior right
to the use of such name or one
similar to it. That promise is
still binding upon the
corporation and its
responsible officers. (pp. 17-
18, Record.)
It is obvious that the matter at issue is within the
competence of the Securities and Exchange
Commission to resolve in the first instance in the
exercise of the jurisdiction it used to possess
under Commonwealth Act 287 as amended by
Republic Act 1055 to administer the application
and enforcement of all laws affecting domestic
corporations and associations, reserving to the
courts only conflicts of judicial nature, and, of
course, the Supreme Court's authority to review
the Commissions actuations in appropriate
instances involving possible denial of due
process and grave abuse of discretion. Thus, in
the case at bar, there being no claim of denial of
any constitutional right, all that We are called
upon to determine is whether or not the order of
the Commission enjoining petitioner to its
corporate name constitutes, in the light of the
circumstances found by the Commission, a grave
abuse of discretion.
We believe it is not. Indeed, it cannot be said that
the impugned order is arbitrary and capricious.
Clearly, it has rational basis. The corporate
names in question are not Identical, but they are
indisputably so similar that even under the test
of "reasonable care and observation as the public
generally are capable of using and may be
expected to exercise" invoked by appellant, We
are apprehensive confusion will usually arise,
considering that under the second amendment of
its articles of incorporation on August 14, 1964,
appellant included among its primary purposes
the "manufacturing, dyeing, finishing and selling
of fabrics of all kinds" in which respondent had
petitioner. Factually, the Commission found
existence of such confusion, and there is
evidence to support its conclusion. Since
respondent is not claiming damages in this
proceeding, it is, of course, immaterial whether
or not appellant has acted in good faith, but We
cannot perceive why of all names, it had to
choose a name already being used by another
firm engaged in practically the same business for
more than a decade enjoying well earned
patronage and goodwill, when there are so many
other appropriate names it could possibly adopt
without arousing any suspicion as to its motive
and, more importantly, any degree of confusion
in the mind of the public which could mislead
even its own customers, existing or prospective.
Premises considered, there is no warrant for our
interference.

As this is purely a case of injunction, and

considering the time that has elapsed since the
facts complained of took place, this decision
should not be deemed as foreclosing any further
remedy which appellee may have for the
protection of its interests.

WHEREFORE, with the reservation already

mentioned, the appealed decision is affirmed.
Costs against petitioners.

Fernando (Chairman), Antonio, Aquino,

Concepcion Jr. and Santos, JJ., concur.
Republic of the Philippines "mercantil regular colectiva, under the style and
SUPREME COURT firm name of "Siuliong y Cia.;"
Manila
2. That the petitioners herein, who had
EN BANC theretofore been members of said partnership of
"Siuliong y Cia.," desired to dissolve said
partnership and to form a corporation composed
G.R. No. L-15429 December 1, 1919
of the same persons as incorporators, to be
known as "Siulong y Compañia, Incorporada;"
UY SIULIONG, MARIANO LIMJAP, GACU UNG
JIENG, EDILBERTO CALIXTO and UY CHO
YEE, petitioners, 3. That the purpose of said corporation, "Siuliong
y Cia., Inc.," is (a) to acquire the business of the
vs.
THE DIRECTOR OF COMMERCE AND partnership theretofore known as Siuliong & Co.,
and (b) to continue said business with some of
INDUSTRY, respondent.
its objects or purposes;
Kincaid and Perkins for petitioners.
Attorney-General Paredes for respondent. 4. That an examination of the articles of
incorporation of the said "Siuliong y Compañia,
Incorporada" (Exhibit A) shows that it is to be
organized for the following purposes:
(a) The purchase and sale, importation and
JOHNSON, J.: exportation, of the products of the country as
well as of foreign countries;
The purpose of this action is to obtain the writ
of mandamus to require the respondent (b) To discount promissory notes, bills of
to file and register, upon the payment of the exchange, and other negotiable instruments;
lawful fee, articles of incorporation, and to
issue to the petitioners as the incorporators of a
certain corporation to be known as "Siuliong y (c) The purchase and sale of bills of exchange,
bonds, stocks, or "participaciones de sociedades
Compañia, Inc.," a certificate under the seal of the
office of said respondent, certifying that the mercantiles e industriales [joint account of
mercantile and industrial associations]," and of
articles of incorporation have been duly filed and
registered in his office in accordance with the all classes of mercantile documents; "comisiones
[commissions];" "consignaciones
law.
[consignments];"
To the petition the respondent demurred and the
cause was finally submitted upon the petition (d) To act as agents for life, marine and fire
insurance companies; lawphi1.net
and demurrer.
The important facts necessary for the solution of (e) To purchase and sell boats of all classes "y
the question presented, which are found in the fletamento de los mismos [and charterage of
petition, may be stated as follows: same];" and
1. That prior to the presentation of the petition (f) To purchase and sell industrial and
the petitioners had been associated together as mercantile establishments.
partners, which partnership was known as
While the articles of incorporation of "Siuliong y
Cia., Inc." states that its purpose is to acquire and
continue the business, with some of its objects or
purposes, of Siuliong & Co., it will be found upon
an examination of the purposes enumerated in
the proposed articles of incorporation of
"Siuliong y Cia., Inc.," that some of the purposes
of the original partnership of "Siuliong y Cia."
have been omitted. For example, the articles of
partnership of "Siuliong y Cia." gave said
company the authority to purchase and sell all
classes "de fincas rusticas y urbanas [of rural and
city real estate]" as well as the right to act as
agents for the establishment of any other
business which it might esteem convenient for
the interests of "la compañia [the company]."
(Exhibit C).
The respondent in his argument in support of the
demurrer contends (a) that the proposed articles
of incorporation presented for file and registry
permitted the petitioners to engage in a business
which had for its end more than one purpose; (b)
that it permitted the petitioners to engage in the
banking business, and (c) to deal in real estate, in
violation of the Act of Congress of July 1, 1902.
The petitioners, in reply to said argument of the
respondent, while insisting that said proposed
articles of incorporation do not permit it to enter
into the banking business nor to engage in the
purchase and sale of real estate in violation of
said Act of Congress, expressly renounced in
open court their right to engage in such business
under their articles of incorporation, even
though said articles might be interpreted in a
way to authorize them to so to do. That
renouncement on the part of the petitioners
eliminates from the purposes of said proposed
corporation (of "Siuliong y Cia., Inc.") any right to
engage in the banking business as such, or in the
purchase and sale of real estate.
We come now to the consideration of the
principal question raised by the respondent, to
wit: that the proposed articles of incorporation
of "Siuliong y Cia., Inc.," permits it to engage in a
business with more than one purpose.
If upon an examination of the articles of
incorporation we find that its purpose is to
engage in a business with butone principal
purpose, then that contention of the respondent
will have been answered and it will be
unnecessary to discuss at length the question
whether or not a corporation organized
for commercial purposes in the Philippine Islands
can be organized for more than one purpose.
The attorney for the respondent, at the time of
the argument, admitted in open court that
corporations in the Philippine Islands might be
organized for both the "importation and
exportation" of merchandise and that there
might be no relation between the kind of
merchandise imported with the class of
merchandise exported.
Referring again to be proposed articles of
incorporation, a copy of which is united with the
original petition and marked Exhibit A, it will be
seen that the only purpose of said corporation
are those enumerated in subparagraphs (a), (b),
(c), (d), (e) and ( f ) of paragraph 4 above. While
said articles of incorporation are somewhat
loosely drawn, it is clear from a reading of the
same that the principal purpose of said
corporation is to engage in a mercantile business,
with the power to do and perform the particular
acts enumerated in said subparagraphs above
referred to.
Without discussing or deciding at this time
whether a corporation organized under the laws
of the Philippine Islands may be organized for
more than one purpose, we are of the opinion
and so decide that a corporation may be
organized under the laws of the Philippine
Islands for mercantile purposes, and to engage in
suchincidental business as may be
necessary and advisable to give effect to, and aid
in, the successful operation and conduct of the
principal business.1awphi1.net
In the present case we are fully persuaded
that all of the power and authority included in the
articles of incorporation of "Siuliong y Cia., Inc.,"
enumerated above in paragraph 4 (Exhibit A) are
only incidental to the principal purpose of said
proposed incorporation, to wit: "mercantile
business." The purchase and sale, importation
and exportation of the products of the country,
as well as of foreign countries, might make it
necessary to purchase and discount promissory
notes, bills of exchange, bonds, negotiable
instruments, stock, and interest in other
mercantile and industrial associations. It might
also become important and advisable for the
successful operation of the corporation to act as
agent for insurance companies as well as to buy,
sell and equip boats and to buy and sell other
establishments, and industrial and mercantile
businesses.
While we have arrived at the conclusion that the
proposed articles of incorporation do not
authorize the petitioners to engage in a business
with more than one purpose, we do not mean to
be understood as having decided that
corporations under the laws of the Philippine
Islands may not engage in a business with more
than one purpose. Such an interpretation might
work a great injustice to corporations organized
under the Philippine laws. Such an interpretation
would give foreign corporations, which are
permitted to be registered under the laws here
and which may be organized for more than one
purpose, a great advantage over domestic
corporations. We do not believe that it was the
intention of the legislature to give foreign
corporations such an advantage over domestic
corporations.
Considering the particular purposes and objects
of the proposed articles of incorporation which
are specially enumerated above, we are of the
opinion that it contains nothing which violates in
the slightest degree any of the provisions of the
laws of the Philippine Islands, and the
petitioners are, therefore, entitled to have such
articles of incorporation filed and registered as
prayed for by them and to have issued to them
a certificate under the seal of the office of the
respondent, setting forth that such articles of
incorporation have been duly filed in his office.
(Sec. 11, Act No. 1459.)
Therefore, the petition prayed for is hereby
granted, and without any finding as to costs, it is
so ordered.
Arellano, C.J., Torres and Avanceña, JJ., concur.
Separate Opinions
STREET, J., concurring:
The petitioners in this case are desirous of
forming a corporation to take over and continue
a business which for a number of years has been
conducted in the city of Manila as an ordinary
collective mercantile partnership under the
name of "Siuliong y Compañia." To this end it is
necessary that the articles of incorporation
should be filed in the office of the Director of
Commerce and Industry, who, it appears, has
withheld approval of the articles submitted to
him and has refused to file the same in his office.
The position taken by the Director of Commerce
and Industry is that the articles of the proposed
corporation state more than one corporate
purpose, contrary to the provisions of Act No.
1459 (the Corporation Law). In order to
ascertain whether this contention is sound it
becomes necessary to examine the provisions
contained in the proposed articles in relation
with the requirements of the Act mentioned.
The purposes for which the corporation is to be
formed are stated in the second clause of the
proposed articles in the following language:
Second. That the object for which said
corporation is organized are: to acquire
the business of the regular partnership
"Siuliong y Compañia," and to continue
operating said business in all its parts,
and incidental to the principal object,
the corporation shall have powers to
transact the following: the buying and
selling, importation and exportation, of
native as well as foreign merchandise;
the discount of promissory notes, bills
of exchange and other negotiable
instruments; the buying and selling of
bills of exchange, bonds, shares, and
interests in mercantile and industrial
partnerships; commissions;
consignments; life, maritime, and fire
insurance: the buying and selling of
vessels of all kinds and charterage of
same; and the buying and selling of
industrial or mercantile plants.
This language is substantially a reproduction of
the fourth clause of the partnership articles
under which the business of Siuliong & Company
is being now conducted, as may be seen by a
comparison with the wording of said fourth
clause, which is as follows:
Fourth. The object of the partnership
shall be the continuation of all the
business of the partnership "Siuliong y
Compañia" which is dissolved on this
date, June 30, 1916, or rather the
buying and selling, the importation and
exportation, of native as well as foreign
products; the buying and selling is bills
of exchange and of all kinds of
commercial documents; commissions;
consignments; maritime and fire
insurance; the buying and selling of all
kinds of rural and city real estate, as
well as vessels of all kinds and their
charterage; and the manager is hereby
authorized to organize any other kind
of business which he may deem
convenient for the company's interest.
It must be admitted that the second clause of the
proposed articles of incorporation is expressed
in a way which invites criticism; and if I my be
permitted so to suggest the provision would
have been better conceived if it had started off
something like this:
The general object of this corporation is to
engage in commercial activities, such as the
buying and selling of merchandise and
commodities of every kind; the importation and
exportation thereof; the conduct of the business
of commission merchants, consignees, and
insurance agencies; the buying and selling of
boats and the chartering thereof, as well as the
buying and selling of industrial and mercantile
plants; etc., etc.
In setting out the corporate purpose with a view
to defining the legitimate range of the faculties of
the corporation, it is undesirable to state that its
primary purpose is to take over the business of
some existing concern. Undoubtedly a
corporation may obtain its capital and draw its
resources from a prior enterprise, but it acquires
such business by transfer; and the nature of the
activities of the older business has no bearing on
the faculties of the new corporation. All the
powers that a corporation can lawfully exercise
are derived from the state by virtue of the laws
governing the creation and conduct of
corporations.
Now, what are limits upon the activities for
which a corporation may be created? The answer
is to be found, if anywhere, in the Corporation
Law. The first chapter of that law deals with
corporations in general and contains the
provisions common to all corporations. In the
second chapter are found various special
provisions applicable to particular forms of
corporate activities. Of these there are several
varieties, to wit, railroad corporations, savings
and mortgage banks, banking corporations, trust
corporations, domestic insurance corporations,
religious corporations, colleges and institutions
of learning, and building and loan corporations.
It is obvious that no single corporation can be
permitted to exercise the mixed functions of
more than one of these classes; and the Director
of Commerce and Industry would be clearly
acting within his power in rejecting any
proposed articles of a corporation which confers
or appears to confer powers particularly
appropriate to more than one of these forms of
corporate enterprise.
Aside from the lines that are laid down in the
fundamental classification contained in the
Corporation Law, there seems to be no limit
upon the legitimate activities of corporate
enterprise. For instance, a corporation organized
for commercial purposes can lawfully engage in
any one of the thousand or more activities which
may be imagined under the head of commercial;
but it must abstain from activities peculiar to the
forms of corporate enterprise for which special
provisions are made.
This implies that the word "purpose" as used in
the expression "the purpose for which the
corporation is formed," in subsection 2 of section
6 of the Corporation Law, may properly be
conceived as including the plural as well as the
singular. But the purposes, when there are more
than one, must be capable of being lawfully
combined, that is not obnoxious to the
classification created by the law.
It is not necessary, and indeed will rarely be
found desirable, to attempt to set out in the
articles of incorporation the multitude of
activities in which the corporation can engage
incidentally, as reasonably necessary to
accomplish the purpose or purposes for which
the corporation was primarily formed. There is
general authority for the exercise of all such
implied powers in section 13 of the Corporation
Law, and they need not be expressed.
Returning now to the second clause of the
proposed articles of incorporation for "Siuliong y
Compañia, Incorporated," I entertain a doubt as
to the propriety of admitting into that document
the words "discounts of notes, bills, and other
negotiable documents" and "the buying and
selling of bills, bonds, stocks, and shares of
mercantile and industrial partnership, as well as
mercantile documents of every sort." The reason
simply is that in so far as it is necessary to
engage in these activities for the accomplishment
of the general purposes of the corporation, it
may all be done in the exercise of the implied
power expressed in section 13; and the insertion
into the articles of the words quoted may give
rise to the inference that the incorporators may
desire to engage in a line of business appropriate
only to corporations created for banking
purposes. (See sec. 116 of Act No. 1459.) On the
other hand, it may be said that the activities
expressed in the words quoted are those
peculiar to the business of stock-brokers; and
one reason is apparent why the business of
stock-broking might not be lawfully combined
under one corporate chapter with the other
mercantile activities mentioned in the second
clause of the articles.
On the whole, as I understand the opinion
written by Justice Johnson, this court intends to
hold that the second clause of the proposed
articles, when property interpreted, means that
the company to be formed intends primarily to
dedicate itself to industrial and mercantile
activities, as its principal object and that the
other activities mentioned are purely
subordinate. I have no special criticism to make
of this view; and inasmuch as the interpretation
which the court thus places upon the proposed
charter removes the possibility that the
corporation may, under the protection thereof,
engage in illegitimate lines of enterprise, I am
content to express my concurrence in the result
reached by the court. But I really think the
proposed articles ought to be amended.
MALCOLM, J., concurs in the result, reserving his
opinion concerning the suggestion in the third
paragraph from the last of the principal decision.
Republic of the Philippines New Cagayan Grocery, the word "NOT"
SUPREME COURT between the words "WASHED" and
Manila "AVAILABLE," thus changing entirely
the contents and purport of the same
EN BANC and causing the said addressee to suffer
damages. After service of summons, the
Clavecilla Radio System filed a motion
G.R. No. L-22238 February 18, 1967 to dismiss the complaint on the
grounds that it states no cause of action
CLAVECILLIA RADIO SYSTEM, petitioner- and that the venue is improperly laid.
appellant, The New Cagayan Grocery interposed
vs. an opposition to which the Clavecilla
HON. AGUSTIN ANTILLON, as City Judge of the Radio System filed its rejoinder.
Municipal Court of Cagayan de Oro City Thereafter, the City Judge, on
and NEW CAGAYAN GROCERY, respondents- September 18, 1963, denied the motion
appellees. to dismiss for lack of merit and set the
case for hearing.1äwphï1.ñët
B. C. Padua for petitioner and appellant.
Pablo S. Reyes for respondents and appellees. Hence, the Clavecilla Radio System filed a
petition for prohibition with preliminary
REGALA, J.: injunction with the Court of First Instance
praying that the City Judge, Honorable Agustin
Antillon, be enjoined from further proceeding
This is an appeal from an order of the Court of with the case on the ground of improper venue.
First Instance of Misamis Oriental dismissing the
The respondents filed a motion to dismiss the
petition of the Clavecilla Radio System to petition but this was opposed by the petitioner.
prohibit the City Judge of Cagayan de Oro from
Later, the motion was submitted for resolution
taking cognizance of Civil Case No. 1048 for on the pleadings.
damages.
In dismissing the case, the lower court held that
It appears that on June 22, 1963, the New the Clavecilla Radio System may be sued either
Cagayan Grocery filed a complaint against the in Manila where it has its principal office or in
Clavecilla Radio System alleging, in effect, that on Cagayan de Oro City where it may be served, as
March 12, 1963, the following message, in fact it was served, with summons through the
addressed to the former, was filed at the latter's Manager of its branch office in said city. In other
Bacolod Branch Office for transmittal thru its words, the court upheld the authority of the city
branch office at Cagayan de Oro: court to take cognizance of the case.1äwphï1.ñët
NECAGRO CAGAYAN DE ORO In appealing, the Clavecilla Radio System
(CLAVECILLA) contends that the suit against it should be filed in
Manila where it holds its principal office.
REURTEL WASHED NOT AVAILABLE
REFINED TWENTY FIFTY IF It is clear that the case for damages filed with the
AGREEABLE SHALL SHIP LATER city court is based upon tort and not upon a
REPLY POHANG written contract. Section 1 of Rule 4 of the New
Rules of Court, governing venue of actions in
The Cagayan de Oro branch office inferior courts, provides in its paragraph (b) (3)
having received the said message that when "the action is not upon a written
omitted, in delivering the same to the contract, then in the municipality where the
defendant or any of the defendants resides or may Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
be served with summons." (Emphasis supplied) Bengzon, J.P., Zaldivar, Sanchez and Castro, J
Settled is the principle in corporation law that
the residence of a corporation is the place where
its principal office is established. Since it is not
disputed that the Clavecilla Radio System has its
principal office in Manila, it follows that the suit
against it may properly be filed in the City of
Manila.
The appellee maintain, however, that with the
filing of the action in Cagayan de Oro City, venue
was properly laid on the principle that the
appellant may also be served with summons in
that city where it maintains a branch office. This
Court has already held in the case of Cohen vs.
Benguet Commercial Co., Ltd., 34 Phil. 526; that
the term "may be served with summons" does
not apply when the defendant resides in the
Philippines for, in such case, he may be sued only
in the municipality of his residence, regardless of
the place where he may be found and served
with summons. As any other corporation, the
Clavecilla Radio System maintains a residence
which is Manila in this case, and a person can
have only one residence at a time (See Alcantara
vs. Secretary of the Interior, 61 Phil. 459;
Evangelists vs. Santos, 86 Phil. 387). The fact that
it maintains branch offices in some parts of the
country does not mean that it can be sued in any
of these places. To allow an action to be
instituted in any place where a corporate entity
has its branch offices would create confusion and
work untold inconvenience to the corporation.
It is important to remember, as was stated by
this Court in Evangelista vs. Santos, et al., supra,
that the laying of the venue of an action is not left
to plaintiff's caprice because the matter is
regulated by the Rules of Court. Applying the
provision of the Rules of Court, the venue in this
case was improperly laid.
The order appealed from is therefore reversed,
but without prejudice to the filing of the action in
Which the venue shall be laid properly. With
costs against the respondents-appellees.
Republic of the Philippines On June 20, 1963 — within Alhambra's three-
SUPREME COURT year statutory period for liquidation - Republic
Manila Act 3531 was enacted into law. It amended
Section 18 of the Corporation Law; it empowered
EN BANC domestic private corporations to extend their
corporate life beyond the period fixed by the
articles of incorporation for a term not to exceed
G.R. No. L-23606 July 29, 1968 fifty years in any one instance. Previous to
Republic Act 3531, the maximum non-extendible
ALHAMBRA CIGAR & CIGARETTE term of such corporations was fifty years.
MANUFACTURING COMPANY, INC., petitioner,
vs. On July 15, 1963, at a special meeting,
SECURITIES & EXCHANGE Alhambra's board of directors resolved to amend
COMMISSION, respondent. paragraph "Fourth" of its articles of
incorporation to extend its corporate life for an
Gamboa and Gamboa for petitioner. additional fifty years, or a total of 100 years from
Office of the Solicitor General for respondent. its incorporation.
SANCHEZ, J.: On August 26, 1963, Alhambra's stockholders,
representing more than two-thirds of its
To the question — May a corporation extend its subscribed capital stock, voted to approve the
foregoing resolution. The "Fourth" paragraph of
life by amendment of its articles of incorporation
effected during the three-year statutory period Alhambra's articles of incorporation was thus
altered to read:
for liquidation when its original term of
existence had already expired? — the answer of
the Securities and Exchange Commissioner was FOURTH. That the term for which said
in the negative. Offshoot is this appeal. corporation is to exist is fifty (50) years
from and after the date of
incorporation, and for an additional
That problem emerged out of the following
controlling facts: period of fifty (50) years thereafter.
Petitioner Alhambra Cigar and Cigarette On October 28, 1963, Alhambra's articles of
Manufacturing Company, Inc. (hereinafter incorporation as so amended certified correct by
referred to simply asAlhambra) was duly its president and secretary and a majority of its
incorporated under Philippine laws on January board of directors, were filed with respondent
Securities and Exchange Commission (SEC).
15, 1912. By its corporate articles it was to exist
for fifty (50) years from incorporation. Its term
of existence expired on January 15, 1962. On that On November 18, 1963, SEC, however, returned
date, it ceased transacting business, entered into said amended articles of incorporation to
a state of liquidation. Alhambra's counsel with the ruling that Republic
Act 3531 "which took effect only on June 20,
Thereafter, a new corporation. — Alhambra 1963, cannot be availed of by the said
corporation, for the reason that its term of
Industries, Inc. — was formed to carry on the
business of Alhambra. existence had already expired when the said law
took effect in short, said law has no retroactive
effect."
On May 1, 1962, Alhambra's stockholders, by
resolution named Angel S. Gamboa trustee to
take charge of its liquidation.
On December 3, 1963, Alhambra's counsel
sought reconsideration of SEC's ruling aforesaid,
refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference
hearing, issued an order denying the
reconsideration sought.
Alhambra now invokes the jurisdiction of this
Court to overturn the conclusion below.1
1. Alhambra relies on Republic Act 3531, which
amended Section 18 of the Corporation Law.
Well it is to take note of the old and the new
statutes as they are framed. Section 18, prior to
and after its modification by Republic Act 3531,
covers the subject of amendment of the articles
of incorporation of private corporations. A
provision thereof which remains unaltered is
that a corporation may amend its articles of
incorporation "by a majority vote of its board of
directors or trustees and ... by the vote or written
assent of the stockholders representing at least
two-thirds of the subscribed capital stock ... "
But prior to amendment by Republic Act 3531,
an explicit prohibition existed in Section 18,
thus:
... Provided, however, That the life of
said corporation shall not be extended
by said amendment beyond the time
fixed in the original articles: ...
This was displaced by Republic Act 3531 which
enfranchises all private corporations to extend
their corporate existence. Thus incorporated into
the structure of Section 18 are the following:
... Provided, however, That should the
amendment consist in extending the
corporate life, the extension shall not
exceed fifty years in any one instance:
Provided, further, That the original
articles, and amended articles together
shall contain all provisions required by
law to be set out in the articles of
incorporation: ...
As we look in retrospect at the facts, we find
these: From July 15 to October 28, 1963, when
Alhambra made its attempt to extend its
corporate existence, its original term of fifty
years had already expired (January 15, 1962); it
was in the midst of the three-year grace period
statutorily fixed in Section 77 of the Corporation
Law, thus: .
SEC. 77. Every corporation whose
charter expires by its own limitation or
is annulled by forfeiture or otherwise,
or whose corporate existence for other
purposes is terminated in any other
manner, shall nevertheless be
continued as a body corporate for three
years after the time when it would have
been so dissolved, for the purpose of
prosecuting and defending suits by or
against it and of enabling it gradually to
settle and close its affairs, to dispose of
and convey its property and to divide its
capital stock, but not for the purpose of
continuing the business for which it was
established.2
Plain from the language of the provision is its
meaning: continuance of a "dissolved"
corporation as a body corporate for three years
has for its purpose the final closure of its
affairs, and no other; the corporation is
specifically enjoined from "continuing the
business for which it was established". The
liquidation of the corporation's affairs set forth
in Section 77 became necessary precisely
because its life had ended. For this reason alone,
the corporate existence and juridical personality
of that corporation to do business may no longer
be extended.
Worth bearing in mind, at this juncture, is the
basic development of corporation law.
The common law rule, at the beginning, was rigid
and inflexible in that upon its dissolution, a
corporation became legally dead for all purposes.
Statutory authorizations had to be provided for
its continuance after dissolution "for limited and
specified purposes incident to complete
liquidation of its affairs".3 Thus, the moment a
corporation's right to exist as an "artificial
person" ceases, its corporate powers are
terminated "just as the powers of a natural
person to take part in mundane affairs cease to
exist upon his death".4 There is nothing left but
to conduct, as it were, the settlement of the
estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the
Corporation Law, is silent, it is true, as to when
such act of extension may be made. But even
with a superficial knowledge of corporate
principles, it does not take much effort to reach a
correct conclusion. For, implicit in Section 77
heretofore quoted is that the privilege given
toprolong corporate life under the amendment
must be exercised before the expiry of the term
fixed in the articles of incorporation.
Silence of the law on the matter is not hard to
understand. Specificity is not really necessary.
The authority to prolong corporate life was
inserted by Republic Act 3531 into a section of
the law that deals with the power of a
corporation to amend its articles of
incorporation. (For, the manner of prolongation
is through an amendment of the articles.) And it
should be clearly evident that under Section 77
no corporation in a state of liquidation can act in
any way, much less amend its articles, "for the
purpose of continuing the business for which it
was established".
All these dilute Alhambra's position that it could
revivify its corporate life simply because when it
attempted to do so, Alhambra was still in the
process of liquidation. It is surely impermissible
for us to stretch the law — that merely
empowers a corporation to act in liquidation —
to inject therein the power to extend its
corporate existence.
3. Not that we are alone in this view. Fletcher has
written: "Since the privilege of extension is
purely statutory, all of the statutory conditions
precedent must be complied with in order that
the extension may be effectuated. And, generally
these conditions must be complied with, and the
steps necessary to effect the extension must be
taken, during the life of the corporation, and
before the expiration of the term of existence as
original fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto
dissolved as soon as that time expires. So where
the extension is by amendment of the articles of
incorporation, the amendment must be adopted
before that time. And, similarly, the filing and
recording of a certificate of extension after that
time cannot relate back to the date of the
passage of a resolution by the stockholders in
favor of the extension so as to save the life of the
corporation. The contrary is true, however, and
the doctrine of relation will apply, where the
delay is due to the neglect of the officer with
whom the certificate is required to be filed, or to
a wrongful refusal on his part to receive it. And
statutes in some states specifically provide that a
renewal may be had within a specified time
before or after the time fixed for the termination
of the corporate existence".5
The logic of this position is well expressed in a
foursquare case decided by the Court of Appeals
of Kentucky.6There, pronouncement was made
as follows:
... But section 561 (section 2147)
provides that, when any corporation
expires by the terms of its articles of
incorporation, it may be thereafter
continued to act for the purpose of
closing up its business, but for no other
purpose. The corporate life of the Home
Building Association expired on May 3,
1905. After that date, by the mandate of
the statute, it could continue to act for
the purpose of closing up its business,
but for no other purpose. The proposed
amendment was not made until
January 16, 1908, or nearly three years
after the corporation expired by the
terms of the articles of
incorporation. When the corporate life
of the corporation was ended, there was
nothing to extend. Here it was proposed
nearly three years after the corporate
life of the association had expired to
revivify the dead body, and to make
that relate back some two years and
eight months. In other words, the
association for two years and eight
months had only existed for the
purpose of winding up its business,
and, after this length of time, it was
proposed to revivify it and make it a
live corporation for the two years and
eight months daring which it had not
been such.
The law gives a certain length of time
for the filing of records in this court,
and provides that the time may be
extended by the court, but under this
provision it has uniformly been held
that when the time was expired, there
is nothing to extend, and that the
appeal must be dismissed... So, when
the articles of a corporation have
expired, it is too late to adopt an
amendment extending the life of a
corporation; for, the corporation
having expired, this is in effect to create
a new corporation ..."7
True it is, that the Alabama Supreme Court has
stated in one case.8 that a corporation
empowered by statute torenew its corporate
existence may do so even after the expiration of
its corporate life, provided renewal is taken
advantage of within the extended statutory
period for purposes of liquidation. That ruling,
however, is inherently weak as persuasive
authority for the situation at bar for at least two
reasons: First. That case was a suit for
mandamus to compel a former corporate officer
to turn over books and records that came into
his possession and control by virtue of his office.
It was there held that such officer was obliged to
surrender his books and records even if the
corporation had already expired. The holding on
the continued existence of the corporation was a
mere dictum. Second. Alabama's law is different.
Corporations in that state were authorized not
only to extend but also to renew their corporate
existence.That very case defined the word
"renew" as follows; "To make new again; to
restore to freshness; to make new spiritually; to
regenerate; to begin again; to recommence; to
resume; to restore to existence, to revive; to re-
establish; to recreate; to replace; to grant or
obtain an extension of Webster's New
International Dict.; 34 Cyc. 1330; Carter v.
Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E.
396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher:
"There is a broad distinction between the
extension of a charter and the grant of a new
one. To renew a charter is to revive a charter
which has expired, or, in other words, "to give a
new existence to one which has been forfeited,
or which has lost its vitality by lapse of time". To
"extend" a charter is "to increase the time for the
existence of one which would otherwise reach its
limit at an earlier period".10 Nowhere in our
statute — Section 18, Corporation Law, as
amended by Republic Act 3531 — do we find the
word "renew" in reference to the authority given
to corporations to protract their lives. Our law
limits itself to extension of corporate existence.
And, as so understood, extension may be
made only before the term provided in the
corporate charter expires.
Alhambra draws attention to another
case11 which declares that until the end of the
extended period for liquidation, a dissolved
corporation "does not become an extinguished
entity". But this statement was obviously lifted
out of context. That case dissected the question
whether or not suits can be commenced by or
against a corporation within its liquidation
period. Which was answered in the affirmative.
For, the corporation still exists for the settlement
of its affairs.
People, ex rel. vs. Green,12 also invoked by
Alhambra, is as unavailing. There, although the
corporation amended its articles to extend its
existence at a time when it had no legal authority
yet, it adopted the amended articles later on
when it had the power to extend its life and
during its original term when it could amend its
articles.
The foregoing notwithstanding, Alhambra falls
back on the contention that its case is arguably
within the purview of the law. It says that before
cessation of its corporate life, it could not have
extended the same, for the simple reason that
Republic Act 3531 had not then become law. It
must be remembered that Republic Act 3531
took effect on June 20, 1963, while the original
term of Alhambra's existence expired before that
date — on January 15, 1962. The mischief that
flows from this theory is at once apparent. It
would certainly open the gates for all defunct
corporations — whose charters have expired
even long before Republic Act 3531 came into
being — to resuscitate their corporate existence.
4. Alhambra brings into argument Republic Act
1932, which amends Section 196 of the
Insurance Act, now reading as
follows: 1äwphï1.ñët
SEC. 196. Any provision of law to the
contrary notwithstanding, every
domestic life insurance corporation,
formed for a limited period under the
provisions of its articles of
incorporation, may extend its corporate
existence for a period not exceeding
fifty years in any one instance by
amendment to its articles of
incorporation on or before the
expiration of the term so fixed in said
articles ...
To be observed is that the foregoing statute —
unlike Republic Act 3531 — expressly authorizes
domestic insurance corporations to extend their
corporate existence "on or before the expiration
of the term" fixed in their articles of
incorporation. Republic Act 1932 was approved
on June 22, 1957, long before the passage of
Republic Act 3531 in 1963. Congress, Alhambra
points out, must have been aware of Republic Act
1932 when it passed Republic Act 3531. Since
the phrase "on or before", etc., was omitted in
Republic Act 3531, which contains no similar
limitation, it follows, according to Alhambra, that
it is not necessary to extend corporate existence
on or before the expiration of its original term.
That Republic Act 3531 stands mute as to when
extention of corporate existence may be made,
assumes no relevance. We have already said, in
the face of a familiar precept, that a defunct
corporation is bereft of any legal faculty not
otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B.
1774, later Republic Act 3531 — now in dispute.
Its first paragraph states that "Republic Act No.
1932 allows the automatic extension of the
corporate existence of domestic life insurance
corporations upon amendment of their articles
of incorporation on or before the expiration of
the terms fixed by said articles". The succeeding
lines are decisive: "This is a good law, a sane and
sound one. There appears to be no valid reason
why it should not be made to apply to other
private corporations.13
The situation here presented is not one where
the law under consideration is ambiguous,
where courts have to put in harness extrinsic
aids such as a look at another statute to
disentangle doubts. It is an elementary rule in
legal hermeneutics that where the terms of the
law are clear, no statutory construction may be
permitted. Upon the basic conceptual scheme
under which corporations operate, and with
Section 77 of the Corporation Law particularly in
mind, we find no vagueness in Section 18, as
amended by Republic Act 3531. As we view it, by
directing attention to Republic Act 1932,
Alhambra would seek to create obscurity in the
law; and, with that, ask of us a ruling that such
obscurity be explained. This, we dare say, cannot
be done.
The pari materia rule of statutory construction,
in fact, commands that statutes must be
harmonized with each other.14 So harmonizing,
the conclusion is clear that Section 18 of the
Corporation Law, as amended by Republic Act
3531 in reference to extensions of corporate
existence, is to be read in the same light as
Republic Act 1932. Which means that domestic
corporations in general, as with domestic
insurance companies, can extend corporate
existence only on or before the expiration of the
term fixed in their charters.
5. Alhambra pleads for munificence in
interpretation, one which brushes technicalities
aside. Bases for this posture are that Republic
Act 3531 is a remedial statute, and that
extension of corporate life is beneficial to the
economy.
Alhambra's stance does not induce assent.
Expansive construction is possible only
when there is something to expand. At the time
of the passage of Republic Act 3531, Alhambra's
corporate life had already expired. It had
overstepped the limits of its limited existence.
No life there is to prolong.
Besides, a new corporation — Alhambra
Industries, Inc., with but slight change in
stockholdings15 — has already been established.
Its purpose is to carry on, and it actually does
carry on,16 the business of the dissolved entity.
The beneficial-effects argument is off the mark.
The way the whole case shapes up then, the only
possible drawbacks of Alhambra might be that,
instead of the new corporation (Alhambra
Industries, Inc.) being written off, the old one
(Alhambra Cigar & Cigarette Manufacturing
Company, Inc.) has to be wound up; and that the
old corporate name cannot be retained fully in
its exact form.17 What is important though is that
the word Alhambra, the name that counts [it has
goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the
Securities and Exchange Commission of
November 18, 1963, and its order of September
8, 1964, both here under review, are hereby
affirmed.
Costs against petitioner Alhambra Cigar &
Cigarette Manufacturing Company, Inc. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal,
Zaldivar, Castro, Angeles and Fernando, JJ., co
SECOND DIVISION
[G.R. No. L-7231. March 28, 1956.]
BENGUET CONSOLIDATED MINING
CO., Petitioner, vs. MARIANO PINEDA, in his
capacity as Securities and Exchange
Commissioner, Respondent. CONSOLIDATED
MINES, INC., Intervenor.
DECISION
REYES, J. B. L., J.:
Appeal under Rule 43 from a decision of the
Securities and Exchange Commissioner, denying
the right of a sociedad anonima to extend its
corporate existence by amendment of its original
articles of association, or alternatively, to reform
and continue existing under the Corporation Law
(Act 1459) beyond the original period.
The Petitioner, the Benguet Consolidated Mining
Co. (hereafter termed “Benguet” for short), was
organized on June 24,1903, as a sociedad
anonima regulated by Articles 151 et seq., of the
Spanish Code of Commerce of 1886, then in force
in the Philippines. The articles of association
expressly provided that it was organized for a
term of fifty (50) years. In 1906, the governing
Philippine Commission enacted Act 1459,
commonly known as the Corporation Law,
establishing in the islands the American type of
juridical entities known as corporation, to take
effect on April 1, 1906. Of its enactment, this
Court said in its decision in Harden vs. Benguet
Consolidated Mining Co., 58 Phil., 141, at pp.
145-146, and 147:chanroblesvirtuallawlibrary
“When the Philippine Islands passed to the
sovereignty of the United States, the attention of
the Philippine Commission was early drawn to
the fact there is no entity in Spanish law exactly
corresponding to the motion of the corporation
in English and American law; chan
roblesvirtualawlibraryand in the Philippine Bill,
approved July 1, 1906, the Congress of the
United States inserted certain provisions, under
the head of Franchises, which were intended to
control the lawmaking power in the Philippine
Islands in the matter of granting of franchises,
privileges and concessions. These provisions are
found in sections 74 and 75 of the Act. The
provisions of section 74 have been superseded
by section 28 of the Act of Congress of August 29,
1916, but in section 75 there is a provision
referring to mining corporations, which still
remains the law, as amended. This provision, in
its original form, reads as
follows:chanroblesvirtuallawlibrary cralaw it
shall be unlawful for any member of a
corporation engaged in agriculture or mining
and for any corporation organized for any
purpose except irrigation to be in any wise
interested in any other corporation engaged in
agriculture or in mining.
Under the guidance of this and certain other
provisions thus enacted by Congress, the
Philippine Commission entered upon the
enactment of a general law authorizing the
creation of corporations in the Philippine
Islands. This rather elaborate piece of legislation
is embodied in what is called our Corporation
Law (Act No. 1459 of the Philippine
Commission). The evident purpose of the
commission was to introduce the American
corporation into the Philippine Islands as the
standard commercial entity and to hasten the
day when the sociedad anonima of the Spanish
law would be obsolete. That statute is a sort of
codification of American corporate law.”
“As it was the intention of our lawmakers to
stimulate the introduction of the American
corporation into the Philippine law in the place
of the sociedad anonima, it was necessary to
make certain adjustment resulting from the
continued co-existence, for a time, of the two
forms of commercial entities. Accordingly, in
section 75 of the Corporation Law, a provision is
found making the sociedad anonima subject to
the provisions of the Corporation Law ‘so far as
such provisions may be applicable’ and giving to
the sociedades anonimas previously created in
the Islands the option to continue business as
such or to reform and organize under the
provisions of the Corporation Law. Again, in
section 191 of the Corporation Law, the Code of
Commerce is repealed in so far as it relates to
sociedades anonimas. The purpose of the
commission in repealing this part of the Code of
Commerce was to compel commercial entities
thereafter organized to incorporate under the
Corporation Law, unless they should prefer to
adopt some form or other of the partnership. To
this provision was added another to the effect
that existing sociedades anonimas, which elected
to continue their business as such, instead of
reforming and reorganizing under the
Corporation Law, should continue to be
governed by the laws that were in force prior to
the passage of this Act ‘in relation to their
organization and method of transacting business
and to the rights of members thereof as between
themselves, but their relations to the public and
public officials shall be governed by the
provisions of this Act.’“
Specifically, the two sections of Act No. 1459
referring to sociedades anonimas then already
existing, provide as
follows:chanroblesvirtuallawlibrary
“SEC. 75. Any corporation or a sociedad anonima
formed, organized, and existing under the laws
of the Philippines on the date of the passage of
this Act, shall be subject to the provisions hereof
so far as such provisions may be applicable and
shall be entitled at its option either to continue
business as such corporation or to reform and
organize under and by virtue of the provisions of
this Act, transferring all corporate interests to
the new corporation which, if a stock
corporation, is authorized to issue its shares of
stock at par to the stockholders or members of
the old corporation according to their interests.”
“SEC. 191. The Code of Commerce, in so far as it
relates to corporation or sociedades anonimas,
and all other Acts or parts of Acts in conflict or
inconsistent with this Act, are hereby repealed
with the exception of Act Numbered fifty-two,
entitled ‘An Act providing for examinations of
banking institutions in the Philippines, and for
reports by their officers,’ as amended, and Act
Numbered Six hundred sixty-seven, entitled ‘An
Act prescribing the method of applying to
governments of municipalities, except the city of
Manila and of provinces for franchises to
contract and operate street railway, electric light
and power and telephone lines, the conditions
upon which the same may be granted, certain
powers of the grantee of said franchises, and of
grantees of similar franchises under special Act
of the Commission, and for other purposes.’
Provided, however, That nothing in this Act
contained shall be deemed to repeal the existing
law relating to those classes of associations
which are termed sociedades colectivas, and
sociedades de cuentas en participacion, as to
which association the existing law shall be
deemed to be still in force; chan
roblesvirtualawlibraryAnd provided, further,
That existing corporations or sociedades
anonimas, lawfully organized as such, which
elect to continue their business as such
sociedades anonimas instead of reforming and
reorganizing under and by virtue of the
provisions of this Act, shall continue to be
governed by the laws that were in force prior to
the passage of this Act in relation to their
organization and method of transacting business
and to the rights of members thereof as between
themselves, but their relations to the public and
public officials shall be governed by the
provisions of this Act.”
As the expiration of its original 50 year term of
existence approached, the Board of Directors of
Benguet adopted in 1946 a resolution to extend
its life for another 50 years from July 3, 1946 and
submitted it for registration to
the Respondent Securities and Exchange
Commissioner. Upon advice of the Secretary of
Justice (Op. No. 45, Ser. 1917) that such
extension was contrary to law, the registration
was denied. The matter was dropped, allegedly
because the stockholders of Benguet did not
approve of the Directors’ action.
Some six years later in 1953, the shareholders of
Benguet adopted a resolution empowering the
Director to “effectuate the extension of the
Company’s business life for not less than 20 and
not more than 50 years, and this by either (1) an
amendment to the Articles of Association or
Charter of this Company or (2) by reforming and
reorganizing the Company as a Philippine
Corporation, or (3) by both or (4) by any other
means.” Accordingly, the Board of Directors on
May 27, 1953, adopted a resolution to the
following effect —
“Be It
Resolved, that the Company be reformed,
reorganized and organized under the provisions
of section 75 and other provisions of the
Philippine Corporation Law as a Philippine
corporation with a corporate life and corporate
powers as set forth in the Articles of
Incorporation attached hereto as Schedule ‘I’ and
made a part hereof by this reference; chan
roblesvirtualawlibraryand
Be It
‘FURTHER RESOLVED, that any five or more of
the following shareholders of the Company be
and they hereby are authorized as instructed to
act for and in behalf of the share holders of the
Company and of the Company as Incorporators
in the reformation, reorganization and
organization of the Company under and in
accordance with the provisions aforesaid of said
Philippine Corporation Law, and in such
capacity, they are hereby authorized and
instructed to execute the aforesaid Articles of
Incorporation attached to these Minutes as
Schedule ‘I’ hereof, with such amendments,
deletion and additions thereto as any five or
more of those so acting shall deem necessary,
proper, advisable or convenient to effect prompt
registration of said Articles under Philippine
Law; chan roblesvirtualawlibraryand five or
more of said Incorporators are hereby further
authorized and directed to do all things
necessary, proper, advisable or convenient to
effect such registration.”
In pursuance of such resolution, Benguet
submitted in June, 1953, to the Securities and
Exchange Commissioner, for alternative
registration, two
documents:chanroblesvirtuallawlibrary (1)
Certification as to the Modification of (the
articles of association of) the Benguet
Consolidated Mining Company, extending the
term of its existence to another fifty years from
June 15, 1953; chan roblesvirtualawlibraryand
(2) articles of incorporation, covering its
reformation or reorganization as a corporation
in accordance with section 75 of the Philippine
Corporation Law.
Relying mainly upon the adverse opinion of the
Secretary of Justice (Op. No. 180, s. 1953), the
Securities and Exchange Commissioner denied
the registration and
ruled:chanroblesvirtuallawlibrary
(1) That the Benguet, as sociedad anonima, had
no right to extend the original term of corporate
existence stated in its Articles of Association, by
subsequent amendment thereof adopted after
enactment of the Corporation Law (Act No.
1459); chan roblesvirtualawlibraryand
(2) That Benguet, by its conduct, had chosen to
continue as sociedad anonima, under section 75
of Act No. 1459, and could no longer exercise the
option to reform into a corporation, specially
since it would indirectly produce the effect of
extending its life.
This ruling is the subject of the present appeal.
Petitioner Benguet
contends:chanroblesvirtuallawlibrary
(1) That the proviso of section 18 of the
Corporation Law to the effect —
“that the life of said corporation shall not be
extended by amendment beyond the time fixed
in the original articles.”
does not apply to sociedades anonimas already
in existence at the passage of the law,
likePetitioner herein;
(2) That to apply the said restriction imposed by
section 18 of the Corporation Law to sociedades
anonimas already functioning when the said law
was enacted would be in violation of
constitutional inhibitions;
(3) That even assuming that said restriction was
applicable to it, Benguet could still exercise the
option of reforming and reorganizing under
section 75 of the Corporation Law, thereby
prolonging its corporate existence, since the law
is silent as to the time when such option may be
exercised or availed of.
The first issue arises because the Code of
Commerce of 1886 under which Benguet was
organized, contains no prohibition (to extend the
period of corporate existence), equivalent to that
set forth in section 18 of the Corporation Law.
Neither does it expressly authorize the
extension. But the text of Article 223,
reading:chanroblesvirtuallawlibrary
“ART. 223. After the termination of the period
for which commercial associations are
constituted, it shall not be understood as
extended by the implied or presumed will of the
members; chan roblesvirtualawlibraryand if the
members desire to continue in association, they
shall draw up new articles, subject to all the
formalities prescribed for their creation as
provided in Article 119.” (Code of Commerce.)
would seem to imply that the period of existence
of the sociedad anonimas (or of any other
commercial association for that matter) may be
extended if the partners or members so agree
before the expiration of the original period.
While the Code of Commerce, in so far as
sociedades anonimas are concerned, was
repealed by Act No 1459, Benguet claims that
article 223 is still operative in its favor under the
last proviso of section 191 of the Corporation
law (ante, p. 4 to the effect that existing
sociedades anonimas would continue to be
governed by the law in force before Act 1459,
“in relation to their organization and method of
transacting business and to the rights of
members among themselves, but their relations
to the public and public officials shall be
governed by the provisions of this Act.”
Benguet contends that the period of corporate
life relates to its organization and the rights of its
members inter se, and not to its relations to the
public or public officials.
We find this contention untenable.
The term of existence of association (partnership
or sociedad anonima) is coterminous with their
possession of an independent legal personality,
distinct from that of their component members.
When the period expires, the sociedad anonima
loses the power to deal and enter into further
legal relations with other persons; chan
roblesvirtualawlibraryit is no longer possible for
it to acquire new rights or incur new obligations,
have only as may be required by the process of
liquidating and winding up its affairs. By the
same token, its officers and agents can no longer
represent it after the expiration of the life term
prescribed, save for settling its business.
Necessarily, therefore, third persons or strangers
have an interest in knowing the duration of the
juridical personality of the sociedad anonima,
since the latter cannot be dealt with after that
period; chan roblesvirtualawlibrarywherefore its
prolongation or cessation is a matter directly
involving the company’s relations to the public at
large.
On the importance of the term of existence set in
the articles of association of commercial
companies under the Spanish Code of Commerce,
D. Lorenzo Benito y Endar, professor of
mercantile law in the Universidad Central de
Madrid, has this to
say:chanroblesvirtuallawlibrary
“La duracion de la Sociedad. — La necesidad de
consignar este requisito en el contrato social
tiene un valor analogo al que dijimos tenia el
mismo al tratar de las compañias colectivas, aun
cuando respecto de las anonimas no haya de
tenerse en cuenta para nada lo que dijimos
entonces acerca de la trascendencia que ello
tiene para los socios; chan
roblesvirtualawlibraryporque no existiendo en
las anonimas la serie de responsibilidades de
caracter personal que afectan a los socios
colectivos, es claro que la duracion de la
sociedad importa conocerla a los socios y los
terceros, porque ella marca al limite natural del
desenvolvimiento de la empresa constituida y el
comienzo de la liquidacion de la sociedad.” (3
Benito, Derecho Mercantil, 292-293.)
“Interesa, pues, la fijacion de la vida de la
compañia, desenvolviendose con normalidad y
regularidad, tanto a los asociados como a los
terceros. A aquellos, porque su libertad
economica, en cierto modo limitada por la
existencia del contrato de compañia, se recobra
despues de realizada, mas o menos
cumplidamente, la finalidad comun
perseguida; chan roblesvirtualawlibraryy a los
terceros, porque les advierte el momento en que,
extinguida la compañia, no cabe y a la creacion
con ella de nuevas relaciones juridicas, de que
nazcan reciprocamente derechos y obligaciones,
sino solo la liquidacion de los negocios hasta
entonces convenidos, sin otra excepcion que la
que luego mas adelante habremos de señalar”. (3
Benito, Derecho Mercantil, p. 245.)
The State and its officers also have an obvious
interest in the term of life of associations, since
the conferment of juridical capacity upon them
during such period is a privilege that is derived
from statute. It is obvious that no agreement
between associates can result in giving rise to a
new and distinct personality, possessing
independent rights and obligations, unless the
law itself shall decree such result. And the State
is naturally interested that this privilege be
enjoyed only under the conditions and not
beyond the period that it sees fit to grant; chan
roblesvirtualawlibraryand, particularly, that it be
not abused in fraud and to the detriment of other
parties; chan roblesvirtualawlibraryand for this
reason it has been ruled that “the limitation (of
corporate existence) to a definite period is an
exercise of control in the interest of the public”
(Smith vs. Eastwood Wire Manufacturing Co., 43
Atl. 568).
We cannot assent to the thesis of Benguet that its
period of corporate existence has relation to its
“organization”. The latter term is defined in
Webster’s International Dictionary
as:chanroblesvirtuallawlibrary
“The executive structure of a business; chan
roblesvirtualawlibrarythe personnel of
management, with its several duties and places
in administration; chan
roblesvirtualawlibrarythe various persons who
conduct a business, considered as a unit.”
The legal definitions of the term “organization”
are concordant with that given
above:chanroblesvirtuallawlibrary
“Organize or ‘organization,’ as used in reference
to corporations, has a well-understood meaning,
which is the election of officers, providing for the
subscription and payment of the capital stock,
the adoption of by-laws, and such other steps as
are necessary to endow the legal entity with the
capacity to transact the legitimate business for
which it was created. Waltson vs. Oliver, 30 P.
172, 173, 49 Kan. 107, 33 Am. St. Rep. 355; chan
roblesvirtualawlibraryTopeka Bridge Co. vs.
Cummings, 3 Kan. 55, 77; chan
roblesvirtualawlibraryHunt vs. Kansas & M.
Bridge Co., 11 Kan. 412, 439; chan
roblesvirtualawlibraryAspen Water & Light Co.,
vs. City of Aspen, 37 P. 728, 730, 6 Colo. App.
12; chan roblesvirtualawlibraryNemaha Coal &
Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.
Under a statute providing that, until articles of
incorporation should be recorded, the
corporation should transact no business except
its own organization, it is held that the term
“organization” means simply the process of
forming and arranging into suitable disposition
the parties who are to act together in, and
defining the objects of, the compound body, and
that this process, even when complete in all its
parts, does not confer a franchise either valid or
defective, but, on the contrary, it is only the act of
the individuals, and something else must be done
to secure the corporate franchise. Abbott vs.
Omaha Smelting & Refining Co. 4 Neb. 416, 421.”
(30 Words and Phrases, p. 282.)
It is apparent from the foregoing definitions that
the term “organization” relates merely to the
systematization and orderly arrangement of the
internal and managerial affairs and organs of
the Petitioner Benguet, and has nothing to do
with the prorogation of its corporate life.
From the double fact that the duration of its
corporate life (and juridical personality) has
evident connection with the Petitioner’s relations
to the public, and that it bears none to
thePetitioner’s organization and method of
transacting business, we derive the conclusion
that the prohibition contained in section 18 of
the Corporation Law (Act No. 1459) against
extension of corporate life by amendment of the
original articles was designed and intended to
apply to “compañias anonimas” that,
like Petitioner Benguet, were already existing at
the passage of said law. This conclusion is
reinforced by the avowed policy of the law to
hasten the day when compañias anonimas would
be extinct, and replace them with the American
type of corporation (Harden vs. Benguet
Consolidated Mining Co., supra), for the
indefinite prorogation of the corporation life of
sociedades anonimas would maintain the
unnecessary duality of organizational types
instead of reducing them to a single one; chan
roblesvirtualawlibraryand what is more, it
would confer upon these sociedades anonimas,
whose obsolescence was sought, the
advantageous privilege of perpetual existence
that the new corporation could not possess.
Of course, the retroactive application of the
limitations on the terms of corporate existence
could not be made in violation of constitutional
inhibitions specially those securing equal
protection of the laws and prohibiting
impairment of the obligation of contracts. It
needs no argument to show that if Act No. 1459
allowed existing compañias anonimas to be
governed by the old law in respect to their
organization, methods of transacting business
and the rights of the members among
themselves, it was precisely in deference to the
vested rights already acquired by the entity and
its members at the time the Corporation Law
was enacted. But we do not agree
with Petitioner Benguet (and here lies the second
issue in this appeal) that the possibility to extend
its corporate life under the Code of Commerce
constituted a right already vested when Act No.
1459 was adopted. At that time, Benguet’s
existence was well within the 50 years period set
in its articles of association; chan
roblesvirtualawlibraryand its members had not
entered into any agreement that such period
should be extended. It is safe to say that none of
the members of Benguet anticipated in 1906 any
need to reach an agreement to increase the term
of its corporate life, barely three years after it
had started. The prorogation was purely
speculative; chan roblesvirtualawlibrarya mere
possibility that could not be taken for granted. It
was as yet conditional, depending upon the
ultimate decision of the members and directors.
They might agree to extend Benguet’s existence
beyond the original 50 years; chan
roblesvirtualawlibraryor again they might not. It
must be remembered that in 1906, the success of
Benguet in its mining ventures was by no means
so certain as to warrant continuation of its
operations beyond the 50 years set in its articles.
The records of this Court show that Benguet ran
into financial difficulties in the early part of its
existence, to the extent that, as late as 1913, ten
years after it was found, 301,100 shares of its
capital stock (with a par value of $1 per share)
were being offered for sale at 25 centavos per
share in order to raise the sum of P75,000 that
was needed to rehabilitate the company (Hanlon
vs. Hausermann and Beam, 40 Phil., 796).
Certainly the prolongation of the corporate
existence of Benguet in 1906 was merely a
possibility in futuro, a contingency that did not
fulfill the requirements of a vested right entitled
to constitutional protection, defined by this
Court in Balboa vs. Farrales, 51 Phil., 498, 502, as
follows:chanroblesvirtuallawlibrary
“Vested right is ‘some right or interest in the
property which has become fixed and
established, and is no longer open to doubt or
controversy,”
“A ‘vested’ right is defined to be an immediate
fixed right of present or future enjoyment, and
rights are ‘vested’ in contradistinction to being
expectant or contingent” (Pearsall vs. Great
Northern R. Co., 161 U. S. 646, 40 L. Ed. 838).
In Corpus Juris Secundum we
find:chanroblesvirtuallawlibrary
“Rights are vested when the right to enjoyment,
present or prospective, has become the property
of some particular person or persons as a
present interest. The right must be absolute,
complete, and unconditional, independent of a
contingency, and a mere expectancy of future
benefit, or a contingent interest in property
founded on anticipated continuance of existing
laws, does not constitute a vested right. So,
inchoate rights which have not been acted on are
not vested.” (16 C.J. S. 214-215.)
Since there was no agreement as yet to extend
the period of Benguet’s corporate existence
(beyond the original 50 years) when the
Corporation Law was adopted in 1906, neither
Benguet nor its members had any actual or
vested right to such extension at that time.
Therefore, when the Corporation Law, by section
18, forbade extensions of corporate life, neither
Benguet nor its members were deprived of any
actual or fixed right constitutionally protected.
To hold, as Petitioner Benguet asks, that the
legislative power could not deprive Benguet or
its members of the possibility to enter at some
indefinite future time into an agreement to
extend Benguet’s corporate life, solely because
such agreements were authorized by the Code of
Commerce, would be tantamount to saying that
the said Code was irrepealable on that point. It is
a well settled rule that no person has a vested
interest in any rule of law entitling him to insist
that it shall remain unchanged for his benefit.
(New York C. R. Co. vs. White, 61 L. Ed (U.S.)
667; chan roblesvirtualawlibraryMondou vs.
New York N. H. & H. R. Co., 56 L. Ed. 327; chan
roblesvirtualawlibraryRainey vs. U. S., 58 L. Ed.
617; chan roblesvirtualawlibraryLilly Co. vs.
Saunders, 125 ALR. 1308; chan
roblesvirtualawlibraryShea vs. Olson, 111 ALR.
998).
“There can be no vested right in the continued
existence of a statute or rule of the common law
which precludes its change or repeal, nor in any
omission to legislate on a particular matter or
subject. Any right conferred by statute may be
taken away by statute before it has become
vested, but after a right has vested, repeal of the
statute or ordinance which created the right
does not and cannot affect much right.” (16 C.J. S.
222-223.)
It is a general rule of constitutional law that a
person has no vested right in statutory privileges
and exemptions” (Brearly School vs. Ward, 201
NY. 358, 40 LRA NS. 1215; chan
roblesvirtualawlibraryalso, Cooley,
Constitutional Limitations, 7th ed., p. 546).
It is not amiss to recall here that after Act No.
1459 the Legislature found it advisable to
impress further restrictions upon the power of
corporations to deal in public lands, or to hold
real estate beyond a maximum area; chan
roblesvirtualawlibraryand to prohibit any
corporation from endeavouring to control or
hold more than 15 per cent of the voting stock of
an agricultural or mining corporation (Act No.
3518). These prohibitions are so closely
integrated with our public policy that
Commonwealth Act No. 219 sought to extend
such restrictions to associations of all kinds. It
would be subversive of that policy to enable
Benguet to prolong its peculiar status of
sociedad anonimas, and enable it to cast doubt
and uncertainty on whether it is, or not, subject
to those restrictions on corporate power, as it
once endeavoured to do in the previous case of
Harden vs. Benguet Mining Corp. 58 Phil., 149.
Stress has been laid upon the fact that the
Compañia Maritima (like Benguet, a sociedad
anonima established before the enactment of the
Corporation Law) has been twice permitted to
extend its corporate existence by amendment of
its articles of association, without objection from
the officers of the defunct Bureau of Commerce
and Industry, then in charge of the enforcement
of the Corporation Laws, although the exact
question was never raised then. Be that as it
may, it is a well established rule in this
jurisdiction that the government is never
estopped by mistake or error on the part of its
agents” (Pineda vs. Court of First Instance of
Tayabas, 52 Phil., 803, 807), and that estopped
cannot give validity to an act that is prohibited
by law or is against public policy (Eugenio vs.
Perdido, (97 Phil., 41, May 19, 1955; chan
roblesvirtualawlibrary19 Am. Jur. 802); chan
roblesvirtualawlibraryso that the Respondent,
Securities and Exchange Commissioner, was not
bound by the rulings of his predecessor if they be
inconsistent with law. Much less could erroneous
decisions of executive officers bind this Court
and induce it to sanction an unwarranted
interpretation or application of legal principles.
We now turn to the third and last issue of this
appeal, concerning the exercise of the option
granted by section 75 of the Corporation Law to
every sociedad anonima “formed, organized and
existing under the laws of the Philippines on the
date of the passage of this Act” to either continue
business as such sociedad anonima or to reform
and organize under the provisions of the
Corporation Law. Petitioner-Appellant Benguet
contends that as the law does not determine the
period within which such option may be
exercised, Benguet may exercise it at any time
during its corporate existence; chan
roblesvirtualawlibraryand that in fact on June
22, 1953, it chose to reform itself into a
corporation for a period of 50 years from that
date, filing the corresponding papers and by-
laws with the Respondent Commissioner of
Securities and Exchange registration; chan
roblesvirtualawlibrarybut the latter refused to
accept them as belatedly made.
The Petitioner’s argument proceeds from the
unexpressed assumption that Benguet, as
sociedad anonima, had not exercised the option
given by section 75 of the Corporation Law until as a sociedad anonima, it could not become a
1953. This we find to be incorrect. Under that corporation.”
section, by continuing to do business as sociedad
Having thus made its choice, Benguet may not
anonima, Benguet in fact rejected the alternative
now go back and seek to change its position and
to reform as a corporation under Act No. 1459. It
adopt the reformation that it had formerly
will be noted from the text of section 75 (quoted
repudiated. The election of one of several
earlier in this opinion) that no special act or
manifestation is required by the law from the alternatives is irrevocable once made (as now
expressly recognized in article 940 of the new
existing sociedades anonimas that prefer to
Civil Code of the
remain and continue as such. It is when they
Philippines):chanroblesvirtuallawlibrary such
choose to reform and organize under the
rule is inherent in the nature of the choice, its
Corporation Law that they must, in the words of
purpose being to clarify and render definite the
the section, “transfer all corporate interests to
rights of the one exercising the option, so that
the new corporation”. Hence if they do not so
other persons may act in consequence. While
transfer, the sociedades anonimas affected are to
successive choices may be provided there is
be understood to have elected the alternative “to
nothing in section 75 of the Corporation Law to
continue business as such corporation”
show or hint that a sociedad anonima may make
(sociedad anonima) 2
more than one choice thereunder, since only one
The election of Benguet to remain a sociedad option is provided for.
anonima after the enactment of the Corporation
While no express period of time is fixed by the
Law is evidence, not only by its failure, from
1906 to 1953, to adopt the alternative to transfer law within which sociedades anonimas may elect
under section 75 of Act No. 1459 either to reform
its corporate interests to a new corporation, as
or to retain their status quo, there are powerful
required by section 75; chan
reasons to conclude that the legislature intended
roblesvirtualawlibraryit also appears from
such choice to be made within a reasonable time
positive acts. Thus around 1933, Benguet
from the effectivity of the Act. To enable a
claimed and defended in court its acquisition of
sociedad anonima to choose reformation when
shares of the capital stock of the Balatoc Mining
its stipulated period of existence is nearly ended,
Company, on the ground that as a sociedad
would be to allow it to enjoy a term of existence
anonima it (Benguet) was not a corporation
far longer than that granted to corporations
within the purview of the laws prohibiting a
organized under the Corporation Law; chan
mining corporation from becoming interested in
roblesvirtualawlibraryin Benguet’s case, 50
another mining corporation (Harden vs. Benguet
years as sociedad anonima, and another 50 years
Mining Corp., 58 Phil., p. 149). Even in the
as an American type of corporation under Act
present proceedings, Benguet has urged its right
to amend its original articles of association as 1459; chan roblesvirtualawlibrarya result
incompatible with the avowed purpose of the Act
“sociedad anonima” and extend its life as such
to hasten the disappearance of the sociedades
under the provisions of the Spanish Code of
anonimas. Moreover, such belated election, if
Commerce. Such appeals to privileges as
permitted, would enable sociedades anonimas to
“sociedad anonima” under the Code of 1886
reap the full advantage of both types of
necessarily imply that Benguet has rejected the
organization. Finally, it would permit sociedades
alternative of reforming under the Corporation
anonimas to prolong their corporate existence
Law. As Respondent Commissioner’s order, now
indirectly by belated reformation into
under appeal, has stated —
corporations under Act No. 1459, when they
“A sociedad anonima could not claim the benefit could not do so directly by amending their
of both, but must have to choose one and discard articles of association.
the other. If it elected to become a corporation it
Much stress is laid upon allegedly improper
could not continue as a sociedad anonima; chan
motives on the part of the intervenor,
roblesvirtualawlibraryand if it choose to remain
Consolidated Mines, Inc., in supporting the
orders appealed from, on the ground that
intervenor seeks to terminate Benguet’s
operating contract and appropriate the profits
that are the result of Benguet’s efforts in
developing the mines of the intervenor. Suffice it
to say that whatever such motives should be,
they are wholly irrelevant to the issues in this
appeal, that exclusively concern the legal
soundness of the order of
the Respondent Securities and Exchange
Commissioner rejecting the claims of the
Benguet Consolidated Mining Company to
extend its corporate life.
Neither are we impressed by the prophesies of
economic chaos that would allegedly ensure with
the cessation of Benguet’s activities. If its mining
properties are really susceptible of profitable
operation, inexorable economic laws will ensure
their exploitation; chan roblesvirtualawlibraryif,
on the other hand, they can no longer be worked
at a profit, then catastrophe becomes inevitable,
whether or not Petitioner Benguet retains
corporate existence.
Sustaining the opinions of
the Respondent Securities and Exchange
Commissioner and of the Secretary of Justice, we
rule that:chanroblesvirtuallawlibrary
(1) The prohibition contained in section 18 of
Act No. 1459, against extending the period of
corporate existence by amendment of the
original articles, was intended to apply, and does
apply, to sociedades anonimas already formed,
organized and existing at the time of the
effectivity of the Corporation Law (Act No. 1459)
in 1906;
(2) The statutory prohibition is valid and
impairs no vested rights or constitutional
inhibition where no agreement to extend the
original period of corporate life was perfected
before the enactment of the Corporation Law;
(3) A sociedad anonima, existing before the
Corporation Law, that continues to do business
as such for a reasonable time after its
enactments, is deemed to have made its election
and may not subsequently claim to reform into a
corporation under section 75 of Act No. 1459.
In view of the foregoing, the order appealed from
is affirmed. Costs against Petitioner-
AppellantBenguet Consolidated Mining
Company.
Padilla, Montemayor, Reyes, A. Labrador,
Concepcion and Endencia, JJ., concur.
Separate Opinions
PARAS, C.J.,
dissenting:chanroblesvirtuallawlibrary
The Petitioner, Benguet Consolidated Mining
Company, was organized as a sociedad anonima
on June 24, 1903, under the provisions of the
Code of Commerce, and its term as fixed in the
articles of association was fifty years. It has been
a leading enterprise, long and widely reputed to
have pioneered in and boosted the mining
industry, distributed profits among its
shareholders, and given employment to
thousands. To be more approximately exact,
thePetitioner has kept on its payrolls over four
thousand Filipino employees who have about
twenty thousand dependents. The taxes and
other dues paid by it to the Government have
been in enormous amounts. It has always been
subject to such supervision and control of
Government officials as are prescribed by law.
When, therefore, the Petitioner on June 3, 1953,
presented all necessary documents to
theRespondent, the Securities and Exchange
Commissioner, with a view to the extension of its
term as a sociedad anonima for a period of fifty
years from June 15, 1953; chan
roblesvirtualawlibrarywhen on June 22, 1953, it
filed with said Respondent the necessary articles
of incorporation and other documents, with a
view to reforming itself as a corporation under
the Corporation Law for a period of fifty years
from June 22, 1953, followed by the filing on July
22, 1953, of the corresponding by-laws; chan
roblesvirtualawlibraryand when on October 27,
1953, the Respondent issued an order denying
the registration of the instruments as well for
extension as for reformation, Petitioner’s
corporate life was being snapped out with such
lightning abruptness as undoubtedly to spell
damage and prejudice not so much to its
shareholders as to its beneficiaries — thousands
of employees and their dependents — and even
to the Government which stands to lose a good
source of revenue.
The Petitioner contends (1) that
the Respondent had the ministerial duty of
registering the documents presented either for
extension of Petitioner’s term as a sociedad
anonima or for its reformation under the
Corporation Law, in the absence (as in this case)
of any pretense that said documents are formally
defective or that Petitioner’s purposes are
unlawful; chan roblesvirtualawlibraryand (2)
that as the Petitioner had organized as a sociedad
anonima under the Code of Commerce, it has
acquired a vested right which cannot
subsequently be affected or taken away by the
Corporation Law enacted on April 1, 1906. I
would not dwell upon these contentions, because
I hold that, even under the provisions of the
Corporation Law, the Petitioner may either
extend its life as a sociedad anonima or reform
as a corporation.
Section 75 of the Corporation Law
provides:chanroblesvirtuallawlibrary
“Any corporation or sociedad anonima formed,
organized and existing under the laws of the
Philippine Islands and lawfully transacting
business in the Philippine Islands on the date of
the passage of this Act, shall be subject to the
provisions hereof so far as such provisions may
be applicable and shall be entitled at its option
either to continue business as such corporation
or to reform and organize under, and by virtue of
the provisions of this Act, transferring all
corporate interests to the new corporation
which, if a stock corporation, is authorized to
issue its shares of stock at par to the
stockholders or members of the old corporation
according to their interests.”
Upon the other hand, section 191 reads as
follows:chanroblesvirtuallawlibrary
“The Code of Commerce, in so far as it relates to
corporations or sociedades anonimas, and all
other or parts of Acts in conflict or inconsistent
with this Act, are hereby repealed cralaw And
provided, further, That existing corporations or
sociedades anonimas lawfully organized as such,
which elect to continue their business as such
sociedades anonimas instead of reforming and
reorganizing under and by virtue of the
provisions of this Act, shall continue to be
governed by the laws that were in force prior to
the passage of this Act in relation to their
organization and method of transacting business
and to the rights of members thereof as between
themselves, but their relations to the public and
public officials shall be governed by the
provisions of this Act.”
It is noteworthy that section 75 has not limited
the optional continuance of a sociedad anonima
to its unexpired term, and section 191 expressly
allows a sociedad anonima which has elected to
continue its business as such to be governed by
the laws in force prior to the enactment of the
Corporation Law in relation to its organization
and method of transacting business and to the
rights of members as between themselves. It is
admitted that the Code of Commerce, while
containing no express provision allowing it, does
not prohibit a sociedad anonima from extending
its term; chan roblesvirtualawlibraryand
commentators Gay de Montella (Tratado
Practico de Sociedad Marcantiles — Compañias
Anonimas, Tomo II, p. 285) and Cesar Vivante
(Tratado de Derecho Mercantil, pp. 254, 258)
have observed that a sociedad anonima may
prolong its corporate duration by amendment of
its articles of association before the expiration of
the term.
When a business or commercial association is
organized, the members are naturally interested
in knowing not only their rights and obligations
but also the duration of their legal relations.
While “organization” in a strict sense may refer
to formalities like election of officers, adoption of
by-laws, and subscription and payment of capital
stock, it cannot be spoken of or conceived in a
wider sense without necessarily involving the
specification of the term of the entity formed.
Extension of corporation life is thus essentially
an incident of “organization” and, in any event, a
matter directly affecting or in relation to the
rights of the shareholders as between
themselves, within the contemplation of section
191, and should accordingly be governed by the
Code of Commerce. As pointed out by the
Supreme Court of Wyoming in the case of Drew
vs. Beckwith, (114 P. 2d. 98), extension “merely
involves an additional privilege to carry out the
business of enterprise undertaken by the
corporation,” and is “but an enlargement of the
enterprise undertaken by the corporation.” It is
true that the duration of a sociedad anonima is of
some concern to the public and public officials
who ought to know the time when it will cease to
exist and its business will be wound up. Notice to
the world is however served by the registration
of Petitioner’s articles of association as a
sociedad anonima or articles of incorporation as
a reformed corporation with the Securities and
Exchange Commission.
When section 191 mentions “relations to the
public and public officials” as being governed by
the provisions of the Corporation Law, the idea is
obviously more to enable the Government to
enforce its powers of supervision, inspection and
investigation, than to restrict the freedom of the
corporate entity as to organizational or
substantive rights of members as between
themselves. In one of the public hearings
conducted by the Philippine Commission before
the enactment of the Corporation Law,
Commissioner Ide pertinently expressed, “Of
course, whether they (sociedades) come under
the new law or not they would be subject to
inspection, regulations, and examination for the
purpose of protecting the community.” The
Attorney General in turn held that sociedades
anonimas, although governed by the Code of
Commerce, are subject to the examination
provided in section 54 of the Corporation Law (5
Op. Atty. Gen. 442). In this connection,
the Petitioner has admittedly subjected itself to
the provisions of the Corporation Law.
In Harden vs. Benguet Consolidated Mining Co.,
58 Phil., 141, it was
remarked:chanroblesvirtuallawlibrary “The
purpose of the commission in repealing this part
of the Code of Commerce was to compel
commercial entities thereafter organized to
incorporate under the Corporation Law, unless
they should prefer to adopt some form or other
of the partnership.” This Court already indicated
that the commercial entities compelled to
incorporate under the Corporation Law were
those organized after its enactment.
Section 6, subsection 4, of the Corporation Law
provides that the term for which corporations
shall exist shall not exceed fifty years; chan
roblesvirtualawlibrarysection 18 provides that
the life of a corporation shall not be extended by
amendment beyond the time fixed in the original
articles; chan roblesvirtualawlibraryand section
11 provides that upon the issuance by the
Securities and Exchange Commissioner of the
certificate of incorporation, the persons
organizing the corporation shall constitute a
body politic and corporate for the term specified
in the articles of incorporation, not exceeding
fifty years. The corporations contemplated are
those defined in section 22 — corporations
organized under the Corporation Law. They
cannot be sociedades anonimas formed under
the Code of Commerce and licensed to continue
as such in virtue of sections 75 and 191.
Otherwise the words “or sociedad anonima”
would have been added to the term
“corporation” in section 18, as was done in
sections 75 and 191. A similar observation was
made in Harden vs. Benguet Consolidated Mining
Co., supra:chanroblesvirtuallawlibrary “But
when the word corporation is used in the sense
of sociedad anonima and close discrimination is
necessary, it should be associated with the
Spanish expression sociedad anonima either in
parenthesis or connected by the word ‘or’. This
latter device was adopted in sections 75 and 191
of the Corporation Law.”
The citation from 3 Benito, Derecho Mercantil, p.
245, invoked in the majority decision, to the
effect that the duration of a sociedad anonima is
of interest both to its members and to third
persons, is clearly an authority for our
conclusions that the extension of Petitioner’s
term is in relation “to the rights of members
thereof as between themselves.” Section 191
does not say that a sociedad anonima shall be
governed by the provisions of the Corporation
Law when the matter involved affects not only
“the rights of members thereof as between
themselves” but also “the public and public
officials.”
We are also of the opinion that alternatively,
under section 75, the Petitioner may elect to
reform and organize under the Corporation Law,
transferring all its corporate interests to the new
corporation. Contrary to the ruling of
the Respondent, we are convinced that, as no
period was fixed within which it should exercise
the option either of continuing as a sociedad
anonima or reforming and organizing under the
Corporation Law, the Petitioner was entitled to
have its articles of incorporation and by-laws
presented respectively on June 22 and July 22,
1953, registered by the Respondent. Section 75
did not take away Petitioner’s right to exhaust its
term as a sociedad anonima, already vested
before the enactment of the Corporation Law,
but merely granted it the choice to organize as a
regular corporation, instead of extending its life
as a sociedad anonima. The only limitation
imposed is that prescribed in section 191,
namely, that if a sociedad anonima elects to
continue its business as such, it shall be
governed by the prior law in relation to its
organization and method of transacting business
and to the rights of its members as between
themselves, and by the provisions of the
Corporation Law as to its relations to the public
and public officials. If the intention were to fix a
period for reformation, the law would have
expressly so provided, in the same way that
section 19 fixes two years during which a
corporation should formally organize and
commence the transaction of its business,
otherwise its corporate powers would
cease; chan roblesvirtualawlibrarysection 77
fixes three years from the dissolution of a
corporation within which it may clear and settle
its affairs; chan roblesvirtualawlibraryand
section 78 fixes the same period of three years
within which a corporation may convey its
properties to a trustee for the benefit of its
stockholders and other interested persons.
It is not correct to argue that the Petitioner is not
entitled to elect to continue as a sociedad
anonima and at the same time reform and
organize as a regular corporation, because when
it continued as a sociedad anonima after the
passage of the Corporation Law and during its
full term of fifty years, it merely exercised a right
it theretofore had; chan
roblesvirtualawlibraryand the Petitioner can be
said properly to have availed itself of the other
option only when in June 1953 it filed the
necessary papers of incorporation under the
Corporation Law. It is likewise not accurate to
contend that, as the Respondent ruled,
the Petitioner could reform as and be a regular
corporation at most only for the remainder of its
term as a sociedad anonima. Section 75, in
allowing a sociedad anonima to reform and
organize under the Corporation Law, also
authorizes the transfer of its corporate interests
to the new corporation. This “new” corporation
should have the advantage of the prescribed
maximum duration, regardless of the original
term of the old or substituted entity. There is no
basis for the criticism that, if the Petitioner were
allowed to exhaust its full term as a sociedad
anonima, and afterwards to reform as a regular
corporation for another fifty years, it would have
a span of life twice as long as that granted to
corporations organized under the Corporation
Law. The simple reason is that the Petitioner was
already a corporate entity before the enactment
of the Corporation Law, with a fixed duration
under its original articles of association. It was
clearly not in parity with any corporation
organized under and coming into existence after
the effectivity of the Corporation Law which has
no choice on the matter and can therefore have
only the prerogative granted by said law, — no
more no less.
The Respondent has suggested that
the Petitioner, if desirous of continuing its
business, may organize a new corporation — a
suggestion which need not be made because no
one would probably think of denying it that
right. But we cannot see any cogent reason or
practical purpose for the suggestion. In the first
place, the filing of Petitioner’s articles of
incorporation and by-laws in July, 1953, in effect
amounted to the formation of a new corporation.
To require more is to give greater importance to
form than to substance. In the second place, the
public and public officials may not as a matter of
fact be adversely affected by allowing
the Petitioner to reform, instead of requiring it
technically to form a new corporation. It will
acquire no greater rights or obligations by
simple reformation than by newly organizing
another corporation. Conversely, the public and
public officials will acquire no greater benefit or
control by requiring thePetitioner to form a new
corporation, than by allowing it to reform. And
as already stated, whatever interest the public
and public officials may have in determining the
duration of a sociedad anonima or any
corporation for that matter, is amply protected
by registration in the Securities and Exchange
Commission.
The Respondent and the intervenor, Consolidated
Mines, Inc., have tried to show that
thePetitioner holds or owns interests in eight
mining companies, in violation of section 13,
subsection 5 of the Corporation Law, in that it
has operating contracts with the intervenor and
seven other mining companies, besides owning
the majority shares in Balatoc Mining Co. This
matter has not merited any attention or
favorable comment in the majority decision, and
rightly of course. Even so, we may observe that
the alleged violation was not the subject of any
finding by the Respondent, nor relied upon in his
order of denial; chan roblesvirtualawlibrarythat
the Petitioner has denied the charge; chan
roblesvirtualawlibrarythat the holding by
the Petitioner of shares of stock in Balatoc
Mining Co., if really illegal, may look into only in
a quo warranto proceeding instituted by the
Government; chan roblesvirtualawlibrarythat at
any rate the Petitioner has always been ready
and willing to dispose of said shares and, in a
proper proceeding, it should be given reasonable
time to do so, as this Court gave the Philippine
Sugar Estates a period of six months after final
decision within which to “liquidate, dissolve and
separate absolutely in every respect and in all of
its relations, complained of in the petition, with
the Tayabas Land Company” (Government vs.
Philippine Sugar Estates Co., 38 Phil., 15).
With special reference to the intervenor, it may
be of some moment to know the antecedents and
nature of business relations existing between it
and the Petitioner, at least to demonstrate the
righteousness of the position of one or the other
even from a factual point of view. The following
excerpts from “Petitioner’s Reply to a portion of
Intervenor’s Brief” are in
point:chanroblesvirtuallawlibrary
“What has happened in our case is that prior to
the execution of the Operating Agreement of July
9, 1934, the stockholders, directors, and officers
of the intervenor, Consolidated Mines, Inc., did
not want to risk one centavo of their own funds
for the development of their chrome ore mining
claims in Zambales province, and proposed to
the Petitioner herein, Benguet Consolidated
Mining Company, to explore, develop and
operate their mining claims, Benguet to furnish
all the funds that might be necessary, and to
explore, develop, mine and concentrate and
market ‘all the pay are found on or within paid
claims or properties’, the intervenor,
Consolidated Mines, Inc., and the Petitioner,
Benguet Consolidated Mining Company, after the
latter had reimbursed itself for all its advances,
to divide half and half the excess of receipts over
disbursements. Benguet agreed to it, and
advanced approximately three million pesos,
one-half thereof before the war, and the other
half after the war (the intervenor’s properties
having been destroyed during the war).
Paragraph XII of the intervenor’s complaint in
the civil action instituted by it against Benguet in
the Court of First Instance of Manila, No. 18938,
and to which counsel for the intervenor refer in
page 5 of their brief, makes mention of the large
sums of money that Benguet advanced, as
follows:chanroblesvirtuallawlibrary
‘Initial advances amounting to approximately
P1,500,000 made by Defendant during the first
phases of said Operating Agreement which had
been fully reimbursed to it before the war, end of
the amounts likewise advanced by it (Benguet)
for rehabilitation amounting to close
P1,500,000.00.’
“While Benguet risked and poured
approximately three million pesos (P3,000,000)
into the venture, and while Benguet was looking
for, and establishing, a market for intervenor’s
chrome ore, the intervenor, Consolidated Mines,
Inc., considered the said Operating Agreement of
July 9, 1934, as valid. Now that Benguet’s efforts
have been crowned with success, and Benguet
has established a market for intervenor’s chrome
ore, the intervenor claims that its said operating
Agreement of July 9, 1934, with the Petitioner,
Benguet, is contrary to law because Benguet has
become interested in intervenor’s chrome ore
mining claims (although the agreement
expressly states that Benguet has no interest
therein), and objects to the registration of the
documents which Benguet filed with
the Respondent Securities and Exchange
Commissioner, extending its life as a sociedad
anonima, and reforming itself s a corporation, in
accordance with the provisions of section 75 of
the Corporation Law.
“Under the foregoing facts, the intervenor,
Consolidated Mines, Inc., cannot be heard to
complain against Benguet. No court can give now
a helping hand to the intervenor, which claims
that Benguet no longer lives, and wants to keep
for itself all the products of Benguet’s efforts
after the latter risked into the venture
approximately three million pesos
(P3,000,000).”
The foregoing considerations may not constitute
a legal justification for ruling that
the Petitionershould be allowed either to extend
its life as a sociedad anonima or to reform and
organize under the provisions of the Corporation
Law, but they may aid in resolving in Petitioner’s
favor and doubt as to the clarity or definiteness
of sections 75 and 191 of the Corporation Law
regarding its right to exercise either option in
the manner claimed by it.
The same result may be arrived at if, in addition,
we bear in mind the possible economic harm
that may be brought about by the affirmance of
the order complained of. This aspect is
adequately touched in Petitioner’s brief, as
follows:chanroblesvirtuallawlibrary
“1. A loss of employment in the Baguio district
by about 4,000 Filipino and a loss of direct living
from the Benguet operation supplied to 20,000,
that is, the 4,000 employed and their
dependents.
“(a) This would be calamity to the district of the
highest order which could very well produce a
snow balling depression which could react all
over the Philippine Islands.
“2. Losses of direct and indirect taxes to the
Philippine Government in an extremely large
yearly amount.
“3. No one would be able to continue the
Benguet and Balatoc mines in operation should a
liquidation of Benguet take place because the net
profits after labor and material costs and taxes in
the last two years or more from the gold mining
operations have not warranted their continued
operation as independent units. The profits in
1953 certainly do not warrant it. It is merely a
case of taking gold out of the ground in order to
pay for labor, materials and taxes with very little
return to the stockholders and on the huge
investment made in the reconstruction since
1946.
“(a) The relief provided by the elimination of the
17 per cent Excise Tax, the 7 per cent
Compensating Tax and the lowering of the
Extraction Tax, when counter-balanced against
consistently increasing costs from month to
month up to this very month, is now nothing but
an offsetting item against constantly increasing
costs.”
For whatever persuasive effect it may have, we
cannot help calling attention to the fact that
there are only about nine sociedades anonimas
in the country, foremost among them being
Compañia Maritima, which have existed for
years and along with the Petitioner figured
prominently in our economic development.
Compañia Maritima, in particular, has been twice
allowed to extend its life by amendment of its
articles of incorporation. It may be argued that if
there was an official mistake in acceding to the
extension of the term of Compañia Maritima, the
same should not warrant the commission of
another mistake. But it will go to show that
sections 75 and 191 of the Corporation Law are,
on the points herein involved, of doubtful
construction; chan roblesvirtualawlibraryand it
is for this reason that we had to advert
hereinabove to the somewhat unequitable
position of the intervenor and to the possible
adverse effect on Philippine economy of the
abrupt termination of Petitioner’s corporate
existence.
By and large, it is my considered opinion that
the Respondent’s order of denial dated October
27, 1953, should be reversed and
the Respondent ordered to register at least the
documents presented by the Petitioner,
reforming and organizing itself as a corporation
under the provisions of the Corporation Law.
This would be in line with the policy of doing
away with sociedad anonimas, at the same time
saving “the goose that lays the golden egg.”
Jugo and Bautista Angelo, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 9321 September 24, 1914
NORBERTO ASUNCION, ET AL., petitioners-
appellants,
vs.
MANUEL DE YRIARTE, respondent-appellee.
Modesto Reyes for appellants.
Attorney-General Villamor for appellee.
MORELAND, J.:
This is an action to obtain a writ of mandamus to
compel the chief of the division of achieves of the
Executive Bureau to file a certain articles of
incorporation.
The chief of the division of archives, the
respondent, refused to file the articles of
incorporation, hereinafter referred to, upon the
ground that the object of the corporation, as
stated in the articles, was not lawful and that, in
pursuance of section 6 of Act No. 1459, they
were not registerable.
The proposed incorporators began an action in
the Court of First Instance of the city of Manila to
compel the chief of the division of archives to
receive and register said articles of
incorporation and to do any and all acts
necessary for the complete incorporation of the
persons named in the articles. The court below
found in favor of the defendant and refused to
order the registration of the articles mentioned,
maintaining ad holding that the defendant, under
the Corporation Law, had authority to determine
both the sufficiency of the form of the articles
and the legality of the object of the proposed
corporation. This appeal is taken from that
judgment.
The first question that arises is whether or not
the chief of the division of archives has authority,
under the Corporation for registration, to decide
not only as to the sufficiency of the form of the
articles, but also as to the lawfulness of the
purpose of the proposed corporation.
It is strongly urged on the part of the appellants
that the duties of the defendant are purely
ministerial and that he has no authority to pass
upon the lawfulness of the object for which the
incorporators propose to organize. No
authorities are cited to support this proposition
and we are of the opinion that it is not sound.
Section 6 of the Corporation Law reads in part as
follows:
Five or more persons, not exceeding
fifteen, a majority of whom are
residents of the Philippine Islands, may
form a private corporation for any
lawful purpose by filing with the
division of archives, patents,
copyrights, and trademarks if the
Executive Bureau articles of
incorporation duly executed and
acknowledged before a notary public, . .
..
Simply because the duties of an official happens
to be ministerial, it does not necessarily follow
that he may not, in the administration of his
office, determine questions of law. We are of the
opinion that it is the duty of the division of
archives, when articles of incorporation are
presented for registration, to determine whether
the objects of the corporation as expressed in the
articles are lawful. We do not believe that, simply
because articles of incorporation presented foe
registration are perfect in form, the division of
archives must accept and register them and issue
the corresponding certificate of incorporation no
matter what the purpose of the corporation may
be as expressed in the articles. We do not believe
it was intended that the division of archives
should issue a certificate of incorporation to, and
thereby put the seal of approval of the
Government upon, a corporation which was
organized for base of immoral purposes. That
such corporation might later, if it sought to carry
out such purposes, be dissolved, or its officials
imprisoned or itself heavily fined furnished no
reason why it should have been created in the
first instance. It seems to us to be not only the
right but the duty of the divisions of archives to
determine the lawfulness of the objects and
purposes of the corporation before it issues a
certificate of incorporation.
It having determined that the division of
archives, through its officials, has authority to
determine not only the sufficiency as to form of
the articles of incorporation offered for
registration, but also the lawfulness of the
purposes of leads us to the determination of the
question whether or not the chief of the division
of archives, who is the representative thereof
and clothed by it with authority to deal subject
to mandamus in the performance of his duties.
We are of the opinion that he may
be mandamused if he act in violation of law or if
he refuses, unduly, to comply with the law. While
we have held that defendant has power to pass
upon the lawfulness of the purposes of the
proposed corporation and that he may, in the
fulfillment of his duties, determine the question
of law whether or not those purposes are lawful
and embraced within that class concerning
which the law permits corporations to be
formed, that does not necessarily mean, as we
have already intimated, that his duties are not
ministerial. On the contrary, there is no
incompatibility in holding, as we do hold, that his
duties are ministerial and that he has no
authority to exercise discretion in receiving and
registering articles of incorporation. He may
exercise judgment — that is, the judicial function
— in the determination of the question of law
referred to, but he may not use discretion. The
question whether or not the objects of a
proposed corporation are lawful is one that can
be decided one way only. If he err in the
determination of that question and refuse to file
articles which should be filed under the law, the
decision is subject to review and correction and,
upon proper showing, he will be ordered to file
the articles. This is the same kind of
determination which a court makes when it
decides a case upon the merits, the court makes
when it decides a case upon the merits. When a
case is presented to a court upon the merits, the
court can decide only one way and be right. As a
matter of law, there is only one way and be right.
As a matter of law, there is only one course to
pursue. In a case where the court or other official
has discretion in the resolution of a question,
then, within certain limitations, he may decide
the question either way and still be right.
Discretion, it may be said generally, is a faculty
conferred upon a court or other official by which
he may decide a question either way and still be
right. The power conferred upon the division of
archives with respect to the registration of
articles of incorporation is not of that character.
It is of the same character as the determination
of a lawsuit by a court upon the merits. It can be
decided only one way correctly.
If, therefore, the defendant erred in determining
the question presented when the articles were
offered for registration, then that error will be
corrected by this court in this action and he will
be compelled to register the articles as offered.
If, however, he did not commit an error, but
decided that question correctly, then, of course,
his action will be affirmed to the extent that we
will deny the relief prayed for.
The next question leads us to the determination
of whether or not the purposes of the
corporation as stated in the articles of
incorporation are lawful within the meaning of
the Corporation Law.
The purpose of the incorporation as stated in the
articles is: "That the object of the corporation is
(a) to organize and regulate the management,
disposition, administration and control which
the barrio of Pulo or San Miguel or its
inhabitants or residents have over the common
property of said residents or inhabitants or
property belonging to the whole barrio as such;
and (b) to use the natural products of the said
property for institutions, foundations, and
charitable works of common utility and
advantage to the barrio or its inhabitants."
The municipality of Pasig as recognized by law
contains within its limits several barrios or small
settlements, like Pulo or San Miguel, which have
no local government of their own but are
governed by the municipality of Pasig through its
municipal president and council. The president
and members of the municipal council are
elected by a general vote of the municipality, the
qualified electors of all the barrios having the
right to participate.
What the law does not permit cannot be
obtained by indirection. The object of the
proposed corporation is clearly repugnant to the
provisions of the Municipal Code and the
governments of municipalities as they have been
organized thereunder. (Act No. 82, Philippine
Commission.)
The judgment appealed from is affirmed, with
costs against appellants.

The municipality of Pasig is a municipal Arellano, C.J., Torres, Johnson, Carson and Araullo,
corporation organized by law. It has the control JJ., concur.
of all property of the municipality. The various
barrios of the municipality have no right to own
or hold property, they not being recognized as
legal entities by any law. The residents of the
barrios participate in the advantages which
accrue to the municipality from public property
and receive all the benefits incident to residence
in a municipality organized by law. If there is any
public property situated in the barrio of Pulo or
San Miguel not belonging to the general
government or the province, it belongs to the
municipality of Pasig and the sole authority to
manage and administer the same resides in that
municipality. Until the present laws upon the
subject are charged no other entity can be the
owner of such property or control or administer
it.

The object of the proposed corporation, as

appears from the articles offered for registration,
is to make of the barrio of Pulo or San Miguel a
corporation which will become the owner of and
have the right to control and administer any
property belonging to the municipality of Pasig
found within the limits of that barrio. This clearly
cannot be permitted. Otherwise municipalities as
now established by law could be deprived of the
property which they now own and administer.
Each barrio of the municipality would become
under the scheme proposed, a separate
corporation, would take over the ownership,
administration, and control of that portion of the
municipal territory within its limits. This would
disrupt, in a sense, the municipalities of the
Islands by dividing them into a series of smaller
municipalities entirely independent of the
original municipality.
SECOND DIVISION
[G.R. No. 117188. August 7, 1997]
LOYOLA GRAND VILLAS HOMEOWNERS
(SOUTH) ASSOCIATION,
INC.,petitioner, vs. HON. COURT OF
APPEALS, HOME INSURANCE AND
GUARANTY CORPORATION, EMDEN
ENCARNACION and HORATIO
AYCARDO, respondents.
DECISION
ROMERO, J.:
May the failure of a corporation to file its
by-laws within one month from the date of its
incorporation, as mandated by Section 46 of the
Corporation Code, result in its automatic
dissolution?
This is the issue raised in this petition for
review on certiorari of the Decision[1] of the
Court of Appeals affirming the decision of the
Home Insurance and Guaranty Corporation
(HIGC). This quasi-judicial body recognized
Loyola Grand Villas Homeowners Association
(LGVHA) as the sole homeowners association in
Loyola Grand Villas, a duly registered
subdivision in Quezon City and Marikina City
that was owned and developed by Solid Homes,
Inc. It revoked the certificates of registration
issued to Loyola Grand Villas Homeowners
(North) Association Incorporated (the North
Association for brevity) and Loyola Grand Villas
Homeowners (South) Association Incorporated
(the South Association).
LGVHAI was organized on February 8,
1983 as the association of homeowners and
residents of the Loyola Grand Villas. It was
registered with the Home Financing Corporation,
the predecessor of herein respondent HIGC, as
the sole homeowners organization in the said
subdivision under Certificate of Registration No.
04-197. It was organized by the developer of the
subdivision and its first president was Victorio V.
Soliven, himself the owner of the developer. For
unknown reasons, however, LGVHAI did not file
its corporate by-laws.
Sometime in 1988, the officers of the
LGVHAI tried to register its by-laws. They failed
to do so.[2] To the officers consternation, they
discovered that there were two other
organizations within the subdivision the North
Association and the South Association. According
to private respondents, a non-resident and
Soliven himself, respectively headed these
associations. They also discovered that these
associations had five (5) registered homeowners
each who were also the incorporators, directors
and officers thereof. None of the members of the
LGVHAI was listed as member of the North
Association while three (3) members of LGVHAI
were listed as members of the South
Association.[3] The North Association was
registered with the HIGC on February 13, 1989
under Certificate of Registration No. 04-1160
covering Phases West II, East III, West III and
East IV. It submitted its by-laws on December 20,
1988.
In July, 1989, when Soliven inquired about
the status of LGVHAI, Atty. Joaquin A. Bautista,
the head of the legal department of the HIGC,
informed him that LGVHAI had been
automatically dissolved for two reasons. First, it
did not submit its by-laws within the period
required by the Corporation Code and, second,
there was non-user of corporate charter because
HIGC had not received any report on the
associations activities. Apparently, this
information resulted in the registration of the
South Association with the HIGC on July 27, 1989
covering Phases West I, East I and East 11. It
filed its by-laws on July 26, 1989.
These developments prompted the officers
of the LGVHAI to lodge a complaint with the
HIGC. They questioned the revocation of
LGVHAIs certificate of registration without due
notice and hearing and concomitantly prayed for
the cancellation of the certificates of registration
of the North and South Associations by reason of
the earlier issuance of a certificate of registration
in favor of LGVHAI.
On January 26, 1993, after due notice and
hearing, private respondents obtained a
favorable ruling from HIGC Hearing Officer
Danilo C. Javier who disposed of HIGC Case No.
RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered
recognizing the Loyola Grand Villas
Homeowners Association, Inc., under Certificate
of Registration No. 04-197 as the duly registered
and existing homeowners association for Loyola
Grand Villas homeowners, and declaring the
Certificates of Registration of Loyola Grand Villas
Homeowners (North) Association, Inc. and
Loyola Grand Villas Homeowners (South)
Association, Inc. as hereby revoked or cancelled;
that the receivership be terminated and the
Receiver is hereby ordered to render an
accounting and turn-over to Loyola Grand Villas
Homeowners Association, Inc., all assets and
records of the Association now under his custody
and possession.
The South Association appealed to the
Appeals Board of the HIGC. In its Resolution of
September 8, 1993, the Board[4] dismissed the
appeal for lack of merit.
Rebuffed, the South Association in turn
appealed to the Court of Appeals, raising two
issues.First, whether or not LGVHAIs failure to
file its by-laws within the period prescribed by
Section 46 of the Corporation Code resulted in
the automatic dissolution of
LGVHAI. Second, whether or not two
homeowners associations may be authorized by
the HIGC in one sprawling subdivision. However,
in the Decision of August 23, 1994 being assailed
here, the Court of Appeals affirmed the
Resolution of the HIGC Appeals Board.
In resolving the first issue, the Court of
Appeals held that under the Corporation Code, a
private corporation commences to have
corporate existence and juridical personality
from the date the Securities and Exchange
Commission (SEC) issues a certificate of
incorporation under its official seal. The
requirement for the filing of by-laws under
Section 46 of the Corporation Code within one
month from official notice of the issuance of the
certificate of incorporation presupposes that it is
already incorporated, although it may file its by-
laws with its articles of
incorporation. Elucidating on the effect of a
delayed filing of by-laws, the Court of Appeals
said:
We also find nothing in the provisions cited by
the petitioner, i.e., Sections 46 and 22,
Corporation Code, or in any other provision of
the Code and other laws which provide or at
least imply that failure to file the by-laws results
in an automatic dissolution of the corporation.
While Section 46, in prescribing that by-laws
must be adopted within the period prescribed
therein, may be interpreted as a mandatory
provision, particularly because of the use of the
word must, its meaning cannot be stretched to
support the argument that automatic dissolution
results from non-compliance.
We realize that Section 46 or other provisions of
the Corporation Code are silent on the result of
the failure to adopt and file the by-laws within
the required period. Thus, Section 46 and other
related provisions of the Corporation Code are to
be construed with Section 6 (1) of P.D. 902-A.
This section empowers the SEC to suspend or
revoke certificates of registration on the grounds
listed therein. Among the grounds stated is the
failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such
suspension or revocation, the same section
provides, should be made upon proper notice
and hearing. Although P.D. 902-A refers to the
SEC, the same principles and procedures apply to
the public respondent HIGC as it exercises its
power to revoke or suspend the certificates of
registration or homeowners associations.
(Section 2 [a], E.O. 535, series 1979, transferred
the powers and authorities of the SEC over
homeowners associations to the HIGC.)
We also do not agree with the petitioners
interpretation that Section 46, Corporation Code
prevails over Section 6, P.D. 902-A and that the
latter is invalid because it contravenes the
former. There is no basis for such interpretation
considering that these two provisions are not
inconsistent with each other. They are, in fact,
complementary to each other so that one cannot
be considered as invalidating the other.
The Court of Appeals added that, as there
was no showing that the registration of LGVHAI
had been validly revoked, it continued to be the
duly registered homeowners association in the
Loyola Grand Villas. More importantly, the South
Association did not dispute the fact that LGVHAI
had been organized and that, thereafter, it
transacted business within the period prescribed
by law.
On the second issue, the Court of Appeals
reiterated its previous ruling[5] that the HIGC has
the authority to order the holding of a
referendum to determine which of two
contending associations should represent the
entire community, village or subdivision.
Undaunted, the South Association filed the
instant petition for review on certiorari. It
elevates as sole issue for resolution the first
issue it had raised before the Court of Appeals,
i.e., whether or not the LGVHAIs failure to file its
by-laws within the period prescribed by Section
46 of the Corporation Code had the effect of
automatically dissolving the said corporation.
Petitioner contends that, since Section 46
uses the word must with respect to the filing of
by-laws, noncompliance therewith would result
in self-extinction either due to non-occurrence of
a suspensive condition or the occurrence of a
resolutory condition under the hypothesis that
(by) the issuance of the certificate of registration
alone the corporate personality is deemed
already formed. It asserts that the Corporation
Code provides for a gradation of violations of
requirements. Hence, Section 22 mandates that
the corporation must be formally organized and
should commence transactions within two years
from date of incorporation. Otherwise, the
corporation would be deemed dissolved. On the
other hand, if the corporation commences
operations but becomes continuously
inoperative for five years, then it may be
suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the
other provisions of the Corporation Code do not
provide for sanctions for non-filing of the by-
laws. However, it insists that no sanction need be
provided because the mandatory nature of the
provision is so clear that there can be no doubt
about its being an essential attribute of
corporate birth. To petitioner, its submission is
buttressed by the facts that the period for
compliance is spelled out distinctly; that the
certification of the SEC/HIGC must show that the
by-laws are not inconsistent with the Code, and
that a copy of the by-laws has to be attached to
the articles of incorporation. Moreover, no
sanction is provided for because in the first
place, no corporate identity has been completed.
Petitioner asserts that non-provision for remedy
or sanction is itself the tacit proclamation that
non-compliance is fatal and no corporate
existence had yet evolved, and therefore, there
was no need to proclaim its demise.[6] In a bid to
convince the Court of its arguments, petitioner
stresses that:
x x x the word MUST is used in Sec. 46 in its
universal literal meaning and corollary human
implication its compulsion is integrated in its
very essence MUST is always enforceable by the
inevitable consequence that is,OR ELSE. The use
of the word MUST in Sec. 46 is no exception it
means file the by-laws within one month after
notice of issuance of certificate of
registration OR ELSE. The OR ELSE, though not
specified, is inextricably a part of MUST. Do this
or if you do not you are Kaput. The importance of
the by-laws to corporate existence compels such
meaning for as decreed the by-laws is `the
government of the corporation. Indeed, how can
the corporation do any lawful act as such
without by-laws. Surely, no law is intended to
create chaos.[7]
Petitioner asserts that P.D. No. 902-A
cannot exceed the scope and power of
theCorporation Code which itself does
not provide sanctions for non-filing of by-
laws. For the petitioner, it is not proper to assess
the true meaning of Sec. 46 x x x on an
unauthorized provision on such matter
contained in the said decree.
In their comment on the petition, private
respondents counter that the requirement of
adoption of by-laws is not mandatory. They
point to P.D. No. 902-A as having resolved the
issue of whether said requirement is mandatory
or merely directory. Citing Chung Ka Bio v.
Intermediate Appellate Court,[8] private
respondents contend that Section 6(I) of that
decree provides that non-filing of by-laws is only
a ground for suspension or revocation of the
certificate of registration of corporations and,
therefore, it may not result in automatic
dissolution of the corporation. Moreover, the
adoption and filing of by-laws is a condition
subsequent which does not affect the corporate
personality of a corporation like the
LGVHAI. This is so because Section 9 of the
Corporation Code provides that the corporate
existence and juridical personality of a
corporation begins from the date the SEC issues
a certificate of incorporation under its official
seal. Consequently, even if the by-laws have not
yet been filed, a corporation may be considered
a de facto corporation. To emphasize the fact the
LGVHAI was registered as the sole homeowners
association in the Loyola Grand Villas, private
respondents point out that membership in the
LGVHAI was an unconditional restriction in the
deeds of sale signed by lot buyers.
In its reply to private respondents
comment on the petition, petitioner reiterates its
argument that the word must in Section 46 of the
Corporation Code is mandatory. It adds that,
before the ruling in Chung Ka Bio v.
Intermediate Appellate Court could be applied
to this case, this Court must first resolve the
issue of whether or not the provisions of P.D. No.
902-A prescribing the rules and regulations to
implement the Corporation Code can rise above
and change the substantive provisions of the
Code.
The pertinent provision of the Corporation
Code that is the focal point of controversy in this
case states:
Sec. 46. Adoption of by-laws. Every corporation
formed under this Code, must within one (1)
month after receipt of official notice of the
issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a
code of by-laws for its government not
inconsistent with this Code. For the adoption of
by-laws by the corporation, the affirmative vote
of the stockholders representing at least a
majority of the outstanding capital stock, or of at
least a majority of the members, in the case of
non-stock corporations, shall be necessary. The
by-laws shall be signed by the stockholders or
members voting for them and shall be kept in the
principal office of the corporation, subject to the
stockholders or members voting for them and
shall be kept in the principal office of the
corporation, subject to inspection of the
stockholders or members during office hours;
and a copy thereof, shall be filed with the
Securities and Exchange Commission which shall
be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding
paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-laws
shall be approved and signed by all the
incorporators and submitted to the Securities
and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only upon
the issuance by the Securities and Exchange
Commission of a certification that the by-laws
are not inconsistent with this Code.
The Securities and Exchange Commission shall
not accept for filing the by-laws or any
amendment thereto of any bank, banking
institution, building and loan association, trust
company, insurance company, public utility,
educational institution or other special
corporations governed by special laws, unless
accompanied by a certificate of the appropriate
government agency to the effect that such by-
laws or amendments are in accordance with law.
As correctly postulated by the petitioner,
interpretation of this provision of law begins
with the determination of the meaning and
import of the word must in this
section. Ordinarily, the word must connotes an
imperative act or operates to impose a duty
which may be enforced.[9] It is synonymous with
ought which connotes compulsion or
mandatoriness.[10] However, the word must in a
statute, like shall, is not always imperative. It
may be consistent with an exercise of
discretion.In this jurisdiction, the tendency has
been to interpret shall as the context or a
reasonable construction of the statute in which it
is used demands or requires.[11] This is equally
true as regards the word must. Thus, if the
language of a statute considered as a whole and
with due regard to its nature and object reveals
that the legislature intended to use the words
shall and must to be directory, they should be
given that meaning.[12]
In this respect, the following portions of
the deliberations of the Batasang Pambansa No.
68 are illuminating:
MR. FUENTEBELLA. Thank
you, Mr. Speaker.
On page 34, referring to the
adoption of by-laws, are we
made to understand here, Mr.
Speaker, that by-laws must
immediately be filed within one
month after the issuance? In
other words, would this be
mandatory or directory in
character?
MR. MENDOZA. This is
mandatory.
MR. FUENTEBELLA. It
being mandatory, Mr. Speaker,
what would be the effect of the
failure of the corporation to file
these by-laws within one
month?
MR. MENDOZA. There is a
provision in the latter part of
the Code which identifies and
describes the consequences of
violations of any provision of
this Code. One such
consequence is the dissolution
of the corporation for its
inability, or perhaps, incurring
certain penalties.
MR. FUENTEBELLA. But it
will not automatically amount
to a dissolution of the
corporation by merely failing to
file the by-laws within one
month. Supposing the
corporation was late, say, five
days, what would be the
mandatory penalty?
MR. MENDOZA. I do not
think it will necessarily result in
the automatic or ipso
factodissolution of the
corporation. Perhaps, as in the
case, as you suggested, in the
case of El Hogar Filipino where
a quo warranto action is
brought, one takes into account
the gravity of the violation
committed. If the by-laws were
late the filing of the by-laws
were late by, perhaps, a day or
two, I would suppose that might
be a tolerable delay, but if they
are delayed over a period of
months as is happening now
because of the absence of a
clear requirement that by-laws
must be completed within a
specified period of time, the
corporation must suffer certain
consequences.[13]
This exchange of views demonstrates
clearly that automatic corporate dissolution for
failure to file the by-laws on time was never the
intention of the legislature. Moreover, even
without resorting to the records of deliberations
of the Batasang Pambansa, the law itself
provides the answer to the issue propounded by
petitioner.
Taken as a whole and under the principle
that the best interpreter of a statute is the
statute itself (optima statuli interpretatix est
ipsum statutum),[14] Section 46 aforequoted
reveals the legislative intent to attach a
directory, and not mandatory, meaning for the
word must in the first sentence thereof. Note
should be taken of the second paragraph of the
law which allows the filing of the by-laws
even prior to incorporation. This provision in the
same section of the Code rules out mandatory
compliance with the requirement of filing the by-
laws within one (1) month after receipt of official
notice of the issuance of its certificate of
incorporation by the Securities and Exchange
Commission. It necessarily follows that failure to
file the by-laws within that period does not
imply the demise of the corporation. By-laws
may be necessary for the government of the
corporation but these are subordinate to the
articles of incorporation as well as to the
Corporation Code and related statutes.[15] There
are in fact cases where by-laws are unnecessary
to corporate existence or to the valid exercise of
corporate powers, thus:
In the absence of charter or statutory provisions
to the contrary, by-laws are not necessary either
to the existence of a corporation or to the valid
exercise of the powers conferred upon it,
certainly in all cases where the charter
sufficiently provides for the government of the
body; and even where the governing statute in
express terms confers upon the corporation the
power to adopt by-laws, the failure to exercise
the power will be ascribed to mere nonaction
which will not render void any acts of the
corporation which would otherwise be
valid.[16] (Italics supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation
are the rule of its life, and that until by-laws have
been adopted the corporation may not be able to
act for the purposes of its creation, and that the
first and most important duty of the members is
to adopt them. This would seem to follow as a
matter of principle from the office and functions
of by-laws. Viewed in this light, the adoption of
by-laws is a matter of practical, if not one of
legal, necessity. Moreover, the peculiar
circumstances attending the formation of a
corporation may impose the obligation to adopt
certain by-laws, as in the case of a close
corporation organized for specific purposes.And
the statute or general laws from which the
corporation derives its corporate existence may
expressly require it to make and adopt by-laws
and specify to some extent what they shall
contain and the manner of their adoption. The
mere fact, however, of the existence of power
in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise
of such power essential to its corporate life, or
to the validity of any of its acts.[17]
Although the Corporation Code requires
the filing of by-laws, it does not expressly
provide for the consequences of the non-filing of
the same within the period provided for in
Section 46.However, such omission has been
rectified by Presidential Decree No. 902-A, the
pertinent provisions on the jurisdiction of the
SEC of which state:
SEC. 6. In order to effectively exercise such
jurisdiction, the Commission shall possess the
following powers:
xxx xxx xxx xxx
(l) To suspend, or revoke, after proper notice
and hearing, the franchise or certificate of
registration of corporations, partnerships or
associations, upon any of the grounds provided
by law, including the following:
xxx xxx xxx xxx
5. Failure to file by-laws within the required
period;
xxx xxx xxx xxx
In the exercise of the foregoing authority and
jurisdiction of the Commissions or by a
Commissioner or by such other bodies, boards,
committees and/or any officer as may be created
or designated by the Commission for the
purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees
and/or officer may be appealed to the
Commission sitting en banc within thirty (30)
days after receipt by the appellant of notice of
such decision, ruling or order. The Commission
shall promulgate rules of procedures to govern
the proceedings, hearings and appeals of cases
falling within its jurisdiction.
The aggrieved party may appeal the order,
decision or ruling of the Commission sitting en
banc to the Supreme Court by petition for review
in accordance with the pertinent provisions of
the Rules of Court.
Even under the foregoing express grant of
power and authority, there can be no automatic
corporate dissolution simply because the
incorporators failed to abide by the required
filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright demise of
corporate existence. Proper notice and hearing
are cardinal components of due process in any
democratic institution, agency or society. In
other words, the incorporators must be given the
chance to explain their neglect or omission and
remedy the same.
That the failure to file by-laws is not
provided for by the Corporation Code but in
another law is of no moment. P.D. No. 902-A,
which took effect immediately after its
promulgation on March 11, 1976, is very much
apposite to the Code. Accordingly, the provisions
abovequoted supply the law governing the
situation in the case at bar, inasmuch as the
Corporation Code and P.D. No. 902-A are statutes
in pari materia. Interpretare et concordare
legibus est optimus interpretandi.Every statute
must be so construed and harmonized with
other statutes as to form a uniform system of
jurisprudence.[18]
As the rules and regulations or private laws
enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns
and its stockholders or members and directors
and officers with relation thereto and among
themselves in their relation to it,[19] by-laws are
indispensable to corporations in this
jurisdiction. These may not be essential to
corporate birth but certainly, these are required
by law for an orderly governance and
management of corporations. Nonetheless,
failure to file them within the period required by
law by no means tolls the automatic dissolution
of a corporation.
In this regard, private respondents are
correct in relying on the pronouncements of this
Court in Chung Ka Bio v. Intermediate
Appellate Court,[20] as follows:
x x x. Moreover, failure to file the by-laws does
not automatically operate to dissolve a
corporation but is now considered only a ground
for such dissolution.
Section 19 of the Corporation Law, part of which
is now Section 22 of the Corporation Code,
provided that the powers of the corporation
would cease if it did not formally organize and
commence the transaction of its business or the
continuation of its works within two years from
date of its incorporation. Section 20, which has
been reproduced with some modifications in
Section 46 of the Corporation Code, expressly
declared that every corporation formed under
this Act, must within one month after the filing of
the articles of incorporation with the Securities
and Exchange Commission, adopt a code of by-
laws. Whether this provision should be given
mandatory or only directory effect remained a
controversial question until it became academic
with the adoption of PD 902-A. Under this
decree, it is now clear that the failure to file by-
laws within the required period is only a ground
for suspension or revocation of the certificate of
registration of corporations.
Non-filing of the by-laws will not result in
automatic dissolution of the corporation. Under
Section 6(I) of PD 902-A, the SEC is empowered
to suspend or revoke, after proper notice and
hearing, the franchise or certificate of
registration of a corporation on the ground inter
alia of failure to file by-laws within the required
period. It is clear from this provision that there
must first of all be a hearing to determine the
existence of the ground, and secondly, assuming
such finding, the penalty is not necessarily
revocation but may be only suspension of the
charter. In fact, under the rules and regulations
of the SEC, failure to file the by-laws on time may
be penalized merely with the imposition of an
administrative fine without affecting the
corporate existence of the erring firm.
It should be stressed in this connection that
substantial compliance with conditions
subsequent will suffice to perfect corporate
personality. Organization and commencement of
transaction of corporate business are but
conditions subsequent and not prerequisites for
acquisition of corporate personality. The
adoption and filing of by-laws is also a condition
subsequent. Under Section 19 of the Corporation
Code, a corporation commences its corporate
existence and juridical personality and is
deemed incorporated from the date the
Securities and Exchange Commission issues
certificate of incorporation under its official
seal. This may be done even before the filing of
the by-laws, which under Section 46 of the
Corporation Code, must be adopted within one
month after receipt of official notice of the
issuance of its certificate of incorporation.[21]
That the corporation involved herein is
under the supervision of the HIGC does not alter
the result of this case. The HIGC has taken over
the specialized functions of the former Home
Financing Corporation by virtue of Executive
Order No. 90 dated December 17, 1986.[22] With
respect to homeowners associations, the HIGC
shall exercise all the powers, authorities and
responsibilities that are vested on the Securities
and Exchange Commission x x x, the provision of
Act 1459, as amended by P.D. 902-A, to the
contrary notwithstanding.[23]
WHEREFORE, the instant petition for
review on certiorari is hereby DENIED and the
questioned Decision of the Court of Appeals
AFFIRMED. This Decision is immediately
executory. Costs against petitioner.
SO ORDERED.
Regalado, (Chairman), Puno, and Mendoza,
JJ., concur.
Torres, Jr., J., on leave.
SECOND DIVISION
[G.R. No. 121466. August 15, 1997]
PMI COLLEGES, petitioner, vs. THE NATIONAL
LABOR RELATIONS COMMISSION and
ALEJANDRO GALVAN, respondents.
DECISION
ROMERO, J.:
Subject of the instant petition
for certiorari under Rule 65 of the Rules of Court
is the resolution[1] of public respondent National
Labor Relations Commission[2] rendered on
August 4, 1995, affirming in toto the December 7,
1994 decision[3] of Labor Arbiter Pablo C.
Espiritu declaring petitioner PMI Colleges liable
to pay private respondent Alejandro
Galvan P405,000.00 in unpaid wages
and P40,532.00 as attorneys fees.
A chronicle of the pertinent events on
record leading to the filing of the instant petition
is as follows:
On July 7, 1991, petitioner, an educational
institution offering courses on basic seamans
training and other marine-related courses, hired
private respondent as contractual instructor
with an agreement that the latter shall be paid at
an hourly rate of P30.00 to P50.00, depending on
the description of load subjects and on the
schedule for teaching the same. Pursuant to this
engagement, private respondent then organized
classes in marine engineering.
Initially, private respondent and other
instructors were compensated for services
rendered during the first three periods of the
abovementioned contract. However, for reasons
unknown to private respondent, he stopped
receiving payment for the succeeding rendition
of services. This claim of non-payment was
embodied in a letter dated March 3, 1992,
written by petitioners Acting Director, Casimiro
A. Aguinaldo, addressed to its President, Atty.
Santiago Pastor, calling attention to and
appealing for the early approval and release of
the salaries of its instructors including that of
private respondent. It appeared further in said
letter that the salary of private respondent
corresponding to the shipyard and plant visits
and the ongoing on-the-job training of Class 41
on board MV Sweet Glory of Sweet Lines, Inc.
was not yet included. This request of the Acting
Director apparently went unheeded. Repeated
demands having likewise failed, private
respondent was soon constrained to file a
complaint[4] before the National Capital Region
Arbitration Branch on September 14, 1993
seeking payment for salaries earned from the
following: (1) basic seaman course Classes 41
and 42 for the period covering October 1991 to
September 1992; (2) shipyard and plant visits
and on-the-job training of Classes 41 and 42 for
the period covering October 1991 to September
1992 on board M/V Sweet Glory vessel; and (3)
as Acting Director of Seaman Training Course for
3-1/2 months.
In support of the abovementioned claims,
private respondent submitted documentary
evidence which were annexed to his complaint,
such as the detailed load and schedule of classes
with number of class hours and rate per hour
(Annex A); PMI Colleges Basic Seaman Training
Course (Annex B); the aforementioned letter-
request for payment of salaries by the Acting
Director of PMI Colleges (Annex C); unpaid load
of private respondent (Annex D); and vouchers
prepared by the accounting department of
petitioner but whose amounts indicated therein
were actually never paid to private respondent
(Exhibit E).
Private respondents claims, as expected,
were resisted by petitioner. It alleged that
classes in the courses offered which complainant
claimed to have remained unpaid were not held
or conducted in the school premises of PMI
Colleges. Only private respondent, it was argued,
knew whether classes were indeed conducted. In
the same vein, petitioner maintained that it
exercised no appropriate and proper supervision
of the said classes which activities allegedly
violated certain rules and regulations of the
Department of Education, Culture and Sports
(DECS).Furthermore, the claims, according to
petitioner, were all exaggerated and that, at any
rate, private respondent abandoned his work at
the time he should have commenced the same.
In reply, private respondent belied
petitioners allegations contending, among
others, that he conducted lectures within the
premises of petitioners rented space located at
5th Floor, Manufacturers Bldg., Sta. Cruz, Manila;
that his students duly enrolled with the
Registrars Office of petitioner; that shipyard and
plant visits were conducted at Fort San Felipe,
Cavite Naval Base; that petitioner was fully
aware of said shipyard and plant visits because it
even wrote a letter for that purpose; and that
basic seaman courses 41 and 42 were sanctioned
by the DECS as shown by the records of the
Registrars Office.
Later in the proceedings below, petitioner
manifested that Mr. Tomas G. Cloma, Jr., a
member of the petitioners Board of Trustees
wrote a letter[5] to the Chairman of the Board on
May 23, 1994, clarifying the case of private
respondent and stating therein, inter alia, that
under petitioners by-laws only the Chairman is
authorized to sign any contract and that private
respondent, in any event, failed to submit
documents on the alleged shipyard and plant
visits in Cavite Naval Base.
Attempts at amicable settlement having
failed, the parties were required to submit their
respective position papers. Thereafter, on June
16, 1994, the Labor Arbiter issued an order
declaring the case submitted for decision on the
basis of the position papers which the parties
filed. Petitioner, however, vigorously opposed
this order insisting that there should be a formal
trial on the merits in view of the important
factual issues raised. In another order dated July
22, 1994, the Labor Arbiter impliedly denied
petitioners opposition, reiterating that the case
was already submitted for decision. Hence, a
decision was subsequently rendered by the
Labor Arbiter on December 7, 1994 finding for
the private respondent. On appeal, the NLRC
affirmed the same intoto in its decision of August
4, 1995.
Aggrieved, petitioner now pleads for the
Court to resolve the following issues in its favor,
to wit:
I. Whether the money claims of
private respondent
representing salaries/wages as
contractual instructor for class
instruction, on-the-job training
and shipboard and plant visits
have valid legal and factual
bases;
II. Whether claims for salaries/wages
for services relative to on-the-
job training and shipboard and
plant visits by instructors,
assuming the same were really
conducted, have valid bases;
III. Whether the petitioner was
denied its right to procedural
due process; and
IV. Whether the NLRC findings in its
questioned resolution have
sound legal and factual support.
We see no compelling reason to grant
petitioners plea; the same must, therefore, be
dismissed.
At once, a mere perusal of the issues raised
by petitioner already invites dismissal for
demonstrated ignorance and disregard of settled
rules on certiorari. Except perhaps for the third
issue, the rest glaringly call for a re-examination,
evaluation and appreciation of the weight and
sufficiency of factual evidence presented before
the Labor Arbiter. This, of course, the Court
cannot do in the exercise of
its certiorari jurisdiction without transgressing
the well-defined limits thereof. The corrective
power of the Court in this regard is confined only
to jurisdictional issues and a determination of
whether there is such grave abuse of discretion
amounting to lack or excess of jurisdiction on the
part of a tribunal or agency. So unyielding and
consistent are the decisional rules thereon that it
is indeed surprising why petitioners counsel
failed to accord them the observance they
deserve.
 Thus, in San Miguel Foods, Inc. Cebu B-Meg
Feed Plant v. Hon. Bienvenido Laguesma,[6] we
were emphatic in declaring that:
This Court is definitely not the proper venue to
consider this matter for it is not a trier of facts. x
x x Certiorari is a remedy narrow in its scope and
inflexible in character. It is not a general utility
tool in the legal workshop.Factual issues are not
a proper subject for certiorari, as the power of
the Supreme Court to review labor cases is
limited to the issue of jurisdiction and grave
abuse of discretion. x x x (Emphasis supplied).
Of the same tenor was our disquisition
in Ilocos Sur Electric Cooperative,
Inc. v. NLRC[7]where we made plain that:
In certiorari proceedings under Rule 65 of the
Rules of Court, judicial review by this Court does
not go so far as to evaluate the sufficiency of
evidence upon which the Labor Arbiter and the
NLRC based their determinations, the inquiry
being limited essentially to whether or not said
public respondents had acted without or in
excess of its jurisdiction or with grave abuse of
discretion. (Emphasis supplied).
To be sure, this does not mean that the
Court would disregard altogether the evidence
presented. We merely declare that the extent of
review of evidence we ordinarily provide in
other cases is different when it is a special civil
action of certiorari. The latter commands us to
merely determine whether there is basis
established on record to support the findings of a
tribunal and such findings meet the required
quantum of proof, which in this instance, is
substantial evidence.Our deference to the
expertise acquired by quasi-judicial agencies and
the limited scope granted to us in the exercise of
certiorari jurisdiction restrain us from going so
far as to probe into the correctness of a tribunals
evaluation of evidence, unless there is palpable
mistake and complete disregard thereof in which
case certiorari would be proper. In plain terms,
in certiorariproceedings, we are concerned with
mere errors of jurisdiction and not errors of
judgment. Thus:
The rule is settled that the original and exclusive
jurisdiction of this Court to review a decision of
respondent NLRC (or Executive Labor Arbiter as
in this case) in a petition for certiorari under
Rule 65 does not normally include an inquiry
into the correctness of its evaluation of the
evidence. Errors of judgment, as distinguished
from errors of jurisdiction, are not within the
province of a special civil action for certiorari,
which is merely confined to issues of jurisdiction
or grave abuse of discretion. It is thus incumbent
upon petitioner to satisfactorily establish that
respondent Commission or executive labor
arbiter acted capriciously and whimsically in
total disregard of evidence material to or even
decisive of the controversy, in order that the
extraordinary writ of certiorari will lie. By grave
abuse of discretion is meant such capricious and
whimsical exercise of judgment as is equivalent
to lack of jurisdiction, and it must be shown that
the discretion was exercised arbitrarily or
despotically. For certiorari to lie there must be
capricious, arbitrary and whimsical exercise of
power, the very antithesis of the judicial
prerogative in accordance with centuries of both
civil law and common law traditions.[8]
The Court entertains no doubt that the
foregoing doctrines apply with equal force in the
case at bar.
In any event, granting that we may have to
delve into the facts and evidence of the parties,
we still find no puissant justification for us to
adjudge both the Labor Arbiters and NLRCs
appreciation of such evidence as indicative of
any grave abuse of discretion.
First. Petitioner places so much emphasis
on its argument that private respondent did not
produce a copy of the contract pursuant to which
he rendered services. This argument is, of
course, puerile. The absence of such copy does
not in any manner negate the existence of a
contract of employment since (C)ontracts shall
be obligatory, in whatever form they have been
entered into, provided all the essential requisites
for their validity are present.[9] The only
exception to this rule is when the law requires
that a contract be in some form in order that it
may be valid or enforceable, or that a contract be
proved in a certain way. However, there is no
requirement under the law that the contract of
employment of the kind entered into by
petitioner with private respondent should be in
any particular form. While it may have been
desirable for private respondent to have
produced a copy of his contract if one really
exists, but the absence thereof, in any case, does
not militate against his claims inasmuch as:
No particular form of evidence is required to
prove the existence of an employer-employee
relationship. Any competent and relevant
evidence to prove the relationship may be
admitted. For, if only documentary evidence
would be required to show that relationship, no
scheming employer would ever be brought
before the bar of justice, as no employer would
wish to come out with any trace of the illegality
he has authored considering that it should take
much weightier proof to invalidate a written
instrument. x x x [10]
At any rate, the vouchers prepared by
petitioners own accounting department and the
letter-request of its Acting Director asking for
payment of private respondents services suffice
to support a reasonable conclusion that private
respondent was employed with petitioner. How
else could one explain the fact that private
respondent was supposed to be paid the
amounts mentioned in those documents if he
were not employed? Petitioners evidence is
wanting in this respect while private respondent
affirmatively stated that the same arose out of
his employment with petitioner. As between the
two, the latter is weightier inasmuch as we
accord affirmative testimony greater value than
a negative one. For the foregoing reasons, we
find it difficult to agree with petitioners
assertion that the absence of a copy of the
alleged contract should nullify private
respondents claims.
Neither can we concede that such contract
would be invalid just because the signatory
thereon was not the Chairman of the Board
which allegedly violated petitioners by-
laws. Since by-laws operate merely as internal
rules among the stockholders, they cannot affect
or prejudice third persons who deal with the
corporation, unless they have knowledge of the
same.[11] No proof appears on record that private
respondent ever knew anything about the
provisions of said by-laws. In fact, petitioner
itself merely asserts the same without even
bothering to attach a copy or excerpt thereof to
show that there is such a provision. How can it
now expect the Labor Arbiter and the NLRC to
believe it? That this allegation has never been
denied by private respondent does not
necessarily signify admission of its existence
because technicalities of law and procedure and
the rules obtaining in the courts of law do not
strictly apply to proceedings of this nature.
Second. Petitioner bewails the fact that
both the Labor Arbiter and the NLRC accorded
due weight to the documents prepared by
private respondent since they are said to be self-
serving.Self-serving evidence is not to be literally
taken as evidence that serves ones selfish
interest.[12]The fact alone that most of the
documents submitted in evidence by private
respondent were prepared by him does not
make them self-serving since they have been
offered in the proceedings before the Labor
Arbiter and that ample opportunity was given to
petitioner to rebut their veracity and
authenticity. Petitioner, however, opted to
merely deny them which denial, ironically, is
actually what is considered self-serving
evidence[13] and, therefore, deserves scant
consideration. In any event, any denial made by
petitioner cannot stand against the affirmative
and fairly detailed manner by which private
respondent supported his claims, such as the
places where he conducted his classes, on-the-
job training and shipyard and plant visits; the
rate he applied and the duration of said rendition
of services; the fact that he was indeed engaged
as a contractual instructor by petitioner; and
that part of his services was not yet
remunerated. These evidence, to reiterate, have
never been effectively refuted by petitioner.
Third. As regards the amounts demanded
by private respondent, we can only rely upon the
evidence presented which, in this case, consists
of the computation of private respondent as well
as the findings of both the Labor Arbiter and the
NLRC. Petitioner, it must be stressed, presented
no satisfactory proof to the contrary. Absent
such proof, we are constrained to rely upon
private respondents otherwise straightforward
explanation of his claims.
Fourth. The absence of a formal hearing or
trial before the Labor Arbiter is no cause for
petitioner to impute grave abuse of
discretion. Whether to conduct one or not
depends on the sole discretion of the Labor
Arbiter, taking into account the position papers
and supporting documents submitted by the
parties on every issue presented. If the Labor
Arbiter, in his judgment, is confident that he can
rely on the documents before him, he cannot be
faulted for not conducting a formal trial
anymore, unless it would appear that, in view of
the particular circumstances of a case, the
documents, without more, are really insufficient.
the complaint or position papers, affidavits and
other documents. x x x (Emphasis supplied).
Thus, given the mandate of said rule,
petitioner should have foreseen that the Labor
Arbiter, in view of the non-litigious nature of the
proceedings before it, might not proceed at all to
trial.Petitioner cannot now be heard to complain
of lack of due process. The following is apropos:
The petitioners should not have assumed that
after they submitted their position papers, the
Labor Arbiter would call for a formal trial or
hearing. The holding of a trial is discretionary on
the Labor Arbiter, it is not a matter of right of the
parties, especially in this case, where the private
respondents had already presented their
documentary evidence.
Motion and Manifestation. It should have
presented the documents it was proposing to
submit. The affidavits of its witnesses would
have sufficed in lieu of their direct
testimony[17] to clarify what it perceives to be
complex factual issues. We rule that the Labor
Arbiter and the NLRC were not remiss in their
duty to afford petitioner due process. The
essence of due process is merely that a party be
afforded a reasonable opportunity to be heard
and to submit any evidence he may have in
support of his defense.[18]
WHEREFORE, in view of the foregoing, the
instant petition is hereby DISMISSED for lack of
merit while the resolution of the National Labor
Relations Commission dated August 4, 1995 is
hereby AFFIRMED.
SO ORDERED.

As applied to the instant case, we can xxx Regalado, (Chairman),

understand why the Labor Arbiter has opted not
to proceed to trial, considering that private
respondent, through annexes to his position
paper, has adequately established that, first of
all, he was an employee of petitioner; second, the
nature and character of his services, and finally,
the amounts due him in consideration of his
services.Petitioner, it should be reiterated, failed
to controvert them. Actually, it offered only four
documents later in the course of the
proceedings. It has only itself to blame if it did
not attach its supporting evidence with its
position paper. It cannot now insist that there be
a trial to give it an opportunity to ventilate what
it should have done earlier. Section 3, Rule V of
the New Rules of Procedure of the NLRC is very
clear on the matter:
Section 3. x x x
These verified position papers x x x shall be
accompanied by all supporting documents
including the affidavits of their respective
witnesses which shall take the place of the
latters direct testimony. The parties shall
thereafter not be allowed to allege facts, or
present evidence to prove facts, not referred to
and any cause or causes of action not included in
Puno, and Mendoza, JJ., concur.
The petitioners did ask in their position paper Torres, Jr., J., on leave.
for a hearing to thresh out some factual matters
pertinent to their case. However, they had no
right or reason to assume that their request
would be granted. The petitioners should have
attached to their position paper all the
documents that would prove their claim in case
it was decided that no hearing should be
conducted or was necessary. In fact, the rules
require that position papers shall be
accompanied by all supporting documents,
including affidavits of witnesses in lieu of their
direct testimony.[14]
It must be noted that adequate opportunity
was given to petitioner in the presentation of its
evidence, such as when the Labor Arbiter
granted petitioners Manifestation and
Motion[15] dated July 22, 1994 allowing it to
submit four more documents. This opportunity
notwithstanding, petitioner still failed to fully
proffer all its evidence which might help the
Labor Arbiter in resolving the issues. What it
desired instead, as stated in its petition,[16] was
to require presentation of witnesses buttressed
by relevant documents in support thereof. But
this is precisely the opportunity given to
petitioner when the Labor Arbiter granted its
Republic of the Philippines P128,000.00 to the Office of the
SUPREME COURT Provincial Sheriff (Exh. 23). The
Manila certificate of sale was registered on
October 29, 1974 (Exh. G).
FIRST DIVISION
On November 19, 1974, the board of
directors of PAMBUSCO, through three
G.R. No. 91478 February 7, 1991
(3) out of its five (5) directors, resolved
to assign its right of redemption over
ROSITA PEÑA petitioner, the aforesaid lots and authorized one of
vs. its members, Atty. Joaquin Briones "to
THE COURT OF APPEALS, SPOUSES RISING T.
execute and sign a Deed of Assignment
YAP and CATALINA YAP, PAMPANGA BUS CO., for and in behalf of PAMBUSCO in favor
INC., JESUS DOMINGO, JOAQUIN BRIONES,
of any interested party . . ." (Exh. 24).
SALVADOR BERNARDEZ, MARCELINO Consequently, on March 18, 1975,
ENRIQUEZ and EDGARDO A.
Briones executed a Deed of Assignment
ZABAT, respondents. of PAMBUSCO's redemption right over
the subject lots in favor of Marcelino
Cesar L. Villanueva for petitioner. Enriquez (Exh. 25). The latter then
Martin N. Roque for private respondents. redeemed the said properties and a
certificate of redemption dated August
15, 1975 was issued in his favor by
Sheriff Zabat upon payment of the sum
of one hundred forty thousand, four
hundred seventy four pesos
GANCAYCO, J.: P140,474.00) to the Office of the
Provincial Sheriff of Pampanga (Exh.
The validity of the redemption of a foreclosed 26).
real property is the center of this controversy.
A day after the aforesaid certificate was
The facts as found by the respondent court are issued, Enriquez executed a deed of
not disputed. absolute sale of the subject properties
in favor of plaintiffs-appellants, the
spouses Rising T. Yap and Catalina
A reading of the records shows that
[Pampanga Bus Co.] PAMBUSCO, Lugue, for the sum of P140,000.00
(Exh. F).
original owners of the lots in question
under TCT Nos. 4314, 4315 and 4316,
mortgaged the same to the On August 18, 1975, a levy on
Development Bank of the Philippines attachment in favor of Capitol Allied
(DBP) on January 3, 1962 in Trading was entered as an additional
consideration of the amount of encumbrance on TCT Nos. 4314, 4315
P935,000.00. This mortgage was and 4316 and a Notice of a
foreclosed. In the foreclosure sale pending consulta was also annotated on
under Act No. 3135 held on October 25, the same titles concerning the Allied
1974, the said properties were Trading case entitled Dante Gutierrez,
awarded to Rosita Peña as highest et al. vs. PAMBUSCO(Civil Case No.
bidder. A certificate of sale was issued 4310) in which the registrability of the
in her favor by the Senior Deputy aforesaid lots in the name of the
Sheriff of Pampanga, Edgardo A. Zabat, spouses Yap was sought to be resolved
upon payment of the sum of (Exh. 20-F). The certificate of sale
issued by the Sheriff in favor of
defendant Peña, the resolution of the
PAMBUSCO's board of directors
assigning its redemption rights to any
interested party, the deed of
assignment PAMBUSCO executed in
favor of Marcelino B. Enriquez, the
certificate of redemption issued by the
Sheriff in favor of Enriquez as well as
the deed of absolute sale of the subject
lots executed by Enriquez in favor of
the plaintiffs-appellants were all
annotated on the same certificates of
title likewise on August 18, 1975. Also,
on the same date, the Office of the
Provincial Sheriff of San Fernando,
Pampanga informed defendant-
appellee by registered mail "that the
properties under TCT Nos. 4314, 4315
and 4316 . . . . were all redeemed by Mr.
Marcelino B. Enriquez on August
15,1975 . . . ;" and that she may now get
her money at the Sheriffs Office (Exh. J
and J-1).
On September 8, 1975, Peña wrote the
Sheriff notifying him that the
redemption was not valid as it was
made under a void deed of assignment.
She then requested the recall of the
said redemption and a restraint on any
registration or transaction regarding
the lots in question (Exh. 27).
On Sept. 10, 1975, the CFI Branch III,
Pampanga in the aforementioned Civil
Case No. 4310, entitledDante Gutierrez,
et al. vs. PAMBUSCO, et al., ordered the
Register of Deeds of Pampanga . . . to
desist from registering or noting in his
registry of property . . . any of the
following documents under contract,
until further orders:
(a) Deed of Assignment dated March
18, 1975 executed by the defendant
Pampanga Bus Company in virtue of a
resolution of its Board of Directors in
favor of defendant Marcelino Enriquez;
(b) A Certificate of Redemption issued
by defendant Deputy Sheriff Edgardo
Zabat in favor of defendant Marcelino
Enriquez dated August 15, 1975;
(c) Deed of Sale dated August 16, 1975
executed by defendant Marcelino
Enriquez in favor of defendant Rising
Yap. (Original Record, p. 244)
On November 17, 1975, the Land
Registration Commission opined under
LRC Resolution No. 1029 that "the levy
on attachment in favor of Capitol Allied
Trading (represented by Dante
Gutierrez) should be carried over on
the new title that would be issued in
the name of Rising Yap in the event that
he is able to present the owner's
duplicates of the certificates of title
herein involved" (Exh. G).
Meanwhile, defendant Peña, through
counsel, wrote the Sheriff asking for the
execution of a deed of final sale in her
favor on the ground that "the one (1)
year period of redemption has long
elapsed without any valid redemption
having been exercised;" hence she "will
now refuse to receive the redemption
money . . . (Exh. 28).
On Dec. 30, 1977, plaintiff Yap wrote
defendant Peña asking payment of back
rentals in the amount of P42,750.00
"for the use and occupancy of the land
and house located at Sta. Lucia, San
Fernando, Pampanga," and informing
her of an increase in monthly rental to
P2,000; otherwise, to vacate the
premises or face an
eviction cum collection suit (Exh. D).
In the meantime, the subject lots,
formerly under TCT Nos. 4314, 4315
and 4316 were registered on June 16,
1978 in the name of the spouses Yap
under TCT Nos. 148983-R, 148984-R
and 148985-R, with an annotation of a
 levy on attachment in favor of Capitol
Allied Trading. The LRC Resolution No.
1029 allowing the conditioned
registration of the subject lots in the
name of the spouses Yap was also
annotated on TCT No. 4315 on June 16,
1978 and the notice of a pending
consulta noted thereon on August 18,
1975 was cancelled on the same date.
No Trial on the merits was held
concerning Civil Case No. 4310. In an
order dated February 17, 1983, the
case was dismissed without prejudice.
Despite the foregoing, defendant-
appellee Peña remained in possession
of the lots in question hence, the
spouses Yap were prompted to file the
instant case.1
The antecedents of the present petition are as
follows:
Plaintiffs-appellants, the spouses Rising
T. Yap and Catalina Lugue, are the
registered owners of the lots in
question under Transfer Certificate of
Title (TCT) Nos. 148983-R, 148984-R,
148985-R. In the complaint filed on
December 15, 1978, appellants sought
to recover possession over the subject
lands from defendants Rosita Peña and
Washington Distillery on the ground
that being registered owners, they have
to enforce their right to possession
against defendants who have been
allegedly in unlawful possession
thereof since October 1974 "when the
previous owners assigned (their) right
to collect rentals . . . in favor of
plaintiffs" (Record, p. 5). The amount
claimed as damages is pegged on the
total amount of unpaid rentals from
October 1974 (as taken from the
allegations in the complaint) up to
December 1978 at a monthly rate of
P1,500.00 'and the further sum of
P2,000.00 a month from January 1979
until the defendants finally vacate the . .
. premises in question with interest at
the legal rate (Record, p. 61).
In their answer, defendants Rosita Peña
and Washington Distillery denied the
material allegations of the complaint
and by way of an affirmative and
special defense asserted that Peña is
now the legitimate owner of the subject
lands for having purchased the same in
a foreclosure proceeding instituted by
the DBP . . . against PAMBUSCO . . . and
no valid redemption having been
effected within the period provided by
law. It was contended that plaintiffs
could not have acquired ownership
over the subject properties under a
deed of absolute sale executed in their
favor by one Marcelino B. Enriquez
who likewise could not have become
[the] owner of the properties in
question by redeeming the same on
August 18, 1975 (Exh. 26) under an
alleged[ly] void deed of assignment
executed in his favor on March 18,
1975 by the original owners of the land
in question, the PAMBUSCO. The
defense was that since the deed of
assignment executed by PAMBUSCO in
favor of Enriquez was void ab initio for
being an ultra vires act of its board of
directors and, for being without any
valuable consideration, it could not
have had any legal effect; hence, all the
acts which flowed from it and all the
rights and obligations which derived
from the aforesaid void deed are
likewise void and without any legal
effect.
Further, it was alleged in the same
Answer that plaintiffs are buyers in bad
faith because they have caused the
titles of the subject properties with the
Register of Deeds to be issued in their
names despite an order from the then
CFI, Br. III, Pampanga in Civil Case No.
4310, entitled Dante Gutierrez, et al. vs.
Pampanga Bus Company, Inc., et al., to
desist from registering or noting in his
registry of property . . . any of the
above-mentioned documents under
contest, until further orders. (Record, p.
11).
For its part, defendant Washington
Distillery stated that it has never
occupied the subject lots hence they
should not have been impleaded in the
complaint.
The defendants, therefore, prayed that
the complaint be dismissed; that the
deed of assignment executed in favor of
Marcelino Enriquez, the certificate of
redemption issued by the Provincial
Sheriff also in favor of Marcelino
Enriquez, and the deed of sale of these
parcels of land executed by Marcelino
Enriquez in favor of the plaintiffs
herein be all declared null and void;
and further, that TCT Nos. 148983-R,
148984-R and 148985-R, covering
these parcels issued in the plaintiffs
name be cancelled and, in lieu thereof,
corresponding certificates of title over
these same parcels be issued in the
name of defendant Rosita Peña.
Thereafter, the defendants with prior
leave of court filed a third-party
complaint third-party defendants
PAMBUSCO, Jesus Domingo, Joaquin
Briones, Salvador Bernardez (as
members of the Board of Directors of
PAMBUSCO), Marcelino Enriquez, and
Deputy Sheriff Edgardo Zabat of
Pampanga. All these third-party
defendants, how ever, were declared as
in default for failure to file their
answer, except Edgardo Zabat who did
file his answer but failed to appear at
the pre-trial.
After trial, a decision was rendered by
the court in favor of the defendants-
appellees, to wit:
WHEREFORE, and in view of
all the foregoing, judgment is
hereby rendered dismissing
the complaint filed by the
plaintiffs against the
defendants and declaring as
null and void the following:
(a) The resolution of the
Board of Directors of
PAMBUSCO approved on
November 19, 1974 assigning
the PAMBUSCO's right of
redemption concerning the
parcels involved herein
(b) The deed of assignment
dated March 18, 1975
executed in favor of Marcelino
Enriquez pursuant to the
resolution referred to in the
preceding paragraph;
(c) The certificate of
redemption dated August 15,
1975 issued by Deputy Sheriff
Edgardo Zabat in favor of
Marcelino Enriquez
concerning these parcels;
(d) The deed of absolute sale
dated August 15, 1975
executed by Marcelino
Enriquez in favor of the
plaintiffs concerning the same
parcels and
(e) TCT Nos. 148983-R,
148984-R and 148985-R of
the Register of Deeds of
Pampanga in the name of the
plaintiffs also covering these
parcels.
Third-party defendant
Edgardo Zabat, in his capacity
as Deputy Sheriff of
Pampanga is directed to
execute in favor of defendant
 Rosita Peña the
corresponding certificate of
final sale involving the parcels
bought by her in the auction
sale of October 25, 1974 for
which a certificate of sale had
been issued to her.
Finally, the third-party
defendants herein except
Deputy Sheriff Edgardo Zabat
are hereby ordered to pay the
defendants/third party
plaintiffs, jointly and
severally, the amount of
P10,000.00 as attorney's fees
plus costs.2
Thus, an appeal from said judgment of the trial
court was interposed by private respondents to
the Court of Appeals wherein in due course a
decision was rendered on June 20, 1989, the
dispositive part of which reads as follows:
WHEREFORE, premises considered, the
judgment of the trial court on appeal is
REVERSED. Defendant-appellee Peña is
hereby ordered to vacate the lands in
question and pay the plaintiffs-
appellants the accrued rentals from
October, 1974 in the amount of
P1,500.00 per month up to December,
1978 and the amount of P2,000.00 per
month thereafter, until appellee finally
vacate (sic) the premises with interest
at the legal rate.
SO ORDERED.3
A motion for reconsideration filed by the
appellee was denied in a resolution dated
December 27, 1989.
Hence, this petition for review on certiorari of
said decision and resolution of the appellate
court predicated on the following assigned
errors:
First Assignment of Error ASSIGNMENT, DATED 8 MARCH 1975, In Union Glass & Container Corporation vs.
WAS VOID AB INITIO FOR FAILING TO Securities and Exchange Commission,6 this Court
THE RESPONDENT COURT OF COMPLY WITH THE FORMALITIES defined the relationships which are covered
APPEALS ERRED IN HOLDING THAT MANDATORILY REQUIRED UNDER within "intra-corporate disputes" under
THE TRIAL COURT HAD NO THE LAW FOR DONATIONS. Presidential Decree No. 902-A, as amended, as
JURISDICTION TO RULE ON THE follows:
VALIDITY OF THE QUESTIONED Sixth Assignment of Error
RESOLUTION AND TRANSFERS. Otherwise stated, in order that the SEC
THE RESPONDENT COURT OF can take cognizance of a case, the
Second Assignment of Error APPEALS ERRED IN HOLDING THAT controversy must pertain to any of the
RESPONDENTS YAP ARE PURCHASERS following relationships (a) between the
IN GOOD FAITH AND IN FURTHER corporation, partnership or association
THE RESPONDENT COURT OF and the public; (b) between the
APPEALS ERRED IN HOLDING THAT HOLDING THAT IT WAS TOO LATE FOR
PETITIONER TO INTERPOSE THE corporation, partnership or association
PETITIONER HAS NO LEGAL and its stockholders, partners,
STANDING TO ASSAIL THE VALIDITY ISSUE THAT RESPONDENTS YAP WERE
PURCHASERS IN BAD FAITH. members, or officers; (c) between the
OF THE QUESTIONED RESOLUTION corporation, partnership or association
AND THE SERIES OF SUCCEEDING and the state in so far as its franchise,
TRANSACTIONS LEADING TO THE Seventh Assignment of Error permit or license to operate is
REGISTRATION OF THE SUBJECT
concerned; and (d) among the
PROPERTIES IN FAVOR OF THE THE RESPONDENT COURT OF stockholders, partners or associates
RESPONDENTS YAP.
APPEALS ERRED IN REVERSING THE themselves.
DECISION OF THE TRIAL COURT.4
Third Assignment of Error In this case, neither petitioner nor respondents
The petition is impressed with merit. Yap spouses are stockholders or officers of
THE RESPONDENT COURT OF PAMBUSCO. Consequently, the issue of the
APPEALS ERRED IN HOLDING THAT First, the preliminary issues. validity of the series of transactions resulting in
THE RESOLUTION OF RESPONDENT the subject properties being registered in the
PAMBUSCO, ADOPTED ON 19 names of respondents Yap may be resolved only
NOVEMBER 1974, ASSIGNING ITS The respondent court ruled that the trial court by the regular courts.
has no jurisdiction to annul the board resolution
RIGHT OF REDEMPTION IS NOT VOID
OR AT THE VERY LEAST LEGALLY as the matter falls within the jurisdiction of the
Securities and Exchange Commission (SEC) and Respondent court held that petitioner being a
DEFECTIVE. stranger to the questioned resolution and series
that petitioner did not have the proper standing
to have the same declared null and void. of succeeding transactions has no legal standing
Fourth Assignment of Error to question their validity.
In Philex Mining Corporation vs. Reyes,5
THE RESPONDENT COURT OF In Teves vs. People's Homesite and Housing
APPEALS ERRED IN HOLDING THAT Corporation,7 this Court held:
THE DEED OF ASSIGNMENT, DATED 8 this Court held that it is the fact of relationship
MARCH 1975, IN FAVOR OF between the parties that determines the proper
and exclusive jurisdiction of the SEC to hear and We note however, in reading the
RESPONDENT ENRIQUEZ IS NOT VOID complaint that the plaintiff is seeking
OR AT THE VERY LEAST VOIDABLE OR decide intra-corporate disputes; that unless the
controversy has arisen between and among the declaration of the nullity of the
RESCISSIBLE. deed of sale, not as a party in the deed,
stockholders of the corporation, or between the
stockholders and the officers of the corporation, or because she is obliged principally or
Fifth Assignment of Error then the case is not within the jurisdiction of the subsidiarily under the deed, but
SEC. Where the issue involves a party who is because she has an interest that is
THE RESPONDENT COURT OF neither a stockholder or officer of the affected by the deed. This Court has held
APPEALS ERRED IN NOT HOLDING corporation, the same is not within the that a person who is not a party obliged
THAT THE QUESTIONED DEED OF jurisdiction of the SEC. principally or subsidiarily in a contract
 may exercise an action for nullity of the
contract if he is prejudiced in his rights
with respect to one of the contracting
parties, and can show the detriment
which would positively result to him
from the contract in which he had no
intervention, Indeed, in the case now
before Us, the complaint alleges facts
which show that plaintiff suffered
detriment as a result of the deed of sale
entered into by and between defendant
PHHC and defendant Melisenda L.
Santos. We believe that the plaintiff
should be given a chance to present
evidence to establish that she suffered
detriment and that she is entitled to
relief. (Emphasis supplied.)
There can be no question in this case that the
questioned resolution and series of transactions
resulting in the registration of the properties in
the name of respondent Yap spouses adversely
affected the rights of petitioner to the said
properties. Consequently, petitioner has the legal
standing to question the validity of said
resolution and transactions.
As to the question of validity of the board
resolution of respondent PAMBUSCO adopted on
November 19, 1974, Section 4, Article III of the
amended by-laws of respondent PAMBUSCO,
provides as follows:
Sec. 4. Notices of regular and special
meetings of the Board of Directors shall
be mailed to each Director not less than
five days before any such meeting, and
notices of special meeting shall state
the purpose or purposes thereof
Notices of regular meetings shall be
sent by the Secretary and notices of
special meetings by the President or
Directors issuing the call. No failure or
irregularity of notice of meeting shall
invalidate any regular meeting or
proceeding thereat; Provided a quorum
of the Board is present, nor of any
special meeting; Provided at least four
Directors are present. (Emphasis
supplied.)8
The trial court in finding the resolution void held
as follows:
On the other hand, this Court finds
merit in the position taken by the
defendants that the questioned
resolution should be declared invalid it
having been approved in a meeting
attended by only 3 of the 5 members of
the Board of Directors of PAMBUSCO
which attendance is short of the
number required by the by-laws of the
corporation.
xxx xxx xxx
In the meeting of November 19, 1974
when the questioned resolution was
approved, the three members of the
Board of Directors of PAMBUSCO who
were present were Jesus Domingo,
Joaquin Briones, and Salvador
Bernardez The remaining 2 others,
namely: Judge Pio Marcos and Alfredo
Mamuyac were both absent therefrom.
As it becomes clear that the resolution
approved on November 19, 1974 is null
and void it having been approved by
only 3 of the members of the Board of
Directors who were the only ones
present at the said meeting, the deed of
assignment subsequently executed in
favor of Marcelino Enriquez pursuant
to this resolution also becomes null and
void. . . .9
However, the respondent court overturning said
legal conclusions of the trial court made the
following disquisition:
It should be noted that the provision in
Section 4, Article III of PAMBUSCO's
amended by-laws would apply only in
case of a failure to notify the members
of the board of directors on the holding
of a special meeting, . . . .
In the instant case, however, there was
no proof whatsoever, either by way of
documentary or testimonial evidence,
that there was such a failure or
irregularity of notice as to make the
aforecited provision apply. There was
not even such an allegation in the
Answer that should have necessitated a
proof thereof. The fact alone that only
three (3) out of five (5) members of the
board of directors attended the subject
special meeting, was not enough to
declare the aforesaid proceeding
void ab initio, much less the board
resolution borne out of it, when there
was no proof of irregularity nor failure
of notice and when the defense made in
the Answer did not touch upon the said
failure of attendance. Therefore, the
judgment declaring the nullity of the
subject board resolution must be set
aside for lack of proof.
Moreover, there is no categorical
declaration in the by-laws that a failure
to comply with the attendance
requirement in a special meeting
should make all the acts of the board
therein null and void ab initio. A
cursory reading of the subject
provision, as aforequoted, would show
that its framers only intended to make
voidable a board meeting held without
the necessary compliance with the
attendance requirement in the by-laws.
Just the use of the word "invalidate"
already denotes a legal imputation of
validity to the questioned board
meeting absent its invalidation in the
proceedings prescribed by the
corporation's by-laws and/or the
general incorporation law. More
significantly, it should be noted that
even if the subject special meeting is
itself declared void, it does not follow
that the acts of the board therein
are ipso factovoid and without any legal
effect. Without the declaration of
nullity of the subject board
proceedings, its validity should be
maintained and the acts borne out of it
should be presumed valid. Considering
that the subject special board meeting
has not been declared void in a proper
proceeding, nor even in the trial by the
court below, there is no reason why the
acts of the board in the said special
meeting should be treated as void AB.
initio. . . .10
The Court disagrees.
The by-laws of a corporation are its own private
laws which substantially have the same effect as
the laws of the corporation. They are in effect,
written, into the charter. In this sense they
become part of the fundamental law of the
corporation with which the corporation and its
directors and officers must comply.11
Apparently, only three (3) out of five (5)
members of the board of directors of respondent
PAMBUSCO convened on November 19, 1974 by
virtue of a prior notice of a special meeting.
There was no quorum to validly transact
business since, under Section 4 of the amended
by-laws hereinabove reproduced, at least four
(4) members must be present to constitute a
quorum in a special meeting of the board of
directors of respondent PAMBUSCO.
Under Section 25 of the Corporation Code of the
Philippines, the articles of incorporation or by-
laws of the corporation may fix a greater number
than the majority of the number of board
members to constitute the quorum necessary for
the valid transaction of business. Any number
less than the number provided in the articles or
by-laws therein cannot constitute a quorum and
any act therein would not bind the corporation;
all that the attending directors could do is to
adjourn.12
Moreover, the records show that respondent
PAMBUSCO ceased to operate as of November
15, 1949 as evidenced by a letter of the SEC to
said corporation dated April 17, 1980.13 Being a
dormant corporation for several years, it was
highly irregular, if not anomalous, for a group of
three (3) individuals representing themselves to
be the directors of respondent PAMBUSCO to
pass a resolution disposing of the only remaining
asset of the corporation in favor of a former
corporate officer.
As a matter of fact, the three (3) alleged directors
who attended the special meeting on November
19, 1974 were not listed as directors of
respondent PAMBUSCO in the latest general
information sheet of respondent PAMBUSCO
filed with the SEC dated 18 March
1951.14 Similarly, the latest list of stockholders of
respondent PAMBUSCO on file with the SEC does
not show that the said alleged directors were
among the stockholders of respondent
PAMBUSCO.15
Under Section 30 of the then applicable
Corporation Law, only persons who own at least
one (1) share in their own right may qualify to be
directors of a corporation. Further, under
Section 28 1/2 of the said law, the sale or
disposition of an and/or substantially all
properties of the corporation requires, in
addition to a proper board resolution, the
affirmative votes of the stockholders holding at
least two-thirds (2/3) of the voting power in the
corporation in a meeting duly called for that
purpose. No doubt, the questioned resolution
was not confirmed at a subsequent stockholders
meeting duly called for the purpose by the
affirmative votes of the stockholders holding at
least two-thirds (2/3) of the voting power in the
corporation. The same requirement is found in
Section 40 of the present Corporation Code.
It is also undisputed that at the time of the
passage of the questioned resolution, respondent
PAMBUSCO was insolvent and its only remaining
asset was its right of redemption over the subject
properties. Since the disposition of said
redemption right of respondent PAMBUSCO by
virtue of the questioned resolution was not
approved by the required number of
stockholders under the law, the said resolution,
as well as the subsequent assignment executed
on March 8, 1975 assigning to respondent
Enriquez the said right of redemption, should be
struck down as null and void.
Respondent court, in upholding the questioned
deed of assignment, which appears to be without
any consideration at all, held that the
consideration thereof is the liberality of the
respondent PAMBUSCO in favor of its former
corporate officer, respondent Enriquez, for
services rendered. Assuming this to be so, then
as correctly argued by petitioner, it is not just an
ordinary deed of assignment, but is in fact a
donation. Under Article 725 of the Civil Code, in
order to be valid, such a donation must be made
in a public document and the acceptance must be
made in the same or in a separate instrument. In
the latter case, the donor shall be notified of the
acceptance in an authentic form and such step
must be noted in both instruments.16
Non-compliance with this requirement renders
the donation null and
void.17 Since undeniably the deed of assignment
dated March 8, 1975 in question,18 shows that
there was no acceptance of the donation in the
same and in a separate document, the said deed
of assignment is thus voidab initio and of no
force and effect.
WHEREFORE, the petition is GRANTED. The
questioned decision of the respondent Court of
Appeals dated June 20, 1989 and its resolution
dated December 27, 1989 are hereby REVERSED
AND SET ASIDE and another judgment is hereby
rendered AFFIRMING in toto the decision of the
trial court.
SO ORDERED.
Narvasa, Cruz, Griño-Aquino and Medialdea, JJ.,
concur.
FIRST DIVISION
[G.R. No. 101699. March 13, 1996]
BENJAMIN A. SANTOS, petitioner,
vs. NATIONAL LABOR RELATIONS
COMMISSION, HON. LABOR ARBITER
FRUCTUOSO T. AURELLANO and
MELVIN D. MILLENA, respondents.
DECISION
VITUG, J.:
In a petition for certiorari under Rule 65 of
the Rules of Court, petitioner Benjamin A. Santos,
former President of the Mana Mining and
Development Corporation (MMDC), questions
the resolution of the National Labor Relations
Commission (NLRC) affirming the decision of the
Labor Arbiter Fructouso T. Aurellano who,
having held illegal the termination of
employment of private respondent Melvin D.
Millena, has ordered petitioner MMDC, as well as
its president (herein petitioner) and the
executive vice-president in their personal
capacities, to pay Millena his monetary claims.
Private respondent, on 01
October 1985, was hired to be the project
accountant for MMDCs mining operations in
Gatbo, Bacon, Sorsogon. On 12 August 1986,
private respondent sent to Mr. Gil Abao, the
MMDC corporate treasurer, a memorandum
calling the latters attention to the failure of the
company to comply with the withholding tax
requirements of, and to make the corresponding
monthly remittances to, the Bureau of Internal
Revenue (BIR) on account of delayed payments
of accrued salaries to the companys laborers and
employees.[1]
In a letter, dated 08 September 1986,
Abano advised private respondent thusly:
Regarding Gatbo operations, as you also are
aware, the rainy season is now upon us and the
peace and order condition in Sorsogon has
deteriorated. It is therefore, the boards decision
that it would be useless for us to continue
operations, especially if we will always be in the
hole, so to speak. Our first funds receipts will be
used to pay all our debts. We will stop
production until the advent of the dry season,
and until the insurgency problem clears. We will
undertake only necessary maintenance and
repair work and will keep our overhead down to
the minimum manageable level. Until we resume
full-scale operations, we will not need a project
accountant as there will be very little paper work
at the site, which can be easily handled at Makati.
We appreciate the work you have done for Mana
and we will not hesitate to take you back when
we resume work at Gatbo. However it would be
unfair to you if we kept you in the payroll and
deprive you of the opportunity to earn more,
during this period of Manas crisis.[2]
Private respondent expressed shock over
the termination of his employment. He
complained that he would not have resigned
from the Sycip, Gorres & Velayo accounting firm,
where he was already a senior staff auditor, had
it not been for the assurance of a continuos job
by MMDCs Engr. Rodillano E. Velasquez. Private
respondent requested that he be reimbursed the
advances he had made for the company and be
paid his accrued salaries/claims.[3]
The claim was not heeded; on 20 October
1986, private respondent filed with the NLRC
Regional Arbitration, Branch No. V, in Legazpi
City, a complaint for illegal dismissal, unpaid
salaries, 13th month pay, overtime pay,
separation pay and incentive leave pay against
MMDC and its two top officials, namely, herein
petitioner Benjamin A. Santos (the President)
and Rodillano A. Velasquez (the executive vice-
president). In his complaint-affidavit (position
paper), submitted on 27 October 1986, Millena
alleged, among other things, that his dismissal
was merely an offshoot of his letter of 12 August
1986 to Abao about the companys inability to
pay its workers and to remit withholding taxes
to the BIR.[4]
A copy of the notice and summons was
served on therein respondent
(MMDC, Santos and Velasquez) on 29 October
1986.[5] At the initial hearing on 14 November
1986 before the Labor Arbiter, only the
complaint, Millena, appeared; however, Atty.
Romeo Perez, in representation of the
respondents, requested by telegram that the
hearing be reset to 01 December 1986. Although
the request was granted by the Labor Arbiter,
private respondent was allowed, nevertheless, to
present his evidence ex-parte at that initial
hearing.
The scheduled 01st December
1986 hearing was itself later reset to 19
December 1986. On05 December 1986, the NLRC
in Legazpi City again received a telegram from
Atty. Perez asking for fifteen (15) days within
which to submit the respondents position paper.
On 19 December 1986, Atty. Perez sent yet
another telegram seeking a further
postponement of the hearing and asking for a
period until 15 January 1987 within which to
submit the position paper.
On 15 January 1987, Atty. Perez advised
the NLRC in Legazpi City that the position paper
had finally been transmitted through the mail
and that he was submitting the case for
resolution without further hearing. The position
paper was received by the Legazpi City NLRC
office on 19 January 1987. Complainant Millena
filed, on 26 February 1987, his rejoinder to the
position paper.
On 27 July 1988, Labor Arbiter Fructouso
T. Aurellano, finding no valid cause for
terminating complainants employment, ruled,
citing this Courts pronouncement in Construction
& Development Corporation of the Philippines vs.
Leogardo, Jr.[6] that a partial closure of an
establishment due to losses was a retrenchment
measure that rendered the employer liable for
unpaid salaries and other monetary claims. The
Labor Arbiter adjudged:
WHEREFORE, the respondents are hereby
ordered to pay the petitioner the amount of
P37,132.25 corresponding to the latters unpaid
salaries and advances: P5,400.00 for petitioners
13th month pay; P3,340.95 as service incentive
leave pay; and P5,400.00 as separation pay. The
respondents are further ordered to pay the
petitioner 10% of the monetary awards as
attorneys fees.
All other claims are dismissed for lack of
sufficient evidence.
SO ORDERED.[7]
Alleging abuse of discretion by the Labor
Arbiter, the company and its co-respondents
filed a motion for reconsideration and/or
appeal.[8] The motion/ appeal was forthwith
indorsed to the Executive Director of the NLRC
in Manila.
In a resolution, dated 04 September 1989,
the NLRC[9] affirmed the decision of the Labor
Arbiter. It held that the reasons relied upon by
MMDC and its co-respondents in the dismissal of
Millena, i.e., the rainy season, deteriorating peace
and order situation and little paperwork, were
not causes mentioned under Article 282 of the
Labor Code of the Philippines and that Millena,
being a regular employee, was shielded by the
tenurial clause mandated under the law.[10]
A writ of execution correspondingly issued;
however, it was returned unsatisfied for the
failure of the sheriff to locate the offices of the
corporation in the address indicated. Another
writ of execution and an order of garnishment
was thereupon served on petitioner at his
residence.
Contending that he had been denied due
process, petitioner filed a motion for
reconsideration of the NLRC s resolution along
with a prayer for the quashal of the writ of
execution and order of garnishment. He averred
that he had never received any notice, summons
or even a copy of the complaint; hence, he said,
the Labor Arbiter at no time had acquired
jurisdiction over him.
On 16 August 1991, the NLRC[11] dismissed
the motion for reconsideration. Citing Section 2,
Rule 13,[12] and Section 13, Rule 14,[13] of the
Rules of Court, it ruled that the Regional
Arbitration office had not, in fact, been remiss in
the observance of the legal processes for
acquiring jurisdiction over the case and over the
persons of the respondents therein. The NLRC
was also convinced that Atty. Perez had been the
authorized counsel of MMDC and its two most
ranking officers.
In holding petitioner personally liable for
private respondents claim, the NLRC cited Article
289[14] of the Labor Code and the ruling in A.C.
Ransom Labor Union-CCLU vs. NLRC[15] to the
effect that (t)he responsible officer of an
employer corporation (could) be held personally,
not to say even criminally, liable for non-
payment of backwages, and that of Gudez vs.
NLRC[16] which amplified that where the
employer corporation (was) no longer existing
and unable to satisfy the judgment in favor of the
employee, the officer should be liable for acting
on behalf of the corporation.
In the instant petition
for certiorari, petitioner Santos reiterates that he
should not have been adjudged personally liable
by public respondents, the latter not having
validly acquired jurisdiction over his person
whether by personal service of summons or by
substituted service under Rule 19 of the Rules of
Court.
Petitioner s contention is unacceptable.
The fact that Atty. Romeo B. Perez has been able
to timely ask for a deferment of
the initial hearing on 14 November 1986,
coupled with his subsequent active participation
in the proceedings, should disprove the
supposed want of service of legal process.
Although as a rule, modes of service of summons
are strictly followed in order that the court may
acquire jurisdiction over the person of a
defendant,[17] such procedural modes, however,
are liberally construed in quasi-judicial
proceedings, substantial compliance with the
same being considered adequate.[18] Moreover,
jurisdiction over the person of the defendant in
civil cases is acquired not only by service of
summons but also by voluntary appearance in
court and submission to its
authority.[19] Appearance by a legal advocate is
such voluntary submission to a courts
jurisdiction.[20] It may be made not only by actual
physical appearance but likewise by the
submission of pleadings in compliance with the
order of the court or tribunal.
To say that petitioner did not authorize
Atty. Perez to represent him in the case[21] is to
unduly tax credulity. Like the Solicitor General,
the Court likewise considers it unlikely that Atty.
Perez would have been so irresponsible as to
represent petitioner if he were not, in fact,
authorized.[22]Atty. Perez is an officer of the
court, and he must be presumed to have acted
with due propriety. The employment of a counsel
or the authority to employ an attorney, it might
be pointed out, need not be proved in writing;
such fact could inferred from circumstantial
evidence.[23] Petitioner was not just an ordinary
official of the MMDC; he was the President of the
company.
Petitioner, in any event, argues that public
respondents have gravely abused their
discretion in finding petitioner solidarily liable
with MMDC even (in) the absence of bad faith
and malice on his part.[24] There is merit in this
plea.
A corporation is a juridical entity with legal
personality separate and distinct from those
acting for and in its behalf and, in general, from
the people comprising it. The rule is that
obligations incurred by the corporation, acting
through its directors, officers and employees, are
its sole liabilities. Nevertheless, being a mere
fiction of law, peculiar situations or valid
grounds can exist to warrant, albeit done
sparingly, the disregard of its independent being
and the lifting of the corporate veil.[25] As a rule,
this situation might arise when a corporation is
used to evade a just and due obligation or to
justify a wrong,[26] to shield or perpetrate
fraud,[27] to carry out similar other unjustifiable
aims or intentions, or as a subterfuge to commit
injustice and so circumvent the law.[28] In Tramat
Mercantile, Inc., vs. Court of Appeals,[29] the Court
has collated the settled instances when, without
necessarily piercing the veil of corporate fiction,
personal civil liability can also be said to lawfully
attach to a corporate director, trustee or officer;
to wit: When
(1) He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
(2) He consents to the issuance of watered
stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary
his written objection thereto;
(3) He agrees to hold himself personally and
solidarily liable with the corporation; or
(4) He is made, by a specific provision of law, to
personally answer for his corporate action.
The case of petitioner is way off these
exceptional instances. It is not even shown that
petitioner has had a direct hand in the dismissal
of private respondent enough to attribute to him
(petitioner) a patently unlawful act while acting
for the corporation. Neither can Article 289[30] of
the Labor Code be applied since this law
specifically refers only to the imposition
of penalties under the Code. It is undisputed that
the termination of petitioners employment has,
instead, been due, collectively, to the need for a
further mitigation of losses, the onset of the
rainy season, the insurgency problem in
Sorsogon and the lack of funds to further support
the mining operation in Gatbo.
It is true, there were various cases when
corporate officers were themselves held by the
Court to be personally accountable for the
payment of wages and money claims to its
employees. In A.C. Ransom Labor Union-CCLU vs.
NLRC,[31] for instance, the Court ruled that under
the Minimum Wage Law, the responsible officer
of an employer corporation could be held
personally liable for nonpayment of backwages
for (i)f the policy of the law were otherwise, the
corporation employer (would) have devious
ways for evading payment of backwages. In the
absence of a clear identification of the officer
directly responsible for failure to pay the
backwages, the Court considered the President
of the corporation as such officer. The case was
cited in Chua vs. NLRC[32] in holding personally
liable the vice-president of the company, being
the highest and most ranking official of the
corporation next to the President who was
dismissed for the latters claim for unpaid wages.
A review of the above exceptional cases
would readily disclose the attendance of facts
and circumstances that could rightly sanction
personal liability on the part of the company
officer. InA.C. Ransom, the corporate entity was a
family corporation and execution against it could
not be implemented because of the disposition
posthaste of its leviable assets evidently in order
to evade its just and due obligations. The
doctrine of piercing the veil of corporate fiction
was thus clearly appropriate. Chua likewise
involved another family corporation, and this
time the conflict was between two brothers
occupying the highest ranking positions in the
company. There were incontrovertible facts
which pointed to extreme personal animosity
that resulted, evidently in bad faith, in the easing
out from the company of one of the brothers by
the other.
The basic rule is still that which can be
deduced from the Courts pronouncement
in Sunio vs. National Labor Relations
Commission;[33] thus:
We come now to the personal liability of
petitioner, Sunio, who was made jointly and
severally responsible with petitioner company
and CIPI for the payment of the backwages of
private respondents. This is reversible error. The
Assistant Regional Directors Decision failed to
disclose the reason why he was made personally
liable. Respondents, however, alleged as grounds
thereof, his being the owner of one-half ()
interest of said corporation, and his alleged
arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint
in his capacity as General Manager of petitioner
corporation. There appears to be no evidence on
record that he acted maliciously or in bad faith in
terminating the services of private respondents.
His act, therefore, was within the scope of his
authority and was a corporate act.
It is basic that a corporation is invested by law
with a personality separate and distinct from
those of the persons composing it as well as from
that of any other legal entity to which it may be
related. Mere ownership by a single stockholder
or by another corporation of all or nearly all of
the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate
corporate personality. Petitioner Sunio,
therefore, should not have been made personally
answerable for the payment of private
respondents back salaries.

The Court, to be sure, did appear to have

deviated somewhat in Gudez
vs. NLRC;[34]however, it should be clear from our
recent pronouncement in Mam Realty
Development Corporation and Manuel Centeno vs.
NLRC[35] that the Sunio doctrine still prevails.
WHEREFORE, the instant petition for
certiorari is given DUE COURSE and the decision
of the Labor Arbiter, affirmed by the NLRC, is
hereby MODIFIED insofar as it holds herein
petitioner Benjamin Santos personally liable
with Mana Mining and Development
Corporation, which portion of the questioned
judgment is now SET ASIDE. In all other respects,
the questioned decision remains unaffected. No
costs.
SO ORDERED.
Padilla (Chairman), Bellosillo,
Kapunan, and Hermosisima, Jr., JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18216 October 30, 1962
STOCKHOLDERS OF F. GUANZON AND SONS,
INC., petitioners-appellants,
vs.
REGISTER OF DEEDS OF MANILA, respondent-
appellee.
Ramon C. Fernando for petitioners-appellants.
Office of the Solicitor General for respondent-
appellee.
BAUTISTA ANGELO, J.:
On September 19, 1960, the five stockholders of
the F. Guanzon and Sons, Inc. executed a
certificate of liquidation of the assets of the
corporation reciting, among other things, that by
virtue of a resolution of the stockholders
adopted on September 17, 1960, dissolving the
corporation, they have distributed among
themselves in proportion to their shareholdings,
as liquidating dividends, the assets of said
corporation, including real properties located in
Manila.
The certificate of liquidation, when presented to
the Register of Deeds of Manila, was denied
registration on seven grounds, of which the
following were disputed by the stockholders:
3. The number of parcels not certified
to in the acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need
be attached to the document;
7. The judgment of the Court approving
the dissolution and directing the
disposition of the assets of the
corporation need be presented (Rules
of Court, Rule 104, Sec. 3).
Deciding the consulta elevated by the
stockholders, the Commissioner of Land
Registration overruled ground No. 7 and
sustained requirements Nos. 3, 5 and 6.
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land
Registration, the propriety or impropriety of the
three grounds on which the denial of the
registration of the certificate of liquidation was
predicated hinges on whether or not that
certificate merely involves a distribution of the
corporation's assets or should be considered a
transfer or conveyance.
Appellants contend that the certificate of
liquidation is not a conveyance or transfer but
merely a distribution of the assets of the
corporation which has ceased to exist for having
been dissolved. This is apparent in the minutes
for dissolution attached to the document. Not
being a conveyance the certificate need not
contain a statement of the number of parcel of
land involved in the distribution in the
acknowledgment appearing therein. Hence the
amount of documentary stamps to be affixed
thereon should only be P0.30 and not P940.45,
as required by the register of deeds. Neither is it
correct to require appellants to pay the amount
of P430.50 as registration fee.
The Commissioner of Land Registration,
however, entertained a different opinion. He
concurred in the view expressed by the register
of deed to the effect that the certificate of
liquidation in question, though it involves a
distribution of the corporation's assets, in the
last analysis represents a transfer of said assets
from the corporation to the stockholders. Hence,
in substance it is a transfer or conveyance.
We agree with the opinion of these two officials.
A corporation is a juridical person distinct from
the members composing it. Properties registered
in the name of the corporation are owned by it as
an entity separate and distinct from its members.
While shares of stock constitute personal
property they do not represent property of the
corporation. The corporation has property of its
own which consists chiefly of real estate (Nelson
v. Owen, 113 Ala., 372, 21 So. 75; Morrow v.
Gould, 145 Iowa 1, 123 N.W. 743). A share of
stock only typifies an aliquot part of the
corporation's property, or the right to share in
its proceeds to that extent when distributed
according to law and equity (Hall & Faley v.
Alabama Terminal, 173 Ala 398, 56 So., 235), but
its holder is not the owner of any part of the
capital of the corporation (Bradley v. Bauder 36
Ohio St., 28). Nor is he entitled to the possession
of any definite portion of its property or assets
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis,
35 Ohio St., 474). The stockholder is not a co-
owner or tenant in common of the corporate
property (Halton v. Hohnston, 166 Ala 317, 51 So
992).
On the basis of the foregoing authorities, it is
clear that the act of liquidation made by the
stockholders of the F. Guanzon and Sons, Inc. of
the latter's assets is not and cannot be
considered a partition of community property,
but rather a transfer or conveyance of the title of
its assets to the individual stockholders. Indeed,
since the purpose of the liquidation, as well as
the distribution of the assets of the corporation,
is to transfer their title from the corporation to
the stockholders in proportion to their
shareholdings, — and this is in effect the
purpose which they seek to obtain from the
Register of Deeds of Manila, — that transfer
cannot be effected without the corresponding
deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to
consider the certificate of liquidation as one in
the nature of a transfer or conveyance.
WHEREFORE, we affirm the resolution appealed
from, with costs against appellants.
Labrador, Concepcion, Reyes, J.B.L., Paredes,
Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-42780 January 17, 1936
MANILA GAS CORPORATION, plaintiff-
appellant,
vs.
THE COLLECTOR OF INTERNAL
REVENUE, defendant-appellee.
DeWitt, Perkins and Ponce Enrile for appellant.
Office of the Solicitor-General Hilado for appellee.
MALCOLM, J.:
This is an action brought by the Manila Gas
Corporation against the Collector of Internal
Revenue for the recovery of P56,757.37, which
the plaintiff was required by the defendant to
deduct and withhold from the various sums paid
it to foreign corporations as dividends and
interest on bonds and other indebtedness and
which the plaintiff paid under protest. On the
trial court dismissing the complaint, with costs,
the plaintiff appealed assigning as the principal
errors alleged to have been committed the
following:
1. The trial court erred in holding that
the dividends paid by the plaintiff
corporation were subject to income tax
in the hands of its stockholders,
because to impose the tax thereon
would be to impose a tax on the
plaintiff, in violation of the terms of its
franchise, and would, moreover, be
oppressive and inequitable.
2. The trial court erred in not holding
that the interest on bonds and other
indebtedness of the plaintiff
corporation, paid by it outside of the
Philippine Islands to corporations not
residing therein, were not, on the part
of the recipients thereof, income from
Philippine sources, and hence not
subject to Philippine income tax.
The facts, as stated by the appellant and as
accepted by the appellee, may be summarized as
follows: The plaintiff is a corporation organized
under the laws of the Philippine Islands. It
operates a gas plant in the City of Manila and
furnishes gas service to the people of the
metropolis and surrounding municipalities by
virtue of a franchise granted to it by the
Philippine Government. Associated with the
plaintiff are the Islands Gas and Electric
Company domiciled in New York, United States,
and the General Finance Company domiciled in
Zurich, Switzerland. Neither of these last
mentioned corporations is resident in the
Philippines.
For the years 1930, 1931, and 1932, dividends in
the sum of P1,348,847.50 were paid by the
plaintiff to the Islands Gas and Electric Company
in the capacity of stockholders upon which
withholding income taxes were paid to the
defendant totalling P40,460.03 For the same
years interest on bonds in the sum of P411,600
was paid by the plaintiff to the Islands Gas and
Electric Company upon which withholding
income taxes were paid to the defendant
totalling P12,348. Finally for the stated time
period, interest on other indebtedness in the
sum of P131,644,90 was paid by the plaintiff to
the Islands Gas and Electric Company and the
General Finance Company respectively upon
which withholding income taxes were paid to the
defendant totalling P3,949.34.
Some uncertainty existing regarding the place of
payment, we will not go into this factor of the
case at this point, except to remark that the
bonds and other tokens of indebtedness are not
to be found in the record. However, Exhibits E, F,
and G, certified correct by the Treasurer of the
Manila Gas Corporation, purport to prove that
the place of payment was the United States and
Switzerland.
The appeal naturally divides into two subjects,
one covered by the first assigned error, and the
other by the second assigned error. We shall
discuss these subjects and errors in order.
1. Appellant first contends that the
dividends paid by it to its stockholders,
the Islands Gas and Electric Company ,
were not subject to tax because to
impose a tax thereon would be to do so
on the plaintiff corporation, in violation
of the terms of its franchise and would,
moreover, be oppressive and
inequitable. This argument is
predicated on the constitutional
provision that no law impairing the
obligation of contracts shall be enacted.
The particular portion of the franchise
which is invoked provides:
The grantee shall annually on
the fifth day of January of each
year pay to the City of Manila
and the municipalities in the
Province of Rizal in which gas
is sold, two and one half per
centum of the gross receipts
within said city and
municipalities, respectively,
during the preceding year.
Said payment shall be in lieu
of all taxes, Insular, provincial
and municipal, except taxes
on the real estate, buildings,
plant, machinery, and other
personal property belonging
to the grantee.
The trial judge was of the opinion that
the instant case was governed by our
previous decision in the case
of Philippine Telephone and Telegraph
Co., vs. Collector of Internal
Revenue ([1933], 58 Phil. 639). In this
view we concur. It is true that the tax
exemption provision relating to the
Manila Gas Corporation hereinbefore
quoted differs in phraseology from the
tax exemption provision to be found in
the franchise of the Telephone and
Telegraph Company, but the ratio
decidendi of the two cases is
substantially the same. As there held
and as now confirmed, a corporation
has a personality distinct from that of
its stockholders, enabling the taxing
power to reach the latter when they
receive dividends from the corporation.
It must be considered as settled in this
jurisdiction that dividends of a
domestic corporation, which are paid
and delivered in cash to foreign
corporations as stockholders, are
subject to the payment in the income
tax, the exemption clause in the charter
of the corporation notwithstanding.
For the foreign reasons, we are led to
sustain the decision of the trial court
and to overrule appellant's first
assigned error.
2. In support of its second assignment
of error, appellant contends that, as the
Islands Gas and Electric Company and
the General Finance Company are
domiciled in the United States and
Switzerland respectively, and as the
interest on the bonds and other
indebtedness earned by said
corporations has been paid in their
respective domiciles, this is not income
from Philippine sources within the
meaning of the Philippine Income Tax
Law. Citing sections 10 (a) and 13 (e) of
Act No. 2833, the Income Tax Law,
appellant asserts that their applicability
has been squarely determined by
decisions of this court in the cases
of Manila Railroad Co. vs. Collector of
Internal Revenue (No. 31196,
promulgated December 2, 1929, nor
reported), and Philippine Railway Co. vs.
Posadas (No. 38766, promulgated
October 30, 1933 [58 Phil., 968])
wherein it was held that interest paid
to non-resident individuals or
corporations is not income from
Philippine sources, and hence not
subject to the Philippine Income Tax.
 The Solicitor-General answers with the
observation that the cited decisions
interpreted the Income Tax Law before
it was amended by Act No. 3761 to
cover the interest on bonds and other
obligations or securities paid "within or
without the Philippine Islands."
Appellant rebuts this argument by
"assuming, for the sake of the
argument, that by the amendment
introduced to section 13 of Act No.
2833 by Act No. 3761 the Legislature
intended the interest from Philippine
sources and so is subject to tax," but
with the necessary sequel that the
amendatory statute is invalid and
unconstitutional as being the power of
the Legislature to enact.
Taking first under observation that last point, it
is to be observed that neither in the pleadings,
the decision of the trial court, nor the assignment
of errors, was the question of the validity of Act
No. 3761 raised. Under such circumstances, and
no jurisdictional issue being involved, we do not
feel that it is the duty of the court to pass on the
constitutional question, and accordingly will
refrain from doing so. (Cadwaller-Gibson
Lumber Co. vs. Del Rosario [1913], 26 Phil., 192;
Macondray and Co. vs. Benito and Ocampo, P.
137, ante; State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and
of the Porto Rican case of Domenech vs. United
Porto Rican Sugar co. ([1932], 62 F. [2d], 552),
we need only observe that these cases
announced good law, but that each he must be
decided on its particular facts. In other words, in
the opinion of the majority of the court, the facts
at bar and the facts in those cases can be clearly
differentiated. Also, in the case at bar there is
some uncertainty concerning the place of
payment, which under one view could be
considered the Philippines and under another
view the United States and Switzerland, but
which cannot be definitely determined without
the necessary documentary evidence before, us.
The approved doctrine is that no state may tax
anything not within its jurisdiction without
violating the due process clause of the
constitution. The taxing power of a state does
not extend beyond its territorial limits, but
within such it may tax persons, property, income,
or business. If an interest in property is taxed,
the situs of either the property or interest must
be found within the state. If an income is taxed,
the recipient thereof must have a domicile within
the state or the property or business out of
which the income issues must be situated within
the state so that the income may be said to have
a situs therein. Personal property may be
separated from its owner, and he may be taxed
on its account at the place where the property is
although it is not the place of his own domicile
and even though he is not a citizen or resident of
the state which imposes the tax. But debts owing
by corporations are obligations of the debtors,
and only possess value in the hands of the
creditors. (Farmers Loan Co. vs. Minnesota
[1930], 280 U.S., 204; Union Refrigerator Transit
Co. vs. Kentucky [1905], 199 U.S., 194 State Tax
on Foreign held Bonds [1873, 15 Wall., 300;
Bick vs. Beach [1907], 206 U. S., 392; Stateex
rel. Manitowoc Gas Co. vs. Wig. Tax Comm.
[1915], 161 Wis., 111; United States Revenue Act
of 1932, sec. 143.)
These views concerning situs for taxation
purposes apply as well to an organized,
unincorporated territory or to a Commonwealth
having the status of the Philippines.
Pushing to one side that portion of Act No. 3761
which permits taxation of interest on bonds and
other indebtedness paid without the Philippine
Islands, the question is if the income was derived
from sources within the Philippine Islands.
In the judgment of the majority of the court, the
question should be answered in the affirmative.
The Manila Gas Corporation operates its
business entirely within the Philippines. Its
earnings, therefore come from local sources. The
place of material delivery of the interest to the
foreign corporations paid out of the revenue of
the domestic corporation is of no particular
moment. The place of payment even if conceded
to be outside of tho country cannot alter the fact
that the income was derived from the
Philippines. The word "source" conveys only one
idea, that of origin, and the origin of the income
was the Philippines.
In synthesis, therefore, we hold that conditions
have not been provided which justify the court in
passing on the constitutional question suggested;
that the facts while somewhat obscure differ
from the facts to be found in the cases relied
upon, and that the Collector of Internal Revenue
was justified in withholding income taxes on
interest on bonds and other indebtedness paid to
non-resident corporations because this income
was received from sources within the Philippine
Islands as authorized by the Income Tax Law.
For the foregoing reasons, the second assigned
error will be overruled.
Before concluding, it is but fair to state that the
writer's opinion on the first subject and the first
assigned error herein discussed is accurately set
forth, but that his opinion on the second subject
and the second assigned error is not accurately
reflected, because on this last division his views
coincide with those of the appellant. However, in
the interest of the prompt disposition of this
case, the decision has been written up in
accordance with instructions received from the
court.
Judgment affirmed, with the cost of this instance
assessed against the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ.,
concur.
Separate Opinions
VILLA-REAL, J., concurring and dissenting:
I concur with the majority decision regarding the
disposition of the second error, but dissent as to
its disposition of the first error. In my opinion,
the exemption clause to be found in the charter
of the plaintiff is broader in scope than that to be
found in the charter of the Philippine Telephone
and Telegraph Company, thus making
inapplicable the decision of this court in the case
of Philippine Telephone and Telegraph Co. vs.
Collector of Internal Revenue (58 Phil., 639).
ABAD SANTOS, J., concurring in part and
dissenting in part:
I am of opinion that the first assignment of error
should be sustained and the judgment below
reversed in that respect.
The franchise held by the appellant corporation
contains a stipulation by the Government to the
effect that the payment by the corporation to the
entities named in the franchise of two and one-
half per centum of its gross receipts, shall be in
lieu of all taxes, except taxes on the real estate,
buildings, plant, machinery and other personal
property belonging to the corporation. The
dividends paid by the appellant corporation to
its stockholders were a part of its earnings and
as such not subject to tax under the terms of the
franchise. The franchise in this case is a contract,
the obligation of which can not be impaired.
I agree with the majority of the court that the
second assignment of error should be overruled,
and the judgment affirmed in that particular.
Section 13 (e) of Act No. 2833, as amended by
Act No. 3761, expressly provides for the
imposition of a tax "... upon the income derived
from interest upon bonds and mortgages, or
deeds of trust, notes, or other interest-bearing
obligations of a domestic or resident foreign
corporation, ..." The income derived from the
interest on bonds and other indebtedness of the
appellant corporation, is clearly within the
purview of the statute. The power of the
legislature to impose such a tax must be
recognized. As stated by Justice Bradley in
United States vs.Erie R. Co. (106 U.S., 327; 27
Law. ed., 151, 153) : "... The tax laid upon their
bonds was intended to affect the owners of the
bonds, and whilst the companies were directed
to pay it, they were authorized to retain the
amount from the installments due to the
bondholders, whether citizens or aliens. The
objection that Congress had no power to tax non-
resident aliens, is met by the fact that the tax was
not assessed against them personally, but against
the rem, the credit, the debt due to them.
Congress has the right to tax all property within
the jurisdiction of the United States, with certain
exceptions not necessary to be noted. The money
due to non-resident bondholders in this case was
in the United States in the hands of the company
before it could be transmitted to London, or
other place where the bondholders resided.
Whilst here it was liable to taxation. Congress, by
the internal revenue law, by way of tax., stopped
a part of the money before its transmission,
namely; 5 per cent of it. Plausible grounds for
levying such a tax might be assigned. It might be
said that the creditor is protected by our laws in
the enjoyment of the debt; that the whole
machinery of our courts and the physical power
of the government are placed at his disposal for
its security and collection."
AVANCEÑA, C.J., dissenting:
I do not agree with the majority opinion with
respect to the appellant's second assignment of
error, which in my opinion should be sustained.
The question involved in this error has been
clearly decided by this court in the case of Manila
Railroad Co. vs. Collector of Internal Revenue (G.R.
No. 31196, promulgated December 2, 1929, not
reported). In said case it was held that interest
on bonds purchased outside the Philippine
Islands by non-residents of the Islands cannot be
considered derived from sources within the
Islands. The amendment of the law introduced
by Act no. 3761 as to the place of payment of
interest does not affect the aspect of the question
raised in this error if the interest on which the
tax in the present case has been collected is not
derived from sources within the Islands, as it is
not so in fact, in accordance with the doctrine
laid down in said case ofManila Railroad Co. vs.
Collector of Internal Revenue.
GODDARD, J., dissenting:
The tax exemption and commutation clause in
the plaintiffs franchise provides that:
The grantee shall annually on the 5th day of
January of each year pay to the City of Manila
and to the municipalities in the Province of Rizal
in which gas is sold, two and one half per centum
of the gross receipts within said city and
municipalities, respectively, during the
preceding year. Said payment shall be in lieu of all
tax, Insular, provincial and municipal, except taxes
on the real estate, buildings, plant, machinery, and
other personal property belonging to the grantee.
This franchise is a contract between the
Government and the grantees thereof, whose
rights have been acquired by the plaintiff
corporation. In Manila Railroad Co. vs.
Rafferty (40 Phil., 224, 230), this court held that
"... Once granted, a charter becomes a private
contract ...." Article 1091 of the Civil Code
provides that "Obligations arising from contract
shall have the force of law between the
contracting parties and must be performed in
accordance with their stipulations." It follows
that as the plaintiff corporation has paid to the
City of Manila and to the municipalities of Rizal,
where gas is sold by it, the franchise tax
stipulated in the contract, the Government has
no legal right to impose another tax on its
earnings.
The case of Farrington vs. Tennessee (95 U.S.,
679; 24 Law. ed., 558), is almost in exact parallel
with the case at bar. The facts of that case were
as follows: The Union and Planters' Bank of
Memphis was duly organized under the charter
granted by the Legislature of Tennessee, by two
Acts, respectively dated March 20, 1858, and
February 12, 1869. Since its organization it
continued doing a regular banking business. Its
capital subscribed and paid in amounted to
$675,000, divided into 6,750 shares of $100
each. Farrington, the plaintiff in error, was the
owner of 150 shares, of the value of $15,000.
The tenth section of the charter of the bank
declared:
That said Company shall pay to the
State an annual tax of one-half of one
per cent on each share of the capital
stock subscribe, which shall be in lieu
of all other taxes.
The State of Tennessee and the County of Shelby,
claiming the right under the Revenue Law of the
State, to tax the stock of the plaintiff in error, a
stockholder of the bank, assessed and taxed it for
the year 1872. It was assessed at its per value.
The tax imposed by the State was forty cents on
the $100, making the state tax $60. The county
tax was $1.20 on the $100, making the county tax
$180.
The plaintiff in error denied the right of the State
and County to impose these taxes. He claimed;
(1) That the 10th section of the charter
was a contract between the State and
the bank;
(2) That any other tax than that therein
specified was expressly forbidden, and.
(3) That the revenue laws imposing the
taxes in question impaired the
obligation of the contract.
The Supreme Court of Tennessee adjudge the
taxes to be valid and the plaintiff in error
thereupon removed the case to the Federal
Supreme Court for review.
In upholding all of the contentions of the plaintiff
in error, and pronouncing invalid the taxes
involved as impairing the obligation of the
contract created by the franchise, the United
States Supreme court said:
This case turns upon the construction
to be given to the 10th section of the
charter of the bank. . . .
xxx xxx xxx
When this charter was granted, the
State might have been silent as to
taxation. In that case, the power would
have been unfettered. (Bk. vs. Billings, 4
Pet., 514.) It might have reserved the
power as to some things, and yielded it
as to others. It had the power to make
its own terms or to refuse the charter.
It chose to stipulate for a specified tax
on the and declared and bound itself
that this tax should be "in lieu of all
other taxes."
There is no question before us as to the
tax imposed on the shares by the
charter. But the State has by her
revenue imposed another and an
additional tax on these same shares.
This is one of those "other taxes" which
it had stipulated to forego. The identity
of the thing doubly taxed is not affected
by the fact that in one case the tax is to
be paid vicariously by the bank, and in
the other by the owner of the share
himself. The thing thus taxed is to the
same, and the second tax is expressly
forbidden by the contract of the parties.
After the most careful consideration,
we can come to no other conclusion.
Such, we think, must have been the
understanding and intent of the parties
when the charter was granted and the
bank was organized. Any other view
would ignore the covenant that the tax
specified should be "in lieu of all other
taxes." It would blot those terms from
the context, and construe it as if they
were not a part of it. . . .
xxx xxx xxx
The decree of the Supreme Court of
Tennessee is reversed and the case will
be remanded, with directions to enter a
decree in favor of the plaintiff in error.
(Farrington vs. Tennessee, 95 U.S., 679;
24 Law. ed., 560, 561.)
That case, it will be observed, is almost in exact
parallel with the case at bar. Both cases deal with
tax commutation provided for in a franchise
granted by the State. In both cases the State
covenanted that the tax specified in the franchise
should be in lieu of all other taxes. In both cases
the additional tax which the tax authorities
sought to impose was a revenue tax. In both
cases the tax provided for in the franchise was
paid by the corporation, and the tax which the
authorities attempted to collect were imposed
on the stockholders. In theFarrington case the
provision in the Federal Constitution that "No
State shall ... pass any ... law impairing the
obligation of contracts" was applied; in this case
the provision of our Organic Law that "no law
impairing the obligation of contracts shall be
enacted" is involved. It will be observed further,
that in the Farrington case the franchise was
granted to a corporation, yet the court held that
the court mutation provision of the franchise
extended to the individual stockholders. In the
case at bar, while the plaintiff the present owner
of the franchise. is a corporation, the original
grantees were natural persons; hence there is
more reason for holding in the present case that
the mutation provision in the franchise granted
by the Philippine Government should extend to
the stockholders of plaintiff corporation.
The Farrington Case, decided in 1878, was by a
divided court. Eighteen years — later in 1896 —
the State of Tennessee sought to have the
decision in that case reviewed, on the ground
that the court did not consider the other portions
of the charter which, according to the State, were
material. The Supreme Court — this time
unanimously — declined to reverse its view as
expressed in the Farrington decision, saying.
We do not think under the
circumstances that we ought now to
come to a different conclusion upon the
question of exemption from that which
was arrived at by this court in
the Farrington Case. As the whole
charter was then before the court, we
are not prepared to say that its force
was misunderstood, or that there was
an omission by the court to consider all
the language of the exemption clause
simply because a portion of its omitted
in the quotation from the record made
in the opinion therein delivered. We are
not inclined, therefore, to overrule or
distinguish the Farrington Case, and we
must now told that the charter clause of
exemption limits the amount of tax on
each share of stock in the hands of the
shareholder, and that any subsequent
revenue law of the state which imposes
an additional tax on such shares in the
hands or shareholders, impairs the
obligation of the contract, and is void.
This compels us to reverse the
judgments herein against the
shareholders. (Bank of
Commerce vs. Tennessee, 16 U.S. 134;
40 Law. ed., 645, 648.)
The doctrine of the Farrington Case is now the
settled rule of the highest court of the United
States. The first assignment of error should
therefore be sustained.
As to the second assignment of error I concur
with the dissenting opinion of the Chief Justice
for the reasons set forth therein. Consequently
that assignment of error should also be
sustained.
The trial court erred in not holding that interest
received by a non-resident corporation, outside
the Philippine Islands, is not income from
Philippine sources and so not subject to income
tax.
In view of the above I am of the opinion that the
appealed decision should be reversed and
another entered by this courts ordering the
defendant to pay the plaintiff the sum of
P40,460.03, the amount of withholding taxes
paid on account of interest on bonds and other
indebtedness, or a total of P56,757.37.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 58168 December 19, 1989
CONCEPCION MAGSAYSAY-LABRADOR,
SOLEDAD MAGSAYSAY-CABRERA, LUISA
MAGSAYSAY-CORPUZ, assisted be her
husband, Dr. Jose Corpuz, FELICIDAD P.
MAGSAYSAY, and MERCEDES MAGSAYSAY-
DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA
RODRIGUEZ-MAGSAYSAY, Special
Administratrix of the Estate of the late
Genaro F. Magsaysay respondents.
FERNAN, C.J.:
In this petition for review on certiorari,
petitioners seek to reverse and set aside [1] the
decision of the Court of Appeals dated July l3,
1981, 1 affirming that of the Court of First
Instance of Zambales and Olongapo City which
denied petitioners' motion to intervene in an
annulment suit filed by herein private
respondent, and [2] its resolution dated
September 7, 1981, denying their motion for
reconsideration.
Petitioners are raising a purely legal question;
whether or not respondent Court of Appeals
correctly denied their motion for intervention.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-
Magsaysay, widow and special administratix of
the estate of the late Senator Genaro Magsaysay,
brought before the then Court of First Instance of
Olongapo an action against Artemio Panganiban,
Subic Land Corporation (SUBIC), Filipinas
Manufacturer's Bank (FILMANBANK) and the
Register of Deeds of Zambales. In her complaint,
she alleged that in 1958, she and her husband
acquired, thru conjugal funds, a parcel of land
with improvements, known as "Pequena Island",
covered by TCT No. 3258; that after the death of
her husband, she discovered [a] an annotation at
the back of TCT No. 3258 that "the land was
acquired by her husband from his separate
capital;" [b] the registration of a Deed of
Assignment dated June 25, 1976 purportedly
executed by the late Senator in favor of SUBIC, as
a result of which TCT No. 3258 was cancelled
and TCT No. 22431 issued in the name of SUBIC;
and [c] the registration of Deed of Mortgage
dated April 28, 1977 in the amount of P
2,700,000.00 executed by SUBIC in favor of
FILMANBANK; that the foregoing acts were void
and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal,
her marital consent to the annotation on TCT No.
3258 was not obtained, the change made by the
Register of Deeds of the titleholders was effected
without the approval of the Commissioner of
Land Registration and that the late Senator did
not execute the purported Deed of Assignment
or his consent thereto, if obtained, was secured
by mistake, violence and intimidation. She
further alleged that the assignment in favor of
SUBIC was without consideration and
consequently null and void. She prayed that the
Deed of Assignment and the Deed of Mortgage be
annulled and that the Register of Deeds be
ordered to cancel TCT No. 22431 and to issue a
new title in her favor.
On March 7, 1979, herein petitioners, sisters of
the late senator, filed a motion for intervention
on the ground that on June 20, 1978, their
brother conveyed to them one-half (1/2 ) of his
shareholdings in SUBIC or a total of 416,566.6
shares and as assignees of around 41 % of the
total outstanding shares of such stocks of SUBIC,
they have a substantial and legal interest in the
subject matter of litigation and that they have a
legal interest in the success of the suit with
respect to SUBIC.
On July 26, 1979, the court denied the motion for
intervention, and ruled that petitioners have no
legal interest whatsoever in the matter in
litigation and their being alleged assignees or
transferees of certain shares in SUBIC cannot
legally entitle them to intervene because SUBIC
has a personality separate and distinct from its
stockholders.
On appeal, respondent Court of Appeals found no
factual or legal justification to disturb the
findings of the lower court. The appellate court
further stated that whatever claims the
petitioners have against the late Senator or
against SUBIC for that matter can be ventilated
in a separate proceeding, such that with the
denial of the motion for intervention, they are
not left without any remedy or judicial relief
under existing law.
Petitioners' motion for reconsideration was
denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the
purported assignment made by the late Senator
of a certain portion of his shareholdings to them
as evidenced by a Deed of Sale dated June 20,
1978. 2 Such transfer, petitioners posit, clothes
them with an interest, protected by law, in the
matter of litigation.
Invoking the principle enunciated in the case of
PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853
(1927), 3petitioners strongly argue that their
ownership of 41.66% of the entire outstanding
capital stock of SUBIC entitles them to a
significant vote in the corporate affairs; that they
are affected by the action of the widow of their
late brother for it concerns the only tangible
asset of the corporation and that it appears that
they are more vitally interested in the outcome
of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the
Revised Rules of Court, this Court affirms the
respondent court's holding that petitioners
herein have no legal interest in the subject
matter in litigation so as to entitle them to
intervene in the proceedings below. In the case
of Batama Farmers' Cooperative Marketing
Association, Inc. v. Rosal, 4 we held: "As clearly
stated in Section 2 of Rule 12 of the Rules of
Court, to be permitted to intervene in a pending
action, the party must have a legal interest in the
matter in litigation, or in the success of either of
the parties or an interest against both, or he
must be so situated as to be adversely affected
by a distribution or other disposition of the
property in the custody of the court or an officer
thereof ."
To allow intervention, [a] it must be shown that
the movant has legal interest in the matter in
litigation, or otherwise qualified; and [b]
consideration must be given as to whether the
adjudication of the rights of the original parties
may be delayed or prejudiced, or whether the
intervenor's rights may be protected in a
separate proceeding or not. Both requirements
must concur as the first is not more important
than the second. 5
The interest which entitles a person to intervene
in a suit between other parties must be in the
matter in litigation and of such direct and
immediate character that the intervenor will
either gain or lose by the direct legal operation
and effect of the judgment. Otherwise, if persons
not parties of the action could be allowed to
intervene, proceedings will become
unnecessarily complicated, expensive and
interminable. And this is not the policy of the
law. 6
The words "an interest in the subject" mean a
direct interest in the cause of action as pleaded,
and which would put the intervenor in a legal
position to litigate a fact alleged in the complaint,
without the establishment of which plaintiff
could not recover. 7
Here, the interest, if it exists at all, of petitioners-
movants is indirect, contingent, remote,
conjectural, consequential and collateral. At the
very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of
the corporation and to share in the profits
thereof and in the properties and assets thereof
on dissolution, after payment of the corporate
debts and obligations.
While a share of stock represents a
proportionate or aliquot interest in the property
of the corporation, it does not vest the owner
thereof with any legal right or title to any of the
property, his interest in the corporate property
being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of
corporate property, which is owned by the
corporation as a distinct legal person. 8
Petitioners further contend that the availability
of other remedies, as declared by the Court of
appeals, is totally immaterial to the availability of
the remedy of intervention.
We cannot give credit to such averment. As
earlier stated, that the movant's interest may be
protected in a separate proceeding is a factor to
be considered in allowing or disallowing a
motion for intervention. It is significant to note
at this juncture that as per records, there are
four pending cases involving the parties herein,
enumerated as follows: [1] Special Proceedings
No. 122122 before the CFI of Manila, Branch
XXII, entitled "Concepcion Magsaysay-Labrador,
et al. v. Subic Land Corp., et al.", involving the
validity of the transfer by the late Genaro
Magsaysay of one-half of his shareholdings in
Subic Land Corporation; [2] Civil Case No. 2577-
0 before the CFI of Zambales, Branch III,
"Adelaida Rodriguez-Magsaysay v. Panganiban,
etc.; Concepcion Labrador, et al. Intervenors",
seeking to annul the purported Deed of
Assignment in favor of SUBIC and its annotation
at the back of TCT No. 3258 in the name of
respondent's deceased husband; [3] SEC Case
No. 001770, filed by respondent praying, among
other things that she be declared in her capacity
as the surviving spouse and administratrix of the
estate of Genaro Magsaysay as the sole
subscriber and stockholder of SUBIC. There,
petitioners, by motion, sought to intervene. Their
motion to reconsider the denial of their motion
to intervene was granted; [4] SP No. Q-26739
before the CFI of Rizal, Branch IV, petitioners
herein filing a contingent claim pursuant to
Section 5, Rule 86, Revised Rules of
Court. 9 Petitioners' interests are no doubt amply
protected in these cases.
Neither do we lend credence to petitioners'
argument that they are more interested in the
outcome of the case than the corporation-
assignee, owing to the fact that the latter is
willing to compromise with widow-respondent
and since a compromise involves the giving of
reciprocal concessions, the only conceivable
concession the corporation may give is a total or
partial relinquishment of the corporate assets. 10
Such claim all the more bolsters the contingent
nature of petitioners' interest in the subject of
litigation.
The factual findings of the trial court are clear on
this point. The petitioners cannot claim the right
to intervene on the strength of the transfer of
shares allegedly executed by the late Senator.
The corporation did not keep books and
records. 11 Perforce, no transfer was ever
recorded, much less effected as to prejudice third
parties. The transfer must be registered in the
books of the corporation to affect third persons.
The law on corporations is explicit. Section 63 of
the Corporation Code provides, thus: "No
transfer, however, shall be valid, except as
between the parties, until the transfer is
recorded in the books of the corporation
showing the names of the parties to the
transaction, the date of the transfer, the number
of the certificate or certificates and the number
of shares transferred."
And even assuming arguendo that there was a
valid transfer, petitioners are nonetheless barred
from intervening inasmuch as their rights can be
ventilated and amply protected in another
proceeding.
WHEREFORE, the instant petition is hereby
DENIED. Costs against petitioners.
SO ORDERED.
Gutierrez, Jr., Bidin and Corte's, JJ., concur.
Feliciano, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 82797 February 27, 1991
GOOD EARTH EMPORIUM INC., and LIM KA
PING, petitioners,
vs.
HONORABLE COURT OF APPEALS and ROCES-
REYES REALTY INC., respondents.
A.E. Dacanay for petitioners.
Antonio Quintos Law Office for private
respondent.
PARAS, J.:
This is a petition for review on certiorari of the
December 29, 1987 decision * of the Court of
Appeals in CA-G.R. No. 11960 entitled "ROCES-
REYES REALTY, INC. vs. HONORABLE JUDGE
REGIONAL TRIAL COURT OF MANILA, BRANCH
44, GOOD EARTH EMPORIUM, INC. and LIM KA
PING" reversing the decision of respondent
Judge ** of the Regional Trial Court of Manila,
Branch 44 in Civil Case No. 85-30484, which
reversed the resolution of the Metropolitan Trial
Court Of Manila, Branch 28 in Civil Case No.
09639, *** denying herein petitioners' motion to
quash the alias writ of execution issued against
them.
As gathered from the records, the antecedent
facts of this case, are as follows:
A Lease Contract, dated October 16, 1981, was
entered into by and between ROCES-REYES
REALTY, INC., as lessor, and GOOD EARTH
EMPORIUM, INC., as lessee, for a term of three
years beginning November 1, 1981 and ending
October 31, 1984 at a monthly rental of
P65,000.00 (Rollo, p. 32; Annex "C" of Petition).
The building which was the subject of the
contract of lease is a five-storey building located
at the corner of Rizal Avenue and Bustos Street
in Sta. Cruz, Manila.
From March 1983, up to the time the complaint
was filed, the lessee had defaulted in the
payment of rentals, as a consequence of which,
private respondent ROCES-REYES REALTY, INC.,
(hereinafter designated as ROCES for brevity)
filed on October 14, 1984, an ejectment case
(Unlawful Detainer) against herein petitioners,
GOOD EARTH EMPORIUM, INC. and LIM KA
PING, hereinafter designated as GEE, (Rollo, p.
21; Annex "B" of the Petition). After the latter
had tendered their responsive pleading, the
lower court (MTC, Manila) on motion of Roces
rendered judgment on the pleadings dated April
17, 1984, the dispositive portion of which states:
Judgment is hereby rendered ordering
defendants (herein petitioners) and all
persons claiming title under him to
vacate the premises and surrender the
same to the plaintiffs (herein
respondents); ordering the defendants
to pay the plaintiffs the rental of
P65,000.00 a month beginning March
1983 up to the time defendants actually
vacate the premises and deliver
possession to the plaintiff; to pay
attorney's fees in the amount of
P5,000.00 and to pay the costs of this
suit. (Rollo, p. 111; Memorandum of
Respondents)
On May 16, 1984, Roces filed a motion for
execution which was opposed by GEE on May 28,
1984 simultaneous with the latter's filing of a
Notice of Appeal (Rollo, p. 112, Ibid.). On June 13,
1984, the trial court resolved such motion ruling:
After considering the motion for the
issuance of a writ of execution filed by
counsel for the plaintiff (herein
respondents) and the opposition filed
in relation thereto and finding that the
defendant failed to file the necessary
supersedeas bond, this court resolved
to grant the same for being
meritorious. (Rollo, p. 112)
On June 14, 1984, a writ of execution was issued
by the lower court. Meanwhile, the appeal was
assigned to the Regional Trial Court (Manila)
Branch XLVI. However, on August 15, 1984, GEE
thru counsel filed with the Regional Trial Court
of Manila, a motion to withdraw appeal citing as
reason that they are satisfied with the decision of
the Metropolitan Trial Court of Manila, Branch
XXVIII, which said court granted in its Order of
August 27, 1984 and the records were remanded
to the trial court (Rollo, p. 32; CA Decision). Upon
an ex-parte Motion of ROCES, the trial court
issued an Alias Writ of Execution dated February
25, 1985 (Rollo, p. 104; Annex "D" of Petitioner's
Memorandum), which was implemented on
February 27, 1985. GEE thru counsel filed a
motion to quash the writ of execution and notice
of levy and an urgent Ex-parte Supplemental
Motion for the issuance of a restraining order, on
March 7, and 20, 1985, respectively. On March
21, 1985, the lower court issued a restraining
order to the sheriff to hold the execution of the
judgment pending hearing on the motion to
quash the writ of execution (Rollo, p. 22; RTC
Decision). While said motion was pending
resolution, GEE filed a Petition for Relief from
judgment before another court, Regional Trial
Court of Manila, Branch IX, which petition was
docketed as Civil Case No. 80-30019, but the
petition was dismissed and the injunctive writ
issued in connection therewith set aside. Both
parties appealed to the Court of Appeals; GEE on
the order of dismissal and Roces on denial of his
motion for indemnity, both docketed as CA-G.R.
No. 15873-CV. Going back to the original case,
the Metropolitan Trial Court after hearing and
disposing some other incidents, promulgated the
questioned Resolution, dated April 8, 1985, the
dispositive portion of which reads as follows:
Premises considered, the motion to
quash the writ is hereby denied for lack
of merit.
The restraining orders issued on March
11 and 23, 1985 are hereby recalled,
lifted and set aside. (Rollo, p. 20, MTC
Decision)
GEE appealed and by coincidence. was raffled to
the same Court, RTC Branch IX. Roces moved to
dismiss the appeal but the Court denied the
motion. On certiorari, the Court of Appeals
dismissed Roces' petition and remanded the case
to the RTC. Meantime, Branch IX became vacant
and the case was re-raffled to Branch XLIV.
On April 6, 1987, the Regional Trial Court of
Manila, finding that the amount of P1 million
evidenced by Exhibit "I" and another P1 million
evidenced by the pacto de retro sale instrument
(Exhibit "2") were in full satisfaction of the
judgment obligation, reversed the decision of the
Municipal Trial Court, the dispositive portion of
which reads:
Premises considered, judgment is
hereby rendered reversing the
Resolution appealed from quashing the
writ of execution and ordering the
cancellation of the notice of levy and
declaring the judgment debt as having
been fully paid and/or Liquidated.
(Rollo, p. 29).
On further appeal, the Court of Appeals reversed
the decision of the Regional Trial Court and
reinstated the Resolution of the Metropolitan
Trial Court of Manila, the dispositive portion of
which is as follows:
WHEREFORE, the judgment appealed
from is hereby REVERSED and the
Resolution dated April 8, 1985, of the
Metropolitan Trial Court of Manila
Branch XXXIII is hereby REINSTATED.
No pronouncement as to costs. (Rollo,
p. 40).
GEE's Motion for Reconsideration of April 5,
1988 was denied (Rollo, p. 43). Hence, this
petition.
The main issue in this case is whether or not
there was full satisfaction of the judgment debt
in favor of respondent corporation which would
justify the quashing of the Writ of Execution.
A careful study of the common exhibits (Exhibits
1/A and 2/B) shows that nowhere in any of said
exhibits was there any writing alluding to or
referring to any settlement between the parties
of petitioners' judgment obligation (Rollo, pp. 45-
48).
Moreover, there is no indication in the receipt,
Exhibit "1", that it was in payment, full or partial,
of the judgment obligation. Likewise, there is no
indication in the pacto de retro sale which was
drawn in favor of Jesus Marcos Roces and
Marcos V. Roces and not the respondent
corporation, that the obligation embodied
therein had something to do with petitioners'
judgment obligation with respondent
corporation.
Finding that the common exhibit, Exhibit 1/A
had been signed by persons other than judgment
creditors (Roces-Reyes Realty, Inc.) coupled with
the fact that said exhibit was not even alleged by
GEE and Lim Ka Ping in their original motion to
quash the alias writ of execution (Rollo, p. 37)
but produced only during the hearing (Ibid.)
which production resulted in petitioners having
to claim belatedly that there was an
"overpayment" of about half a million pesos
(Rollo, pp. 25-27) and remarking on the utter
absence of any writing in Exhibits "1/A" and
"2/B" to indicate payment of the judgment debt,
respondent Appellate Court correctly concluded
that there was in fact nopayment of the judgment
debt. As aptly observed by the said court:
What immediately catches one's
attention is the total absence of any
writing alluding to or referring to any
settlement between the parties of
private respondents' (petitioners')
judgment obligation. In moving for the
dismissal of the appeal Lim Ka Ping
who was then assisted by counsel
simply stated that defendants (herein
petitioners) are satisfied with the
decision of the Metropolitan Trial Court
(Records of CA, p. 54).
Notably, in private respondents'
(petitioners') Motion to Quash the Writ
of Execution and Notice of Levy
dated March 7, 1985, there is absolutely
no reference to the alleged payment of
one million pesos as evidenced by
Exhibit 1 dated September 20, 1984. As
pointed out by petitioner (respondent
corporation) this was brought out by
Linda Panutat, Manager of Good Earth
only in the course of the latter's
testimony. (Rollo, p. 37)
Article 1240 of the Civil Code of the Philippines
provides that:
Payment shall be made to the person in
whose favor the obligation has been
constituted, or his successor in interest,
or any person authorized to receive it.
In the case at bar, the supposed payments were
not made to Roces-Reyes Realty, Inc. or to its
successor in interest nor is there positive
evidence that the payment was made to a person
authorized to receive it. No such proof was
submitted but merely inferred by the Regional
Trial Court (Rollo, p. 25) from Marcos Roces
having signed the Lease Contract as President
which was witnessed by Jesus Marcos Roces. The
latter, however, was no longer President or even
an officer of Roces-Reyes Realty, Inc. at the time
he received the money (Exhibit "1") and signed
the sale with pacto de retro (Exhibit "2"). He, in
fact, denied being in possession of authority to
receive payment for the respondent corporation
nor does the receipt show that he signed in the
same capacity as he did in the Lease Contract at a
time when he was President for respondent
corporation (Rollo, p. 20, MTC decision).
On the other hand, Jesus Marcos Roces testified
that the amount of P1 million evidenced by the
receipt (Exhibit "1") is the payment for a loan
extended by him and Marcos Roces in favor of
Lim Ka Ping. The assertion is home by the receipt
itself whereby they acknowledged payment of
the loan in their names and in no other capacity.
A corporation has a personality distinct and
separate from its individual stockholders or
members. Being an officer or stockholder of a
corporation does not make one's property also of
the corporation, and vice-versa, for they are
separate entities (Traders Royal Bank v. CA-G.R.
No. 78412, September 26, 1989; Cruz v. Dalisay,
152 SCRA 482). Shareowners are in no legal
sense the owners of corporate property (or
credits) which is owned by the corporation as a
distinct legal person (Concepcion Magsaysay-
Labrador v. CA-G.R. No. 58168, December 19,
1989). As a consequence of the separate juridical
personality of a corporation, the corporate debt
or credit is not the debt or credit of the
stockholder, nor is the stockholder's debt or
credit that of the corporation (Prof. Jose
Nolledo's "The Corporation Code of the
Philippines, p. 5, 1988 Edition, citing Professor
Ballantine).
The absence of a note to evidence the loan is
explained by Jesus Marcos Roces who testified
that the IOU was subsequently delivered to
private respondents (Rollo, pp. 97-98). Contrary
to the Regional Trial Court's premise that it was
incumbent upon respondent corporation to
prove that the amount was delivered to the
Roces brothers in the payment of the loan in the
latter's favor, the delivery of the amount to and
the receipt thereof by the Roces brothers in their
names raises the presumption that the said
amount was due to them.1âwphi1 There is a
disputable presumption that money paid by one
to the other was due to the latter (Sec. 5(f) Rule
131, Rules of Court). It is for GEE and Lim Ka
Ping to prove otherwise. In other words, it is for
the latter to prove that the payments made were
for the satisfaction of their judgment debt and
not vice versa.
The fact that at the time payment was made to
the two Roces brothers, GEE was also indebted
to respondent corporation for a larger amount, is
not supportive of the Regional Trial Court's
conclusions that the payment was in favor of the
latter, especially in the case at bar where the
amount was not receipted for by respondent
corporation and there is absolutely no indication
in the receipt from which it can be reasonably
inferred, that said payment was in satisfaction of
the judgment debt. Likewise, no such inference
can be made from the execution of the pacto de
retro sale which was not made in favor of
respondent corporation but in favor of the two
Roces brothers in their individual capacities
without any reference to the judgment obligation
in favor of respondent corporation.
In addition, the totality of the amount covered by
the receipt (Exhibit "1/A") and that of the sale
with pacto de retro (Exhibit "2/B") all in the sum
of P2 million, far exceeds petitioners' judgment
obligation in favor of respondent corporation in
the sum of P1,560,000.00 by P440,000.00, which
militates against the claim of petitioner that the
aforesaid amount (P2M) was in full payment of
the judgment obligation.
Petitioners' explanation that the excess is
interest and advance rentals for an extension of
the lease contract (Rollo, pp. 25-28) is belied by
the absence of any interest awarded in the case
and of any agreement as to the extension of the
lease nor was there any such pretense in the
Motion to Quash the Alias Writ of Execution.
Petitioners' averments that the respondent court
had gravely abused its discretion in arriving at
the assailed factual findings as contrary to the
evidence and applicable decisions of this
Honorable Court are therefore, patently
unfounded. Respondent court was correct in
stating that it "cannot go beyond what appears in
the documents submitted by petitioners
themselves (Exhibits "1" and "2") in the absence
of clear and convincing evidence" that would
support its claim that the judgment obligation
has indeed been fully satisfied which would
warrant the quashal of the Alias Writ of
Execution.
It has been an established rule that when the
existence of a debt is fully established by the
evidence (which has been done in this case), the
burden of proving that it has been extinguished
by payment devolves upon the debtor who offers
such a defense to the claim of the plaintiff
creditor (herein respondent corporation) (Chua
Chienco v. Vargas, 11 Phil. 219; Ramos v.
Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30
Phil. 365). For indeed, it is well-entrenched in
Our jurisprudence that each party in a case must
prove his own affirmative allegations by the
degree of evidence required by law (Stronghold
Insurance Co. v. CA, G.R. No. 83376, May
29,1989; Tai Tong Chuache & Co. v. Insurance
Commission, 158 SCRA 366).

The appellate court cannot, therefore, be said to

have gravely abused its discretion in finding lack
of convincing and reliable evidence to establish
payment of the judgment obligation as claimed
by petitioner. The burden of evidence resting on
the petitioners to establish the facts upon which
their action is premised has not been
satisfactorily discharged and therefore, they
have to bear the consequences.

PREMISES CONSIDERED, the petition is hereby

DENIED and the Decision of the Respondent
court is hereby AFFIRMED, reinstating the April
8, 1985 Resolution of the Metropolitan Trial
Court of Manila.

SO ORDERED.

Melencio-Herrera, Padilla, Sarmiento and

Regalado, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-30188 October 2, 1928
FELIPE TAYKO, EDUARDO BUENO, BAUTISTA
TAYKO, BERNARDO SOLDE and VICENTE
ELUM,petitioners,
vs.
NICOLAS CAPISTRANO, acting as Judge of
First Instance of Oriental Negros. ALFREDO B.
CACNIO, as Provincial Fiscal of Oriental
Negros, and JUAN GADIANI, respondents.
Abad Santos, Camus and Delgado and Teopisto
Guingona for petitioners.
Araneta and Zaragoza for respondents.
The respondent Judge in his own behalf.
OSTRAND, J.:
This is a petition for a writ of prohibition
enjoining the respondent judge from making
cognizance of certain civil and criminal election
cases in which the petitioners are parties.
The petitioners allege that the respondent judge,
previous to this date, was appointed judge of the
Court of First Instance of Oriental Negros, to hold
office during good behavior and until he should
reach the age of 65 years; that he now has
reached that age and, therefore, under the
provisions of section 148 of the Administrative
Code as amended, is disqualified from acting as a
judge of the Court of First Instance. The
petitioners further allege that in view of the
many election protests and criminal cases for
violation of the election law filed in the Court of
First Instance of Oriental Negros arising in the
Court of First Instance of Oriental Negros arising
from the last election of June 5, 1928, the
Honorable Sixto de la Costa was duly designated
and acted as auxiliary judge of the Province of
Oriental Negros; that between the auxiliary judge
and the respondent judge herein there was an
understanding, and the assignment of the said
auxiliary judge was made with this
understanding, that the said auxiliary judge so
designated would hear and take cognizance of all
election protests and criminal actions then
pending or to filed arising from the said last
general election, and that the respondent
Honorable Nicolas Capistrano would try and
hear the ordinary cases pending in the said
court, but, notwithstanding this understanding
or agreement, the respondent judge tried and is
still trying to take cognizance of the election
protests an criminal actions in said court; that
the respondent judge declared in open court that
he will try the criminal cases herein mentioned
for the reason that the auxiliary judge refused to
try the same on the ground that the preliminary
investigations were held before him, when, in
truth and in fact, the said auxiliary judge did not
make the statement imputed to him and was and
is still willing to try the election protests and
criminal cases for violation of the election law
pending in the court of the Province of Oriental
Negros; that the respondent Honorable Nicolas
Capistrano, in spite of the fact that he was
holding and is now pretending to hold the office
of judge of the Court of First Instance of Oriental
Negros, took great interest and active part in the
filing of criminal charges against the petitioners
herein to the unjustifiable extent of appointing a
deputy fiscal, who then filed the proper
informations, when the provincial fiscal refused
to file criminal charges against the petitioners
for violation of the election law for lack of
sufficient evidence to sustain the same; that said
respondent is neither a judge de jure nor de
facto, but that, notwithstanding this fact, he
continues to hold the office of judge of the Court
of First Instance of Oriental Negros and pretends
to be duly qualified and acting judge of the said
province; and that he has tried, and continues to
try, to act as such judge and that there is
reasonable ground to believe that he will take
cognizance of the cases in question unless he be
restrained by order of this court; that in acting as
a duly qualified judge notwithstanding the facts
alleged in the fifth, sixth, and seventh paragraphs
hereof, the respondent judge acted and is about
to act without and in excess of jurisdiction and (a) But little need be said as to
also after the loss of jurisdiction. the first proposition. A writ of
prohibition to a judge of an
To this petition the respondents demur on the interior court will only lie in
ground that the facts stated in that (1) none of cases where he acts without
the facts alleged in the petition divest the or in excess of his jurisdiction
respondent judge of his jurisdiction to take (section 226, Code of Civil
Procedure), and it is obvious
cognizance of the cases referred to in the
complaint, and (2) even admitting as true, for the that a mere "understanding"
sake of this demurrer, the facts alleged in as to the distribution of cases
paragraph 7 of the petition, the respondent judge for trial did not deprive the
is still a de facto judge and his title to the office respondent judge of the
and his jurisdiction to hear the cases referred to jurisdiction conferred upon
in the petition cannot be questioned by him by law. It may be noted
prohibition, as this writ, even when directed that it is not alleged that
against persons acting as judges, cannot be another judge had taken
treated as a substitute for quo warranto, or be cognizance of the cases in
rightfully called upon to perform any of the question or that they had
functions of that writ. been definitely assigned to
trial before such other judge.
The ground upon which the petition rests may be
reduced to three propositions. (1) That the (b) The second proposition is
equally
assignment of the Auxiliary Judge, Sixto de la
Costa, to Dumaguete was made with the untenable.1awph!l.net That
the respondent judge took
understanding that the he was to hear and take
cognizance of all election contests and criminal great interest and an active
part in the filing of the
causes for violation of the election law and that
the respondent judge was to take cognizance of criminal charges against the
petitioners to the extent of
the ordinary cases and that there was an
understanding between them that this appointing a deputy fiscal
when the regular provincial
arrangement was to be followed.
fiscal refused to file the
proper informations, did not
(2) That the respondent judge took disqualify him from trying the
great interest and an active part in the case in question. Section 1679
filing of the criminal charges against
of the Administrative Code
the petitioners herein to the provides that "when a
unjustifiable extent of appointing a
provincial fiscal shall be
deputy fiscal who filed the proper disqualified by personal
informations when the regular
interest to act in a particular
provincial fiscal refused to file them for case or when for any reason
lack of sufficient evidence.
he shall be unable, or shall
fail, to discharge any of the
(3) That the respondent judge is duties of his position, the
already over 65 years of age and has, judge of the Court of First
therefore, automatically ceased as Instance of the province shall
judge of the Court of First Instance of appoint an acting provincial
Oriental Negros and that he is neither a fiscal, . . . ." (Emphasis ours.)
judge de jure nor de facto.
 The determination of the
question as to whether the
fiscal has failed to discharge
his duty in the prosecution of
a crime must necessarily, to a
large extent, lie within the
sound discretion of the
presiding judge, and there is
no allegation in the petition
that such discretion was
abused in the present
instance. It is true that it is
stated that the appointment of
the acting fiscal was
"unjustifiable," but that is only
a conclusion of law and not an
allegation of facts upon which
such a conclusion can be
formed and may, therefore, be
disregarded. It follows that in
appointing an acting fiscal, the
respondent judge was well
within his jurisdiction.
(c) The third ground upon
which the petition is based is
the most important and
merits some consideration. It
is well settled that the title to
the office of a judge,
whether de jure or de facto,
can only be determined in a
proceeding in the nature
of quo warranto and cannot
be tested by prohibition. But
counsel for the petitioners
maintains that the respondent
judge is neither a judge de
jure nor de facto and that,
therefore, prohibition will lie.
In this, counsel is undoubtedly
mistaken.
The respondent judge has been duly appointed
to the office of Judge of the Court of First
Instance of Oriental Negros, but section 148 of
the Administrative Code, as amended, provides
that "Judges of the Court of First Instance and
auxiliary judges shall be appointed to serve until
they shall reach the age of sixty-five years." In
view of this provision and assuming, as we must,
that the allegations of the petition are true, it is
evident that the respondent is no longer a
judge de jure, but we do not think that it can be
successfully disputed that he is still a judge de
facto.
Briefly defined, a de facto judge is one who
exercises the duties of a judicial office under
color of an appointment or election thereto
(Brown vs. O'Connell, 36 Conn., 432). He differs,
on the one hand, from a mere usurper who
undertakes to act officially without any color of
right, and on the other hand, from a judge de
jure who is in all respects legally appointed and
qualified and whose term of office has not
expired (State vs. Carroll, 38 Conn., 449; Denny
vs. Matton, 2 Allen [Mass.], 361; Van Slyke vs.
Farmers' Mut. Fire Ins. Co., 39 Wis., 390).
Apart from any constitutional or
statutory regulation on the subject
there seems to be a general rule of law
that an incumbent of an office will hold
over after the conclusion of his term
until the elction and qualification of a
successor (22 R. C. L., pp. 554-5). When
a judge in good faith remains in office
after his title has ended, he is a de
facto officer (Sheehan's Case, 122
Mass., 445).
Applying the principles stated to the facts set
forth in the petition before us, we cannot escape
the conclusion that, on the assumption that said
facts are true, the respondent judge must be
considered a judge de facto. His term of office
may have expired, but his successor has not been
appointed, and as good faith is presumed, he
must be regarded as holding over in good faith.
The contention of counsel for the petitioners that
the auxiliary judge present in the district must be
considered the regular judge seems obviously
erroneous.
In these circumstances the remedy prayed for
cannot be granted. "The rightful authority of a
judge, in the full exercise of his public judicial
function, cannot be questioned by any merely
private suitor, nor by any other, excepting in the warranto at suit of the sovereign." (15 R. C. L., pp.
form especially provided by law. A judge de 519-521.)
facto assumes the exercise of a part of the
prerogative of sovereignty, and the legality of The demurrer to the petition is sustained, and
that assumption is open to the attack of the inasmuch as it is evident that the weakness of
sovereign power alone. Accordingly, it is a well the petition cannot be cured by amendment the
established principle, dating from the earliest present proceedings are hereby dismissed with
period and repeatedly confirmed by an the costs against the petitioners jointly and
unbroken current of decisions, that the official severally. The preliminary injunction
acts of a de facto judge are just as valid for all hereinbefore issued is dissolved. So ordered.
purposes as those of a de jure judge, so far as the
public or third persons who are interested
therein are concerned. The rule is the same in Avanceña, C. J., Johnson, Street, Malcolm, Villamor,
Romualdez, and Villa-Real, JJ., concur.
civil criminal cases. The principle is one founded
in policy and convenience, for the right of no one
claiming a title or interest under or through the
proceedings of an officer having an apparent
authority to act would be safe, if it were
necessary in every case to examine the legality of
the title of such officer up to its original source,
and the title or interest of such person were held
to be invalidated by some accidental defect or
flaw in the appointment, election or qualification
of such officer, or in the rights of those from
whom his appointment or election emanated;
nor could the supremacy of the laws be
maintained, or their execution enforced, if the
acts of the judge having a colorable, but not a
legal title, were to be deemed invalid. As in the
case of judges of courts of record, the acts of a
justice de facto cannot be called in question in
any suit to which he is not a party. The official
acts of a de facto justice cannot b attacked
collaterally. An exception to the general rule that
the title of a person assuming to act as judge
cannot be questioned in a suit before him is
generally recognized in the case of a special
judge, and it is held that a party to an action
before a special judge may question his title to
the office of a judge on the proceedings before
him, and that the judgment will be reversed on
appeal, where proper exceptions are taken, if the
person assuming to act as special judge is not a
judge de jure. The title of a de facto officer cannot
be indirectly questioned in a proceeding to
obtain a writ of prohibition to prevent him from
doing an official act nor in a suit to enjoin the
collection of a judgment rendered by him. Having
at least colorable right to the office his title can
be determined only in a quo warranto
proceeding or information in the nature of a quo
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21114 November 28, 1967
FEDERICO FERNANDEZ, plaintiff-appellant,
vs.
P. CUERVA and CO., defendant-appellee.
Gerardo P. Moreno, Jr. for plaintiff-appellant.
N.O. Bueno for defendant-appellee.
ZALDIVAR, J.:
This is an appeal from the order of the Court of
First Instance of Manila, dated January 29, 1963,
in its Civil Case No. 52946, dismissing the
complaint upon the ground that the action in the
first two causes of action had prescribed and that
it had no jurisdiction over the third cause of
action.
It appears that plaintiff Federico Fernandez was
employed as salesman by defendant P. Cuerva &
Co. from March, 1949 to October, 1959. After his
separation from the service, plaintiff filed a
claim, on July 26, 1960, before Regional Office
No. 4 of the Department of Labor,1 docketed as L.
S. Case No. 2940, to recover unpaid salaries and
commissions, and separation pay.
During the pendency of said case, or on
December 17, 1962, plaintiff again instituted a
similar complaint against the same defendant
with the Court of First Instance of Manila (Civil
Case No. 52946) alleging, among others, that he
was employed by defendant company as
salesman in March, 1949 with a salary of
P200.00 per month that beginning June, 1955
until the termination of his services in October,
1959, his salary was increased to, P300.00
monthly and was given, in addition, a
commission of 10% on his sales; that the
increase of P100.00 a month and the 10%
commission were not actually received by him as
there was a verbal understanding between him
and defendant company that the same would be
retained by the latter as bond or deposit for the
goods being handled by the former; and that
because plaintiff was separated from the service
in October, 1959, he sought to recover the sum of
P5,300.00 representing the P100.00 monthly
deductions from his salary; P4,770.00
corresponding to his 10% commissions that
were withheld, and P1,500.00 as separation pay,
or the total sum of P11,570.00. These three items
were respectively the subject matter of the first,
second and third causes of action of the
complaint.
On January 2, 1963, defendant filed a motion to
dismiss the complaint upon the grounds that the
actions had prescribed and that the court had no
jurisdiction over the case. The court below, after
allowing the parties to submit their respective
memorandum on the questions of prescription
and jurisdiction, dismissed the case, in an order
issued on January 29, 1963, holding that because
the claim of plaintiff in the first two causes of
action amounting to P10,070.00 represented the
sum total of unauthorized deductions from his
salaries and withheld commissions, under
Section 10, paragraph (f) of Republic Act No. 602,
otherwise known as the Minimum Wage Law, the
action to recover the same was already barred
under Section 17 of said Act inasmuch as it was
not brought within three years from the time the
right of action accrued; and that because the
remaining claim of plaintiff was limited to his
separation pay amounting only to P1,500.00, the
action to collect the same was not within the
original jurisdiction of the court.
On February 1, 1963, plaintiff moved to
reconsider the above-mentioned order,
advancing as his main argument the fact that his
having filed a similar claim with Regional Office
No. 4 of the Department of Labor had suspended
the running of the prescriptive period insofar as
his claim for refund of unauthorized deductions
and withheld commissions was concerned —
which were the subject matters of the first and
second causes of action that were dismissed by
the court. The defendant filed an opposition to
the motion for reconsideration. In an order dated
February 15, 1963, the court denied plaintiff's
motion for reconsideration. Hence this appeal by
the plaintiff direct to this Court on purely
questions of law.
We are in accord with the court a quo that the
law applicable to the case at bar is Republic Act
602 because the bond or deposit sought to be
recovered by appellant was actually the sum
total of the unauthorized deductions from his
salaries and withheld commissions under
Section 10 thereof. Under Section 17 of said law,
"any action . . . to enforce any cause of action
under this Act may be commenced within three
years after the cause of action accrued, and every
such action shall be forever barred unless
commenced within three years after the cause of
action accrued." Since a right of action accrues
only from the moment the right to commence the
action comes into existence, and prescription
begins to run from that time,2 the question to be
resolved is: When did the right of action of
plaintiff accrue?
To answer the foregoing query, it is meet to
recall that while the amounts withheld by
defendant were actually deductions from
plaintiff's salaries and unpaid commissions, they
were, however, constituted as a bond or a
deposit to answer for any liability that he might
incur in connection with the goods handled by
him. The bond and/or deposit was thus
answerable for merchandise entrusted to
plaintiff during the period of his employment
with defendant. It was, therefore, not feasible for
plaintiff to demand every month or every
payday, or during the period of his employment
with the company the return or refund of those
amounts withheld as contended by defendant,
because the undertaking for which the bond or
deposit was constituted was still subsisting. And
so the right of plaintiff to commence an action
for the return or refund of the amounts
representing such bond or deposit would accrue
only when the same was no longer needed, and
the time when it was no longer needed only
came in October 1959 when plaintiff was
separated from the service. Having ceased to be
employed by the defendant, the bond put up by
plaintiff thereby became unnecessary or useless.
It would seem, however, that even if We count
from October, 1959 in computing the
prescriptive period, plaintiff's action to recover
the amount held by defendant as bond is already
barred because more than three years had
elapsed by the time plaintiff instituted the
present case in the court below on December 17,
1962. The record, however, shows that on July
26, 1960, plaintiff filed a similar claim against
the defendant with Regional Office No. 4 of the
Department of Labor.
At this juncture, the question posed is: Did the
filing by plaintiff of that claim with the regional
office of the Department of Labor suspend the
running of the period of prescription?
Defendant answers the question in the negative.
While defendant does not question the
applicability to the case at bar of Article 1155 of
the Civil Code, which provides that the
"prescription of actions is interrupted when they
are filed before the Court," nevertheless, it
contends that inasmuch as plaintiff's claim was
lodged with the regional office of the Department
of Labor, which is not a court, the same could not
be considered a judicial demand that would
suspend the running of the prescriptive period.
We do not agree with defendant. It is true that
the claim filed by plaintiff with the regional office
of the Department of Labor is not a judicial
demand in the same sense of the term "judicial
demand" because the same was not instituted in
a court of justice. Judicial notice, however, should
be taken that on December 10, 1956,
Reorganization Plan No. 20-A was promulgated
pursuant to Republic Act 997, and under Section
25 of said reorganization plan each regional
office of the Department of Labor was vested
with original and exclusive jurisdiction over all
cases affecting all money claims arising from
violations of labor standards on working
conditions such as unpaid wages, underpayment,
overtime and separation pay, etc., to the
exclusion of courts.3Consequently, when plaintiff
wanted to enforce his claim after his dismissal
from the service in October, 1959, he had no
choice but to file the same with Regional Office
No. 4 of the Department of Labor which was the
agency then empowered to take cognizance of
the claim. He could not institute the action to
recover his claim in the court of justice because
of the provisions of Reorganization Plan No. 20-
A. At least it may be said that on July 26, 1960,
when plaintiff filed his claim with Regional
Office. No. 4 of the Department of Labor, he acted
in accordance with the procedure that was then
prescribed under authority of law. Under the
circumstances, We believe that the filing by
plaintiff of his claim before the regional office of
the Department of Labor had the attributes of a
judicial demand. And We say this because under
the provisions of Section 25 of Reorganization
Plan No. 20-A each regional office of the
Department of Labor was invested with
jurisdiction, similar to that of a court, to receive,
determine, and adjudicate claims arising out of
employer-employee relations as specified in said
section. We quote Section 25 of Reorganization
Plan No. 20-A:
Each Regional Office shall
have original and exclusive jurisdiction
over all cases affecting all money claims
arising from violations of labor
standards on working conditions,
including but not restrictive to: unpaid
wages, underpayment, overtime,
separation pay, and maternity leave of
employees/laborers and unpaid wages,
overtime, separation pay, vacation pay,
and payment for medical services of
domestic held. (Emphasis supplied)
It can be gathered from a reading of the above-
quoted Section 25 of Reorganization Plan No. 20-
A that some sort of judicial powers was
conferred upon the regional offices of the
Department of Labor over money claims
mentioned in said section. Certainly, it can be
considered that filing a money claim before a
regional office of the Department of Labor
pursuant to Section 25 of Reorganization Plan
No. 20-A is like filing a complaint in court to
enforce said money claim. We believe that the
filing of a claim before an administrative agency
which is vested with authority to decide said
claim would produce the effect of a judicial
demand for the purpose of interrupting the
running of the period of prescription. The
purpose of the law on prescription and the
statute of limitations is to protect the person
who is diligent and vigilant in asserting his right,
and conversely to punish the person who sleeps
on his right.4 Indeed, it cannot be said that in the
case before Us the plaintiff had slept on his right,
because shortly after he was separated from the
service by the defendant he filed his claim before
the agency of the government that was at the
time clothed with exclusive authority to pass
upon his claim.
We have taken note of the fact that on June 30,
1961, Section 25 of Reorganization Plan No. 20-A
had been declared unconstitutional by this Court
in the case of Corominas, et al. v. The Labor
Standards Commission, et al., supra. It appears,
however, that the plaintiff had filed his claim
before Regional Office No. 4 of the Department of
Labor on July 26, 1960, or about one year before
said Section 25 had been declared
unconstitutional. The circumstance that Section
25 of Reorganization Plan No. 20-A had been
declared unconstitutional should not be counted
against the defendant in the present case. In the
case of Manila Motor Co., Inc. v. Flores, 99 Phil.,
738, this Court upheld the right of a party under
the Moratorium Law which had accrued in his
favor before said law was declared
unconstitutional by this Court in the case
of Rutter v. Esteban, 93 Phil., 68. This Court, in its
decision in the Manila Motor case, quoted the
following doctrine:
[t]here are several instances wherein
courts, out of equity, have relaxed its
operation (cf. note in Cooley's
Constitutional Limitations 8th ed., p.
383 and Notes 53 A.L.R., 273) or
qualified its effects "since the actual
existence of a statute prior to such
declaration is an operative fact, and
may have consequences which cannot
justly be ignored" (Chicot County vs.
Baster, 308 U.S., 371) and a realistic
approach is eroding the general
doctrine (Warring vs. Colpoys 136 Am.
Law Rep., 1025, 1030).
We believe that it is only fair and just that the
foregoing doctrine should be applied in favor of
the plaintiff in the present case.
We have noted in the record that it was precisely
because Section 25 of Reorganization Plan No.
20-A was declared unconstitutional by this Court
on June 30, 1961 that the plaintiff, without
awaiting the action of Regional Office No. 4 of the
Department of Labor on the claim that he filed
on July 26, 1960, instituted his action in the
present case in the court below on December 17,
1962. The move of plaintiff was precisely
intended to protect his right of action from the
adverse effect of the decision of this Court. The
Regional Office No. 4 of the Department of Labor
dismissed plaintiff's claim on January 16, 1963
upon the ground that it had no more jurisdiction
to pass upon the claim as a result of the ruling of
this Court in the Corominas case.
Considering that from October, 1959 when
plaintiff was separated from the service up to
July 26, 1960 when he filed his claim with
Regional Office No. 4 of the Department of Labor
only eight months had elapsed, and that since
July 26, 1960 until the filing of the complaint in
the court below on December 17, 1962 the
running of prescriptive period was deemed
interrupted, it is clear that plaintiff's action to
enforce his claim was not yet barred by the
statute of limitations when he filed his complaint
in the court below. Plaintiff's action may be
considered as brought before the court still
within the period of three years from the time
his right of action accrued in accordance with the
provisions of Section 17 of Republic Act 602
(Minimum Wage Law). Only about nine months
of the three-year period provided in Section 17
of Republic Act 602 may be considered as having
lapsed when plaintiff commenced his action in
the court below. And considering further that the
amount sought to be recovered in the complaint
is more than P10,000.00, it follows that the
court a quo has the exclusive and original
jurisdiction to entertain the action of the
plaintiff. The lower court, therefore, erred when
it dismissed plaintiff's complaint.
WHEREFORE, the order appealed from is set
aside, and this case is remanded to the court
below for further proceedings, with costs against
the defendant-appellee. It is so ordered.
Dizon, Makalintal, Bengzon, J.P., Sanchez, Castro
and Angeles, JJ., concur.
Concepcion, C.J., and Reyes, J.B.L., J., took no part.
Separate Opinions
FERNANDO, J., concurring:
The opinion of the Court penned by Justice
Zaldivar, notable for its thorough and
comprehensive character, deserves full
concurrence. That I readily give.1 In view
however of what for me is the full acceptance by
this Court that a legislative or executive measure
subsequently annulled on constitutional
grounds, while necessarily devoid as a source of
legal right, should be considered as a fact from
which legal consequences may attach, I would
like to add a few, words.
Where the assailed legislative or executive act is
found by the judiciary to be contrary to the
Constitution, it is null and void. As the new Civil
Code puts it: "When the courts declare a law to
be inconsistent with the Constitution, the former
shall be void and the latter shall govern.
Administrative or executive acts, orders and
regulations shall be valid only when they are not
contrary to the laws or the Constitution."2 The
above provision of the Civil Code reflects the
orthodox view that an unconstitutional act,
whether legislative or executive, is not a law,
confers no rights, imposes no duties, and affords
no protection.3 This doctrine admits of
qualifications, however. As the American
Supreme Court stated: "The actual existence of a
statue prior to such a determination [of
constitutionality], is an operative fact and may
have consequences which cannot always be
erased by a new judicial declaration. The effect of
the subsequent ruling as to invalidity may have
to be considered in various aspects, — with Court commends itself for full and unqualified
respect to particular regulations, individual and approval.
corporate, and particular conduct, private and
official."4

The orthodox view finds support in the well-

settled doctrine that the Constitution is supreme
and provides the measure for the validity of
legislative or executive acts. Clearly then, neither
the legislative nor the executive branch, and for
that matter, much less, this Court, has power
under the Constitution to act contrary to its
terms. Any attempted exercise of power in
violation of its provisions is to that extent
unwarranted and null.

The growing awareness of the role of the

judiciary as the governmental organ which has
the final say on whether or not a legislative or
executive measure is valid leads to a more
appreciative attitude of the emerging concept
that a declaration of nullity may have legal
consequences which the more orthodox view
would deny. That for a period of time such a
statute, treaty, executive order, or ordinance was
in "actual existence" appears to be indisputable.
What is more appropriate and logical then than
to consider it as "an operative fact."
With Araneta v. Hill,5 Manila Motor Co. v.
Flores,6 and now this decision, such a view has
much more than propriety and logic in its favor.
It is now settled law. That is as it ought to be.

Considering that it is one of the basic

presuppositions of our constitutional polity, that
the act of any branch of the government is
subject to judicial scrutiny, the effect of which
maybe to invalidate it for being unconstitutional.
it is far from realistic, to say the least, to
disregard completely its existence. More
specifically, as the then Justice, now Chief Justice,
Concepcion noted, while the validity of
Reorganization Plan No. 20-A was debatable, it
was nevertheless "presumed valid until
otherwise held by final judgment of a competent
court." Both reason and authority thus concur in
the view that to treat the matter as if such an
executive regulation had never been would be
far from satisfying the ends of justice, not to say
common sense.7 To repeat, the opinion of the
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P.
HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of
First Instance of Leyte, FRED BROWN, EMMA
BROWN, HIPOLITA CAPUCIONG, in his
capacity as receiver of the Far Eastern
Lumber and Commercial Co.,
Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for
respondents.
BENGZON, J.:
This is petition to set aside all the proceedings
had in civil case No. 381 of the Court of First
Instance of Leyte and to enjoin the respondent
judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C.
Arnold Hall and Bradley P. Hall, and the
respondents Fred Brown, Emma Brown, Hipolita
D. Chapman and Ceferino S. Abella, signed and
acknowledged in Leyte, the article of
incorporation of the Far Eastern Lumber and
Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general
contractors, operators and managers, etc.
Attached to the article was an affidavit of the
treasurer stating that 23,428 shares of stock had
been subscribed and fully paid with certain
properties transferred to the corporation
described in a list appended thereto.
(2) Immediately after the execution of said
articles of incorporation, the corporation
proceeded to do business with the adoption of
by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of
incorporation were filed in the office of the
Securities and Exchange Commissioner, for the
issuance of the corresponding certificate of
incorporation.
(4) On March 22, 1948, pending action on the
articles of incorporation by the aforesaid
governmental office, the respondents Fred
Brown, Emma Brown, Hipolita D. Chapman and
Ceferino S. Abella filed before the Court of First
Instance of Leyte the civil case numbered 381,
entitled "Fred Brown et al. vs. Arnold C. Hall et
al.", alleging among other things that the Far
Eastern Lumber and Commercial Co. was an
unregistered partnership; that they wished to
have it dissolved because of bitter dissension
among the members, mismanagement and fraud
by the managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold
Hall and Bradley P. Hall, filed a motion to
dismiss, contesting the court's jurisdiction and
the sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S.
Piccio ordered the dissolution of the company;
and at the request of plaintiffs, appointed of the
properties thereof, upon the filing of a P20,000
bond.
(7) The defendants therein (petitioners herein)
offered to file a counter-bond for the discharge of
the receiver, but the respondent judge refused to
accept the offer and to discharge the receiver.
Whereupon, the present special civil action was
instituted in this court. It is based upon two main
propositions, to wit:
(a) The court had no jurisdiction in civil case No.
381 to decree the dissolution of the company,
because it being a de facto corporation,
dissolution thereof may only be ordered in a quo
warranto proceeding instituted in accordance
with section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and
Emma Brown had signed the article of
incorporation but only a partnership.
Discussion: The second proposition may at once
be dismissed. All the parties are informed that
the Securities and Exchange Commission has not,
so far, issued the corresponding certificate of
incorporation. All of them know, or sought to
know, that the personality of a corporation
begins to exist only from the moment such
certificate is issued — not before (sec. 11,
Corporation Law). The complaining associates
have not represented to the others that they
were incorporated any more than the latter had
made similar representations to them. And as
nobody was led to believe anything to his
prejudice and damage, the principle of estoppel
does not apply. Obviously this is not an instance
requiring the enforcement of contracts with the
corporation through the rule of estoppel.
The first proposition above stated is premised on
the theory that, inasmuch as the Far Eastern
Lumber and Commercial Co., is a de
facto corporation, section 19 of the Corporation
Law applies, and therefore the court had not
jurisdiction to take cognizance of said civil case
number 381. Section 19 reads as follows:
. . . The due incorporation of any
corporations claiming in good faith to
be a corporation under this Act and its
right to exercise corporate powers shall
not be inquired into collaterally in any
private suit to which the corporation
may be a party, but such inquiry may
be had at the suit of the Insular
Government on information of the
Attorney-General.
There are least two reasons why this section
does not govern the situation. Not having
obtained the certificate of incorporation, the Far
Eastern Lumber and Commercial Co. — even its
stockholders — may not probably claim "in good
faith" to be a corporation.
Under our statue it is to be noted
(Corporation Law, sec. 11) that it is the
issuance of a certificate of
incorporation by the Director of the
Bureau of Commerce and Industry
which calls a corporation into being.
The immunity if collateral attack is
granted to corporations "claiming in
good faith to be a corporation under
this act." Such a claim is compatible
with the existence of errors and
irregularities; but not with a total or
substantial disregard of the law. Unless
there has been an evident attempt to
comply with the law the claim to be a
corporation "under this act" could not
be made "in good faith." (Fisher on the
Philippine Law of Stock Corporations,
p. 75. See also Humphreys vs. Drew, 59
Fla., 295; 52 So., 362.)
Second, this is not a suit in which the
corporation is a party. This is a litigation
between stockholders of the alleged corporation,
for the purpose of obtaining its dissolution. Even
the existence of a de jure corporation may be
terminated in a private suit for its dissolution
between stockholders, without the intervention
of the state.
There might be room for argument on the right
of minority stockholders to sue for
dissolution;1 but that question does not affect the
court's jurisdiction, and is a matter for decision
by the judge, subject to review on appeal. Whkch
brings us to one principal reason why this
petition may not prosper, namely: the
petitioners have their remedy by appealing the
order of dissolution at the proper time.
There is a secondary issue in connection with the
appointment of a receiver. But it must be
admitted that receivership is proper in
proceedings for dissolution of a company or
corporation, and it was no error to reject the
counter-bond, the court having declared the
dissolution. As to the amount of the bond to be
demanded of the receiver, much depends upon
the discretion of the trial court, which in this
instance we do not believe has been clearly
abused.
Judgment: The petition will, therefore, be
dismissed, with costs. The preliminary injunction
heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes,
JJ., concur.
 Republic of the Philippines The court below rendered judgment in favor of
SUPREME COURT the plaintiff for the sum demanded in the
Manila complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate
EN BANC of 10 per cent per annum, and the costs. From
this judgment the defendant appeals to this
court.
G.R. No. 22106 September 11, 1924
At the trial of the case the plaintiff failed to prove
ASIA BANKING CORPORATION, plaintiff- affirmatively the corporate existence of the
appellee, parties and the appellant insists that under these
vs. circumstances the court erred in finding that the
STANDARD PRODUCTS, CO., INC., defendant- parties were corporations with juridical
appellant. personality and assigns same as reversible error.

Charles C. De Selms for appellant. There is no merit whatever in the appellant's

Gibbs & McDonough and Roman Ozaeta for contention. The general rule is that in the
appellee. absence of fraud a person who has contracted or
otherwise dealt with an association in such a
OSTRAND, J.: way as to recognize and in effect admit its legal
existence as a corporate body is thereby
This action is brought to recover the sum of estopped to deny its corporate existence in any
P24,736.47, the balance due on the following action leading out of or involving such contract
promissory note: or dealing, unless its existence is attacked for
cause which have arisen since making the
contract or other dealing relied on as an estoppel
P37,757.22 and this applies to foreign as well as to domestic
corporations. (14 C. J., 227; Chinese Chamber of
Commerce vs. Pua Te Ching, 14 Phil., 222.)
MANILA, P. I., Nov. 28, 1921.

The defendant having recognized the corporate

MANILA, P. I., Nov. 28, 1921.
On demand, after date we promise to
pay to the Asia Banking Corporation, or
order, the sum of thirty-seven thousand
seven hundred fifty-seven and 22/100
pesos at their office in Manila, for value
received, together with interest at the
rate of ten per cent per annum.
No. ________ Due __________
THE STANDARD PRODUCTS CO., INC.
By (Sgd.) GEORGE H. SEAVER
By President
existence of the plaintiff by making a promissory
note in its favor and making partial payments on
the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course,
also estopped from denying its own corporate
existence. Under these circumstances it was
unnecessary for the plaintiff to present other
evidence of the corporate existence of either of
the parties. It may be noted that there is no
evidence showing circumstances taking the case
out of the rules stated.
The judgment appealed from is affirmed, with
the costs against the appellant. So ordered.
Street, Malcolm, Avanceña, Villamor and
Romualdez, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-11442 May 23, 1958
MANUELA T. VDA. DE
SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity
as Judge of the Court of First Instance of
Leyte, Branch II, and SEGUNDINO
REFUERZO, respondents.
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino
Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela
T. Vda. de Salvatierra seeking to nullify the order
of the Court of First Instance of Leyte in Civil
Case No. 1912, dated March 21, 1956, relieving
Segundino Refuerzo of liability for the contract
entered into between the former and the
Philippine Fibers Producers Co., Inc., of which
Refuerzo is the president. The facts of the case
are as follows:
Manuela T. Vda. de Salvatierra appeared to be
the owner of a parcel of land located at
Maghobas, Poblacion, Burauen, Teyte. On March
7, 1954, said landholder entered into a contract
of lease with the Philippine Fibers Producers Co.,
Inc., allegedly a corporation "duly organized and
existing under the laws of the Philippines,
domiciled at Burauen, Leyte, Philippines, and
with business address therein, represented in
this instance by Mr. Segundino Q. Refuerzo, the
President". It was provided in said contract,
among other things, that the lifetime of the lease
would be for a period of 10 years; that the land
would be planted to kenaf, ramie or other crops
suitable to the soil; that the lessor would be
entitled to 30 per cent of the net income accruing
from the harvest of any, crop without being
responsible for the cost of production thereof;
and that after every harvest, the lessee was
bound to declare at the earliest possible time the
income derived therefrom and to deliver the
corresponding share due the lessor.
Apparently, the aforementioned obligations
imposed on the alleged corporation were not
complied with because on April 5, 1955,
Alanuela T. Vda, de Salvatierra filed with the
Court of First Instance of Leyte a complaint
against the Philippine Fibers Producers Co., Inc.,
and Segundino Q. Refuerzo, for accounting,
rescission and damages (Civil Case No. 1912).
She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the
leased property which crop was, at the time of
the commencement of the action, already
harvested, processed and sold by defendants;
that notwithstanding that fact, defendants
refused to render an accounting of the income
derived therefrom and to deliver the lessor's
share; that the estimated gross income was
P4,500, and the deductible expenses amounted
to P1,000; that as defendants' refusal to
undertake such task was in violation of the terms
of the covenant entered into between the
plaintiff and defendant corporation, a rescission
was but proper.
As defendants apparently failed to file their
answer to the complaint, of which they were
allegedly notified, the Court declared them in
default and proceeded to receive plaintiff's
evidence. On June 8, 1955, the lower Court
rendered judgment granting plaintiff's prayer,
and required defendants to render a complete
accounting of the harvest of the land subject of
the proceeding within 15 days from receipt of
the decision and to deliver 30 per cent of the net
income realized from the last harvest to plaintiff,
with legal interest from the date defendants
received payment for said crop. It was further
provide that upon defendants' failure to abide by
the said requirement, the gross income would be
fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per
cent of which or P960 was held to be due the
plaintiff pursuant to the aforementioned
contract of lease, which was declared rescinded.
No appeal therefrom having been perfected
within the reglementary period, the Court, upon
motion of plaintiff, issued a writ of execution, in
virtue of which the Provincial Sheriff of Leyte
caused the attachment of 3 parcels of land
registered in the name of Segundino Refuerzo.
No property of the Philippine Fibers Producers
Co., Inc., was found available for attachment. On
January 31, 1956, defendant Segundino Refuerzo
filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and
void with respect to him, there being no
allegation in the complaint pointing to his
personal liability and thus prayed that an order
be issued limiting such liability to defendant
corporation. Over plaintiff's opposition, the
Court a quo granted the same and ordered the
Provincial Sheriff of Leyte to release all
properties belonging to the movant that might
have already been attached, after finding that the
evidence on record made no mention or referred
to any fact which might hold movant personally
liable therein. As plaintiff's petition for relief
from said order was denied, Manuela T. Vda. de
Salvatierra instituted the instant action asserting
that the trial Judge in issuing the order
complained of, acted with grave abuse of
discretion and prayed that same be declared a
nullity.
From the foregoing narration of facts, it is clear
that the order sought to be nullified was issued
by tile respondent Judge upon motion of
defendant Refuerzo, obviously pursuant to Rule
38 of the Rules of Court. Section 3 of said Rule,
however, in providing for the period within
which such a motion may be filed, prescribes
that:
SEC. 3. WHEN PETITION FILED;
CONTENTS AND VERIFICATION. — A
petition provided for in either of the
preceding sections of this rule must be
verified, filed within sixty days after the
petitioner learns of the judgment, order,
or other proceeding to be set aside, and
not more than six months after such
judgment or order was entered, or such
proceeding was taken; and must be
must be accompanied with affidavit
showing the fraud, accident, mistake, or
excusable negligence relied upon, and
the facts constituting the petitioner is
good and substantial cause of action or
defense, as the case may be, which he
may prove if his petition be granted".
(Rule 38)
The aforequoted provision treats of 2 periods,
i.e., 60 days after petitioner learns of the
judgment, and not more than 6 months after the
judgment or order was rendered, both of which
must be satisfied. As the decision in the case at
bar was under date of June 8, 1955, whereas the
motion filed by respondent Refuerzo was dated
January 31, 1956, or after the lapse of 7 months
and 23 days, the filing of the aforementioned
motion was clearly made beyond the
prescriptive period provided for by the rules.
The remedy allowed by Rule 38 to a party
adversely affected by a decision or order is
certainly an alert of grace or benevolence
intended to afford said litigant a penultimate
opportunity to protect his interest. Considering
the nature of such relief and the purpose behind
it, the periods fixed by said rule are non-
extendible and never interrupted; nor could it be
subjected to any condition or contingency
because it is of itself devised to meet a condition
or contingency (Palomares vs. Jimenez,* G.R. No.
L-4513, January 31, 1952). On this score alone,
therefore, the petition for a writ of certiorarifiled
herein may be granted. However, taking note of
the question presented by the motion for relief
involved herein, We deem it wise to delve in and
pass upon the merit of the same.
Refuerzo, in praying for his exoneration from
any liability resulting from the non-fulfillment of
the obligation imposed on defendant Philippine
Fibers Producers Co., Inc., interposed the defense
that the complaint filed with the lower court
contained no allegation which would hold him
liable personally, for while it was stated therein
that he was a signatory to the lease contract, he
did so in his capacity as president of the
corporation. And this allegation was found by the
Court a quo to be supported by the records.
Plaintiff on the other hand tried to refute this
averment by contending that her failure to
specify defendant's personal liability was due to
the fact that all the time she was under the
impression that the Philippine Fibers Producers
Co., Inc., represented by Refuerzo was a duly
registered corporation as appearing in the
contract, but a subsequent inquiry from the
Securities and Exchange Commission yielded
otherwise. While as a general rule a person who
has contracted or dealt with an association in
such a way as to recognize its existence as a
corporate body is estopped from denying the
same in an action arising out of such transaction
or dealing, (Asia Banking Corporation vs.
Standard Products Co., 46 Phil., 114; Compania
Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta
Development Co.; vs. Steamship Pompey, 49
Phil., 117), yet this doctrine may not be held to
be applicable where fraud takes a part in the said
transaction. In the instant case, on plaintiff's
charge that she was unaware of the fact that the
Philippine Fibers Producers Co., Inc., had no
juridical personality, defendant Refuerzo gave no
confirmation or denial and the circumstances
surrounding the execution of the contract lead to
the inescapable conclusion that plaintiff Manuela
T. Vda. de Salvatierra was really made to believe
that such corporation was duly organized in
accordance with law.
There can be no question that a corporation with
registered has a juridical personality separate
and distinct from its component members or
stockholders and officers such that a corporation
cannot be held liable for the personal
indebtedness of a stockholder even if he should
be its president (Walter A. Smith Co. vs. Ford, SC-
G.R. No. 42420) and conversely, a stockholder or
member cannot be held personally liable for any
financial obligation be, the corporation in excess
of his unpaid subscription. But this rule is
understood to refer merely to registered
corporations and cannot be made applicable to
the liability of members of an unincorporated
association. The reason behind this doctrine is
obvious-since an organization which before the
law is non-existent has no personality and would
be incompetent to act and appropriate for itself
the powers and attribute of a corporation as
provided by law; it cannot create agents or
confer authority on another to act in its behalf;
thus, those who act or purport to act as its
representatives or agents do so without
authority and at their own risk. And as it is an
elementary principle of law that a person who
acts as an agent without authority or without a
principal is himself regarded as the principal,
possessed of all the rights and subject to all the
liabilities of a principal, a person acting or
purporting to act on behalf of a corporation
which has no valid existence assumes such
privileges and obligations and comes personally
liable for contracts entered into or for other acts
performed as such, agent (Fay vs. Noble, 7
Cushing [Mass.] 188. Cited in II Tolentino's
Commercial Laws of the Philippines, Fifth Ed., P.
689-690). Considering that defendant Refuerzo,
as president of the unregistered corporation
Philippine Fibers Producers Co., Inc., was the
moving spirit behind the consummation of the
lease agreement by acting as its representative,
his liability cannot be limited or restricted that
imposed upon corporate shareholders. In acting
on behalf of a corporation which he knew to be
unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any,
arising out of such transaction.
Wherefore, the order of the lower Court of March
21, 1956, amending its previous decision on this
matter and ordering the Provincial Sheriff of
Leyte to release any and all properties of movant
therein which might have been attached in the
execution of such judgment, is hereby set aside
and nullified as if it had never been issued. With
costs against respondent Segundino Refuerzo. It
is so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A.,
Bautista Angelo, Labrador, Concepcion, Reyes,
J.B.L., and Endencia, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19118 January 30, 1965
MARIANO A. ALBERT, plaintiff-appellant,
vs.
UNIVERSITY PUBLISHING CO., INC., defendant-
appellee.
Uy & Artiaga and Antonio M. Molina for plaintiff-
appellant.
Aruego, Mamaril & Associates for defendant-
appellees.
BENGZON, J.P., J.:
No less than three times have the parties here
appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-
9300, April 18, 1958, we found plaintiff entitled
to damages (for breach of contract) but reduced
the amount from P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co.,
Inc., L-15275, October 24, 1960, we held that the
judgment for P15,000.00 which had become final
and executory, should be executed to its full
amount, since in fixing it, payment already made
had been considered.
Now we are asked whether the judgment may be
executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the
real defendant.
Fifteen years ago, on September 24, 1949,
Mariano A. Albert sued University Publishing Co.,
Inc. Plaintiff alleged inter alia that defendant was
a corporation duly organized and existing under
the laws of the Philippines; that on July 19, 1948,
defendant, through Jose M. Aruego, its President,
entered into a contract with plaintifif; that
defendant had thereby agreed to pay plaintiff
P30,000.00 for the exclusive right to publish his
revised Commentaries on the Revised Penal
Code and for his share in previous sales of the
book's first edition; that defendant had
undertaken to pay in eight quarterly installments
of P3,750.00 starting July 15, 1948; that per
contract failure to pay one installment would
render the rest due; and that defendant had
failed to pay the second installment.
Defendant admitted plaintiff's allegation of
defendant's corporate existence; admitted the
execution and terms of the contract dated July
19, 1948; but alleged that it was plaintiff who
breached their contract by failing to deliver his
manuscript. Furthermore, defendant
counterclaimed for damages.1äwphï1.ñët
Plaintiff died before trial and Justo R. Albert, his
estate's administrator, was substituted for him.
The Court of First Instance of Manila, after trial,
rendered decision on April 26, 1954, stating in
the dispositive portion —
IN VIEW OF ALL THE FOREGOING, the
Court renders judgment in favor of the
plaintiff and against the defendant the
University Publishing Co., Inc., ordering
the defendant to pay the administrator
Justo R. Albert, the sum of P23,000.00
with legal [rate] of interest from the
date of the filing of this complaint until
the whole amount shall have been fully
paid. The defendant shall also pay the
costs. The counterclaim of the
defendant is hereby dismissed for lack
of evidence.
As aforesaid, we reduced the amount of damages
to P15,000.00, to be executed in full. Thereafter,
on July 22, 1961, the court a quo ordered
issuance of an execution writ against University
Publishing Co., Inc. Plaintiff, however, on August
10, 1961, petitioned for a writ of execution
against Jose M. Aruego, as the real defendant,
stating, "plaintiff's counsel and the Sheriff of
Manila discovered that there is no such entity as
University Publishing Co., Inc." Plaintiff annexed
to his petition a certification from the securities
and Exchange Commission dated July 31, 1961,
attesting: "The records of this Commission do
not show the registration of UNIVERSITY
PUBLISHING CO., INC., either as a corporation or
partnership." "University Publishing Co., Inc."
countered by filing, through counsel (Jose M.
Aruego's own law firm), a "manifestation"
stating that "Jose M. Aruego is not a party to this
case," and that, therefore, plaintiff's petition
should be denied.
Parenthetically, it is not hard to decipher why
"University Publishing Co., Inc.," through counsel,
would not want Jose M. Aruego to be considered
a party to the present case: should a separate
action be now instituted against Jose M. Aruego,
the plaintiff will have to reckon with the statute
of limitations.
The court a quo denied the petition by order of
September 9, 1961, and from this, plaintiff has
appealed.
The fact of non-registration of University
Publishing Co., Inc. in the Securities and
Exchange Commission has not been disputed.
Defendant would only raise the point that
"University Publishing Co., Inc.," and not Jose M.
Aruego, is the party defendant; thereby
assuming that "University Publishing Co., Inc." is
an existing corporation with an independent
juridical personality. Precisely, however, on
account of the non-registration it cannot be
considered a corporation, not even a
corporation de facto (Hall vs. Piccio, 86 Phil.
603). It has therefore no personality separate
from Jose M. Aruego; it cannot be sued
independently.
The corporation-by-estoppel doctrine has not
been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-
existent entity and induced not only the plaintiff
but even the court to believe in such
representation. He signed the contract as
"President" of "University Publishing Co., Inc.,"
stating that this was "a corporation duly
organized and existing under the laws of the
Philippines," and obviously misled plaintiff
(Mariano A. Albert) into believing the same. One
who has induced another to act upon his wilful
misrepresentation that a corporation was duly
organized and existing under the law, cannot
thereafter set up against his victim the principle
of corporation by estoppel (Salvatiera vs.
Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to
come to court, answering the complaint and
litigating upon the merits. But as stated,
"University Publishing Co., Inc." has no
independent personality; it is just a name. Jose
M. Aruego was, in reality, the one who answered
and litigated, through his own law firm as
counsel. He was in fact, if not, in name, the
defendant.
Even with regard to corporations duly organized
and existing under the law, we have in many a
case pierced the veil of corporate fiction to
administer the ends of justice. * And in Salvatiera
vs. Garlitos, supra, p. 3073, we ruled: "A person
acting or purporting to act on behalf of a
corporation which has no valid
existence assumes such privileges and obligations
and becomes personally liable for contracts
entered into or for other acts performed as such
agent." Had Jose M. Aruego been named as party
defendant instead of, or together with,
"University Publishing Co., Inc.," there would be
no room for debate as to his personal liability.
Since he was not so named, the matters of "day
in court" and "due process" have arisen.
In this connection, it must be realized that
parties to a suit are "persons who have a right to
control the proceedings, to make defense, to
adduce and cross-examine witnesses, and to
appeal from a decision" (67 C.J.S. 887) — and
Aruego was, in reality, the person who had and
exercised these rights. Clearly, then, Aruego had
his day in court as the real defendant; and due
process of law has been substantially observed.
By "due process of law" we mean " "a law which
hears before it condemns; which proceeds upon
inquiry, and renders judgment only after trial. ... We need hardly state that should there be
." (4 Wheaton, U.S. 518, 581.)"; or, as this Court persons who under the law are liable to Aruego
has said, " "Due process of law" contemplates for reimbursement or contribution with respect
notice and opportunity to be heard before to the payment he makes under the judgment in
judgment is rendered, affecting one's person or question, he may, of course, proceed against
property" (Lopez vs. Director of Lands, 47 Phil. them through proper remedial measures.
23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14,
1956.) And it may not be amiss to mention here PREMISES CONSIDERED, the order appealed
also that the "due process" clause of the from is hereby set aside and the case remanded
Constitution is designed to secure justice as a ordering the lower court to hold supplementary
living reality; not to sacrifice it by paying undue proceedings for the purpose of carrying the
homage to formality. For substance must prevail judgment into effect against University
over form. It may now be trite, but none the less Publishing Co., Inc. and/or Jose M. Aruego. So
apt, to quote what long ago we said in Alonso vs. ordered.
Villamor, 16 Phil. 315, 321-322:
Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera,
A litigation is not a game of Paredes, Dizon, Regala, Makalintal and Zaldivar,
technicalities in which one, more JJ., concur.
deeply schooled and skilled in the Bautista Angelo, J., took no part.
subtle art of movement and position,
entraps and destroys the other. It is,
rather, a contest in which each
contending party fully and fairly lays
before the court the facts in issue and
then, brushing side as wholly trivial
and indecisive all imperfections of form
and technicalities of procedure, asks
that Justice be done upon the merits.
Lawsuits, unlike duels, are not to be
won by a rapier's thrust. Technicality,
when it deserts its proper office as an
aid to justice and becomes its great
hindrance and chief enemy, deserves
scant consideration from courts. There
should be no vested rights in
technicalities.

The evidence is patently clear that Jose M.

Aruego, acting as representative of a non-
existent principal, was the real party to the
contract sued upon; that he was the one who
reaped the benefits resulting from it, so much so
that partial payments of the consideration were
made by him; that he violated its terms, thereby
precipitating the suit in question; and that in the
litigation he was the real defendant. Perforce, in
line with the ends of justice, responsibility under
the judgment falls on him.
THIRD DIVISION
[G.R. No. 136448. November 3, 1999]
LIM TONG LIM, petitioner, vs. PHILIPPINE
FISHING GEAR INDUSTRIES,
INC., respondent.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist
among parties who agree to borrow money to
pursue a business and to divide the profits or
losses that may arise therefrom, even if it is
shown that they have not contributed any capital
of their own to a "common fund." Their
contribution may be in the form of credit or
industry, not necessarily cash or fixed
assets. Being partners, they are all liable for
debts incurred by or on behalf of the
partnership. The liability for a contract entered
into on behalf of an unincorporated association
or ostensible corporation may lie in a person
who may not have directly transacted on its
behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us,
Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV
41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error
in the appealed decision, the same is hereby
affirmed.[2]
The decretal portion of the Quezon City
Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of
preliminary attachment issued by this Court on
September 20, 1990;
2. That defendants are jointly liable to plaintiff
for the following amounts, subject to the
modifications as hereinafter made by reason of
the special and unique facts and circumstances
and the proceedings that transpired during the
trial of this case;
a. P532,045.00 representing [the] unpaid
purchase price of the fishing nets covered by the
Agreement plusP68,000.00 representing the
unpaid price of the floats not covered by said
Agreement;
b. 12% interest per annum counted from date of
plaintiffs invoices and computed on their
respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No.
14407 for P385,377.80 dated February 9, 1990;
ii. Accrued interest of P27,904.02 on Invoice No.
14413 for P146,868.00 dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No.
14426 for P68,000.00 dated February 19, 1990;
c. P50,000.00 as and for attorneys fees,
plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly
rental for storage charges on the nets counted
from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants
for the principal obligation or for the unpaid
price of nets and floats in the amount
of P532,045.00 and P68,000.00, respectively, or
for the total amount of P600,045.00, this Court
noted that these items were attached to
guarantee any judgment that may be rendered in
favor of the plaintiff but, upon agreement of the
parties, and, to avoid further deterioration of the
nets during the pendency of this case, it was
ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the
sole and winning bidder. The proceeds of the
sale paid for by plaintiff was deposited in
court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for
any judgment that plaintiff may be able to secure
in this case with the ownership and possession
of the nets and floats awarded and delivered by
the sheriff to plaintiff as the highest bidder in the
public auction sale. It has also been noted that
ownership of the nets [was] retained by the
plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the
plaintiff attached its own properties. It [was] for
this reason also that this Court earlier ordered
the attachment bond filed by plaintiff to guaranty
damages to defendants to be cancelled and for
the P900,000.00 cash bidded and paid for by
plaintiff to serve as its bond in favor of
defendants.
From the foregoing, it would appear therefore
that whatever judgment the plaintiff may be
entitled to in this case will have to be satisfied
from the amount of P900,000.00 as this amount
replaced the attached nets and
floats.Considering, however, that the total
judgment obligation as computed above would
amount to onlyP840,216.92, it would be
inequitable, unfair and unjust to award the
excess to the defendants who are not entitled to
damages and who did not put up a single centavo
to raise the amount of P900,000.00 aside from
the fact that they are not the owners of the nets
and floats. For this reason, the defendants are
hereby relieved from any and all liabilities
arising from the monetary judgment obligation
enumerated above and for plaintiff to retain
possession and ownership of the nets and floats
and for the reimbursement of the P900,000.00
deposited by it with the Clerk of Court.
SO ORDERED. [3]
The Facts
On behalf of "Ocean Quest Fishing
Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990,
for the purchase of fishing nets of various sizes
from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they
were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a
signatory to the agreement. The total price of the
nets amounted toP532,045. Four hundred pieces
of floats worth P68,000 were also sold to the
Corporation.[4]
The buyers, however, failed to pay for the
fishing nets and the floats; hence, private
respondent filed a collection suit against Chua,
Yao and Petitioner Lim Tong Lim with a prayer
for a writ of preliminary attachment. The suit
was brought against the three in their capacities
as general partners, on the allegation that Ocean
Quest Fishing Corporation was a nonexistent
corporation as shown by a Certification from the
Securities and Exchange Commission.[5] On
September 20, 1990, the lower court issued a
Writ of Preliminary Attachment, which the
sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua
filed a Manifestation admitting his liability and
requesting a reasonable time within which to
pay. He also turned over to respondent some of
the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to
have waived his right to cross-examine
witnesses and to present evidence on his behalf,
because of his failure to appear in subsequent
hearings. Lim Tong Lim, on the other hand, filed
an Answer with Counterclaim and Crossclaim
and moved for the lifting of the Writ of
Attachment.[6] The trial court maintained the
Writ, and upon motion of private respondent,
ordered the sale of the fishing nets at a public
auction. Philippine Fishing Gear Industries won
the bidding and deposited with the said court the
sales proceeds of P900,000.[7]
On November 18, 1992, the trial court
rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ
of Attachment and that Chua, Yao and Lim, as
general partners, were jointly liable to pay
respondent.[8]
The trial court ruled that a partnership
among Lim, Chua and Yao existed based (1) on
the testimonies of the witnesses presented and
(2) on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua
and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of
nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and
(e) damages.[10] The Compromise Agreement
provided:
a) That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount ofP5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full
payment forP3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will
be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into
3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3
Peter Yao;
c) If the proceeds of the sale the vessels will be
less than P5,750,000.00 whatever the deficiency
shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise
Agreement was silent as to the nature of their
obligations, but that joint liability could be
presumed from the equal distribution of the
profit and loss.[12]
Lim appealed to the Court of Appeals (CA)
which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that
petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a
such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate
court ruled:
The evidence establishes that all the defendants
including herein appellant Lim Tong Lim
undertook a partnership for a specific
undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the
defendants was to divide the profits among
themselves which is what a partnership
essentially is x x x. By a contract of partnership,
two or more persons bind themselves to
contribute money, property or industry to a
common fund with the intention of dividing the
profits among themselves (Article 1767, New
Civil Code).[13]
Hence, petitioner brought this recourse
before this Court.[14]
The Issues
In his Petition and Memorandum, Lim asks
this Court to reverse the assailed Decision on the
following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING,
BASED ON A COMPROMISE AGREEMENT THAT
CHUA, YAO AND PETITIONER LIM ENTERED
INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
II SINCE IT WAS ONLY CHUA WHO
REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN
HE BOUGHT THE NETS FROM PHILIPPINE
FISHING, THE COURT OF APPEALS WAS
UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED
THE SEIZURE AND ATTACHMENT OF
PETITIONER LIMS GOODS.
In determining whether petitioner may be
held liable for the fishing nets and floats
purchased from respondent, the Court must
resolve this key issue: whether by their acts, Lim,
Chua and Yao could be deemed to have entered
into a partnership.
This Courts Ruling
The Petition is devoid of merit.
First and Second Issues: Existence of a
Partnership and Petitioner's Liability
In arguing that he should not be held liable
for the equipment purchased from respondent,
petitioner controverts the CA finding that a
partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct
participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua
and Yao only, and that he has not even met the
representatives of the respondent
company. Petitioner further argues that he was a
lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990,
showed that he had merely leased to the two the
main asset of the purported partnership -- the
fishing boat F/B Lourdes.The lease was for six
months, with a monthly rental of P37,500 plus
25 percent of the gross catch of the boat.
We are not persuaded by the arguments of
petitioner. The facts as found by the two lower
courts clearly showed that there existed a
partnership among Chua, Yao and him, pursuant
to Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two
or more persons bind themselves to contribute
money, property, or industry to a common fund,
with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a
partnership among the three existed based on
the following factual findings:[15]
(1) That Petitioner Lim Tong Lim requested
Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was
already Yaos partner;
(2) That after convening for a few times, Lim
Chua, and Yao verbally agreed to acquire two
fishing boats, theFB Lourdes and the FB
Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus
Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.
(4) That they bought the boats from CMF Fishing
Corporation, which executed a Deed of Sale over
these two (2) boats in favor of Petitioner Lim
Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the
refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would
be shouldered by Chua and Yao;
(6) That because of the unavailability of funds,
Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured
by a check, because of which, Yao and Chua
entrusted the ownership papers of two other
boats, Chuas FB Lady Anne Mel and Yaos FB
Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement,
Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN
was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong
Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4)
injunction; and (e) damages.
(9) That the case was amicably settled through a
Compromise Agreement executed between the
parties-litigants the terms of which are already
enumerated above.
From the factual findings of both lower
courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which
they started by buying boats worth P3.35
million, financed by a loan secured from Jesus
Lim who was petitioners brother. In their
Compromise Agreement, they subsequently
revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide
equally among them the excess or loss. These
boats, the purchase and the repair of which were
financed with borrowed money, fell under the
term common fund under Article 1767. The
contribution to such fund need not be cash or
fixed assets; it could be an intangible like credit
or industry. That the parties agreed that any loss
or profit from the sale and operation of the boats
would be divided equally among them also
shows that they had indeed formed a
partnership.
Moreover, it is clear that the partnership
extended not only to the purchase of the boat,
but also to that of the nets and the floats. The
fishing nets and the floats, both essential to
fishing, were obviously acquired in furtherance
of their business. It would have been
inconceivable for Lim to involve himself so much
in buying the boat but not in the acquisition of
the aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that
there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing
business. They purchased the boats, which
constituted the main assets of the partnership,
and they agreed that the proceeds from the sales
and operations thereof would be divided among
them.
We stress that under Rule 45, a petition for
review like the present case should involve only
questions of law. Thus, the foregoing factual
findings of the RTC and the CA are binding on
this Court, absent any cogent proof that the
present action is embraced by one of the
exceptions to the rule.[16] In assailing the factual
findings of the two lower courts, petitioner
effectively goes beyond the bounds of a petition
for review under Rule 45.
Compromise Agreement Not the Sole Basis of
Partnership
Petitioner argues that the appellate courts
sole basis for assuming the existence of a
partnership was the Compromise Agreement. He
also claims that the settlement was entered into
only to end the dispute among them, but not to
adjudicate their preexisting rights and
obligations. His arguments are baseless. The
Agreement was but an embodiment of the
relationship extant among the parties prior to its
execution.
A proper adjudication of claimants rights
mandates that courts must review and
thoroughly appraise all relevant facts. Both
lower courts have done so and have found,
correctly, a preexisting partnership among the
parties. In implying that the lower courts have
decided on the basis of one piece of document
alone, petitioner fails to appreciate that the CA
and the RTC delved into the history of the
document and explored all the possible
consequential combinations in harmony with
law, logic and fairness. Verily, the two lower
courts factual findings mentioned above nullified
petitioners argument that the existence of a
partnership was based only on the Compromise
Agreement.
Petitioner Was a Partner, Not a Lessor
We are not convinced by petitioners
argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the
fishing venture. His argument allegedly finds
support in the Contract of Lease and the
registration papers showing that he was the
owner of the boats, including F/B Lourdes where
the nets were found.
His allegation defies logic. In effect, he
would like this Court to believe that he
consented to the sale of his own boats to pay a
debt of Chua and Yao, with the excess of the
proceeds to be divided among the three of
them. No lessor would do what petitioner
did. Indeed, his consent to the sale proved that
there was a preexisting partnership among all
three.
Verily, as found by the lower courts,
petitioner entered into a business agreement
with Chua and Yao, in which debts were
undertaken in order to finance the acquisition
and the upgrading of the vessels which would be
used in their fishing business. The sale of the
boats, as well as the division among the three of
the balance remaining after the payment of their
loans, proves beyond cavil that F/B Lourdes,
though registered in his name, was not his own
property but an asset of the partnership. It is not
uncommon to register the properties acquired
from a loan in the name of the person the lender
trusts, who in this case is the petitioner
himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it
is absurd -- for petitioner to sell his property to
pay a debt he did not incur, if the relationship
among the three of them was merely that of
lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of
corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, we
disagree.
Section 21 of the Corporation Code of the
Philippines provides:
Sec. 21. Corporation by estoppel. - All persons
who assume to act as a corporation knowing it to
be without authority to do so shall be liable as
general partners for all debts, liabilities and
damages incurred or arising as a result
thereof: Provided however, That when any such
ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to
use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible
corporation as such, cannot resist performance
thereof on the ground that there was in fact no
corporation.
Thus, even if the ostensible corporate
entity is proven to be legally nonexistent, a party
may be estopped from denying its corporate
existence. The reason behind this doctrine is
obvious - an unincorporated association has no
personality and would be incompetent to act and
appropriate for itself the power and attributes of
a corporation as provided by law; it cannot
create agents or confer authority on another to
act in its behalf; thus, those who act or purport to
act as its representatives or agents do so without
authority and at their own risk.And as it is an
elementary principle of law that a person who
acts as an agent without authority or without a
principal is himself regarded as the principal,
possessed of all the right and subject to all the
liabilities of a principal, a person acting or
purporting to act on behalf of a corporation
which has no valid existence assumes such
privileges and obligations and becomes
personally liable for contracts entered into or for
other acts performed as such agent.[17]
The doctrine of corporation by estoppel
may apply to the alleged corporation and to a
third party. In the first instance, an
unincorporated association, which represented
itself to be a corporation, will be estopped from
denying its corporate capacity in a suit against it
by a third person who relied in good faith on
such representation. It cannot allege lack of
personality to be sued to evade its responsibility
for a contract it entered into and by virtue of
which it received advantages and benefits.
On the other hand, a third party who,
knowing an association to be unincorporated,
nonetheless treated it as a corporation and
received benefits from it, may be barred from
denying its corporate existence in a suit brought
against the alleged corporation. In such case, all
those who benefited from the transaction made
by the ostensible corporation, despite knowledge
of its legal defects, may be held liable for
contracts they impliedly assented to or took
advantage of.
There is no dispute that the respondent,
Philippine Fishing Gear Industries, is entitled to
be paid for the nets it sold. The only question
here is whether petitioner should be held
jointly[18] liable with Chua and Yao.Petitioner
contests such liability, insisting that only those
who dealt in the name of the ostensible
corporation should be held liable. Since his name
does not appear on any of the contracts and
since he never directly transacted with the
respondent corporation, ergo, he cannot be held
liable.
Unquestionably, petitioner benefited from
the use of the nets found inside F/B Lourdes, the
boat which has earlier been proven to be an
asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has
effectively stopped his use of the fishing vessel.
 It is difficult to disagree with the RTC and agreement, ownership of the nets remained with
the CA that Lim, Chua and Yao decided to form a Respondent Philippine Fishing Gear, until full
corporation.Although it was never legally formed payment thereof.
for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting WHEREFORE, the Petition is DENIED and
parties in representation of it. Clearly, under the the assailed Decision AFFIRMED. Costs against
law on estoppel, those acting on behalf of a petitioner.
corporation and those benefited by it, knowing it SO ORDERED.
to be without valid existence, are held liable as
general partners. Melo, (Chairman), Purisima, and Gonzaga-
Reyes, JJ., concur.
Technically, it is true that petitioner did Vitug, J., Pls. see concurring opinion.
not directly act on behalf of the
corporation. However, having reaped the benefits
of the contract entered into by persons with whom
he previously had an existing relationship, he is
deemed to be part of said association and is
covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling
of the Court in Alonso v. Villamor:[19]
A litigation is not a game of technicalities in
which one, more deeply schooled and skilled in
the subtle art of movement and position , entraps
and destroys the other. It is, rather, a contest in
which each contending party fully and fairly lays
before the court the facts in issue and then,
brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of
procedure, asks that justice be done upon the
merits. Lawsuits, unlike duels, are not to be won
by a rapiers thrust. Technicality, when it deserts
its proper office as an aid to justice and becomes
its great hindrance and chief enemy, deserves
scant consideration from courts. There should be
no vested rights in technicalities.
Third Issue: Validity of Attachment
Finally, petitioner claims that the Writ of
Attachment was improperly issued against the
nets. We agree with the Court of Appeals that
this issue is now moot and academic. As
previously discussed, F/B Lourdes was an asset
of the partnership and that it was placed in the
name of petitioner, only to assure payment of the
debt he and his partners owed. The nets and the
floats were specifically manufactured and tailor-
made according to their own design, and were
bought and used in the fishing venture they
agreed upon. Hence, the issuance of the Writ to
assure the payment of the price stipulated in the
invoices is proper. Besides, by specific
Republic of the Philippines 2) Ordering plaintiffs- The original complaint for annulment of title proceeding
SUPREME COURT appellees to vacate the subject filed in the court a quo by herein petitioners s prior to
Manila properties; and included as party defendants the Philippine 1970 (per
Machinery Parts Manufacturing Co., Inc. (PM exhibits A-
SECOND DIVISION 3) Ordering plaintiffs- Parts), Insurance Corporation of the Philippines 1 and A-2)
appellees to pay upon (ICP), Bormaheco, Inc., (Bormaheco) and which case
defendants' counterclaims: Santiago M. Rivera (Rivera). A Second Amended was filed in
G.R. No. 89561 September 13, 1990 Complaint was filed, this time impleading Court way
Santiago M. Rivera as party plaintiff. back in
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE a) To 1964;
CASTILLO, VICTORIA M. CASTILLO, BERTILLA defendant-
appellant During the pre-trial conference, the parties
C. RADA, MARIETTA C. ABAÑEZ, LEOVINA C. entered into the following stipulation of facts: b) The four
JALBUENA and SANTIAGO M. PM Parts:
(i) (4) parcels
RIVERA, petitioners, of land
vs. damages As between
consisting all described
COURT OF APPEALS, BORMAHECO, INC. and in
PHILIPPINE MACHINERY PARTS of the value parties: Plai
of the fruits ntiff paragraph
MANUFACTURING CO., INC., respondents. 3 of the
in the Buenaflor
subject M. Castillo Complaint
Edmundo T. Zepeda for petitioners. parcels of is the were
land of judicial originally
Martin M. De Guzman for respondent which they administrat covered by
BORMAHECO, Inc. were rix of the TCT No. T-
deprived in estate of 42104 and
the sum of Felipe Tax Dec.
Renato J. Robles for P.M. Parts Manufacturing Co., No. 14134
Inc. P26,000.00 Castillo in
and (ii) Special with
attorney's Proceeding assessed
fees of No. 4053, value of
P15,000.00 pending P3,100.00;
REGALADO, J.: before TCT No. T
Branch IX, 32227 and
b) To Tax Dec.
This is a petition to review the decision of defendant- CFI of
Quezon No. 14132,
respondent Court of Appeals, dated August 3, appellant with
1989, in CA-GR CV No. 15412, entitled "Buenaflor Bormaheco (per
Exhibit A) assessed
M. Castillo Umali, et al. vs. Philippine Machinery : (i) value of
Parts Manufacturing Co., Inc., et al.," 1 the expenses of which
intestate P5,130,00;
dispositive portion whereof provides: litigation in TCT No. T-
the amount proceeding
s was 31762 and
WHEREFORE, viewed in the of Tax Dec.
P5,000.00 instituted
light of the entire record, the by No. 14135,
judgment appealed from must and (ii) with
attorney's Mauricia
be, as it is hereby REVERSED. Meer Vda. assessed
In lieu thereof, a judgment is fees of value of
P15,000.00 de Castillo,
hereby rendered- the P6,150.00;
. and TCT
previous
1) Dismissing the complaint, administrat No. T-
with cost against plaintiffs; SO ORDERED. rix of the 42103 with
said Tax Dec.
No. 14133, Marietta Santiago immovable
with and Rivera s in
assessed Leovina, all (Exhibit 1); question
value of surnamed (per
P3,580.00 Castillo has e) That Exhibit 6
(per (sic) been based on for PM
Exhibits A- issued, the Parts) and
2 and B, B- namely: Certificate by reason
1 to B-3 C, TCT No. T- of Sale thereof,
C-1 -to C3 12113 issued by succeeded
(Exhibit E the Sheriff in
c) That the ); TCT No. of the transferrin
above- T-13113 Province of g unto
enumerate (Exhibit F); Quezon in itself the
d four (4) TCT No. T- favor of titles over
parcels of 13116 Insurance the lots in
land were (Exhibit G ) Corporatio dispute,
the subject and TCT n of the namely:
of the Deed No. T13117 Philippines per TCT
of Extra- (Exhibit H ) it was able No. T-
Judicial to transfer 24846
Partition d) That to itself the (Exhibit Q
executed mentioned titles over ), per TCT
by the parcels of the lots in No. T-
heirs of land were question, 24847
Felipe submitted namely: (Exhibit R
Castillo as guaranty TCT No. T- ), TCT No.
(per in the 23705 T-24848
Exhibit D) Agreement (Exhibit (Exhibit),
and by of Counter- M), TCT TCT No. T-
virtue Guaranty No. T 24849
thereof the with 23706 (Exhibit T
titles Chattel- (Exhibit N );
thereto has Real Estate ), TCT No.
(sic) been Mortgage T-23707 g) On 26
cancelled executed (Exhibit 0) August
and in lieu on 24 and TCT l976,
thereof, October No. T Mauricia
new titles 1970 23708 Meer Vda.
in the between (Exhibit P); de Castillo'
name of Insurance genther
Mauricia Corporatio f) That on letter to
Meer Vda. n of the 10 April Modesto N.
de Castillo Philippines 1975, the Cervantes
and of her and Slobec Insurance stating that
children, Realty Corporatio she and her
namely: Corporatio n of the children
Buenaflor, n Philippines refused to
Bertilla, represente sold to PM comply
Victoria, d by Parts the with his
demands Corporatio contract and ratified
(Exhibit V- n of the marked before
2); Philippines Exhibit J notary
and PM and Exhibit public
h) That Parts; that I for Alberto R.
from at Modesto N. Bormaheco Navoa of
least the Cervantes , Inc.; the City of
months of served Manila on
October, later on as j) That the October
November President Surety 24,1970;
and of PM Bond No.
December Parts, and 14010 k) That the
1970 and that Atty. issued by property
January de Guzman co- mortgaged
1971, was defendant consisted
Modesto N. retained by ICP was of four (4)
Cervantes Insurance likewise parcels of
was the Corporatio secured by land
Vice- n of the an situated in
President Philippines Agreement Lucena City
of specifically with and
Bormaheco for Counter- covered by
, Inc. later foreclosure Guaranty TCT Nos. T-
President purposes with Real 13114,
thereof, only; Estate T13115,
and also he Mortgage T-13116
is one of i) executed and T-
the Board Defendant by Slobec 13117 of
of Bormaheco Realty & the
Directors , Inc. on Developme Register of
of PM November nt, Inc., Deeds of
Parts; on 25, 1970 Mauricia Lucena
the other sold to Castillo City;
hand, Atty. Slobec Meer,
Martin M. Realty and Buenaflor l) That the
De Guzman Developme Castillo, tractor sold
was the nt, Inc., Bertilla by
legal represente Castillo, defendant
counsel of d by Victoria Bormaheco
Bormaheco Santiago Castillo, , Inc. to
, Inc., later Rivera, Marietta Slobec
Executive President, Castillo and Realty &
Vice- one (1) Leovina Developme
President unit Castillo, as nt, Inc. was
thereof, Caterpillar mortgagors delivered
and who Tractor D-7 in favor of to
also is the with Serial ICP which Bormaheco
legal No. 281114 document , Inc. on or
counsel of evidenced was about
Insurance by a executed October
 2,1973, by Makati, (Exhibit January
Mr. Rizal, Same 15); 23,1971
Menandro Rivera, in (Exhibit
Umali for representat p) On 18 16);
purposes ion of the December
of repair; Slobec 1970, at q)
Realty & Makati, Although it
m) That in Developme Rizal, the appears on
August nt Bormaheco the
1976, PM Corporatio , Inc., document
Parts n executed represente entitled
notified in favor of d by its Chattel
Mrs. Bormaheco Vice- Mortgage
Mauricia , Inc., President (per
Meer about represente Modesto Exhibit K)
its d by its Cervantes that it was
ownership Vice- and Slobec executed
and the President Realty on 25
assignment Modesto N. Corporatio November
of Mr. Cervantes a n 1970, and
Petronilo Chattel represente in the
Roque as Mortgage d by document
caretaker concerning Santiago entitled
of the one unit Rivera Sales
subject model CAT executed Agreement
property; D7 the sales (per
Caterpillar agreement Exhibit J)
Crawler concerning that it was
n) That Tractor as
plaintiff the sale of executed
described one (1) on 18
and other therein as
heirs are unit Model December
security for CAT D7 1970, it
harvest the
fruits of the Caterpillar appears in
payment in Crawler the notarial
property favor of the
(daranghit Tractor as register of
mortgagee described the notary
a) which is of the
worth no therein for public who
amount of the amount notarized
less than P180,000.0
Pl,000.00 of them that
0 (per P230,000.0 those two
per Exhibit K)
harvest. 0 (per documents
that Id Exhibit J) were
document which executed
As between plaintiffs and was document on 11
defendant Bormaheco, Inc superseded was December
by another superseded 1970. The
o) That on chattel by the certified
25 mortgage Sales xerox copy
November dated Agreement of the
1970, at January 23, dated notarial
1971
register of delivery Insurance ed and
Notary receipt No. Corporatio repainted.
Public 10368 (per n of the "2
Guillermo Exhibits 10 Philippines
Aragones and 10-A in favor of We cull the following antecedents from the
issued by for PM Parts decision of respondent Court of Appeals:
the Bureau Bormaheco on 1 0 April
of Records , Inc 1975,
Manageme Modesto N. Plaintiff Santiago Rivera is the
nt is hereto Cervantes, nephew of plaintiff Mauricia
s) That on Meer Vda. de Castillo. The
submitted 28 formerly
as Exhibit Vice- Castillo family are the owners
September of a parcel of land located in
BB That 1973, Atty. President
said chattel and now Lucena City which was given
Martin M. as security for a loan from the
mortgage de Guzman, President
was of Development Bank of the
as counsel Philippines. For their failure
superseded of Bormaheco
by another , Inc., sent to pay the amortization,
Insurance foreclosure of the said
document Corporatio his letter
dated dated 9 property was about to be
n of the initiated. This problem was
January 23, Philippines August
1971; 1976 to made known to Santiago
purchased Rivera, who proposed to them
at public Mauricia
Meer Vda. the conversion into
r) That on auction for subdivision of the four (4)
23 January said de Castillo
(Exhibit V), parcels of land adjacent to the
1971, corporatio mortgaged property to raise
Slobec n the four demanding
that she the necessary fund. The Idea
Realty (4) parcels was accepted by the Castillo
Developme of land and her
children family and to carry out the
nt subject of project, a Memorandum of
Corporatio tills case should
vacate the Agreement (Exh. U p. 127,
n, (per Record) was executed by and
represente Exhibit L), premises;
between Slobec Realty and
d by and which Development, Inc.,
Santiago document u) That the represented by its President
Rivera, was Caterpillar Santiago Rivera and the
received presented Crawler Castillo family. In this
from to the Tractor agreement, Santiago Rivera
Bormaheco Register of Model CAT obliged himself to pay the
, Inc. one Deeds on 1 D-7 which Castillo family the sum of
(1) tractor October was P70,000.00 immediately after
Caterpillar 1973; received by the execution of the
Model D-7 Slobec agreement and to pay the
pursuant to t) Although Realty additional amount of
Invoice No. it appears Developme P400,000.00 after the
33234 that the nt property has been converted
(Exhibits 9 realties in Corporatio into a subdivision. Rivera,
and 9-A, issue has n was armed with the agreement,
Bormaheco (sic) been actually Exhibit U , approached Mr.
, Inc.) and sold by recondition Modesto Cervantes, President
of defendant Bormaheco, and
proposed to purchase from
Bormaheco two (2) tractors
Model D-7 and D-8
Subsequently, a Sales
Agreement was executed on
December 28,1970 (Exh. J, p.
22, Record).
On January 23, 1971,
Bormaheco, Inc. and Slobec
Realty and Development, Inc.,
represented by its President,
Santiago Rivera, executed a
Sales Agreement over one
unit of Caterpillar Tractor D-7
with Serial No. 281114, as
evidenced by the contract
marked Exhibit '16'. As shown
by the contract, the price was
P230,000.00 of which
P50,000.00 was to constitute
a down payment, and the
balance of P180,000.00
payable in eighteen monthly
installments. On the same
date, Slobec, through Rivera,
executed in favor of
Bormaheco a Chattel
Mortgage (Exh. K, p. 29,
Record) over the said
equipment as security for the
payment of the aforesaid
balance of P180,000.00. As
further security of the
aforementioned unpaid
balance, Slobec obtained from
Insurance Corporation of the
Phil. a Surety Bond, with ICP
(Insurance Corporation of the
Phil.) as surety and Slobec as
principal, in favor of
Bormaheco, as borne out by
Exhibit '8' (p. 111, Record).
The aforesaid surety bond
was in turn secured by an
Agreement of Counter-
Guaranty with Real Estate
Mortgage (Exhibit I, p. 24,
Record) executed by Rivera as
president of Slobec and
Mauricia Meer Vda. de
Castillo, Buenaflor Castillo
Umali, Bertilla Castillo-Rada,
Victoria Castillo, Marietta
Castillo and Leovina Castillo
Jalbuena, as mortgagors and
Insurance Corporation of the
Philippines (ICP) as
mortgagee. In this agreement,
ICP guaranteed the obligation
of Slobec with Bormaheco in
the amount of P180,000.00. In
giving the bond, ICP required
that the Castillos mortgage to
them the properties in
question, namely, four parcels
of land covered by TCTs in the
name of the aforementioned
mortgagors, namely TCT Nos.
13114, 13115, 13116 and
13117 all of the Register of
Deeds for Lucena City.
On the occasion of the
execution on January 23,
1971, of the Sales Agreement
Exhibit '16', Slobec,
represented by Rivera
received from Bormaheco the
subject matter of the said
Sales Agreement, namely, the
aforementioned tractor
Caterpillar Model D-7 as
evidenced by Invoice No.
33234 (Exhs. 9 and 9-A, p.
112, Record) and Delivery
Receipt No. 10368 (Exhs. 10
and 10-A, p. 113). This tractor
was known by Rivera to be a
reconditioned and repainted
one [Stipulation of Facts, Pre-
trial Order, par. (u)].
Meanwhile, for violation of
the terms and conditions of
the Counter-Guaranty
Agreement (Exh. 1), the
properties of the Castillos
were foreclosed by ICP As the
highest bidder with a bid of
P285,212.00, a Certificate of
Sale was issued by the
Provincial Sheriff of Lucena
City and Transfer Certificates
of Title over the subject
parcels of land were issued by
the Register of Deeds of
Lucena City in favor of ICP
namely, TCT Nos. T-23705, T
23706, T-23707 and T-23708
(Exhs. M to P, pp. 38-45). The
mortgagors had one (1) year
from the date of the
registration of the certificate
of sale, that is, until October 1,
1974, to redeem the property,
but they failed to do so.
Consequently, ICP
consolidated its ownership
over the subject parcels of
land through the requisite
affidavit of consolidation of
ownership dated October 29,
1974, as shown in Exh. '22'(p.
138, Rec.). Pursuant thereto, a
Deed of Sale of Real Estate
covering the subject
properties was issued in favor
of ICP (Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance
Corporation of the Phil. ICP
sold to Phil. Machinery Parts
Manufacturing Co. (PM Parts)
the four (4) parcels of land
and by virtue of said
conveyance, PM Parts
transferred unto itself the
titles over the lots in dispute
so that said parcels of land are
now covered by TCT Nos. T-
24846, T-24847, T-24848 and
T-24849 (Exhs. Q-T, pp. 46-
49, Rec.).
Thereafter, PM Parts, through
its President, Mr. Modesto
Cervantes, sent a letter dated
August 9,1976 addressed to
plaintiff Mrs. Mauricia Meer
Castillo requesting her and
her children to vacate the
subject property, who (Mrs.
Castillo) in turn sent her reply
expressing her refusal to
comply with his demands.
On September 29, 1976, the
heirs of the late Felipe
Castillo, particularly plaintiff
Buenaflor M. Castillo Umali as
the appointed administratrix
of the properties in question
filed an action for annulment
of title before the then Court
of First Instance of Quezon
and docketed thereat as Civil
Case No. 8085. Thereafter,
they filed an Amended
Complaint on January 10,
1980 (p. 444, Record). On July
20, 1983, plaintiffs filed their
Second Amended Complaint,
impleading Santiago M. Rivera
as a party plaintiff (p. 706,
Record). They contended that
all the aforementioned
transactions starting with the
Agreement of Counter-
Guaranty with Real Estate
Mortgage (Exh. I), Certificate
of Sale (Exh. L) and the Deeds
of Authority to Sell, Sale and
the Affidavit of Consolidation
of Ownership (Annexes F, G,
H, I) as well as the Deed of
Sale (Annexes J, K, L and M)
are void for being entered
into in fraud and without the
consent and approval of the
Court of First Instance of
Quezon, (Branch IX) before
whom the administration
proceedings has been
pending. Plaintiffs pray that
the four (4) parcels of land
subject hereof be declared as
owned by the estate of the
late Felipe Castillo and that all
Transfer Certificates of Title Guaranty Quezon in actual litigation expenses in
Nos. with favor of the sum of P6,500.00.
13114,13115,13116,13117, Chattel- Insurance
23705, 23706, 23707, 23708, Real Estate Corporatio Defendants are likewise
24846, 24847, 24848 and Mortgage n of the ordered to pay the plaintiffs,
24849 as well as those dated Philippines jointly and severally, the sum
appearing as encumbrances at October (Exhibit L); of P10,000.00 for and as
the back of the certificates of 24,1970 attomey's fees. With costs
title mentioned be declared as (Exhibit 1); null and void for being against the defendants.
a nullity and defendants to fictitious, spurious and
pay damages and attorney's Sales without consideration.
fees (pp. 71071 1, Record). SO ORDERED. 4
Agreement Consequently, Transfer
dated Certificates of Title Nos. T
In their amended answer, the December 23705, T-23706, T23707 and As earlier stated, respondent court reversed the
defendants controverted the 28, 1970 T-23708 (Exhibits M, N, O and aforequoted decision of the trial court and
complaint and alleged, by way (Exhibit J) P) issued in the name of rendered the judgment subject of this petition-
of affirmative and special Insurance Corporation of the
defenses that the complaint Chattel Philippines, are likewise null Petitioners contend that
did not state facts sufficient to Mortgage and void. respondent Court of Appeals
state a cause of action against dated erred:
defendants; that plaintiffs are November The sale by Insurance
not entitled to the reliefs 25, 1970 Corporation of the- 1. In holding and finding that
demanded; that plaintiffs are (Exhibit K) Philippines in favor of the actions entered into
estopped or precluded from defendant Philippine between petitioner Rivera
asserting the matters set forth Machinery Parts with Cervantes are all fair and
in the Complaint; that Sales
Agreement Manufacturing Co., Inc., over regular and therefore binding
plaintiffs are guilty of laches Id four (4) parcels of land and between the parties thereto;
in not asserting their alleged dated
January 23, Transfer Certificates of Title
right in due time; that Nos. T 24846, T-24847, T-
defendant PM Parts is an 1971 2. In reversing the decision of
(Exhibit 24848 and T-24849 the lower court, not only
innocent purchaser for value subsequently issued by virtue
and relied on the face of the 16); based on erroneous
of said sale in the name of conclusions of facts,
title before it bought the Philippine Machinery Parts
subject property (p. 744, Chattel erroneous presumptions not
Manufacturing Co., Inc., are supported by the evidence on
Record). 3 Mortgage similarly declared null and
dated record but also, holding valid
void, and the Register of and binding the supposed
After trial, the court a January 23, Deeds of Lucena City is
1971 payment by ICP of its
quo rendered judgment, with hereby directed to issue, in obligation to Bormaheco,
the following decretal (Exhibit lieu thereof, transfer
17); despite the fact that the
portion: certificates of title in the surety bond issued it had
names of the plaintiffs, except already expired when it opted
WHEREFORE, judgment is Certificate Santiago Rivera. to foreclose extrajudically the
hereby rendered in favor of of Sale mortgage executed by the
the plaintiffs and against the dated Orders the defendants jointly petitioners;
defendants, declaring the September and severally to pay the
following documents: 28, 1973 plaintiffs moral damages in
executed 3. In aside the finding of the
the sum of P10,000.00, lower court that there was
by the exemplary damages in the
Agreement Provincial necessity to pierce the veil of
of Counter- amount of P5,000.00, and corporate existence; and
Sheriff of
 4. In reversing the decision of
the lower court of affirming
the same 5
I. Petitioners aver that the transactions entered
into between Santiago M. Rivera, as President of
Slobec Realty and Development Company
(Slobec) and Mode Cervantes, as Vice-President
of Bormaheco, such as the Sales
Agreement, 6 Chattel Mortgage 7 and the
Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, 8are all fraudulent
and simulated and should, therefore, be declared
nun and void. Such allegation is premised
primarily on the fact that contrary to the
stipulations agreed upon in the Sales Agreement
(Exhibit J), Rivera never made any advance
payment, in the alleged amount of P50,000.00, to
Bormaheco; that the tractor was received by
Rivera only on January 23, 1971 and not in 1970
as stated in the Chattel Mortgage (Exhibit K); and
that when the Agreement of Counter-Guaranty
with Chattel/Real Estate Mortgage was executed
on October 24, 1970, to secure the obligation of
ICP under its surety bond, the Sales Agreement
and Chattel Mortgage had not as yet been
executed, aside from the fact that it was
Bormaheco, and not Rivera, which paid the
premium for the surety bond issued by ICP
At the outset, it will be noted that petitioners
submission under the first assigned error hinges
purely on questions of fact. Respondent Court of
Appeals made several findings to the effect that
the questioned documents are valid and binding
upon the parties, that there was no fraud
employed by private respondents in the
execution thereof, and that, contrary to
petitioners' allegation, the evidence on record
reveals that petitioners had every intention to be
bound by their undertakings in the various
transactions had with private respondents. It is a
general rule in this jurisdiction that findings of
fact of said appellate court are final and
conclusive and, thus, binding on this Court in the
absence of sufficient and convincing proof, inter
alia, that the former acted with grave abuse of
discretion. Under the circumstances, we find no
compelling reason to deviate from this long-
standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay
the consideration agreed upon in the Sales
Agreement, which clearly constitutes a breach of
the contract, cannot be availed of by the guilty
party to justify and support an action for the
declaration of nullity of the contract. Equity and
fair play dictates that one who commits a breach
of his contract may not seek refuge under the
protective mantle of the law.
The evidence of record, on an overall calibration,
does not convince us of the validity of
petitioners' contention that the contracts
entered into by the parties are either absolutely
simulated or downright fraudulent.
There is absolute simulation, which renders the
contract null and void, when the parties do not
intend to be bound at all by the same. 9 The basic
characteristic of this type of simulation of
contract is the fact that the apparent contract is
not really desired or intended to either produce
legal effects or in any way alter the juridical
situation of the parties. The subsequent act of
Rivera in receiving and making use of the tractor
subject matter of the Sales Agreement and
Chattel Mortgage, and the simultaneous issuance
of a surety bond in favor of Bormaheco,
concomitant with the execution of the
Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage, conduce to the
conclusion that petitioners had every intention
to be bound by these contracts. The occurrence
of these series of transactions between
petitioners and private respondents is a strong
indication that the parties actually intended, or
at least expected, to exact fulfillment of their
respective obligations from one another.
Neither will an allegation of fraud prosper in this
case where petitioners failed to show that they
were induced to enter into a contract through
the insidious words and machinations of private
respondents without which the former would
not have executed such contract. To set aside a
document solemnly executed and voluntarily
delivered, the proof of fraud must be clear and
convincing. 10 We are not persuaded that such
quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the
premium for the surety bond issued by ICP does
not per se affect the validity of the bond.
Petitioners themselves admit in their present
petition that Rivera executed a Deed of Sale with
Right of Repurchase of his car in favor of
Bormaheco and agreed that a part of the
proceeds thereof shall be used to pay the
premium for the bond. 11 In effect, Bormaheco
accepted the payment of the premium as an
agent of ICP The execution of the deed of sale
with a right of repurchase in favor of Bormaheco
under such circumstances sufficiently
establishes the fact that Rivera recognized
Bormaheco as an agent of ICP Such payment to
the agent of ICP is, therefore, binding on Rivera.
He is now estopped from questioning the validity
of the suretyship contract.
II. Under the doctrine of piercing the veil of
corporate entity, when valid grounds therefore
exist, the legal fiction that a corporation is an
entity with a juridical personality separate and
distinct from its members or stockholders may
be disregarded. In such cases, the corporation
will be considered as a mere association of
persons. The members or stockholders of the
corporation will be considered as the
corporation, that is, liability will attach directly
to the officers and stockholders. 12 The doctrine
applies when the corporate fiction is used to
defeat public convenience, justify wrong, protect
fraud, or defend crime, 13 or when it is made as a
shield to confuse the legitimate issues 14 or
where a corporation is the mere alter ego or
business conduit of a person, or where the
corporation is so organized and controlled and
its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of
another corporation. 15
In the case at bar, petitioners seek to pierce the
V621 Of corporate entity of Bormaheco, ICP and
PM Parts, alleging that these corporations
employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging
to petitioners While we do not discount the
possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined
to apply the doctrine invoked by petitioners in
granting the relief sought. It is our considered
opinion that piercing the veil of corporate entity
is not the proper remedy in order that the
foreclosure proceeding may be declared a nullity
under the circumstances obtaining in the legal
case at bar.
In the first place, the legal corporate entity is
disregarded only if it is sought to hold the
officers and stockholders directly liable for a
corporate debt or obligation. In the instant case,
petitioners do not seek to impose a claim against
the individual members of the three
corporations involved; on the contrary, it is these
corporations which desire to enforce an alleged
right against petitioners. Assuming that
petitioners were indeed defrauded by private
respondents in the foreclosure of the mortgaged
properties, this fact alone is not, under the
circumstances, sufficient to justify the piercing of
the corporate fiction, since petitioners do not
intend to hold the officers and/or members of
respondent corporations personally liable
therefor. Petitioners are merely seeking the
declaration of the nullity of the foreclosure sale,
which relief may be obtained without having to
disregard the aforesaid corporate fiction
attaching to respondent corporations. Secondly,
petitioners failed to establish by clear and
convincing evidence that private respondents
were purposely formed and operated, and
thereafter transacted with petitioners, with the
sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of
two or more corporations are interrelated is not
a justification for disregarding their separate
personalities, 16 absent sufficient showing that
the corporate entity was purposely used as a
shield to defraud creditors and third persons of
their rights.
III. The main issue for resolution is whether
there was a valid foreclosure of the mortgaged
properties by ICP Petitioners argue that the
foreclosure proceedings should be declared null
and void for two reasons, viz.: (1) no written
notice was furnished by Bormaheco to ICP anent
the failure of Slobec in paying its obligation with
the former, plus the fact that no receipt was
presented to show the amount allegedly paid by
ICP to Bormaheco; and (b) at the time of the
foreclosure of the mortgage, the liability of ICP
under the surety bond had already expired.
Respondent court, in finding for the validity of
the foreclosure sale, declared:
Now to the question of
whether or not the
foreclosure by the ICP of the
real estate mortgage was in
the exercise of a legal right,
We agree with the appellants
that the foreclosure
proceedings instituted by the
ICP was in the exercise of a
legal right. First, ICP has in its
favor the legal presumption
that it had indemnified
Bormaheco by reason of
Slobec's default in the
payment of its obligation
under the Sales Agreement,
especially because Bormaheco
consented to ICPs foreclosure
of the mortgage. This
presumption is in consonance
with pars. R and Q Section 5,
Rule 5, * New Rules of Court
which provides that it is
disputably presumed that
private transactions have
been fair and regular.
likewise, it is disputably
presumed that the ordinary
course of business has been
followed: Second, ICP had the
right to proceed at once to the
foreclosure of the mortgage as
mandated by the provisions of
Art. 2071 Civil Code for these
further reasons: Slobec, the
principal debtor, was
admittedly insolvent; Slobec's
obligation becomes
demandable by reason of the
expiration of the period of
payment; and its
authorization to foreclose the
mortgage upon Slobec's
default, which resulted in the
accrual of ICPS liability to
Bormaheco. Third, the
Agreement of Counter-
Guaranty with Real Estate
Mortgage (Exh. 1) expressly
grants to ICP the right to
foreclose the real estate
mortgage in the event of 'non-
payment or non-liquidation of
the entire indebtedness or
fraction thereof upon
maturity as stipulated in the
contract'. This is a valid and
binding stipulation in the
absence of showing that it is
contrary to law, morals, good
customs, public order or
public policy. (Art. 1306, New
Civil Code). 17
1. Petitioners asseverate that there was no notice
of default issued by Bormaheco to ICP which
would have entitled Bormaheco to demand
payment from ICP under the suretyship contract.
Surety Bond No. B-1401 0 which was issued by
ICP in favor of Bormaheco, wherein ICP and
Slobec undertook to guarantee the payment of
the balance of P180,000.00 payable in eighteen
(18) monthly installments on one unit of Model
CAT D-7 Caterpillar Crawler Tractor, pertinently
provides in part as follows:
1. The liability of INSURANCE
CORPORATION OF THE
PHILIPPINES, under this
BOND will expire Twelve (I 2)
months from date hereof.
Furthermore, it is hereby
agreed and understood that
the INSURANCE
CORPORATION OF THE
PHILIPPINES will not be liable
for any claim not presented in
writing to the Corporation
within THIRTY (30) DAYS
from the expiration of this
BOND, and that the obligee
hereby waives his right to
bring claim or file any action
against Surety and after the
termination of one (1) year
from the time his cause of
action accrues. 18
The surety bond was dated October 24,
1970. However, an annotation on the
upper part thereof states: "NOTE:
EFFECTIVITY DATE OF THIS BOND
SHALL BE ON JANUARY 22, 1971." 19
On the other hand, the Sales Agreement dated
January 23, 1971 provides that the balance of
P180,000.00 shall be payable in eighteen (18)
monthly installments. 20 The Promissory Note
executed by Slobec on even date in favor of
Bormaheco further provides that the obligation
shall be payable on or before February 23, 1971
up to July 23, 1972, and that non-payment of any
of the installments when due shall make the
entire obligation immediately due and
demandable. 21
It is basic that liability on a bond is contractual in
nature and is ordinarily restricted to the
obligation expressly assumed therein. We have
repeatedly held that the extent of a surety's
liability is determined only by the clause of the
contract of suretyship as well as the conditions
stated in the bond. It cannot be extended by
implication beyond the terms the contract. 22
Fundamental likewise is the rule that, except
where required by the provisions of the contract,
a demand or notice of default is not required to
fix the surety's liability. 23 Hence, where the
contract of suretyship stipulates that notice of
the principal's default be given to the surety,
generally the failure to comply with the
condition will prevent recovery from the surety.
There are certain instances, however, when
failure to comply with the condition will not
extinguish the surety's liability, such as a failure
to give notice of slight defaults, which are waived
by the obligee; or on mere suspicion of possible
default; or where, if a default exists, there is
excuse or provision in the suretyship contract
exempting the surety for liability therefor, or
where the surety already has knowledge or is
chargeable with knowledge of the default. 24
In the case at bar, the suretyship contract
expressly provides that ICP shag not be liable for
any claim not filed in writing within thirty (30)
days from the expiration of the bond. In its
decision dated May 25 1987, the court a
quo categorically stated that '(n)o evidence was
presented to show that Bormaheco demanded
payment from ICP nor was there any action
taken by Bormaheco on the bond posted by ICP
to guarantee the payment of plaintiffs obligation.
There is nothing in the records of the
proceedings to show that ICP indemnified
Bormaheco for the failure of the plaintiffs to pay
their obligation. " 25 The failure, therefore, of
Bormaheco to notify ICP in writing about
Slobec's supposed default released ICP from
liability under its surety bond. Consequently, ICP
could not validly foreclose that real estate
mortgage executed by petitioners in its favor
since it never incurred any liability under the
surety bond. It cannot claim exemption from the
required written notice since its case does not
fall under any of the exceptions hereinbefore
enumerated.
Furthermore, the allegation of ICP that it has
paid Bormaheco is not supported by any
documentary evidence. Section 1, Rule 131 of the
Rules of Court provides that the burden of
evidence lies with the party who asserts an
affirmative allegation. Since ICP failed to duly
prove the fact of payment, the disputable
presumption that private transactions have been
fair and regular, as erroneously relied upon by
respondent Court of Appeals, finds no
application to the case at bar.
2. The liability of a surety is measured by the
terms of his contract, and, while he is liable to
the full extent thereof, such liability is strictly
limited to that assumed by its terms. 26 While
ordinarily the termination of a surety's liability is
governed by the provisions of the contract of
suretyship, where the obligation of a surety is,
under the terms of the bond, to terminate at a
specified time, his obligation cannot be enlarged
by an unauthorized extension thereof. 27 This is
an exception to the general rule that the
obligation of the surety continues for the same
period as that of the principal debtor. 28
It is possible that the period of suretyship may
be shorter than that of the principal obligation,
as where the principal debtor is required to
make payment by installments. 29 In the case at
bar, the surety bond issued by ICP was to expire
on January 22, 1972, twelve (1 2) months from
its effectivity date, whereas Slobec's installment
payment was to end on July 23, 1972. Therefore,
while ICP guaranteed the payment by Slobec of
the balance of P180,000.00, such guaranty was
valid only for and within twelve (1 2) months
from the date of effectivity of the surety bond, or
until January 22, 1972. Thereafter, from January
23, 1972 up to July 23, 1972, the liability of
Slobec became an unsecured obligation. The
default of Slobec during this period cannot be a
valid basis for the exercise of the right to
foreclose by ICP since its surety contract had
already been terminated. Besides, the liability of
ICP was extinguished when Bormaheco failed to
file a written claim against it within thirty (30)
days from the expiration of the surety bond.
Consequently, the foreclosure of the mortgage,
after the expiration of the surety bond under
which ICP as surety has not incurred any
liability, should be declared null and void.
3. Lastly, it has been held that where The
guarantor holds property of the principal as
collateral surety for his personal indemnity, to
which he may resort only after payment by
himself, until he has paid something as such
guarantor neither he nor the creditor can resort
to such collaterals. 30
The Agreement of Counter-Guaranty with
Chattel/Real Estate Mortgage states that it is
being issued for and in consideration of the
obligations assumed by the Mortgagee-Surety
Company under the terms and conditions of ICP
Bond No. 14010 in behalf of Slobec Realty
Development Corporation and in favor of
Bormaheco, Inc. 31 There is no doubt that said
Agreement of Counter-Guaranty is issued for the
personal indemnity of ICP Considering that the
fact of payment by ICP has never been parcels of land covered by the aforesaid
established, it follows, pursuant to the doctrine certificates of title; and (4) Transfer Certificates
above adverted to, that ICP cannot foreclose on of Title Nos. T-24846, T-24847, T-24848 and
the subject properties, T24849 subsequently issued by virtue of said
sale in the name of the latter corporation.
IV. Private respondent PM Parts posits that it is a
buyer in good faith and, therefore, it acquired a The Register of Deeds of Lucena City is hereby
valid title over the subject properties. The directed to cancel Transfer Certificates of Title
submission is without merit and the conclusion Nos. T-24846, T-24847, T24848 and T-24849 in
is specious the name of Philippine Machinery Parts
Manufacturing Co., Inc. and to issue in lieu
We have stated earlier that the doctrine of thereof the corresponding transfer certificates of
piercing the veil of corporate fiction is not title in the name of herein petitioners, except
applicable in this case. However, its Santiago Rivera.
inapplicability has no bearing on the good faith
or bad faith of private respondent PM Parts. It The foregoing dispositions are without prejudice
must be noted that Modesto N. Cervantes served to such other and proper legal remedies as may
as Vice-President of Bormaheco and, later, as be available to respondent Bormaheco, Inc.
President of PM Parts. On this fact alone, it against herein petitioners.
cannot be said that PM Parts had no knowledge
of the aforesaid several transactions executed
SO ORDERED.
between Bormaheco and petitioners. In addition,
Atty. Martin de Guzman, who is the Executive
Vice-President of Bormaheco, was also the legal Melencio-Herrera (Chairman), Paras and Padilla,
counsel of ICP and PM Parts. These facts were JJ., concur.
admitted without qualification in the stipulation
of facts submitted by the parties before the trial Sarmiento, J., is on leave.
court. Hence, the defense of good faith may not
be resorted to by private respondent PM Parts
which is charged with knowledge of the true
relations existing between Bormaheco, ICP and
herein petitioners. Accordingly, the transfer
certificates of title issued in its name, as well as
the certificate of sale, must be declared null and
void since they cannot be considered altogether
free of the taint of bad faith.
WHEREFORE, the decision of respondent Court
of Appeals is hereby REVERSED and SET ASIDE,
and judgment is hereby rendered declaring the
following as null and void: (1) Certificate of Sale,
dated September 28,1973, executed by the
Provincial Sheriff of Quezon in favor of the
Insurance Corporation of the Philippines; (2)
Transfer Certificates of Title Nos. T-23705, T-
23706, T-23707 and T-23708 issued in the name
of the Insurance Corporation of the Philippines;
(3) the sale by Insurance Corporation of the
Philippines in favor of Philippine Machinery
Parts Manufacturing Co., Inc. of the four (4)
Republic of the Philippines I. That plaintiff is a corporation duly
SUPREME COURT organized and existing under and by
Manila virtue of the laws of the Philippines,
with principal office therein at the City
EN BANC of Manila, the capital stock of which is
divided into thousand (1,000) shares of
P100 each. The Koppel Industrial Car
G.R. No. L-47673 October 10, 1946 and Equipment company, a corporation
organized and existing under the laws
KOPPEL (PHILIPPINES), INC., plaintiff- of the State of Pennsylvania, United
appellant, States of America, and not licensed to
vs. do business in the Philippines, owned
ALFREDO L. YATCO, Collector of Internal nine hundred and ninety-five (995)
Revenue, defendant-appellee. shares out of the total capital stock of
the plaintiff from the year 1928 up to
Padilla, Carlos and Fernando for appellant. and including the year 1936, and the
Office of the Solicitor General Ozaeta, First remaining five (5) shares only were
Assistant Solicitor General Reyes and. and are owned one each by officers of
Office of the Solicitor General Reyes and Solicitor the plaintiff corporation.
Cañizanes for appellee.
II. That plaintiff, at all times material to
this case, was and now is duly licensed
to engage in business as a merchant
and commercial broker in the
Philippines; and was and is the holder
HILADO, J.: of the corresponding merchant's and
commercial broker's privilege tax
This is an appeal by Koppel (Philippines), Inc., receipts.
from the judgment of the Court of First Instance
of Manila in civil case No. 51218 of said court
III. That the defendant Collector of
dismissing said corporation's complaint for the Internal revenue is now Mr. Bibiano L.
recovery of the sum of P64,122.51 which it had
Meer in lieu of Mr. Alfredo L. Yatco.
paid under protest to the Collector of Internal
Revenue on October 30, 1936, as merchant sales
tax. The main facts of the case were stipulated in IV. That during the period from January
the court below as follows: 1, 1929, up to and including December
31, 1932, plaintiff transacted business
in the Philippines in the following
AGREED STATEMENT OF FACTS manner, with the exception of the
transactions which are described in
Now come the plaintiff by attorney paragraphs V and VI of this stipulation:
Eulogio P. Revilla and the defendant by
the Solicitor General and undersigned When a local buyer was interested in
Assistant Attorney of the Bureau of the purchase of railway materials,
Justice and, with leave of this machinery, and supplies, it asked for
Honorable Court, hereby respectfully price quotations from plaintiff. Atypical
stipulated and agree to the following form of such request is attached hereto
facts, to wit: and made a part hereof as Exhibit A.
(Exhibit A represents typical
transactions arising from written
requests for quotations, while Exhibits
B to G, inclusive, are typical
transactions arising from verbal
requests for quotation.) Plaintiff then
cabled for the quotation desired for
Koppel Industrial Car and Equipment
Company. A sample of the pertinent
cable is hereto attached and made a
part hereof as Exhibit B. Koppel
Industrial Car and Equipment Company
answered by cable quoting its cost
price, usually A. C. I. F. Manila cost
price, which was later followed by a
letter of confirmation. A sample of the
said cable quotation and of the letter of
confirmation are hereto attached and
made a part hereof as Exhibits C and C-
1. Plaintiff, however, quoted by Koppel
Industrial Car and Equipment
Company. Copy of the plaintiff's letter
to purchaser is hereto attached and
made a part hereof as Exhibit D. On the
basis of these quotations, orders were
placed by the local purchasers, copies
of which orders are hereto attached as
Exhibits E and E-1.
A cable was then sent to Koppel
Industrial Car and Equipment company
giving instructions to ship the
merchandise to Manila forwarding the
customer's order. Sample of said cable
is hereto attached as Exhibit F. The bills
of lading were usually made to "order"
and indorsed in blank with notation to
the effect that the buyer be notified of
the shipment of the goods covered in
the bills of lading; commercial invoices
were issued by Koppel Industrial Car
and Equipment Company in the names
of the purchasers and certificates of
insurance were likewise issued in their
names, or in the name of Koppel
Industrial Car and Equipment Company
but indorsed in blank and attached to
drafts drawn by Koppel Industrial Car
and Equipment Company on the
purchasers, which were forwarded
through foreign banks to local banks.
Samples of the bills of lading are hereto
attached as Exhibits F-1, I-1, I-2 and I-3.
Bills of ladings, Exhibits I-1, I-2 and I-3,
may equally have been employed, but
said Exhibits I-1, I-2 and I-3 have no
connection with the transaction
covered by Exhibits B to G, inclusive.
The purchasers secured the shipping
papers by arrangement with the banks,
and thereupon received and cleared the
shipments. If the merchandise were of
European origin, and if there was not
sufficient time to forward the
documents necessary for clearance,
through foreign banks to local banks, to
the purchasers, the Koppel Industrial
Car and Equipment company did, in
many cases, send the documents
directly from Europe to plaintiff with
instructions to turn these documents
over to the purchasers. In many cases,
where sales was effected on the basis of
C. I. F. Manila, duty paid, plaintiff
advanced the sums required for the
payment of the duty, and these sums, so
advanced, were in every case
reimbursed to plaintiff by Koppel
Industrial Car and Equipment
Company. The price were payable by
drafts agreed upon in each case and
drawn by Koppel Industrial Car and
Equipment Company on respective
purchasers through local banks, and
payments were made to the banks by
the purchasers on presentation and
delivery to them of the above-
mentioned shipping documents or
copies thereof. A sample of said drafts
is hereto attached as Exhibit G. Plaintiff
received by way of compensation a
percentage of the profits realized on
the above transactions as fixed in
paragraph 6 of the plaintiff's contract
with Koppel Industrial Car and
Equipment Company, which contract is
hereto attached as Exhibit H, and
suffered its corresponding share in the
losses resulting from some of the
transactions.
That the total gross sales from January
1, 1929, up to and including December
31, 1932, effected in the foregoing
manner and under the above specified
conditions, amount to P3, 596,438.84.
V. That when a local sugar central was
interested in the purchase of railway
materials, machinery and supplies, it
secured quotations from, and placed
the corresponding orders with, the
plaintiff in substantially the same
manner as outlined in paragraph IV of
this stipulation, with the only
difference that the purchase orders
which were agreed to by the central
and the plaintiff are similar to the
sample hereto attached and made a
part hereof as Exhibit I. Typical
samples of the bills of lading covering
the herein transaction are hereto
attached and made a part hereto as
Exhibits I-1, I-2 and I-3. The value of
the sales carried out in the manner
mentioned in this paragraph is
P133,964.98.
VI. That sometime in February, 1929,
Miguel J. Ossorio, of Manila, Philippines,
placed an option with Koppel Industrial
Car and Equipment Company, through
plaintiff, to purchase within three
months a pair of Atlas-Diesel Marine
Engines. Koppel Industrial Car and
Equipment Company purchased said
Diesel Engines in Stockholm, Sweden,
for $16,508.32. The suppliers drew a
draft for the amount of $16,508.32 on
the Koppel Industrial Car and
Equipment Company, which paid the
amount covered by the draft. Later,
Miguel J. Ossorio definitely called the
deal off, and as Koppel Industrial Car
and Equipment Company could not
ship to or draw on said Mr. Miguel J.
Ossorio, it in turn drew another draft
on plaintiff for the same amount at six
months sight, with the understanding
that Koppel Industrial Car and
Equipment Company would reimburse
plaintiff when said engines were
disposed of. Plaintiff honored the draft
and debited the said sum of $16,508.32
to merchandise account. The engines
were left stored at Stockholm, Sweden.
On April 1, 1930, a new local buyer, Mr.
Cesar Barrios, of Iloilo, Philippines, was
found and the same engines were sold
to him for $21,000 (P42,000) C. I. F.
Hongkong. The engines were shipped
to Hongkong and a draft for $21,000
was drawn by Koppel Industrial Car
and Equipment Company on Mr. Cesar
Barrios. After the draft was fully paid
by Mr. Barrios, Koppel Industrial Car
and Equipment Company reimbursed
plaintiff with cost price of $16,508.32
and credited it with $1,152.95 as its
share of the profit on the transaction.
Exhibits J and J-1 are herewith attached
and made integral parts of this
stipulation with particular reference to
paragraph VI hereof.
VII. That plaintiff's share in the profits
realized out of these transactions
described in paragraphs IV, V and VI
hereof totaling P3,772,403.82, amounts
to P132,201.30; and that plaintiff
within the time provided by law
returned the aforesaid amount
P132,201.30 for the purpose of the
commercial broker's 4 per cent tax and
paid thereon the sum P5,288.05 as such
tax.
VIII. That defendant demanded of the
plaintiff the sum of P64,122.51 as the
merchants' sales tax of 1% per cent on
the amount of P3,772,403.82,
representing the total gross value of the
sales mentioned in paragraphs IV, V
and VI hereof, including the 25 per cent
surcharge for the late payment of the
said tax, which tax and surcharge were
determined after the amount of
P5,288.05 mentioned in paragraph VI
hereof was deducted.
IX. That plaintiff, on October 30, 1936, to their agreed statement of facts. A
paid under protest said sum of preponderance of evidence has
P64,122.51 in order to avoid further established, besides the facts thus
penalties, levy and distraint stipulated, the following:
proceedings.
(a) The shares of stock of
X. That defendant, on November 10, plaintiff corporation were and
1936, overruled plaintiff's protest, and are all owned by Koppel
defendant has failed and refused and Industries Car and Equipment
still fails and refuses, notwithstanding Company of Pennsylvania, U.
demands by plaintiff, to return to the S. A., exceptive which were
plaintiff said sum of P64,122.51 or any necessary to qualify the Board
part thereof. of Directors of said plaintiff
corporation;
xxx xxx xxx
(b) In the transactions
That the parties involved herein the plaintiff
corporation acted as the
hereby reserve the
right to present representative of Koppel
Industrial Car and Equipment
additional evidence
in support of their Company only, and not as the
agent of both the latter
respective
contentions. company and the respective
local purchasers — plaintiff's
principal witness, A.H. Bishop,
Manila, Philippines, its resident Vice-President, in
December 26, 1939 his testimony invariably
referred to Koppel Industrial
(Sgd.) ROMAN Car and Equipment Co. as "our
OZAETA principal" 9 t. s. n., pp. 10, 11,
Solicitor General 12, 19, 75), except that at the
bottom of page 10 to the top
of page 11, the witness stated
that they had "several
(Sgd.)
ANTONIO principal" abroad but that
CAÑIZARES "our principal abroad was, for
Assistant the years in question, Koppel
Attorney Industrial Car and Equipment
Company," and on page 68, he
testified that what he actually
(Sgd.) E. P. REVILLA said was ". . . but
our principal abroad" and not
Attorney for the "our principal abroad" — as
Plaintiff to which it is very significant
3rd Floor, Perez that neither this witness nor
Samanillo Bldg., any other gave the name of
Manila even a single other principal
abroad of the plaintiff
Both parties adduced some oral corporation;
evidence in clarification of or addition
(c) The plaintiff corporation
bore alone incidental
expenses — as, for instance,
cable expenses-not only those
of its own cables but also
those of its "principal" (t.s.n.,
pp. 52, 53);
(d) the plaintiff's "share in the
profits" realized from the
transactions in which it
intervened was left virtually
in the hands of Koppel
Industrial Car and Equipment
Company (t.s.n., p. 51);
(e) Where drafts were not
paid by the purchasers, the
local banks were instructed
not to protest them but to
refer them to plaintiff which
was fully empowered by
Koppel Industrial Car and
Equipment company to
instruct the banks with
regards to disposition of the
drafts and documents (t.s.n.,
p. 50; Exhibit G);lawphil.net
(f) Where the goods were
European origin, consular
invoices, bill of lading, and, in
general, the documents
necessary for clearance were
sent directly to plaintiff (t.s.n.,
p. 14);
(g) If the plaintiff had in stock
the merchandise desired by
local buyers, it immediately
filled the orders of such local
buyers and made delivery in
the Philippines without the
necessity of cabling its
principal in America either for
price quotations or
confirmation or rejection of
that agreed upon between it
and the buyer (t.s.n., pp. 39-
43);
(h) Whenever the deliveries
made by Koppel Industrial Car
and Equipment Company
were incomplete or
insufficient to fill the local
buyer's orders, plaintiff used
to make good the deficiencies
by deliveries from its own
local stock, but in such cases it
charged its principal only the
actual cost of the merchandise
thus delivered by it from its
stock and in such transactions
plaintiff did not realize any
profit (t.s.n., pp. 53-54);
(i) The contract of sale
involved herein were all
perfected in the Philippines.
Those described in paragraph IV of the
agreed statement of facts went through
the following process: (1) "When a local
buyer was interested in the purchase of
railway materials, machinery, and
supplies, it asked for price quotations
from plaintiff"; (2) "Plaintiff then
cabled for the quotation desired from
Koppel Industrial Car and Equipment
Company"; (3) "Plaintiff, however,
quoted to the purchaser a selling price
above the figures quoted by Koppel
Industrial Car and Equipment
Company"; (4) "On the basis of these
quotations, orders were placed by the
local purchasers . . ."
Those described in paragraph V of said
agreed statement of facts were
transacted "in substantially the same
manner as outlined in paragraph IV."
As to the single transaction described
in paragraph VI of the same agreed
statement of facts, discarding the
Ossorio option which anyway was
called off, "On April 1, 1930, a new local
buyer, Mr. Cesar Barrios, of Iloilo,
Philippines, was found and the same
engines were sold to him for
$21,000(P42,000) C.I.F. Hongkong."
(Emphasis supplied.).
(j) Exhibit H contains the
following paragraph:
It is clearly understood that the intent
of this contract is that the broker shall
perform only the functions of a broker
as set forth above, and shall not take
possession of any of the materials or
equipment applying to said orders or
perform any acts or duties outside the
scope of a broker; and in no sense shall
this contract be construed as granting
to the broker the power to represent
the principal as its agent or to make
commitments on its behalf.
The Court of First Instance held for the
defendant and dismissed plaintiff's complaint
with costs to it.
Upon this appeal, seven errors are assigned to
said judgment as follows:.
1. That the court a quo erred in not
holding that appellant is a domestic
corporation distinct and separate from,
and not a mere branch of Koppel
Industrial Car and Equipment Co.;
2. the court a quo erred in ignoring the
ruling of the Secretary of Finance, dated
January 31, 1931, Exhibit M;
3. the court a quo erred in not holding
that a character of a broker is
determined by the nature of the
transaction and not by the basis or
measure of his compensation;
4. The court a quo erred in not holding
that appellant acted as a commercial
broker in the transactions covered
under paragraph VI of the agreed
statement of facts;
5. The court a quo erred in not holding
that appellant acted as a commercial
broker in the transactions covered
under paragraph v of the agreed
statement of facts;
6. The court a quo erred in not holding
that appellant acted as a commercial
broker in the sole transaction covered
under paragraph VI of the agreed
statement of facts;
7. the court a quo erred in dismissing
appellant's complaint.
The lower court found and held that Koppel
(Philippines), Inc. is a mere dummy or brach
("hechura") of Koppel industrial Car and
Equipment Company. The lower court did not
deny legal personality to Koppel (Philippines),
Inc. for any and all purposes, but in effect its
conclusion was that, in the transactions involved
herein, the public interest and convenience
would be defeated and what would amount to a
tax evasion perpetrated, unless resort is had to
the doctrine of "disregard of the corporate
fiction."
I. In its first assignment of error appellant
submits that the trial court erred in not holding
that it is a domestic corporation distinct and
separate from and not a mere branch of Koppel
Industrial Car and Equipment Company. It
contends that its corporate existence as
Philippine corporation can not be collaterally
attacked and that the Government is estopped
from so doing. As stated above, the lower court
did not deny legal personality to appellant for
any and all purposes, but held in effect that in the
transaction involved in this case the public
interest and convenience would be defeated and
what would amount to a tax evasion perpetrated,
unless resort is had to the doctrine of "disregard
of the corporate fiction." In other words, in
looking through the corporate form to the
ultimate person or corporation behind that form,
in the particular transactions which were
involved in the case submitted to its
determination and judgment, the court did so in
order to prevent the contravention of the local
internal revenue laws, and the perpetration of
what would amount to a tax evasion, inasmuch
as it considered — and in our opinion, correctly
— that appellant Koppel (Philippines), Inc. was a
mere branch or agency or dummy ("hechura") of
Koppel Industrial Car and Equipment Co. The
court did not hold that the corporate personality
of Koppel (Philippines), Inc., would also be
disregarded in other cases or for other purposes.
It would have had no power to so hold. The
courts' action in this regard must be confined to
the transactions involved in the case at bar "for
the purpose of adjudging the rights and liabilities
of the parties in the case. They have no
jurisdiction to do more." (1 Flethcer, Cyclopedia
of Corporation, Permanent ed., p. 124, section
41.)
A leading and much cited case puts it as follows:
If any general rule can be laid down, in
the present state of authority, it is that
a corporation will be looked upon as a
legal entity as a general rule, and until
sufficient reason to the contrary
appears; but, when the notion of legal
entity is used to defeat public
convinience, justify wrong, protect
fraud, or defend crime, the law will
regard the corporation as an
association of persons. (1 Fletcher
Cyclopedia of Corporation [Permanent
Edition], pp. 135, 136; United States vs.
Milwaukee Refrigeration Transit Co.,
142 Fed., 247, 255, per Sanborn, J.)
In his second special defense appellee alleges
"that the plaintiff was and is in fact a branch or
subsidiary of Koppel Industrial Car and
Equipment Co., a Pennsylvania corporation not
licensed to do business in the Philippines but
actually doing business here through the
plaintiff; that the said foreign corporation holds
995 of the 1,000 shares of the plaintiff's capital
stock, the remaining five shares being held by
the officers of the plaintiff herein in order to
permit the incorporation thereof and to enable
its aforesaid officers to act as directors of the
plaintiff corporation; and that plaintiff was
organized as a Philippine corporation for the
purpose of evading the payment by its parent
foreign corporation of merchants' sales tax on
the transactions involved in this case and others
of similar nature."
By most courts the entity is normally
regarded but is disregarded to prevent
injustice, or the distortion or hiding of
the truth, or to let in a just defense. (1
Fletcher, Cyclopedia of Corporation,
Permanent Edition, pp. 139,140;
emphasis supplied.)
Another rule is that, when the
corporation is the mere alter ego, or
business conduit of a person, it may de
disregarded." (1 Fletcher, Cyclopedia of
Corporation, Permanent Edition, p.
136.)
Manifestly, the principle is the same whether the
"person" be natural or artificial.
A very numerous and growing class of
cases wherein the corporate entity is
disregarded is that (it is so organized
and controlled, and its affairs are so
conducted, as to make it merely an
instrumentality, agency, conduit or
adjunct of another corporation)." (1
Fletcher, Cyclopedia of Corporation,
Permanent ed., pp. 154, 155.)
While we recognize the legal principle
that a corporation does not lose its
entity by the ownership of the bulk or
even the whole of its stock, by another
corporation (Monongahela Co. vs.
Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79
Am. St. Rep., 685) yet it is equally well
settled and ignore corporate forms."
(Colonial Trust Co. vs. Montello Brick
Works, 172 Fed., 310.)
Where it appears that two business
enterprises are owned, conducted and
controlled by the same parties, both
law and equity will, when necessary to
protect the rights of third persons,
disregard the legal fiction that two
corporations are distinct entities, and
treat them as identical. (Abney vs.
Belmont Country Club Properties, Inc.,
279 Pac., 829.)
. . . the legal fiction of distinct corporate
existence will be disregarded in a case
where a corporation is so organized
and controlled and its affairs are so
conducted, as to make it merely an
instrumentality or adjunct of another
corporation. (Hanter vs. Baker Motor
Vehicle Co., 190 Fed., 665.)
In United States vs. Lehigh Valley R. Co. 9220 U.S.,
257; 55 Law. ed., 458, 464), the Supreme Court
of the United States disregarded the artificial
personality of the subsidiary coal company in
order to avoid that the parent corporation, the
Lehigh Valley R. Co., should be able, through the
fiction of that personality, to evade the
prohibition of the Hepburn Act against the
transportation by railroad companies of the
articles and commodities described therein.
Chief Justice White, speaking for the court, said:
. . . Coming to discharge this duty it
follows, in view of the express
prohibitions of the commodities clause,
it must be held that while the right of a
railroad company as a stockholder to
use its stock ownership for the purpose
of a bona fide separate administration
of the affairs of a corporation in which
it has a stock interest may not be
denied, the use of such stock ownership
in substance for the purpose of
destroying the entity of a producing,
etc., corporation, and commingling its
affairs in administration with the
affairs of the railroad company, so as to
make the two corporations virtually
one, brings the railroad company so
voluntarily acting as to such producing,
etc., corporation within the
prohibitions of the commodities clause.
In other words, that by operation and
effect of the commodities clause there
is duty cast upon a railroad company
proposing to carry in interstate
commerce the product of a producing,
etc., corporation in which it has a stock
interest, not to abuse such power so as
virtually to do by indirectionthat which
the commodities clause prohibits, — a
duty which plainly would be violated
by the unnecessary commingling of the
affairs of the producing company with
its own, so as to cause them to be one
and inseparable.
Corrobarative authorities can be cited in support
of the same proposition, which we deem
unnecessary to mention here.
From the facts hereinabove stated, as established
by a preponderance of the evidence , particularly
those narrated in paragraph (a), (b), (c), (d),
(e),(f), (h), (i), and (j) after the agreed statement
of facts, we find that, in so far as the sales
involved herein are concerned, Koppel
(Philippines), Inc., and Koppel Industrial Car and
Equipment company are to all intents and
purposes one and the same; or, to use another
mode of expression, that, as regards those
transactions, the former corporation is a mere
branch, subsidiary or agency of the latter. To our
mind, this is conclusively borne out by the fact,
among others, that the amount of he so-called
"share in the profits" of Koppel (Philippines),
Inc., was ultimately left to the sole, unbridled
control of Koppel Industrial Car and Equipment
Company. If, in their relations with each other,
Koppel (Philippines), Inc., was considered and
intended to function as a bona fide separate
corporation, we can not conceive how this
arrangement could have been adopted, for if
there was any factor in its business as to which it
would in that case naturally have been opposed
to being thus controlled, it must have been
precisely the amount of profit which it could
endeavor and hope to earn. No group of
businessmen could be expected to organize a
mercantile corporation — the ultimate end of
which could only be profit — if the amount of
that profit were to be subjected to such a
unilateral control of another corporation, unless
indeed the former has previously been designed
by the incorporators to serve as a mere
subsidiary, branch or agency of the latter.
Evidently, Koppel Industrial Car and Equipment
Company made us of its ownership of the
overwhelming majority — 99.5% — of the
capital stock of the local corporation to control
the operations of the latter to such an extent that
it had the final say even as to how much should
be allotted to said local entity in the so-called
sharing in the profits. We can not overlook the
fact that in the practical working of corporate
organizations of the class to which these two
entities belong, the holder or holders of the
controlling part of the capital stock of the
corporation, particularly where the control is
determined by the virtual ownership of the
totality of the shares, dominate not only the
selection of the Board of Directors but, more
often than not, also the action of that Board.
Applying this to the instant case, we can not
conceive how the Philippine corporation could
effectively go against the policies, decisions, and
desires of the American corporation with
regards to the scheme which was devised
through the instrumentality of the contract
Exhibit H, as well as all the other details of the
system which was adopted in order to avoid
paying the 1½ per cent merchants sales tax.
Neither can we conceive how the Philippine
corporation could avoid following the directions
of the American corporation held 99.5 per cent
of the capital stock of the Philippine corporation.
In the present instance, we note that Koppel
(Philippines), Inc., was represented in the
Philippines by its "resident Vice-President." This
fact necessarily leads to the inference that the
corporation had at least a Vice-President, and
presumably also a President, who were not
resident in the Philippines but in America, where
the parent corporation is domiciled. If Koppel
(Philippines), Inc., had been intended to operate
as a regular domestic corporation in the
Philippines, where it was formed, the record and
the evidence do not disclose any reason why all
its officers should not reside and perform their
functions in the Philippines.
Other facts appearing from the evidence, and
presently to be stated, strengthen our
conclusion, because they can only be explained if
the local entity is considered as a mere
subsidiary, branch or agency of the parent
organization. Plaintiff charged the parent
corporation no more than actual cost — without
profit whatsoever — for merchandise allegedly
of its own to complete deficiencies of shipments
made by said parent corporation (t.s.n., pp. 53,
54) — a fact which could not conceivably have
been the case if plaintiff had acted in such
transactions as an entirely independent entity
doing business — for profit, of course — with the
American concern. There has been no attempt
even to explain, if the latter situation really
obtained, why these two corporations should
have thus departed from the ordinary course of
business. Plaintiff was charged by the American
corporation with the cost even of the latter's
cable quotations — from ought that appears
from the evidence, this can only be
comprehended by considering plaintiff as such a
subsidiary, branch or agency of the parent entity,
in which case it would be perfectly
understandable that for convenient accounting
purposes and the easy determination of the
profits or losses of the parent corporation's
Philippines should be charged against the
Philippine office and set off against its receipts,
thus separating the accounts of said branch from
those which the central organization might have
in other countries. The reference to plaintiff by
local banks, under a standing instruction of the
parent corporation, of unpaid drafts drawn on
Philippine customers by said parent corporation,
whenever said customers dishonored the drafts,
and the fact that the American corporation had
previously advised said banks that plaintiff in
those cases was "fully empowered to instruct
(the banks) with regard to the disposition of the
drafts and documents" (t.s.n., p. 50), in the
absence of any other satisfactory explanation
naturally give rise to the inference that plaintiff
was a subsidiary, branch or agency of the
American concern, rather than an independent
corporation acting as a broker. For, without such
positive explanation, this delegation of power is
indicative of the relations between central and
branch offices of the same business enterprise,
with the latter acting under instructions already
given by the former. Far from disclosing a real
separation between the two entities, particularly
in regard to the transactions in question, the
evidence reveals such commongling and
interlacing of their activities as to render even
incomprehensible certain accounting operations
between them, except upon the basis that the
Philippine corporation was to all intents and
purposes a mere subsidiary, branch, or agency of
the American parent entity. Only upon this basis
can it be comprehended why it seems not to
matter at all how much profit would be allocated
to plaintiff, or even that no profit at all be so
allocated to it, at any given time or after any
given period.
As already stated above, under the evidence the
sales in the Philippines of the railway materials,
machinery and supplies imported here by
Koppel Industrial Car and Equipment Company
could have been as conviniently and efficiently
transacted and handled — if not more so — had
said corporation merely established a branch or
agency in the Philippines and obtained license to
do business locally; and if it had done so and said
sales had been effected by such branch or
agency, there seems to be no dispute that the 1½
per cent merchants' sales tax then in force would
have been collectible. So far as we can discover,
there would be only one, but very important,
difference between the two schemes — a
difference in tax liability on the ground that the
sales were made through another and distinct
corporation, as alleged broker, when we have
seen that this latter corporation is virtually
owned by the former, or that they practically one
and the same, is to sanction a circumvention of
our tax laws, and permit a tax evasion of no
mean proportions and the consequent
commission of a grave injustice to the
Government. Not only this; it would allow the
taxpayer to do by indirection what the tax laws
prohibited to be done directly (non-payment of
legitimate taxes), paraphrasing the United States
Supreme Court in United States vs. Lehigh Valley
R. Co., supra.
The act of one corporation crediting or debiting
the other for certain items, expenses or even
merchandise sold or disposed of, is perfectly
compatible with the idea of the domestic entity
being or acting as a mere branch, agency or
subsidiary of the parent organization. Such
operations were called for any way by the
exigencies or convenience of the entire business.
Indeed, accounting operation such as these are
invitable, and have to be effected in the ordinary
course of business enterprise extends its trade to
another land through a branch office, or through
another scheme amounting to the same thing.
If plaintiff were to act as broker in the
Philippines for any other corporation, entity or
person, distinct from Koppel Industrial Car and
Equipment company, an entirely different
question will arise, which, however, we are not
called upon, nor in a position, to decide.
As stated above, Exhibit H contains to the
following paragraph:
It is clearly understood that the intent
of this contract is that the broker shall
perform only the functions of a broker
as set forth above, and shall not take
possession of any of the materials or
equipment applying to said orders or
perform any acts or duties outside the
scope of a broker; and in no sense shall
this contract be construed as granting
to the broker the power to represent
the principal as its agent or to make
commitments on its behalf.
The foregoing paragraph, construed in the light
of other facts noted elsewhere in this decision,
betrays, we think a deliberate intent, through the
medium of a scheme devised with great care, to
avoid the payment of precisely the 1½ per cent
merchants' sales tax in force in the Philippines
before, at the time of, and after, the making of the
said contract Exhibit H. If this were to be
allowed, the payment of a tax, which directly
could not have been avoided, could be evaded by
indirection, consideration being had of the
aforementioned peculiar relations between the
said American and local corporations. Such
evasion, involving as it would, a violation of the
former Internal Revenue Law, would even fall
within the penal sanction of section 2741 of the
Revised Administrative Code. Which only goes to
show the illegality of the whole scheme. We are
not here concerned with the impossibility of
collecting the merchants' sales tax, as a mere
incidental consequence of transactions legal in
themselves and innocent in their purpose. We
are dealing with a scheme the primary, not to say
the sole, object of which the evasion of the
payment of such tax. It is this aim of the scheme
that makes it illegal.
We have said above that the contracts of sale
involved herein were all perfected in the
Philippines. From the facts stipulated in
paragraph IV of the agreed statement of facts, it
clearly appears that the Philippine purchasers
had to wait for Koppel Industrial Car and
Equipment Company to communicate its cost
prices to Koppel (Philippines), Inc., were
perfected in the Philippines. In those cases
where no such price quotations from the
American corporation were needed, of course,
the sales effected in those cases described in
paragraph V of the agreed statement of facts
were, as expressed therein, transacted "in
substantially the same manner as outlined in
paragraph VI." Even the single transaction
described in paragraph VI of the agreed
statement of facts was also perfected in the
Philippines, because the contracting parties were
here and the consent of each was given here.
While it is true that when the contract was thus
perfected in the Philippines the pair of Atlas-
Diesel Marine Engines were in Sweden and the
agreement was to deliver them C.I.F. Hongkong,
the contract of sale being consensual —
perfected by mere consent — (Civil Code, article
1445; 10 Manresa, 4th ed., p. 11), the location of
the property and the place of delivery did not
matter in the question of where the agreement
was perfected.
In said paragraph VI, we read the following, as
indicating where the contract was perfected,
considering beforehand that one party, Koppel
(Philippines),Inc., which in contemplation of law,
as to that transaction, was the same Koppel
Industrial Car Equipment Co., was in the
Philippines:
. . . on April 1, 1930, a new local buyer
Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were
sold to him for $21,000 (P42,000) C.I.F.
Hongkong . . . (Emphasis supplied.)
Under the revenue law in force when the sales in
question took place, the merchants' sales tax
attached upon the happening of the respective
sales of the "commodities, goods, wares, and
merchandise" involved, and we are clearly of
opinion that such "sales" took place upon the
perfection of the corresponding contracts. If such
perfection took place in the Philippines, the
merchants' sales tax then in force here attached
to the transactions.
Even if we should consider that the Philippine
buyers in the cases covered by paragraph IV and
V of the agreed statement of facts, contracted
with Koppel Industrial Car and Equipment
company, we will arrive at the same final result.
It can not be denied in that case that said
American corporation contracted through
Koppel (Philippines), Inc., which was in the
Philippines. The real transaction in each case of
sale, in final effect, began with an offer of sale
from the seller, said American corporation,
through its agent, the local corporation, of the
railway materials, machinery, and supplies at the
prices quoted, and perfected or completed by the
acceptance of that offer by the local buyers when
the latter, accepting those prices, placed their
orders. The offer could not correctly be said to
have been made by the local buyers when they
asked for price quotations, for they could not
rationally be taken to have bound themselves to
buy before knowing the prices. And even if we
should take into consideration the fact that the
american corporation contracted, at least partly,
through correspondence, according to article 54
of the Code of Commerce, the respective
contracts were completed from the time of the
acceptance by the local buyers, which happened
in the Philippines.
Contracts executed through
correspondence shall be completed
from the time an answer is
madeaccepting the proposition or the
conditions by which the latter may be
modified." (Code of Commerce, article
54; emphasis supplied.)
A contract is as a rule considered as
entered into at the place where the
place it is performed. So where delivery
is regarded as made at the place of
delivery." (13 C. J., 580-81, section
581.)
(In the consensual contract of sale
delivery is not needed for its
perfection.)
II. Appellant's second assignment of error can be
summarily disposed of. It is clear that the ruling
of the Secretary of Finance, Exhibit M, was not
binding upon the trial court, much less upon this
tribunal, since the duty and power of
interpreting the laws is primarily a function of
the judiciary. (Ortua vs. Singson Encarnacion, 59
Phil., 440, 444.) Plaintiff cannot be excused from
abiding by this legal principle, nor can it
properly be heard to say that it relied on the
Secretary's ruling and that, therefore, the courts
should not now apply an interpretation at
variance therewith. The rule of stare decisis is
undoubtedly entitled to more respect in the
construction of statutes than the interpretations
given by officers of the administrative branches
of the government, even those entrusted with
the administration of particular laws. But this
court, in Philippine Trust Company and Smith,
Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:
. . . The rule of stare decisis is entitled to
respect. Stability in the law, particularly
in the business field, is desirable. But
idolatrous reverence for precedent,
simply as precedent, no longer rules.
More important than anything else is
that court should be right. . . .
III. In the view we take of the case, and after the
disposition made above of the first assignment of
error, it becomes unnecessary to make any
specific ruling on the third, fourth, fifth, sixth,
and seventh assignments of error, all of which
are necessarily disposed of adversely to
appellant's contention.
Wherefore, he judgment appealed from is
affirmed, with costs of both instances against
appellant. So ordered.
Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones,
and Tuason, JJ., concur.
Separate Opinions
PERFECTO, J., concurring:
We fully agree with the well-written decision
penned by Mr. Justice Hilado in this case. We
only wish to add that the ingenious device of
evading the payment of taxes, is not a new one. It
is only one of the manifold manifestations of the
shrewdness of the masterminds behind some
powerful corporations who, without ay
compunction, do not stop at adopting any
scheme by which the controlling capitalists may
get even richer and richer, sometimes at
government expense, sometimes by squeezing
credulous or ignorant small shareholders,
sometimes with the exploitation of the helpless
public at large, and sometimes at great sacrifice
of all the three entities.
The system of corporation combines, of holding
and subsidiary corporations, of spreading and
interlocking companies, has no well developed
and has grown so powerful that even the wisest
government had been unable to defend itself and
protect the people from the crushing tentacles of
the moneyed octopuses. It is true that in the
United States of America anti trusts laws were
enacted but, notwithstanding their ability and
wisdom, the Americans were unable to stave off
the effects of the bankruptcy of the pyramid of
holding and interlocking companies built around
the tragic figure of Samuel Insull.

That Philippine Government, that Filipino

consumers, that Filipino public at large, had
already been victims of the evil effects of such a
system has been conclusively proved in the
scandalous illegalities and irregularities
disclosed in the investigation made by the first
National Assembly, through its Committee on
Rate Reducing of Public Utilities. In said
investigation, it was revealed that, by a system of
holding and interlocking companies, by their
manipulation of books of accounts, our
government was defrauded of enormous
amounts in taxes and millions of pesos were
unjustly squeezed from the public.

It is high time that alarm be sounded so that our

government and our public may avoid being
further victimized and this country turned into a
puppet at the mercy of moneyed tycoons who
are not stopped by any scruple to attain their
unquenchable thristiness for more money and
for power and domination. All liberal-minded
people must fight not only against political
imperialism, but also against economic or
financial imperialism, in fact, against any kind of
imperialism. The call for eternal vigilance must
be heeded by all, including tribunals, if the
survival of our people must not be jeopardized
by artful corporations and unscrupulous
financiers.
EN BANC
G.R. No. L-13119 September 22, 1959
RICARDO TANTONGCO, Petitioner,
vs. KAISAHAN NG MGA MANGGAGAWA SA LA
CAMPAN (KKM) AND THE HONORABLE
COURT OF INDUSTRIAL
RELATIONS, Respondents.
Ernesto C. Estrella for petition for petitioner.
Carlos E. Santiago for respondent Union.
Pedro M. Ligaya for respondent CIR.
MONTEMAYOR, J.: chanrobles virtual law
library
This is a petition
forcertiorari and prohibition with prayer for
issuance of a writ of preliminary injunction to
prohibit respondent Court of Industrial Relations
from proceeding with the hearing of the
contempt proceedings for which petitioner
Ricardo Tantongco was cited to appear the
present his evidence. The contempt proceedings
which petitioner seeks to stop are based on the
order of the Court of Industrial Relations, dated
September 30, 1957, which reads as follows:
It appearing that the Order of this Court, in
the above-entitled case, dated February 18, 1957
(folios 134-166), has become final and executory
and the respondents have failed to comply with
the same, the said respondents, namely, the La
Campana Starch and Coffee Factory or its
manager or the person who has charge of the
management, and the administrator of the Estate
of Ramon Tantongco are hereby ordered to
comply with said order, within five days from
receipt hereof, particularly the following, to wit:
(a) To reinstate the persons named in the
said Order of February 18, 1957;chanrobles
virtual law library
(b) To deposit the amount of P65,534.01
with this Court.
With respect to possible back wages from
August 28, 1957 as mentioned in the petition for
contempt of August 30, 1957, the same shall first
be
determined.chanroblesvirtualawlibrary chanrobl
es virtual law library
Failure to comply with this Order shall be
directly dealt with accordingly.
It would appear that petitioner Ricardo
Tantongco failed to comply with said order and
so, as already stated, he was cited to appear and
to adduce evidence on his behalf to show why he
should not be punished for indirect
contempt.chanroblesvirtualawlibrary chanrobles
virtual law library
The facts in this case may be briefly
narrated thus: Sometime in June, 1951, members
of the Kaisahan ng mga Manggagawa sa La
Campana, a labor union to which were affiliated
workers in the La Campana Starch Factory and
La Campana Coffee Factory, two separate entities
but under the one management, presented
demands for higher wages, and more privileges
and benefits in connection with their work.
When the management failed and refused to
grant the demands, the Department of Labor
intervened; but failing to settle the controversy,
it certified the dispute to the Court of Industrial
Relations on July 17, 1951, where it was
docketed as Case No. 584-V. On the theory that
the laborers presenting the demands were only
the ones working in the coffee factory, said
company filed through the management a
motion to dismiss claiming that inasmuch as
there were only 14 of them in said factory, the
Court of Industrial Relations had no jurisdiction
to entertain and decide the case. The motion was
denied by the Court of Industrial Relations,
which said:
. . . There was only management for the
business of gawgaw and coffee with whom the
laborers are dealing regarding their work. Hence,
the filing of action against the La Campana Starch
and Coffee Factory is proper and justified.
The order of denial was appealed to this
Tribunal throughcertiorari under G.R. No. L-
5677. In disposing of the case, we held:
As to the first ground, petitioners obviously
do not question the fact that the number of
employees of the La Campana Gaugau Packing
involved in the case is more than the
jurisdictional number (31) required by law, but
they contend that the industrial court has no
jurisdiction to try case against La Campana
Coffee Factory Co. Inc. because the latter has
allegedly only 14 laborers and only five of these
are members of respondent Kaisahan. This
contention loses force when it is noted that, as
found by the industrial court - and this finding is
conclusive upon us - La Campana Gaugau
Packing and La Campana Coffee Factory Co. Inc.,
are operating under one single management,
that is, one business though with two trade
names. True, the coffee factory is a corporation ,
and, by legal fiction, an entity existing separate
and part from the persons composing it, that is,
Tan Tong and his family. But is settled this fiction
of law, which has been introduced as a matter of
convenience and to subserve the ends of justice
cannot be invoke to further an end subversive of
that
purpose.chanroblesvirtualawlibrary chanrobles
virtual law library
... The attempt to make the two factories
appear as two separate business, when in reality,
they are but one is but a device to defeat the
ends of the law (the Act governing capital and
labor relations) and should not be permitted to
prevail. (La Campana Coffee Factory, et al., vs.
Kaisahan ng mga Manggagawa, etc. et al., 93 Phil.,
160; 49 Off. Gaz., [6] 2300.)
Upon the return of the case to the Court of
Industrial Relations, the latter proceeded with
the hearing. In the meantime incidental cases
involving the same parties came up and were
filed before the Court of Industrial Relations in
the following cases:
Case No. 584-V(1) - petition for contempt
against the La Campana Starch and Coffee
Factory for having employed 21 new laborers in
violation of the order of July 21, 1951, filed on
July 25, 1951;chanrobles virtual law library
Case No. 584-V(2) - petition of La Campana
for authority for authority to dismiss Loreto
Bernabe, filed on July 25, 19651;chanrobles
virtual law library
Case No. 584-V(3) - petition of Union to
reinstate Bonifacio Calderon with backpay, filed
on August 3, 1951;chanrobles virtual law library
Case No. 584-V(5) - petition of Union to
reinstate Marcelo Estrada and Exequiel Rapiz
with back pay and to punish officials of the
company for contempt, filed on February 13,
1952; and chanrobles virtual law library
Case No. 584-V(6) - petition of union for
reinstatement of Ibardolaza and seven other
member-laborers and to punish the officers of
the company for contempt, filed on July 15, 1953.
These five cases were heard jointly. In the
meantime Ramon Tantongco supposed to be the
owner and manager of the La Campana Starch
Factory and the person in charge of the La
Campana Coffee Factory died on May 16, 1956.
On motion of the labor union, the Court of
Industrial Relations order the inclusion as party
respondent of the administrator of the estate of
Ramon Tantongco who was Ricardo
Tantongco.chanroblesvirtualawlibrary chanroble
s virtual law library
Ricardo Tantongco, as administrator, under
a special appearance filed a motion to dismiss all
the cases including the main case, that is to say,
Cases No. 584-(V) to 584-V(6), on the ground
that said cases involved claims for sums of
money and consequently should be filed before
the probate court having jurisdiction over the
estate, pursuant to the provisions of Rule 3,
Section 21, and Rule 88, Section 1 of the Rules of
Court. On August 23, 1956, the Court of
Industrial Relations denied the motion to
dismiss and proceed to hear the incidental cases
against the La Campana
entities.chanroblesvirtualawlibrary chanrobles
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On June 12, 1956, a partial decision was
rendered in the main case No. 584-V, which
partial decision was elevated to us and is still
pending appeal. On February 18, 1957, the Court
of Industrial Relations issued an order in
incidental Cases No. 584-V(1), V(2), V(5) and
V(6), directing the "management of the
respondent company and or the administrator of
the Estate of Ramon Tantongco", to reinstate the
dismissed laborers mentioned therein with back
wages. This order of February 18, 1957, as well
as the order directing the inclusion of the
administrator of the estate of Ramon Tantongco
as additional respondent in the incidental cases,
and the order denying the petition of the
administrator to dismiss said incidental cases
were appealed to this tribunal though certiorari.
The appeal, however, was summarily dismissed
by this Court in its resolution of June 12, 1957, as
follows:
This Court, deliberating upon the
allegations of the petition filed in case l-12355
(La Campana Starch Coffee Factory et al. vs.
Kaisahan ng Mga Manggagawa sa la Campana,
KKM, et al) for review, on certiorari of the
decision of the Court of Industrial Relations
referred to therein, and finding that there is no
merit in the petition, RESOLVE TO DISMISS the
same.
The CIR order of February 18, ,1957, in the
incidental cases Nos. 584-V to V(6), having
become final and executory , the laborers
involved reported for work on August 28, 1957,
but they were not admitted by the management.
Consequently, the union filed a petition dated
August 30, 1957, to hold respondents in said
cases for contempt. After hearing the CIR issued
the order of September 30, 1957, subject of this
petition, ordering "the La Campana Starch and
Coffee Factory or its manager or the person who
has charge of its management and the
administrator of the estate of Ramon Tantongco"
to "reinstate the persons named in the order of
February 18, 1957" and "to deposit the amount
of P65,534.01." For refusal or failure to comply
with said order, petitioner Ricardo Tantongco
was required to appear before the attorney of
the CIR in contempt proceedings. Petitioner now
seeks to prohibit the CIR from proceeding with
the trial for contempt and to enjoin respondent
CIR from enforcing its order of September 30,
1957.chanroblesvirtualawlibrary chanrobles
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Petitioner contends that upon the death of
Ramon Tantongco, the claims of the laborers
should have been dismissed and that said claims
should have been filed with the probate court
having jurisdiction over the administration
proceedings of the estate of Ramon Tantongco,
pursuant to the provisions of Rule 3, Section 21
of the Rules of Court and that the failure to file
claims with the administrator forever barred
said claims as provided in Rule 87, Section 5 of
the Rules of Court, especially after the assets of
the estate had been distributed among the heirs,
and petitioner had ceased to be the
administrator of the estate. As already stated this
same question was raised by petitioner in G.R.
No. L-12355, entitled "La Campana Starch and
Coffee Factory and Ricardo Tantongco, etc. vs.
Kaisahan ng mga Manggagawa sa La Campana
(KKM)," which, as already stated, was summarily
dismissed by this Court in a resolution dated
June 12, 1957. Consequently, said question may
not again be raised in the present case.
Furthermore, it may be recalled that both in the
main case in the incidental cases No. 584-V to
584-V(6), Ramon Tantongco was never a party.
The party there was the La Campana Starch and
Coffee Factory by which name it was sought to
designate the two entities La Campana Starch
Packing and the La Campana Coffee Factory.
Naturally, the claims contained in said cases
were not the claims contemplated by law to be
submitted before the administrator. In other
words the death of Ramon Tantongco did not
deprive the CIR of its jurisdiction over the cases
aforementioned. Moreover, the money claims of
the laborers were merely incidental to their
demands for reinstatement for having been
unjustly dismissed, and for better working
conditions.chanroblesvirtualawlibrary chanroble
s virtual law library
Petitioner, however, contends that in G.R.
No. L-5677, we "pierced the veil of corporate
existence", and held that the La Campana Starch
and Coffee Factory and its owner, Ramon
Tantongco, were one; so that with the death of
Ramon, the La Campana entities ceased to exist,
resulting in the loss of jurisdiction of the CIR to
enforce its order against said entities. The reason
we applied the so-called "piercing the veil of
corporate existence" in G.R. No. L-5677 was to
avoid the technicality therein advanced in order
to defeat the jurisdiction of the CIR. We there
found that although there were ostensibly two
separate companies or entities, they were
managed by the same person or persons and the
workers in both were used interchangeably so
that in order to determine whether or not the
CIR had jurisdiction, the number of workers in
both entitles, not in only one, was to be
considered. However, we still believe that
although the family of Ramon Tantongco was
practically the owner of both the coffee factory
and the starch factory, nevertheless these
entities are separate from the personality of
Ramon. The coffee factory is a stock corporation
and the shares are owned not only by Ramon but
also by others, such as petitioner Ricardo who
not only is a stockholder and director and
treasurer but also the management of the same
Furthermore, petitioner is now estopped from
claiming that the two entities in question and
Ramon are one. Thus in Annex 3-CIR (par. 1
thereof) which is a complaint for injunction filed
by La Campana Food Products, et al and La
Campana Starch Packing against the
consolidated Labor Organization of the
Philippines, in civil Case No. P-25482 in the
Court of First Instance of Rizal, petitioner
admitted the existence and operation of said
entities; in Annex 4-CIR where petitioner
appeared as General Manager representing the
two entities in its agreement with the La
Campana Workers Union to resolve the dispute
between the two entities and the laborers in case
Nos. 1072-V and 1371-ULP, the existence of the
two entities appears to have been admitted; and
in Annex 5-A-CIR, an answer to the complaint of
La Campana Workers Union in case No. 1471-
ULP (Annex 5-CIR), petitioner admitted the
allegation that said two factories were in
existence and doing business with petitioner as
manager of the
same.chanroblesvirtualawlibrary chanrobles
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In relation to the order of the CIR requiring
petitioner to appear in the contempt proceedings
instituted against him, petitioner contends that
after he ceased to be the administrator of the
estate of Ramon Tantongco, he may not now be
compelled to comply with the order of the court.
In answer, it is enough to bear in mind the
jurisdiction and authority of the CIR as to
compliance with and violations of its orders
under section 6, Commonwealth Act No. 143,
which we quote below:
. . . The Court or any Judge thereof shall
have furthermore, all the inherent powers of a
court of justice provided in paragraph 5 of Rule
124 of the Supreme Court, as well as the power
to punish direct and indirect contempt as
provided in Rule 64 of the same Court, under the
same procedure and penalties provided
therein.chanroblesvirtualawlibrary chanrobles
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Any violation of any order, award, or
decision of the Court of Industrial Relations shall,
after such order, award or decision has become
final, conclusive, and executory, constitute
contempt of court: . .
.chanroblesvirtualawlibrary chanrobles virtual
law library
In case the employer (or landlord)
committing any such violation or contempt is an
association or corporation, the manager or the
person who has the charge of the management of
the business of the association or corporation
and the officers of directors thereof who have
ordered or authorized the violation of contempt
shall be liable. . . .
In conclusion, we find and hold that the La
Campana Starch and Food Products Company
which stands for the La Campana Starch and
Coffee Factory are entities distinct from the
personality of Ramon Tantongco; that after the
death of Ramon these two entities continued to
exist and to operate under the management of
petitioner and that consequently he is the proper
person and official to which the orders of the CIR
are addressed and who is in duty bound to
comply with the same. We further find that the
CIR acted with in its jurisdiction in issuing its
order of September 30, 1957 and in requiring
petitioner to appear to give his evidence if any in
relation with the contempt proceedings
instituted against
him.chanroblesvirtualawlibrary chanrobles
virtual law library

In view of the foregoing, the petition for

certiorari is .hereby denied and the writ of
preliminary injunction dissolved, with costs.

Paras, C.J., Bengzon, Padilla, Bautista Angelo,

Labrador, Concepcion, Endencia and Barrera, JJ.,
concur.
Republic of the Philippines expiration, the registration was renewed on July petitioners, after losing their jobs in BSPA, were the settlement of Bacani's estate was pending.
SUPREME COURT 1, 1987 for a term of five (5) years ending 1992. employed in BASEC. Petitioners moved for a reconsideration but their
Manila motion was denied for lack of merit. Hence this
On December 31, 1989, Felipe Bacani retired the On July 5, 1990, some of the petitioners filed a petition for review.
SECOND DIVISION business name and BSPA ceased to operate complaint with
effective on that day. At that time, respondent the Department of Labor and Employment, No appeal lies to review decisions of the NLRC.
Alicia Bacani, daughter of Felipe Bacani, was National Capital Region, for underpayment of Nonetheless the petition in this case was treated
BSPA's Executive Directress. wages and nonpayment of overtime pay, legal as a special civil action of certiorari to determine
holiday pay, separation pay and/or whether the NLRC did not commit a grave abuse
G.R. No. 110358 November 9, 1994 retirement/resignation benefits, and for the of its discretion in reversing the Labor Arbiter's
On January 15, 1990 Felipe Bacani died. An
intestate proceeding was instituted for the return of their cash bond which they posted with decision.
QUINTIN ROBLEDO, MARIO SINLAO, settlement of his estate before the Regional Trial BSPA. Made respondents were BSPA and BASEC.
LEONARDO SAAVEDRA, VICENTE SECAPURI, Court, National Capital Region, Branch 155, Petitioners were subsequently joined by the rest The issues in this case are two fold: first, whether
DANIEL AUSTRIA, ET AL., petitioners, Pasig, Metro Manila. of the petitioners herein who filed Bacani Security and Allied Services Co. Inc.
vs. supplementary complaints. (BASEC) and Alicia Bacani can be held liable for
THE NATIONAL LABOR RELATIONS claims of petitioners against Bacani Security and
COMMISSION, BACANI SECURITY AND ALLIED Earlier, on October 26, 1989, respondent Bacani
Security and Allied Services Co., Inc. (BASEC, for On March 1, 1992, the Labor Arbiter rendered a Protective Agency (BSPA) and, second, if the
SERVICES CO., INC., AND BACANI SECURITY decision upholding the right of the petitioners. claims were the personal liability of the late
AND PROTECTIVE AGENCY AND/OR ALICIA brevity) had been organized and registered as a
corporation with the Securities and Exchange The dispositive portion of his decision reads: Felipe Bacani, as owner of BSPA, whether the
BACANI, respondents. Labor Arbiter had jurisdiction to decide the
Commission. The following were the
incorporators with their respective CONFORMABLY WITH THE claims.
Benjamin C. Pineda for petitioners. shareholdings: FOREGOING, the judgment is
hereby rendered finding Petitioners contend that public respondent erred
Villanueva, Ebora & Caña for private respondents. ALICIA complainants entitled to their in setting aside the Labor Arbiter's judgment on
BACANI — money claims as herein above the ground that BASEC is the same entity as
25,250 computed and to be paid by BSPA the latter being owned and controlled by
shares all the respondents herein in one and the same family, namely the Bacani
LYDIA solidum except BSPA which family. For this reason they urge that the
MENDOZA, J.: has already been retired from corporate fiction should be disregarded and
BACANI —
25,250 business. BASEC should be held liable for the obligations of
This is a petition for review of the decision of the shares the defunct BSPA.
First Division1 of the National Labor Relations AMADO P. Respondents are further
Commission, setting aside the decision of the ELEDA — ordered to pay attorney's fees We find the petition to be without merit.
Labor Arbiter which held private respondents 25,250 equivalent to five (5) percent
jointly and severally liable to the petitioners for shares of the awarded money claims.
overtime and legal holiday pay. As correctly found by the NLRC, BASEC is an
VICTORIA entity separate and distinct from that of BSPA.
B. All other claims are hereby BSPA is a single proprietorship owned and
The facts of this case are as follows: AURIGUE dismissed for lack of merit. operated by Felipe Bacani. Hence its debts and
— 25,250 obligations were the personal obligations of its
Petitioners were former employees of Bacani shares owner. Petitioners' claim which are based on
FELIPE SO ORDERED.
Security and Protective Agency (BSPA, for these debts and personal obligations, did not
brevity). They were employed as security guards BACANI — survive the death of Felipe Bacani on January 15,
at different times during the period 1969 to 20,000 On appeal the National Labor Relations 1990 and should have been filed instead in the
December 1989 when BSPA ceased to operate. shares Commission reversed. In a decision dated March intestate proceedings involving his estate.
30, 1993, the NLRC's First Division declared the
The primary purpose of the corporation was to Labor Arbiter without jurisdiction and instead
BSPA was a single proprietorship owned, suggested that petitioners file their claims with Indeed, the rule is settled that unless expressly
managed and operated by the late Felipe Bacani. "engage in the business of providing security" to assumed labor contracts are not enforceable
persons and entities. This was the same line of the Regional Trial Court, Branch 155, Pasig,
It was registered with the Bureau of Trade and Metro Manila, where an intestate proceeding for against the transferee of an enterprise. The
Industry as a business name in 1957. Upon its business that BSPA was engaged in. Most of the reason for this is that labor contracts are in
personam.2 Consequently, it has been held that
claims for backwages earned from the former
employer cannot be filed against the new owners
of an enterprise.3 Nor is the new operator of a
business liable for claims for retirement pay of
employees.4
Petitioners claim, however, that BSPA was
intentionally retired in order to allow expansion
of its business and even perhaps an increase in
its capitalization for credit purpose. According to
them, the Bacani family merely continued the
operation of BSPA by creating BASEC in order to
avoid the obligations of the former. Petitioners
anchor their claim on the fact that Felipe Bacani,
after having ceased to operate BSPA, became an
incorporator of BASEC together with his wife
and daughter. Petitioners urge piercing the veil
of corporate entity in order to hold BASEC liable
for BSPA's obligations.
The doctrine of piercing the veil of corporate
entity is used whenever a court finds that the
corporate fiction is being used to defeat public
convenience, justify wrong, protect fraud, or
defend crime, or to confuse legitimate issues, or
that a corporation is the mere alter ego or
business conduit of a person or where the
corporation is so organized and controlled and
its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of
another corporation.5 It is apparent, therefore,
that the doctrine has no application to this case
where the purpose is not to hold the individual
stockholders liable for the obligations of the
corporation but, on the contrary, to hold the
corporation liable for the obligations of a
stockholder or stockholders. Piercing the veil of
corporate entity means looking through the
corporate form to the individual stockholders
composing it. Here there is no reason to pierce
the veil of corporate entity because there is no
question that petitioners' claims, assuming them
to be valid, are the personal liability of the late
Felipe Bacani. It is immaterial that he was also a
stockholder of BASEC.
Indeed, the doctrine is stood on its head when
what is sought is to make a corporation liable for
the obligations of a stockholder. But there are
several reasons why BASEC is not liable for the of the decedent, and judgment
personal obligations of Felipe Bacani. For one, for money against the
BASEC came into existence before BSPA was decedent, must be filed within
retired as a business concern. BASEC was the time limited in the notice;
incorporated on October 26, 1989 and its license otherwise they are barred
to operate was released on May 28, 1990, while forever, except that they may
BSPA ceased to operate on December 31, 1989. be set forth as counterclaims
Before, BSPA was retired, BASEC was already in any action that the executor
existing. It is, therefore, not true that BASEC is a or administrator may bring
mere continuity of BSPA. against the claimants . . .
Second, Felipe Bacani was only one of the five (5) The rationale for the rule is that upon the death
incorporators of BASEC. He owned the least of the defendant, a testate or intestate
number of shares in BASEC, which included proceeding shall be instituted in the proper court
among its incorporators persons who are not wherein all his creditors must appear and file
members of his family. That his wife Lydia and their claims which shall be paid proportionately
daughter Alicia were also incorporators of the out of the property left by the deceased. The
same company is not sufficient to warrant the objective is to avoid duplicity of procedure.
conclusion that they hold their shares in his Hence the ordinary actions must be taken out
behalf. from the ordinary courts. 6 Under Art. 110 of the
Labor Code, money claims of laborers enjoy
Third, there is no evidence to show that the preference over claims of other creditors in case
assets of BSPA were transferred to BASEC. If of bankruptcy or liquidation of the employer's
BASEC was a mere continuation of BSPA, all or at business.
least a substantial part of the latter's assets
should have found their way to BASEC. WHEREFORE, the petition for certiorari is
DISMISSED.
Neither can respondent Alicia Bacani be held
liable for BSPA's obligations. Although she was SO ORDERED.
Executive Directress of BSPA, she was merely an
employee of the BSPA, which was a single
Narvasa, C.J., Regalado and Puno, JJ., concur.
proprietorship.
Now, the claims of petitioners are actually
money claims against the estate of Felipe Bacani.
They must be filed against his estate in
accordance with Sec. 5 of Rule 86 which provides
in part:
Sec. 5. Claims which must be
filed under the notice. If not
filed, barred; exceptions. — All
claims for money against the
decedent, arising from
contract, express or implied,
whether the same be due, not
due, or contingent, all claims
for funeral expenses and
expenses for the last sickness
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2886 August 22, 1952
GREGORIO ARANETA, INC., plaintiff-appellant,
vs.
PAZ TUASON DE PATERNO and JOSE
VIDAL, defendants-appellants.
Araneta and Araneta for appellant.
Ramirez and Ortigas for defendants-appellants.
Perkins, Ponce Enrile and Contreras And La O and
Feria for appellee.
TUASON, J.:
This is a three-cornered contest between the
purchasers, the seller, and the mortgagee of
certain portions (approximately 40,703 square
meters) of a big block of residential land in the
district of Santa Mesa, Manila. The plaintiff,
which is the purchaser, and the mortgagee
elevated this appeal. Though not an appellant,
the seller and mortgagor has made assignments
of error in her brief, some to strengthen the
judgment and others for the purpose of new trial.
The case is extremely complicated and multiple
issues were raised.
The salient facts in so far as they are not
controverted are these. Paz Tuason de Paterno is
the registered owner of the aforesaid land, which
was subdivided into city lots. Most of these lots
were occupied by lessees who had contracts of
lease which were to expire on December
31,1952, and carried a stipulation to the effect
that in the event the owner and lessor should
decide to sell the property the lessees were to be
given priority over other buyers if they should
desire to buy their leaseholds, all things being
equal. Smaller lots were occupied by tenants
without formal contract.
In 1940 and 1941 Paz Tuason obtained from Jose
Vidal several loans totalling P90,098 and
constituted a first mortgage on the aforesaid
property to secure the debt. In January and April,
1943, she obtained additional loans of P30,000
and P20,000 upon the same security. On each of
the last-mentioned occasions the previous
contract of mortgage was renewed and the
amounts received were consolidated. In the first
novated contract the time of payment was fixed
at two years and in the second and last at four
years. New conditions not relevant here were
also incorporated into the new contracts.
There was, besides, a separate written
agreement entitled "Penalidad del Documento de
Novacion de Esta Fecha" which, unlike the
principal contracts, was not registered. The
tenor of this separate agreement, all copies, of
which were alleged to have been destroyed or
lost, was in dispute and became the subject of
conflicting evidence. The lower court did not
make categorical findings on this point, however,
and it will be our task to do so at the appropriate
place in this decision.
In 1943 Paz Tuason decided to sell the entire
property for the net amount of P400,000 and
entered into negotiations with Gregorio Araneta,
Inc. for this purpose. The result of the
negotiations was the execution on October 19,
1943, of a contract called "Promesa de Compra y
Venta" and identified as Exhibit "1." This
contract provided that subject to the preferred
right of the lessees and that of Jose Vidal as
mortgagee, Paz Tuason would sell to Gregorio
Araneta, Inc. and the latter would buy for the
said amount of P400,000 the entire estate under
these terms.
El precio sera pagado como sigue: un
40 por ciento juntamente con la carta
de aceptacion del arrendatario, un 20
por ciento delprecio al otorgarse la
escritura de compromiso de venta, y el
remanente 40 por ciento al otorgarse la
escritura de venta definitiva, la cual
sera otorgada despues de que se
habiese canceladola hipoteca a favor de
Jose Vidal que pesa sobre dichos lotes.
Lacomision del 5 por ciento que
corresponde a Jose Araneta serapagada
al otorgarse la escritura de
compromiso de venta.
Paz Tuason se obliga a entregar
mediante un propio las cartasque
dirigira a este efecto a los
arrendatarios, de conformidad con el
formulario adjunto, que se marca como
Apendice A.
Expirado el plazo arriba mencionado,
Paz Tuason otorgara las escrituras
correspondientes de venta a los
arrendatarios que hayan decidido
comprar sus respectivos lotes.
9. Los alquieres correspondientes a
este año se prorratearan entre la
vendedora y el comprador,
correspondiendo al comprador los
alquileres correspondientes a cancelarse la hipoteca que pesa sobre el
Noviembre y Diciembre de este año y
asimismo sera por cuenta del
comprador el amillaramiento
correspondiente a dichos meses.
10. Paz Tuason, reconoce haver
recibido en este acto de Gregorio
Araneta, Inc., la suma de Ciento
Noventa Mil Pesos (P190,000)como
adelanto del precio de venta que
Gregorio Araneta, Inc., tuviere que
pagar a Paz Tuason.
La cantidad que Paz Tuason recibe en
este acto sera aplicadapor ella a saldar
su deuda con Jose Vidal, los
amillaramientos, sobre el utilizado por
Paz Tuason para otros fines.
11. Una vez determinados los lotes que
Paz Tuason podra vendera Gregorio
Araneta, Inc., Paz Tuason otorgara una
escritura deventa definitiva sobre
dichos lotes a favor de Gregorio
Araneta, Inc.
Gregorio Araneta, Inc., pagara el precio
de venta como sigue: 90 por ciento del
mismo al otorgarse la escritura de
venta definitiva descontandose de la
cantidad que entonces se tenga que
pagar de adelanto de P190,000 que se
entrega en virtud de esta escritura. El
10 por ciento remanente se pagara a
Paz Tuazon, una vez se haya cancelado
la hipoteca que pesa actualmente sobre
el terreno.
No obstante la dispuesto en el parrafo
8, cualquier arrendatario que decida
comprar el lote que occupa con
contrato de arrendamiento podra optar
por pedir el otorgamiento inmediato a
su favor el acto de la escritura de venta
definitiva pagando en el acto el 50 por
ciento del precio (ademas del 40 por
ciento que debio incluir en su carta de
aceptacion) y el remanente de 10 por
ciento inmediatemente despues de
terreno.
12. Si la mencionada cantidad de
P190,000 excediere del 90 por ciento
de la cantidad que Gregorio Araneta,
Inc., tuviere que vender a dicho
comprador, el saldo sera pagado
inmediatamente por Paz Tuazon,
tomandolo de las cantidades que reciba
de los arrendatarios como precio de
venta.
In furtherance of this promise to buy and sell,
letters were sent the lessees giving them until
August 31, 1943, an option to buy the lots they
occupied at the price and terms stated in said
letters. Most of the tenants who held contracts of
lease took advantage of the opportunity thus
extended and after making the stipulated
payments were giving their deeds of conveyance.
These sales, as far as the record would show,
have been respected by the seller.
With the elimination of the lots sold or be sold to
the tenants there remained unencumbered,
except for the mortgage to Jose Vidal, Lots 1, 8-
16 and 18 which have an aggregate area of
14,810.20 square meters; and on December 2,
1943, Paz Tuason and Gregorio Araneta, Inc.
executed with regard to these lots an absolute
deed of sale, the terms of which, except in two
respects, were similar to those of the sale to the
lessees. This deed, copy of which is attached to
the plaintiff's complaint as Exhibit A, provided,
among other things, as follows:
The aforesaid lots are being sold by he
Vendor to the Vendee separately at the
prices mentioned in paragraph (6) of
the aforesaid contract entitled
"Promesa de Compra y Venta," making
a total sum of One Hundred Thirty-Nine
Thousand Eighty-three pesos and
Thirty-two centavos (P139,083.32),
ninety (90%) per cent of which
amount, i.e., the sum of One Hundred
Twenty-five Thousand One Hundred
Seventy-four Pesos and Ninety-nine
centavos (P125,174.99), the Vendor
acknowledges to have received by
virtue of the advance of One Hundred
Ninety Thousand (P190,000) Pesos
made by the Vendee to the Vendor
upon the execution of the aforesaid
contract entitled "Promesa de Compra
y Venta". The balance of Sixty-Four
Thousand Eight Hundred Twenty-five
Pesos and One centavo (P64,825.01)
between the sum of P125,174.99, has
been returned by the Vendor to the
Vendee, which amount the Vendee
acknowledges to have received by
these presents;
The aforesaid sum of P190,000 was
delivered by the Vendee to the Vendor
by virtue of four checks issued by the
Vendee against the Bank of the
Philippine Islands, as follows:
No. C-286445 in favor of Paz Tuason de Paterno
No. C-286444 in favor of the City Treasurer, Manila
No. C-286443 in favor of Jose Vidal
No. C-286442 in favor of Jose Vidal 143,150.00 adjusted between the parties in a
Por:
separate document.
Total (Fdo.) "M.J. GONZALEZ
P190,000.00
Should any of the aforesaid lessees of
The return of the sum of P64,825.01 In view of the foregoing liquidation, the lots Nos. 2, 3, 4, 5, 6, 7, 9 and 17 fail to
was made by the Vendor to the Vendee vendor acknowledges fully and carry out their respective obligations
in a liquidation which reads as follows: unconditionally, having received the under the option to purchase exercised
sum of P125,174.99 of the present legal by them so that the rights of the lessee
currency de
and hereby expressly declares to purchase the respective property
Hemos recibido de Da. Paz Tuason de Paterno la cantidad Sesenta
y Cuatro mil Ochocientos Veinticinco Pesos thaty she
un will not hold the Vendee
centimo leased by him is cancelled, the Vendor
(P64,825.01) enconcepto de devolucion que nos hace del excesode lo loss that she might
responsible for any shall be bound to sell the same to the
pagadoa ella de suffer due to the fact that two of the
P190,000.00 herein Vendee, Gregorio Araneta,
checks paid to her by the Vendee were Incorporated, in conformity with the
Menos el 90% de P139,083.32, importe de los issued
lotes que vamosofa Jose Vidal and the
in favor terms and conditions provided in the
comprar latter has, up to the125,174.99
present time, not aforesaid contract of "Promesa de
Exceso yet collected the same.
64,825.01 Compra y Venta";
Cheque BIF No. D-442988 de Simplicio del Rosario
The ten (10%) per cent 21,984.20
balance of the The documentary stamps to be affixed
purchase price not yet paid in the total to this deed will be for the account of
Cheque PNB No. 177863-K de L.E. Dumas 21,688.60
sum of P13,908.33 will be paid by the the Vendor while the expenses for the
Cheque PNB No. 267682-K de Alfonso Sycip Vendee to the Vendor20,000.00
when the existing registration of this document will be for
Cheque PNB No. 83940 de Josefina de Pabalan mortgage over the property4,847.96sold by the the account of the Vendee.
Vendor to the Vendee is duly cancelled
Billetes recibidos de Alfonso Sycip in the office of the Register42.96
of Deeds, or
The remaining area of the property of
sooner at the option of the Vendee.
P68,563.21 the Vendor subject to Transfer
Certificates of Title Nos. 60471 and
Menos las comisiones de 5 % recibidas de Josefina
This de
Deed of Sale is executed by the 60472, are lots Nos. 2, 3, 4, 5, 6, 7, 9,
Pabalan Vendor P538.60
free from all liens and and 17, all of the Consolidation of lots
L.E. Dumas encumbrances, with the only exception
1,084.43 Nos. 20 and 117 of plan II-4755,
of the existing lease contracts on G.L.R.O. Record No. 7680.
Angela S. Tuason 1,621.94
parcels Nos. 1, 10, 11,3,244.97
and 16, which
lease contracts will expire on December
P65,318.24 Before the execution of the above deed, that is,
31, 1953, with the understanding, on October 20, 1943, the day immediately
Menos cheque BIF No. C-288642 a favor de Da. Paz
however, that this sale is being following the signing of the agreement to buy
Tuason de Paterno que le entregamos como exceso 493.23
executed free from any option or right and sell, Paz Tuason had offered to Vidal the
on the part of the lessees
P64,825.01
to purchase check for P143,150 mentioned in Exhibit A, in
the lots respectively leased by them. full settlement of her mortgage obligation, but
Manila, Noviembre 2, 1943 the mortgagee had refused to receive that check
It is therefore clearly understood that or to cancel the mortgage, contending that by the
the Vendor will pay the existing separate agreement before mentioned payment
GREGORIO ARANETA, INCORPORATED mortgage on her property in favor of of the mortgage was not to be effected totally or
Por; Jose Vidal. partially before the end of four years from April,
(Fdo.) "JOSE ARANETA 1943.
Presidente The liquidation of the amounts
respectively due between the Vendor Because of this refusal of Vidal's Paz Tuason,
P13,476.62
and the Vendee in connection with the through Atty. Alfonso Ponce Enrile, commenced
Recibido cheque No. C-288642 BIF-
3,373.38 rents and real estate taxes as stipulated an action against the mortgagee in October or
P493.23
30,000.00 in paragraph (9) of the contract entitled the early paret of November 1943. the record of
"Promesa de Compara y Venta" will be that case was destroyed and no copy of the
complaint was presented in evidence. Attached
to the complaint or deposited with the clerk of
court by Attorney Ponce Enrile simultaneously
with the docketing of the suit were the check for
P143,150 previously turned down by Vidal,
another certified check for P12,932.61, also
drawn by Gregorio Araneta, Inc., in favor of
Vidal, and one ordinary check for P30,000 issued
by Paz Tuazon. These three checks were
supposed to cover the whole indebtedness to
Vidal including the principal and interest up to
that time and the penalty provided in the
separate agreement.
But the action against Vidal never came on for
trial and the record and the checks were
destroyed during the war operations in January
or February, 1945; and neither was the case
reconstituted afterward. This failure of the suit
for the cancellation of Vidal's mortgage, coupled
with the destruction of the checks tendered to
the mortgagee, the nullification of the bank
deposit on which those checks had been drawn,
and the tremendous rise of real estate value
following the termination of the war, gave
occasion to the breaking off the schemes
outlined in Exhibits 1 and A; Paz Tuason after
liberation repudiated them for the reasons to be
hereafter set forth. The instant action was the
offshoot, begun by Gregorio Araneta, Inc. to
compel Paz Tuason to deliver to the plaintiff a
clear title to the lots described in Exhibit A free
from all liens and encumbrances, and a deed of
cancellation of the mortgage to Vidal. Vidal came
into the case in virtue of a summon issued by
order of the court, and filed a cross-claim against
Paz Tuazon to foreclose his mortgage.
It should be stated that the outset that all the
parties are in agreement that Vidal's loans are
still outstanding. Paz Tuason's counsel concede
that the tender of payment to Vidal was legally
defective and did not operate to discharge the
mortgage, while the plaintiff is apparently
uninterested in this feature of the case
considering the matter one largely between the
mortgagor and the mortgagee, although to a
certain degree this notion is incorrect. At any
rate, the points of discord between Paz Tuason
and Vidal concern only the accrual of interest on
the loans, Vidal's claim to attorney's fees, and the
application of the debt moratorium law which
the debtor now invokes. These matters will be
taken up in the discussion of the controversy
between Paz Tuason and Jose Vidal.
The principal bone of contention between
Gregorio Araneta, Inc., and Paz Tuason was the
validity of the deed of sale of Exhibit A on which
the suit was predicated. The lower court's
judgment was that this contract was invalid and
was so declared, "sin per juicio de que la
demandada Paz Tuason de Paterno pague a la
entidad demandante todas las cantidades que
habia estado recibiendo de lareferida entidad
demandante, en concepto de pago de
losterrenos, en moneda corriente, segun el
cambio que debiaregir al tiempo de otorgarse la
escritura segun la escalade "Ballentine",
descontando, sin embargo, de dichas cantidades
cualesquiera que la demandante haya
estadorecibiendo como alquileres de los
terrenos supuestamentevendidos a ella." The
court based its opinion that Exhibit 1. His Honor,
Judge Sotero Rodas, agreedwith the defendant
that under paragraph 8 of Exhibit 1 there was to
be no absolute sale to Gregorio Araneta, Inc.,
unless Vidal's mortgage was cancelled.
In our opinion the trial court was in error in its
interpretation of Exhibit 1. The contemplated
execution of an absolute deed of sale was not
contingent on the cancellation of Vidal's
mortgage. What Exhibit 1 did provide (eleventh
paragraph) was that such deed of absolute sale
should be executed "una vez determinado los
lotes que Paz Tuason podra vender a Gregorio
Araneta, Inc." The lots which could be sold to
Gregorio Araneta, Inc. were definitely known by
October 31, 1943, which was the expiry of the
tenants' option to buy, and the lots included in
the absolute of which the occupants' option to
buy lapsed unconditionally. Such deed as Exhibit
A was then in a condition to be made.
Vidal's mortgage was not an obstacle to the sale.
An amount had been set aside to take care of it,
and the parties, it would appear, were confident
that the suit against the mortgagee would
succeed. The only doubt in their minds was in
the amount to which Vidal was entitled. The
failure of the court to try and decide that the case
was not foreseen either.
This refutes, were think, the charge that there
was undue rush on the part of the plaintiff to
push across the sale. The fact that
simultaneously with Exhibit A similar deeds
were given the lessees who had elected to buy
their leaseholds, which comprise an area about
twice as big as the lots described in Exhibit A,
and the further fact that the sale to the lessees
have never been questioned and the proceeds
thereof have been received by the defendant,
should add to dispel any suspicion of bad faith on
the part of the plaintiff. If anyone was in a hurry
it could have been the defendant. The clear
preponderance of the evidence that Paz Tuason
was pressed for cash and that the payment of the
mortgage was only an incident, or a necessary
means to effectuate the sale. Otherwise she could
have settled her mortgage obligation merely by
selling a portion of her estate, say, some of the
lots leased to tenants who, except two who were
in concentration camps, were only too anxious to
buy and own the lots on which their houses were
built.
Whatever the terms of Exhibit 1, the plaintiff and
the defendant were at perfect liberty to make a
new agreement different from or even contrary
to the provisions of that document. The validity
of the subsequent sale must of necessity depend
on what it said and not on the provisions of the
promise to buy and sell.
It is as possible proof or fraud that the
discrepancies between the two documents bear
some attention. It was alleged that Attorneys
Salvador Araneta and J. Antonio Araneta who the
defendant said had been her attorneys and had
drawn Exhibit A, and not informed or had
misinformed her about its contents; that being
English, she had not read the deed of sale; that if
she had not trusted the said attorneys she would
not have been so foolish as to affix her signature
to a contract so one-sided.
The evidence does not support the defendant.
Except in two particulars, Exhibit A was a
substantial compliance with Exhibit 1 in
furtherance of which Exhibit A was made. One
departure was the proviso that 10 per cent of the
purchase price should be paid only after Vidal's
mortgage should have been cancelled. This
provisional deduction was not onerous or
unusual. It was not onerous or unusual that the
vendee should withhold a relatively small
portion of the purchase price before all the
impediments to the final consummation of the
sale had been removed. The tenants who had
bought their lots had been granted the privilege
to deduct as much as 40 per cent of the
stipulated price pending discharge of the
mortgage, although his percentage was later
reduced to 10 as in the case of Gregorio Araneta,
Inc. It has also been that the validity of the sales
to the tenants has not been contested; that these
sales embraced in the aggregate 24,245.40
square meters for P260,916.68 as compared to
14,811.20 square meters sold to Gregorio
Araneta, Inc. for P139,083.32; that the seller has
already received from the tenant purchasers 90
per cent of the purchase money.
There is good reason to believe that had
Gregorio Araneta, Inc. not insisted on charging to
the defendant the loss of the checks deposited
with the court, the sale in question would have
gone the smooth way of the sales to the tenants.
Thus Dindo Gonzales, defendant's son, declared:
P. Despues de haberse presentado esta
demanda, recuerda usted haber tenido
conversacion con Salvador Araneta
acerca de este asunto?
R. Si Señor.
P. Usted fue quien se acerco al señor
Salvador Araneta?
R. Si, señor.
P. Quiero usted decir al Honorable
Juzgado que era lo que usted dijo al
señor Salvador Araneta?
R. No creo que es propio que yo diga,
por tratarse de mi madre.
P. En otras palabras, usted quiere decir
que no quiere usted que se vuelva decir
o repetir ante este Honorable Juzgado
lo que usted dijo al señor Salvador
Araneta, pues, se trata de su madre?
R. No, señor.
P. Puede usted decirnos que quiso
usted decir cuando que no quisiera
decir?
R. Voy a decir lo que Salvador Araneta,
yo me acerque a Don Salvador Araneta,
y yo le dije que es una verguenza de
que nosotros, en la familia tengamos
que ir a la Corte por este, y tambien dije
que mi madre de por si quiere vender
el terreno a ellos, porque mi madre
quiere pagar al señor Vidal, y que es
una verguenza, siendo entre parientes,
tener que venir por este; era lo que yo
dije al señor Salvador Araneta.
xxx xxx xxx
P. No recuerda usted tambien dijo al
señor Salvador Araneta que usted no
comulgaba con ella (su madre) en este
asunto?
R. Si, Señor; porque yo creia que mi
madre solamente queria anular esta
venta, pero cuando me dijo el señor La
O y sus abogados que, encima de quitar
la propiedad, todavia tendria ella que
pagar al señor Vidal, este no veso claro.
xxx xxx xxx
P. Ahora bien; de tal suerte que, tal
como nosotros desperendemos de su
testimonio, tanto, usted como, su
madre, esteban muy conformes en la
venta, es asi?
R. Si, señor.
The other stipulation embodied in Exhibit A
which had no counterpart in Exhibit 1 was that
by which Gregorio Araneta Inc. would hold Paz
Tuason liable for the lost checks and which, as
stated, appeared to be at the root of the whole
trouble between the plaintiff and the defendant.
The stipulation reads:
In view of the foregoing liquidation, the
Vendor acknowledges fully and
unconditionally, having received the
sum of P125,174.99 of the present legal
currency and hereby expressly declares
that she will not hold the Vendee
responsible for any loss that she might
suffer due to the fact that two of the
checks paid to her by the Vendee were
used in favor of Jose Vidal and the latter
has, up to the present time, not yet
collected the same.
It was argued that no person in his or her right
senses would knowingly have agreed to a
covenant so iniquitous and unreasonable.
In the light of all the circumstances, it is difficult
to believe that the defendant was deceived into
signing Exhibit A, in spite of the provision of
which she and her son complaint. Intelligent and
well educated who had been managing her
affairs, she had an able attorney who was
assisting her in the suit against Vidal, a case
which was instituted precisely to carry into
effect Exhibit A or Exhibit 1, and a son who is
leading citizen and a business-man and knew the
English language very well if she did not. Dindo
Gonzalez took active part in, if he was not the
initiator of the negotiations that led to the
execution of Exhibit 1, of which he was an
attesting witness besides. If the defendant signed
Exhibit A without being apprised of its import, it
can hardly be conceived that she did not have
her attorney or her son read it to her afterward.
The transaction involved the alienation of
property then already worth a fortune and now
assessed by the defendant at several times
higher. Doubts in defendant's veracity are
enhanced by the fact that she denied or at least
pretended in her answer to be ignorant of the
existence of Exhibit A, and that only after she
was confronted with the signed copy of the
document on the witness did she spring up the
defense of fraud. It would look as if she gambled
on the chance that no signed copy of the deed
had been saved from the war. She could not have
forgotten having signed so important a
document even if she had not understood some
of its provisions.
From the unreasonableness and inequity of the
aforequoted Exhibit A it is not to be presumed
that the defendant did not understand it. It was
highly possible that she did not attach much
importance to it, convinced that Vidal could be
forced to accept the checks and not foreseeing
the fate that lay in store for the case against the
mortgagee.
Technical objections are made against the deed
of sale.
First of these is that Jose Araneta, since deceased,
was defendant's agent and at the same time the
president of Gregorio Araneta, Inc.
The trial court found that Jose Araneta was not
Paz Tuason's agent or broker. This finding is
contrary to the clear weight of the evidence,
although the point would be irrelevant, if the
court were right in its holding that Exhibit A was
void on another ground, i.e., it was inconsistent
with Exhibit 1.
Without taking into account defendant's Exhibit
7 and 8, which the court rejected and which, in
our opinion, should have been admitted, Exhibit
1 is decisive of the defendant's assertion. In
paragraph 8 of Exhibit 1 Jose Araneta was
referred to as defendant's agent or broker "who
acts in this transaction" and who as such was to
receive a commission of 5 per cent, although the
commission was to be charged to the purchasers,
while in paragraph 13 the defendant promised,
in consideration of Jose Araneta's services
rendered to her, to assign to him all her right,
title and interest to and in certain lots not
embraced in the sales to Gregorio Araneta, Inc.
or the tenants.
However, the trial court hypothetically admitting
the existence of the relation of principal and
agent between Paz Tuason and Jose Araneta,
pointed out that not Jose Araneta but Gregorio
Araneta, Inc. was the purchaser, and cited the
well-known distinction between the corporation
and its stockholders. In other words, the court
opined that the sale to Gregorio Araneta, Inc. was
not a sale to Jose Araneta the agent or broker.
The defendant would have the court ignore this
distinction and apply to this case the other well-
known principle which is thus stated in 18 C.J.S.
380: "The courts, at law and in equity, will
disregard the fiction of corporate entity apart
from the members of the corporation when it is
attempted to be used as a means of
accomplishing a fraud or an illegal act.".
It will at once be noted that this principle does
not fit in with the facts of the case at bar.
Gregorio Araneta, Inc. had long been organized
and engaged in real estate business. The
corporate entity was not used to circumvent the
law or perpetrate deception. There is no denying
that Gregorio Araneta, Inc. entered into the
contract for itself and for its benefit as a
corporation. The contract and the roles of the
parties who participated therein were exactly as
they purported to be and were fully revealed to
the seller. There is no pretense, nor is there
reason to suppose, that if Paz Tuason had known
Jose Araneta to Gregorio Araneta, Inc's
president, which she knew, she would not have
gone ahead with the deal. From her point of view
and from the point of view of public interest, it
would have made no difference, except for the
brokerage fee, whether Gregorio Araneta, Inc. or
Jose Araneta was the purchaser. Under these
circumstances the result of the suggested
disregard of a technicality would be, not to stop
the commission of deceit by the purchaser but to
pave the way for the evasion of a legitimate and
binding commitment buy the seller. The
principle invoked by the defendant is resorted to
by the courts as a measure or protection against
deceit and not to open the door to deceit. "The
courts," it has been said, "will not ignore the
corporate entity in order to further the
perpetration of a fraud." (18 C.J.S. 381.)
The corporate theory aside, and granting for the
nonce that Jose Araneta and Gregorio Araneta,
Inc. were identical and that the acts of one where
the acts of the other, the relation between the
defendant and Jose Araneta did not fall within
the purview of article 1459 of the Spanish Civil
Code.1
Agency is defined in article 1709 in broad term,
and we have not come across any commentary
or decision dealing directly with the precise
meaning of agency as employed in article 1459.
But in the opinion of Manresa(10 Manresa 4th
ed. 100), agent in the sense there used is one
who accepts another's representation to perform
in his name certain acts of more or less
transcendency, while Scaevola (Vol. 23, p. 403)
says that the agent's in capacity to buy his
principal's property rests in the fact that the
agent and the principal form one juridicial
person. In this connection Scaevola observes that
the fear that greed might get the better of the
sentiments of loyalty and disinterestedness
which should animate an administrator or agent,
is the reason underlying various classes of
incapacity enumerated in article 1459. And as
American courts commenting on similar
prohibition at common law put it, the law does
not trust human nature to resist the temptations
likely to arise of antogonism between the
interest of the seller and the buyer.
So the ban of paragraph 2 of article 1459
connotes the idea of trust and confidence; and so
where the relationship does not involve
considerations of good faith and integrity the
prohibition should not and does not apply. To
come under the prohibition, the agent must be in
a fiduciary with his principal.
Tested by this standard, Jose Araneta was not an
agent within the meaning of article 1459. By
Exhibits 7 and 8 he was to be nothing more than
a go-between or middleman between the
defendant and the purchaser, bringing them
together to make the contract themselves. There
was no confidence to be betrayed. Jose Araneta
was not authorize to make a binding contract for
the defendant. He was not to sell and he did not
sell the defendant's property. He was to look for
a buyer and the owner herself was to make, and
did make, the sale. He was not to fix the price of
the sale because the price had been already fixed
in his commission. He was not to make the terms
of payment because these, too, were clearly
specified in his commission. In fine, Jose Araneta
was left no power or discretion whatsoever,
which he could abuse to his advantage and to the
owner's prejudice.
Defendant's other ground for repudiating Exhibit
A is that the law firm of Araneta & Araneta who
handled the preparation of that deed and
represented by Gregorio Araneta, Inc. were her
attorneys also. On this point the trial court's
opinion is likewise against the defendant.
Since attorney Ponce Enrile was the defendant's
lawyer in the suit against Vidal, it was not likely
that she employed Atty. Salvador Araneta and J.
Antonio Araneta as her attorneys in her dealings
with Gregorio Araneta, Inc., knowing, as she did,
their identity with the buyer. If she had needed
legal counsels, in this transaction it seems
certain that she would have availed herself of the
services of Mr. Ponce Enrile who was allegedly
representing her in another case to pave the way
for the sale.
The fact that Attys. Salvador and Araneta and J.
Antonio Araneta drew Exhibits 1 and A,
undertook to write the letters to the tenants and
the deeds of sale to the latter, and charged the
defendant the corresponding fees for all this
work, did not themselves prove that they were
the seller's attorneys. These letters and
documents were wrapped up with the
contemplated sale in which Gregorio Araneta,
Inc. was interested, and could very well have
been written by Attorneys Araneta and Araneta
in furtherance of Gregorio Araneta's own
interest. In collecting the fees from the defendant
they did what any other buyer could have
appropriately done since all such expenses
normally were to be defrayed by the seller.
Granting that Attorney Araneta and Araneta
were attorneys for the defendant, yet they were
not forbidden to buy the property in question.
Attorneys are only prohibited from buying their
client's property which is the subject of
litigation. (Art. 1459, No. 5, Spanish Civil Code.)
The questioned sale was effected before the
subject thereof became involved in the present
action. There was already at the time of the sale a
litigation over this property between the
defendant and Vidal, but Attys. Salvador Araneta
and J. Antonio Araneta were not her attorneys in
that case.
From the pronouncement that Exhibit A is valid,
however, it does not follow that the defendant
should be held liable for the loss of the certified
checks attached to the complaint against Vidal or
deposited with the court, or of the funds against
which they had been issued. The matter of who
should bear this loss does not depend upon the
validity of the sale but on the extent and scope of
the clause hereinbefore quoted as applied to the
facts of the present case.
The law and the evidence on this branch of the
case revealed these facts, of some of which
passing mention has already been made.
The aforesaid checks, one for P143,150 and one
for P12,932.61, were issued by Gregorio Araneta,
Inc. and payable to Vidal, and were drawn
against the Bank of the Philippines with which
Gregorio Araneta, Inc. had a deposit in the
certification stated that they were to be "void if
not presented for payment date of acceptance"
office (Bank) within 90 days from date of
acceptance."
Under banking laws and practice, by the
clarification" the funds represented by the check
were transferred from the credit of the maker to
that of the payee or holder, and, for all intents
and purposes, the latter became the depositor of
the drawee bank, with rights and duties of one
such relation." But the transfer of the
corresponding funds from the credit of the
depositor to that of that of the payee had to be
co-extensive with the life of the checks, which in
the case was 90 days. If the checks were not
presented for payment within that period they
became invalid and the funds were automatically
restored to the credit of the drawer though not
as a current deposit but as special deposit. This
is the consensus of the evidence for both parties
which does not materially differ on this
proposition.
The checks were never collected and the account
against which they were drawn was not used or
claimed by Gregorio Araneta, Inc.; and since that
account "was opened during the Japanese
occupation and in Japanese currency," the checks
"became obsolete as the account subject thereto
is considered null and void in accordance with
Executive Order No. 49 of the President of the
Philippines", according to the Bank.
Whether the Bank of the Philippines could
lawfully limit the negotiability of certified checks
to a period less than the period provided by the
Statute of Limitations does not seem material.
The limitation imposed by the Bank as to time
would adversely affect the payee, Jose Vidal, who
is not trying to recover on the instruments but
on the contrary rejected them from the outset,
insisting that the payment was premature. As far
as Vidal was concerned, it was of no importance
whether the certification was or was not
restricted. On the other hand, neither the
plaintiff nor the defendant now insists that Vidal
should present, or should have presented, the
checks for collection. They in fact agree that the
offer of those checks to Vidal did not, for
technical reason, work to wipe out the mortgage.
But as to Gregorio Araneta and Paz Tuason, the
conditions specified in the certification and the
prevailing regulations of the Bank were the law
of the case. Not only this, but they were aware of
and abided by those regulations and practice, as
instanced by the fact that the parties presented
testimony to prove those regulations and
practice. And that Gregorio Araneta, Inc. knew
that Vidal had not cashed the checks within 90
days is not, and could not successfully be denied.
In these circumstances, the stipulation in Exhibit
A that the defendant or seller "shall not hold the
vendee responsible for any loss of these checks"
was unconscionable, void and unenforceable in
so far as the said stipulation would stretch the
defendant's liability for this checks beyond 90
days. It was not in accord with law, equity or
good conscience to hold a party responsible for
something he or she had no access to and could
not make use of but which was under the
absolute control and disposition of the other
party. To make Paz Tuason responsible for those
checks after they expired and when they were
absolutely useless would be like holding an
obligor to answer for the loss or destruction of
something which the obligee kept in its safe with
no power given the obligor to protect it or
interfere with the obligee's possession.
To the extent that the contract Exhibit A would
hold the vendor responsible for those checks
after they had lapsed, the said contract was
without consideration. The checks having
become obsolete, the benefit in exchange for
which the defendant had consented to be
responsible for them had vanished. The sole
motivation on her part for the stipulation was
the fact that by the checks the mortgage might or
was to be released. After 90 days the defendant
stood to gain absolutely nothing by them, which
had become veritable scraps of paper, while the
ownership of the deposit had reverted to the
plaintiff which alone could withdraw and make
use of it.
What the plaintiff could and should have done if
the disputed stipulation was to be kept alive was
to keep the funds accessible for the purpose of
paying the mortgage, by writing new checks
either to Vidal or to the defendant, as was done
with the check for P30,000, or placing the
deposit at the defendant's disposal. The check for
P30,000 intended for the penalty previously had
been issued in the name of Vidal and certified,
too, but by mutual agreement it was changed to
an ordinary check payable to Paz Tuason.
Although that check was also deposited with the
court and lost, its loss undoubtedly was
imputable to the defendant's account, and she
did not seem to disown her liability for it.
Let it be remembered that the idea of certifying
the lost checks was all the plaintiff's. The plaintiff
would not trust the defendant and studiously so
arranged matters that she could not by any
possibility put a finger on the money. For all the
practical intents and purposes the plaintiff dealt
directly with the mortgagee and excluded the
defendant from meddling in the manner of
payment to Vidal. And let it also be kept in mind
that Gregorio Araneta, Inc. was not a mere
accommodator in writing these checks. It was as
much interested in the cancellation of the
mortgage as Paz Tuason.
Coming down to Vidal's cross-claim Judge Rodas
rendered no judgment other than declaring that
the mortgage remained intact and subsisting.
The amount to be paid Vidal was not named and
the question whether interest and attorney's fees
were due was not passed upon. The motion for
reconsideration of the decision by Vidal's
attorney's praying that Paz Tuason be sentenced
to pay the creditor P244,917.90 plus interest at
the rate of 1 percent monthly from September
10, 1948 and that the mortgaged property be
ordered sold in case of default within 90 days,
and another motion by the defendant seeking
specification of the amount she had to pay the
mortgagee were summarily denied by Judge
Potenciano Pecson, to whom the motions were
submitted, Judge Rodas by that time having been
appointed to the Court of Appeals.
All the facts and evidence on this subject are on
the record, however, and we may just as well
determine from these facts and evidence the
amount to which the mortgagee is entitled,
instead of remanding the case for new trial, if
only to avoid further delay if the disposition of
this case.
It is obvious that Vidal had a right to judgment
for his credit and to foreclose the mortgage if the
credit was not paid.
There is no dispute as to the amount of the
principal and there is agreement that the loans
made in 1943, in Japanese war notes, should be
computed under the Ballantyne conversion table.
As has been said, where the parties do not see
eye-to-eye was in regard to the mortgagee's
claim to attorney's fees and interest from
October, 1943, which was reached a
considerable amount. It was contended that,
having offered to pay Vidal her debt in that
month, the defendant was relieved thereafter
from paying such interest.
It is to be recalled that Paz Tuason deposited
with the court three checks which were intended
to cover the principal and interest up to October,
1943, plus the penalty provided in the
instrument "Penalidad del Documento de
Novacion de Esta Fecha." The mortgagor
maintains that although these checks may not
have constituted a valid payment for the purpose
of discharging the debt, yet they did for the
purpose of stopping the running of interest. The
defendant draws attention to the following
citations:
An offer in writing to pay a particular
sum of money or to deliver a written
instrument or specific personal
property is, if rejected, equivalent to
the actual production and tender of the
money, instrument or property. (Sec.
24, Rule 123.)
It is not accord with either the letter or
the spirit of the law to impose upon the
person affecting a redemption of
property, in addition to 12 per cent
interest per annum up to the time of
the offer to redeem, a further payment
of 6 per cent per annum from the date
of the officer to redeem. (Fabros vs.
Villa Agustin, 18 Phil., 336.)
A tender by the debtor of the amount of
this debt, if made in the proper manner,
will suspend the running of interest on
the debt for the time of such tender. (30
Am. Jur., 42.)
In the case of Fabrosa vs. Villa Agustin, supra, a
parcel of land had been sold on execution to one
Tabliga. Within the period of redemption Fabros,
to whom the land had been mortgaged by the
execution debtor, had offered to redeem the land
from the execution creditor and purchaser at
public auction. The trial court ruled that the
redemptioner was not obliged to pay the
stipulated interest of 12 per cent after he offered
to redeem the property; nevertheless he was
sentenced to pay 6 per cent interest from the
date of the offer.
This court on appeal held that "there is no
reason for this other (6 per cent) interest, which
appears to be a penalty for delinquency while
there was no delinquency." The court cited an
earlier decision, Martinez vs. Campbell, 10 Phil.,
626, where this doctrine was laid down: "When
the right of redemption is exercised within the
term fixed by section 465 of the Code of Civil
Procedure, and an offer is made of the amount
due for the repurchase of the property to which
said right refers, it is neither reasonable nor just
that the repurchaser should pay interest on the
redemption money after the time when he
offered to repurchase and tendered the money
therefor."
In the light of these decisions and law, the next
query is; Did the mortgagor have the right under
the contract to pay the mortgage on October 20,
1943? The answer to this question requires an
inquiry into the provision of the "Penalidad del
Documento de Novacion de Esta Fecha."
Vidal introduced oral evidence to the effect that
he reserved unto himself in that agreement the
right "to accept or refuse the total payment of
the loan outstanding . . ., if at the time of such
offer of payment he considered it advantageous
to his interest." This was gist of Vidal's testimony
and that of Lucio M. Tiangco, one of Vidal's
former attorneys who, as notary public, had
authenticated the document. Vidal's above
testimony was ordered stricken out as hearsay,
for Vidal was blind and, according to him, only
had his other lawyer read the document to him.
We are of the opinion that the court erred in
excluding Vidal's statement. There is no reason
to suspect that Vidal's attorney did not correctly
read the paper to him. The reading was a
contemporaneous incident of the writing and the
circumstances under which the document was
read precluded every possibility of design,
premeditation, or fabrication.
Nevertheless, Vidal's testimony, like the
testimony of Lucio M. Tiangco's, was based on
recollection which, with the lapse of time, was
for from infallible. By contrast, the testimony of
Attorneys Ponce Enrile, Salvador Araneta, and J.
Antonio Araneta does not suffer from such
weakness and is entitled to full faith and credit.
The document was the subject of a close and
concerted study on their part with the object of
finding the rights and obligations of the
mortgagee and the mortgagor in the premises
and mapping out the course to be pursued. And
the results of their study and deliberation were
translated into concrete action and embodied in
a letter which has been preserved. In line with
the results of their study, action was instituted in
court to compel acceptance by Vidal of the
checks consigned with the complaint, and before
the suit was commenced, and with the document
before him, Atty. Ponce Enrile, in behalf of his
client, wrote Vidal demanding that he accept the
payment and execute a deed of cancellation of
the mortgage. In his letter Atty. Ponce Enrile
reminded Vidal that the recital in the "Penalidad
del Documento de Novacion de Esta Fecha" was
"to the effect that should the debtor wish to pay
the debt before the expiration of the period the
reinstated (two years) such debtor would have
to pay, in addition to interest due, the penalty of
P30,000 — this is in addition to the penalty
clause of 10 per cent of the total amount due
inserted in the document of mortgage of January
20, 1943."
Atty. Ponce Enrile's concept of the agreement,
formed after mature and careful reading of it,
jibes with the only possible reason for the
insertion of the penalty provision. There was no
reason for the penalty unless it was for
defendant's paying her debt before the end of the
agreed period. It was to Vidal's interest that the
mortgage be not settled in the near future, first,
because his money was earning good interest
and was guaranteed by a solid security, and
second, which was more important, he, in all
probability, shared the common belief that
Japanese war notes were headed for a crash and
that four years thence, judging by the trends of
the war, the hostilities would be over.
To say, as Vidal says, that the debtor could not
pay the mortgage within four years and, at the
same time, that there would be penalty if she
paid after that period, would be a contradiction.
Moreover, adequate remedy was provided for
failure to pay or after the expiration of the
mortgage: increased rate or interest, foreclosure
of the mortgage, and attorney's fees.
It is therefore to be concluded that the
defendant's offer to pay Vidal in October, 1943,
was in accordance with the parties' contract and
terminated the debtor's obligation to pay
interest. The technical defects of the
consignation had to do with the discharge of the
mortgage, which is conceded on all sides to be
still in force because of the defects. But the
matter of the suspension of the running of
interest on the loan stands of a different footing
and is governed by different principles. These
principles regard reality rather than technicality,
substance rather than form. Good faith of the
offer or and ability to make good the offer should
in simple justice excuse the debtor from paying
interest after the offer was rejected. A debtor can
not be considered delinquent who offered checks
backed by sufficient deposit or ready to pay cash
if the creditor chose that means of payment.
Technical defects of the offer cannot be adduced
to destroy its effects when the objection to
accept the payment was based on entirely
different grounds. If the creditor had told the
debtor that he wanted cash or an ordinary check,
which Vidal now seems to think Paz Tuason
should have tendered, certainly Vidal's wishes
would have been fulfilled, gladly.
The plain truth was that the mortgagee bent all
his efforts to put off the payment, and thanks to
the defects which he now, with obvious
inconsistency, points out, the mortgage has not
perished with the checks.
Falling within the reasons for the stoppage of
interest are attorney's fees. In fact there is less
merit in the claim for attorney's fees than in the
claim for interest; for the creditor it was who by
his refusal brought upon himself this litigation,
refusal which, as just shown, resulted greatly to
his benefit.
Vidal, however, is entitled to the penalty, a point
which the debtor seems to a grant. The
suspension of the running of the interest is
premised on the thesis that the debt was
considered paid as of the date the offer to pay
the principal was made. It is precisely the
mortgagor's contention that he was to pay said
penalty if and when she paid the mortgage
before the expiration of the four-year period
provided in the mortgage contract. This penalty
was designed to take the place of the interest
which the creditor would be entitled to collect if
the duration of the mortgage had not been cut
short and from which interest the debtor has
been relieved. "In obligations with a penalty
clause the penalty shall substitute indemnity for
damages and the payment of interest. . ." (Art.
1152, Civil Code of Spain.).
To summarize, the following are our findings and
decision:
The contract of sale Exhibit A was valid and
enforceable, but the loss of the checks for
P143,150 and P12,932.61 and invalidation of the
corresponding deposit is to be borne by the
buyer. Gregorio Araneta, Inc. the value of these
checks as well as the several payments made by
Paz Tuason to Gregorio Araneta, Inc. shall be
deducted from the sum of P190,000 which the
buyer advanced to the seller on the execution of
Exhibit 1.
The buyer shall be entitled to the rents on the
land which was the subject of the sale, rents
which may have been collected by Paz Tuason
after the date of the sale.
Paz Tuason shall pay Jose Vidal the amount of
the mortgage and the stipulated interest up to
October 20,1943, plus the penalty of P30,000,
provided that the loans obtained during the
Japanese occupation shall be reduced according
to the Ballantyne scale of payment, and provided
that the date basis of the computation as to the
penalty is the date of the filing of the suit against
Vidal.
Paz Tuason shall pay the amount that shall have
been found due under the contracts of mortgage
within 90 days from the time the court's
judgment upon the liquidation shall have
become final, otherwise the property mortgaged
shall be ordered sold provided by law.
Vidal's mortgage is superior to the purchaser's
right under Exhibit A, which is hereby declared
subject to said mortgage. Should Gregorio
Araneta, Inc. be forced to pay the mortgage, it
will be subrogated to the right of the mortgagee.
This case will be remanded to the court of origin
with instruction to hold a rehearing for the
purpose of liquidation as herein provided. The
court also shall hear and decide all other
controversies relative to the liquidation which
may have been overlooked at this decision, in a
manner not inconsistent with the above findings
and judgment.
The mortgagor is not entitled to suspension of
payment under the debt moratorium law or
orders. Among other reasons: the bulk of the
debt was a pre-war obligation and the
moratorium as to such obligations has been
abrogated unless the debtor has suffered war
damages and has filed claim for them; there is no
allegation or proof that she has. In the second
place, the debtor herself caused her creditor to
be brought into the case which resulted in the
filing of the cross-claim to foreclose the
mortgage. In the third place, prompt settlement
of the mortgage is necessary to the settlement of
the dispute and liquidation between Gregorio
Araneta, Inc. and Paz Tuason. If for no other
reason, Paz Tuason would do well to forego the
benefits of the moratorium law.
There shall be no special judgments as to costs of
either instance.
Paras, C.J., Pablo, Bengzon, Padilla, Bautista
Angelo and Labrador, JJ., concur.
RESOLUTION
December 22, 1952
TUASON, J.:
The motion for reconsideration of the plaintiff,
Gregorio Araneta, Inc., and the defendant, Paz
Tuason de Paterno, are in large part devoted to
the question, extensively discussed in the
decision, of the validity of the contract of sale
Exhibit A. The arguments are not new and at
least were given due consideration in the
deliberation and study of the case. We find no
reason for disturbing our decision on this phase
of the case.
The plaintiff-appellant's alternative proposition
— to wit: "Should this Honorable Court declare
that the purchase price was not paid and that
plaintiff has to bear the loss due to the
invalidation of the occupation currency, its loss
should be limited to: (a) the purchase price of
P139,083.32 less P47,825.70 which plaintiff paid
and the defendant actually collected during the
occupation, or the sum of P92,233.32, or at most,
(b) the purchase price of the lot in the sum of
P139,083.32," — as well as the alleged over-
payment by the defendant-appellee, may be
taken up in the liquidation under the reservation
in the judgment that "the court (below) shall
hold a rehearing for the purpose of liquidation as
herein provided" and "shall also hear and decide
all other controversies relative to the liquidation
which may have been overlooked in this
decision, in the manner not inconsistent with the
above findings and judgment."
These payments and disbursement are matters
of accounting which, not having been put directly
in issue or given due attention at the trial and in
the appealed decision, can better be treshed out
in the proposed rehearing where each party will
have an opportunity to put forward his views
and reasons, with supporting evidence if
necessary, on how the various items in question
should be regarded and credited, in the light of
our decision.
As to Jose Vidal's motion: There is nothing to add
to or detract from what has been said in the
decision relative to the interest on the loans and
attorney's fees. There are no substantial features
of the case that have not been weighed carefully
in arriving at our conclusions. It is our
considered opinion that the decision is in accord
with law, reason and equity.
The vehement protest that this court should not
modify the conclusion of the lower court on
interest and attorney's fees is actually and
entirely contrary to the cross-claimant's own
suggestion in his brief. From page 20 of his brief,
we copy these passages:
We submit that this Honorable Court is
in a position now to render judgment in
the foreclosure of mortgage suit as no
further issue of fact need be acted upon
by the trial court. Defendant Paz
Tuason has admitted the amount of
capital due. That is a fact. She only
requests that interest be granted up to
October 20,1943, and that the
moratorium law be applied. Whether
this is possible or not is a legal question,
which can be decided by this court.
Unnecessary loss of time and expenses
to the parties herein will be avoided by
this Honorable Court by rendering
judgment in the foreclosure of
mortgage suit as follows:
xxx xxx xxx
In reality, the judgment did not adjudicate the
foreclosure of the mortgage nor did it fix the
amount due on the mortgage. The
pronouncement that the mortgage was in full
force and effect was a conclusion which the
mortgagor did not and does not now question.
There was therefore virtually no decision that
could be executed.
Vidal himself moved in the Court of First
Instance for amendment of the decision alleging,
correctly, that "the court failed to act on the
cross-claim of Jose Vidal dated April 22, 1947,
where he demanded foreclosure of the mortgage
. . . ." That motion like Paz Tuason's motion to
complete the judgment, was summarily denied.
In strict accordance with the procedure, the case
should have been remanded to the court of
origin for further proceedings in the form stated
by Paz Tuason's counsel. Both the mortgagor and
the mortgagee agree on this. We did not follow
the above course believing it best, in the interest
of the parties themselves and following Vidal's
attorney's own suggestion, to decide the
controversies between Vidal and Paz Tuason
upon the records and the briefs already
submitted.
The three motions for reconsideration are
denied.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor,
Jugo, Bautista Angelo and Labrador, JJ., concur.
RESOLUTION
January 26, 1953
TUASON, J.:
In the second motion for reconsideration by
defendant-appellee it is urged that the sale be
resolved for failure of plaintiff-appellant to pay
the entire purchase price of the property sold.
Rescission of the contract, it is true, was
alternative prayer in the cross-complaint, but the
trial court declared the sale void in accordance
with the main contention of the defendant, and
passed no judgment on the matter of rescission.
For this reason, and because rescission was not
pressed on appeal, we deemed unnecessary, if
not uncalled for, any pronouncement touching
this point.
In the second place, the nonpayment of a portion,
albeit big portion, of the price was not, in our
opinion, such failure as would justify recission
under Articles 1124 and 1505 et seq. of the Civil
Code of Spain, which was still in force when this
case was tried. "The general rule is that recission
will not be permitted for a slight or casualbreach
of the contract, but only for such breaches as are
so substantial and fundamental as to defeat the
object of the parties." (Song Fo & Co. vs.
Hawaiian-Philippine Co., 47 Phil., 821, 827.)
In the present case, the vendee did not fail or
refuse to pay by plan or design, granting there
was failure or refusal to pay. As a matter of fact,
the portion of the purchase price which is said
not to have been satisfied until now was actually
received by checks by the vendor and deposited
by her with the court in the suit against Vidal, in
accordance with the understanding if not
express agreement between vendor and vendee.
The question of who should bear the loss of this
amount, the checks having been destroyed and
the funds against which they were drawn having
become of no value, was one of the most bitterly
debated issues, and in adjudging the vendee to
be the party to shoulder the said loss and
ordering the said vendee to pay the amount to
the vendor, this Court's judgment was not, and
was not intended to be, in the nature of an
extension of time of payment. In contemplation
of the Civil Code there was no default, except
possibly in connection with the alleged
overcharges by the vendee arising from honest
mistakes of accounting, mistakes which, by our
decision, are to be corrected in a new trial
thereby ordered.
The second motion for reconsideration is,
therefore, denied.
Paras, C.J., Pablo, Bengzon, Padilla, Montemayor,
Reyes, Jugo, Bautista Angelo and Labrador,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-15121 August 31, 1962
GREGORIO PALACIO, in his own behalf and in
behalf of his minor child,
MARIO PALACIO, plaintiffs-appellants,
vs.
FELY TRANSPORTATION
COMPANY, defendant-appellee.
Antonio A. Saba for plaintiffs-appellants.
Mercado, Ver and Reyes for defendant-appellee.
REGALA, J.:
This is an appeal by the plaintiffs from the
decision of the Court of First Instance of Manila
which dismissed their complaint.
Originally taken to the Court of Appeals, this
appeal was certified to this Court on the ground
that it raises purely questions of law.
The parties in this case adopt the following
findings of fact of the lower court:
In their complaint filed with this Court
on May 15, 1954, plaintiffs allege,
among other things, "that about
December, 1952, the defendant
company hired Alfredo Carillo as driver
of AC-787 (687) (a registration for
1952) owned and operated by the said
defendant company; that on December
24, 1952, at about 11:30 a.m., while the
driver Alfonso (Alfredo) Carillo was
driving AC-687 at Halcon Street,
Quezon City, wilfully, unlawfully and
feloniously and in a negligent, reckless
and imprudent manner, run over a
child Mario Palacio of the herein
plaintiff Gregorio Palacio; that on
account of the aforesaid injuries, Mario
Palacio suffered a simple fracture of the
right tenor (sic), complete third,
thereby hospitalizing him at the
Philippine Orthopedic Hospital from
December 24, 1952, up to January 8,
1953, and continued to be treated for a
period of five months thereafter; that
the plaintiff Gregorio Palacio herein is a
welder by occupation and owner of a
small welding shop and because of the
injuries of his child he has abandoned
his shop where he derives income of
P10.00 a day for the support of his big
family; that during the period that the
plaintiff's (Gregorio Palacio's) child was
in the hospital and who said child was
under treatment for five months in
order to meet the needs of his big
family, he was forced to sell one air
compressor (heavy duty) and one
heavy duty electric drill, for a sacrifice
sale of P150.00 which could easily sell
at P350.00; that as a consequence of
the negligent and reckless act of the
driver Alfredo Carillo of the herein
defendant company, the herein
plaintiffs were forced to litigate this
case in Court for an agreed amount of
P300.00 for attorney's fee; that the
herein plaintiffs have now incurred the
amount of P500.00 actual expenses for
transportation, representation and
similar expenses for gathering evidence
and witnesses; and that because of the
nature of the injuries of plaintiff Mario
Palacio and the fear that the child might
become a useless invalid, the herein
plaintiff Gregorio Palacio has suffered
moral damages which could be
conservatively estimated at P1,200.00.
On May 23, 1956, defendant Fely
Transportation Co., filed a Motion to
Dismiss on the grounds (1) that there is
no cause of action against the
defendant company, and (2) that the
cause of action is barred by prior
judgment..
In its Order, dated June 8, 1956, this
Court deferred the determination of the
grounds alleged in the Motion to
Dismiss until the trial of this case.
On June 20, 1956, defendant filed its
answer. By way of affirmative defenses,
it alleges (1) that complaint states no
cause of action against defendant, and
(2) that the sale and transfer of the jeep
AC-687 by Isabelo Calingasan to the
Fely Transportation was made on
December 24, 1955, long after the
driver Alfredo Carillo of said jeep had
been convicted and had served his
sentence in Criminal Case No. Q-1084
of the Court of First Instance of Quezon
City, in which both the civil and
criminal cases were simultaneously
tried by agreement of the parties in
said case. In the Counterclaim of the
Answer, defendant alleges that in view
of the filing of this complaint which is a
clearly unfounded civil action merely to
harass the defendant, it was compelled
to engage the services of a lawyer for
an agreed amount of P500.00.
During the trial, plaintiffs presented the
transcript of the stenographic notes of
the trial of the case of "People of the
Philippines vs. Alfredo Carillo, Criminal
Case No. Q-1084," in the Court of First
Instance of Rizal, Quezon City (Branch
IV), as Exhibit "A".1äwphï1.ñët
It appears from Exhibit "A" that
Gregorio Palacio, one of the herein
plaintiffs, testified that Mario Palacio,
the other plaintiff, is his son; that as a
result of the reckless driving of accused
Alfredo Carillo, his child Mario was
injured and hospitalized from
December 24, 1952, to January 8, 1953;
that during all the time that his child
was in the hospital, he watched him
during the night and his wife during the
day; that during that period of time he
could not work as he slept during the
day; that before his child was injured,
he used to earn P10.00 a day on
ordinary days and on Sundays from
P20 to P50 a Sunday; that to meet his
expenses he had to sell his compressor
and electric drill for P150 only; and
that they could have been sold for P300
at the lowest price.
During the trial of the criminal case
against the driver of the jeep in the
Court of First Instance of Quezon City
(Criminal Case No. Q-1084) an attempt
was unsuccessfully made by the
prosecution to prove moral damages
allegedly suffered by herein plaintiff
Gregorio Palacio. Likewise an attempt
was made in vain by the private
prosecutor in that case to prove the
agreed attorney's fees between him
and plaintiff Gregorio Palacio and the
expenses allegedly incurred by the
herein plaintiffs in connection with that
case. During the trial of this case,
plaintiff Gregorio Palacio testified
substantially to the same facts.
The Court of First Instance of Quezon
City in its decision in Criminal Case No.
1084 (Exhibit "2") determined and
thoroughly discussed the civil liability
of the accused in that case. The
dispositive part thereof reads as
follows:
IN VIEW OF THE FOREGOING, the
Court finds the accused Alfredo Carillo
y Damaso guilty beyond reasonable
doubt of the crime charged in the
information and he is hereby sentenced
to suffer imprisonment for a period of
Two Months & One Day of Arresto
Mayor; to indemnify the offended
party, by way of consequential
damages, in the sum of P500.00 which
the Court deems reasonable; with
subsidiary imprisonment in case of
insolvency but not to exceed ¹/3 of the
principal penalty imposed; and to pay
the costs.
On the basis of these facts, the lower court held
action is barred by the judgment in the criminal
case and, that under Article 103 of the Revised
Penal Code, the person subsidiarily liable to pay
damages is Isabel Calingasan, the employer, and
not the defendant corporation.
Against that decision the plaintiffs appealed,
contending that:
THE LOWER COURT ERRED IN NOT
SUSTAINING THAT THE DEFENDANT-
APPELLEE IS SUBSIDIARILY LIABLE
FOR DAMAGES AS A RESULT OF
CRIMINAL CASE NO. Q-1084 OF THE
COURT OF FIRST INSTANCE OF
QUEZON CITY FOR THE REASON THAT
THE INCORPORATORS OF THE FELY
TRANSPORTATION COMPANY, THE
DEFENDANT-APPELLEE HEREIN, ARE
ISABELO CALINGASAN HIMSELF, HIS
SON AND DAUGHTERS;
THE LOWER COURT ERRED IN NOT
CONSIDERING THAT THE INTENTION
OF ISABELO CALINGASAN IN
INCORPORATING THE FELY
TRANSPORTATION COMPANY, THE
DEFENDANT-APPELLEE HEREIN, WAS
TO EVADE HIS CIVIL LIABILITY AS A
RESULT OF THE CONVICTION OF HIS
DRIVER OF VEHICLE AC-687 THEN
OWNED BY HIM:
THE LOWER COURT ERRED IN
HOLDING THAT THE CAUSE OF
ACTION OF THE PLAINTIFFS-
APPELLANTS IS BARRED BY PRIOR
JUDGMENT.
With respect to the first and second assignments
of errors, plaintiffs contend that the defendant
corporate should be made subsidiarily liable for
damages in the criminal case because the sale to
it of the jeep in question, after the conviction of
Alfred Carillo in Criminal Case No. Q-1084 of the
Court of First Instance of Quezon City was
merely an attempt on the part of Isabelo
Calingasan its president and general manager, to barred by the judgment of the Court of First
evade his subsidiary civil liability. Instance of Quezon City in the criminal case.
While there seems to be some confusion on part
The Court agrees with this contention of the of the plaintiffs as to the theory on which the is
plaintiffs. Isabelo Calingasan and defendant Fely based — whether ex-delito or quasi ex-
Transportation may be regarded as one and the delito(culpa aquiliana) — We are convinced,
same person. It is evident that Isabelo from the discussion prayer in the brief on appeal,
Calingasan's main purpose in forming the that they are insisting the subsidiary civil
corporation was to evade his subsidiary civil liability of the defendant. As a matter of fact, the
liability1 resulting from the conviction of his record shows that plaintiffs merely presented
driver, Alfredo Carillo. This conclusion is borne the transcript of the stenographic notes (Exhibit
"A") taken at the hearing of the criminal case,
out by the fact that the incorporators of the Fely
Transportation are Isabelo Calingasan, his wife, which Gregorio Palacio corroborated, in support
of their claim for damages. This rules out the
his son, Dr. Calingasan, and his two daughters.
We believe that this is one case where the defense of res judicata, because such liability
proceeds precisely from the judgment in the
defendant corporation should not be heard to
say that it has a personality separate and distinct criminal action, where the accused was found
guilty and ordered to pay an indemnity in the
from its members when to allow it to do so
would be to sanction the use of the fiction of sum P500.00.
corporate entity as a shield to further an end
subversive of justice. (La Campana Coffee WHEREFORE, the decision of the lower court is
Factory, et al. v. Kaisahan ng mga Manggagawa, hereby reversed and defendants Fely
etc., et al., G.R. No. L-5677, May 25, 1953) Transportation and Isabelo Calingasan are
Furthermore, the failure of the defendant ordered to pay, jointly and severally, the
corporation to prove that it has other property plaintiffs the amount of P500.00 and the costs.
than the jeep (AC-687) strengthens the
conviction that its formation was for the purpose
Bengzon, C.J., Padilla, Bautista Angelo, Labrador,
above indicated. Concepcion, Barrera, Paredes, Dizon and
Makalintal,concur.
And while it is true that Isabelo Calingasan is not Reyes, J.B.L., J., took no part.
a party in this case, yet, is held in the case of
Alonso v. Villamor, 16 Phil. 315, this Court can
substitute him in place of the defendant
corporation as to the real party in interest. This
is so in order to avoid multiplicity of suits and
thereby save the parties unnecessary expenses
and delay. (Sec. 2, Rule 17, Rules of Court;
Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12
Phil. 109.)
Accordingly, defendants Fely Transportation and
Isabelo Calingasan should be held subsidiarily
liable for P500.00 which Alfredo Carillo was
ordered to pay in the criminal case and which
amount he could not pay on account of
insolvency.
We also sustain plaintiffs' third assignment of
error and hold that the present action is not
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-56076 September 21, 1983
PALAY, INC. and ALBERT
ONSTOTT, petitioner,
vs.
JACOBO C. CLAVE, Presidential Executive
Assistant NATIONAL HOUSING AUTHORITY
and NAZARIO DUMPIT respondents.
Santos, Calcetas-Santos & Geronimo Law Office for
petitioner.
Wilfredo E. Dizon for private respondent.
MELENCIO-HERRERA, J.:
The Resolution, dated May 2, 1980, issued by
Presidential Executive Assistant Jacobo Clave in
O.P. Case No. 1459, directing petitioners Palay,
Inc. and Alberto Onstott jointly and severally, to
refund to private respondent, Nazario Dumpit,
the amount of P13,722.50 with 12% interest per
annum, as resolved by the National Housing
Authority in its Resolution of July 10, 1979 in
Case No. 2167, as well as the Resolution of
October 28, 1980 denying petitioners' Motion for
Reconsideration of said Resolution of May 2,
1980, are being assailed in this petition.
On March 28, 1965, petitioner Palay, Inc.,
through its President, Albert Onstott executed in
favor of private respondent, Nazario Dumpit, a
Contract to Sell a parcel of Land (Lot No. 8, Block
IV) of the Crestview Heights Subdivision in
Antipolo, Rizal, with an area of 1,165 square
meters, - covered by TCT No. 90454, and owned
by said corporation. The sale price was
P23,300.00 with 9% interest per annum, payable
with a downpayment of P4,660.00 and monthly
installments of P246.42 until fully paid.
Paragraph 6 of the contract provided for I reconsidered the dismissal and gave due course
automatic extrajudicial rescission upon default
in payment of any monthly installment after the Whether notice or demand is
lapse of 90 days from the expiration of the grace not mandatory under the
period of one month, without need of notice and circumstances and, therefore,
with forfeiture of all installments paid. may be dispensed with by
stipulation in a contract to
Respondent Dumpit paid the downpayment and sell.
several installments amounting to P13,722.50.
The last payment was made on December 5,
II
1967 for installments up to September 1967.
Whether petitioners may be
On May 10, 1973, or almost six (6) years later, held liable for the refund of
private respondent wrote petitioner offering to the installment payments
update all his overdue accounts with interest, made by respondent Nazario
and seeking its written consent to the M. Dumpit.
assignment of his rights to a certain Lourdes
Dizon. He followed this up with another letter
dated June 20, 1973 reiterating the same III
request. Replying petitioners informed
respondent that his Contract to Sell had long Whether the doctrine of
been rescinded pursuant to paragraph 6 of the piercing the veil of corporate
contract, and that the lot had already been fiction has application to the
resold. case at bar.
Questioning the validity of the rescission of the IV
contract, respondent filed a letter complaint with
the National Housing Authority (NHA) for
Whether respondent
reconveyance with an altenative prayer for Presidential Executive
refund (Case No. 2167). In a Resolution, dated
Assistant committed grave
July 10, 1979, the NHA, finding the rescission abuse of discretion in
void in the absence of either judicial or notarial
upholding the decision of
demand, ordered Palay, Inc. and Alberto Onstott respondent NHA holding
in his capacity as President of the corporation,
petitioners solidarily liable for
jointly and severally, to refund immediately to the refund of the installment
Nazario Dumpit the amount of P13,722.50 with
payments made by
12% interest from the filing of the complaint on respondent Nazario M.
November 8, 1974. Petitioners' Motion for
Dumpit thereby denying
Reconsideration of said Resolution was denied substantial justice to the
by the NHA in its Order dated October 23, 1979. 1
petitioners, particularly
petitioner Onstott
On appeal to the Office of the President, upon the
allegation that the NHA Resolution was contrary
We issued a Temporary Restraining Order on
to law (O.P. Case No. 1459), respondent Feb 11, 1981 enjoining the enforcement of the
Presidential Executive Assistant, on May 2, 1980,
questioned Resolutions and of the Writ of
affirmed the Resolution of the NHA. Execution that had been issued on December 2,
Reconsideration sought by petitioners was
1980. On October 28, 1981, we dismissed the
denied for lack of merit. Thus, the present petition but upon petitioners' motion,
petition wherein the following issues are raised:
to the petition on March 15, 1982.
On the first issue, petitioners maintain that it
was justified in cancelling the contract to sell
without prior notice or demand upon
respondent in view of paragraph 6 thereof which
provides-
6. That in case the BUYER falls
to satisfy any monthly
installment or any other
payments herein agreed upon,
the BUYER shall be granted a
month of grace within which
to make the payment of the t
in arrears together with the
one corresponding to the said
month of grace. -It shall be
understood, however, that
should the month of grace
herein granted to the BUYER
expire, without the payment &
corresponding to both months
having been satisfied, an
interest of ten (10%) per cent
per annum shall be charged
on the amounts the BUYER
should have paid; it is
understood further, that
should a period of NINETY
(90) DAYS elapse to begin
from the expiration of the
month of grace hereinbefore
mentioned, and the BUYER
shall not have paid all the
amounts that the BUYER
should have paid with the
corresponding interest up to
the date, the SELLER shall
have the right to declare this
contract cancelled and of no
effect without notice, and as a
consequence thereof, the
SELLER may dispose of the
lot/lots covered by this
Contract in favor of other
persons, as if this contract had
never been entered into. In
case of such cancellation of
 this Contract, all the amounts
which may have been paid by
the BUYER in accordance with
the agreement, together with
all the improvements made on
the premises, shall be
considered as rents paid for
the use and occupation of the
above mentioned premises
and for liquidated damages
suffered by virtue of the
failure of the BUYER to fulfill
his part of this agreement :
and the BUYER hereby
renounces his right to
demand or reclaim the return
of the same and further
obligates peacefully to vacate
the premises and deliver the
same to the SELLER.
Well settled is the rule, as held in previous
jurisprudence, 2 that judicial action for the
rescission of a contract is not necessary where
the contract provides that it may be revoked and
cancelled for violation of any of its terms and
conditions. However, even in the cited cases,
there was at least a written notice sent to the
defaulter informing him of the rescission. As
stressed in University of the Philippines vs.
Walfrido de los Angeles 3 the act of a party in
treating a contract as cancelled should be made
known to the other. We quote the pertinent
excerpt:
Of course, it must be
understood that the act of a
party in treating a contract as
cancelled or resolved in
account of infractions by the
other contracting party must
be made known to the other
and is always provisional being
ever subject to scrutiny and
review by the proper court. If
the other party denies that
rescission is justified it is free
to resort to judicial action in
its own behalf, and bring the
matter to court. Then, should
the court, after due hearing,
decide that the resolution of
the contract was not
warranted, the responsible
party will be sentenced to
damages; in the contrary case,
the resolution will be
affirmed, and the consequent
indemnity awarded to the
party prejudiced.
In other words, the party who
deems the contract violated
may consider it resolved or
rescinded, and act
accordingly, without previous
court action, but it proceeds at
its own risk. For it is only the
final judgment of the
corresponding court that will
conclusively and finally settle
whether the action taken was
or was not correct in law. But
the law definitely does not
require that the contracting
party who believes itself
injured must first file suit and
wait for a judgment before
taking extrajudicial steps to
protect its interest. Otherwise,
the party injured by the
other's breach will have to
passively sit and watch its
damages accumulate during
the pendency of the suit until
the final judgment of
rescission is rendered when
the law itself requires that he
should exercise due diligence
to minimize its own damages
(Civil Code, Article 2203).
We see no conflict between
this ruling and the previous
jurisprudence of this Court
invoked by respondent
declaring that judicial action
is necessary for the resolution
of a reciprocal obligation
(Ocejo Perez & Co., vs.
International Banking Corp.,
37 Phil. 631; Republic vs.
Hospital de San Juan De Dios,
et al., 84 Phil 820) since in
every case where the
extrajudicial resolution is
contested only the final award
of the court of competent
jurisdiction can conclusively
settle whether the resolution
was proper or not. It is in this
sense that judicial action win
be necessary, as without it,
the extrajudicial resolution
will remain contestable and
subject to judicial invalidation
unless attack thereon should
become barred by
acquiescense, estoppel or
prescription.
Fears have been expressed
that a stipulation providing
for a unilateral rescission in
case of breach of contract may
render nugatory the general
rule requiring judicial action
(v. Footnote, Padilla Civil Law,
Civil Code Anno., 1967 ed. Vol.
IV, page 140) but, as already
observed, in case of abuse or
error by the rescinder the
other party is not barred from
questioning in court such
abuse or error, the practical
effect of the stipulation being
merely to transfer to the
defaulter the initiative of
instituting suit, instead of the
rescinder (Emphasis
supplied).
Of similar import is the ruling in Nera vs.
Vacante 4 , reading:
A stipulation entitling one
party to take possession of the
land and building if the other
party violates the contract
does not ex propio
vigore confer upon the former
the right to take possession
thereof if objected to without
judicial intervention and
determination.
This was reiterated in Zulueta vs.
Mariano 5 where we held that extrajudicial
rescission has legal effect where the other party
does not oppose it.6 Where it is objected to, a
judicial determination of the issue is still
necessary.
In other words, resolution of reciprocal contracts
may be made extrajudicially unless successfully
impugned in Court. If the debtor impugns the
declaration, it shall be subject to judicial
determination. 7
In this case, private respondent has denied that
rescission is justified and has resorted to judicial
action. It is now for the Court to determine
whether resolution of the contract by petitioners
was warranted.
We hold that resolution by petitioners of the
contract was ineffective and inoperative against
private respondent for lack of notice of
resolution, as held in the U.P. vs. Angeles case,
supra
Petitioner relies on Torralba vs. De los
Angeles 8 where it was held that "there was no
contract to rescind in court because from the
moment the petitioner defaulted in the timely
payment of the installments, the contract
between the parties was deemed ipso
facto rescinded." However, it should be noted
that even in that case notice in writing was made
to the vendee of the cancellation and annulment
of the contract although the contract entitled the
seller to immediate repossessing of the land
upon default by the buyer.
The indispensability of notice of cancellation to
the buyer was to be later underscored in
Republic Act No. 6551 entitled "An Act to
Provide Protection to Buyers of Real Estate on
Installment Payments." which took effect on
September 14, 1972, when it specifically
provided:
Sec. 3(b) ... the actual
cancellation of the contract
shall take place after thirty
days from receipt by the
buyer of the notice of
cancellation or the demand
for rescission of the contract
by a notarial act and upon full
payment of the cash
surrender value to the buyer.
(Emphasis supplied).
The contention that private respondent had
waived his right to be notified under paragraph 6
of the contract is neither meritorious because it
was a contract of adhesion, a standard form of
petitioner corporation, and private respondent
had no freedom to stipulate. A waiver must be
certain and unequivocal, and intelligently made;
such waiver follows only where liberty of choice
has been fully accorded. 9 Moreover, it is a
matter of public policy to protect buyers of real
estate on installment payments against onerous
and oppressive conditions. Waiver of notice is
one such onerous and oppressive condition to
buyers of real estate on installment payments.
Regarding the second issue on
refund of the installment
payments made by private
respondent. Article 1385 of
the Civil Code provides:
ART. 1385. Rescission creates
the obligation to return the
things which were the object
of the contract, together with
their fruits, and the price with
its interest; consequently, it
can be carried out only when
he who demands rescission
can return whatever he may
be obliged to restore.
Neither sham rescission take
place when the things which
are the object of the contract
are legally in the possession of
third persons who did not act
in bad faith.
In this case, indemnity for
damages may be demanded
from the person causing the
loss.
As a consequence of the resolution by
petitioners, rights to the lot should be restored
to private respondent or the same should be
replaced by another acceptable lot. However,
considering that the property had already been
sold to a third person and there is no evidence
on record that other lots are still available,
private respondent is entitled to the refund of
installments paid plus interest at the legal rate of
12% computed from the date of the institution of
the action. 10 It would be most inequitable if
petitioners were to be allowed to retain private
respondent's payments and at the same time
appropriate the proceeds of the second sale to
another.
We come now to the third and fourth issues
regarding the personal liability of petitioner
Onstott who was made jointly and severally
liable with petitioner corporation for refund to
private respondent of the total amount the latter
had paid to petitioner company. It is basic that a
corporation is invested by law with a personality
separate and distinct from those of the persons
composing it as wen as from that of any other
legal entity to which it may be related. 11 As a
general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders
or those of the legal entities to which it may be
connected and vice versa. However, the veil of
corporate fiction may be pierced when it is used
as a shield to further an end subversive of
justice 12 ; or for purposes that could not have
been intended by the law that created it 13 ; or to
defeat public convenience, justify wrong, protect
fraud, or defend crime. 14 ; or to perpetuate fraud
or confuse legitimate issues 15 ; or to circumvent
the law or perpetuate deception 16 ; or as an alter
ego, adjunct or business conduit for the sole
benefit of the stockholders. 17
We find no badges of fraud on petitioners' part.
They had literally relied, albeit mistakenly, on
paragraph 6 (supra) of its contract with private
respondent when it rescinded the contract to sell
extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable
because he was then the President of the
corporation and he a to be the controlling
stockholder. No sufficient proof exists on record
that said petitioner used the corporation to
defraud private respondent. He cannot,
therefore, be made personally liable just because
he "appears to be the controlling stockholder".
Mere ownership by a single stockholder or by
another corporation is not of itself sufficient
ground for disregarding the separate corporate
personality. 18 In this respect then, a
modification of the Resolution under review is
called for.
WHEREFORE, the questioned Resolution of
respondent public official, dated May 2, 1980, is
hereby modified. Petitioner Palay, Inc. is directed
to refund to respondent Nazario M. Dumpit the
amount of P13,722.50, with interest at twelve
(12%) percent per annum from November 8,
1974, the date of the filing of the Complaint. The
temporary Restraining Order heretofore issued
is hereby lifted.
No costs.
SO ORDERED.
Plana, Relova and Gutierrez, Jr., JJ., concur.
Teehankee, J., concurs in the result.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 89879 April 20, 1990
JAIME PABALAN AND EDUARDO
LAGDAMEO, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION,
LABOR ARBITER AMBROSIO B. SISON,
ELIZABETH RODEROS, ET AL., and THE
SHERIFF OF THE NATIONAL LABOR
RELATIONS COMMISSION,respondents.
Sofronio A. Larcia and Conrado Abriol Padilla for
petitioners.
Apolinario N. Lomabao, Jr. for private
respondents.
GANCAYCO, J.:
Once again the parameters of the liability of the
officers of a corporation as to unpaid wages and
other claims of the employees of a corporation
which has a separate and distinct personality are
brought to fore in this case.
On October 20, 1987, eighty-four (84) workers of
the Philippine Inter-Fashion, Inc. (PIF) filed a
complaint against the latter for illegal transfer
simultaneous with illegal dismissal without
justifiable cause and in violation of the provision
of the Labor Code on security of tenure as well as
the provisions of Batas Pambansa Blg. 130.
Complainants demanded reinstatement with full
backwages, living allowance, 13th month pay
and other benefits under existing laws and/or
separation pay.
On October 21, 1987, PIF, through its General
Manager, was notified about the complaint and
summons for the hearing set for November 6,
1987. The hearing was re-set for November 27,
1987 for failure of respondents to appear. On
November 30, 1987 respondents (petitioners
herein) moved for the cancellation of the hearing
scheduled on November 6, 1987 so that they
could engage a counsel to properly represent
them preferably on November 17, 1987.
On December 10, 1987 both parties were
directed to submit their respective position
papers within ten (10) days. By mutual
agreement the hearing was re-set on December
21, 1987 but on said date respondents and/or
counsel failed to appear. The hearing was re-set
on January 14, 1988 on which date respondents
were given a deadline to submit their position
paper.
On January 4, 1988 complainants filed their
position paper. On January 14, 1988 counsel for
respondents moved that he be given until
January 22, 1988 to file their position paper. The
labor arbiter granted the motion. The PIF filed its
position paper on January 22, 1988. The heating
for February 17, 1988 was re-set to March 9,
1988 and on March 29, 1988 on which dates
respondents failed to appear.
On May 5, 1988, with leave of the labor arbiter,
complainants filed their supplemental position
paper impleading the petitioners as officers of
the PIF in the complaint for their illegal transfer
to a new firm.
On July 13, 1988 a decision was rendered by the
labor arbiter the dispositive part of which reads
as follows:
IN VIEW OF THE FOREGOING
CONSIDERATION, respondent
Philippine Inter-Fashion and its officers
Mr. Jaime Pabalan and Mr. Eduardo
Lagdameo are hereby ordered to:
1. reinstate the sixty two (62)
complainants to their former or
equivalent position without loss of
seniority rights and privileges;
2. to pay, jointly and severally, their
backwages and other benefits from the
time they were dismissed up to the
time they are actually reinstated, the
computation to be based from the latest
minimum wage law at the time of their
dismissal. (See attached Annex "A" of
complainants' position paper.)
SO ORDERED. 1
Not satisfied therewith petitioners filed a motion
for reconsideration in the First Division of the
public respondent, National Labor Relations
Commission (NLRC), which nevertheless,
affirmed the appealed decision and dismissed
the appeal for lack of merit in a resolution dated
June 30, 1989. Petitioners were ordered to pay
the appeal fee in accordance with law.
Hence the herein petition for certiorari with
prayer for the issuance of a temporary
restraining order wherein the petitioners raised
the following issues:
A labor arbiter affirmed by the NLRC upon a bond
THE ARBITER AND THE NLRC DID NOT
ACQUIRE JURISDICTION OVER THE
PERSONS OF THE PETITIONERS AND,
THEREFORE, THE DECISION AND THE
RESOLUTION, UNDER DISPUTE, ARE
NULL AND VOID.
B
THE DECISION AND THE NLRC
RESOLUTION SUFFER FROM A LEGAL
AND CONSTITUTIONAL INFIRMITY
BECAUSE THEY SANCTION A
DEPRIVATION OF PETITIONERS'
PROPERTIES WITHOUT DUE PROCESS
OF LAW.
C The Court finds these grounds to be devoid of
THE ARBITER AND THE NLRC
COMMITTED A GRAVE ABUSE OF
DISCRETION IN ADJUDGING
PETITIONERS HEREIN AS JOINTLY
AND SEVERALLY LIABLE WITH
PHILIPPINE INTER-FASHION, INC. TO
PAY THE JUDGMENT DEBT.
On September 25, 1989 this Court dismissed the
petition for insufficiency in form and substance,
having failed to comply with the Rules of Court
and Administrative Circular No. 1-88 requiting
the verification of the petition. A motion for
reconsideration filed by the petitioners of the
said resolution was denied on October 16, 1989
for failure to raise any substantial arguments to
warrant a modification thereof. However, acting
on an urgent motion to include the motion for
reconsideration of the resolution of September
25, 1989 in the court's calendar which the Court
granted, on November 30, 1989 the Court
resolved to set aside said resolutions of
September 25, 1989 and October 16, 1989, and
to require respondents to comment thereon
within ten (10) days from notice thereof. A
temporary restraining order was issued
enjoining respondents from enforcing or
implementing the questioned decision of the
to be filed by petitioners in the amount of
P100,000.00. However, on February 7, 1990 for
failure of petitioner to file the required bond
despite extensions of time granted them, the
Court resolved to lift the temporary restraining
order issued on November 13, 1989.
Now to the merit of the petition.
Petitioners do not question the merits of the
decision insofar as PIF is concerned in this
proceeding.1âwphi1 The first two issues they
raised are to the effect that the public
respondents never acquired jurisdiction over
them as they have not been served with
summons and thus they were deprived due
process.
merit. As the record shows while originally it
was PIF which was impleaded as respondent
before the labor arbiter, petitioners also
appeared in their behalf through counsel.
Thereafter when the supplemental position
paper was filed by complainants, petitioners
were impleaded as respondents to which they
filed an opposition inasmuch as they filed their
own supplemental position papers. They were
therefore properly served with summons and
they were not deprived of due process.
Petitioners contend however that under the
circumstances of the case as officers of the
corporation PIF they could not be jointly and
severally held liable with the corporation for its
liability in this case.
The settled rule is that the corporation is vested
by law with a personality separate and distinct
from the persons composing it, including its
officers as well as from that of any other legal
entity to which it may be related. Thus, a
company manager acting in good faith within the
scope of his authority in terminating the services
of certain employees cannot be held personally
liable for damages. 2 Mere ownership by a single
stockholder or by another corporation of all or
nearly all capital stocks of the corporation is not
by itself sufficient ground for disregarding the
separate corporate personality. 3
almost similar facts as in this case, it
was also held that the shield of
corporate fiction should be pierced
when it is deliberately and maliciously
designed to evade financial obligations
to employees.
To the same effect . . . (are) this Court's
rulings in still other cases:
When the notion of legal entity is used
as a means to perpetrate fraud or an
illegal act or as a vehicle for the evasion
of an existing obligation, the
circumvention of statutes, and or (to)
confuse legitimate issues the veil which
protects the corporation will be lifted. 5
In this particular case complainants did not
allege or show that petitioners, as officers of the
corporation deliberately and maliciously
designed to evade the financial obligation of the
corporation to its employees, or used the
transfer of the employees as a means to
perpetrate an illegal act or as a vehicle for the
evasion of existing obligations, the
circumvention of statutes, or to confuse the
legitimate issues.
and agents of A.C. Ransom Corporation were
intended to avoid payment of its obligations to
its employees. In such case this Court considered
the president of the corporation to be personally
liable together with the corporation for the
satisfaction of the claim of the employees. 7
Not one of the above circumstances has been
shown to be present. Hence petitioners can not
be held jointly and severally liable with the PIF
corporation under the questioned decision and
resolution of the public respondent.
WHEREFORE, the petition is GRANTED and the
questioned resolution of the public respondent
dated June 30, 1989 is hereby modified by
relieving petitioners of any liability as officers of
the PIF and holding that the liability shall be
solely that of Philippine Inter-Fashion, Inc. No
costs.
SO ORDERED.
Narvasa, Cruz, Griño-Aquino and Medialdea, JJ.,
concur.

As a general rule, officers of a corporation are
not personally liable for their official acts unless
it is shown that they have exceeded their
authority. 4 However, the legal fiction that a
corporation has a personality separate and
distinct from stockholders and members may be
disregarded as follows:
This finding does not ignore the legal
fiction that a corporation has a
personality separate and distinct from
its stockholders and members, for, as
this Court had held "where the
incorporators and directors belong to a
single family, the corporation and its
members can be considered as one in
order to avoid its being used as an
instrument to commit injustice," or to
further an end subversive of justice. In
the case of Claparols vs. CIR involving
Indeed, in the questioned resolution of the NLRC
dated June 30, 1989 there is no finding as to why
petitioners were being held jointly and severally
liable for the liability and obligation of the
corporation except as to invocation of the ruling
of this Court in A.C. Ransom Labor Union-CCLU
vs. NLRC 6 in that the liability in the cases of
illegal termination of employees extends not
only to the corporation as a corporate entity but
also to its responsible officers acting in the
interest of the corporation or employer.
It must be noted, however, that A.C. Ransom
Labor Union-CCLU vs. NLRC the corporation was
a family corporation and that during the strike
the members of the family organized another
corporation which was the Rosario Industrial
Corporation to which all the assets of the A.C.
Ransom Corporation were transferred to
continue its business which acts of such officers
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 85416 July 24, 1990
FRANCISCO V. DEL ROSARIO, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION
and LEONARDO V. ATIENZA, respondents.
Jardeleza, Sobreviñas, Diaz, Hayudini & Bodegon
Law Offices for petitioner.
Lourdes T. Pagayatan for private respondent.
CORTES, J.:
In POEA Case No. 85-06-0394, the Philippine
Overseas Employment Administration (POEA)
promulgated a decision on February 4, 1986
dismissing the complaint for money claims for
lack of merit. The decision was appealed to the
National Labor Relations Commission (NLRC),
which on April 30, 1987 reversed the POEA
decision and ordered Philsa Construction and
Trading Co., Inc. (the recruiter) and Arieb
Enterprises (the foreign employer) to jointly and
severally pay private respondent the peso
equivalent of $16,039.00, as salary differentials,
and $2,420.03, as vacation leave benefits. The
case was elevated to the Supreme Court, but the
petition was dismissed on August 31, 1987 and
entry of judgment was made on September 24,
1987.
A writ of execution was issued by the POEA but it
was returned unsatisfied as Philsa was no longer
operating and was financially incapable of
satisfying the judgment. Private respondent
moved for the issuance of an alias writ against
the officers of Philsa. This motion was opposed
by the officers, led by petitioner, the president
and general manager of the corporation.
On February 12, 1988, the POEA issued a
resolution, the dispositive portion of which read:
WHEREFORE, premises
considered, let an alias writ of
Execution be issued and the
handling sheriff is ordered to
execute against the properties
of Mr. Francisco V. del -
Rosario and if insufficient,
against the cash and/or
surety bond of Bonding
Company concerned for the
full satisfaction of the
judgment awarded.
Petitioner appealed to the NLRC. On September
23, 1988, the NLRC dismissed the appeal. On
October 21, 1988, petitioner's motion for
reconsideration was denied.
Thus, this petition was filed on October 28, 1988,
alleging that the NLRC gravely abused its
discretion. On November 10, 1988 the Court
issued a temporary restraining order enjoining
the enforcement of the NLRC's decision dated
September 23, 1988 and resolution dated
October 21, 1988. The petition was given due
course on June 14, 1989.
After considering the undisputed facts and the
arguments raised in the pleadings, the Court
finds grave abuse of discretion on the part of the
NLRC.
The action of the NLRC affirming the issuance of
an alias writ of execution against petitioner, on
the theory that the corporate personality of
Philsa should be disregarded, was founded
primarily on the following findings of the POEA
— juridical personality, separate and distinct from
xxx xxx xxx
6. Per the certification issued
by the Licensing Division of
this Office, it appears that
Philsa Construction & Trading
Co., Inc., with office address at
126 Pioneer St., Mandaluyong,
Metro Manila, represented by
Mr. Francisco V. del Rosario,
President and General
Manager, was formerly a
registered construction
contractor whose authority
was originally issued on July
21, 1978 but was already
delisted from the list of
agencies/entities on August
15, 1986 for inactivity;
7. Per another certification
issued by the Licensing
Division of this Office, it also
appears that another
corporation, Philsa
International Placement &
Services Corp., composed of
practically the same set of
incorporators/stockholders,
was registered as a licensed
private employment agency
whose license was issued on
November 5, 1981,
represented by the same Mr.
Francisco V. del Rosario as its
President/ General Manager.
and an application of the ruling of the Court
in A.C. Ransom Labor Union-CCLU v. NLRC, G.R.
No. 69494, June 10, 1986, 142 SCRA 269.
However, we find that the NLRC's reliance on the
findings of the POEA and the ruling in A. C.
Ransom is totally misplaced.
1. Under the law a corporation is bestowed
its stockholders [Civil Code, Art. 44; Corporation
Code, sec. 2]. But when the juridical personality
of the corporation is used to defeat public
convenience, justify wrong, protect fraud or
defend crime, the corporation shall be
considered as a mere association of persons
[Koppel (Phil.), Inc. v. Yatco, 77 Phil. 496 (1946),
citing 1 Fletcher, Cyclopedia of Corporations,
135-136; see also Palay, Inc. v. Clave, G.R. No.
56076, September 21, 1983, 124 SCRA 638], and
its responsible officers and/or stockholders shall
be held individually liable [Namarco v.
Associated Finance Co., Inc., G.R. No. L-20886,
April 27, 1967, 19 SCRA 962]. For the same
reasons, a corporation shall be liable for the
obligations of a stockholder [Palacio v. Fely
Transportation Company, G.R. No. L-15121,
August 31, 1962, 5 SCRA 1011; Emilio Cano
Enterprises, Inc. v. Court of Industrial Relations,
G.R. No. L-20502, February 26, 1965, 13 SCRA
290], or a corporation and its successor-in-
interest shall be considered as one and the
liability of the former shall attach to the latter
[Koppel v. Yatco, supra; Liddell & Co. v. Collector
of Internal Revenue, G.R. No. L-9687, June 30,
1961, 2 SCRA 632].
But for the separate juridical personality of a
corporation to be disregarded, the wrongdoing
must be clearly and convincingly established. It
cannot be presumed.
In this regard we find the NLRC's decision
wanting. The conclusion that Philsa allowed its
license to expire so as to evade payment of
private respondent's claim is not supported by
the facts. Philsa's corporate personality
therefore remains inviolable.
Consider the following undisputed facts:
(1) Private respondent filed
his complaint with the POEA
on June 4, 1985;
(2) The last renewal of
Philsa's license expired on
October 12, 1985;
(3) The POEA dismissed
private respondent's
complaint on February 4,
1986;
 (4) Philsa was delisted for
inactivity on August 15, 1986;
* No. 602 (the old Minimum Wage Law.)
(5) The dismissal of the
complaint was appealed to
the NLRC and it was only on
April 30, 1987 that the
judgment awarding
differentials and benefits to
private respondent was
rendered.
Thus, at the time Philsa allowed its license to
lapse in 1985 and even at the time it was delisted
in 1986, there was yet no judgment in favor of
private respondent. An intent to evade payment
of his claims cannot therefore be implied from
the expiration of Philsa's license and its delisting.
Neither will the organization of Philsa
International Placement and Services Corp. and
its registration with the POEA as a private
employment agency imply fraud since it was
organized and registered in 1981, several years
before private respondent filed his complaint
with the POEA in 1985. The creation of the
second corporation could not therefore have
been in anticipation of private respondent's
money claims and the consequent adverse
judgment against Philsa
Likewise, substantial identity of the
incorporators of the two corporations does not
necessarily imply fraud.
The circumstances of this case distinguish it
from those in earlier decisions of the Court in
labor cases where the veil of corporate fiction
was pierced.
In La Campana Coffee Factory, Inc. v. Kaisahan ng
Manggagawa sa La Campana (KKM) 93 Phil. 160
(1953), La Campana Coffee Factory, Inc. and La
Campana Gaugau Packing were substantially
owned by the same person. They had one office,
one management, and a single payroll for both
businesses. The laborers of the gaugaufactory
and the coffee factory were also interchangeable,
i.e., the workers in one factory worked also in the
other factory.
In Claparols v. Court of Industrial Relations, G.R.
No. L-30822, July 31, 1975, 65 SCRA 613, the
Claparols Steel and Nail Plant, which was
ordered to pay its workers backwages, ceased
operations on June 30, 1957 and was succeeded
on the next day, July 1, 1957 by the Claparols
Steel Corporation. Both corporations were
substantially owned and controlled by the same
person and there was no break or cessation in
operations. Moreover, all the assets of the steel
and nail plant were transferred to the new
corporation.
2. As earlier stated, we also find that, contrary to
the NLRC'S holding, the ruling in A. C. Ransom is
inapplicable to this case. In A. C. Ransom, the
Court said:
... In the instant case, it would
appear that RANSOM, in 1969,
foreseeing the possibility or
probability of payment of
back wages to the 22 strikers,
organized ROSARIO to replace
RANSOM, with the latter to be
eventually phased out if the
22 strikers win their case.
RANSOM actually ceased
operations on May 1, 1973,
after the December 19, 1972
Decision of the Court of
Industrial Relations was
promulgated against
RANSOM. [At p. 274.]
The distinguishing marks of fraud were
therefore clearly apparent in A. C. Ransom. A new
corporation was created, owned by the same
family, engaging in the same business and
operating in the same compound.
Thus, considering that the non-payment of the
workers was a continuing situation, the Court
adjudged its President, the "responsible officer"
of the corporation, personally liable for the
backwages awarded, he being the chief operation
officer or "manager" who could be held subject to replenishment when they are
criminally liable for violations of Republic Act garnished, and failure to replenish shall cause
the suspension or cancellation of the recruiter's
license [Rule II, sec. 19]. Furthermore, a cash
In the case now before us, not only has there bond shall be refunded to a recruiter who
been a failure to establish fraud, but it has also surrenders his license only upon posting of a
not been shown that petitioner is the corporate surety bond of similar amount valid for three (3)
officer responsible for private respondent's years [Rule II, sec. 20]. All these, to ensure
predicament. It must be emphasized that the recovery from the recruiter.
claim for differentials and benefits was actually
directed against the foreign employer. Philsa It is therefore surprising why the POEA ordered
became liable only because of its undertaking to execution "against the properties of Mr.
be jointly and severally bound with the foreign Francisco V. del Rosario and if insufficient,
employer, an undertaking required by the rules against the cash and/or surety bond of Bonding
of the POEA [Rule II, sec. 1(d) (3)], together with Company concerned for the till satisfaction of the
the filing of cash and surety bonds [Rule 11, sec. judgment awarded" in complete disregard of the
4], in order to ensure that overseas workers shall scheme outlined in the POEA Rules and
find satisfaction for awards in their favor. Regulations. On this score alone, the NLRC
should not have affirmed the POEA.
At this juncture, the Court finds it appropriate to
point out that a judgment against a recruiter WHEREFORE, the petition is GRANTED and the
should initially be enforced against the cash and decision and resolution of the NLRC, dated
surety bonds filed with the POEA. As provided in September 23, 1988 and October 21, 1988,
the POEA Rules and Regulations — respectively, in POEA Case No. 85-06-0394 are
SET ASIDE. The temporary restraining order
... The bonds shall answer for issued by the Court on November 10, 1988 is
all valid and legal claims MADE PERMANENT.
arising from violations of the
conditions for the grant and SO ORDERED.
use of the license or authority
and contracts of employment. Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ.,
The bonds shall likewise concur.
guarantee compliance with
the provisions of the Labor
Code and its implementing
rules and regulations relating
to recruitment and placement,
the rules of the
Administration and relevant
issuances of the Ministry and
all liabilities which the
Administration may impose. ...
[Rule II, see. 4.]
Quite evidently, these bonds do not answer for a
single specific liability, but for all sorts of
liabilities of the recruiter to the worker and to
the POEA. Moreover, the obligations guaranteed
by the bonds are continuing. Thus, the bonds are
Republic of the Philippines The rather ramified circumstances of the instant
SUPREME COURT case can best be understood by a chronological
Manila narration of the essential facts, to wit:
EN BANC Prior to 1959, Jose M. Villarama was an operator
of a bus transportation, under the business name
of Villa Rey Transit, pursuant to certificates of
G.R. No. L-23893 October 29, 1968
public convenience granted him by the Public
Service Commission (PSC, for short) in Cases
VILLA REY TRANSIT, INC., plaintiff-appellant, Nos. 44213 and 104651, which authorized him
vs. to operate a total of thirty-two (32) units on
EUSEBIO E. FERRER, PANGASINAN various routes or lines from Pangasinan to
TRANSPORTATION CO., INC. and PUBLIC Manila, and vice-versa. On January 8, 1959, he
SERVICE COMMISSION,defendants. sold the aforementioned two certificates of
EUSEBIO E. FERRER and PANGASINAN public convenience to the Pangasinan
TRANSPORTATION CO., INC., defendants- Transportation Company, Inc. (otherwise known
appellants. as Pantranco), for P350,000.00 with the
condition, among others, that the seller
PANGASINAN TRANSPORTATION CO., (Villarama) "shall not for a period of 10 years
INC., third-party plaintiff-appellant, from the date of this sale, apply for any TPU
vs. service identical or competing with the buyer."
JOSE M. VILLARAMA, third-party defendant-
appellee.
Barely three months thereafter, or on March 6,
1959: a corporation called Villa Rey Transit, Inc.
Chuidian Law Office for plaintiff-appellant. (which shall be referred to hereafter as the
Bengzon, Zarraga & Villegas for defendant- Corporation) was organized with a capital stock
appellant / third-party plaintiff-appellant. of P500,000.00 divided into 5,000 shares of the
Laurea & Pison for third-party defendant- par value of P100.00 each; P200,000.00 was the
appellee. subscribed stock; Natividad R. Villarama (wife of
Jose M. Villarama) was one of the incorporators,
and she subscribed for P1,000.00; the balance of
ANGELES, J.:
P199,000.00 was subscribed by the brother and
sister-in-law of Jose M. Villarama; of the
This is a tri-party appeal from the decision of the subscribed capital stock, P105,000.00 was paid
Court of First Instance of Manila, Civil Case No.
to the treasurer of the corporation, who was
41845, declaring null and void the sheriff's sale Natividad R. Villarama.
of two certificates of public convenience in favor
of defendant Eusebio E. Ferrer and the
subsequent sale thereof by the latter to In less than a month after its registration with
the Securities and Exchange Commission (March
defendant Pangasinan Transportation Co., Inc.;
declaring the plaintiff Villa Rey Transit, Inc., to be 10, 1959), the Corporation, on April 7, 1959,
bought five certificates of public convenience,
the lawful owner of the said certificates of public
convenience; and ordering the private forty-nine buses, tools and equipment from one
Valentin Fernando, for the sum of P249,000.00,
defendants, jointly and severally, to pay to the
plaintiff, the sum of P5,000.00 as and for of which P100,000.00 was paid upon the signing
of the contract; P50,000.00 was payable upon
attorney's fees. The case against the PSC was
dismissed. the final approval of the sale by the PSC;
P49,500.00 one year after the final approval of
the sale; and the balance of P50,000.00 "shall be
paid by the BUYER to the different suppliers of
the SELLER."
The very same day that the aforementioned
contract of sale was executed, the parties thereto
immediately applied with the PSC for its
approval, with a prayer for the issuance of a
provisional authority in favor of the vendee
Corporation to operate the service therein
involved.1 On May 19, 1959, the PSC granted the
provisional permit prayed for, upon the
condition that "it may be modified or revoked by
the Commission at any time, shall be subject to
whatever action that may be taken on the basic
application and shall be valid only during the
pendency of said application." Before the PSC
could take final action on said application for
approval of sale, however, the Sheriff of Manila,
on July 7, 1959, levied on two of the five
certificates of public convenienceinvolved therein,
namely, those issued under PSC cases Nos.
59494 and 63780, pursuant to a writ of
execution issued by the Court of First Instance of
Pangasinan in Civil Case No. 13798, in favor of
Eusebio Ferrer, plaintiff, judgment creditor,
against Valentin Fernando, defendant, judgment
debtor. The Sheriff made and entered the levy in
the records of the PSC. On July 16, 1959, a public
sale was conducted by the Sheriff of the
said twocertificates of public convenience. Ferrer
was the highest bidder, and a certificate of sale
was issued in his name.
Thereafter, Ferrer sold the two certificates of
public convenience to Pantranco, and jointly
submitted for approval their corresponding
contract of sale to the PSC.2 Pantranco therein
prayed that it be authorized provisionally to
operate the service involved in the
said two certificates.
The applications for approval of sale, filed before
the PSC, by Fernando and the Corporation, Case
No. 124057, and that of Ferrer and Pantranco,
Case No. 126278, were scheduled for a joint
hearing. In the meantime, to wit, on July 22,
1959, the PSC issued an order disposing that
during the pendency of the cases and before a
final resolution on the aforesaid applications, the
Pantranco shall be the one to operate
provisionally the service under
the two certificates embraced in the contract
between Ferrer and Pantranco. The Corporation
took issue with this particular ruling of the PSC
and elevated the matter to the Supreme
Court,3 which decreed, after deliberation, that
until the issue on the ownership of the disputed
certificates shall have been finally settled by the
proper court, the Corporation should be the one
to operate the lines provisionally.
On November 4, 1959, the Corporation filed in
the Court of First Instance of Manila, a complaint
for the annulment of the sheriff's sale of the
aforesaid two certificates of public convenience
(PSC Cases Nos. 59494 and 63780) in favor of
the defendant Ferrer, and the subsequent sale
thereof by the latter to Pantranco, against Ferrer,
Pantranco and the PSC. The plaintiff Corporation
prayed therein that all the orders of the PSC
relative to the parties' dispute over the said
certificates be annulled.
In separate answers, the defendants Ferrer and
Pantranco averred that the plaintiff Corporation
had no valid title to the certificates in question
because the contract pursuant to which it
acquired them from Fernando was subject to a
suspensive condition — the approval of the PSC
— which has not yet been fulfilled, and,
therefore, the Sheriff's levy and the consequent
sale at public auction of the certificates referred
to, as well as the sale of the same by Ferrer to
Pantranco, were valid and regular, and vested
unto Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party
complaint against Jose M. Villarama, alleging that
Villarama and the Corporation, are one and the
same; that Villarama and/or the Corporation was
disqualified from operating the two certificates
in question by virtue of the aforementioned
agreement between said Villarama and
Pantranco, which stipulated that Villarama "shall
not for a period of 10 years from the date of this
sale, apply for any TPU service identical or
competing with the buyer."
Upon the joinder of the issues in both the
complaint and third-party complaint, the case
was tried, and thereafter decision was rendered
in the terms, as above stated.
As stated at the beginning, all the parties
involved have appealed from the decision. They
submitted a joint record on appeal.
Pantranco disputes the correctness of the
decision insofar as it holds that Villa Rey Transit,
Inc. (Corporation) is a distinct and separate
entity from Jose M. Villarama; that the restriction
clause in the contract of January 8, 1959 between
Pantranco and Villarama is null and void; that
the Sheriff's sale of July 16, 1959, is likewise null
and void; and the failure to award damages in its
favor and against Villarama.
Ferrer, for his part, challenges the decision
insofar as it holds that the sheriff's sale is null
and void; and the sale of the two certificates in
question by Valentin Fernando to the
Corporation, is valid. He also assails the award of
P5,000.00 as attorney's fees in favor of the
Corporation, and the failure to award moral
damages to him as prayed for in his
counterclaim.
The Corporation, on the other hand, prays for a
review of that portion of the decision awarding
only P5,000.00 as attorney's fees, and insisting
that it is entitled to an award of P100,000.00 by
way of exemplary damages.
After a careful study of the facts obtaining in the
case, the vital issues to be resolved are: (1) Does
the stipulation between Villarama and
Pantranco, as contained in the deed of sale, that
the former "SHALL NOT FOR A PERIOD OF 10
YEARS FROM THE DATE OF THIS SALE, APPLY
FOR ANY TPU SERVICE IDENTICAL OR
COMPETING WITH THE BUYER," apply to new
lines only or does it include existing lines?; (2)
Assuming that said stipulation covers all kinds of
lines, is such stipulation valid and enforceable?;
(3) In the affirmative, that said stipulation is
valid, did it bind the Corporation?
For convenience, We propose to discuss the
foregoing issues by starting with the last
proposition.
The evidence has disclosed that Villarama, albeit
was not an incorporator or stockholder of the
Corporation, alleging that he did not become
such, because he did not have sufficient funds to
invest, his wife, however, was an incorporator
with the least subscribed number of shares, and
was elected treasurer of the Corporation. The
finances of the Corporation which, under all
concepts in the law, are supposed to be under
the control and administration of the treasurer
keeping them as trust fund for the Corporation,
were, nonetheless, manipulated and disbursed as
if they were the private funds of Villarama, in
such a way and extent that Villarama appeared
to be the actual owner-treasurer of the business
without regard to the rights of the stockholders.
The following testimony of Villarama,4 together
with the other evidence on record, attests to that
effect:
Q. Doctor, I want to go back again to
the incorporation of the Villa Rey
Transit, Inc. You heard the testimony
presented here by the bank regarding
the initial opening deposit of ONE
HUNDRED FIVE THOUSAND PESOS, of
which amount Eighty-Five Thousand
Pesos was a check drawn by yourself
personally. In the direct examination
you told the Court that the reason you
drew a check for Eighty-Five Thousand
Pesos was because you and your wife,
or your wife, had spent the money of
the stockholders given to her for
incorporation. Will you please tell the
Honorable Court if you knew at the
time your wife was spending the money
to pay debts, you personally knew she
was spending the money of the
incorporators?
A. You know my money and my
wife's money are one. We never talk
about those things.
Q. Doctor, your answer then is that
since your money and your wife's
money are one money and you did not
know when your wife was paying debts
with the incorporator's money?
A. Because sometimes she uses my
money, and sometimes the money
given to her she gives to me and I
deposit the money.
Q. Actually, aside from your wife,
you were also the custodian of some of
the incorporators here, in the
beginning?
A. Not necessarily, they give to my
wife and when my wife hands to me I
did not know it belonged to the
incorporators.
Q. It supposes then your wife gives
you some of the money received by her
in her capacity as treasurer of the
corporation?
A. Maybe.
Q. What did you do with the money,
deposit in a regular account?
A. Deposit in my account.
Q. Of all the money given to your
wife, she did not receive any check?
A. I do not remember.
Q. Is it usual for you, Doctor, to be
given Fifty Thousand Pesos without
even asking what is this?
xxx xxx xxx
JUDGE: Reform the question.
Q. The subscription of your brother-
in-law, Mr. Reyes, is Fifty-Two
Thousand Pesos, did your wife give you
Fifty-two Thousand Pesos?
A. I have testified before that
sometimes my wife gives me money
and I do not know exactly for what.
The evidence further shows that the initial cash
capitalization of the corporation of P105,000.00
was mostly financed by Villarama. Of the
P105,000.00 deposited in the First National City
Bank of New York, representing the initial paid-
up capital of the Corporation, P85,000.00 was
covered by Villarama's personal check. The
deposit slip for the said amount of P105,000.00
was admitted in evidence as Exh. 23, which
shows on its face that P20,000.00 was paid in
cash and P85,000.00 thereof was covered by
Check No. F-50271 of the First National City
Bank of New York. The testimonies of Alfonso
Sancho5 and Joaquin Amansec,6 both employees
of said bank, have proved that the drawer of the
check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the
Corporation, testified that while in the books of
the corporation there appears an entry that the
treasurer received P95,000.00 as second
installment of the paid-in subscriptions, and,
subsequently, also P100,000.00 as the first
installment of the offer for second subscriptions
worth P200,000.00 from the original
subscribers, yet Villarama directed him (Rivera)
to make vouchers liquidating the sums.7 Thus, it
was made to appear that the P95,000.00 was
delivered to Villarama in payment for equipment
purchased from him, and the P100,000.00 was
loaned as advances to the stockholders. The said
accountant, however, testified that he was not
aware of any amount of money that had actually
passed hands among the parties involved,8 and
actually the only money of the corporation was
the P105,000.00 covered by the deposit slip Exh.
23, of which as mentioned above, P85,000.00
was paid by Villarama's personal check.
Further, the evidence shows that when the
Corporation was in its initial months of
operation, Villarama purchased and paid with his
personal checks Ford trucks for the Corporation.
Exhibits 20 and 21 disclose that the said
purchases were paid by Philippine Bank of
Commerce Checks Nos. 992618-B and 993621-B,
respectively. These checks have been sufficiently
established by Fausto Abad, Assistant
Accountant of Manila Trading & Supply Co., from
which the trucks were purchased9 and Aristedes
Solano, an employee of the Philippine Bank of
Commerce,10 as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are
photostatic copies of ledger entries and vouchers
showing that Villarama had co-mingled his
personal funds and transactions with those made
in the name of the Corporation, are very
illuminating evidence. Villarama has assailed the
admissibility of these exhibits, contending that
no evidentiary value whatsoever should be given
to them since "they were merely photostatic
copies of the originals, the best evidence being
the originals themselves." According to him, at
the time Pantranco offered the said exhibits, it
was the most likely possessor of the originals
thereof because they were stolen from the files
of the Corporation and only Pantranco was able
to produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court
provides for the requisites for the admissibility
of secondary evidence when the original is in the
custody of the adverse party, thus: (1)
opponent's possession of the original; (2)
reasonable notice to opponent to produce the
original; (3) satisfactory proof of its existence;
and (4) failure or refusal of opponent to produce
the original in court.11 Villarama has practically
admitted the second and fourth requisites.12 As
to the third, he admitted their previous existence
in the files of the Corporation and also that he
had seen some of them.13 Regarding the first
element, Villarama's theory is that since even at
the time of the issuance of the subpoena duces
tecum, the originals were already missing,
therefore, the Corporation was no longer in
possession of the same. However, it is not
necessary for a party seeking to introduce
secondary evidence to show that the original is
in the actual possession of his adversary. It is
enough that the circumstances are such as to
indicate that the writing is in his possession or
under his control. Neither is it required that the
party entitled to the custody of the instrument
should, on being notified to produce it, admit
having it in his possession.14 Hence, secondary
evidence is admissible where he denies having it
in his possession. The party calling for such
evidence may introduce a copy thereof as in the
case of loss. For, among the exceptions to the
best evidence rule is "when the original has been
lost, destroyed, or cannot be produced in
court."15 The originals of the vouchers in
question must be deemed to have been lost, as
even the Corporation admits such loss. Viewed
upon this light, there can be no doubt as to the
admissibility in evidence of Exhibits 6 to 19 and
22.
Taking account of the foregoing evidence,
together with Celso Rivera's testimony,16 it
would appear that: Villarama supplied the
organization expenses and the assets of the
Corporation, such as trucks and
equipment;17 there was no actual payment by
the original subscribers of the amounts of
P95,000.00 and P100,000.00 as appearing in the
books;18 Villarama made use of the money of the
Corporation and deposited them to his private
accounts;19 and the Corporation paid his
personal accounts.20
Villarama himself admitted that he mingled the
corporate funds with his own money.21 He also
admitted that gasoline purchases of the
Corporation were made in his name22 because
"he had existing account with Stanvac which was
properly secured and he wanted the Corporation
to benefit from the rebates that he received."23
The foregoing circumstances are strong
persuasive evidence showing that Villarama has
been too much involved in the affairs of the
Corporation to altogether negative the claim that
he was only a part-time general manager. They
show beyond doubt that the Corporation is
his alter ego.
It is significant that not a single one of the acts
enumerated above as proof of Villarama's
oneness with the Corporation has been denied
by him. On the contrary, he has admitted them
with offered excuses.
Villarama has admitted, for instance, having paid
P85,000.00 of the initial capital of the
Corporation with the lame excuse that "his wife
had requested him to reimburse the amount
entrusted to her by the incorporators and which
she had used to pay the obligations of Dr.
Villarama (her husband) incurred while he was
still the owner of Villa Rey Transit, a single
proprietorship." But with his admission that he
had received P350,000.00 from Pantranco for
the sale of the two certificates and one unit,24 it
becomes difficult to accept Villarama's
explanation that he and his wife, after
consultation,25 spent the money of their relatives
(the stockholders) when they were supposed to
have their own money. Even if Pantranco paid
the P350,000.00 in check to him, as claimed, it
could have been easy for Villarama to have
deposited said check in his account and issued
his own check to pay his obligations. And there is
no evidence adduced that the said amount of
P350,000.00 was all spent or was insufficient to
settle his prior obligations in his business, and in
the light of the stipulation in the deed of sale
between Villarama and Pantranco that
P50,000.00 of the selling price was earmarked
for the payments of accounts due to his
creditors, the excuse appears unbelievable.
On his having paid for purchases by the
Corporation of trucks from the Manila Trading &
Supply Co. with his personal checks, his reason
was that he was only sharing with the
Corporation his credit with some companies.
And his main reason for mingling his funds with
that of the Corporation and for the latter's paying
his private bills is that it would be more
convenient that he kept the money to be used in
paying the registration fees on time, and since he
had loaned money to the Corporation, this would
be set off by the latter's paying his bills.
Villarama admitted, however, that the corporate
funds in his possession were not only for
registration fees but for other important
obligations which were not specified.26
Indeed, while Villarama was not the Treasurer of
the Corporation but was, allegedly, only a part-
time manager,27he admitted not only having held
the corporate money but that he advanced and
lent funds for the Corporation, and yet there was
no Board Resolution allowing it.28
Villarama's explanation on the matter of his
involvement with the corporate affairs of the
Corporation only renders more credible
Pantranco's claim that his control over the
corporation, especially in the management and
disposition of its funds, was so extensive and
intimate that it is impossible to segregate and
identify which money belonged to whom. The
interference of Villarama in the complex affairs
of the corporation, and particularly its finances,
are much too inconsistent with the ends and
purposes of the Corporation law, which,
precisely, seeks to separate personal
responsibilities from corporate undertakings. It
is the very essence of incorporation that the acts
and conduct of the corporation be carried out in
its own corporate name because it has its own
personality.
The doctrine that a corporation is a legal entity
distinct and separate from the members and
stockholders who compose it is recognized and
respected in all cases which are within reason
and the law.29 When the fiction is urged as a
means of perpetrating a fraud or an illegal act or
as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or
generally the perpetration of knavery or
crime,30 the veil with which the law covers and
isolates the corporation from the members or
stockholders who compose it will be lifted to
allow for its consideration merely as an
aggregation of individuals.
Upon the foregoing considerations, We are of the
opinion, and so hold, that the preponderance of
evidence have shown that the Villa Rey Transit,
Inc. is an alter ego of Jose M. Villarama, and that
the restrictive clause in the contract entered into
by the latter and Pantranco is also enforceable
and binding against the said Corporation. For the
rule is that a seller or promisor may not make
use of a corporate entity as a means of evading
the obligation of his covenant.31 Where the
Corporation is substantially the alter ego of the
covenantor to the restrictive agreement, it can be
enjoined from competing with the covenantee.32
The Corporation contends that even on the
supposition that Villa Rey Transit, Inc. and
Villarama are one and the same, the restrictive
clause in the contract between Villarama and
Pantranco does not include the purchase of
existing lines but it only applies to application
for the new lines. The clause in dispute reads
thus:
(4) The SELLER shall not, for a period
of ten (10) years from the date of this
sale apply for any TPU service identical
or competing with the BUYER.
(Emphasis supplied)
As We read the disputed clause, it is evident
from the context thereof that the intention of the
parties was to eliminate the seller as a
competitor of the buyer for ten years along the
lines of operation covered by the certificates of
public convenience subject of their transaction.
The word "apply" as broadly used has for frame
of reference, a service by the seller on lines or
routes that would compete with the buyer along
the routes acquired by the latter. In this
jurisdiction, prior authorization is needed before
anyone can operate a TPU service,33whether the
service consists in a new line or an old one
acquired from a previous operator. The clear
intention of the parties was to prevent the seller
from conducting any competitive line for 10
years since, anyway, he has bound himself not to
apply for authorization to operate along such
lines for the duration of such period.34
If the prohibition is to be applied only to the
acquisition of new certificates of public
convenience thru an application with the Public
Service Commission, this would, in effect, allow
the seller just the same to compete with the
buyer as long as his authority to operate is only
acquired thru transfer or sale from a previous
operator, thus defeating the intention of the
parties. For what would prevent the seller, under
the circumstances, from having a representative
or dummy apply in the latter's name and then
later on transferring the same by sale to the
seller? Since stipulations in a contract is the law
between the contracting parties,
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. (Art. 19, New Civil Code.)
We are not impressed of Villarama's contention
that the re-wording of the two previous drafts of
the contract of sale between Villarama and
Pantranco is significant in that as it now appears,
the parties intended to effect the least
restriction. We are persuaded, after an
examination of the supposed drafts, that the
scope of the final stipulation, while not as long
and prolix as those in the drafts, is just as broad
and comprehensive. At most, it can be said that
the re-wording was done merely for brevity and
simplicity.
The evident intention behind the restriction was
to eliminate the sellers as a competitor, and this
must be, considering such factors as the good
will35 that the seller had already gained from the
riding public and his adeptness and proficiency
in the trade. On this matter, Corbin, an authority
on Contracts has this to say.36
When one buys the business of another
as a going concern, he usually wishes to
keep it going; he wishes to get the
location, the building, the stock in
trade, and the customers. He wishes to
step into the seller's shoes and to enjoy
the same business relations with other
men. He is willing to pay much more if
he can get the "good will" of the
business, meaning by this the good will
of the customers, that they may
continue to tread the old footpath to his
door and maintain with him the
business relations enjoyed by the seller.
... In order to be well assured of this, he
obtains and pays for the seller's
promise not to reopen business in
competition with the business sold.
As to whether or not such a stipulation in
restraint of trade is valid, our jurisprudence on
the matter37says:
The law concerning contracts which
tend to restrain business or trade has
gone through a long series of changes
from time to time with the changing
condition of trade and commerce. With
trifling exceptions, said changes have
been a continuous development of a
general rule. The early cases show
plainly a disposition to avoid and annul
all contract which prohibited or
restrained any one from using a lawful
trade "at any time or at any place," as
being against the benefit of the
state. Later, however, the rule became
well established that if the restraint was
limited to "a certain time" and within "a
certain place," such contracts were valid
and not "against the benefit of the state."
Later cases, and we think the rule is now
well established, have held that a
contract in restraint of trade is valid
providing there is a limitation upon
either time or place. A contract,
however, which restrains a man from
entering into business or trade without
either a limitation as to time or place,
will be held invalid.
The public welfare of course must
always be considered and if it be not
involved and the restraint upon one
party is not greater than protection to
the other requires, contracts like the
one we are discussing will be sustained.
The general tendency, we believe, of
modern authority, is to make the test
whether the restraint is reasonably
necessary for the protection of the
contracting parties. If the contract is
reasonably necessary to protect the
interest of the parties, it will be upheld.
(Emphasis supplied.)
Analyzing the characteristics of the questioned
stipulation, We find that although it is in the
nature of an agreement suppressing competition,
it is, however, merely ancillary or incidental to
the main agreement which is that of sale. The
suppression or restraint is only partial or
limited: first, in scope, it refers only to
application for TPU by the seller in competition
with the lines sold to the buyer; second, in
duration, it is only for ten (10) years; and
third, with respect to situs or territory, the
restraint is only along the lines covered by the
certificates sold. In view of these limitations,
coupled with the consideration of P350,000.00
for just two certificates of public convenience,
and considering, furthermore, that the disputed
stipulation is only incidental to a main
agreement, the same is reasonable and it is not
harmful nor obnoxious to public service.38 It
does not appear that the ultimate result of the
clause or stipulation would be to leave solely to
Pantranco the right to operate along the lines in
question, thereby establishing monopoly or
predominance approximating thereto. We
believe the main purpose of the restraint was to
protect for a limited time the business of the
buyer.
Indeed, the evils of monopoly are farfetched
here. There can be no danger of price controls or
deterioration of the service because of the close
supervision of the Public Service
Commission.39 This Court had stated long
ago,40that "when one devotes his property to a
use in which the public has an interest, he
virtually grants to the public an interest in that
use and submits it to such public use under
reasonable rules and regulations to be fixed by
the Public Utility Commission."
Regarding that aspect of the clause that it is
merely ancillary or incidental to a lawful
agreement, the underlying reason sustaining its
validity is well explained in 36 Am. Jur. 537-539,
to wit:
... Numerous authorities hold that a
covenant which is incidental to the sale
and transfer of a trade or business, and
which purports to bind the seller not to
 engage in the same business in
competition with the purchaser, is
lawful and enforceable. While such
covenants are designed to prevent
competition on the part of the seller, it
is ordinarily neither their purpose nor
effect to stifle competition generally in
the locality, nor to prevent it at all in a
way or to an extent injurious to the
public. The business in the hands of the
purchaser is carried on just as it was in
the hands of the seller; the former
merely takes the place of the latter; the
commodities of the trade are as open to
the public as they were before; the
same competition exists as existed
before; there is the same employment
furnished to others after as before; the
profits of the business go as they did
before to swell the sum of public
wealth; the public has the same
opportunities of purchasing, if it is a
mercantile business; and production is
not lessened if it is a manufacturing
plant.
The reliance by the lower court on tile case
of Red Line Transportation Co. v. Bachrach41 and
finding that the stipulation is illegal and void
seems misplaced. In the said Red Line case, the
agreement therein sought to be enforced was
virtually a division of territory between two
operators, each company imposing upon itself an
obligation not to operate in any territory covered
by the routes of the other. Restraints of this type,
among common carriers have always been
covered by the general rule invalidating
agreements in restraint of trade. 42
Neither are the other cases relied upon by the
plaintiff-appellee applicable to the instant case.
In Pampanga Bus Co., Inc. v. Enriquez,43the
undertaking of the applicant therein not to apply
for the lifting of restrictions imposed on his
certificates of public convenience was not an
ancillary or incidental agreement. The restraint
was the principal objective. On the other hand,
in Red Line Transportation Co., Inc. v.
Gonzaga,44 the restraint there in question not to
ask for extension of the line, or trips, or increase
of equipment — was not an agreement between
the parties but a condition imposed in the
certificate of public convenience itself.
Upon the foregoing considerations, Our
conclusion is that the stipulation prohibiting
Villarama for a period of 10 years to "apply" for
TPU service along the lines covered by the
certificates of public convenience sold by him to
Pantranco is valid and reasonable. Having
arrived at this conclusion, and considering that
the preponderance of the evidence have shown
that Villa Rey Transit, Inc. is itself the alter ego of
Villarama, We hold, as prayed for in Pantranco's
third party complaint, that the said Corporation
should, until the expiration of the 1-year period
abovementioned, be enjoined from operating the
line subject of the prohibition.
To avoid any misunderstanding, it is here to be
emphasized that the 10-year prohibition upon
Villarama is not against his application for, or
purchase of, certificates of public convenience,
but merely the operation of TPU along the lines
covered by the certificates sold by him to
Pantranco. Consequently, the sale between
Fernando and the Corporation is valid, such that
the rightful ownership of the disputed
certificates still belongs to the plaintiff being the
prior purchaser in good faith and for value
thereof. In view of the ancient rule of caveat
emptorprevailing in this jurisdiction, what was
acquired by Ferrer in the sheriff's sale was only
the right which Fernando, judgment debtor, had
in the certificates of public convenience on the
day of the sale.45
Accordingly, by the "Notice of Levy Upon
Personalty" the Commissioner of Public Service
was notified that "by virtue of an Order of
Execution issued by the Court of First Instance of
Pangasinan, the rights, interests, or participation
which the defendant, VALENTIN A. FERNANDO
— in the above entitled case may have in the
following realty/personalty is attached or levied
upon, to wit: The rights, interests and
participation on the Certificates of Public
Convenience issued to Valentin A. Fernando, in
Cases Nos. 59494, etc. ... Lines — Manila to
Lingayen, Dagupan, etc. vice versa." Such notice
of levy only shows that Ferrer, the vendee at
auction of said certificates, merely stepped into
the shoes of the judgment debtor. Of the same
principle is the provision of Article 1544 of the
Civil Code, that "If the same thing should have
been sold to different vendees, the ownership
shall be transferred to the person who may have
first taken possession thereof in good faith, if it
should be movable property."
There is no merit in Pantranco and Ferrer's
theory that the sale of the certificates of public
convenience in question, between the
Corporation and Fernando, was not
consummated, it being only a conditional sale
subject to the suspensive condition of its
approval by the Public Service Commission.
While section 20(g) of the Public Service Act
provides that "subject to established limitation
and exceptions and saving provisions to the
contrary, it shall be unlawful for any public
service or for the owner, lessee or operator
thereof, without the approval and authorization
of the Commission previously had ... to sell,
alienate, mortgage, encumber or lease its
property, franchise, certificates, privileges, or
rights or any part thereof, ...," the same section
also provides:
... Provided, however, That nothing
herein contained shall be construed to
prevent the transaction from being
negotiated or completed before its
approval or to prevent the sale,
alienation, or lease by any public
service of any of its property in the
ordinary course of its business.
It is clear, therefore, that the requisite approval
of the PSC is not a condition precedent for the
validity and consummation of the sale.
Anent the question of damages allegedly suffered
by the parties, each of the appellants has its or
his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the
"tortious acts" of defendants (Pantranco and
Ferrer) in acquiring the certificates of public
convenience in question, despite constructive
and actual knowledge on their part of a prior sale
executed by Fernando in favor of the said
corporation, which necessitated the latter to file
the action to annul the sheriff's sale to Ferrer
and the subsequent transfer to Pantranco, it is
entitled to collect actual and compensatory
damages, and attorney's fees in the amount of
P25,000.00. The evidence on record, however,
does not clearly show that said defendants acted
in bad faith in their acquisition of the certificates
in question. They believed that because the bill
of sale has yet to be approved by the Public
Service Commission, the transaction was not a
consummated sale, and, therefore, the title to or
ownership of the certificates was still with the
seller. The award by the lower court of
attorney's fees of P5,000.00 in favor of Villa Rey
Transit, Inc. is, therefore, without basis and
should be set aside.
Eusebio Ferrer's charge that by reason of the
filing of the action to annul the sheriff's sale, he
had suffered and should be awarded moral,
exemplary damages and attorney's fees, cannot
be entertained, in view of the conclusion herein
reached that the sale by Fernando to the
Corporation was valid.
Pantranco, on the other hand, justifies its claim
for damages with the allegation that when it
purchased ViIlarama's business for P350,000.00,
it intended to build up the traffic along the lines
covered by the certificates but it was rot afforded
an opportunity to do so since barely three
months had elapsed when the contract was
violated by Villarama operating along the same
lines in the name of Villa Rey Transit, Inc. It is
further claimed by Pantranco that the
underhanded manner in which Villarama
violated the contract is pertinent in establishing
punitive or moral damages. Its contention as to
the proper measure of damages is that it should
be the purchase price of P350,000.00 that it paid
to Villarama. While We are fully in accord with
Pantranco's claim of entitlement to damages it
suffered as a result of Villarama's breach of his
contract with it, the record does not sufficiently
supply the necessary evidentiary materials upon
which to base the award and there is need for
further proceedings in the lower court to
ascertain the proper amount.

PREMISES CONSIDERED, the judgment appealed

from is hereby modified as follows:

1. The sale of the two certificates of public

convenience in question by Valentin Fernando to
Villa Rey Transit, Inc. is declared preferred over
that made by the Sheriff at public auction of the
aforesaid certificate of public convenience in
favor of Eusebio Ferrer;

2. Reversed, insofar as it dismisses the third-

party complaint filed by Pangasinan
Transportation Co. against Jose M. Villarama,
holding that Villa Rey Transit, Inc. is an entity
distinct and separate from the personality of Jose
M. Villarama, and insofar as it awards the sum of
P5,000.00 as attorney's fees in favor of Villa Rey
Transit, Inc.;

3. The case is remanded to the trial court for the

reception of evidence in consonance with the
above findings as regards the amount of
damages suffered by Pantranco; and

4. On equitable considerations, without costs. So

ordered.

Concepcion, C. J., Reyes, J.B.L., Dizon, Makalintal,

Castro and Fernando, JJ., concur.
Sanchez and Capistrano, JJ., took no part.
Zaldivar, J., is on leave.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20214 March 17, 1923
G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-
appellee.
Fisher, DeWitt, Perkins and Brady for appellant.
Ross and Lawrence for appellee.
STATEMENT
For a number of years prior to the times alleged
in the complaint, the plaintiff was in the employ
of the International Banking Corporation of
Manila, and it is conceded that he is a competent
and experienced business man. July 31, 1916, C.
D. Willits and I. L. Patterson were partners doing
business in San Francisco, California, under the
name of Willits & Patterson. The plaintiff was
then in San Francisco, and as a result of
negotiations the plaintiff and the firm entered
into a written contract, known in the record as
Exhibit A, by which the plaintiff was employed as
the agent of the firm in the Philippine Islands for
certain purposes for the period of five years at a
minimum salary of $200 per month and
travelling expenses. The plaintiff returned to
Manila and entered on the discharge of his duties
under the contract. As a result of plaintiff's
employment and the world war conditions, the
business of the firm in the Philippines very
rapidly increased and grew beyond the fondest
hopes of either party. A dispute arose between
the plaintiff and the firm as to the construction of
Exhibit A as to the amount which plaintiff should
receive for his services. Meanwhile Patterson
retired from the firm and Willits became the sole
owner of its assets. For convenience of operation
and to serve his own purpose, Willits organized a
corporation under the laws of California with its
principal office at San Francisco, in and by which
he subscribed for, and became the exclusive
owner of all the capital stock except a few shares
for organization purposes only, and the name of
the firm was used as the name of the
corporation. A short time after that Willits came
to Manila and organized a corporation here
known as Willits & Patterson, Ltd., in and to
which he again subscribed for all of the capital
stock except the nominal shares necessary to
qualify the directors. In legal effect, the San
Francisco corporation took over and acquired all
of the assets and liabilities of the Manila
corporation. At the time that Willits was in
Manila and while to all intents and purposes he
was the sole owner of the stock of corporations,
there was a conference between him and the
plaintiff over the disputed construction of
Exhibit A. As a result of which another
instrument, known in the record as Exhibit B,
was prepared in the form of a letter which the
plaintiff addressed to Willits at Manila on
November 10, 1919, the purpose of which was to
more clearly define and specify the
compensation which the plaintiff was to receive
for his services. Willits received and confirmed
this letter by signing the name of Willits &
Patterson, By C.d. Willits. At the time both
corporations were legally organized, and there is
nothing in the corporate minutes to show that
Exhibit B was ever formally ratified or approved
by either corporation. After its organization, the
Manila corporation employed a regular
accountant whose duty it was to audit the
accounts of the company and render financial
statements both for the use of the local banks
and the local and parent corporations at San
Francisco. From time to time and in the ordinary
course of business such statements of account
were prepared by the accountant and duly
forwarded to the home office, and among other
things was a statement of July 31, 1921, showing
that there was due and owing the plaintiff under
Exhibit B the sum of P106,277.50. A short time
previous to that date, the San Francisco
corporation became involved in financial trouble,
and all of its assets were turned over to a
"creditors' committee." When this statement was
received, the "creditors' committee" immediately
protested its allowance. An attempt was made
without success to adjust the matter on a
friendly basis and without litigation. January 10,
1922, the plaintiff brought this action to recover
from the defendant the sum of P106,277.50 with
legal interest and costs, and written instruments
known in the record as Exhibits A and B were
attached to, and made a part of, the complaint.
For answer, the defendant admits the formal
parts of the complaint, the execution of Exhibit A
and denies each and every other allegation,
except as specifically admitted, and alleges that
what is known as Exhibit B was signed by Willits
without the authority of the defendant
corporation or the firm of Willits & Patterson,
and that it is not an agreement which was ever
entered into with the plaintiff by the defendant
or the firm, and, as a separate defense and
counterclaim, it alleges that on the 30th of June,
1920, there was a balance due and owing the
plaintiff from the defendant under the contract
Exhibit A of the sum of P8,741.05. That his salary
from June 30, 1920, to July 31, 1921, under
Exhibit A was $400 per month, or a total of
P10,400. That about July 6, 1921, the plaintiff
wrongfully took P30,000 from the assets of the
firm, and that he is now indebted to the firm in
the sum of P10,858.95, with interest and costs,
from which it prays judgement.
The plaintiff admits that he withdrew the
P30,000, but alleges that it was with the consent
and authority of the defendant, and denies all
other new matter in the answer.
Upon such issues a trial was had, and the lower
court rendered judgment in favor of the
defendant as prayed for in its counterclaim, from
which the plaintiff appeals, contending that the
trial court erred in not holding that the contract
between the parties is that which is embodied in
Exhibits A and B, and that the defendant
assumed all partnership obligations, and in
failing to render judgment for the plaintiff, as
prayed for, and in dismissing his complaint, and
denying plaintiff's motion for a new trial.
JOHNS, J.:
In their respective briefs opposing counsel agree
that the important questions involved are "what
was the contract under which the plaintiff
rendered services for five years ending July 31,
1921," and "what is due the plaintiff under that
contract." Plaintiff contends that his services
were performed under Exhibits A and B, and that
the defendant assumed all of the obligations of
the original partnership under Exhibit A, and is
now seeking to deny its liability under, and
repudiate, Exhibit B. The defendant admits that
Exhibit A was the original contract between
Arnold and the firm of Willits & Patterson by
which he came to the Philippine Islands, and that
it was therein agreed that he was to be employed
for a period of five years as the agent of Willits &
Patterson in the Philippine Islands to operate a
certain oil mill, and to do such other business as
might be deemed advisable for which he was to
receive, first, the travelling expenses of his wife
and self from San Francisco to Manila, second,
the minimum salary of $200 per month, third, a
brokerage of 1 per cent upon all purchases and
sales of merchandise, except for the account of
the coconut oil mill, fourth, one-half of the profits
on any transaction in the name of the firm or
himself not provided for in the agreement. That
the agreement also provided that if it be found
that the business was operated at a loss, Arnold
should receive a monthly salary of $400 during
such period. That the business was operated at a
loss from June 30, 1920, to July 31, 1921, and
that for such reason, he was entitled to nothing
more than a salary of $400 per month, or for that
period P10,400. Adding this amount to the
P8,741.05, which the defendant admits he owed
Arnold on June 30, 1920, makes a total of
P19,141.05, leaving a balance due the defendant
as set out in the counterclaim. In other words,
that the plaintiff's compensation was measured
by, and limited to, the above specified provisions
in the contract Exhibit A, and that the defendant
corporation is not bound by the terms or
provisions of Exhibit B, which is as follows:
WILLITS & PATTERSON, LTD.
MANILA, P. I., Nov. 10, 1919.
CHAS. D. WILLITS, Esq.,
Present.
DEAR MR. WILLITS: My
understanding of the intent of
my agreement with Willits &
Patterson is as under:
Commissions. Willits & Francisco, in the State of California, which took
Patterson, San Francisco, pay
me a commission of one per
cent on all purchases made
for them in the Philippines or
sales made to them by Manila
and one per cent on all sales
made for them in the
Philippines, or purchases
made from them by Manila. If
such purchases or sales are on
an f. o. b. basis the
commission is on the f. o. b.
price; if on a c. i. f. basis the
commission is computed on
the c. i. f. price
These commissions are
credited to me in San
Francisco.
I do not participate in any
profits on business transacted
between Willits & Patterson,
San Francisco, and Willits &
Patterson, Ltd., Manila.
Profits. On all business
transacted between Willits &
Patterson, Ltd. and others
than Willits & Patterson, San
Francisco, half the profits are
to be credited to my account
and half to the Profit & Loss
account of Willits & Patterson,
Ltd., Manila.
On all other business, such as
the Cooperative Coconut
Products Co. account, or any
other business we may
undertake as agents or
managers, half the profits are
to be credited to my account
and half to the Profit & Loss
account of Willits & Patterson,
Ltd., Manila.
Where Willits & Patterson,
San Francisco, or Willits &
Patterson, Ltd., Manila, have
their own funds invested in
the capital stock or a
corporation, I of course do not
participate in the earnings of
such stock, any more than
Willits & Patterson would
participate in the earnings of
stock held by me on my
account.
If the foregoing conforms to
your understanding of our
agreement, please confirm
below.
Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & Manila, and that at the time it was signed by
PATTERSON
By (Sgd.) CHAS. D.
WILLITS
There is no dispute about any of the following
facts: That at the inception C.D. Willits and I. L.
Patterson constituted the firm of Willits &
Patterson doing business in the City of San
Francisco; that later Patterson retired from the
firm, and Willits acquired all of his interests and
thereafter continued the business under the
name and style of Willits & Patterson; that the
original contract Exhibit A was made between
the plaintiff and the old firm at San Francisco on
July 31, 1916, to cover a period of five years from
that date; that plaintiff entered upon the
discharged of his duties and continued his
services in the Philippine Islands to someone for
the period of five years; that on November 10,
1919, and as a result of conferences between
Willits and the plaintiff, Exhibit B was addressed
and signed in the manner and form above stated
in the City of Manila. A short time prior to that
date Willits organized a corporation in San
over and acquired all of the assets of the firm's
business in California then being conducted
under the name and style of Willits & Patterson;
that he subscribed for all of the capital stock of
the corporation, and that in truth and in fact he
was the owner of all of its capital stock. After this
was done he caused a new corporation to be
organized under the laws of the Philippine
Islands with principal office at Manila, which
took over and acquired all the business and
assets of the firm of Willits & Patterson in the
Philippine Islands, in and to which, in legal effect,
he subscribed for all of its capital stock, and was
the owner of all of its stock. After both
corporations were organized the above letter
was drafted and signed. The plaintiff contends
that the signing of Exhibit B in the manner and
under the conditions in which it was signed, and
through the subsequent acts and conduct of the
parties, was ratified and, in legal effect, became
and is now binding upon the defendant.
It will be noted that Exhibit B was executed in
Willits, he was to all intents and purposes the
legal owner of all the stock in both corporations.
It also appears from the evidence that the parent
corporation at San Francisco took over and
acquired all of the assets and liabilities of the
local corporation at Manila. That after it was
organized the Manila corporation kept separate
records and account books of its own, and that
from time to time financial statements were
made and forwarded to the home office, from
which it conclusively appears that plaintiff was
basing his claim for services upon Exhibit A, as it
was modified by Exhibit B. That at no time after
Exhibit B was signed was there ever any dispute
between plaintiff and Willits as to the
compensation for plaintiff's services. That is to
say, as between the plaintiff and Willits, Exhibit B
was approved, followed and at all times in force
and effect, after it was signed November 10,
1919. It appears from an analysis of Exhibit B
that it was for the mutual interest of both parties.
From a small beginning, the business was then in
a very flourishing conditions and growing fast,
and the profits were very large and were running
into big money.
Among other things, Exhibit A provided: "(a)
That the net profits from said coconut oil
business shall be divided in equal shares
between the said parties hereto; (b) that Arnold
should receive a brokerage of 1 per cent from all
purchases and sales of merchandise, except for
the account of the coconut mills; (c) that the net
profits from all other business should be divided
in equal half shares between the parties hereto."
Under the above provisions, the plaintiff might
well contend that he was entitled to one-half of
all the profits and a brokerage of 1 per cent from
all purchases and sales, except those for the
account of the coconut oil mills, which under the
volume of business then existing would run into
a very large sum of money. It was for such
reason and after personal conferences between
them, and to settle all disputed questions, that
Exhibit B was prepared and signed.
The record recites that "the defendant admits
that from July 31, 1916 to July 31, 1921, the
plaintiff faithfully performed all the duties
incumbent upon him under his contract of
employment, it being understood, however, that
this admission does not include an admission
that the plaintiff placed a proper interpretation
upon his right to remuneration under said
contract of employment."
It being admitted that the plaintiff worked
"under his contract of employment" for the
period of five years, the question naturally
arises, for whom was he working? His contract
was made with the original firm of Willits &
Patterson, and that firm was dissolved and it
ceased to exist, and all of its assets were merged
in, and taken over by, the parent corporation at
San Francisco. In the very nature of things, after
the corporation was formed, the plaintiff could
not and did not continue to work for the firm,
and, yet, he continued his employment for the
full period of five years. For whom did he work
after the partnership was merged in the
corporation and ceased to exist?
It is very apparent that, under the conditions
then existing, the signing of Exhibit B was for the
mutual interests of both parties, and that if the
contract Exhibit A was to be enforced according
to its terms, that Arnold might well contend for a
much larger sum of money for his services. In
truth and in fact Willits and both corporations
recognized his employment and accepted the
benefits of his services. He continued his
employment and rendered his services after the
corporation were organized and Exhibit B was
signed just the same as he did before, and both
corporations recognized and accepted his
services. Although the plaintiff was president of
the local corporation, the testimony is conclusive
that both of them were what is known as a one
man corporation, and Willits, as the owner of all
of the stock, was the force and dominant power
which controlled them. After Exhibit B was
signed it was recognized by Willits that the
plaintiff's services were to be performed and
measured by its term and provisions, and there
never was any dispute between plaintiff and
Willits upon that question.
The controversy first arose after the corporation
was in financial trouble and the appointment of
what is known in the record as a "creditors'
committee." There is no claim or pretense that
there was any fraud or collusion between
plaintiff and Willits, and it is very apparent that
Exhibit B was to the mutual interest of both
parties. It is elementary law that if Exhibit B is a
binding contract between the plaintiff and Willits
and the corporations, it is equally binding upon
the creditors' committee. It would not have any
higher or better legal right than the corporation
itself, and could not make any defense which it
could not make. It is very significant that the
claim or defense which is now interposed by the
creditors' committee was never made or
asserted at any previous time by the defendant,
and that it never was made by Willits, and it is
very apparent that if he had remained in control
of the corporation, it would never have made the
defense which is now made by the creditors'
committee. The record is conclusive that at the
time he signed Exhibit B, Willits was, in legal
effect, the owner and holder of all the stock in
both corporations, and that he approved it in
their interest, and to protect them from the
plaintiff having and making a much larger claim
under Exhibit A. As a matter of fact, it appears
from the statement of Mr. Larkin, the accountant,
in the record that if plaintiff's cause of action was
now founded upon Exhibit A, he would have a
claim for more than P160,000.
Thompson on Corporations, 2d ed., vol. I, section
10, says:
The proposition that a corporation has
an existence separate and distinct from
its membership has its limitations. It
must be noted that this separate
existence is for particular purposes. It
must also be remembered that there
can be no corporate existence without
persons to compose it; there can be no
association without associates. This
separate existence is to a certain extent
a legal fiction. Whenever necessary for
the interests of the public or for the
protection or enforcement of the rights
of the membership, courts will
disregard this legal fiction and operate
upon both the corporation and the
persons composing it.
In the same section, the author quotes from a
decision in 49 Ohio State, 1371; 15 L. R. A., 145, in
which the Supreme Court of Ohio says:
"So long as a proper use is made of the
fiction that a corporation is an entity
apart from its shareholders, it is
harmless, and, because convenient,
should not be called in question; but
where it is urged to an end subversive
of its policy, or such is the issue, the
fiction must be ignored, and the
question determined whether the act in
question, though done by shareholders,
— that is to say, by the persons uniting
in one body, — was done simply as
individuals, and with respect to their
individual interest as shareholders, or
was done ostensibly as such, but, as a
matter of fact, to control the
corporation, and affect the transaction
of its business, in the same manner as if
the act had been clothed with all the
formalities of a corporate act. This must
be so, because, the stockholders having
a dual capacity, and capable of acting in
either, and a possible interest to
conceal their character when acting in
their corporate capacity, the absence of
the formal evidence of the character of
the act cannot preclude judicial inquiry
on the subject. If it were otherwise,
then in that department of the law
fraud would enjoy an immunity
awarded to it in no other."
Where the stock of a corporation is
owned by one person whereby the
corporation functions only for the
benefit of such individual owner, the
corporation and the individual should
be deemed to be the same. (U. S.
Gypsum Co. vs. Mackay Wall Plaster Co.,
199 Pac., 249.)
Ruling Case Law, vol. 7, section 663, says:
While of course a corporation cannot
ratify a contract which is strictly ultra
vires, and which it in the first instance
could not have made, it may by
ratification render binding on it a
contract, entered into on its behalf by
its officers or agents without authority.
As a general rule such ratification need
not be manifested by any voted or
formal resolution of the corporation or
be authenticated by the corporate seal;
no higher degree of evidence is
requisite in establishing ratification on
the part of a corporation, than is
requisite in showing an antecedent
authorization.
xxx xxx xxx
SEC. 666. The assent or approval of a
corporation to acts done on its account
may be inferred in the same manner
that the absent of a natural person may
be, and it is well settled that where a
corporation with full knowledge of the
unauthorized act of its officer or agents
acquiesces in and consents to such acts,
it thereby ratifies them, especially
where the acquiescence results in
prejudice to a third person.
xxx xxx xxx
SEC. 669. So, when, in the usual course
of business of a corporation, an officer
has been allowed in his official capacity
to manage its affair, his authority to
represent the corporation may be
inferred from the manner in which he
has been permitted by the directors to
transact its business.
SEC. 656. In accordance with a well-
known rule of the law of agency, notice
to corporate officers or agents within
the scope or apparent scope of their
authority is attributed to the
corporation.
SEC. 667. As a general rule, if a
corporation with knowledge of its
agents unauthorized act received and
enjoys the benefits thereof, it impliedly
ratifies the unauthorized act if it is one
capable of ratification by parol.
In its article on corporations, Corpus Juris, in
section 2241 says:
Ratification by a corporation of a
transaction not previously authorized
is more easily inferred where the
corporation receives and retains
property under it, and as a general rule
where a corporation, through its
 proper officers or board, takes and
retains the benefits of the unauthorized
act or contract of an officer or agent,
with full knowledge of all the material
facts, it thereby ratifies and becomes
bound by such act of contract, together
with all the liabilities and burdens
resulting therefrom, and in some
jurisdiction this rule is, in effect,
declared by statute. Thus the
corporation is liable on the ground of
ratification where, with knowledge of
the facts, it accepts the benefit of
services rendered under an
unauthorized contract of employment .
...
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was
employed by the local corporation, and from
time to time and in the ordinary course of
business made and prepared financial
statements showing its assets and liabilities, true
copies of which were sent to the home office in
San Francisco. It appears upon their face that
plaintiff's compensation was made and founded
on Exhibit B, and that such statements were
made and prepared by the accountant on the
assumption that Exhibit B was in full force and
effect as between the plaintiff and the defendant.
In the course of business in the early part of
1920, plaintiff, as manager of the defendant, sold
500 tons of oil for future delivery at P740 per
ton. Due to break in the market, plaintiff was
able to purchase the oil at P380 per ton or a
profit of P180,000.
It appears from Exhibit B under the heading of
"Profits" that:
On all the business transacted between
Willits & Patterson, Ltd. and others
than Willits & Patterson, San Francisco,
half the profit are to be credited to may
account and half to the Profit & Loss
account Willits & Patterson, Ltd.,
Manila.
The purchasers paid P105,000 on the contracts
and gave their notes for P75,000, and it was
agreed that all of the oil purchased should be
held as security for the full payment of the
purchase price. As a result, the defendant itself
received the P105,000 in cash, P75,000 in notes,
and still holds the 500 tons of oil as security for
the balance of the purchase price. This
transaction was shown in the semi-annual
financial statement for the period ending
December 31, 1920. That is to say, the business
was transacted by and through the plaintiff, and
the defendant received and accepted all of the
profits on the deal, and the statement which was
rendered gave him a credit for P90,737.88, or
half the profit as provided in the contract Exhibit
B, with interest.
Although the previous financial statements show
upon their face that the account of plaintiff was
credit with several small items on the same
basis, it was not until the 23d of March, 1921,
that any objection was ever made by anyone, and
objection was made for the first time by the
creditors' committee in a cable of that date.
As we analyze the facts Exhibit B was, in legal
effect, ratified and approved and is now binding
upon the defendant corporation, and the plaintiff
is entitled to recover for his services on that
writing as it modified the original contract
Exhibit A.
It appears from the statement prepared by
accountant Larkin founded upon Exhibit B that
the plaintiff is entitled to recover P106,277.50. It
is very apparent that his statement was based
upon the assumption that there was a net profit
of P180,000 on the 500 tons of oil, of which the
plaintiff was entitled to one-half.
In the absence of any other proof, we have the
right to assume that the 500 tons of oil was
worth the amount which the defendant paid for
them at the time of the purchase or P380 per ton,
and the record shows that the defendant took
and now has the possession of all of the oil
secure the payment of the price at which it was
sold. Hence, the profit on the deal to the
defendant at the time of the sale would amount
to the difference between what the defendant
paid for the oil and the amount which it received
for the oil at the time it sold the oil. It appears
that at the time of the sale the defendant only
received P105,000 in cash, and that it took and
accepted the promissory notes of Cruz & Tan
Chong Say, the purchasers, for P75,000 more
which have been collected and may never be.
Hence, it must follow that the amount evidence
by the notes cannot now be deemed or treated as
profits on the deal and cannot be until such times
as the notes are paid.
The judgment of the lower court is reversed, and
a money judgment will be entered here in favor
of the plaintiff and against the defendant for the
sum of P68,527.50, with thereon at the rate of 6
per cent per annum from the 10th day of
January, 1922. In addition thereto, judgment will
be rendered against the defendant in substance
and to the effect that the plaintiff is the owner of
an undivided one-half interest in the promissory
notes for P75,000 which were executed by Cruz
& Tan Chong Say, as a part of the purchase price
of the oil, and that he is entitled to have and
receive one-half of all the proceeds from the
notes or either of them, and that also he have
judgment against the defendant for costs. So
ordered.
Araullo, C. J., Street, Malcolm, Avanceña, Ostrand,
and Romualdez, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5677 May 25, 1953
LA CAMPANA FACTORY, INC., and TAN TONG
doing business under the trial name "LA
CAMPANA GAUGAU PACKING", petitioners,
vs.
KAISAHAN NG MGA MANGGAGAWA SA LA
CAMPANA (KKM) and THE COURT OF
INDUSTRIAL RELATIONS, respondents.
Ceferino de los Santos, R., Ceferino de los Santos,
Jr. and Manuel V. Roxas for petitioners.
Carlos E. Santiago for respondent union.
REYES, J.:
Tan Tong, one of the herein petitioners, has since
1932 been engaged in the business of buying and
selling gaugau under the trade name La Campana
Gaugau Packing with an establishment in
Binondo, Manila, which was later transferred to
España Extension, Quezon City. But on July 6,
1950, Tan Tong, with himself and members of
his family corporation known as La Campana
Factory Co., Inc., with its principal office located
in the same place as that of La Campana Gaugau
Packing.
About a year before the formation of the
corporation, or on July 11, 1949, Tan Tong had
entered into a collective bargaining agreement
with the Philippine Legion of Organized
Workers, known as PLOW for short, to which the
union of Tan Tong's employees headed by
Manuel E. Sadde was then affiliated. Seceding,
however, from the PLOW, Tan Tong's employees
later formed their own organization known
as Kaisahan Ng Mga Manggagawa Sa La
Campana, one of the herein respondents, and
applied for registration in the Department of
Labor as an independent entity. Pending
consideration of this application, the Department
gave the new organization legal standing by
issuing it a permit as an affiliate to
the Kalipunan Ng Mga Manggagawa.
On July 19, 1951, the Kaisahan Ng Mga
Manggagawa Sa La Campana, hereinafter to be
referred to as the respondent Kaisahan, which,
as of that date, counted with 66 members —
workers all of them of both La Campana Gaugau
Packing and La Campana Coffee Factory Co., Inc.
— presented a demand for higher wages and
more privileges, the demand being addressed to
La Campana Starch and Coffee Factory, by which
name they sought to designate, so it appears, the
La Campana Gaugau Packing and the La
Campana Coffee Factory Co., Inc. As the demand
was not granted and an attempt at settlement
through the mediation of the Conciliation Service
of the Department of Labor had given no result,
the said Department certified the dispute to the
Court of Industrial Relations on July 17, 1951,
the case being there docketed as Case No. 584-V.
With the case already pending in the industrial
court, the Secretary of Labor, on September 5,
1951, revoked theKalipunan Ng Mga Kaisahang
Manggagawa's permit as a labor union on the
strength of information received that it was
dominated by subversive elements, and, in
consequence, on the 20th of the same month,
also suspended the permit of its affiliate, the
respondent Kaisahan.
We have it from the court's order of January 15,
1952, which forms one of the annexes to the
present petition, that following the revocation of
the Kaisahan's permit, "La Campana Gaugau and
Coffee Factory" (obviously the combined name of
La Campana Gaugau Packing and La Campana
Coffee Factory Co., Inc,) and the PLOW, which
had been allowed to intervene as a party having
an interest in the dispute, filed separate motions
for the dismissal of the case on the following
grounds:
1. That the action is directed against
two different entities with distinct
personalities, with "La Campana Starch
Factory" and the "La Campana Coffee
Factory, Inc.";
2. That the workers of the "La Campana
Coffee Factory, Inc." are less than
thirty-one;
3. That the petitioning union has no
legal capacity to sue, because its
registration as an organized union has
been revoked by the Department of
Labor on September 5, 1951; and
4. That there is an existing valid
contract between the respondent "La
Campana Gaugau Packing" and the
intervenor PLOW, where-in the
petitioner's members are contracting
parties bound by said contract.
Several hearings were held on the above
motions, in the course of which ocular
inspections were also made, and on the basis of
the evidence received and the facts observed in
the ocular inspections, the Court of Industrial
Relations denied the said motions in its order of
January 14, 1952, because if found as a fact that:
A. While the coffee corporation is a
family corporation with Mr. Tan Tong,
his wife, and children as the
incorporations and stockhelders
(Exhibit 1), the La Campana Gaugau
Packing is merely a business name
(Exhibit 4).
B. According to the contract of lease
(Exhibit 23), Mr. Tan Tong., propriety
and manager of the Ka Campana
Gaugau Factory, leased a space of 200
square meters in the bodega housing
the gaugau factory to his son Tan Keng
Lim, manager of the La Campana Coffee
Factory. But the lease was executed
only on September 1, 1951, while the
dispute between the parties was
pending before the Court.
C. There is only one entity La Campana
Starch and Coffee Factory, as shown by
the signboard (Exhibit 1), the
advertisement in the delivery trucks
(Exhibit I-1), the packages of
gaugau(Exhibit K), and delivery forms
(Exhibits J, J-1, and J-2).
D. All the laborers working in the
gaugau or in the coffee factory receive
their pay from the same person, the
cashier, Miss Natividad Garcia,
secretary of Mr. Tan Tong; and they are
transferred from the gaugau to the
coffee and vice-versa as the
management so requires.
E. There has been only one payroll for
the entire La Campana personnel and
only one person preparing the same —
Miss Natividad Garcia, secretary of Mr.
Tan Tong. But after the case at bar was
certified to this Court on July 17, 1951,
the company began making separate
payrolls for the coffee factory (Exhibits
M-2 and M-3, and for the gaugau
factory (Exhibits O-2, O-3 and O-4). It is
to be noted that before July 21, 1951,
the coffee payrolls all began with
number "41-Maria Villanueva" with 24
or more laborers (Exhibits M and M-1),
whereas beginning July 21, 1951, the
payrolls for the coffee factory began
with No. 1-Loreta Bernabe with only 14
laborers (Exhibits M-2 and M-3).
F. During the ocular inspection made in
the factory on August 26, 1951 the
Court has found the following:
In the ground floor and second floor of
the gaugau factory there were
hundreds of bags of raw coffee behind
the pile of gaugau sacks. There were
also women employees working paper
wrappers for gaugau, and, in the same
place there were about 3,000 cans to be
used as containers for coffee.
 The Court found out also that there
were 16 trucks used both for the
delivery of coffee and gaugau. To show
that those trucks carried both coffee
and gaugau, the union president invited
the Court to examine the contents of
delivery truck No. T-582 parked in a
garage between the gaugau building
and the coffee factory, and upon
examination, there were found inside
the said truck boxes of gaugau and cans
of coffee,
and held that:
. . . there is only one management for
the business of gaugau and coffee with
whom the laborers are dealing
regarding their work. Hence, the filing
of action against the Ka Campana
Starch and Coffee Factory is proper and
justified.
With regards to the alleged lack of
personality, it is to be noted that before
the certification of the case to this
Court on July 17, 1951, the
petitioner Kaisahan Ng Mga
Manggagawa Sa La Campana, had a
separate permit from the Department
of Labor. This permit was suspended
on September 30, 1951. (Exhibit M-
Intervenor, page 55, of the record). It is
not true that, on July 17, 1951, when
this case forwarded to this Court, the
petitioner's permit, as an independent
union, had not yet been issued, for the
very Exhibit MM-Intervenor regarding
the permit, conclusively shows the
preexistence of said permit. (Annex G.)
Their motion for reconsideration of the above
order having been denied, Tan Tong and La
Campana Coffee Factory, Inc. (same as La
Campana Coffee Factory Co., Inc.), later joined by
the PLOW, filed the present petition for
certiorari on the grounds that the Court of
Industrial Relations had no jurisdiction to take
cognizance of the case, for the reason, according
to them, "(1) that the petitioner La Campana
Coffee Factory, Inc. has only 14 employees, only
5 of whom are members of the respondent union
and therefore the absence of the jurisdictional
number (30) as provided by sections 1 and 4 of
Commonwealth Act No. 103; and, (2) that the
suspension of respondent union's permit by the
Secretary of Labor has the effect of taking away
the union's right to collective bargaining under
section 2 of Commonwealth Act No. 213 and
consequently, its personality to sue for ad in
behalf of its members."
As to the first ground, petitioners obviously do
not question the fact that the number of
employees of the La Campana Gaugau Packing
involved in the case is more than the
jurisdictional number (31) required bylaw, but
they do contend that the industrial court has no
jurisdiction to try the case as against La
Campana Coffee Factory, Inc. because the latter
has allegedly only 14 laborers and only of these
are members of the respondent Kaisahan. This
contention loses force when it is noted that, as
found by the industrial court — and this finding
is conclusive upon us — La Campana Gaugau
Packing and La Campana Coffee Factory Co. Inc.,
are operating under one single management,
that is, as one business though with two trade
names. True, the coffee factory is a corporation
and, by legal fiction, an entity existing separate
and apart fro the persons composing it, that is,
Tan Tong and his family. But it is settled that this
fiction of law, which has been introduced as a
matter of convenience and to subserve the ends
of justice cannot be invoked to further an end
subversive of that purpose.
Disregarding Corporate Entity. — The
doctrine that a corporation is a legal
entity existing separate and apart from
the person composing it is a legal
theory introduced for purposes of
convenience and to subserve the ends
of justice. The concept cannot,
therefore, be extended to a point
beyond its reason and policy, and when
invoked in support of an end
subversive of this policy, will be
disregarded by the courts. Thus, in an
appropriate case and in furtherance of the Court of Industrial Relations, that court duly
the ends of justice, a corporation and acquired jurisdiction over the case (International
the individual or individuals owning all Oil Factory vs. NLU, Inc. 73 Phil., 401; section 4, C.
its stocks and assets will be treated as A. 103). This jurisdiction was not when the
identical, the corporate entity being Department of Labor suspended the permit of
disregarded where used as a cloak or the respondent Kaisahan as a labor organization.
cover for fraud or illegality. (13 Am. For once jurisdiction is acquired by the Court of
Jur., 160-161.) Industrial Relations it is retained until the case is
completely decided. (Manila Hotel Employees
. . . A subsidiary or auxiliary Association vs. Manila Hotel Co. et al., 73 Phil.,
corporation which is created by a 374.)
parent corporation merely as an agency
for the latter may sometimes be In view of the foregoing, the petition is denied,
regarded as identical with the parent with costs against the petitioner.
corporation, especially if the
stockholders or officers of the two Paras, C.J., Feria, Pablo, Bengzon, Tuason,
corporations are substantially the same Montemayor, Jugo, Bautista Angelo and Labrador,
or their system of operation unified. JJ., concur.
(Ibid. 162; see Annotation 1 A. L. R. 612,
s. 34 A. L. R. 599.)
In the present case Tan Tong appears to be the
owner of the gaugau factory. And the coffee
factory, though an incorporated business, is in
reality owned exclusively by Tan Tong and his
family. As found by the Court of industrial
Relations, the two factories have but one office,
one management and one payroll, except after
July 17, the day the case was certified to the
Court of Industrial Relations, when the person
who was discharging the office of cashier for
both branches of the business began preparing
separate payrolls for the two. And above all, it
should not be overlooked that, as also found by
the industrial court, the laborers of
the gaugau factory and the coffee factory were
interchangeable, that is, the laborers from the
gaugau factory were sometimes transferred to
the coffee factory and vice-versa. In view of all
these, the attempt to make the two factories
appears as two separate businesses, when in
reality they are but one, is but a device to defeat
the ends of the law (the Act governing capital
and labor relations) and should not be permitted
to prevail.
The second point raised by petitioners is
likewise with-out merit. In the first place, there
being more than 30 laborers involved and the
Secretary of Labor having certified the dispute to
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-13203 January 28, 1961
YUTIVO SONS HARDWARE
COMPANY, petitioner,
vs.
COURT OF TAX APPEALS and COLLECTOR OF
INTERNAL REVENUE, respondents.
Sycip, Quisumbing, Salazar & Associates for
petitioner.
Office of the Solicitor General for respondents.
GUTIERREZ DAVID, J.:
This is a petition for review of a decision of the
Court of Tax Appeals ordering petitioner to pay
to respondent Collector of Internal Revenue the
sum of P1,266,176.73 as sales tax deficiency for
the third quarter of 1947 to the fourth quarter of
1950; inclusive, plus 75% surcharge thereon,
equivalent to P349,632.54, or a sum total of
P2,215,809.27, plus costs of the suit.
From the stipulation of facts and the evidence
adduced by both parties, it appears that
petitioner Yutivo Sons Hardware Co. (hereafter
referred to as Yutivo) is a domestic corporation,
organized under the laws of the Philippines, with
principal office at 404 Dasmariñas St., Manila.
Incorporated in 1916, it was engaged, prior to
the last world war, in the importation and sale of
hardware supplies and equipment. After the
liberation, it resumed its business and until June
of 1946 bought a number of cars and trucks from
General Motors Overseas Corporation (hereafter
referred to as GM for short), an American
corporation licensed to do business in the
Philippines. As importer, GM paid sales tax
prescribed by sections 184, 185 and 186 of the
Tax Code on the basis of its selling price to
Yutivo. Said tax being collected only once on
original sales, Yutivo paid no further sales tax on
its sales to the public.
On June 13, 1946, the Southern Motors, Inc.
(hereafter referred to as SM) was organized to
engage in the business of selling cars, trucks and
spare parts. Its original authorized capital stock
was P1,000,000 divided into 10,000 shares with
a par value of P100 each.
At the time of its incorporation 2,500 shares
worth P250,000 appear to have been subscribed
into equal proportions by Yu Khe Thai, Yu Khe
Siong, Hu Kho Jin, Yu Eng Poh, and Washington
Sycip. The first three named subscribers are
brothers, being sons of Yu Tiong Yee, one of
Yutivo's founders. The latter two are respectively
sons of Yu Tiong Sin and Albino Sycip, who are
among the founders of Yutivo.
After the incorporation of SM and until the
withdrawal of GM from the Philippines in the
middle of 1947, the cars and tracks purchased by
Yutivo from GM were sold by Yutivo to SM
which, in turn, sold them to the public in the
Visayas and Mindanao.
When GM decided to withdraw from the
Philippines in the middle of 1947, the U.S.
manufacturer of GM cars and trucks appointed
Yutivo as importer for the Visayas and
Mindanao, and Yutivo continued its previous
arrangement of selling exclusively to SM. In the
same way that GM used to pay sales taxes based
on its sales to Yutivo, the latter, as importer, paid
sales tax prescribed on the basis of its selling
price to SM, and since such sales tax, as already
stated, is collected only once on original sales,
SM paid no sales tax on its sales to the public.
On November 7, 1950, after several months of
investigation by revenue officers started in July,
1948, the Collector of Internal Revenue made an
assessment upon Yutivo and demanded from the
latter P1,804,769.85 as deficiency sales tax plus
surcharge covering the period from the third
quarter of 1947 to the fourth quarter of 1949; or
from July 1, 1947 to December 31, 1949,
claiming that the taxable sales were the retail
sales by SM to the public and not the sales at
wholesale made by, Yutivo to the latter inasmuch
as SM and Yutivo were one and the same
corporation, the former being the subsidiary of
the latter.
The assessment was disputed by the petitioner,
and a reinvestigation of the case having been
made by the agents of the Bureau of Internal
Revenue, the respondent Collector in his letter
dated November 15, 1952 countermanded his
demand for sales tax deficiency on the ground
that "after several investigations conducted into
the matter no sufficient evidence could be
gathered to sustain the assessment of this Office
based on the theory that Southern Motors is a
mere instrumentality or subsidiary of Yutivo."
The withdrawal was subject, however, to the
general power of review by the now defunct
Board of Tax Appeals. The Secretary of Finance
to whom the papers relative to the case were
endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to
the respondent Collector for reinvestigation.
After another investigation, the respondent
Collector, in a letter to petitioner dated
December 16, 1954, redetermined that the
aforementioned tax assessment was lawfully due
the government and in addition assessed
deficiency sales tax due from petitioner for the
four quarters of 1950; the respondents' last
demand was in the total sum of P2,215,809.27
detailed as follows:
Assessment (First) of November 7, 1950 for
deficiency sales Tax for the period from 3rd be
1947 to 4th Qrtr 1949 inclusive
Additional Assessment for period from 1st to the
Qrtr 1950, inclusive
Total amount demanded per letter of Decembercorporations
1954
This second assessment was contested by the
petitioner Yutivo before the Court of Tax
Appeals, alleging that there is no valid ground to
disregard the corporate personality of SM and to
hold that it is an adjunct of petitioner Yutivo; (2)
that assuming the separate personality of SM
may be disregarded, the sales tax already paid by
Yutivo should first be deducted from the selling
price of SM in computing the sales tax due on
each vehicle; and (3) that the surcharge has been
erroneously imposed by respondent. Finding
against Yutivo and sustaining the respondent
Collector's theory that there was no legitimate
or bona fide purpose in the organization of SM —
the apparent objective of its organization being
to evade the payment of taxes — and that it was
owned (or the majority of the stocks thereof are
owned) and controlled by Yutivo and is a mere
subsidiary, branch, adjunct, conduit,
instrumentality or alter ego of the latter, the
Court of Tax Appeals — with Judge Roman Umali
not taking part — disregarded its separate
corporate existence and on April 27, 1957,
rendered the decision now complained of. Of the
two Judges who signed the decision, one voted
for the modification of the computation of the
sales tax as determined by the respondent
Collector in his decision so as to give allowance
for the reduction of the tax already paid
(resulting in the reduction of the assessment to
P820,509.91 exclusive of surcharges), while the
other voted for affirmance. The dispositive part
of the decision, however, affirmed the
assessment made by the Collector.
Reconsideration of this decision having been
denied, Yutivo brought the case to this Court
thru the present petition for review.
It is an elementary and fundamental principle of
Deficiency
corporation law that75%
a corporationTotal
is anAmount
entity
Salesand
separate TaxdistinctSurcharge Due
from its stockholders and
from other corporation petitions to which it may
Qrtrconnected. However, "when the notion of
legal entity is used toP773,473.45
P1,031,296.60 defeat public P1,804,769.05
convenience,
justify wrong, protect fraud, or defend crime,"
4th law will regard the corporation as an
234,880.13 176,160.09
association of persons, or in the 411,040.22
case of two
16, merge them into one. (Koppel
[Phil.],P1,266,176.73
Inc. vs. Yatco, 77 Phil. 496,
P949,632.54 citing I
P2,215,809.27
Fletcher Cyclopedia of Corporation, Perm Ed., pp.
135 136; United States vs. Milwaukee
Refrigeration Transit Co., 142 Fed., 247, 255 per
Sanborn, J.) Another rule is that, when the
corporation is the "mere alter ego or business
conduit of a person, it may be disregarded."
(Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the
present case, we are inclined to rule that the
Court of Tax Appeals was not justified in finding
that SM was organized for no other purpose than
to defraud the Government of its lawful
revenues. In the first place, this corporation was
organized in June, 1946 when it could not have
caused Yutivo any tax savings. From that date up
to June 30, 1947, or a period of more than one
year, GM was the importer of the cars and trucks
sold to Yutivo, which, in turn resold them to SM.
During that period, it is not disputed that GM as
importer, was the one solely liable for sales
taxes. Neither Yutivo or SM was subject to the
sales taxes on their sales of cars and trucks. The
sales tax liability of Yutivo did not arise until July
1, 1947 when it became the importer and simply
continued its practice of selling to SM. The
decision, therefore, of the Tax Court that SM was
organized purposely as a tax evasion device runs
counter to the fact that there was no tax to
evade.
Making the observation from a newspaper
clipping (Exh. "T") that "as early as 1945 it was
known that GM was preparing to leave the
Philippines and terminate its business of
importing vehicles," the court below speculated
that Yutivo anticipated the withdrawal of GM
from business in the Philippines in June, 1947.
This observation, which was made only in the
resolution on the motion for reconsideration,
however, finds no basis in the record. On the
other hand, GM had been an importer of cars in
the Philippines even before the war and had but
recently resumed its operation in the Philippines
in 1946 under an ambitious plan to expand its
operation by establishing an assembly plant
here, so that it could not have been expected to
make so drastic a turnabout of not merely
abandoning the assembly plant project but also
totally ceasing to do business as an importer.
Moreover, the newspaper clipping, Exh. "T", was
published on March 24, 1947, and clipping,
merely reported a rumored plan that GM would
abandon the assembly plant project in the
Philippines. There was no mention of the
cessation of business by GM which must not be
confused with the abandonment of the assembly
plant project. Even as respect the assembly plant,
the newspaper clipping was quite explicit in
saying that the Acting Manager refused to
confirm that rumor as late as March 24, 1947,
almost a year after SM was organized.
At this juncture, it should be stated that the
intention to minimize taxes, when used in the
context of fraud, must be proved to exist by clear
and convincing evidence amounting to more
than mere preponderance, and cannot be
justified by a mere speculation. This is because
fraud is never lightly to be presumed. (Vitelli &
Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F
(2d) 786; Budd vs. Commr., 43 F (2d) 509;
Maryland Casualty Co. vs. Palmette Coal Co., 40 F
(2d) 374; Schoonfield Bros., Inc. vs. Commr., 38
BTA 943; Charles Heiss vs. Commr 36 BTA 833;
Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs.
Commr., 114 F. (2d) 548; Moore vs. Commr., 37
BTA 378; National City Bank of New York vs.
Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA
316; Rea Gane vs. Commr., 19 BTA 518). (See
also Balter, Fraud Under Federal Law, pp. 301-
302, citing numerous authorities: Arroyo vs.
Granada, et al., 18 Phil. 484.) Fraud is never
imputed and the courts never sustain findings of
fraud upon circumstances which, at the most,
create only suspicion. (Haygood Lumber &
Mining Co. vs. Commr., 178 F (2d) 769; Dalone
vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it
operated, under circumstance that belied any
intention to evade sales taxes. "Tax evasion" is a
term that connotes fraud thru the use of
pretenses and forbidden devices to lessen or
defeat taxes. The transactions between Yutivo
and SM, however, have always been in the open,
embodied in private and public documents,
constantly subject to inspection by the tax
authorities. As a matter of fact, after Yutivo
became the importer of GM cars and trucks for
Visayas and Mindanao, it merely continued the
method of distribution that it had initiated long
before GM withdrew from the Philippines.
On the other hand, if tax saving was the only
justification for the organization of SM, such
justification certainly ceased with the passage of
Republic Act No. 594 on February 16, 1951,
governing payment of advance sales tax by the
importer based on the landed cost of the
imported article, increased by mark-ups of 25%,
50%, and 100%, depending on whether the
imported article is taxed under sections 186, 185
and 184, respectively, of the Tax Code. Under
Republic Act No. 594, the amount at which the
article is sold is immaterial to the amount of the
sales tax. And yet after the passage of that Act,
SM continued to exist up to the present and
operates as it did many years past in the
promotion and pursuit of the business purposes
for which it was organized.
In the third place, sections 184 to 186 of the said
Code provides that the sales tax shall be
collected "once only on every original sale,
barter, exchange . . , to be paid by the
manufacturer, producer or importer." The use of
the word "original" and the express provision
that the tax was collectible "once only" evidently
has made the provisions susceptible of different
interpretations. In this connection, it should be
stated that a taxpayer has the legal right to
decrease the amount of what otherwise would
be his taxes or altogether avoid them by means
which the law permits. (U.S. vs. Isham 17 Wall.
496, 506; Gregory vs. Helvering 293 U.S. 465,
469; Commr. vs. Tower, 327 U.S. 280; Lawton vs.
Commr 194 F (2d) 380). Any legal means by the
taxpayer to reduce taxes are all right Benry vs.
Commr. 25 T. Cl. 78). A man may, therefore,
perform an act that he honestly believes to be
sufficient to exempt him from taxes. He does not
incur fraud thereby even if the act is thereafter
found to be insufficient. Thus in the case of Court
Holding Co. vs. Commr. 2 T. Cl. 531, it was held
that though an incorrect position in law had been
taken by the corporation there was no
suppression of the facts, and a fraud penalty was
not justified.
The evidence for the Collector, in our opinion,
falls short of the standard of clear and
convincing proof of fraud. As a matter of fact, the
respondent Collector himself showed a great
deal of doubt or hesitancy as to the existence of
fraud. He even doubted the validity of his first
assessment dated November 7, 1959. It must be
remembered that the fraud which respondent
Collector imputed to Yutivo must be related to its
filing of sales tax returns of less taxes than were
legally due. The allegation of fraud, however,
cannot be sustained without the showing that
Yutivo, in filing said returns, did so fully knowing
that the taxes called for therein called for therein
were less than what were legally due.
Considering that respondent Collector himself
with the aid of his legal staff, and after some two
years of investigation and duty of investigation
and study concluded in 1952 that Yutivo's sales
tax returns were correct — only to reverse
himself after another two years — it would seem
harsh and unfair for him to say in 1954 that
Yutivo fully knew in October 1947 that its sales
tax returns were inaccurate.
On this point, one other consideration would
show that the intent to save taxes could not have
existed in the minds of the organizers of SM. The
sales tax imposed, in theory and in practice, is
passed on to the vendee, and is usually billed
separately as such in the sales invoice. As
pointed out by petitioner Yutivo, had not SM
handled the retail, the additional tax that would
have been payable by it, could have been easily
passed off to the consumer, especially since the
period covered by the assessment was a "seller's
market" due to the post-war scarcity up to late
1948, and the imposition of controls in the late
1949.
It is true that the arrastre charges constitute
expenses of Yutivo and its non-inclusion in the
selling price by Yutivo cost the Government
P4.00 per vehicle, but said non-inclusion was
explained to have been due to an inadvertent
accounting omission, and could hardly be
considered as proof of willful channelling and
fraudulent evasion of sales tax. Mere
understatement of tax in itself does not prove
fraud. (James Nicholson, 32 BTA 377, affirmed
90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21)
The amount involved, moreover, is extremely
small inducement for Yutivo to go thru all the
trouble of organizing SM. Besides, the non-
inclusion of these small arrastre charges in the
sales tax returns of Yutivo is clearly shown in the
records of Yutivo, which is uncharacteristic of
fraud (See Insular Lumber Co. vs. Collector, G.R.
No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court
below that SM was actually owned and
controlled by petitioner as to make it a mere
subsidiary or branch of the latter created for the
purpose of selling the vehicles at retail and
maintaining stores for spare parts as well as
service repair shops. It is not disputed that the
petitioner, which is engaged principally in
hardware supplies and equipment, is completely
controlled by the Yutivo, Young or Yu family. The
founders of the corporation are closely related to
each other either by blood or affinity, and most
of its stockholders are members of the Yu
(Yutivo or Young) family. It is, likewise, admitted
that SM was organized by the leading
stockholders of Yutivo headed by Yu Khe Thai. At
the time of its incorporation 2,500 shares worth
P250,000.00 appear to have been subscribed in
five equal proportions by Yu Khe Thai, Yu Khe
Siong, Yu Khe Jin, Yu Eng Poh and Washington
Sycip. The first three named subscribers are
brothers, being the sons of Yu Tien Yee, one of
Yutivo's founders. Yu Eng Poh and Washington
Sycip are respectively sons of Yu Tiong Sing and
Alberto Sycip who are co-founders of Yutivo.
According to the Articles of Incorporation of the
said subscriptions, the amount of P62,500 was
paid by the aforenamed subscribers, but actually
the said sum was advanced by Yutivo. The
additional subscriptions to the capital stock of
SM and subsequent transfers thereof were paid
by Yutivo itself. The payments were made,
however, without any transfer of funds from
Yutivo to SM. Yutivo simply charged the accounts
of the subscribers for the amount allegedly
advanced by Yutivo in payment of the shares.
Whether a charge was to be made against the
accounts of the subscribers or said subscribers
were to subscribe shares appears to constitute a
unilateral act on the part of Yutivo, there being
no showing that the former initiated the
subscription.
The transactions were made solely by and
between SM and Yutivo. In effect, it was Yutivo
who undertook the subscription of shares,
employing the persons named or "charged" with
corresponding account as nominal stockholders.
Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong
and Yu Eng Poh were manifestly aware of these
subscriptions, but considering that they were the
principal officers and constituted the majority of
the Board of Directors of both Yutivo and SM,
their subscriptions could readily or easily be that
of Yutivo's Moreover, these persons were related
to death other as brothers or first cousins. There
was every reason for them to agree in order to
protect their common interest in Yutivo and SM.
The issued capital stock of SM was increased by
additional subscriptions made by various
person's but except Ng Sam Bak and David Sycip,
"payments" thereof were effected by merely
debiting 'or charging the accounts of said
stockholders and crediting the corresponding
amounts in favor of SM, without actually
transferring cash from Yutivo. Again, in this
instance, the "payments" were Yutivo, by
effected by the mere unilateral act of Yutivo a
accounts of the virtue of its control over the
individual persons charged, would necessarily
exercise preferential rights and control directly
or indirectly, over the shares, it being the party
which really undertook to pay or underwrite
payment thereof.
The shareholders in SM are mere nominal
stockholders holding the shares for and in behalf
of Yutivo, so even conceding that the original
subscribers were stockholders bona fide Yutivo
was at all times in control of the majority of the
stock of SM and that the latter was a mere
subsidiary of the former.
True, petitioner and other recorded stockholders
transferred their shareholdings, but the transfers
were made to their immediate relatives, either to
their respective spouses and children or
sometimes brothers or sisters. Yutivo's shares in
SM were transferred to immediate relatives of
persons who constituted its controlling
stockholders, directors and officers. Despite
these purported changes in stock ownership in
both corporations, the Board of Directors and
officers of both corporations remained
unchanged and Messrs. Yu Khe Thai, Yu Khe
Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or
Young family) continued to constitute the
majority in both boards. All these, as observed by
the Court of Tax Appeals, merely serve to
corroborate the fact that there was a common
ownership and interest in the two corporations.
SM is under the management and control of
Yutivo by virtue of a management contract
entered into between the two parties. In fact, the
controlling majority of the Board of Directors of
Yutivo is also the controlling majority of the
Board of Directors of SM. At the same time the
principal officers of both corporations are
identical. In addition both corporations have a
common comptroller in the person of Simeon Sy,
who is a brother-in-law of Yutivo's president, Yu
Khe Thai. There is therefore no doubt that by
virtue of such control, the business, financial and
management policies of both corporations could
be directed towards common ends.
Another aspect relative to Yutivo's control over
SM operations relates to its cash transactions. All
cash assets of SM were handled by Yutivo and all
cash transactions of SM were actually
maintained thru Yutivo. Any and all receipts of
cash by SM including its branches were
transmitted or transferred immediately and
directly to Yutivo in Manila upon receipt thereof.
Likewise, all expenses, purchases or other
obligations incurred by SM are referred to Yutivo
which in turn prepares the corresponding
disbursement vouchers and payments in relation
there, the payment being made out of the cash
deposits of SM with Yutivo, if any, or in the
absence thereof which occurs generally, a
corresponding charge is made against the
account of SM in Yutivo's books. The payments
for and charges against SM are made by Yutivo
as a matter of course and without need of any
further request, the latter would advance all such
cash requirements for the benefit of SM. Any and
all payments and cash vouchers are made on
Yutivo stationery and made under authority of
Yutivo's corporate officers, without any copy
thereof being furnished to SM. All detailed
records such as cash disbursements, such as
expenses, purchases, etc. for the account of SM,
are kept by Yutivo and SM merely keeps a
summary record thereof on the basis of
information received from Yutivo.
All the above plainly show that cash or funds of
SM, including those of its branches which are
directly remitted to Yutivo, are placed in the
custody and control of Yutivo, resources and
subject to withdrawal only by Yutivo. SM's being
under Yutivo's control, the former's operations
and existence became dependent upon the latter.
Consideration of various other circumstances,
especially when taken together, indicates that
Yutivo treated SM merely as its department or
adjunct. For one thing, the accounting system
maintained by Yutivo shows that it maintained a
high degree of control over SM accounts. All
transactions between Yutivo and SM are
recorded and effected by mere debit or credit
entries against the reciprocal account
maintained in their respective books of accounts
and indicate the dependency of SM as branch
upon Yutivo.
Apart from the accounting system, other facts
corroborate or independently show that SM is a
branch or department of Yutivo. Even the
branches of SM in Bacolod, Iloilo, Cebu, and
Davao treat Yutivo — Manila as their "Head
Office" or "Home Office" as shown by their
letters of remittances or other correspondences.
These correspondences were actually received
by Yutivo and the reference to Yutivo as the head
or home office is obvious from the fact that all
cash collections of the SM's branches are
remitted directly to Yutivo. Added to this fact, is
that SM may freely use forms or stationery of
Yutivo
The fact that SM is a mere department or adjunct
of Yutivo is made more patent by the fact that
arrastre conveying, and charges paid for the
"operation of receiving, loading or unloading" of
imported cars and trucks on piers and wharves,
were charged against SM. Overtime charges for
the unloading of cars and trucks as requested by
Yutivo and incurred as part of its acquisition cost
thereof, were likewise charged against and
treated as expenses of SM. If Yutivo were the
importer, these arrastre and overtime charges
were Yutivo's expenses in importing goods and
not SM's. But since those charges were made
against SM, it plainly appears that Yutivo had
sole authority to allocate its expenses even as
against SM in the sense that the latter is a mere
adjunct, branch or department of the former.
Proceeding to another aspect of the relation of
the parties, the management fees due from SM to
Yutivo were taken up as expenses of SM and
credited to the account of Yutivo. If it were to be
assumed that the two organizations are separate
juridical entities, the corresponding receipts or
receivables should have been treated as income
on the part of Yutivo. But such management fees
were recorded as "Reserve for Bonus" and were
therefore a liability reserve and not an income
account. This reserve for bonus were
subsequently distributed directly to and credited
in favor of the employees and directors of Yutivo,
thereby clearly showing that the management
fees were paid directly to Yutivo officers and
employees.
Briefly stated, Yutivo financed principally, if not
wholly, the business of SM and actually extended
all the credit to the latter not only in the form of
starting capital but also in the form of credits
extended for the cars and vehicles allegedly sold
by Yutivo to SM as well as advances or loans for
the expenses of the latter when the capital had
been exhausted. Thus, the increases in the capital
stock were made in advances or "Guarantee"
payments by Yutivo and credited in favor of SM.
The funds of SM were all merged in the cash fund
of Yutivo. At all times Yutivo thru officers and
directors common to it and SM, exercised full
control over the cash funds, policies,
expenditures and obligations of the latter.
Southern Motors being but a mere
instrumentality, or adjunct of Yutivo, the Court of
Tax Appeals correctly disregarded the technical
defense of separate corporate entity in order to
arrive at the true tax liability of Yutivo.
Petitioner contends that the respondent
Collector had lost his right or authority to issue
the disputed assessment by reason of
prescription. The contention, in our opinion,
cannot be sustained. It will be noted that the first
assessment was made on November 7, 1950 for
deficiency sales tax from 1947 to 1949. The
corresponding returns filed by petitioner
covering the said period was made at the earliest
on October 1, as regards the third quarter of
1947, so that it cannot be claimed that the
assessment was not made within the five-year
period prescribed in section 331 of the Tax Code
invoked by petitioner. The assessment, it is
admitted, was withdrawn by the Collector on
insufficiency of evidence, but November 15,
1952 due to insufficiency of evidence, but the
withdrawal was made subject to the approval of
the Secretary of Finance and the Board of Tax
Appeals, pursuant to the provisions of section 9
of Executive Order No. 401-A, series of 1951. The
decision of the previous assessment of
November 7, Collector countermanding the as
1950 was forwarded to the Board of Tax Appeals
through the Secretary of Finance but that official,
apparently disagreeing with the decision, sent it
back for re-investigation. Consequently, the
assessment of November 7, 1950 cannot be
considered to have been finally withdrawn. That
the assessment was subsequently reiterated in
the decision of respondent Collector on
December 16, 1954 did not alter the fact that it
was made seasonably. In this connection, it
would appear that a warrant of distraint and levy
had been issued on March 28, 1951 in relation
with this case and by virtue thereof the
properties of Yutivo were placed under
constructive distraint. Said warrant and
constructive distraint have not been lifted up to
the present, which shows that the assessment of
November 7, 1950 has always been valid and
subsisting.
Anent the deficiency sale tax for 1950,
considering that the assessment thereof was
made on December 16, 1954, the same was
assessed well within the prescribed five-year
period.
Petitioner argues that the original assessment of
November 7, 1950 did not extend the
prescriptive period on assessment. The
argument is untenable, for, as already seen, the
assessment was never finally withdrawn, since it
was not approved by the Secretary of Finance or
of the Board of Tax Appeals. The authority of the
Secretary to act upon the assessment cannot be
questioned, for he is expressly granted such
authority under section 9 of Executive Order No.
401-And under section 79 (c) of the Revised
Administrative Code, he has "direct control,
direction and supervision over all bureaus and
offices under his jurisdiction and may, any
provision of existing law to the contrary not
withstanding, repeal or modify the decision of
the chief of said Bureaus or offices when
advisable in public interest."
It should here also be stated that the assessment
in question was consistently protested by
petitioner, making several requests for
reinvestigation thereof. Under the
circumstances, petitioner may be considered to
have waived the defense of prescription.
"Estoppel has been employed to
prevent the application of the statute of
limitations against the government in
certain instances in which the taxpayer
has taken some affirmative action to
prevent the collection of the tax within
the statutory period. It is generally held
that a taxpayer is estopped to repudiate
waivers of the statute of limitations
upon which the government relied. The
cases frequently involve dissolved
corporations. If no waiver has been
given, the cases usually show come
conduct directed to a postponement of
collection, such, for example, as some
variety of request to apply an
overassessment. The taxpayer has
'benefited' and 'is not in a position to
contest' his tax liability. A definite
representation of implied authority
may be involved, and in many cases the
taxpayer has received the 'benefit' of
being saved from the inconvenience, if
not hardship of immediate collection. "
Conceivably even in these cases a fully
informed Commissioner may err to the
sorrow of the revenues, but generally
speaking, the cases present a strong
combination of equities against the
taxpayer, and few will seriously quarrel
with their application of the doctrine of
estoppel." (Mertens Law of Federal
Income Taxation, Vol. 10-A, pp. 159-
160.)
It is also claimed that section 9 of Executive
Order No. 401-A, series of 1951 — es involving
an original assessment of more than P5,000 —
refers only to compromises and refunds of taxes,
but not to total withdrawal of the assessment.
The contention is without merit. A careful
examination of the provisions of both sections 8
and 9 of Executive Order No. 401-A, series of
1951, reveals the procedure prescribed therein
is intended as a check or control upon the
powers of the Collector of Internal Revenue in
respect to assessment and refunds of taxes. If it
be conceded that a decision of the Collector of
Internal Revenue on partial remission of taxes is
subject to review by the Secretary of Finance and
the Board of Tax Appeals, then with more reason
should the power of the Collector to withdraw
totally an assessment be subject to such review.
We find merit, however, in petitioner's
contention that the Court of Tax Appeals erred in
the imposition of the 5% fraud surcharge. As
already shown in the early part of this decision,
no element of fraud is present.
Pursuant to Section 183 of the National Internal
Revenue Code the 50% surcharge should be
added to the deficiency sales tax "in case a false
or fraudulent return is willfully made." Although
the sales made by SM are in substance by Yutivo
this does not necessarily establish fraud nor the
willful filing of a false or fraudulent return.
The case of Court Holding Co. v. Commissioner of
Internal Revenue (August 9, 1943, 2 TC 531, 541-
549) is in point. The petitioner Court Holding Co.
was a corporation consisting of only two
stockholders, to wit: Minnie Miller and her
husband Louis Miller. The only assets of third
husband and wife corporation consisted of an
apartment building which had been acquired for
a very low price at a judicial sale. Louis Miller,
the husband, who directed the company's
business, verbally agreed to sell this property to
Abe C. Fine and Margaret Fine, husband and wife,
for the sum of $54,000.00, payable in various
installments. He received $1,000.00 as down
payment. The sale of this property for the price
mentioned would have netted the corporation a
handsome profit on which a large corporate
income tax would have to be paid. On the
afternoon of February 23, 1940, when the Millers
and the Fines got together for the execution of
the document of sale, the Millers announced that
their attorney had called their attention to the
large corporate tax which would have to be paid
if the sale was made by the corporation itself. So
instead of proceeding with the sale as planned,
the Millers approved a resolution to declare a
dividend to themselves "payable in the assets of
the corporation, in complete liquidation and
surrender of all the outstanding corporate
stock." The building, which as above stated was
the only property of the corporation, was then
transferred to Mr. and Mrs. Miller who in turn
sold it to Mr. and Mrs. Fine for exactly the same
price and under the same terms as had been
previously agreed upon between the corporation
and the Fines.
The return filed by the Court Holding Co. with
the respondent Commissioner of Internal
Revenue reported no taxable gain as having been
received from the sale of its assets. The Millers,
of course, reported a long term capital gain on
the exchange of their corporate stock with the
corporate property. The Commissioner of
Internal Revenue contended that the liquidating
dividend to stockholders had no purpose other
than that of tax avoidance and that, therefore,
the sale by the Millers to the Fines of the
corporation's property was in substance a sale
by the corporation itself, for which the
corporation is subject to the taxable profit
thereon. In requiring the corporation to pay the
taxable profit on account of the sale, the
Commissioner of Internal Revenue, imposed a
surcharge of 25% for delinquency, plus an
additional surcharge as fraud penalties.
The U. S. Court of Tax Appeals held that the sale
by the Millers was for no other purpose than to
avoid the tax and was, in substance, a sale by the
Court Holding Co., and that, therefore, the said
corporation should be liable for the assessed
taxable profit thereon. The Court of Tax Appeals
also sustained the Commissioner of Internal
Revenue on the delinquency penalty of 25%.
However, the Court of Tax Appeals disapproved
the fraud penalties, holding that an attempt to
avoid a tax does not necessarily establish fraud;
that it is a settled principle that a taxpayer may
diminish his tax liability by means which the law
permits; that if the petitioner, the Court Holding
Co., was of the opinion that the method by which
it attempted to effect the sale in question was
legally sufficient to avoid the imposition of a tax
upon it, its adoption of that methods not subject
to censure; and that in taking a position with
respect to a question of law, the substance of
which was disclosed by the statement indorsed
on it return, it may not be said that that position
was taken fraudulently. We quote in full the
pertinent portion of the decision of the Court of
Tax Appeals: .
". . . The respondent's answer alleges
that the petitioner's failure to report as
income the taxable profit on the real
estate sale was fraudulent and with
intent to evade the tax. The petitioner
filed a reply denying fraud and averring
that the loss reported on its return was
correct to the best of its knowledge and
belief. We think the respondent has not
sustained the burden of proving a
fraudulent intent. We have concluded
that the sale of the petitioner's
property was in substance a sale by the
petitioner, and that the liquidating
dividend to stockholders had no
purpose other than that of tax
avoidance. But the attempt to avoid tax
does not necessarily establish fraud. It
is a settled principle that a taxpayer
may diminish his liability by any means
which the law permits. United States v.
Isham, 17 Wall. 496; Gregory v.
Helvering, supra; Chrisholm v.
Commissioner, 79 Fed. (2d) 14. If the
petitioner here was of the opinion that
the method by which it attempted to
effect the sale in question was legally
sufficient to avoid the imposition of tax
upon it, its adoption of that method is
not subject to censure. Petitioner took a
position with respect to a question of
law, the substance of which was
disclosed by the statement endorsed on
its return. We can not say, under the
record before us, that that position was
taken fraudulently. The determination
of the fraud penalties is reversed."
When GM was the importer and Yutivo, the
wholesaler, of the cars and trucks, the sales tax
was paid only once and on the original sales by
the former and neither the latter nor SM paid
taxes on their subsequent sales. Yutivo might
have, therefore, honestly believed that the
payment by it, as importer, of the sales tax was
enough as in the case of GM Consequently, in
filing its return on the basis of its sales to SM and
not on those by the latter to the public, it cannot
be said that Yutivo deliberately made a false
return for the purpose of defrauding the
government of its revenues which will justify the
imposition of the surcharge penalty.
We likewise find meritorious the contention that
the Tax Court erred in computing the alleged
deficiency sales tax on the selling price of SM
without previously deducting therefrom the
sales tax due thereon. The sales tax provisions
(sees. 184.186, Tax Code) impose a tax on
original sales measured by "gross selling price"
or "gross value in money". These terms, as
interpreted by the respondent Collector, do not
include the amount of the sales tax, if invoiced
separately. Thus, General Circular No. 431 of the
Bureau of Internal Revenue dated July 29, 1939,
which implements sections 184.186 of the Tax
Code provides: "
. . .'Gross selling price' or gross value in
money' of the articles sold, bartered,
exchanged, transferred as the term is
used in the aforecited sections
(sections 184, 185 and 186) of the
National Internal Revenue Code, is the
total amount of money or its equivalent
which the purchaser pays to the vendor
to receive or get the goods. However, if
a manufacturer, producer, or importer,
in fixing the gross selling price of an
article sold by him has included an
amount intended to cover the sales tax
in the gross selling price of the articles,
the sales tax shall be based on the gross
selling price less the amount intended
to cover the tax, if the same is billed to
the purchaser as a separate item.
General Circular No. 440 of the same Bureau
reads:
Amount intended to cover the tax must
be billed as a separate em so as not to
pay a tax on the tax. — On sales made
after he third quarter of 1939, the
amount intended to cover the sales tax
must be billed to the purchaser as
separate items in the, invoices in order
that the reduction thereof from the
gross ailing price may be allowed in the
computation of the merchants'
percentage tax on the sales. Unless
billed to the purchaser as a separate
item in the invoice, the amounts
intended to cover the sales tax shall be
considered as part of the gross selling
price of the articles sold, and
deductions thereof will not be allowed,
(Cited in Dalupan, Nat. Int. Rev. Code,
Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its
sales to SM, and as separately billed, the sales
taxes did not form part of the "gross selling
price" as the measure of the tax. Since Yutivo had
previously billed the sales tax separately in its
sales invoices to SM General Circulars Nos. 431
and 440 should be deemed to have been
complied. Respondent Collector's method of
computation, as opined by Judge Nable in the
decision complained of —
 . . . is unfair, because . . .(it is) practically
Collector by less than the statutory requirement
imposing tax on a tax already paid. of at least two votes of its judges. Anent this
Besides, the adoption of the procedure contention, section 2 of Republic Act No. 1125,
would in certain cases elevate the creating the Court of Tax Appeals, provides that
bracket under which the tax is based. "Any two judges of the Court of Tax Appeals shall
The late payment is already penalized, constitute a quorum, and the concurrence of two
thru the imposition of surcharges, by judges shall be necessary to promulgate decision
adopting the theory of the Collector, we thereof. . . . " It is on record that the present case
will be creating an additional penalty was heard by two judges of the lower court. And
not contemplated by law." while Judge Nable expressed his opinion on the
issue of whether or not the amount of the sales
If the taxes based on the sales of SM are tax should be excluded from the gross selling
computed in accordance with Gen. Circulars Nos. price in computing the deficiency sales tax due
431 and 440 the total deficiency sales taxes, from the petitioner, the opinion, apparently, is
exclusive of the 25% and 50% surcharges for merely an expression of his general or "private
late payment and for fraud, would amount only sentiment" on the particular issue, for he
to P820,549.91 as shown in the following concurred the dispositive part of the decision. At
computation: any rate, assuming that there is no valid decision
for lack of concurrence of two judges, the case
was submitted for decision of the court below on
Gross Sales of Sales Taxes March
Due and Total and
28, 1957 Gross
underSelling
section 13 of Republic
Rates of
Vehicles Exclusive of Computed under
Act Gen. cases
1125, Price brought
Chargedbefore
to thesaid court hall be
Sales Tax
Sales Tax Cir Nos. 431 decided
& 400 within Public30 days after submission thereof.
5% P11,912,219.57 P595,610.98 "If no decision is rendered by the Court within
P12,507,83055
thirty days from the date a case is submitted for
7% 909,559.50 63,669.16 decision, the 973,228.66
party adversely affected by said
10% 2,618,695.28 261,869.53 ruling, order or decision, may file with said Court
2,880,564.81
a notice of his intention to appeal to the Supreme
15% 3,602,397.65 540,359.65 4,142,757.30
Court, and if no decision has as yet been
20% 267,150.50 53,430.10 rendered by 320,580.60
the Court, the aggrieved party may
30% 837,146.97 251,114.09 file directly with the Supreme Court an appeal
1,088,291.06
from said ruling, order or decision,
50% 74,244.30 37,122.16 notwithstanding 111,366.46the foregoing provisions of this
75% 8,000.00 6,000.00section." The case having been brought before us
14,000.00
on appeal, the question raised by petitioner as
TOTAL P20,220,413.77 P1,809,205.67become purelyP22,038,619.44
academic.

Less Taxes Paid by Yutivo
Deficiency Tax still due
This is the exact amount which, according to
Presiding Judge Nable of the Court of Tax
Appeals, Yutivo would pay, exclusive of the
surcharges.
988,655.76 IN VIEW OF THE FOREGOING, the decision of the
P820,549.91 Court of Tax Appeals under review is hereby
modified in that petitioner shall be ordered to
pay to respondent the sum of P820,549.91, plus
25% surcharge thereon for late payment.
So ordered without costs.

Bengzon, Labrador, Concepcion, Reyes, J.B.L.,

Petitioner finally contends that the Court of Tax
Barrera and Paredes, JJ., concur.
Appeals erred or acted in excess of its
Padilla, J., took no part.
jurisdiction in promulgating judgment for the
affirmance of the decision of respondent
Republic of the Philippines Undisputed Facts. The parties submitted a partial two other agreements (Exhibits B and Directors of Liddell & Co., stock dividends were
SUPREME COURT stipulation of facts, each reserving the right to C) dated May 24, 1947 and June 3, again declared. As a result of said declaration
Manila present additional evidence. 1948, wherein Frank Liddell and in accordance with the agreements, Exhibits,
transferred (On June 7, 1948) to A, B, and C, the stockholdings in the company
EN BANC Said undisputed facts are substantially as various employees of Liddell & Co. appeared to be:
follows: shares of stock.
G.R. No. L-9687 June 30, 1961 No. of
At the annual meeting of stockholders Name Amount
The petitioner, Liddell & Co. Inc., Shares
(Liddell & Co. for short) is a domestic of Liddell & Co. held on March 9, 1948,
LIDDELL & CO., INC., petitioner-appellant, a 100% stock dividend was declared, Frank Liddell 19,738 P1,973,8
vs. corporation establish in the Philippines
on February 1, 1946, with an thereby increasing the issued capital Irene Liddell 1 100
THE COLLECTOR OF INTERNAL stock of aid corporation from
REVENUE, respondent-appellee. authorized capital of P100,000 divided Mercedes Vecin 1 100
into 1000 share at P100 each. Of this P1,000.000 to P 3,000,000 which
authorized capital, 196 shares valued at increase was duly approved by the Charles Kurz 2,215 221,500
Ozaeta, Lichauco and Picazo for petitioner- P19,600 were subscribed and paid by Securities and Exchange Commission E.J. Darras 2,215 221,500
appellant. Frank Liddell while the other four on June 7, 1948. Frank Liddell
Office of the Solicitor General for respondent- subscribed to and paid 20% of the Angel Manzano 1,810 181,000
shares were in the name of Charles
appellee. Kurz, E.J. Darras, Angel Manzano and increase of P400,000. He paid 25% Julian Serrano 1,700 170,000
Julian Serrano at one shares each. Its thereof in the amount of P100,000 and
the balance of P3,000,000 was merely E. Hasim 830 83,000
BENGZON, C.J.: purpose was to engage in the business
of importing and retailing Oldsmobile debited to Frank Liddell-Drawing G. W. Kernot 1,490 149,00
and Chevrolet passenger cars and GMC Account and credited to Subscribed
Statement. This is an appeal from the decision of 30,000 P3,000,0
and Chevrolet trucks.. Capital Stock on December 11, 1948.
the Court of Tax Appeals imposing a tax
deficiency liability of P1,317,629.61 on Liddell & On the basis of the agreement Exhibit A, (May,
Co., Inc. On January 31, 1947, with the limited On March 8, 1949, stock dividends
were again issued by Liddell & Co. and 1947) "40%" of the earnings available for
paid-in capital of P20,000, Liddell & Co. dividends accrued to Frank Liddell although at
was able to declare a 90% stock in accordance with the agreements,
Said Company lists down several issues which Exhibits A, B, and C, the stocks of said the time of the execution of aid instrument,
may be boiled to the following: dividend after which declaration on, Frank Liddell owned all of the shares in said
Frank Liddells holding in the Company company stood as follows:
corporation. 45% accrued to the employees,
increased to 1,960 shares and the parties thereto; Kurz 12-1/2%; Darras 12-1/2%;
(a) Whether or not Judge Umali of the employees, Charles Kurz E.J. Darras, No. of
Tax Court below could validly Angel Manzano and Julian Serrano at Name Amount A. Manzano 12-1/2% and Julian Serrano 7-1/2%.
Per Cent
participate in the making of the Shares The agreement Exhibit A was also made
10 share each. The declaration of stock retroactive to 1946. Frank Liddell reserved the
decision; dividend was followed by a resolution Frank Liddell 13,688 P1,368,800 72.00%
right to reapportion the 45% dividends
increasing the authorized capital of the Irene Liddell 1 100 .01% to the employees in the future for the
pertaining
(b) Whether or not Liddell & Co. Inc., company to P1,000.000 which the purpose
Mercedes Vecin 1 100 .01%of including such other faithful and
and the Liddell Motors, Inc. are Securities & Exchange Commission efficient employees as he may subsequently
(practically) identical corporations, the approved on March 3, 1947. Upon such Charles Kurz 1,225 122,500 6.45%
designate. (As a matter of fact, Frank Liddell did
latter being merely .the alter ego of the approval, Frank Liddell subscribed to E.J. Darras 1,225 122,500so designate
6.45% two additional employees namely:
former; 3,000 additional shares, for which he E. Hasim and G. W. Kernot). It was for such
paid into the corporation P300,000 so Angel Manzano 1,150 115,000 6.06%
inclusion of future faithful employees that
(c) Whether or not, granting the that he had in his own name 4,960 Julian Serrano 710 71,000 Exhibits
3.74%
B-1 and C were executed. As per Exhibit
identical nature of the corporations, the shares. C, dated May 13, 1948, the 45% given by Frank
E. Hasim 500 50,000 2.64%
assessment of tax liability, including the Liddell to his employees was reapportioned as
surcharge thereon by the Court of Tax On May 24, 1957, Frank Liddell, on one G. W. Kernot 500 50,000follows:2.64%
C. Kurz — 12,%; E. J. Darras — 12%; A.
Appeals, is correct. hand and Messrs. Kurz, Darras, 19,000 Manzano
P1,900,000 — l2%; J. Serrano — 3-1/2%; G. W.
100.00%
Manzano and Serrano on the other, Kernot — 2%.
executed an agreement (Exhibit A)
which was further supplemented by On November 15, 1948, in accordance with a
resolution of a special meeting of the Board of
Exhibit B contains the employees' definition in
detail of the manner by which they sought to
prevent their share-holdings from being
transferred to others who may be complete
strangers to the business on Liddell & Co.
From 1946 until November 22, 1948 when the
purpose clause of the Articles of Incorporation of
Liddell & Co. Inc., was amended so as to limit its
business activities to importations of
automobiles and trucks, Liddell & Co. was
engaged in business as an importer and at the
same time retailer of Oldsmobile and Chevrolet
passenger cars and GMC and Chevrolet trucks.
On December 20, 1948, the Liddell Motors, Inc.
was organized and registered with the Securities
and Exchange Commission with an authorized
capital stock of P100,000 of which P20,000 was
subscribed and paid for as follows: Irene Liddell
wife of Frank Liddell 19,996 shares and Messrs.
Marcial P. Lichauco, E. K. Bromwell, V. E. del
Rosario and Esmenia Silva, 1 share each.
At about the end of the year 1948, Messrs.
Manzano, Kurz and Kernot resigned from their
respective positions in the Retail Dept. of Liddell
& Co. and they were taken in and employed by
Liddell Motors, Inc.: Kurz as Manager-Treasurer,
Manzano as General Sales Manager for cars and
Kernot as General Sales Manager for trucks.
Beginning January, 1949, Liddell & Co. stopped
retailing cars and trucks; it conveyed them
instead to Liddell Motors, Inc. which in turn sold
the vehicles to the public with a steep mark-up.
Since then, Liddell & Co. paid sales taxes on the
basis of its sales to Liddell Motors Inc.
considering said sales as its original sales.
Upon review of the transactions between Liddell
& Co. and Liddell Motors, Inc. the Collector of
Internal Revenue determined that the latter was
but an alter ego of Liddell & Co. Wherefore, he
concluded, that for sales tax purposes, those
sales made by Liddell Motors, Inc. to the public
were considered as the original sales of Liddell &
Co. Accordingly, the Collector of Internal
Revenue assessed against Liddell & Co. a sales
tax deficiency, including surcharges, in the
amount of P1,317,629.61. In the computation,
the gross selling price of Liddell Motors, Inc. to
the general public from January 1, 1949 to
September 15, 1950, was made the basis without
deducting from the selling price, the taxes
already paid by Liddell & Co. in its sales to the
Liddell Motors Inc.
The Court of Tax Appeals upheld the position
taken by the Collector of Internal Revenue.
A. Judge Umali: Appellant urges the
disqualification on of Judge Roman M. Umali to
participate in the decision of the instant case
because he was Chief of the Law Division, then
Acting Deputy Collector and later Chief Counsel
of the Bureau of Internal Revenue during the
time when the assessment in question was
made.1 In refusing to disqualify himself despite
admission that had held the aforementioned
offices, Judge Umali stated that he had not in any
way participated, nor expressed any definite
opinion, on any question raised by the parties
when this case was presented for resolution
before the said bureau. Furthermore, after
careful inspection of the records of the Bureau,
he (Judge Umali as well as the other members of
the court below), had not found any indication
that he had expressed any opinion or made any
decision that would tend to disqualify him from
participating in the consideration of the case in
the Tax Court.
At this juncture, it is well to consider that
petitioner did not question the truth of Judge
Umali's statements. In view thereof, this Tribunal
is not inclined to disqualify said judge. Moreover,
in furtherance of the presumption of the judge's
moral sense of responsibility this Court has
adopted, and now here repeats, the ruling that
the mere participation of a judge in prior
proceedings relating to the subject in the
capacity of an administrative official does not
necessarily disqualify him from acting as judge.2
Appellant also contends that Judge Umali signed
the said decision contrary to the provision of
Section 13, Republic Act No. 1125;3 that whereas
the case was submitted for decision of the Court
of Tax Appeals on July 12, 1955, and the decision
of Associate Judge Luciano and Judge Nable were
both signed on August 11, 1955 (that is, on the
last day of the 30-day period provided for in
Section 13, Republic Act No. 1125), Judge Umali
signed the decision August 31, 1955 or 20 days
after the lapse of the 30-day period allotted by
law.
By analogy it may be said that inasmuch as in
Republic Act No. 1125 (law creating the Court of
Tax Appeals) like the law governing the
procedure in the court of Industrial Relations,
there is no provision invalidating decisions
rendered after the lapse of 30 days, the
requirement of Section 13, Republic Act No.
1125 should be construed as directory.4
Besides as pointed out by appellee, the third
paragraph of Section 13 of Republic Act No. 1125
(quoted in the margin)5 confirms this view;
because in providing for two thirty-day periods,
the law means that decision may still be
rendered within the second period of thirty days
(Judge Umali signed his decision within that
period).
B. Identity of the two corporations: On the
question whether or not Liddell Motors, Inc. is
the alter ego of Liddell & Co. Inc., we are fully
convinced that Liddell & Co. is wholly owned by
Frank Liddell. As of the time of its organization,
98% of the capital stock belonged to Frank
Liddell. The 20% paid-up subscription with
which the company began its business was paid
by him. The subsequent subscriptions to the
capital stock were made by him and paid with
his own money.
These stipulations and conditions appear in
Exhibit A: (1) that Frank Liddell had the
authority to designate in the future the employee
who could receive earnings of the corporation; to
apportion among the stock holders the share in
the profits; (2) that all certificates of stock in the
names of the employees should be deposited
with Frank Liddell duly indorsed in blank by the
employees concerned; (3) that each employee
was required to sign an agreement with the
corporation to the effect that, upon his death or
upon his retirement or separation for any cause
whatsoever from the corporation, the said
corporation should, within a period of sixty days
therefor, have the absolute and exclusive option
to purchase and acquire the whole of the stock
interest of the employees so dying, resigning,
retiring or separating.
These stipulations in our opinion attest to the
fact that Frank Liddell also owned it. He supplied
the original his complete control over the
corporation.
As to Liddell Motors, Inc. we are fully persuaded
that Frank Liddell also owned it. He supplied the
original capital funds.6 It is not proven that his
wife Irene, ostensibly the sole incorporator of
Liddell Motors, Inc. had money of her own to pay
for her P20,000 initial subscription.7 Her income
in the United States in the years 1943 and 1944
and the savings therefrom could not be enough
to cover the amount of subscription, much less to
operate an expensive trade like the retail of
motor vehicles. The alleged sale of her property
in Oregon might have been true, but the money
received therefrom was never shown to have
been saved or deposited so as to be still available
at the time of the organization of the Liddell
Motors, Inc.
The evidence at hand also shows that Irene
Liddell had scant participation in the affairs of
Liddell Motors, Inc. She could hardly be said to
possess business experience. The income tax
forms record no independent income of her own.
As a matter of fact, the checks that represented
her salary and bonus from Liddell Motors, Inc.
found their way into the personal account of
Frank Liddell. Her frequent absences from the
country negate any active participation in the
affairs of the Motors company.
There are quite a series of conspicuous
circumstances that militate against the separate
and distinct personality of Liddell Motors, Inc.
from Liddell & Co.8 We notice that the bulk of the
business of Liddell & Co. was channeled through
Liddell Motors, Inc. On the other hand, Liddell
Motors, Inc. pursued no activities except to
secure cars, trucks, and spare parts from Liddell
& Co. Inc. and then sell them to the general
public. These sales of vehicles by Liddell & Co. to
Liddell Motors, Inc. for the most part were
shown to have taken place on the same day that
Liddell Motors, Inc. sold such vehicles to the
public. We may even say that the cars and trucks
merely touched the hands of Liddell Motors, Inc.
as a matter of formality.
During the first six months of 1949, Liddell & Co.
issued ten (10) checks payable to Frank Liddell
which were deposited by Frank Liddell in his
personal account with the Philippine National
Bank. During this time also, he issued in favor of
Liddell Motors, Inc. six (6) checks drawn against
his personal account with the same bank. The
checks issued by Frank Liddell to the Liddell
Motors, Inc. were significantly for the most part
issued on the same day when Liddell & Co. Inc.
issued the checks for Frank Liddell9 and for the
same amounts.
It is of course accepted that the mere fact that
one or more corporations are owned and
controlled by a single stockholder is not of itself
sufficient ground for disregarding separate
corporate entities. Authorities10 support the rule
that it is lawful to obtain a corporation charter,
even with a single substantial stockholder, to
engage in a specific activity, and such activity
may co-exist with other private activities of the
stockholder. If the corporation is a substantial
one, conducted lawfully and without fraud on
another, its separate identity is to be respected.
Accordingly, the mere fact that Liddell & Co. and
Liddell Motors, Inc. are corporations owned and
controlled by Frank Liddell directly or indirectly
is not by itself sufficient to justify the disregard
of the separate corporate identity of one from
the other. There is, however, in this instant case,
a peculiar consequence of the organization and
activities of Liddell Motors, Inc.
Under the law in force at the time of its
incorporation the sales tax on original sales of
cars (sections 184, 185 and 186 of the National
Internal Revenue Code), was progressive, i.e.
10% of the selling price of the car if it did not
exceed P5000, and 15% of the price if more than
P5000 but not more than P7000, etc. This
progressive rate of the sales tax naturally would
tempt the taxpayer to employ a way of reducing
the price of the first sale. And Liddell Motors, Inc.
was the medium created by Liddell & Co. to
reduce the price and the tax liability.
Let us illustrate: a car with engine motor No.
212381 was sold by Liddell & Co. Inc. to Liddell
Motors, Inc. on January 17, 1948 for
P4,546,000.00 including tax; the price of the car
was P4,133,000.23, the tax paid being P413.22,
at 10%. And when this car was later sold (on the
same day) by Liddell Motors, Inc. to P.V. Luistro
for P5500, no more sales tax was paid.11 In this
price of P5500 was included the P413.32
representing taxes paid by Liddell & Co. Inc. in
the sale to Liddell Motors, Inc. Deducting
P413.32 representing taxes paid by Liddell & Co.,
Inc. the price of P5500, the balance of P5,087.68
would have been the net selling price of Liddell &
Co., Inc. to the general public (had Liddell
Motors, Inc. not participated and intervened in
the sale), and 15% sales tax would have been
due. In this transaction, P349.68 in the form of
taxes was evaded. All the other transactions
(numerous) examined in this light will inevitably
reveal that the Government coffers had been
deprived of a sizeable amount of taxes.
As opined in the case of Gregory v.
Helvering,12 "the legal right of a taxpayer to
decrease the amount of what otherwise would
be his taxes, or altogether avoid them by means
which the law permits, cannot be doubted." But,
as held in another case,13 "where a corporation is
a dummy, is unreal or a sham and serves no
business purpose and is intended only as a blind,
the corporate form may be ignored for the law
cannot countenance a form that is bald and a
mischievous fiction."
Consistently with this view, the United States
Supreme Court14 held that "a taxpayer may gain
advantage of doing business thru a corporation if
he pleases, but the revenue officers in proper
cases, may disregard the separate corporate payment and 6% interest thereon from the time
entity where it serves but as a shield for tax the judgment becomes final.
evasion and treat the person who actually may
take the benefits of the transactions as the As it appears that, during the pendency of this
person accordingly taxable." litigation appellant paid under protest to the
Government the total amount assessed by the
Thus, we repeat: to allow a taxpayer to deny tax Collector, the latter is hereby required to return
liability on the ground that the sales were made the excess to the petitioner. No costs.
through an other and distinct corporation when
it is proved that the latter is virtually owned by
Padilla, Labrador, Concepcion, Reyes, J.B.L.,
the former or that they are practically one and Barrera, Paredes, Dizon, De Leon and Natividad,
the same is to sanction a circumvention of our JJ., concur.
tax laws.15
C. Tax liability computation: In the Yutivo
case16 the same question involving the
computation of the alleged deficiency sales tax
has been raised. In accordance with our ruling in
said case we hold as correctly stated by Judge
Nable in his concurring and dissenting opinion
on this case, that the deficiency sales tax should
be based on the selling price obtained by Liddell
Motors, Inc. to the public AFTER DEDUCTING
THE TAX ALREADY PAID BY LIDDELL & CO., INC.
in its sales to Liddell Motors, Inc.
On the imposition of the 50% surcharge by
reason of fraud, we see that the transactions
between Liddell Motors Inc. and Liddell & Co.,
Inc. have always been embodied in proper
documents, constantly subject to inspection by
the tax authorities. Liddell & Co., Inc. have
always made a full report of its income and
receipts in its income tax returns.
Paraphrasing our decision in the Yutivo case, we
may now say, in filing its return on the basis of
its sales to Liddell Motors, Inc. and not on those
by the latter to the public, it cannot be held that
the Liddell & Co., Inc. deliberately made a false
return for the purpose of defrauding the
government of its revenue, and should suffer a
50% surcharge. But penalty for late payment
(25%) should be imposed.
In view of the foregoing, the decision appealed
from is hereby modified: Liddell & Co., Inc. is
declared liable only for the amount of
P426,811.67 with 25% surcharge for late
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22614 August 29, 1969
RAMIREZ TELEPHONE
CORPORATION, petitioner,
vs.
BANK OF AMERICA, E.F. HERBOSA, THE
SHERIFF OF MANILA and THE COURT OF
APPEALS,respondents.
Quijano and Arroyo, for petitioner.
Lichauco, Picazo and Agcaoili for respondent
Bank of America.
Vicente M. Magpoc for respondent E.F. Herbosa.
Fiscal Eulogio S. Serrano for respondent Sheriff of
Manila.
CAPISTRANO, J.:
This is a petition for review on certiorari of a
decision of the Court of Appeals of February 27,
1964, wherein the judgment of the lower court
was reversed and another entered dismissing
the complaint of plaintiff, now petitioner,
Ramirez Telephone Corporation, and ordering it
to pay to defendant, now respondent, Bank of
America, the sum of P500.00 and to the third-
party defendant E.F. Herbosa, now likewise
respondent, the same amount, both in the
concept of attorney's fees, the costs being
adjudged likewise against petitioner. The
judgment of the Court of First Instance which
was reversed by the Court of Appeals reads as
follows:1
In view of the foregoing considerations,
judgment is hereby rendered in favor of
the plaintiff and against the defendant
Bank of America ordering the latter to
pay the former the sum of P3,000.00 in
the form of actual damages, and to pay
the costs of these proceedings.
Likewise, judgment is hereby rendered
sentencing the third-party defendant,
E.F. Herbosa, to indemnify or
reimburse the third-party plaintiff,
Bank of America, any sum or sums
which the latter may pay the plaintiff
by virtue of this judgment.
The third-party complaint against the
Sheriff of Manila as well as the
counterclaim of defendant Bank of
America and third-party defendant E.F.
Herbosa are hereby ordered dismissed.
The facts as found by the Court of Appeals, which
we cannot review are set forth in its decision,
thus:2
Resultando: Que los hechos al parecer,
no son muy embrollados; el
demandado, Herbosa era y es dueno del
edificio No. 612, Int. 3 Sta. Mesa; se lo
habia dado en arrendamiento a Ruben
R. Ramirez, y como este era el
presidente de la Ramirez Telephone
Corporation, el taller de la corporacion
aunque su oficina central estaba en la
Escolta, Natividad Building, Exh. D. fue
trasladado al local: pero habiendose
amontonado los alquilares sin pagar,
Herbosa presento demanda de
desahucio contra Ramirez en el Juzgado
Municipal de Manila el 10 de
Noviembre, 1949, y elevada la causa al
Juzgado del 1.a Instancia, Herbosa pudo
conseguir decision favorable alli el 14
de Octubre, 1950, pero en la vispera de
la promulgacion de la sentencia a su
favor habia ya conseguido
mandamiento de embargo preventivo
contra Ramirez, Exh. A, y el mismo,
servido al Bank of America el 13 de
Octubre, 1950, Exh. 2, lease como sigue:
Civil Case No. 10620
E.F. Herbosa, Plaintiff
-- versus -- GARNISHMENT
Ruben R. Ramirez, Defendant
To: Bank of America
Manila
Greetings:
You and each of you are hereby notified
that, by virtue of an order of
attachment issued by the Court of First
Instance of Manila, copy of which is
hereto attached, levy is hereby made
(or attachment is hereby levied) upon
all the goods, effects, interests, credits,
money, stocks, shares, any interests in
stocks and shares and all debts owing
by you to the defendant, Ruben R.
Ramirez ---------, in the above entitled
case, and any other personal property
in your possession or under your
control, belonging to the said defendant
--------- on this date, to cover the
amount of P2,400.00 and specially the
... .
xxx xxx xxx
Manila, Philippines, October 13, 1950
MACARIO M. OFILADA
Sheriff of Manila
(Exh. 2);
y fue contestado por el banco el mismo
dia de la siguiente manera:
Dear Sir:
In reply to your Garnishment of
October 13, 1950, issued under the
above-subject case, we wish to inform
you that we do not hold any fund in the
name of the defendant, Ruben R.
Ramirez.
Yours very truly, (Exh. 3);
pero el Sheriff reitero el embargo el 17
de Octubre, 1950, Exh. B, notificando al
Bank of America de que quedaba
embargado,
"... the interest or
participation which the
defendant Ruben R. Ramirez
may or might have in the
deposit of the Ramirez
Telephone, Inc., with that
Bank sufficient to cover the
said amount of P2,400.00";
Exh. B; y
la institucion bancaria en contestacion
al Sheriff, de fecha 17 de Octubre, 1950
o sea el mismo dia, hizo constar que:
"... we are holding the amount
of P2,400.00 in the name of
the Ramirez Telephone, Inc.
subject to your further
orders," Exh. G;
es decir acato la notificacion del
embargo de los fondos de la Ramirez
Telephone; ahora bien, recuerdase de
que en aquella fecha, 17 de Octubre,
1950, es Ramirez Telephone tenia en
deposito con el Bank of America, la
suma de P4,789.53, Exh. 9; de manera
que con el embargo, se redujo los
fondos libres a la cantidad de
P2,389.53; pero el dia siguiente, el
Ramirez Telephone retiro la suma de
P1,500.00, quedando por tanto como
ultimo balance, nada mas que unos
P889.00; de esto surgio la presente
contienda, pues, el 19 de Octubre, 1950,
la Ramirez Telephone por medio de su
presidente, el mismo demandado,
Ruben Ramirez, ya mencionado,
habiendo expedido el 19 de Octubre,
1950, otro cheque en la suma de
P2,320.00 a favor de la Ray Electronics,
en pago de ciertos equipos vendidos
por este ultimo, Exhs. 15, 17, L, el
cheque Exh. N, este cheque al ser
presentado a la Bank of America, fue
rechazado por lo que el abogado de la
Ramirez Telephone el 23 de Octubre,
1950, envio carta de requerimiento al
Bank of America, Exh. 14, manifestando
que su cliente habia sufrido
"considerable damage and
embarrassment," y advirtiendole que si
no se le diera completa satisfaccion el
dia siguiente, el presentaria la demanda
correspondiente, "without further
notice," Exh. 14; esta carta la contesto
la institucion bancaria el 24 de Octubre,
1950, alegando que,
"With reference to your letter
dated October 23, 1950, in
which you are writing in
behalf of the Ramirez
Telephone Corporation, it is
suggested that you obtain a
release from the Court on
Civil Case No. 10620, Ruben E.
Ramirez, defendant.
"This Bank is acting only in
accordance with the
garnishment and has no
interest whatsoever in the
funds held," Exh. 15;
pero conforme con su advertencia, el
abogado dela Ramirez Telephone, Inc.,
incoo esta accion el 28 de Octubre,
cuatro dias despues; y el motivo
deaccion se de hace consistir en que el
banco,
"... knows or should have
known that Ruben N. Ramirez
the defendant in said Civil
Case and whose property or
fund was ordered attached
has no personal deposit in
that bank and that the
Ramirez Telephone
Corporation is entirely a
distinct and separate entity
regardless of the fact that
Ruben R. Ramirez happens to
be its President and General
Manager.' par. 4, demanda; y
alegando que con motivo de
ello y la siguiente devolucion
de su cheque a favor de la Ray
Electronics sin pagar, esta
habia cancelado su pedido
para los equipos necesarios
en la construccion de sus
lineas telefonicas en la region
bicolana, asi que todas sus
operaciones se habian
quedado paralizadas, par.
5 id.; la demandada Bank of
America, emplazada de la
demandada, presento mocion
de sobresimiento, que
denegada, el 4 de Diciembre,
1950, el banco sometio su
contestacion el 23 de
Diciembre, 1950 con
reconvencion para despues
presentar demanda contra el
Sheriff, el 25 de Agosto, 1953,
y Contra Herbosa, el 16 de
Agosto, 1955; y este ultimo a
su vez en contestacion,
presento contra reclamacion o
mejor dicho, reconvencion
contra la misma demandante,
Ramirez Telephone, y tambien
contra el Bank of America, el
10 de Septiembre, 1955, y el
Juzgado Inferior, despues de
la vista, como ya se ha dicho,
dictamino en favor de la
demandante contra el Bank of
America en la contra-
demanda de este contra
aquel; ... ."
It was further found by the Court of Appeals:3
Considerando: Que el testimonio de
Estanislao Herbosa al efecto de que; si
bien Ruben R. Ramirez era su inquilino
al principio, pero es que mas tarde, este
lo habia manifestado que "the shop of
company was established downstairs,"
e decir que la Ramirez Telephone
Corporation a la verdad ocupaba el
local alquilado, tanto que Ruben R.
Ramirez solia pagar el alquilar en
cheques de la Ramirez Telephone
Corporation, y esta declaracion, t.n. 10
y 11, 25 June 1956, estando
corroborada no solamente por el Exh.
12, en donde Ruben R. Ramirez, en
papel con el embrete de la Ramirez
Telephone, habia enviado el abogado
de Herbosa, el cheque No. C-78900,
manifestando en la carta de que:
In accordance with your
agreement yesterday with my
attorney, Mr. Jose L. de Leon, I
am sending you herewith
check No. C-78900 for the
amount of P812.60, rentals for
the premises I am occupying
at the rate of P161.00 a month
for the period from February
1, 1949 to June 30, 1949, both
dates, inclusive, plus P7.00 for
the court costs.' Exh. 12;
y esta carta, leida en relacion con el
Exh. 3, en donde se ve que Ruben R.
Ramirez y tenia fondos depositados en
el banco mencionado, Bank of America,
asi que resulta evidente que lo fondos
de la Ramirez Telephone los eran a la
verdad, fondos de que buenasanta
podia disponer su Presidente, Ruben R.
Ramirez, para el pago de los alquilares
por el debidos a Herbosa, y luego,
tambien resulta evidente de que la casa
por el alquilada Ramirez Telephone, y
estos hechos agregados el otro hecho
tambien probado, de que el 75% de las
acciones de la compania pertenecia a
Ruben Ramirez y su esposa Rizalina P.
de Ramirez, Exh. E, todos estos no
pueden menos de justificar la
conclusion de que el embargo de los
fondos de la Ramirez Telephone por y
en virtud de un mandamiento judicial
de embargo contra Ruben R. Ramirez,
especialmente teniendo en cuenta que
el embargo solo abarcaba,
"The interest or participation
which the defendant Ruben R.
Ramirez may or might have in
the deposit of the Ramirez
Telephone, Inc., in the amount
of P2,400.00" Exh. B;
cuando entonces estaba depositada la
cantidad de P4,857.28, Exh. 9, era un
acto de justicia a favor del acreedor
Herbosa y a la verdad, de no haberse
permitido el mencionado embargo, este
se hubiera visto en igual situacion que
aquel pobre agraviado que como se
dice vulgarmente, tras de cornudo, fue
apaleado; ... .
The aforestated facts notwithstanding, which
must be considered conclusive and binding on
us, plaintiff in the lower court, now petitioner,
Ramirez Telephone Corporation, as noted,
appealed, assigning the following alleged errors:4
I
The Court of Appeals erred in not
applying the settled legal principle that
a corporation has a personality
separate and distinct from that of its
stockholders and, therefore, the funds
of a corporation cannot be reached to
satisfy the debt of its stockholders.
II
The Court of Appeals erred in not
taking into account the significant fact
that when the events that gave rise to
this case took place, the lawyer of both
respondents, i.e., the Bank of America
and E.F. Herbosa, was one and the
same.
III
 The Court of Appeals erred in not
granting petitioner damages as
awarded by the lower court; likewise,
the Court of Appeals erred in declaring
instead that it is petitioner that should
pay respondents attorneys' fees.
Petitioner's main grievance in the first assigned
error is that the Court of Appeals disregarded its
corporate personality; it relies on the general
principle "that the corporate entity will not be
disregarded no matter how large the holding a
particular stockholder may have in the
corporation." 5 Petitioner would thus maintain
that the personality as an entity separate and
distinct from its major stockholders, Ruben R.
Ramirez and his wife, was not to be disregarded
even if they did own 75% of the stock of the
corporation. 6 The conclusion that would thus
emerge, in petitioner's opinion, is that its funds
as a corporation cannot be garnished to satisfy
the debts of a principal stockholder.
Co., L-15121, August 31, 1962. Hence, to repeat,
the first assigned error cannot be sustained.
The next two errors assigned likewise fail to call
for a reversal of the judgment now on appeal.
The second alleged error would find fault with
the decision because the Court of Appeals
allegedly did not take into account a significant
fact, namely, that only one lawyer represented
both the respondent Bank of America and
respondent E.F. Herbosa. We are not called upon
to consider this particular assignment of error as
it is essentially factual, which is a matter for the
Court of Appeals, not for us, to determine. The
last assigned error would in effect seek a
restatement of the damages awarded petitioner
on the theory that the Court of Appeals decided
the matter erroneously. Since, as we made clear
in the foregoing, the decision of the Court of
Appeals is in accordance with law on the facts as
found, this alleged error likewise is not
meritorious.

While respect for the corporate personality as PREMISES CONSIDERED, the judgment of the
such is the general rule, there are exceptions. In Court of Appeals of February 27, 1964 is
appropriate cases, the veil of corporate fiction affirmed, with costs against petitioner Ramirez
may be pierced. From the facts as found which Telephone Corporation.
must remain undisturbed, this is such a case.
This assignment of error has no merit, in view of Concepcion, C.J., Dizon, Makalintal, Sanchez,
a number of cases decided by this Court, the Castro, Fernando, Teehankee and Barredo, JJ.,
latest of which is Albert v. Court of First concur.
Instance 7 reaffirming a 1965 resolution in Albert Reyes, J.B.L., and Zaldivar, JJ., are on leave.
v. University Publishing Co., Inc. 8 In that
resolution, the principle is restated thus: "Even
with regard to corporations duly organized and
existing under the law, we have in many a case
pierced the veil of corporate fiction to administer
the ends of justice." In support of the above
principle, the following cases were cited: Arnold
vs. Willits & Patterson, Ltd., 44 Phil. 634; Koppel
(Phil.), Inc. vs. Yatco, 77 Phil. 496; La Campana
Coffee Factory, Inc. vs. Kaisahan ng mga
Manggagawa sa La Campana, 93 Phil. 160;
Marvel Building Corporation vs. David, 94 Phil.
376; Madrigal Shipping Co., Inc. vs. Ogilvie, L-
8431, Oct. 30, 1958; Laguna Transportation Co.,
Inc. vs. S.S.S., L-14606, April 28, 1960; McConnel
vs. C.A., L-10510, March 17, 1961; Liddel & Co.,
Inc. vs. Collector of Internal Revenue, L-9687,
June 30, 1961; Palacio vs. Fely Transportation
Republic of the Philippines private respondent backwages, computed from you went 5. Why
SUPREME COURT the date of his dismissal on November 1988, (sic) to when you
Manila until the decision was rendered on February 28, BEMIL and were asked
1991 or the amount of P50,328.00; and to pay who sent last Friday
SECOND DIVISION separation pay equivalent to one-half (1/2) you there.2 to join the
month for every year of service, for seven (7) Sales Blitz
years or the amount of P6,524.00. IOM-88 to Sta. Ana
you said
From the records it appears that Jolly M. yes and
G.R. No. 100322 March 9, 1994 Explain in you change
Almoradie was first employed by Mercury writing not
Express International Courier Service, Inc. (sic) your
later than mind when
GUATSON INTERNATIONAL TRAVEL AND (MEREX) in October, 1983 as Messenger Monday
TOURS, INC., PHILIPPINE INTEGRATED receiving a monthly salary of P800.00. When it you were
the asked
LABOR ASSISTANCE CORPORATION, closed its operations, Almoradie was absorbed following:
MERCURY EXPRESS INTERNATIONAL by MEREX's sister company Philippine again last
COURIER SERVICES, INC., petitioners, Integrated Labor Assistance Corp. (Philac), Saturday;
vs. likewise as Messenger with an increased salary 1. The
NATIONAL LABOR RELATIONS COMMISSION of P1,200.00. reason why xxx xxx xxx
AND JOLLY ALMORADIE, respondents. you want
to be a
In September, 1986, Almoradie was transferred messenger 7. Why you
Generosa R. Jacinto for petitioners. to Guatson Travel, allegedly also a sister and no have
company of MEREX and Philac, as Liaison Officer more a forgotten
Donato H. De Castro and Rolando P. Rotairo for with a salary of P1,864.00. Thereafter, he was sales the
private respondent. promoted to the position of Sales Representative representat situation
sometime in April, 1988. On April 30, 1988, ive; wherein
Almoradie was issued three separate you refuse
memoranda as follows: (sic) to sell
2. That I'm a certain
NOCON, J.: always product
IOM/88-70 confrontin recommen
g (sic) you, ded by
Petitioners Guatson Travel and Tours, Inc. Please as what
(hereinafter referred to as Guatson Travel), Myrna;
explain in you've told
Philippine Integrated Labor Assistance Corp. writing me
(Philac) and Mercury Express International within 24 personally; 8. The
Courier Services, Inc. (MEREX) assail the hrs. or not meaning of
Decision, rendered by the National Labor later than "You
Relations Commission in Case No. NLRC-NCR-00- 3. Why you pirated me
Monday will not
11-0451-88 entitled "Jolly M. Almoradie v. morning from Philac
Guatson's Travel Company, Philac and MEREX," answer in . . .3
the reason writing the
dated March 21, 1991 and its Resolution, dated why you
May 31, 1991, denying the petitioners' Motion memo
don't want issued to Within the time frame specified, Almoradie
for Reconsideration. to sell.1 responded to each of the charges, the essence of
you by Lou
Cantara on which are as follows:
In the questioned decision, the NLRC found that IOM/88-71 30 Apr;
Mr. Henry Ocier's (Vice-President and General 1. It is not true that I do not
Manager of petitioner Guatson Travel) actuation want to sale (sic) the rates &
of threatening and forcing private respondent, Please xxx xxx xxx
explain in package tour of Our Company
Jolly M. Almoradie, to resign amounted to illegal as imputed and charge (sic),
dismissal and thus ordered petitioners to pay writing
why did because since April, 1988 (sic)
when I was transferred from
Accounting to sales
department of our Company I
was able to sale (sic) almost
110 dollars to 21 passengers.
The truth however is that, I
am hampered in my sales
promotion and solicitation of
customer, due to financial
constraint considering that
the kind and nature of work
entails much expenses for
which I shouldered (sic) with
my personal money. As a
matter of fact I have brought
this matter to the Vice
President and General
Manager if only an
appropriation be set aside for
the expenses in going around,
meeting people and soliciting
prospective clients.
2. Bemil is a customer of our
company. With respect to the
ticketing and booking of Bemil
passengers, undertaking (sic)
by the sales department of
our company, I used to go
Bemil (sic) to inquire whether
they have passengers for
booking and ticketing. As a
matter of fact, I went to Bemil
to pick-up their ticketing and
booking for their passengers
last Monday, April 29, 1988
(sic) and then returned the
following day, Saturday April
30, 1988, to deliver the ticket.
xxx xxx xxx
3.1. Considering that the job
of sales representative entails
so much expense in the
performance thereof (sic), as I
have stated in my number one
(1) explanation and I have to
use my own personal money
to promote and solicit
customer without any funding
of our company (sic), I have
taught (sic) it better that I like
my position as messenger,
that (sic) as sales
representative, although the
later (sic) position is more
dignified, hence I prefer to be
entered to my messenger
position.
3.2. That I admit of the often
confrontation conducted (sic)
by Vice President/General
Manager, even in the absence
of my error or fault (sic) . . .
3.3. It is not true that I did not
or fail to answer the memo
issued by Lou Cantara, since I
was given until May 2, 1988 to
answer the same . . .
xxx xxx xxx
3.5. As scheduled, I said yes to
the sales blitz to Sta. Ana,
because in truth I am very
interested in such sales
business attack since it is in
connection with my function
as a sales representative that
will surely enhance and
sharpen my sales acumen, but
if I was not able to join it is
not the reason my change of
mind (sic), but because the
Vice-President/General
Manager of Our Company,
Henry Ocier summoned me to
his office and had a very
lengthy confrontation of me
(sic), and when I go out (sic)
after the confrontation to join
the sales blitz-krieg to Sta.
Ana last Saturday, April 30,
1988, Mr. Oscar Vanderlipe
who heads the sales Group
(sic) were (sic) already gone.
xxx xxx xxx
3.7. I deny vehemently that I
refuse to sale (sic) a certain
product recommended by
Myrna de Vera because the
same is totally false. Since
April 1, 1988 when I was
transferred to the sales
department of our company
where from the very
beginning I was briefed and
taught and learned about the
nature of my job and the
product to sale (sic) by Myrna
(sic) de Vera herself, I have
ever since until now ventured
and performed the selling of
rates and package tour which
are every products (sic) for
sales department of our
company. If sometimes I make
no sales, which all sales
representative suffer and are
beset such (sic), however,
cannot be considered as
refusal to sale (sic). The only
product of our Company that
Myrna briefed, taught and
required as to (sic) our rates
and Package Tours which I've
been selling since April 1,
1988 up to present. (sic)
xxx xxx xxx4
On May 4, 1988, Almoradie was reverted to the
position of Messenger, yet sometime in
September, 1988, he was again given the
position of Account Executive, the nature of
work of which is similar to that of a sales
representative. Almoradie accepted the transfer
with the understanding that he will solely
discharge the duties of an account executive and
will no longer be required to do messengerial
work.
In the morning of October 1, 1988, Almoradie
was allegedly summoned by Henry Ocier to his
office and was there and then forced by the latter
to resign. Ocier taunted Almoradie with threats
that it he will not resign, he will file charges
against him which would adversely affect his
chances of getting employed in the future. Ocier
allegedly even provided the pen and paper on
which Almoradie wrote and signed the
resignation letter dictated by Ocier himself.5
On that same day, Almoradie sought the help of a
friend, Isagani Mallari, who advised him to
report the matter to the Barangay
Captain.6 Subsequently, Almoradie filed a
complaint for illegal Dismissal on November 14,
1988. The Labor Arbiter, however dismissed his
case based on the following conclusions:
In examining the facts and the
arguments, it is difficult to
abide by the impression that
complainant was forced to
resign. Apart from the
averment of respondent
Guatson that Mr. Ocier was
out of town when the
resignation letter was
executed that he just saw the
resignation letter when he
arrived.7There is reason to
believe that complainant
apparently defied the order
for his transfer or designation
as account executive earlier
before he executed his
resignation letter.
It must be concluded that his
designation as account
executive is a management
prerogative which under the
circumstance is untainted
with any unfair labor practice.
Apparently, complainant
resented his resignation
without any plausible or
cogent reason as he had
earlier resented to be a sales
representative for which he
was made to explain the
reasons why. The only
 graceful exit to the
complainant was to execute
his letter of resignation. As his
letter of resignation shows, it
was executed in his own
handwriting spontaneously
out of his own free will.8
Upon Almoradie's appeal, the NLRC reversed the
decision of the Labor Arbiter on his finding that
complainant was not forced to resign, anchoring
its conclusion to the fact that Almoradie was a
permanent employee who has been working for
the Ocier's for five long years; that he was
receiving a fairly good salary considering that he
is single; that he had no potential employer at
the time of his resignation; that there was no
evidence to show that Mr. Henry Ocier was
indeed not in town on October 1, 1988, when he
allegedly forced Almoradie to resign; and his
reaction immediately after his forced resignation
by seeking the assistance of a friend who was
placed in a similar situation before and in
reporting the incident to the Barangay Chairman
to seek redress.
The issue therefore, boils down to the question
of whether Jolly Almoradie was indeed illegally
dismissed by being forced to resign in the
manner narrated by him.
From a synthesis of the evidence on record, we
fully agree with the finding of the NLRC that Jolly
Almoradie's resignation was NOT voluntary. The
NLRC did not err in disregarding the conclusions
reached by the Labor Arbiter because the latter's
findings are not supported by substantial
evidence.
It appears that as early as April, 1988, when
Almoradie was promoted as Sales
Representative he had caught the ire of
management, so much so that he was issued no
less than three memoranda on one day ordering
him to answer certain charges. Why he was again
promoted to the position of Account Executive
after he was reverted back to the rank of a
messenger from being a Sales Representative is
rather intriguing, unless it was a scheme of
management to really rid him from the company.
Apparently, Almoradie is not cut out for a sales
job, and hence could be dismissed or forced to
resign for failing to make good on his job on
sales. On the other hand, it would be difficult to
dismiss him while being a messenger since he is
a permanent employee and there would not be
enough basis to make him resign.
We do not agree with petitioners' proposition
that Mr. Ocier's mere utterances of the words "I
will file charges against you," and "I have a very
good lawyer," do not constitute force or coercion
as to vitiate the free will of Almoradie in writing
his resignation letter.
Intimidation may vitiate consent when the
following requisites are present: (1) that the
intimidation caused the consent to be given; 2)
that the threatened act be unjust or unlawful; 3)
that the threat be real or serious, there being
evident disproportion between the evil and the
resistance which all man can offer, leading to the
choice of doing that act which is forced on the
person to do as the lesser evil; and 4) that it
produces a well-grounded fear from the fact that
the person from whom it comes has the
necessary means or ability to inflict the
threatened injury to his person or property.9
The moment that a person by whom respect and
reverence are due should wrongly exert
pressure upon his subordinates, amounting to
intimidation in the manner stated in the
Lichauco de Leon case, supra, in order to exact
from said subordinates an act against their will,
the same is enough to vitiate consent.
Henry Ocier did not only say that he will file
charges against Almoradie and that he has a
good lawyer but he even threatened to block his
future employment should the latter not file his
resignation. This threat is not farfetched.
Almoradie is not even a college graduate. 10 With
his limited skills and the scarcity of employment
opportunities it would really be difficult for him
to find a job. Considering further the influence of
Mr. Henry Ocier and his capacity to make good
his threat by refusing to give a favorable
recommendation on Almoradie's performance, separation pay is the amount that an employee
the latter is helpless in not complying with the receives at the time of his severance from the
former's demand for his resignation. service and is designed to provide the employee
with the wherewithal during the period that he
Anent NLRC's grant of separation pay and is looking for another employment. 13
backwages to private respondent Jolly M.
Almoradie, petitioners argues that the However the award of separation pay should be,
companies, Guatson Travel Company, Philac as we have consistently ruled, equivalent to one
Merex have separate and distinct legal (1) month for every year of service, 14 instead of
personalities such that the latter companies one-half (1/2) month as awarded by the NLRC.
should not be held liable; assuming, for the sake In the computation of separation pay, the three
of argument that private respondent was (3) year period wherein backwages are awarded,
illegally dismissed. must be included. 15
We uphold the NLRC. The three companies are WHEREFORE, the decision of the NLRC is hereby
owned by one family, such that majority of the MODIFIED to the extent that the award of
officers of the companies are the same. The backwages should be computed based on a
companies are located in one building and use three-year period, while the separation pay of
the same messengerial service. Moreover, there one month for every year of service should be
was no showing that private respondent was computed from the time petitioner was
paid separation pay when he was absorbed by employed by Merex and should include the
Philac upon closure of Merex; nor was there three-year period as backwages. The petition is
evidence that he resigned from Philac when he hereby DISMISSED for lack of merit.
transferred to Guatson Travel. Under the
doctrine of piercing the veil of corporate fiction, SO ORDERED.
when valid ground exists, the legal fiction that a
corporation is an entity with a juridical
personality separate and distinct from its Narvasa, C.J., Padilla, Regalado and Puno, JJ.,
members or stockholders may be disregarded. concur.
We have applied this doctrine in the case of
"Philippine Scout Veterans Security and
Investigation Agency (PSVSIA), et al. v. The Hon.
Secretary of Labor," G.R. No. 92357, July 21,
1993.
Where there is a finding of illegal dismissal, the
employee is entitled to both reinstatement and
award of backwages from the time the
compensation was withheld, in this case in 1988,
up to a maximum of three years, applying the
Mercury Drug Rule. 11
Reinstatement, however, will not be required not
only for the reason that it was not prayed for by
the respondent, but also because the relationship
between Almoradie and Ocier had become
strained as to preclude a harmonious working
relationship. In lieu of reinstatement, separation
pay is awarded. 12 As the term suggests,
FIRST DIVISION
[G.R. No. 108734. May 29, 1996]
CONCEPT BUILDERS, INC., petitioner, vs. THE
NATIONAL LABOR RELATIONS
COMMISSION, (First Division); and
Norberto Marabe, Rodolfo Raquel,
Cristobal Riego, Manuel Gillego,
Palcronio Giducos, Pedro Aboigar,
Norberto Comendador, Rogello
Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Aifredo Albera,
Paquito Salut, Domingo Guarino,
Romeo Galve, Dominador Sabina,
Felipe Radiana, Gavino Sualibio,
Moreno Escares, Ferdinand Torres,
Felipe Basilan, and Ruben
Robalos, respondents.
DECISION
HERMOSISIMA, JR., J.:
The corporate mask may be lifted and the
corporate veil may be pierced when a
corporation is just but the alter ego of a person
or of another corporation. Where badges of fraud
exist; where public convenience is defeated;
where a wrong is sought to be justified thereby,
the corporate fiction or the notion of legal entity
should come to naught. The law in these
instances will regard the corporation as a mere
association of persons and, in case of two
corporations, merge them into one.
Thus, where a sister corporation is used as
a shield to evade a corporations subsidiary
liability for damages, the corporation may not be
heard to say that it has a personality separate
and distinct from the other corporation. The
piercing of the corporate veil comes into play.
This special civil action ostensibly raises
the question of whether the National Labor
Relations Commission committed grave abuse of
discretion when it issued a break-open order to
the sheriff to be enforced against personal
property found in the premises of petitioners
sister company.
Petitioner Concept Builders, Inc., a
domestic corporation, with principal office
at 355 Maysan Road, Valenzuela, Metro Manila, is
engaged in the construction business. Private
respondents were employed by said company as
laborers, carpenters and riggers.
On November, 1981, private respondents
were served individual written notices of
termination of employment by petitioner,
effective on November 30, 1981. It was stated in
the individual notices that their contracts of
employment had expired and the project in
which they were hired had been completed.
Public respondent found it to be, the fact,
however, that at the time of the termination of
private respondents employment, the project in
which they were hired had not yet been finished
and completed. Petitioner had to engage the
services of sub-contractors whose workers
performed the functions of private respondents.
Aggrieved, private respondents filed a
complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday
pay, overtime pay and thirteenth-month pay
against petitioner.
On December 19, 1984, the Labor Arbiter
rendered judgment1 ordering petitioner to
reinstate private respondents and to pay them
back wages equivalent to one year or three
hundred working days.
On November 27, 1985, the National Labor
Relations Commission (NLRC) dismissed the
motion for reconsideration filed by petitioner on
the ground that the said decision had already
become final and executory.2
On October 16, 1986, the NLRC Research
and Information Department made the finding
that private respondents backwages amounted
to P199,800.00.3
On October 29, 1986, the Labor Arbiter
issued a writ of execution directing the sheriff to
execute the Decision, dated December 19,
1984. The writ was partially satisfied through
garnishment of sums from petitioners debtor,
the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said
amount was turned over to the cashier of the
NLRC.
On February 1, 1989, an Alias Writ of
Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein
petitioner the sum of P117,414.76, representing
the balance of the judgment award, and to
reinstate private respondents to their former
positions.
On July 13, 1989, the sheriff issued a report
stating that he tried to serve the alias writ of
execution on petitioner through the security
guard on duty but the service was refused on the
ground that petitioner no longer occupied the
premises.
On September 26, 1986, upon motion of
private respondents, the Labor Arbiter issued a
second alias writ of execution.
The said writ had not been enforced by the
special sheriff because, as stated in his progress
report, dated November 2, 1989:
1. All the employees inside petitioners premises
at 355 Maysan Road, Valenzuela, Metro Manila,
claimed that they were employees of Hydro
Pipes Philippines, Inc. (HPPI) and not by
respondent;
2. Levy was made upon personal properties he
found in the premises;
3. Security guards with high-powered guns
prevented him from removing the properties he
had levied upon.4
The said special sheriff recommended that
a break-open order be issued to enable him to
enter petitioners premises so that he could
proceed with the public auction sale of the
aforesaid personal properties on November 7,
1989.
On November 6, 1989, a certain Dennis
Cuyegkeng filed a third-party claim with the
Labor Arbiter alleging that the properties sought
to be levied upon by the sheriff were owned by
Hydro (Phils.), Inc. (HPPI) of which he is the
Vice-President.
On November 23, 1989, private
respondents filed a Motion for Issuance of a
Break-Open Order, alleging that HPPI and
petitioner corporation were owned by the same
incorporator! stockholders. They also alleged
that petitioner temporarily suspended its
business operations in order to evade its legal
obligations to them and that private respondents
were willing to post an indemnity bond to
answer for any damages which petitioner and
HPPI may suffer because of the issuance of the
break-open order.
In support of their claim against HPPI,
private respondents presented duly certified
copies of the General Informations Sheet,
dated May 15, 1987, submitted by petitioner to
the Securities and Exchange Commission (SEC)
and the General Information Sheet,
dated May 15, 1987, submitted by HPPI to the
Securities and Exchange Commission.
The General Information Sheet submitted
by the petitioner1 revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
Teodulo R. Dino Member
Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa 0. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila.5
On the other hand, the General Information
Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
On February 1, 1990, HPPI filed an
Opposition to private respondents motion for
issuance of a break-open order, contending that
HPPI is a corporation which is separate and
distinct from petitioner. HPPI also alleged that
the two corporations are engaged in two
different kinds of businesses, i.e., HPPI is a
manufacturing firm while petitioner was then
engaged in construction.
On March 2, 1990, the Labor Arbiter issued
an Order which denied private respondents
motion for break-open order.
Private respondents then appealed to the
NLRC. On April 23, 1992, the NLRC set aside the
order of the Labor Arbiter, issued a break-open
order and directed private respondents to file a
bond. Thereafter, it directed the sheriff to
proceed with the auction sale of the properties
already levied upon. It dismissed the third-party
claim for lack of merit.
Petitioner moved for reconsideration but
the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed
grave abuse of discretion when it ordered the
execution of its decision despite a third-party
claim on the levied property. Petitioner further
contends, that the doctrine of piercing the
corporate veil should not have been applied, in
this case, in the absence of any showing that it
created HPPI in order to evade its liability to
private respondents. It also contends that HPPI
is engaged in the manufacture and sale of steel,
concrete and iron pipes, a business which is
distinct and separate from petitioners
construction business.Hence, it is of no
consequence that petitioner and HPPI shared the
same premises, the same President and the same
set of officers and subscribers.7
We find petitioners contention to be
unmeritorious.
It is a fundamental principle of corporation
law that a corporation is an entity separate and
distinct from its stockholders and from other
corporations to which it may be connected.8 But,
this separate and distinct personality of a
corporation is merely a fiction created by law for
convenience and to promote justice.9 So, when
the notion of separate juridical personality is
used to defeat public convenience, justify wrong,
protect fraud or defend crime, or is used as a
device to defeat the labor laws,10 this separate
personality of the corporation may be
disregarded or the veil of corporate fiction
pierced.11 This is true likewise when the
corporation is merely an adjunct, a business
conduit or an alter ego of another corporation.12
The conditions under which the juridical
entity may be disregarded vary according to the
peculiar facts and circumstances of each case. No
hard and fast rule can be accurately laid down,
but certainly, there are some probative factors of
identity that will justify the application of the
doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common
ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and
records.
4. Methods of conducting the business.13
The SEC en banc explained the
instrumentality rule which the courts have
applied in disregarding the separate juridical
personality of corporations as follows:
Where one corporation is so organized and
controlled and its affairs are conducted so that it
is, in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
instrumentality may be disregarded. The control
necessary to invoke the rule is not majority or
even complete stock control but such domination
of finances, policies and practices that the
controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is
but a conduit for its principal. It must be kept in
mind that the control must be shown to have been
exercised at the time the acts complained of took
place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss
for which the complaint is made.
The test in determining the applicability of
the doctrine of piercing the veil of corporate
fiction is as follows:
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in
contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must
proximately cause the injury or unjust loss
complained of.
The absence of any one of these elements prevents
piercing the corporate veil. in applying the
instrumentality or alter ego doctrine, the courts
are concerned with reality and not form, with how
the corporation operated and the individual
defendants relationship to that operation. 14
Thus, the question of whether a
corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is
purely one of fact.15
In this case, the NLRC noted that, while
petitioner claimed that it ceased its business
operations on April 29, 1986, it filed an
Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating
that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the
same day, a similar information sheet stating
that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by
the same Virgilio O. Casino as the corporate
secretary of both corporations. It would also not
be amiss to note that both corporations had
the same president, the same board of directors,
the same corporate officers, and substantially
the same subscribers.
From the foregoing, it appears that, among other
things, the respondent (herein petitioner) and the
third-party claimant shared the same address
and/or premises. Under this circumstances, (sic) it
cannot be said that the property levied upon by
the sheriff were not of respondents.16
Clearly, petitioner ceased its business
operations in order to evade the payment to
private respondents of backwages and to bar
their reinstatement to their former
positions. HPPI is obviously a business conduit of
petitioner corporation and its emergence was property subject of execution is located or kept,
skillfully orchestrated to avoid the financial the judgment creditor may apply to the
liability that already attached to petitioner Commission or Labor Arbiter concerned for a
corporation. break-open order.
The facts in this case are analogous
to Claparols v. Court of Industrial Furthermore, our perusal of the records
Relations17 where we had the occasion to rule: shows that the twin requirements of due notice
and hearing were complied with. Petitioner and
the third-party claimant were given the
Respondent courts findings that indeed the opportunity to submit evidence in support of
Claparols Steel and Nail Plant, which ceased their claim.
operation of June 30, 1957, was SUCCEEDED by
the Claparols Steel Corporation effective the next Hence, the NLRC did not commit any grave
day, July 1, 1957, up to December 7, 1962, when abuse of discretion when it affirmed the break-
the latter finally ceased to operate, were not open order issued by the Labor Arbiter.
disputed by petitioner. it is very clear that the
latter corporation was a continuation and Finally, we do not find any reason to
disturb the rule that factual findings of quasi-
successor of the first entity x x x. Both predecessors
and successor were owned and controlled by judicial agencies supported by substantial
evidence are binding on this Court and are
petitioner Eduardo Claparols and there was no
break in the succession and continuity of the same entitled to great respect, in the absence of
showing of grave abuse of a discretion.18
business. This avoiding-the-liability scheme is very
patent, considering that 90% of the subscribed WHEREFORE, the petition is DISMISSED
shares of stock of the Claparols Steel Corporation and the assailed resolutions of the NLRC,
(the second corporation) was owned by datedApril 23, 1992 and December 3, 1992, are
respondent x x x Claparols himself, and all the AFFIRMED.
assets of the dissolved Claparols Steel and Nail
Plant were turned over to the emerging Claparols SO ORDERED.
Steel Corporation.
Padilla (Chairman), Bellosillo,
Vitug, and Kapunan, JJ., concur.
It is very obvious that the second
corporation seeks the protective shield of a
corporate fiction whose veil in the present case
could, and should, be pierced as it was
deliberately and maliciously designed to evade
its financial obligation to its employees.
In view of the failure of the sheriff, in the
case at bar, to effect a levy upon the property
subject of the execution, private respondents had
no other recourse but to apply for a break-open
order after the third-party claim of HPPI was
dismissed for lack of merit by the NLRC. This is
in consonance with Section 3, Rule VII of the
NLRC Manual of Execution of Judgment which
provides that:
Should the losing party, his agent or
representative, refuse or prohibit the Sheriff or his
representative entry to the place where the
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-42510 June 30, 1976
LILIA D. SIMON, petitioner,
vs.
REPUBLIC OF THE PHILIPPINES (SUPREME
COURT), respondent.
Lilia D. Simon in her own behalf.
Solicitor General Estelito P. Mendoza, Assistant
Solicitor General Reynato S. Puno and Trial,
Attorney Antonio G. Castro for respondent.
MARTIN, J:
This is a compensation case which affects
directly the Supreme Court because the
petitioner here is a personnel of the Court of
First Instance of Cebu over whom it exercises the
power of supervision. 1 It is a case which We
cannot avoid and which by force of necessity, We
are constrained to decide, there being no other
tribunal authorized to act on it. 2 The case refers
to a decision of the Workmen's Compensation
Commission in WCC Case No. 19003 which
reversed the award made by the Acting Chief of
the Regional Office of the Department of Labor in
Cebu City in favor of the petitioner granting her
compensation for temporary disability and
allowing her to recover reimbursement for
medical, surgical and hospital expenses.
Petitioner Lilia D. Simon started to work as a
legal researcher in the Court of First Instance of
Cebu City, Branch VII since December 1, 1965.
On November 8, 1973, she noticed a swelling
under her chin. Worried about it, she consulted a
physician to be sure that she was not suffering
from any serious ailment. Upon advice of the
latter, she finally submitted to an operation
which ended in the removal of a "dermoid cyst",
benign, under chin. After the operation she was
hospitalized in the Perpetual Succor Hospital
from November 11, to November 23, 1974. On
November 25, 1974 she returned to work, but
even then, she had to go to her doctor to receive
medication until March 20,1975.
On March 21, 1975, the petitioner filed a claim
for compensation benefits and for
reimbursement of her medical, surgical and
hospital expenses with the Regional Office of the
Department of Labor in Cebu City. As said claim
was not controverted, the Acting Chief of the
Regional Office of the Department of Labor in
Cebu City favorably acted on her claim based on
her own declarations and the medical report of
the doctor who operated on her and awarded
her compensation for temporary disability for
the period she failed to report for work from
November 11 to 23, 1974 in the amount of
P100.00 and reimbursement of medical, surgical
and hospital expenses in the amount of P915.40.
From said award of the Acting Chief of the
Regional Office in Cebu City, the Solicitor General
in representation of this Court appealed the
same to the Workmen's Compensation
Commission on the ground that the facts and the
law on which the same is based are not clearly
and distinctly stated therein. Upon review of the
award, the respondent Commission reversed the
same and dismissed the claim of petitioner for
lack of merit.
Hence this petition for review, with the
petitioner raising the following alleged errors of
the respondent Commission:
1. THAT THE WORKMEN'S COMPENSATION
COMMISSION WAS NOT JUSTIFIED IN ITS
CONCLUSION THAT PETITIONER'S AILMENT
HAS NO CAUSAL CONNECTION WITH THE
NATURE OF HER EMPLOYMENT AS LEGAL
RESEARCHER: AND
2. THAT THE WORKMEN'S COMPENSATION
COMMISSION DECIDED THIS CASE IN A WAY
NOT IN ACCORD WITH LAW SPECIALLY
SECTION 4 OF ACT 3428 AND THE APPLICABLE
DECISIONS OF THE SUPREME COURT ON
PRESUMPTION OF COMPENSABILITY AND BY
ITS FAILURE TO CONSIDER THE
FUNDAMENTAL AND PATENT LOGICAL
RELATIONSHIP AND THE EVIDENCE, IT
AMOUNTED TO A CLEAR TRAVESTY OF JUSTICE
AND GRAVE ABUSE OF DISCRETION.
In the Physician's Report, the attending
physician diagnosed the ailment of the petitioner
as "Dermoid Cyst submaxillary area" and
described its cause as congenital although he
admitted that the ailment "may be aggravated by
such employment." According to the book,
Principles of Internal Medicine —
"Dermo Cyst" is the common
type of teratoid tumor
containing estodermal and
often mesodermal tissue in
the form of macerated skin,
hair, bone and teeth. The cyst
is filled with a heavy, already,
sebaceous material. It occurs
primarily in women 18-40
years of age. Orientals are
prone to develop dermoids.
The clinical manifestations of
teratoid tumor is produced
when the freely shifting mass
distorts and displaces
neighboring visceras. It tends
to float and encourages the
development of a long
pedicle; when torsion occurs
sudden excruciating, and
persistent pain results,
treatment is surgical removal.
The prognosis is usually
excellent. 3
There is no dispute that the petitioner entered
the service of the respondent in 1965. When she
entered the service, she was not found to be
suffering from any ailment at the time. Eight (8)
years thereafter or in 1973 she noticed the
swelling under her chin. The implication is
therefore clear that her illness supervened in the
course of her employment. The "dermoid cyst"
may be congenital, but it is admitted in the
Physician's Report that it may also be
aggravated. In fact it flared up only during the
course of her employment. In a very recent case
penned by Mr. Justice Claudio Teehankee, this
Court held:" ... assuming the employee's illness
may be ruled out as an occupational disease or
that the causal link between the nature of his
employment and his ailment has been
insufficiently show, nevertheless, it is to be
presumed as mandated by Section 14 of the
workmen's Compensation Act. 4 that the
employee's illness which supervened during his
employment either arose out of, or at least
aggravated by said employment and with this
presumption, the burden of proofs shifts to the
employer and the employee is relieved of the
burden to show causation. 5 In the case before
Us, the respondent has failed to discharge that
burden. The mere opinion of the doctor who
treated the petitioner that "dermoid cyst" is
congenital, although he admitted that it may also
be aggravated by her employment, cannot
prevail over the presumption of
compensability. 6
Besides the respondent has failed to controvert
the claim of the petitioner, In a long line of
decisions, this Court has ruled that "failure on
the part of the employer to file a seasonable
notice of controversion of the right of employees
to compensation as required by Section 45 of the
Workmen's Compensation Act, 7 as amended,
constitutes a waiver by operation of law of his
right to controvert the employee's claim for
compensation on non- jurisdictional grounds
and such legal defect does not violate the
requirements of due process. 8 A claim for
compensation filed by an employee against his
employer under the Workmen's Compensation
Act is deemed admitted if not controverted
within the time provided by law. 9 It has also
been held that the absence of controversion is
fatal to any defense. 10 Thus the respondent
cannot claim that the illness of the petitioner was
not work-connected or that it was not
aggravated by the nature of her employment.
Accordingly the Referee was justified in making
the corresponding award in favor of the
petitioner based on petitioner's declaration and
the physician's report.

IN VIEW OF THE FOREGOING, the decision of the

respondent Commission is reversed and set
aside and the award made by the Acting Chief of
the Regional Office of the Department of Labor in
Cebu City is hereby affirmed.

Without pronouncement as to costs.

SO ORDERED.

Teehankee (Chairman), Makasiar, Antonio and

Muñoz Palma, JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23586 March 20, 1968
A. D. SANTOS, INC., petitioner,
vs.
VENTURA VASQUEZ, respondent.
Emiliano S. Samson and R. Balderrama-Samson
for petitioner.
Orlando L. Espinas for respondent.
SANCHEZ, J.:
Respondent Ventura Vasquez was
petitioner's taxi driver. Sometime on December
22 or 23, 1961, at about 11:00 a.m., while driving
petitioner's taxicab, he vomitted blood. Aside
from his hemoptysis, he suffered back pains,
fever and headache. He reported to petitioner
the fact of his having vomitted blood. He was
sent to petitioner company's physician, Dr.
Roman, who treated him and sent him to Sto.
Tomas Hospital where he was confined for six
days. Thereafter, he was admitted at the Quezon
Institute. There he stayed until March 19, 1962
under the medical care of Dr. Mario Lirag. Dr.
Lirag diagnosed his ailment as pulmonary
tuberculosis, moderately advanced in both lungs.
Upon his discharge on March 19, 1962, he was
clinically improved. His X-ray examination,
however, showed the same finding, i.e., PTB,
moderately advanced. He has not resumed work.
Offshoot of the foregoing is respondent's
claim filed on May 9, 1962 with the Workmen's
Compensation Commission. 1 In affirming the
decision of the Hearing Officer, the Commission
ordered petitioner:
1. To pay the claimant, thru this
Commission, the sum of THREE
THOUSAND SEVEN HUNDRED THIRTY-
TWO and 30/100 (P3,732.30) PESOS as
compensation as of August 11, 1964,
and P27.30 thereafter up to a period of
208 weeks, but in no case said amount
of compensation exceed P4,000.00;
2. To reimburse the claimant, thru this
Commission, the sum of P53.60 which
he had actually spent for his treatment;
3. To provide claimant continuous
medical, surgical and hospital services
and supplies as his illness may warrant;
4. To pay the claimant, also thru this
Commission, the sum of P277.92 as
Attorney's fees; and
5. To pay the Commission the sum of
P43.00 as costs based on the amount of
compensation already due the claimant
as of August 11, 1964, and P1.00 for
every hundred pesos which may accrue
in his favor as weekly compensation
pursuant to Section 55 of the Act.
The case is now before us on review.
Two questions are raised by petitioner: (1)
respondent's claim should have been dismissed
for his failure to file the notice of injury and
claim for compensation required by Section 24 of
the Workmen's Compensation Act; and (2) the
claim for compensation is directed against
Amador Santos, not against petitioner.
1. Sickness manifested itself on December
22 or 23, 1961. Claim was filed on May 9, 1962.
Petitioner argues that by Section 24 of the
Workmen's Compensation Act, the claim should
be thrown out of court. Because, according to
petitioner, such claim was not filed within two
months following illness.
Petitioner's case must fail. Stabilized Costs against petitioner. So ordered.
jurisprudence is that failure of the employer to
file with the Commission notice of controversion Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P.,
set forth in the second paragraph of Section 45 of Zaldivar, Castro, Angeles and Fernando, JJ., concur.
the Workmen's Compensation Act is a waiver of
the defense that the claim for compensation was
not filed within the statutory period and a
forfeiture of the employer's right to controvert
the claim. Petitioner here knew of respondent's
illness. Yet, it did not controvert respondent's
right to compensation. Constructively, such
failure is an admission that the claim is
compensable. 2
2. Petitioner's averment that respondent
driver had no cause of action against petitioner
is equally without merit. Respondent's claim for
compensation herein is directed against
petitioner A.D. Santos, Inc. Petitioner, in answer
to the claim, categorically admitted that claimant
was its taxi driver. Add to this is the fact that the
claimant contracted pulmonary tuberculosis by
reason of his said employment. And respondent's
cause of action against petitioner is complete.
But petitioner, cites the fact that
respondent driver, in the course of his testimony,
mentioned that he worked for the City Cab
operated by Amador Santos. This will not detract
from the validity of respondent's right to
compensation. For, the truth is that really at one
time Amador Santos was the sole owner and
operator of the City Cab. It was subsequently
transferred to petitioner A.D. Santos, Inc. in
which Amador Santos was an officer. The
mention by respondent of Amador Santos as his
employer in the course of his testimony, in the
words of this Court in Sugay vs. Reyes, L-20451,
December 28, 1964, "should not be allowed to
confuse the facts relating to employer-employee
relationship" for "when the veil of corporate
fiction is made as a shield to perpetrate a fraud
and/or confuse legitimate issues (here, the
relation of employer-employee), the same should
be pierced."
For the reasons given, the decision under
review is hereby affirmed.1äwphï1.ñët
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-10510 March 17, 1961
M. MC CONNEL, W. P. COCHRANE, RICARDO
RODRIGUEZ, ET AL., petitioners,
vs.
THE COURT OF APPEALS and DOMINGA DE
LOS REYES, assisted by her husband, SABINO
PADILLA,respondents.
Jesus B. Santos and Cornelio Antiquera for
petitioners.
Teodoro Padilla for respondents.
REYES, J.B.L., J.:
The issue before us in the correctness of the
decision of the Court of Appeals that, under the
circumstances of record, there was justification
for disregarding the corporate entity of the Park
Rite Co., Inc., and holding its controlling
stockholders personally responsible for a
judgment against the corporation.
The Court of Appeals found that the Park Rite
Co., Inc., a Philippine corporation, was originally
organized on or about April 15, 1947, with a
capital stock of 1,500 shares at P1.00 a share.
The corporation leased from Rafael Perez
Rosales y Samanillo a vacant lot on Juan Luna
street (Manila) which it used for parking motor
vehicles for a consideration.
It turned out that in operating its parking
business, the corporation occupied and used not
only the Samanillo lot it had leased but also an
adjacent lot belonging to the respondents-
appellees Padilla, without the owners'
knowledge and consent. When the latter
discovered the truth around October of 1947,
they demanded payment for the use and
occupation of the lot.
The corporation (then controlled by petitioners
Cirilo Parades and Ursula Tolentino, who had
purchased and held 1,496 of its 1,500 shares)
disclaimed liability, blaming the original
incorporators, McConnel, Rodriguez and
Cochrane. Whereupon, the lot owners filed
against it a complaint for forcible entry in the
Municipal Court of Manila on 7 October 1947
(Civil Case No. 4031).
Judgment was rendered in due course on 13
November 1947, ordering the Park Rite Co., Inc.
to pay P7,410.00 plus legal interest as damages
from April 15, 1947 until return of the lot.
Restitution not having been made until 31
January 1948, the entire judgment amounted to
P11,732.50. Upon execution, the corporation was
found without any assets other than P550.00
deposited in Court. After their application to the
judgment credit, there remained a balance of
P11,182.50 outstanding and unsatisfied.
The judgment creditors then filed suit in the
Court of First Instance of Manila against the
corporation and its past and present
stockholders, to recover from them, jointly and
severally, the unsatisfied balance of the
judgment, plus legal interest and costs. The Court
of First Instance denied recovery; but on appeal,
the Court of Appeals (CA-G.R. No. 8434-R)
reversed, finding that the corporation was a
mere alter ego or business conduit of the
principal stockholders that controlled it for their
own benefit, and adjudged them responsible for
the amounts demanded by the lot owners, as
follows:
WHEREFORE, premises considered, the
decision appealed from is reversed.
Defendants-appellees Cirilo Paredes
and Ursula Tolentino are hereby
declared liable to the plaintiffs-
appellants for the rentals due on the lot
in question from August 22, 1947 to
January 31, 1948 at the rate of
P1,235.00 a month, with legal interest
thereon from the time of the filing of
the complaint. Deducting the P550.00
which was paid at the time when the
corporation was already acquired by
the said defendants-appellees Cirilo
Paredes and Ursula Tolentino, they are
hereby ordered to pay to plaintiffs-
appellants Dominga de los Reyes and
Sabino Padilla the sum of P6,036.66
with legal interest therein from the
time of the filing of the complaint until
fully paid.
Defendant-appellee RICARDO
RODRIGUEZ is hereby ordered to pay
to the plaintiffs-appellants Dominga de
los Reyes and Sabino Padilla the sum of
P1,742.64 with legal interest thereon
from the time of the filing of the
complaint and until it is fully paid. In
addition thereto the defendants-
appellees Cirilo Paredes, Ursula
Tolentino and Ricardo Rodriguez shall
pay the costs proportionately in both
instances.
IT IS SO ORDERED.
Cirilo Paredes and Ursula Tolentino then
resorted to this court. We granted certiorari.
On the main issue whether the individual
stockholders maybe held liable for obligations
contracted by the corporation, this Court has
already answered the question in the affirmative
wherever circumstances have shown that the
corporate entity is being used as an alter ego or
business conduit for the sole benefit of the
stockholders, or else to defeat public
convenience, justify wrong, protect fraud, or
defend crime (Koppel [Phil.] Inc. vs. Yatco, 77
Phil. 496; Arnold vs. Willits and Patterson, 44
Phil. 364).
The Court of Appeals has made express findings
to the following effect:
There is no question that a wrong has
been committed by the so-called Park
Rite Co., Inc., upon the plaintiffs when it
occupied the lot of the latter without its
prior knowledge and consent and
without paying the reasonable rentals
for the occupation of said lot. There is
also no doubt in our mind that the
corporation was a mere alter ego or
business conduit of the defendants Cirilo
Paredes and Ursula Tolentino, and
before them — the defendants M.
McConnel, W. P. Cochrane, and Ricardo
Rodriguez. The evidence clearly shows
that these persons completely
dominated and controlled the
corporation and that the functions of the
corporation were solely for their
benefits.
When it was originally organized on or
about April 15, 1947, the original
incorporators were M. McConnel, W. P.
Cochrane, Ricardo Rodriguez,
Benedicto M. Dario and Aurea Ordrecio
with a capital stock of P1,500.00
divided into 1,500 shares at P1.00 a
share. McConnel and Cochrane each
owned 500 shares, Ricardo Rodriguez
408 shares, and Dario and Ordrecio 1
share each. It is obvious that the shares
of the last two named persons were
merely qualifying shares. Then or about
August 22, 1947 the defendants Cirilo
Paredes and Ursula Tolentino
purchased 1,496 shares of the said
corporation and the remaining four
shares were acquired by Bienvenido J.
Claudio, Quintin C. Paredes, Segundo
Tarictican, and Paulino Marquez at one
share each. It is obvious that the last
four shares bought by these four
persons were merely qualifying shares
and that to all intents and purposes the
spouses Cirilo Paredes and Ursula
Tolentino composed the so-called Park
Rite Co., Inc. That the corporation was a
mere extension of their personality is
shown by the fact that the office of Cirilo
Paredes and that of Park Rite Co., Inc.
were located in the same building, in the
same floor and in the same room — at
507 Wilson Building. This is further
shown by the fact that the funds of the
corporation were kept by Cirilo Paredes
in his own name (p. 14, November 8,
 1950, T.S.N.) The corporation itself had
no visible assets, as correctly found by
the trial court, except perhaps the toll
house, the wire fence around the lot and
the signs thereon. It was for this reason
that the judgment against it could not be
fully satisfied. (Emphasis supplied).

The facts thus found can not be varied by us, and

conclusively show that the corporation is a mere
instrumentality of the individual stockholder's,
hence the latter must individually answer for the
corporate obligations. While the mere ownership
of all or nearly all of the capital stock of a
corporation is a mere business conduit of the
stockholder, that conclusion is amply justified
where it is shown, as in the case before us, that
the operations of the corporation were so
merged with those of the stockholders as to be
practically indistinguishable from them. To hold
the latter liable for the corporation's obligations
is not to ignore the corporation's separate entity,
but merely to apply the established principle
that such entity can not be invoked or used for
purposes that could not have been intended by
the law that created that separate personality.

The petitioners-appellants insist that the Court

could have no jurisdiction over an action to
enforce a judgment within five (5) years from its
rendition, since the Rules of Court provide for
enforcement by mere motion during those five
years. The error of this stand is apparent,
because the second action, originally begun in
the Court of First Instance, was not an action to
enforce the judgment of the Municipal Court, but
an action to have non-parties to the judgment
held responsible for its payment.

Finding no error in the judgment appealed from,

the same is hereby affirmed, with costs against
petitioners-appellants Cirilo Paredes and Ursula
Tolentino.

Bengzon, Actg. C.J., Bautista, Angelo, Labrador,

Barrera and Dizon, JJ., concur.
Concepcion and Paredes, JJ., took no part.
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20502 February 26, 1965
EMILIO CANO ENTERPRISES, INC., petitioner,
vs.
COURT OF INDUSTRIAL RELATIONS, ET
AL., respondents.
D. T. Reyes and Associates for petitioner.
Mariano B. Tuason for respondent Court of
Industrial Relations.
C. E. Santiago for respondent Honorata Cruz.
BAUTISTA ANGELO, J.:
In a complaint for unfair labor practice filed
before the Court of Industrial Relations on June
6, 1956 by a prosecutor of the latter court,
Emilio, Ariston and Rodolfo, all surnamed Cano,
were made respondents in their capacity as
president and proprietor, field supervisor and
manager, respectively, of Emilio Cano
Enterprises, Inc.
After trial, Presiding Judge Jose S. Bautista
rendered decision finding Emilio Cano and
Rodolfo Cano guilty of the unfair labor practice
charge, but absolved Ariston for insufficiency of
evidence. As a consequence, the two were
ordered, jointly and severally, to reinstate
Honorata Cruz, to her former position with
payment of backwages from the time of her
dismissal up to her reinstatement, together with
all other rights and privileges thereunto
appertaining.
Meanwhile, Emilio Cano died on November 14,
1958, and the attempt to have the case dismissed
against him having failed, the case was appealed
to the court en banc, which in due course
affirmed the decision of Judge Bautista. An order
of execution was issued on August 23, 1961 the
dispositive part of which reads: (1) to reinstate
Honorata Cruz to her former position as ordered policy it should be disregarded by the courts (12
in the decision; and (2) to deposit with the court Am. Jur. 160-161).
the amount of P7,222.58 within ten days from
receipt of the order, failing which the court will A factor that should not be overlooked is that
order either a levy on respondents' properties or Emilio and Rodolfo Cano are here indicted, not in
the filing of an action for contempt of court. their private capacity, but as president and
manager, respectively, of Emilio Cano
The order of execution having been directed Enterprises, Inc. Having been sued officially their
against the properties of Emilio Cano connection with the case must be deemed to be
Enterprises, Inc. instead of those of the impressed with the representation of the
respondents named in the decision, said corporation. In fact, the court's order is for them
corporation filed an ex parte motion to quash the to reinstate Honorata Cruz to her former
writ on the ground that the judgment sought to position in the corporation and incidentally pay
be enforced was not rendered against it which is her the wages she had been deprived of during
a juridical entity separate and distinct from its her separation. Verily, the order against them is
officials. This motion was denied. And having in effect against the corporation. No benefit can
failed to have it reconsidered, the corporation be attained if this case were to be remanded to
interposed the present petition the court a quo merely in response to a technical
for certiorari.1äwphï1.ñët substitution of parties for such would only cause
an unwarranted delay that would work to
The issue posed before us is: Can the judgment Honorata's prejudice. This is contrary to the
rendered against Emilio and Rodolfo Cano in spirit of the law which enjoins a speedy
adjudication of labor cases disregarding as much
their capacity as officials of the corporation
Emilio Cano Enterprises, Inc. be made effective as possible the technicalities of procedure. We,
therefore, find unmeritorious the relief herein
against the property of the latter which was not a
party to the case? prayed for.
The answer must be in the affirmative. While it is WHEREFORE, petition is dismissed, with costs.
an undisputed rule that a corporation has a
personality separate and distinct from its Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera,
members or stockholders because of a fiction of Paredes, Dizon, Regala, Makalintal, Bengzon, J.P.,
the law, here we should not lose sight of the fact and Zaldivar, JJ., concur.
that the Emilio Cano Enterprises, Inc. is a closed
family corporation where the incorporators and
directors belong to one single family. Thus, the
following are its incorporators: Emilio Cano, his
wife Juliana, his sons Rodolfo and Carlos, and his
daughter-in-law Ana D. Cano. Here is an instance
where the corporation and its members can be
considered as one. And to hold such entity liable
for the acts of its members is not to ignore the
legal fiction but merely to give meaning to the
principle that such fiction cannot be invoked if
its purpose is to use it as a shield to further an
end subversive of justice. 1 And so it has been
held that while a corporation is a legal entity
existing separate and apart from the persons
composing it, that concept cannot be extended to
a point beyond its reason and policy, and when
invoked in support of an end subversive of this
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20886 April 27, 1967
NATIONAL MARKETING CORPORATION
(NAMARCO), plaintiff-appellant,
vs.
ASSOCIATED FINANCE COMPANY, INC., and
FRANCISCO SYCIP, defendants.
FRANCISCO SYCIP, defendant-appellee.
Tomas P. Matic, Jr,. for plaintiff and appellant.
Francisco Sycip in his behalf as defendant and
appellee.
DIZON, J.:
Appeal by the National Marketing Corporation —
hereinafter referred to as NAMARCO, from the
decision of the Court of First Instance of Manila
in Civil Case No. 45770 ordering the Associated
Finance Company, Inc. — hereinafter referred to
as the ASSOCIATED — to pay the NAMARCO the
sum of P403,514.28, with legal interest thereon
from the date of filing of the action until fully
paid, P80,702.26 as liquidated damages,
P5,000.00 as attorney's fees, plus costs, but
dismissing the complaint insofar as defendant
Francisco Sycip was concerned, as well as the
latter's counterclaim. The appeal is only from
that portion of the decision dismissing the case
as against Francisco Sycip.
On March 25, 1958, ASSOCIATED, a domestic
corporation, through its President, appellee
Francisco Sycip, entered into an agreement to
exchange sugar with NAMARCO, represented by
its then General Manager, Benjamin Estrella,
whereby the former would deliver to the latter
22,516 bags (each weighing 100 pounds) of
"Victorias" and/or "National" refined sugar in
exchange for 7,732.71 bags of "Busilak" and
17,285.08 piculs of "Pasumil" raw sugar
belonging to NAMARCO, both agreeing to pay
liquidated damages equivalent to 20% of the
contractual value of the sugar should either
party fail to comply with the terms and
conditions stipulated (Exhibit A). Pursuant
thereto, on May 19,1958, NAMARCO delivered to
ASSOCIATED 7,732.71 bars of "Busilak" and
17,285.08 piculs of "Pasumil" domestic raw
sugar. As ASSOCIATED failed to deliver to
NAMARCO the 22,516 bags of "Victoria" and/or
"National" refined sugar agreed upon, the latter,
on January 12, 1959, demanded in writing from
the ASSOCIATED either (a) immediate delivery
thereof before January 20, or (b) payment of its
equivalent cash value amounting to P372,639.80.
On January 19, 1959, ASSOCIATED, through
Sycip, offered to pay NAMARCO the value of
22,516 bags of refined sugar at the rate of P15.30
per bag, but the latter rejected the offer. Instead,
on January 21 of the same year it demanded
payment of the 7,732.71 bags of "Busilak" raw
sugar at P15.30 per bag, amounting to
P118,310.40. and of the 17,285.08 piculs of
"Pasumil" raw sugar at P16.50 per picul,
amounting, to P285.203.82, or a total price of
P403,514.28 for both kinds of sugar, based on
the sugar quotations (Exh. H) as of March 20,
1958 — the date when the exchange agreement
was entered into.
As ASSOCIATED refused to deliver the raw sugar
or pay for the refined sugar delivered to it,
inspite of repeated demands therefore,
NAMARCO instituted the present action in the
lower court to recover the sum of P403,514.28 in
payment of the raw sugar received by
defendants from it; P80,702.86 as liquidated
damages; P10,000.00 as attorney's fees,
expenses of litigation and exemplary damages,
with legal interest thereon from the filing of the
complaint until fully paid.
In their amended answer defendants, by way of
affirmative defenses, alleged that the correct
value of the sugar delivered by NAMARCO to
them was P259,451.09 or P13.30 per bag of 100
lbs. weight (quedan basis) and not P403,514.38
as claimed by NAMARCO. As counterclaim they
prayed for the award of P500,000.00 as moral
damages, P100,000.00 as exemplary damages
and P10,000.00 as attorney's fees.
After due trial court rendered the appealed
judgment. The appeal was taken to the Court of
Appeals, but on January 15, 1963 the latter
certified the case to us for final adjudication
pursuant to sections 17 and 31 of the Judiciary
Act of 1948, as amended, the amount involved
being more than P200,000.00, exclusive of
interests and cost.
The only issue to be resolved is whether, upon
the facts found by the trial court, — which, in our
opinion, are fully supported by the evidence —
Francisco Sycip may be held liable, jointly and
severally with his co-defendant, for the sums of
money adjudged in favor of NAMARCO.
The evidence of record shows that, of the capital
stock of ASSOCIATED, Sycip owned P60,000.00
worth of shares, while his wife — the second
biggest stockholder — owned P20,000.00 worth
of shares; that the par value of the subscribed
capital stock of ASSOCIATED was only
P105,000.00; that negotiations that lead to the
execution of the exchange agreement in question
were conducted exclusively by Sycip on behalf of
ASSOCIATED; that, as a matter of fact, in the
course of his testimony, Sycip referred to himself
as the one who contracted or transacted the
business in his personal capacity, and asserted
that the exchange agreement was his personal
contract; that it was Sycip who made personal
representations and gave assurances that
ASSOCIATED was in actual possession of the
22,516 bags of "Victorias" and/or "National"
refined sugar which the latter had agreed to
deliver to NAMARCO, and that the same was
ready for delivery; that, as a matter of fact,
ASSOCIATED was at that time already insolvent;
that when NAMARCO made demands upon
ASSOCIATED to deliver the 22,516 bags of
refined sugar it was under obligation to deliver
to the former, ASSOCIATED and Sycip, instead of
making delivery of the sugar, offered to pay its
value at the rate of P15.30 per bag — a clear
indication that they did not have the sugar
contracted for.1äwphï1.ñët
The foregoing facts, fully established by the
evidence, can lead to no other conclusion than
that Sycip was guilty of fraud because through
false representations he succeeded in inducing
NAMARCO to enter into the aforesaid exchange
agreement, with full knowledge, on his part, on
the fact that ASSOCIATED whom he represented
and over whose business and affairs he had
absolute control, was in no position to comply
with the obligation it had assumed.
Consequently, he can not now seek refuge
behind the general principle that a corporation
has a personality distinct and separate from that
of its stockholders and that the latter are not
personally liable for the corporate obligations.
To the contrary, upon the proven facts, We feel
perfectly justified in "piercing the veil of
corporate fiction" and in holding Sycip
personally liable, jointly and severally with his
co-defendant, for the sums of money adjudged in
favor of appellant. It is settled law in this and
other jurisdictions that when the corporation is
the mere alter ego of a person, the corporate
fiction may be disregarded; the same being true
when the corporation is controlled, and its
affairs are so conducted as to make it merely an
instrumentality, agency or conduit of another
(Koppel Phils., etc. vs. Yatco, etc., 43 O.G. No. 11.
Nov. 1947; Yutivo Sons, etc. vs. Court of Tax
Appeals, etc., G.R. No. L-13203, promulgated on
January 28, 1961).
Wherefore, the decision appealed from is
modified by sentencing defendant-appellee
Francisco Sycip to pay, jointly and severally with
the Associated Finance Company, Inc., the sum of
money which the trial court sentenced the latter
to pay to the National Marketing Corporation, as
follows: the sum of FOUR HUNDRED THREE
THOUSAND FIVE HUNDRED FOURTEEN PESOS,
and TWENTY-EIGHT CENTAVOS P403,514.28),
with interest at the legal rate from the date of the
filing of the action until fully paid plus an
additional amount of EIGHTY THOUSAND SEVEN
HUNDRED TWO PESOS and EIGHTY-SIX
CENTAVOS (P80,702.86) as liquidated damages
and P5,000.00 as attorney's fees and further to
pay the costs. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal,
Bengzon, J.P., Zaldivar and Sanchez JJ., concur.
Castro, J., took no part.
Republic of the Philippines to reimburse to the plaintiffs- party of the SECOND PART an That the unpaid balance of the
SUPREME COURT appellees the sum of P500.00 area of SIX HUNDRED (600) total consideration of the sale
Manila paid by the latter to the SQUARE METERS with a amounting to ONE
Development Bank of the frontage of twenty (20) THOUSAND (P1,000.00)
THIRD DIVISION Philippines for the METERS along the present PESOS shall be paid by the
defendants-appellants' national highway, at the PARTY OF THE SECOND PART
P2,600.00 loan account. corner of the aforementioned directly to the
land bordering a proposed DEVELOPMENT BANK OF
No pronouncement as to five-meter subdivision road THE PHILIPPINES, DAVAO
G.R. No. 81158 May 22, 1992 costs. adjacent to the property of the BRANCH, in ten (10) equal
PARTY OF THE SECOND monthly installments of ONE
OSCAR A. JACINTO and LIBRADA FRANCO- PART; HUNDRED (P100.00) PESOS
SO ORDERED. 2 each not later than the 15th
JACINTO, petitioners,
vs. That for and in consideration day following the end of each
ROGELIO KAPARAZ, RAUL KAPARAZ and The undisputed antecedent facts are as follows: of the foregoing premises and month beginning May 10,
ROSE MARIET KAPARAZ, respondents. of the sum of EIGHT 1966;
On 11 March 1966, herein petitioners and HUNDRED (800.00) PESOS
Garcia, Iñigo & Ledesma Law Office for private respondents entered into an agreement which the PARTY OF THE That the PARTY OF THE
petitioners. (hereinafter referred to as Agreement) under FIRST PARTY (sic) hereby SECOND PART has the right
which the private respondents agreed to sell and acknowledges to have and privilege by virtue of this
convey to petitioners a portion consisting of six received from the PARTY OF (sic) presents to take
hundred (600) square meters of a lot located in THE SECOND PART, THE possession of the area of SIX
Matiao, Mati, Davao Oriental and covered by PARTY OF THE FIRST PART HUNDRED (600) SQUARE
DAVIDE, JR, J.:p Transfer Certificate of Title No. T-3694 for a total hereby agrees, promises and METERS subject of this
consideration of P1,800.00 of downpayment of binds himself to sell, cede, agreement and to appropriate
Petitioners urge this Court to review and set P800.00 was paid upon execution of the transfer, and convey for himself all the
aside the decision of the respondent Court of Agreement. The balance of P1,000.00 was to be absolutely to the PARTY OF improvements existing
Appeals of 30 July 1987 in C.A.-G.R. CV No. paid by petitioners on installment at the rate of THE SECOND PART SIX thereon effective from the
69357, 1 the dispositive portion of which reads: P100.00 a month to the Development Bank of the HUNDRED (600) SQUARE date of execution of this
Philippines (DBP) to be applied to private METERS portion of the agreement; 3
respondents' loan accounts. Paragraphs 5, 6, 7 property covered by
WHEREFORE, the appealed and 8 of the Agreement read as follows: TRANSFER CERTIFICATE OF
decision is hereby REVERSED Paragraph 9 thereof reads:
TITLE NO. T-3694 together
and SET ASIDE and judgment with all the improvements
is hereby rendered as follows: That the PARTY OF THE That the PARTY OF THE
FIRST PART is very much in thereon, which portion is
situated along the national FIRST PART agrees and binds
need of cash to pay the loan to himself to acknowledge
1. The Complaint/Amended the DEVELOPMENT BANK OF highway and shown as the
Complaint is hereby shaded area in the sketch at receipt of every and all
THE PHILIPPINES herein monthly payments remitted
dismissed. abovementioned which is the back hereof; the total
consideration of the sale of to the DEVELOPMENT BANK
very much in arrears and the OF THE PHILIPPINES by the
2. The agreement between the PARTY OF THE SECOND PART the said SIX HUNDRED (600)
SQUARE METERS shall be PARTY OF THE SECOND PART
parties dated March 11, 1966 is agreeable to advance the and further agrees and binds
(Exhibit "A"; also marked as sum of EIGHT HUNDRED ONE THOUSAND EIGHT
HUNDRED PESOS himself to execute the final
Exhibit "1" ) is hereby (P800.00) PESOS as partial deed of absolute sale of the
declared extinguished. payment of the said loan to (P1,800.00), including the
amount of EIGHT HUNDRED SIX HUNDRED (600) SQUARE
the Development Bank of the METERS herein above
Philippines provided that the PESOS (P800.00) advanced by
3. To prevent unjust the PARTY OF THE SECOND referred to in favor of the
enrichment at the expense of PARTY OF THE FIRST PARTY PARTY OF THE SECOND PART
(sic) shall sell, transfer, cede PART upon the execution of
another, the defendants- this document; as soon as the settlement or
appellants are hereby ordered and convey absolutely to the partition of the estate of the
 deceased NARCISA R. the defendants equal monthly installments of
KAPARAZ shall have been property to pay ONE HUNDRED (P100.00)
consummated and effected, consisting plaintiffs PESOS EACH not later than
but not later than March 31, of six reasonable the 15th day following the
1967; 4 hundred attorney's end of each month beginning
(600) fees in the May 10, 1966". The
Upon the execution of the agreement, petitioners square amount of defendants, on the other hand,
paid the downpayment of P800.00 and were meters, P3,000.00 have also bound themselves
placed in possession of the portion described more or and to pay to execute the final deed of
therein. As to the P1,000.00 which was to be paid less, the costs. absolute sale of the portion
directly to the DBP, petitioners claim that they denominat above-mentioned in favor of
had even made an excess payment of P100.00. ed as Lot SO ORDERED. 5 the plaintiffs "as soon as the
H-12, Psd- settlement or partition of the
11-000576, estate of the deceased
In view of the refusal of private respondents to which was The facts as found by the trial court are as NARCISA R. KAPARAZ shall
execute the deed of sale, petitioners filed against formerly a follows: have been consummated and
them a complaint for specific performance with portion of effected, but not later than
the then Court of First Instance (now Regional the xxx xxx xxx March 31, 1967."
Trial Court) of Davao Oriental. The complaint property
was docketed as Civil Case No. 586 and was covered by
amended on 23 January 1979. In their Answer The adduced evidence will It appears that plaintiffs had
Transfer show that the parties herein paid defendant Domingo
filed on 28 June 1977, later amended on 19 Certificate
December 1979 as a consequence of the filing of above executed a certain Kaparaz the amount of
of Title No. agreement (Exh. "A" for the P400.00 (Exh. "B"), the
the amended complaint, private respondents T-3694,
alleged that the sale did not materialize because plaintiffs; Exhibit "1" for the P200.00 which was paid by
and now defendants) dated March 11, plaintiffs to the development
of the failure of petitioners to fulfill their covered by
promise to make timely payments on the 1966, the pertinent portions Bank of the Philippines for the
Transfer of which are hereunder account of the late Domingo
stipulated price to the DBP; as a result of such Certificate
failure, they (private respondents) failed to quoted, to wit: Kaparaz and the P200.00 was
of Title No. given to said defendant.
secure the release of the mortgage on the T-5824 in
property. They then prayed for the dismissal of xxx xxx xxx Plaintiff Oscar Jacinto made
the name another payment to the
the case and a declaration that the agreement is of
null and void. Development Bank of the
defendant From the foregoing provisions Philippines for the account of
Rogelio of the said agreement, the Domingo and Narcisa Kaparaz
After due trial, the court below rendered on 19 Kaparaz; defendants herein have bound covered by Official Receipt No.
November 1981 a decision in favor of the themselves to sell and convey 1113990, dated November 29,
petitioners, the dispositive portion of which (2) a portion of the property 1966, in the amount of
reads as follows: Ordering covered by Transfer P200.00 (Exh. "F"). Another
defendant Certificate of Title No. T-3694, payment was again made to
FOR ALL THE FOREGOING, Rogelio consisting of SIX HUNDRED the Development Bank of the
judgment is hereby rendered Kaparaz to (600) SQUARE METERS, to Philippines for the same
in favor of the plaintiffs and reconvey the plaintiffs for a account by plaintiff Oscar
against the defendants –– this consideration of P1,800.00, Jacinto covered by Official
property to P800.00 of which had been Receipt No. 1334193, dated
the received by the defendants December 5, 1968, in the
(1) upon the execution of the
Declaring plaintiffs amount of P300.00 (Exh. "C")
herein; document and the remaining and another payment also
the balance of P1,000.00 shall be
plaintiffs to was made on December 9,
paid by the plaintiffs directly 1968 in the amount of
be the (3) to the Development Bank of
owners of Ordering P200.00 covered by Official
the Philippines in "ten (10)
Receipt No. 1334196 (Exh.
''H''). All of these payments
are certified by the
Development Bank of the
Philippines (Exh. "E") to have
been made by plaintiff Oscar
Jacinto and applied to the
accounts of Domingo and
Narcisa Kaparaz. For the
subdivision survey of the lot
of six (600) square meters
involved in this case, plaintiffs
contributed the amount of
P80.00 (Exh. "J") and another
amount of P350.00 was paid
also to Engr. Ladera (Exh. "I")
plaintiffs, all in all, aside from
the payments that they made
to the Surveyor, have paid the
Development Bank of the
Philippines for the account of
the late Domingo Kaparaz in
the total amount of P700.00
which in already in excess of
the price consideration of
P1,800.00 after defendants
had received the amount of
P1,200.00. Plaintiff Oscar
Jacinto explained that the
payment was in excess of
P100.00 because the balance
of P600.00 which was
originally intended to be paid
for the surveyor was instead
paid by him to the bank plus
P100.00 to cover the
accumulated interests. Thus
(sic), making the total
payments to the Development
Bank of the Philippines in the
amount of P700.00.
On the other (hand),
defendant Rogelio Kaparaz
testified that plaintiffs did not
comply with the terms of the
agreement (Exh. "A") by
having failed to pay the ten
(10) equal monthly
installments. For failure of
plaintiffs to pay the monthly
installments, as agreed (sic) in
the agreement (Exh. "A" ), he
decided to pay the
Development Bank of the
Philippines of (sic) their
accounts. The partial payment
was made on July 3, 1967 in
the amount of P3,000.00
covered by Official Receipt No.
1160314 (Exh. "2") and
another payment for the
balance was made on August
15, 1967 in the amount of
73,124.11 covered by Official
Receipt No. 1160831 (Exh.
"4").
It is likewise admitted that the
estate of the late Narcisa R.
Kaparaz had already been
settled and that six hundred
(600) square meters portion
of the lot covered by Transfer
Certificate of Title No. T-3694,
or Lot No. H-12, Psd-11-
000576, has already been
adjudicated to defendant
Rogelio Kaparaz and is now
registered in his name under
Transfer Certificate of Title
No. T-5824. 6
Private respondents appealed from said decision
to the Court of Appeals which docketed the case
as C.A.-G.R. CV No. 69357. In their Brief, they
contended that the trial court erred in: (a)
finding that petitioners had fully paid the
consideration for the property subject of the
agreement, (b) ruling that the delay in the
payments to the DBP is only a slight breach of
the agreement, (c) holding private respondents'
failure to protest petitioners' delay of payment
amounted to implied waiver to rescind the
agreement, (d) declaring that laches did not
operate against petitioners considering that the
prescriptive period has not even expired, (e) not
holding that the parties are inpari delicto, and (f)
ordering Rogelio Kaparaz to reconvey the
property in question to petitioners.
As earlier adverted to, in its decision of 30 July
1987, the respondent Court of Appeals reversed
the decision of the trial court. The respondent
Court was of the opinion that: (a) The petitioners
had not fully discharged their obligation under
the agreement considering that their last
payments to DBP of P300.00 7 and
P200.00 8 were "several months delayed beyond
the date/s agreed upon by the parties," and that
the agricultural loan to which the amortizations
of the unpaid balance of P1,000.00 of the
purchase price were to be applied had in fact
been fully settled by the private respondents.
The application of these payments by the DBP to
another account of the private respondents was
of no moment because the agreement of the
parties specifically referred to the agricultural
loan. (b) No evidence supports the .conclusion of
the trial court that private respondents failed to
protest the delay in the payments. On the
contrary, the evidence discloses that private
respondents demanded from the petitioners the
balance of the obligation after the latter had
defaulted; having received no response, private
respondents themselves paid .the agricultural
loan. (c) The delay in the payments was not a
slight breach. The dates of the payments were so
essential that they were specifically stipulated
upon by the parties. The primary importance of
timely payments sprang from the nature of the
subject bank account consisting of a loan secured
by a real estate mortgage which demanded up-
to-date amortization to prevent foreclosure. (d)
While the trial court was correct in holding that
both parties defaulted in the performance of
their respective obligations, petitioners were the
first to incur in delay. There is, therefore, greater
justification to decree rescission. Moreover, even
granting that there was no evidence as to who
violated the agreement first, then the contract is
deemed extinguished pursuant to the second
sentence of Article 1192 of the Civil Code. This
Article provides that:
In case both parties have
committed a breach of the
obligation, the liability of the
first infractor shall be
equitably tempered by the
courts. If it cannot be
determined which of the
parties first violated the
contract, the same shall be
deemed extinguished, and
each shall bear his own
damage.
Unable to accept the above verdict, petitioner
commenced this petition wherein they allege
that respondent Court erred in not finding that:
(a) petitioners had fully paid the consideration
for the 600 square meters of Lot H; (b) private
respondents' failure to protest the delay of
payments can be considered as estoppel on their
part and an implied waiver of their right to
rescind the sale; (c) assuming that the last two
payments to the DBP were not valid as they were
applied to another account, there was at least
substantial performance by the petitioners of
their obligation; (d) the breach on the part of
petitioners was only slight or casual and would
not warrant rescission of the sale; (e) under the
circumstances, it was necessary for the
respondents to make a notarial demand or
obtain prior judicial approval to effect rescission
of the sale; and finally, (e) the agreement was
extinguished.
After the filing of the Comments by private
respondents, the reply thereto by petitioners and
the rejoinder to the latter by private
respondents, the Court gave due course to the
petition and required the parties to submit
simultaneously their respective
Memoranda, 9 which they subsequently complied
with. 10
The petition is impressed with merit.
Vital to the resolution of the controversy is the
determination of the true nature of the
questioned agreement. Is it a contract of sale or a
contract to sell? The two are not, of course, the
same. In the latter case, ownership is retained by
the seller and is not to pass until full payment of
the price. Such payment is a positive suspensive
condition the failure of which is not a broach,
casual or serious, but simply an event that
prevents the obligation of the vendor to convey
title from acquiring binding force. In such a
situation, to argue that there was only a casual
breach is to proceed from the assumption that
the contract is one of absolute sale, where non-
payment is a resolutory question. 11 Otherwise
stated, as capsulized in Luzon Brokerage Co.,
Inc. vs. Maritime Building Co., Inc., 12 "there can be
no rescission or resolution of an obligation as yet
non-existent, because the suspensive condition
did not happen." Expanding on this point, this
Court, in said case, made the following
disquisitions:
. . . The upshot of all these
stipulations is that in seeking
the ouster of Maritime for
failure to pay the price as
agreed upon, Myers was not
rescinding (or more
properly, resolving) the
contract, but
precisely enforcing it
according to its express terms.
In its suit Myers was not
seeking restitution to it of the
ownership of the thing sold
(since it was never disposed
of), such restoration being the
logical consequence of the
fulfillment of
a resolutory condition, express
or implied (article 1190);
neither was it seeking a
declaration that its obligation
to sell was extinguished. What
it sought was a judicial
declaration that because
the suspensive condition (full
and punctual payment)
had notbeen fulfilled, its
obligation to sell to
Maritime never arose or never
became effective and,
therefore, it (Myers) was
entitled to repossess the
property object of the
contract, possession being a
mere incident to its right of
ownership. It is elementary
that, as stated by Castan, ––
b) Si la condicion suspensive
Ilega a faltar, la obligacion se
tiene por no existente, y el
acreedor pierde todo derecho,
incluso el de utilizar las
medidas conservativas. (3
Catan Derecho Civil, 7a Ed., p.
107). (Also Puig Peña, Der.
Civ., T. IV (1), p. 113).
On the other hand, since in a contract of sale, the
non-payment of the price is a resolutory
condition, 13 the remedy of the seller under
Article 1191 of the Civil Code is to exact
fulfillment or to rescind the contract. In respect,
however, to the sale of immovable property, this
Article must be read together with Article 1592
of the same Code:
Art. 1592. In the sale of
immovable property, even
though it may have been
stipulated that upon failure to
pay the price at the time
agreed upon the rescission of
the contract shall of right take
place, the vendee may pay,
even after the expiration of
the period, as long as no
demand for rescission of the
contract has been made upon
him either judicially or by a
notarial act. After the demand,
the court may not grant him a
new term.
This Article applies to instances where no
stipulation for automatic rescission is made
because it says "even though". 14
The agreement in the instant case has all the
earmarks of a contract of sale. The possession of
the portion sold was immediately delivered to
the petitioners. They were granted the right to
enjoy all the improvements therein effective
from the date of the execution of the agreement.
Private respondents unqualifiedly bound
themselves to execute the final deed of sale "as
soon as the settlement or partition of the estate
of the deceased Narcisa R. Kaparaz shall have
been consummated and effected, but not later
than March 31, 1967" and only upon full
payment of the unpaid portion of the purchase
price. The private respondents did not reserve
unto themselves the ownership of the property
until full payment of the unpaid balance of
P1,000.00. Finally, there is no stipulation giving
the private respondents the right to unilaterally
rescind the contract the moment the vendee fails
to pay within a fixed period. In reality, the
agreement was an absolute sale which allowed
the petitioners to pay the remaining balance of
the purchase price in installment. We agree with
the submission of
petitioners 15 that Dignos vs. Court of
Appeals 16 applies in this case. In said case, this
Court stated:
Thus, it has been held that a
deed of sale is absolute in
nature although denominated
as a "Deed of Conditional
Sale" where nowhere in the
contract in question is a
proviso or stipulation to the
effect that title to the property
sold is reserved in the vendor
until full payment of the
purchase price, nor is there a
stipulation giving the vendor
the right to unilaterally
rescind the contract the
moment the vendee fails to
pay within a fixed period
(Taguba v. Vda. de Leon, 132
SCRA 722; Luzon Brokerage
Co., Inc. v. Maritime Building
Co., Inc., 86 SCRA 305).
As stated earlier, in a contract of sale, the remedy
of an unpaid seller is either specific performance
or rescission. The latter, with respect to the sale
of immovables, is specifically governed by Article
1592 of the Civil Code. 17 In the case at bar, there
was non-compliance with the requirements
prescribed in these provisions. It is not
controverted that private respondents had
neither filed an action for specific performance
nor demanded the rescission of the agreement
either judicially or by a notarial act before the
filing of the complaint in Civil Case No. 586. It is
only in their Answer that they belatedly raised
the defense of resolution of the contract
pursuant to Article 1191 by reason of
petitioners' breach of their obligation.
Even if the general law on resolution, Article
1191 of the Civil Code, is to be applied, Our
decision would still be for the petitioners. The
third paragraph of this Article reads:
xxx xxx xxx
The Court shall decree the
rescission claimed, unless
there be just cause
authorizing the fixing of a
period.
It is not denied that petitioners made two (2)
payments in the sums of P200.00 and P300.00 at
a time when what remained unsettled under the
agreement was only P400.00. There was then an
excess payment of P100.00. These payments
were made to the DBP which applied them to an
outstanding account of the private respondents.
Private respondents neither complained of the
delay in these payments nor rejected their
application to their account. They were,
undoubtedly, benefited by the application
because it either satisfied their account or
correspondingly reduced it. The claim that the
account to which it was applied was not the
account stipulated in the agreement is without
merit. In the first place, the agreement fails to
disclose an express agreement that the monthly
amortizations on the P1,000.00 unpaid balance
of the purchase price to be made to the DBP
should be applied exclusively to the agricultural
loan indicated in the exordium of the agreement.
The loan was mentioned only to lay the basis for
private respondents' need for the downpayment.
In the second place, to allow private respondents
to reject the payment of P400.00, plus the excess
of P100.00 after they benefited therefrom, would
be unjust.
Then too, at no time before the filing of their
Answer did private respondents declare their
intention to rescind the agreement, or if they did,
communicate such intention to the petitioners. It
was necessary for private respondents to have
done so. As this Court held in University of the
Philippines vs. De los Angeles: 18
Of course, it must be
understood that the act of a
party in treating a contract as
cancelled or resolved on
account of infractions by the
other contracting party must
be made known to the other
and is always provisional,
being ever subject to scrutiny
and review by the proper
court. If the other party
denies that rescission is
justified, it is free to resort to
judicial action in its own
behalf, and bring the matter to
court. Then, should the court,
after due hearing, decide that
the resolution of the contract
was not warranted, the
responsible party will be
sentenced to damages; in the
contrary case, the resolution
will be affirmed, and the
consequent indemnity
awarded to the party
prejudiced.
In other words, the party who
deems the contract violated
may consider it resolved or
rescinded, and act
accordingly, without previous
court action, but it proceeds at
its own risk. For it is only the
final judgment of the
corresponding court that will
conclusively and finally settle
whether the action taken was
or was not correct in law. But
the law definitely does not
require that the contracting
party who believes itself
injured must first file suit and WHEREFORE, the petition is GRANTED. The
wait for a judgment before challenged decision of the Court of Appeals is
taking extrajudicial steps to REVERSED and the judgment of the lower court
protect its interest. Otherwise, is hereby REINSTATED and AFFIRMED. Costs
the party injured by the against private respondents.
others' breach will have to
passively sit and watch its SO ORDERED.
damages accumulate during
the pendency of the suit until
the final judgment of Gutierrez, Jr., Feliciano, Bidin and Romero, JJ.,
concur.
rescission is rendered when
the law itself requires that he
should exercise due diligence
to minimize its own damages
(Civil Code, Article 2203).
Finally, the delay incurred by petitioners was but
a casual or slight breach of the agreement, which
did not defeat the object of the parties in
entering into the agreement. A mere casual
breach does not justify rescission.19 The prompt
payment of the monthly amortizations of the
unpaid balance of P1,000.00 was not a condition
precedent to the execution of the final deed of
sale. Besides, petitioners had already paid
P1,400.00 of the total consideration of
P1,800.00, or exactly 77.77% of the purchase
price within the period stipulated. Moreover,
they had in fact overpaid the private
respondents by P100.00.
Accordingly, We rule that rescission of the
agreement was not available to private
respondents.
We further rule that the respondent Court erred
in declaring the agreement extinguished
pursuant to the second sentence of Article 1192
of the Civil Code. Having concluded, although
erroneously, that petitioners were the first to
breach the agreement, it should have applied the
first sentence thereof by equitably tempering
petitioners' liability. The second sentence applies
only to cases where it cannot be determined
which of the parties first violated the contract.
The foregoing disquisitions render unnecessary
any discussion on the other issues raised by
petitioners.
Republic of the Philippines checks which the defendant
SUPREME COURT encashed, in the total amount
Manila of P93,358.51, which the
plaintiff willingly extended
THIRD DIVISION because of the
representations of the
defendant that he was a
successful financial consultant
of local and international
G.R. No. 89804 October 23, 1992 businessmen;
CALVIN S. ARCILLA, petitioner, 4. That defendant's
vs. indebtedness referred to in
THE HONORABLE COURT OF APPEALS and the next preceding paragraph,
EMILIO RODULFO, respondents. is shown and described in
thirty (30) "vales" signed by
him or by persons authorized
by him, all of which
documents are in the
DAVIDE, JR., J.: possession of the plaintiff for
being unredeemed or unpaid,
This petition is a belated attempt to avoid the xerox copies attached as
adverse amended decision of public respondent, Annexes "A" to "Z" and "AA"
promulgated on 31 May 1989 in C.A.-G.R. No. to "DD" which are hereby
11389, 1 on the ground that petitioner is not made integral parts hereof;
personally liable for the amount adjudged since
the same constitutes a corporate liability which 5. That commencing with the
nevertheless cannot even bind or be enforced
summer months of 1983 up to
against the corporation because it is not a party the time immediately before
in the collection suit filed before the trial court. the filing of this complaint, the
plaintiff had made numerous
The procedural antecedents are not complicated. demands for payment but the
respondent acted in gross and
On 4 June 1985, private respondent filed with evident bad faith in refusing
the Regional Trial Court (RTC) of Catanduanes a to satisfy the plaintiff's plainly
complaint for a sum of money against valid, just and demandable
petitioner. 2 The case was docketed as Civil Case claim;
No. 1992 and was assigned to Branch 42 thereof.
It is alleged therein: 6. That the plaintiff is left
without any recourse other
xxx xxx xxx than to enforce his claim in
court and had to secure the
services of the undersigned
3. That from late 1981 up to counsel who charged the
early 1983, the defendant,
plaintiff with P1,000.00 for
taking advantage of his close accepting the case, P200.00
friendship with the plaintiff,
appearance fee for every
succeeded in securing on appearance before this Court,
credit from the plaintiff,
and attorney's contingent fee
various items, cash and of 25% of the award in favor
of the plaintiff; plaintiff shall
incur litigation expenses
which may amount to no less
than P5,000.00, all of which
amounts are recoverable from
the defendant.
In his Answer, 3 petitioner does not deny having
had business transactions with the private
respondent but alleges that the professional
relationship began only in August of 1982 when
he "was looking for a "pro-forma"invoice to
support his loan with the Kilusang Kabuhayan at
Kaunlaran (KKK for short) under the Ministry of
Human Settlement (sic)." 4 He explicitly admits
that "(H)is loan was in the same of his family
corporation, CSAR Marine Resources,
Inc.;" 5 however, the "vales", more specifically
Annexes "A" to "DD" of the complaint, "were
liquidated in the bank loan releases." 6 It is thus
clear that his main defense is payment; he did
not interpose any other affirmative defense.
In his Pre-Trial Brief, 7 petitioner reiterated the
earlier claim that his first business dealing with
the plaintiff (private respondent herein) was in
August of 1982. This time, however, he alleges
that "as President of CSAR Marine Resources,
Inc., he requested for a pro-forma Invoice for said
corporation to support the loan application with
the Kilusang Kabuhayan at Kaunlaran (KKK for
short), with the Ministry of Human Settlement
(sic)." 8
In its Decision of 1 August 1986, 9 the trial court
made the following findings of fact:
Defendant admitted the
genuineness (sic) and due
execution of Exhibits "A" to
"DD" but, according to him, he
already paid plaintiff
P56,098.00 thru PNB Virac
Branch, per Cash Voucher
dated September 28, 1982
(Exh. 3) and then P42,363.75
also thru PNB Virac Branch,
per PNB check No. 628861K
dated December 16, 1982
(Exh. 1).
Analyzing the evidence adduced by both parties,
it ruled that since Exhibit "3" is dated 28
September 1982 and the "vales", Exhibits "A" to
"DD", with the exception of Exhibits "K" in the
amount of P1,730.00 and "Q" in the amount of
P10,765.00, were issued after said date, it could
not have been in payment of the "vales" other
than that evidenced by Exhibits "K" and "Q"
Considering, however, that the "vales" remained
in the possession of the private respondent, they
are presumed to remain unpaid; in fact, private
respondent so testified that they were not paid
at all. The court therefore ordered petitioner to
pay private respondent:
(a) the total amount of
P92,358.43 covered by the
"vales", plus interest thereon
at the rate of twelve (12%)
per cent per annum from June
4, 1985 when the complaint
was filed;
(b) P9,000.00 for and as
attorney's fees; and
(c) the cost of suit. 10
Petitioner appealed this decision to the public
respondent which docketed the case as C.A.-G.R.
CV No. 11389.
The public respondent affirmed the trial court's
decision in its Decision of 14 January 1988. 11 As
could be gleaned therefrom, petitioner's
assigned errors are as follows:
. . . defendant raised as error
of the court a quo in (sic)
holding that the "vales" (Exhs.
A to DD) have not been paid;
that the presumption in favor
of the plaintiff-appellee that
since he was in possession of
the "vales" the same have not
 been paid, remained appellee's complaint, with rendered, ordering defendant- with
undisputed; that the total damages and costs against appellant to pay plaintiff- plaintiff-
transaction between the appellee. appellee in his capacity as appellee
parties amount to more than President of Csar Marine out of the
P200,000.00; and in In the remote possibility, that Resources, Inc. the KKK loan
rendering a decision in favor the appellee's complaint outstanding balance of transaction
of the plaintiff-appellee plus cannot be dismissed P23,639.33 to Universal ;
the award of attorney's fees in outrightly, it is further prayed Enterprises, owned and
his favor. 12 that his Honorable Tribunal operated by plaintiff-appellee, 3.3. Csar
orders (sic) a new trial for plus interest at 12% per Marine
On 5 February 1988, petitioner filed a motion to appellant to present annum from June 4, 1985 Resources,
reconsider the aforesaid decision 13 alleging additional evidence he when the complaint was filed; Inc. is not a
therein, inter alia, that (a) the evidence showing wanted to present in his attorney's fees of P1,000.00, party in
payment of the "vales" is "uncontroverted", motion for new trial. 15 P200.00 per court appearance this case;
hence the presumption that they were not paid of counsel and 25% of the
simply because they remain in the possession of amount awarded; plus the
xxx xxx xxx costs of the suit. 19 xxx xxx xxx
the creditor cannot arise; (b) the alleged non-
payment of the "vales" could have been further
explained if the trial court gave the appellant the Reacting to this motion, private respondent, in a On 4 January 1989, petitioner filed a Motion For 5. It is rather confusing (sic)
opportunity to present sur-rebuttal witness and "Manifestation dated 7 February 1988, informed Clarificatory Judgment 20 alleging therein that: that defendant-appellant is
documentary evidence; besides, he has newly the public respondent that in the interest of ordered to pay plaintiff-
discovered evidence — invoked in a prayer for a justice and fair play, he interposes no objection appellee in his capacity as
to the alternative prayer for a new 3. It is very clear from the President of Csar Marine
new trial that was nevertheless denied by the findings of this Honorable
lower court — which consists of a letter, dated 7 trial. 16 Hearing was thereafter conducted to Resources, Inc. the said
receive the petitioner's so-called newly Court contained in the amount of P23,639.33, when
February 1983, signed by Rafael Rodulfo, amended decision
General Manager of the private respondent and discovered evidence consisting of the plaintiff-appellee for ulterior
abovementioned letter of Rafael Rodulfo, dated 7 promulgated on May 31, 1989 motives choose (sic) not to
addressed to Brig. Gen. Clemente Racela, then that:
KKK General Action Officer, categorically stating February 1983, to General Clemente A. Racela implead said corporation. It
that "the account of CSAR Marine Resources, Inc. (Exh. "1"-Motion) wherein the former, as General need not be emphasized that
c/o Atty. Calvin Arcilla" is only P23,639.33; and Manager of private respondent's Universal 3.1. the personality and liability of
(c) the evidence presented by both parties Enterprises, informed the latter that: Defendant the defendant-appellant and
disclosure that "the subject account are (sic) all Calvin S. that of Csar Marine Resources,
in the name of CSAR MARINE RESOURCES, INC., . . . Csar Marine Resources, Inc. Arcilla Inc., as a corporation, are
a corporation separate and distinct from the c/o Atty. Calvin Arcilla has an never had separate and distinct from its
appellant;" such fact remains "uncontroverted" outstanding obligation of any (sic) other. . . . . 21
as shown by Exhibits "1", "3", "A" to "DD" TWENTY THREE THOUSAND personal
adopted as Exhibits "7" to "25" for the SIX PESOS to Universal business He then prays that:
appellant." 14 He then prays that: Enterprises as a result of transaction
various purchases of (sic) in the
plaintiff; . . . an order be issued
. . . considering that appellees construction materials.17 clarifying the liability of
was not able to prove by defendant-appellant in his
preponderance of evidence Thereafter, on 31 May 1989, the public 3.2. Csar personal capacity as regards
the alleged unpaid account of respondent promulgated an Amended Marine the amount of P23,639.33, if
appellant, the decision Decision, 18 the dispositive portion of which Resources, any, otherwise, the case be
promulgated on January 14, reads as follows: Inc. has an dismissed against him. 22
1988 be RECONSIDERED and outstandin
a new one be entered g balance
WHEREFORE, the decision of in the Public respondent denied this motion in its
REVERSING the lower court this Court promulgated on Resolution of 17 August
decision and thereby ordering amount of
January 14, 1988 is hereby P23,636.33 1989 23 on these grounds: (a) the veil of
the DISMISSAL of plaintiff- reconsidered and a new one corporate fiction should be pierced in this case;
(b) since petitioner did not raise the issue of
separate corporate identity in the pleadings in
the trial court or in his Brief, he cannot raise it
for the first time in a Motion for Clarificatory
Judgment; in his answer to paragraphs 3 and 4 of
the complaint, he admits that it was he and not
his corporation who transacted business with
the private respondent; and (c) the "vales" refer
not only to construction materials for which the
loan to Csar Marine Resources, Inc. was
supposed to be used, but also to consumables
such as salt, rice, food seasoning, cigarettes,
coffee, etc.; this indicates that the petitioner
himself did not seriously treat the corporate
affairs of Csar Marine Resources, Inc. as separate
and distinct from his own.
Not satisfied with the Resolution, petitioner filed
this petition. He alleges therein that respondent
Court of Appeals:
I respondent had bent over backwards to grant
. . . ERRED IN HOLDING CSAR
MARINE RESOURCES, INC., A
DOMESTIC CORPORATION
DULY ORGANIZED
ACCORDING TO LAW, WHERE
PETITIONER THE PRESIDENT
(sic), LIABLE TO THE
PRIVATE RESPONDENT IN
THE AMOUNT AWARDED IN
THE APPEALED DECISION
WITHOUT BEING
IMPLEADED AS A PARTY IN
THE CASE IN VIOLATION OF
LAW AND THE APPLICABLE
DECISIONS OF THE SUPREME
COURT; and
II
. . . IN NOT DISMISSING THE
CASE AGAINST THE
PETITIONER. 24
After the filing of the Comment, the Reply
thereto and the Rejoinder to the latter, this Court
gave due course to the petition and required the
parties to submit their respective Memoranda. 25
The records bear nothing to prop up the instant
petition. The arguments adduced by the
petitioner breathe no life to it.
On the contrary, the pleadings lead Us to the
inescapable conclusion that the petitioner, who
is himself a lawyer, is merely taking advantage of
the use of the innocuous phrase "in his capacity
as President" found in the dispositive portion of
the challenged Amended Decision — making the
same a sanctuary for a defense which he, as
hereinafter discussed, had long since abandoned
or waived either deliberately or through his
obliviscence. His sole purpose, of course, is to
avoid complying with the liability adjudged
against him by the public respondent; such
avoidance is premiered on the so-called newly
discovered evidence offered after the public
him a new trial despite the availability of such
evidence during pendency of the proceedings
before the trial court. It is to be noted that he
failed to assign as error in his Brief the denial by
the said court of his motion for new trial on the
basis thereof.
The grant of affirmative relief based on the first
assigned error would really redound to the
benefit of an entirety which was not made a
party in the main case and which did not seek to
intervene therein. Therefore, it has no
personality to seek as review of the public
respondent's Amended Decision under Rule 45
of the Rules of Court. Only the original parties to
the main case may do so. 26 Moreover, by no
stretch of even the most fertile imagination may
one be able to conclude that the challenged
Amended Decision directed Csar Marine
Resources, Inc. to pay the amounts adjudge. By
its clear and unequivocal language, it is the
petitioner who was declared liable therefor and
consequently made to pay. That the latter was
ordered to do so as president of the corporation
would not free him from the responsibility of
paying the due amount simply because according
to him, he had ceased to be corporate president;
such conclusion stems from the fact that the
public respondent, in resolving his motion for
clarificatory judgment, pierced the veil of
corporate fictional and cast aside the contention
that both he and the corporation have separate
and distinct personalities. In short, even if We
are to assume arguendo that the obligation was
incurred in the name of the corporation, the
petitioner would still be personally liable
therefor because for all legal intents and
purposes, he and the corporation are one and the
same. Csar Marine Resources, Inc. is nothing
more than his business conduit and alter ego.
The fiction of a separate juridical personality
conferred upon such corporation by law should
be disregarded. 27 Significantly, petitioner does
not seriously challenge the public respondent's
application of the doctrine which permits the
piercing of the corporate veil and the
disregarding of the fiction of a separate juridical
personality; this is because he knows only too
well that from the very beginning, he merely
used the corporation for his personal purposes.
In his answer to the complaint, petitioner
volunteered the information that the pro-
forma invoice which he obtained from the
private respondent and which became the
source of the obligations reflected in the "vales"
was to support his loan. He states in part:
. . . when defendant was
looking for a "pro-forma"
invoice to support his
loan with the Kilusang
Kabuhayan at Kaunlaran . .
. His loan was in the name of
his family corporation, CSAR
Marine Resources, Inc. . . . . 28
That it was indeed his loan is further
borne out by his allegations therein
part:
(a) The accounting between
plaintiff and
defendant, however, was not
closed because adjustments
were needed in the following
points: 29
(b) 5. While it is true that
plaintiff made demands for
payment of an alleged balance
of P23,000.00 in March 1983,
which demand was even
coursed thru the KKK
Regional and Provincial
Offices, after the demand of
P23,000.00 defendant
paid additional P5,000.00
cash to plaintiff. 30
In his motion to reconsider the public
respondent's original decision,
petitioner becomes more candid in his
admissions that indeed, the transaction
with the private respondent and the
loan obtained previously were for his
personal account. Thus he asserts that:
(a) the first document made
between appellee and
appellant was the pro-
forma invoice. 31
(b) [c]considering
that appellant had already an
approved loan and was ready
for release . . . . 32
Moreover, petitioner neglected to set up in his
Answer the defense that he is not personally
liable to private respondent because the "vales"
were corporate obligations of Csar Marine
Resources, Inc.. Of course, that defense would
have been inconsistent with his volunteered
admission that the KKK loan — which resulted in
the procurement of the pro-forma invoice from
the private respondent — was for his benefit. In
any case, the failure to set it up as an affirmative
defense amounted to a waiver thereof. Section 2,
Rule 9 of the Rules of Court expressly proved
that defenses and objections, other than the
failure to state a cause of action and lack of
jurisdiction, not pleaded either in a motion to
dismiss or in the answer are deemed waved.
Petitioner, as a lawyer, knows or is supposed to
know this rule. Since he prepared the Answer
himself, We cannot think of any possible reason
why he failed to set up this defense other than
his realization of its inherent weakness or his
outright inexcusable negligence of forgetfulness.
And even if it were due to inadvertence, he could
still have subsequently availed of Section 2, Rule
10 of the Rules of Court which allows a party to
amend his answer as a matter of right within the
period therein stated. Failing that, he could have
resorted to Section 3 thereof which allows the
making of amendments upon leave of court. On
the other hand, if the lapse was due to
forgetfulness, it is just unfortunate that he did
not exercise due diligence in the conduct of his
won affairs. He can expect no reward for it.

Then too, as correctly noted by the public

respondent, petitioner, in his Brief, did not
assign as error the holding of the trial court that
he is solely liable for the obligation.

Petitioner's volunteered admission that he

procured the pro-forma invoice from the private
respondent in connection with his loan from the
KKK, using his family corporation in the process,
and his deliberate waiver of the aforementioned
defense provide an insurmountable obstacle to
the viability of this petition.

WHEREFORE, for utter lack of merit, the instant

petition is DENIED with costs against petitioner.

This decision is immediately executory.

SO ORDERED.

Gutierrez, Jr., Bidin, Romero and Melo, JJ., concur.

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-69494 May 29, 1987
A.C. RANSOM LABOR UNION-CCLU, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION,
First Division A.C. RANSOM (PHIIS.)
CORPORATION RUBEN HERNANDEZ, MAXIMO
C. HERNANDEZ, SR., PORFIRIO R. VALENCIA,
LAURA H. CORNEJO, FRANCISCO HERNANDEZ,
CELESTINO C. HERNANDEZ and MA. ROSARIO
HERNANDEZ, respondents.
RESOLUTION
MELENCIO-HERRERA, J.:
In a joint Decision in two earlier cases rendered
by the then Court of Industrial Relations (CIR) on
August 19, 1972, it declared in the dispositive
portion thereof:
IN VIEW OF ALL THE
FOREGOING, ... the A.C.
Ransom Philippine
Corporation is guilty of unfair
labor practice of interference
and discrimination herein
above held and specified;
ordering said corporation, its
officers and agents to cease
and desist from committing
the same: finding thestrike
legal and justified; and
to reinstate immediately ... , to
their respective positions with
backwages from July 25, 1969
until actually reinstated,
without loss of seniority
rights and other privileges
appurtenant to their
employment. (Emphasis
supplied). 1
This Court affirmed that Decision when it denied
the Petition for Review filed by RANSOM on
February 26, 1973 in G.R. Nos. L-36226-68.
The backwages due the 22 employees having
been computed at P 199,276.00 by the (CIR)
Examiner, successive Motions for Execution
were filed by the UNION on January 27, 1973 and
March 1, 1973, all of which RANSOM opposed
stressing its "precarious financial position if
immediate execution of the backwages would be
ordered." Upon the UNION's Motion of April 22,
1973 asking the CIR that RANSOM be ordered to
deposit with the Court the backwages due them.
RANSOM manifested that it did not have the
necessary funds to deposit and asked that the
employees' earnings elsewhere during this
suspension be deducted. After several hearings, a
recomputation was made and the award of
P199,276.00 was reduced to P 164,984.00. 2
The records show that, upon application filed by
RANSOM on April 2, 1973, it was granted
clearance by the Secretary of Labor on June 7,
1973 to cease operation and terminate
employment effective May 1, 1973, without
prejudice to the right of subject employees to
seek redress of grievances under existing laws
and decrees. 3 The reasons given by RANSOM for
the clearance application were financial
difficulties on account of obligations incurred
prior to 1966.
On January 21, 1974, the UNION filed another
Motion for Execution alleging that although
RANSOM had assumed a posture of suffering
from business reverse, its officers and principal
stockholders had organized a new corporation,
the Rosario Industrial Corporation (thereinafter
called ROSARIO), using the same equipment,
personnel, business stocks and the same place of
business. For its part, RANSOM declared that
ROSARIO is a distinct and separate corporation,
which was organized long before these instant
cases were decided adversely against RANSOM.
It appears that sometime in 1969, ROSARIO, a b) Maximo C. Hernandez, Jr.
closed corporation, was, in fact, established. It (Director);
was engaged in the same line of business as
RANSOM with the same Hernandez family as the c) Porfirio N. Valencia
owners, the same officers, the same President, (Director);
the same counsel and the same address at 555
Quirino Avenue, Paranaque, Rizal. The
compound, building, plant, equipment, d) Laura H. Cornejo
machinery, laboratory and bodega were the (Director);
same as those occupied and used by RANSOM.
The UNION claims that ROSARIO thrives to this e) Francisco Hernandez
day. (Chairman of the Board);
Writs of execution were issued successively f) Celestino C. Hernandez
against RANSOM on June 23, 1976, and February (Director); and
17, 1977, to no avail.
g) Ma. Rosario Hernandez
On December 18, 1978, the UNION again filed an (Director).
ex-parte Motion for Writ of Execution and
Garnishment praying that the Writ issue against Consequently, let a writ of
the Officers/Agents of RANSOM personally and execution be issued for P
or their estates, as the case may be, considering 164,984.00 against
their success in hiding or shielding the assets of respondent corporation and
said company. RANSOM countered that the CIR its officers/agents
Decision, dated August 19, 1972, could no longer enumerated above.
be enforced by mere Motion because more than
five (5) years had already lapsed.
SO ORDERED. (Emphasis
supplied) 4
Acting on the Motion, Labor Arbiter Tito F.
Genilo issued, on March 11, 1980, an Order, the
pertinent part of which reads: It appears that among the persons named in the
aforequoted Order, Ma. Rosario Hernandez died
in 1971; Francisco Hernandez died in 1977: and
Under the circumstances and Celestino C. Hernandez passed away in 1979.
pursuant to the decision
And Maximo Hernandez who was named in the
aforementioned, especially CIR Decision, died in 1966. 5
that portion holding the
respondent
corporation's officers and The NLRC, on appeal, modified the Decision by
relieving the officers and agents of liability as
agents liable, the following
officers of the respondent follows:
corporation — as appears in
the record-are hereby deemed As to the liability of the
included parties respondents respondent's officers and
in their official capacity: agents, we agree with the
contention of the respondent-
a) Ruben Hernandez appellant that there is nothing
(President, per his testimony in the order dated March 11,
on August 21, 1974); 1980 that would justify the
holding of the individual
 officers and agents of
respondent in their personal
capacity. As a general rule,
officers of the corporation are
not liable personally for the
official acts unless they have
exceeded the scope of their
authority. In the absence of
evidence showing that the
officers mentioned in the
Order of the Labor Arbiter
dated March 11, 1980 have
exceeded their authority, the
writ of execution can not be
enforced against them,
especially' so since they were
not given a chance to be
heard.
WHEREFORE, the Order
appealed from is hereby
affirmed, except as modified
above.
SO ORDERED. 6
Reconsideration sought by the UNION from the
NLRC was denied, hence this special civil action
of Certiorari.
On June 10, 1986, this Court promulgated its
Decision, the dispositive portion of which
decrees:
WHEREFORE, the questioned
Decision of the National Labor
Relations Commission is SET
ASIDE, and the Order of the
Labor Arbiter Tito F. Genilo of
March 11, 1980 is reinstated
with the modification that
personal liability for the
backwages due the 22 strikers
shall be limited to Ruben
Hernandez, who was
President of RANSOM in 1974,
jointly and severally with
other Presidents of the same
corporation who had been
elected as such after 1972 or
up to the time the corporate
life was terminated.
Both parties have moved for reconsideration.
Private respondents point out that they were
never impleaded as parties in the Trial Court,
and that their personal liabilities were never at
issue; that judgment holding Ruben Hernandez
personally liable is tantamount to deprivation of
property without due process of law; and that he
was not an officer of the corporation at the time
the unfair labor practices were committed.
The UNION on the other hand, in its own Motion
for Reconsideration, prays that the veil of
corporate fiction be pierced and that the
Decision be modified, in that all the individual
private respondents and not only the President,
should be held jointly and severally liable with
RANSOM. On November 4, 1986, it further filed
an Urgent Motion for Preliminary Mandatory
Injunction "directing private respondents to
deposit the amount of P 199,276.00 or to put up
a supersedeas bond of the same sum."
Incontrovertible is the fact that RANSOM was
found guilty by the CIR, in its Decision of August
19, 1972, of unfair labor practice; that its officers
and agents were ordered to cease and desist
from further committing acts constitutive of the
same, and to reinstate immediately the 22 union
members to their respective positions with
backwages from July 25, 1969 until actually
reinstated.
The CIR Decision became final, conclusive, and
executory after this Court denied the RANSOM
petition for review in 1973. In other words, this
Court upheld that portion of the judgment
ordering the officers and agents of RANSOM to
reinstate the laborers concerned, with
backwages. The inclusion of the officers and
agents was but proper since a corporation, as an
artificial being, can act only through them. It was
also pursuant to the CIR Act (CA No. 103 ), 7 the
Industrial Peace Act (R.A. 875) 8 the Minimum
Wage Law (R.A. 602). 9 Consequently, when, in
resolving the UNION's Motion for Writ of
Execution and Garnishment in the Order of When the notion of legal
March 11, 1980, Labor Arbiter Genilo named the entity is used as a means to
seven (17) private respondents herein as the perpetrate fraud or an illegal
RANSOM officers and agents, who should be held act or as a vehicle for the
liable (supra), he merely implemented the evasion of an existing
already final and executory CIR decision of obligation, the circumvention
August 19, 1972. The NLRC, on appeal to it by of statutes, and or confuse
RANSOM, could not have modified the CIR legitimate issues the veil
Decision, as affirmed by this Court, by relieving which protects the
RANSOM's officers and agents of liability. It is corporation will be lifted
also for that reason that in our Decision of June (Villa Rey Transit, Inc. vs.
10, 1986 we set aside said NLRC Decision and Ferrer, 25 SCRA 846 [1968];
reinstated the Order of Labor Arbiter Genilo, Republic vs. Razon, 20 SCRA
with modification, in that we limited liability for 234 [1967]; A.D. Santos, Inc.
backwages due the 22 UNION members to the vs. Vasquez, 22 SCRA 1156
President of RANSOM in 1974 jointly and [1968]; Telephone Eng'g. &
severally with other Presidents of the same Service Company, Inc. vs.
corporation who had been elected as such after WCC, 104 SCRA 354 [1981]).
1972 or up to the time the corporation life was
terminated, since the President should also be
The alleged bankruptcy of RANSOM furnishes no
deemed included in the term "employer. " justification for non-payment of backwages to
the employees concerned taking into
The foregoing, however, limits the scope of consideration Article 110 of the Labor Code,
liability and deviates from the CIR Decision, which provides:
affirmed by this Court in 1973, holding
the officers and agents of RANSOM liable. In ART. 110. Worker preference
other words, the officers and agents listed in the in case of bankruptcy. - In the
Genilo Order except for those who have since
event of bankruptcy or
passed away, should, as affirmed by this Court, liquidation of an employer's
be held jointly and severally liable for the
business, his workers shall
payment of backwages to the 22 strikers. enjoy first preference as
regards wages due them for
This finding does not ignore the legal fiction that services rendered during the
a corporation has a personality separate and period prior to the
distinct from its stockholders and members, for, bankruptcy or liquidation, any
as this Court had held "where the incorporators provision of law to the
and directors belong to a single family, the contrary notwithstanding.
corporation and its members can be considered Unpaid wages shag be paid in
as one in order to avoid its being used as an full before other creditors
instrument to commit injustice," 10 or to further may establish any claim to a
an end subversive of justice. 11 In the case share in the assets of the
of Claparols vs. CIR 12 involving almost similar employer.
facts as in this case, it was also held that the
shield of corporate fiction should be pierced
The term "wages" refers to all remunerations,
when it is deliberately and maliciously designed earnings and other benefits in terms of money
to evade financial obligations to employees. To
accruing to the employees or workers for
the same effect was this Court's rulings in still services rendered. They are to be paid in full
other cases:
before other creditors may establish any claim to
a share in the assets of the employer.
 Section 10. Payment of wages
in case of bankruptcy.-Unpaid
wages earned by the
employees before the
declaration of bankruptcy or
judicial liquidation of the
employer's business shall be
given first preference and
shall be paid in full before
other creditors may establish
any claim to a share in the
assets of the employer. 13
The foregoing provisions are but in consonance
with the principles of social justice and
protection to labor guaranteed by past and
present Constitutions and are not really being
given any retroactive effect when applied herein.
The Decision of the CIR was rendered on August
19, 1972. Clearance to RANSOM to cease
operations and terminate employment granted
by the Secretary of Labor was made effective on
May 1, 1973. The right of the employees
concerned to backwages awarded them,
therefore, had already vested at the time and
even before clearance was granted. Note should
also be taken of the fact that the clearance was
without prejudice to the right of subject
employees to seek redress of grievances under
existing laws and decrees.
The worker preference applies even if the
employer's properties are encumbered by means
of a mortgage contract, as in this case. So that,
when machinery and equipment of RANSOM
were sold to Revelations Manufacturing
Corporation for P 2M in 1975, the right of the 22
laborers to be paid from the proceeds should
have been recognized, even though it is claimed
that those proceeds were turned over to the
Commercial Bank and Trust Company
(Comtrust) in payment of RANSOM obligations,
since the workers' preference is over and above
the claim of other creditors.
The contention, therefore, of the heirs of the late
Maximo C. Hernandez, Sr. that since they paid
from their own personal funds the balance of the
amount owing by RANSOM to Comtrust they are
the "preferential creditors" of RANSOM, is clearly
without merit. Workers are to be paid in full
before other creditors may establish any claim to
a share in the assets of the employer.
... even if the employer's
properties are encumbered by
means of a mortgage contract,
still the workers' wages which
enjoy first preference in case
of bankruptcy or liquidation
are duly protected by an
automatic first lien over and
above all other earlier
encumbrances on the said
properties. Otherwise,
workers' wages may be
imperilled by foreclosure of
mortgages, and as a where
consequence, the aforecited
provision of the New Labor
Code would be rendered
meaningless. 14
Aggravating RANSOM's clear evasion of payment
of its financial obligations is the organization of a
"run-away corporation," ROSARIO, in 1969 at the
time the unfair labor practice case was pending
before the CIR by the same persons who were
the officers and stockholders of RANSOM,
engaged in the same line of business as RANSOM,
producing the same line of products, occupying
the same compound, using the same
machineries, buildings, laboratory, bodega and
sales and accounts departments used by
RANSOM, and which is still in existence. Both
corporations were closed corporations owned
and managed by members of the same family. Its
organization proved to be a convenient
instrument to avoid payment of backwages and
the reinstatement of the 22 workers. This is
another instance where the fiction of separate
and distinct corporate entities should be
disregarded.
It is very obvious that the
second corporation seeks the
protective shield of a acted on.
corporate fiction whose veil in
the present case could, and
should, be pierced as it was
deliberately and maliciously
designed to evade its financial
obligation to its employees.
... When a notion of legal
entity is used to. defeat public
convenience, justify wrong,
protect fraud, or defend
crime, the law will regard the
corporation as an association
or persons, or, in the case of
two corporations, will merge
them into one. 15
The corporation will be
treated merely as an
aggregation of individuals or,
there are two
corporations, they will be
merged as one, the one being
merely regarded as part of the
instrumentality of the
other. 16
The UNION's plea, therefore, for the
reinstatement of the 22 strikers in ROSARIO
should be favorably heard. However, ROSARIO
shall have the option to award them separation
pay equivalent to one-half month for every year
of service actually rendered by the 22 strikers.
The plea of the UNION for the restoration of the
original computation of P199,276.00 or to grant
the 22 Union members three (3) years
backwages is rejected. It is the amount of
P164,984.00 as backwages, which was the
subject of the Writ of Execution issued by the
Labor Arbiter pursuant to the CIR Decision of
1972.
With the conclusions arrived at, the UNION's
Urgent Motion for a Writ of Preliminary
Mandatory Injunction directing private
respondents to deposit the amount due as
backwages in the meantime, need no longer be
A final and executory Decision in favor of the
UNION obtained in 1972 and affirmed by this
Court in 1973 has remained unsatisfied to this
date despite no less than ten (10) Motions for
Execution over a period of fourteen (14) years,
not to mention the fact that this is the second
time that this case is before this Court. The
detriment and prejudice caused the employees
concerned is subversive of the ends of justice.
This protracted litigation must end and labor
should now enjoy the just deserts of its legal
victory.
ACCORDINGLY, private respondents' Motion for
Reconsideration is hereby denied with
FINALITY; the Motion for Reconsideration filed
by petitioner is granted in part; and the
dispositive portion of the Decision, dated June
10, 1986, is hereby amended to read as follows:
WHEREFORE, the questioned
Decision of the National Labor
Relations Commission is SET
ASIDE, and the Order of Labor
Arbiter Tito F. Genilo of March
11, 1980 is reinstated with
the modification that Rosario
Industrial Corporation and its
officers and agents are hereby
held jointly and severally
liable with the surviving
private respondents for the
payment of the backwages
due the 22 union members.
Rosario Industrial
Corporation is hereby
ordered to reinstate the 22
union members or, if this is
not possible, to award them
separation pay equivalent at
least to one (1) month pay or
to one (1) month salary for
every year of service actually
rendered by them with A.C.
Ransom (Phils). Corporation,
whichever is higher.
This decision is immediately executory.
SO ORDERED.

Yap (Chairman), Cruz, Paras * and Gancayco, JJ.,

concur.

Narvasa ** and Sarmiento, *** JJ., took no part.

Feliciano, J., is on leave.

Republic of the Philippines 2. In G.R. No. 79907, whether Sweet Lines but an independent contractor and (b) Backwages based on her
SUPREME COURT or not the petitioner could be that therefore their dispute with her came under last monthly pay rate of
Manila held solidarity liable with the jurisdiction of the civil courts and not of the P3,000.00 to be computed
Sweet Lines, Inc. to the Labor Arbiter. 2 On this matter the private from the time of her dismissal
FIRST DIVISION private respondent. respondent pointedly comments: to the actual payment of her
separation pay;
G.R. No. 79907 March 16, 1989 The record shows that private respondent At this point, private
Victoria Calsado was hired by Sweet Lines, Inc. respondent would like to (c) Proportionate 13th month
on March 5, 1981, as Senior Branch Officer of its underscore the fact that while pay for the year 1985;
SAMUEL CASAS LIM, petitioner, International Accounts Department for a fixed private respondent in the
vs. salary and a stipulated 5 % commission on sales proceedings before the Labor
THE NATIONAL LABOR RELATIONS (d) Sales commission in the
production. On December 1, 1983, after Arbiter presented five sum of P432,656.68;
COMMISSION and VICTORIA R. tendering her resignation to accept another offer witnesses including herself,
CALSADO, respondents. of employment, she was persuaded to remain all of whom were cross-
with an offer of her promotion to Manager of the examined by petitioners, and (e) Moral damages of
G.R. No. 79975. March 16, 1989 Department with corresponding increase in numerous documents which P100,000.00;
compensation, which she accepted. She was also were marked as Exhs. "A" to
SWEET LINES, INC., petitioner, allowed to buy a second-hand Colt Lancer "GG-8d" and 858 receipts and (f) Exemplary damages of
vs. pursuant to a liberal car plan under which one- bills, all of which were duly P10,000.00; and
NATIONAL LABOR RELATIONS COMMISSION; half of the cost was to be paid by the company identified and testified to by
HON. NESTOR C. LIM (In his capacity as Labor and the other half was to be deducted from her private respondent and her (g) Attorney's fees of
Arbiter of the Ministry of Labor and salary. Relations began to sour later, however, witnesses and examined by P10,000.00 plus 25 % of the
Employment and VICTORIA R. when she repeatedly asked for payment of her petitioners, petitioner failed total monetary awards in
CALSADO, respondents. commissions, which had accumulated and were to present any single favor of the complainant.
long overdue. She also complained of the evidence, testimonial or
inordinate demands on her time even when she documentary, to controvert
Puruganan, Chato, Chato & Tan Law Office for was sick and in the hospital. Finally, on July 16, private respondent's The decision was appealed to the National Labor
petitioner. 1985, she was served with a letter from Samuel evidence. All that they Relations Commission and affirmed in
Casas Lim, the other petitioner, informing her presented were their toto except as to the attorney's fees, which were
Leo C. Romero for petitioner Sweet Lines, Inc. that her "employment with Sweet Lines" would unsubstantiated pleadings not reduced to 10% of the total award. 5 Both Sweet
terminate on August 5, 1985. Efforts were also one of which was under oath, Lines and Lim then came to us in separate
taken by Sweet Lines to forcibly take the car not even their position paper petitions to raise the above-stated issues. On
Andrea R. dela Cueva for Victoria R. Calsado. October 14, 1987, we issued a temporary
from her, culminating in an action for replevin which, under the NLRC rules
against her in the regional trial court of Manila. (Sec. 2, Rule 7, Revised Rules restraining order against the enforcement of the
of the NLRC), have to be decision of the public respondent dated
verified. 3 September 11, 1987. 6 The petitions were
On August 14, 1985, Calsado filed a complaint consolidated on December 7, 1987, and given
CRUZ, J.: against both petitioners for illegal dismissal, due course on May 16, 1987, with the parties
illegal deduction, and unpaid wages and On December 29, 1986, decision was rendered being required to submit their respective
These two cases have been consolidated because commissions plus moral and exemplary against the two petitioners by the Labor memoranda. On the first question, we hold that
they relate to the same factual antecedents and damages, among other claims. 1 There followed Arbiter 4 who held them liable in solidum to the the employee-employer relations between
the same private respondent. The issues are: an extended hearing where she testified on the complainant for the following amounts: Calsado and Sweet Lines have been sufficiently
details of her employment, emphasizing her established. The following documents submitted
1. In G.R. No. 79975, whether unsatisfactory treatment by the management of (a) Separation pay equivalent by the former and not controverted by the latter
or not the private respondent Sweet Lines and especially the termination of her to one month pay for every should belie the claim that Calsado was only an
was an employee of the services without the required notice and hearing year of service based on her independent contractor over whom Sweet Lines
petitioner and, if so, had been and without valid cause. She also presented four latest basic salary of had no control.
illegally dismissed; and other witnesses to corroborate her charges. P2,500.00 plus allowance of
corollarily, whether or not the P500.00, or a total monthly 1. Certification issued by
NLRC had jurisdiction over The respondents' defenses were based mainly on pay of P3,000.00; Sweet Lines, lnc. dated May
their dispute. the claim that Calsado was not an employee of
2l,1984, stating that private
respondent 'is employed with
this company since March 5,
1982 up to the present,
presently designated as
International Accounts
Manager of the Sweet Lines,
Inc., Manila Branch." (Exh.
"W" )
2. Termination letter issued
by Samuel Casas Lim to
private respondent reading.
'Your employment with Sweet
lines, Inc. will cease effective
August 15, 1985. In
connection with the foregoing,
you are entitled to (1)
separation pay equivalent to
one half month of every year
of service ... ; (2) The
computed money value of
unused vacation leave ... ; (3)
Thirteenth month pay ... ;"
(Exh. "W")
3. Notice of private
respondent's promotion
effective December 1, 1982
from Senior Branch Officer to
Manager, International
Accounts, with an increase in
basic salary from P1,250 to
P2,500 a month; (Exh. "D")
4. Computation of her salary,
allowance and 13th month
pay differentials on account of
her promotion, prepared and
approved by the proper
officials of petitioner Sweet
Lines, Inc. whose signatures
appear thereon; (Exh. "E")
5. Certification dated
September 6, 19M issued by
the petitioner company,
subscribed and sworn to
before a notary public
declaring that private
respondent was then an
Account Executive of Sweet
Lines, Inc.; (Exh. "E")
6. Certification, notarized on
January 10, 1985, by Atty.
Gregorio Francisco, counsel
for petitioner company, that
private respondent "is a bona
fide employee of Sweet Lines,
Inc. and presently holding the
position of Manager,
International Account.' (Exh.
"Y")
7. Approved application for
sick leave of private
respondent for 15 days from
March 7, 1985 to April 3,
1985. (Exh. "I")
There is in the above exhibits a consistent and
categorical recognition of Calsado as an
employee of petitioner Sweet Lines. Indeed, its
notarized certification that Calsado was its bona
fide employee is irrefutable. The petitioner
cannot now argue that the grant to her of the
13th month pay and even the differential pay
was a mere accomodation like the car plan
(which, for that matter, is a benefit usually
extended only to employees). If it is true that
Sweet Lines had no control over her and left her
free to determine her work schedule, there
would have been no reason at all for its approval
of her application for sick leave from March 7,
1985 to April 3, 1985. The termination letter
itself, which was signed by the other petitioner
as Vice President of Sweet Lines, said she was
"entitled" to certain payments as a result of the
cessation of her "employment with Sweet Lines,
Inc."
Sweet Lines has also failed to substantiate its
allegation that Calsado was an independent
contractor, as it should have, with evidence
showing inter alia that she had the financial
resources and other means or equipment to
operate as such. One must prove what one
alleges, but Sweet Lines confined itself to mere
denials.
At any rate, the determination of the existence of
employee-employer relations is a factual finding
which this Court will not disturb or reverse in
the absence of a showing of grave abuse of
discretion. We do not see such justification here.
On the contrary, the ascertainment of the
employment status of the private respondent
was made on the basis of the criteria consistently
employed by the Court in the determination of
the employee- employer relationship. 7 We find
from the record that all these test have been
satisfied.
Such relationship having been established, the
third issue is automatically resolved and
requires not much elaboration. Suffice it only to
stress that the damages claimed by private
respondent as a result of her illegal dismissal
and the violation of the terms and conditions of
her employment also come within the
jurisdiction of the Labor Arbiter as a contrary
rule would result in the splitting of actions and
the consequent multiplication of suits. So we
recently affirmed in Limquiaco v. Ramolete 8 and
more positively in National Union of Bank
Employees v. Lazaro, 9where we declared:
As we stated, the damages
(allegedly) suffered by the
petitioners only form part of
the civil component of the
injury arising from the unfair
labor practice. Under Article
247 of the Code, "the civil
aspects of all cases involving
unfair labor practices which
may include claims for
damages and other
affirmative relief, shall be
under the jurisdiction of the
labor arbiters.
On the fourth issue, we agree with petitioner Lim
that he cannot be held personally liable with
Sweet Lines for merely having signed the letter
informing Calsado of her separation. There is no
evidence that he acted with malice or bad faith.
The letter, in fact, informed her not only of her
separation but also of the benefits due her as a
result of the termination of her services.
It is true that Lim has raised this matter rather
tardily and also that he belongs to a closed
corporation controlled by the members of one
family only. But these circumstances should not
be allowed to operate against him if he is to be
accorded substantial justice in the resolution of
the private respondent's claim. As we said
in Ortigas vs. Lufthansa German Airlines, 10 the
Court is "clothed with ample authority to review
matters, even if they are not assigned as errors in
the appeal, if it finds that its consideration is
necessary in arriving at a just decision of the
case." As for the second charge, the mere fact
that Lim is part of the family corporation does
not mean that all its acts are imputable to him
directly and personally. His acts were official
acts, done in his capacity as Vice President of
Sweet Lines and on its behalf. There is no
showing that he acted without or in excess of his
authority or was motivated by personal ill-will
toward Calsado. The applicable decision is Sunio
v. NLRC, 11 where it was held:
Petitioner Sunio was
impleaded in the Complaint in
his capacity as General
Manager of petitioner
corporation. There appears to
be no evidence on record that
he acted maliciously or in bad
faith in terminating the
services of private
respondents. His act,
therefore, was within the
scope of his authority and was
a corporate act.
It is basic that a corporation is
invested by law with a
personality separate and
distinct from those of the
persons composing it as well
as from that of any other
entity to which it may be
related. Mere ownership by a
 single stockholder or by
another corporation of all or
nearly all of the capital stock
of a corporation is not of itself
sufficient ground for
disregarding the separate
corporate personality.
Petitioner Sunio, therefore,
should not have been made
personally answerable for the
payment of private
respondents' back salaries.
The case of Ransom v. NLRC 12 is not in point
because there the debtor corporation actually
ceased operations after the decision of the Court
of Industrial Relations was promulgated against
it, making it necessary to enforce it against its
former president. Sweet lines is still existing and
able to satisfy the judgment in favor of the
private respondent.
The Solicitor General, invoking equity rather
than law, observes that making Lim solidarity
liable with Sweet Lines will ensure payment of
Calsado's claim. But this precaution, even
assuming it to be valid, is really unnecessary. in
fact, as a condition for the issuance of our
temporary restraining order of October 14,
1987, Sweet Lines posted as required a bond in
the amount of P850,000.00, which should cover
the amounts awarded to the private
respondent.13
We especially uphold the award of moral and
exemplary damages in view of the acts of
harassment and bad faith testified to by the
private respondent and not refuted by Sweet
Lines. Her treatment during her employment, the
delays in the payment of her commissions, the
pressures exerted upon her even when she was
sick in the hospital, the suggestion of one of the
company officers that she discuss her complaints
with him alone in a private place, her arbitrary
separation, the questionable attempts to get the
vehicle from her after her dismissal, among
other aggravations, clearly demonstrate the
validity of the private respondent's complaints.
Finally, we hold that the contention of Sweet
Lines that separation pay and back wages are
inconsistent with each other is not well-taken.
Separation pay is granted where reinstatement
is no longer advisable because of strained
relations between the employee and the
employer. Back wages represent compensation
that should have been earned but were not
collected because of the unjust dismissal. The
bases for computing the two are different, the
first being usually the length of the employee's
service and the second the actual period when he
was unlawfully prevented from working.
We have ordered the payment of both in proper
case 14 as otherwise the employee might be
deprived of benefits justly due him. Thus, if an
employee who has worked only one year is
sustained by the labor court after three years
from his unjust dismissal, granting him
separation pay only would entitle him to only
one month salary. There is no reason why he
should not also be paid three years back wages
corresponding to the period when he could not
return to his work or could not find employment
elsewhere.
WHEREFORE, subject to the modification that
the award of backwages shall be limited to only
three years, in accordance with existing policy,
G.R. No. 79975 is DISMISSED, with costs against
the petitioner, G.R. No. 79907 is GRANTED and
petitioner Samuel Casas Lim is hereby absolved
of liability in his personal capacity. The
temporary restraining order dated October 14,
1987, is LIFTED. It is so ordered.
Narvasa, Gancayco, Griño-Aquino and Medialdea,
JJ., concur.
Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 90856 July 23, 1992
ARTURO DE GUZMAN, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION,
LABOR ARBITER MA. LOURDES A. SALES,
AVELINO D. VALLESTEROL, ALEJANDRO Q.
FRIAS, LINDA DE LA CRUZ, CORAZON M. DE LA
FUENTE, LILIA F. FLORO, and MARIO F.
JAYME, respondents.
CRUZ, J.:
It is a fundamental principle of law and human
conduct that a person "must, in the exercise of
his rights and in the performance of his duties,
act with justice, give every one his due, and
observe honesty and good faith." 1This is the
principle we shall apply in the case at bar to
gauge the petitioner's motives in his dealings
with the private respondents.
Arturo de Guzman was the general manager of
the Manila office of the Affiliated Machineries
Agency, Ltd., which was based in Hongkong. On
June 30, 1986, he received a telex message from
Leo A. Fialla, managing director of AMAL in its
main office, advising him of the closure of the
company due to financial reverses. This message
triggered the series of events that are the subject
of this litigation.
Immediately upon receipt of the advise, De
Guzman notified all the personnel of the Manila
office. The employees then sent a letter to AMAL
accepting its decision to close, subject to the
payment to them of their current salaries,
severance pay, and other statutory benefits. De
Guzman joined them in these representations.
These requests were, however, not heeded.
Consequently, the employees, now herein
private respondents, lodged a complaint with the
NLRC against AMAL, through Leo A. Fialla and
Arturo de Guzman, for illegal dismissal, unpaid
wages or commissions, separation pay, sick and
vacation leave benefits, 13th month pay, and
bonus.
For his part, the petitioner began selling some of
AMAL's assets and applied the proceeds thereof,
as well as the remaining assets, to the payment
of his claims against the company. He also
organized Susarco, Inc., with himself as its
president and his wife as one of the
incorporators and a member of the board of
directors. This company is engaged in the same
line of business and has the same clients as that
of the dissolved AMAL.
With this development, Susarco and its officers
were impleaded in the amended complaint of the
private respondents. Later, William Quasha
and/or Cirilo Asperilla were also included in the
suit as the resident agents of AMAL of the
Philippines.
On November 7, 1986, the petitioner filed his
own complaint with the NLRC against AMAL for
his remaining unsatisfied claims.
On May 29, 1987, Labor Arbiter Eduardo G.
Magno, to whom the petitioner's complaint was
assigned, rendered a decision ordering AMAL to
pay the petitioner the amount of P371,469.59 as
separation pay, unpaid salary and commissions,
after deducting the value of the assets earlier
appropriated by the petitioner. 2
On September 30, 1987, Labor Arbiter Ma.
Lourdes A. Sales, who tried the private
respondents' complaint, rendered a decision —
1. Ordering Respondents
AMAL and Arturo de Guzman
to pay jointly and severally to
each Complainant separation
pay computed at one-half
month pay for every year of
service, backwages for one
month, unpaid salaries for
June 16-30, 1986, 13th month
pay from January to June 30,
1986 and incentive leave pay
equivalent to two and-a-half
days pay;
2. Dismissing the complaint
against respondents Leo
Fialla, William Quasha,
Susarco, Inc. and its directors
Susan de Guzman, Pacita
Castaneda, George Estomata
and Cynthia Serrano for lack
of basis and/or merit;
3. Dismissing the claims for
damages for lack of basis;
4. Ordering respondents
AMAL and Arturo de Guzman
to pay jointly and severally
attorney's fees to
Complainants equivalent to
10% of the monetary awards
herein. 3
This decision was on appeal affirmed in toto by
the NLRC, which is now faulted for grave abuse
of discretion in this petition for certiorari.
The petitioner does not dispute the jurisdiction
of the Labor Arbiter and NLRC over the
complaint of the private respondents against
AMAL in view of their previous employment
relationship. He argues, however, that the public
respondents acted without or in excess of
jurisdiction in holding him jointly and severally
liable with AMAL as he was not an employer of
the private respondents.
The Solicitor General and the private
respondents disagree. They maintain that the
petitioner, being AMAL's highest local
representative in the Philippines, may be held
personally answerable for the private
respondents' claims because he is included in the
term "employer" under Art. 212 (c),
(now e) of the Labor Code which provides:
Art. 212. Definitions. —
xxx xxx xxx
c. "Employer" includes any
person acting in the interest
of an employer, directly or
indirectly. . . .
In the leading case of A.C. Ransom Labor Union-
CCLU vs. NLRC, 4 as affirmed in the subsequent
cases ofGudez vs. NLRC, 5 and Maglutac vs.
NLRC, 6 this Court treated the president of the
employer corporation as an "employer" and held
him solidarily liable with the said corporation for
the payment of the employees' money claims. So
was the vice-president of the employer
corporation in the case of Chua vs. NLRC. 7
The aforecited cases will not apply to the instant
case, however, because the persons who were
there made personally liable for the employees'
claims were stockholders-officers of the
respondent corporation. In the case at bar, the
petitioner, while admittedly the highest ranking
local representative of AMAL in the Philippines,
is nevertheless not a stockholder and much less a
member of the board of directors or an officer
thereof. He is at most only a managerial
employee under Art. 212 (m) of the Labor Code,
which reads in relevant part as follows:
Art 212. Definitions. —
xxx xxx xxx
m. Managerial employee is
one who is vested with
powers and prerogatives to
lay down and execute
management policies and/or
to
hire, transfer, suspend, lay off,
recall, discharge, assign or
discipline employees. . . .
As such, the petitioner cannot be held directly knowing that it did not have enough assets to Another strong indication of parties
responsible for the decision to close the business pay off its liabilities, called a meeting of its bad faith on the part of with
that resulted in his separation and that of the creditors where it announced that in case of non- Respondent A. de Guzman is different
private respondents. That decision came directly agreement on a pro-rata distribution of its his filing of a separate issues, the
and exclusively from AMAL. The petitioner's assets, including the C-54 plant in California, it complaint against AMAL case which
participation was limited to the enforcement of would file insolvency proceedings. Shell before the NLRC Arbitration was filed
this decision in line with his duties as general Company of the Philippines, one of its creditors, Branch about four (4) months last shall
manager of the company. Even in a normal took advantage of this information and after the filing of the instant be
situation, in fact, he would not be liable, as a immediately made a telegraphic assignment of case without informing this consolidate
managerial employee of AMAL, for the monetary its credits in favor of its sister corporation in the Office about the existence of d with the
claims of its employees. There should be no United States. The latter thereupon promptly said case during the first to
question that the private respondents' recourse attached the plane in California and disposed of proceedings in the instant avoid
for such claims cannot be against the petitioner the same, thus depriving the other creditors of case. This case was deemed unnecessar
but against AMAL and AMAL alone. their proportionate share in its value. The Court submitted for decision on May y costs or
declared that Shell had acted in bad faith and 18, 1987 but it was only on delay. Such
The judgment in favor of the private respondents betrayed the trust of the other creditors of CALI. June 2, 1987 that Respondent cases shall
could have been enforced against the properties The said company was ordered to pay them A. de Guzman formally be
of AMAL located in this country except for one compensatory damages in a sum equal to the notified this Office through his disposed of
difficulty. The problem is that these properties value of the C-54 plane at the time it assigned its Supplemental Position Paper by the
have already been appropriated by the petitioner credit and exemplary damages in the sum of of his pending complaint Labor
to satisfy his own claims against the company. P25,000.00. before Arbiter Eduardo Arbiter to
Magno docketed as NLRC Case whom the
We quote with approval the following No. 11-4441-86. Under Rule V, first case
By so doing, has the petitioner incurred liability Section 4 of the revised rules was
to the private respondents? observations of Labor Arbiter Sales in her
decision: of the NLRC, it is provided assigned.
that: (Emphasis
The Labor Arbiter believed he had because of his supplied).
bad faith and ruled as follows: While the legitimacy of
Respondent A. de Guzman's Sec. 4.
claims against AMAL is not CONSOLID Had Respondent A. de
Considering that Respondent questioned, it must be stated ATION OF Guzman given timely notice of
A. de Guzman is guilty of bad that the manner and the CASES — his complaint, his case could
faith in appropriating for means by which he satisfied where have been consolidated with
himself the properties of such claims are evidently there are this case and the issues in
Respondent AMAL to the characterized by bad faith on two or both cases could have been
prejudice of Complainants his part. For one, Respondent more cases resolved in a manner that
herein whose claims are A. de Guzman took advantage pending would give due consideration
known to Respondent at the of his position as General before to the rights and liabilities of
time he made the disposition Manager and arrogated to different all parties in interest at the
of AMAL's properties, he is himself the right to retain Labor least, in case consolidation is
held jointly and severally possession and ownership of Arbiters in objected to or no longer
liable with Respondent AMAL all properties owned and left the same possible, the Complainants
for the award of unpaid by AMAL in the Philippines, Regional herein could have been given
wages, separation pay, even if he knew that Arbitration a chance to intervene in the
backwages for one month, Complainants herein have Branch other case so that whatever
13th month pay and cash similar valid claims for unpaid involving disposition might be rendered
value of unused vacation wages and other employee thesame by Arbiter Magno would
leave. benefits from the Respondent employer include consideration of
AMAL. . . . and Complainants' claims herein.
In Velayo v. Shell Co. of the issues or
Philippines, 8 Commercial Air Lines, Inc. (CALI), the same
It is not disputed that the petitioner in the case at
bar had his own claims against AMAL and
consequently had some proportionate right over
its assets. However, this right ceased to exist
when, knowing fully well that the private
respondents had similarly valid claims, he took
advantage of his position as general manager
and applied AMAL's assets in payment
exclusively of his own claims.
According to Tolentino in his distinguished work
on the Civil Code:
The exercise of a right ends
when the right disappears,
and it disappears when it is
abused, especially to the
prejudice of others. The mask
of a right without the spirit of
justice which gives it life, is
repugnant to the modern
concept of social law. It
cannot be said that a person
exercises a right when he
unnecessarily prejudices
another or offends morals or
good customs. Over and above
the specific precepts of
positive law are the supreme
norms of justice which the
law develops and which are
expressed in three principles:
honeste vivere, alterum non
laedre and just suum quique
tribuere; and he who violates
them violates the law. For this
reason, it is not permissible to
abuse our rights to prejudice
others. 9
The modern tendency, he continues, is to depart
from the classical and traditional theory, and to
grant indemnity for damages in cases where
there is an abuse of rights, even when the act is
not illicit. Law cannot be given an anti-social
effect. If mere fault or negligence in one's acts
can make him liable for damages for injury
caused thereby, with more reason should abuse
or bad faith make him liable. A person should be
protected only when he acts in the legitimate
exercise of his right, that is, when he acts with
prudence and in good faith; but not when he acts
with negligence or abuse. 10
The above-mentioned principles are contained in
Article 19 of the Civil Code which provides:
Art. 19. 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.
This is supplemented by Article 21 of the same
Code thus:
Art. 21. Any person who
willfully causes loss or injury
to another in a manner that is
contrary to morals, good
customs or public policy shall
compensate the latter for the
damage.
Applying these provisions, we hold that although
the petitioner cannot be made solidarily liable
with AMAL for the monetary demand of its
employees, he is nevertheless directly liable to
them for his questionable conduct in attempting
to deprive them of their just share in the assets
of AMAL.
Under Art. 2219, (10) of the Civil Code, moral
damages may be recovered for the acts referred
to in Art. 21. InBert Osmeña & Associates vs. Court
of Appeals, 11 we held that "fraud and bad faith
having been established, the award of moral
damages is in order." And in Pan Pacific Company
(Phil.) vs. Phil. Advertising Corp., 12 moral
damages were awarded against the defendant
for its wanton and deliberate refusal to pay the
just debt due the plaintiff.
It is settled that the court can grant the relief
warranted by the allegation and the proof even if
it is not specifically sought by the injured
party. 13 In the case at bar, while the private
respondents did not categorically pray for On all fours to the above issue
damages, they did allege that the petitioner, is the ruling of this Court
taking advantage of his position as general in Primero v. Intermediate
manager, had appropriated the properties of Appellate Court(156 SCRA 435
AMAL in payment of his own claims against the [1987]) which once again
company. That was averment enough of the reiterated the doctrine that
injury they suffered as a result of the petitioner's the jurisdiction of the Labor
bad faith. Arbiter under Article 217 of
the Labor Code is broad and
comprehensive enough to
The fact that no actual or compensatory damages
was proven before the trial court does not include claims for moral and
exemplary damages sought to
adversely affect the private respondents' right to
recover moral damages. We have held that moral be recovered by an employee
whose services has been
damages may be awarded in the cases referred
to in the chapter on Human Relations of the Civil illegally terminated by is
employer (Ebon v. De
Code (Articles 19-36) without need of proof that
the wrongful act complained of had caused any Guzman, 113 SCRA 55 [1982];
Aguda v. Vallejos, 113 SCRA
physical injury upon the complainant. 14
69 [1982]; Getz Corporation v.
Court of Appeals, 116 SCRA
When moral damages are awarded, exemplary
86 [1982]).
damages may also be decreed. 15 Exemplary
damages are imposed by the way of example or
correction for the public good, in additional to For the unlawful termination
moral, temperate, liquidated or compensatory of employment, this Court
damages. 16 According to the Code Commission, in Primero v. Intermediate
"exemplary damages are required by public Appellate Court, supra, ruled
policy, for wanton acts must be suppressed. They that the Labor Arbiter had the
are an antidote so that the poison of wickedness exclusive and original
may not run through the body politic." 17 These jurisdiction over claims for
damages are legally assessible against him. moral and other forms of
damages, so that the
employee in the proceedings
The petitioner asserts that, assuming the private before the Labor Arbiter
respondents to have a cause of action against
should prosecute his claims
him for his alleged bad faith, the civil courts and not only for reliefs specified
not the Labor Arbiter have jurisdiction over the
under the Labor Code but also
case. for damages under the Civil
Code.
In Associated Citizen Bank, et al. vs. Judge
Japson, 18 this Court held: . . . Question of damages which
arose out of or connected with
Primarily, the issue to be the labor dispute should be
resolved is whether or not the determined by the labor
respondent court has tribunal to the exclusion of
jurisdiction to hear and the regular courts of justice
decide an action for damages (Limquiaco, Jr. v. Ramolete,
based on the dismissal of the 156 SCRA 162 [1987]). The
employee. regular courts have no
jurisdiction over claims for
moral and exemplary
 damages arising from illegal
dismissal of an employee
(Vargas v. Akai Philippines,
Inc., 156 SCRA 531 [1987]).
Although the question of damages arising from
the petitioner's bad faith has not directly sprung
from the illegal dismissal, it is clearly
intertwined therewith. The predicament of the
private respondents caused by their dismissal
was aggravated by the petitioner's act in the
arrogating to himself all of AMAL's assets to the
exclusion of its other creditors, including its
employees. The issue of bad faith is incidental to
the main action for illegal dismissal and is thus
properly cognizable by the Labor Arbiter.
We agree that, strictly speaking, the
determination of the amount thereof would
require a remand to the Labor Arbiter. However,
inasmuch as the private respondents were
separated in 1986 and this case has been
pending since then, the interests of justice
demand the direct resolution of this motion in
this proceeding.
As this Court has consistently declared:
. . . it is a cherished rule of
procedure for this Court to
always strive to settle the
entire controversy in a single
proceeding leaving no root or
branch to bear the seeds of
future litigation. No useful
purpose will be served if this
case is remanded to the trial
court only to have its decision
raised again tot the
Indeterminate Appellate
Court and from there to this
Court. (Alger Electric, Inc. v.
Court of Appeals, 135 SCRA
37)
Remand of the case to the
lower court for further
reception of evidence is not
necessary where the court is
in a position to resolve the the payment exclusively of his own claims to the
dispute based on the records detriment of other employees.
before it. On many occasions,
the Court, in the public WHEREFORE, the questioned decision is
interest and the expeditious AFFIRMED but with the modification that the
administration of justice, has petitioner shall not be held jointly and severally
resolved actions on the merits liable with AMAL for the private respondents'
instead of remanding them to money claims against the latter. However, for his
the trial court for further bad faith in arrogating to himself AMAL's
proceedings, such as where properties to the prejudice of the private
the ends of justice would not respondents, the petitioner is ordered: 1) to pay
be subserved by the remand the private respondents moral damages in the
of the case or when public sum of P20,00.00 and exemplary damages in the
interest demands an early sum of P20,00.00; and 2) to return the assets of
disposition of the case. AMAL that he has appropriated, or the value
(Lianga Bay Logging Co., Inc. thereof, with legal interests thereon from the
v. CA, 157 SCRA 357) date of the appropriation until they are actually
restored, these amounts to be proportionately
Sound practice seeks to distributed among the private respondents in
accommodate the theory satisfaction of the judgment rendered in their
which avoids waste of time, favor against AMAL.
effort and expense, both to the
parties and the government, SO ORDERED.
not to speak of delay in the
disposal of the case (cf.
Fernandez v. Garcia, 92 Phil. Griño-Aquino, Medialdea and Bellosillo, JJ., concur.
592, 597). A marked
characteristics of our judicial
set-up is that where the
dictates of justice so demand .
. . the Supreme Court should
act, and act with finality. (Li
Siu Liat v. Republic, 21 SCRA
1039, 1046, citing Samal v.
CA, 99 Phil. 230 and U.S. v.
Gimenez, 34 Phil. 74). In this
case, the dictates of justice do
demand that this Court act,
and act with finality.
(Beautifont, Inc. v. CA, 157
SCRA 481)
It is stressed that the petitioner's liability to the
private respondents is a direct liability in the
form of moral and exemplary damages and not a
solidary liability with AMAL for the claims of its
employees against the company. He is being held
liable not because he is the general manager of
AMAL but because he took advantage of his
position by applying the properties of AMAL to
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 132451 December 17, 1999
CONGRESSMAN ENRIQUE T.
GARCIA, petitioner,
vs.
HON. RENATO C. CORONA, in his capacity as
the Executive Secretary, HON. FRANCISCO
VIRAY, in his capacity as the Secretary of
Energy, CALTEX PHILIPPINES INC., PILIPINAS
SHELL PETROLEUM CORP. and PETRON
CORP., respondents.
YNARES-SANTIAGO, J.:
On November 5, 1997, this Court in Tatad
v. Secretary of the Department
Energy and Lagman, et al., v. Hon.Ruben Torres, et
al., 1 declared Republic Act No. 8180, entitled "An
Act Deregulating the Downstream Oil Industry
and For Other Purposes", unconstitutional, and
its implementing Executive Order No. 392 void.
R.A. 8180 was struck down as invalid because
three key provisions intended to promote free
competition were shown to achieve the opposite
result. More specifically, this Court ruled that its
provisions on tariff differential, stocking of
inventories, and predatory pricing inhibit fair
competition, encourage monopolistic power, and
interfere with the free interaction of the market
forces.
While R.A. 8180 contained a separability clause,
it was declared unconstitutional in its entirety
since the three (3) offending provisions so
permeated the law that they were so intimately
the esse of the law. Thus, the whole statute had to
be invalidated.
As a result of the Tatad decision, Congress
enacted Republic Act No. 8479, a new
deregulation law without the offending
provisions of the earlier law. Petitioner Enrique
T. Garcia, a member of Congress, has now
brought this petition seeking to declare Section
19 thereof, which sets the time of full
deregulation, unconstitutional. After failing in his
attempts to have Congress incorporate in the law
the economic theory he espouses, petitioner now
asks us, in the name of upholding the
Constitution, to undo a violation which he claims
Congress has committed.
The assailed Section 19 of R.A. 8479 states in full:
Sec. 19. Start of Full
Deregulation. — Full
deregulation of the Industry
shall start five (5) months
following the effectivity of this
Act: Provided, however, That
when the public interest so
requires, the President may
accelerate the start of full
deregulation upon the
recommendation of the DOE
of and the Department of
Finance (DOF) when the
prices of crude oil and
petroleum products in the
world market are declining
and the value of the peso in
relation to the US dollar is
stable, taking into account
relevant trends and
prospects; Provided, further,
That the foregoing provision
notwithstanding, the five (5)-
month Transition Phase shall
continue to apply to LPG,
regular gasoline and kerosene
as socially-sensitive
petroleum products and said
petroleum products shall be
covered by the automatic
pricing mechanism during the
said period.
Upon the implementation of market is still dominated and controlled by an
full deregulation as provided oligopoly of the three (3) private respondents,
herein, the Transition Phase is namely, Shell, Caltex and Petron.
deemed terminated and the
following laws are repealed: The objective of the petition is deceptively
simple. It states that if the constitutional
a) Republic Act No. 6173, as mandate against monopolies and combinations
amended; in restraint of
trade 2 is to be obeyed, there should be indefinite
and open-ended price controls on gasoline and
b) Section 5 of Executive
Order No. 172, as amended; other oil products for as long as necessary. This
will allegedly prevent the "Big 3" — Shell, Caltex
and Petron — from price-fixing and overpricing.
c) Letter of Instruction No. Petitioner calls the indefinite retention of price
1431, dated October 15, 1984; controls as "partial deregulation".
d) Letter of Instruction No. The grounds relied upon in the petition are:
1441, dated November 20,
1984, as amended;
A.
e) Letter of Instruction No.
1460, dated May 9, 1985; Sec. 19 OF R.A. NO. 8479
WHICH PROVIDES FOR FULL
DEREGULATION FIVE (5)
f) Presidential Decree No. MONTHS OR EARLIER
1889; and
FOLLOWING THE
EFFECTIVITY OF THE LAW, IS
g) Presidential Decree No. GLARINGLY PRO-OLIGOPOLY,
1956, as amended by ANTI-COMPETITION AND
Executive Order No. 137: ANTI-PEOPLE, AND IS
THEREFORE PATENTLY
Provided, however, That in UNCONSTITUTIONAL FOR
case full deregulation is BEING IN GROSS AND
started by the President in the CYNICAL CONTRAVENTION
exercise of the authority OF THE CONSTITUTIONAL
provided in this Section, the POLICY AND COMMAND
foregoing laws shall continue EMBODIED IN ARTCLE XII,
to be in force and effect with SECTION 19 OF THE 1987
respect to LPG, regular CONSTITUTION AGAINST
gasoline and kerosene for the MONOPOLIES AND
rest of the five (5)-month COMBINATIONS IN
period. RESTRAINT OF TRADE.
Petitioner contends that Section 19 of R.A. 8479, B.
which prescribes the period for the removal of
price control on gasoline and other finished SAID SECTION 19 OF R.A. No.
products and for the full deregulation of the local 8479 IS GLARINGLY PRO-
downstream oil industry, is patently contrary to OLIGOPOLY, ANTI-
public interest and therefore unconstitutional COMPETITION AND ANTI-
because within the short span of five months, the PEOPLE, FOR THE FURTHER
REASON THAT IT PALPABLY PRICE-FIXING AND R.A. 8479, the present deregulation law, was towards deregulation of the power and energy
AND CYNICALLY VIOLATES OVERPRICING. 3 enacted to implement Article XII, Section 19 of industry."
THE VERY OBJECTIVE AND the Constitution which provides:
PURPOSE OF R.A. NO. 8479, The issues involved in the deregulation of the Be that as it may, we are not concerned with
WHICH IS TO ENSURE A downstream oil industry are of paramount The State shall regulate or whether or not there should be deregulation.
TRULY COMPETITIVE significance. The ramifications, international and prohibit monopolies when the This is outside our jurisdiction. The judgment on
MARKET UNDER A REGIME local in scope, are complex. The impact on the public interest so requires. No the issue is a settled matter and only Congress
OF FAIR PRICES. nation's economy is pervasive and far-reaching. combinations in restraint of can reverse it. Rather, the question that we
The amounts involved in the oil business are trade or unfair competition should address here is — are the method and the
C. immense. Fluctuations in the supply and price of shall be allowed. manner chosen by Government to accomplish its
oil products have a dramatic effect on economic cherished goal offensive to the Constitution? Is
SAID SECTION 19 OF R.A. No. development and public welfare. As pointed out This is so because the Government believes that indefinite price control in the manner proposed
8479, BEING GLARINGLY in the Tatad decision, few cases carry a deregulation will eventually prevent monopoly. by petitioner the only feasible and legal way to
PRO-OLIGOPOLY, ANTI- surpassing importance on the daily life of every The simplest form of monopoly exists when achieve it?
COMPETITION AND ANTI- Filipino. The issues affect everybody from the there is only one seller or producer of a product
PEOPLE, BEING PATENTLY poorest wage-earners and their families to the or service for which there are no substitutes. In Petitioner has taken upon himself a most
UNCONSTITUTIONAL AND richest entrepreneurs, from industrial giants to its more complex form, monopoly is defined as challenging task. Unquestionably, the direction
BEING PALPABLY VIOLATIVE humble consumers. the joint acquisition or maintenance by members towards which the nation's efforts at economic
OF THE LAW'S POLICY AND of a conspiracy, formed for that purpose, of the and social upliftment should be addressed is a
PURPOSE OF ENSURING A Our decision in this case is complicated by the power to control and dominate trade and function of Congress and the President. In the
TRULY COMPETITIVE unstable oil prices in the world market. Even as commerce in a commodity to such an extent that exercise of this function, Congress and the
MARKET UNDER A REGIME this case is pending, the price of OPEC oil is they are able, as a group, to exclude actual or President have obviously determined that
OF FAIR PRICES, IS A VERY escalating to record levels. We have to potential competitors from the field, speedy deregulation is the answer to the
GRAVE AND GRIEVOUS emphasize that our decision has nothing to do accompanied with the intention and purpose to acknowledged dominion by oligopolistic forces
ABUSE OF DISCRETION ON with worldwide fluctuations in oil prices and the exercise such power. 4 of the oil industry. Thus, immediately after R.A.
THE PART OF THE counter-measures of Government each time a 8180 was declared unconstitutional in
LEGISLATIVE AND new development takes place. Where two or three or a few companies act in the Tatad case, Congress took resolute steps to
EXECUTIVE BRANCHES OF concert to control market prices and resultant fashion new legislation towards the objective of
GOVERNMENT. The most important part of deregulation is profits, the monopoly is called an oligopoly or the earlier law. Invoking the Constitution,
freedom from price control. Indeed, the free play cartel. It is a combination in restraint of trade. petitioner now wants to slow down the process.
D. of market forces through deregulation and when
to implement it represent one option to solve the The perennial shortage of oil supply in the While the Court respects the firm resolve
PREMATURE FULL problems of the oil-consuming public. There are Philippines is exacerbated by the further fact displayed by Congress and the President, all
DEREGULATION UNDER other considerations which may be taken into that the importation, refining, and marketing of departments of Government are equally bound
SECTION 19 OF R.A. NO. 8479 account such as the reduction of taxes on oil this precious commodity are in the hands of a by the sovereign will expressed in the commands
MAY AND SHOULD products, the reinstitution of an Oil Price cartel, local but made up of foreign-owned of the Constitution. There is a need for utmost
THEREFORE BE DECLARED Stabilization Fund, the choice between corporations. Before the start of deregulation, care if this Court is to faithfully discharge its
NULL AND VOID EVEN AS government subsidies taken from the regular the three private respondents controlled the duties as arbitral guardian of the Constitution.
THE REST OF ITS taxpaying public on one hand and the increased entire oil industry in the Philippines. We cannot encroach on the policy functions of
PROVISIONS REMAIN IN costs being shouldered only by users of oil the two other great departments of Government.
FORCE, SUCH AS THE products on the other, and most important, the But neither can we ignore any overstepping of
immediate repeal of the oil deregulation law as It bears reiterating at the outset that the constitutional limitations. Locating the correct
TRANSITION PHASE OR deregulation of the oil industry is a policy
PARTIAL DEREGULATION wrong policy. Petitioner wants the setting of balance between legality and policy,
prices to be done by Government instead of determination of the highest order. It is constitutional boundaries and freedom of action,
WITH PRICE CONTROLS unquestionably a priority program of
THAT ENSURES THE being determined by free market forces. His and validity and expedition is this Court's
preference is continued price control with no Government. The Department of Energy Act of dilemma as it resolves the legitimacy of a
PROTECTION OF THE PUBLIC 19925 expressly mandates that the development
INTEREST BY PREVENTING fixed end in sight. A simple glance at the factors Government program aimed at giving every
surrounding the present problems besetting the and updating of the existing Philippine energy Filipino a more secure, fulfilling and abundant
THE BIG 3 OLIGOPOLY'S program "shall include a policy direction
oil industry shows that they are economic in life.
nature.
Our ruling in Tatad is categorical that the
Constitution's Article XII, Section 19, is anti-trust
in history and spirit. It espouses competition. We
have stated that only competition which is fair
can release the creative forces of the market. We
ruled that the principle which underlies the
constitutional provision is competition. Thus:
Sec. 19, Article XII of our
Constitution is anti-trust in
history and in spirit. It
espouses competition. The
desirability of competition is
the reason for the prohibition
against restraint of trade, the
reason for the interdiction of
unfair competition, and the
reason for regulation of
unmitigated monopolies.
Competition is thus the
underlying principle of
section 19, Article XII of our
Constitution which cannot be
violated by R.A. No. 8180. We
subscribe to the observation
of Prof. Gellhorn that the
objective of anti-trust law is
"to assure a competitive
economy, based upon the
belief that through
competition producers will
strive to satisfy consumer
wants at the lowest price with
the sacrifice of the fewest
resources. Competition
among producers allows
consumers to bid for goods
and services, and thus
matches their desires with
society's opportunity costs."
He adds with appropriateness
that there is a reliance upon
"the operation of the "market"
system (free enterprise) to
decide what shall be
produced, how resources
shall be allocated in the
production process, and to
whom the various products
will be distributed. The
market system relies on the
consumer to decide what and
how much shall be produced,
and on competition, among
producers to determine who
will manufacture it."6
In his recital of the antecedent circumstances,
petitioner repeats in abbreviated form the
factual findings and conclusions which led the
Court to declare R.A. 8180 unconstitutional. The
foreign oligopoly or cartel formed by
respondents Shell, Caltex and Petron, their
indulging in price-fixing and overpricing, their
blockade tactics which effectively obstructed the
entry of genuine competitors, the dangers posed
by the oil cartel to national security and
economic development, and other prevailing
sentiments are stated as axiomatic truths. They
are repeated in capsulized context as the current
background facts of the present petition.
The empirical existence of this deplorable
situation was precisely the reason why Congress
enacted the oil deregulation law. The evils
arising from conspiratorial acts of monopoly are
recognized as clear and present. But the
enumeration of the evils by our Tatad decision
was not for the purpose of justifying continued
government control, especially price control. The
objective was, rather, the opposite. The evils
were emphasized to show the need for free
competition in a deregulated industry. And to be
sure, the measures to address these evils are for
Congress to determine, but they have to meet the
test of constitutional validity.
The Court respects the legislative finding that
deregulation is the policy answer to the
problems. It bears stressing that R.A. 8180 was
declared invalid not because deregulation is
unconstitutional. The law was struck down
because, as crafted, three key provisions plainly
encouraged the continued existence if not the
proliferation of the constitutionally proscribed
evils of monopoly and restraint of trade.
In sharp contrast, the present petition lacks a
factual foundation specifically highlighting the
need to declare the challenged provision
unconstitutional. There is a dearth of relevant,
reliable, and substantial evidence to support
petitioner's theory that price control must
continue even as Government is trying its best to
get out of regulating the oil industry. The facts of
the petition are, in the main, a general
dissertation on the evils of monopoly.
Petitioner overlooks the fact that Congress
enacted the deregulation law exactly because of
the monopoly evils he mentions in his petition.
Congress instituted the lifting of price controls in
the belief that free and fair competition was the
best remedy against monopoly power. In other
words, petitioner's facts are also the reasons
why Congress lifted price controls and why the
President accelerated the process. The facts
adduced in favor of continued and indefinite
price control are the same facts which supported
what Congress believes is an exercise of wisdom
and discretion when it chose the path of speedy
deregulation and rejected Congressman Garcia's
economic theory.
The petition states that it is using the very
thoughts and words of the Court in
its Tatad decision. Those thoughts and words,
however, were directed against the tariff
differential, the inventory requirement, and
predatory pricing, not against deregulation as a
policy and not against the lifting of price
controls.
A dramatic, at times expansive and
grandiloquent, reiteration of the same
background circumstances narrated
inTatad does not squarely sustain petitioner's
novel thesis that there can be deregulation
without lifting price controls.
Petitioner may call the industry subject to price
controls as deregulated. In enacting the
challenged provision, Congress, on the other
hand, has declared that any industry whose
prices and profits are fixed by government
authority remains a highly regulated one.
Petitioner, therefore, engages in a legal paradox.
He fails to show how there can be deregulation
while retaining government price control.
Deregulation means the lifting of control,
governance and direction through rule or
regulation. It means that the regulated industry
is freed from the controls, guidance, and
restrictions to which it used to be subjected. The
use of the word "partial" to qualify deregulation
is sugar-coating. Petitioner is really against
deregulation at this time.
Petitioner states that price control is good. He
claims that it was the regulation of the
importation of finished oil products which led to
the exit of competitors and the consolidation and
dominion of the market by an oligopoly, not
price control. Congress and the President think
otherwise.
The argument that price control is not the villain
in the intrusion and growth of monopoly appears
to be pure theory not validated by experience.
There can be no denying the fact that the evils
mentioned in the petition arose while there was
price control. The dominance of the so-called
"Big 3" became entrenched during the regime of
price control. More importantly, the
ascertainment of the cause and the method of
dismantling the oligopoly thus created are a
matter of legislative and executive choice. The
judicial process is equipped to handle legality
but not wisdom of choice and the efficacy of
solutions.
Petitioner engages in another contradiction
when he puts forward what he calls a self-
evident truth. He states that a truly competitive
market and fair prices cannot be legislated into
existence. However, the truly competitive
market is not being created or fashioned by the
challenged legislation. The market is simply
freed from legislative controls and allowed to
grow and develop free from government
interference. R.A. 8479 actually allows the free
play of supply and demand to dictate prices.
Petitioner wants a government official or board
to continue performing this task. Indefinite and
open-ended price control as advocated by
petitioner would be to continue a regime of
legislated regulation where free competition
cannot possibly flourish. Control is the antithesis
of competition. To grant the petition would mean
that the Government is not keen on allowing a
free market to develop. Petitioner's "self-evident
truth" thus supports the validity of the provision
of law he opposes.
New players in the oil industry intervened in this
case. According to them, it is the free market
policy and atmosphere of deregulation which
attracted and brought the new participants,
themselves included, into the market. The
intervenors express their fear that this Court
would overrule legislative policy and replace it
with petitioner's own legislative program.
The factual allegations of the intervenors have
not been refuted and we see no reason to doubt
them. Their argument that the co-existence of
many viable rivals create free market conditions
induces competition in product quality and
performance and makes available to consumers
an expanded range of choices cannot be
seriously disputed.
On the other hand, the pleadings of public and
private respondents both put forth the argument
that the challenged provision is a policy decision
of Congress and that the wisdom of the provision
is outside the authority of this Court to consider.
We agree. As we have ruled in Morfe v. Mutuc7:
(I)t is well to remember that
this Court, in the language of
Justice Laurel, "does not pass
upon question or wisdom,
justice or expediency of
legislation." As expressed by
Justice Tuason: "It is not the
province of the courts to
supervise legislation and keep
it within the bounds of
propriety and common sense.
That is primarily and
exclusively a legislative
concern." There can be no
possible objection then to the
observation of Justice
Montemayor: "As long as laws
do not violate any
Constitutional provision, the
Courts merely interpret and
apply them regardless of
whether or not they are wise
or salutary." For they,
according to Justice Labrador,
"are not supposed to override
legitimate policy and . . . never
inquire into the wisdom of the
law."
It is thus settled, to
paraphrase Chief Justice
Concepcion in Gonzales
v. Commission on Elections,
that only congressional power
or competence, not the
wisdom of the action taken,
may be the basis for declaring
a statute invalid. This is as it
ought to be: The principle of
separation of powers has in
the main wisely allocated the
respective authority of each
department and confined its
jurisdiction to such a sphere.
There would then be
intrusion not allowable under
the Constitution if on a matter
left to the discretion of a
coordinate branch, the
judiciary would substitute its
own. If there be adherence to
the rule of law, as there ought
to be, the last offender should
be the courts of justice, to
which rightly litigants submit
their controversy precisely to
maintain unimpaired the
supremacy of legal norms and
prescriptions. The attack on
the validity of the challenged
provision likewise insofar as
there may be objections, even
if valid and cogent, on its
wisdom cannot be sustained.
In this petition, Congressman Garcia seeks to
revive the long settled issue of the timeliness of
full deregulation, which issue he had earlier
submitted to this Court by way of a Partial
Motion for Reconsideration in the Tatadcase. In
our Resolution dated December 3, 1997, which
has long become final and executory, we stated:
We shall first resolve
petitioner Garcia's linchpin
contention that the full
deregulation decreed by R.A.
No. 8180 to start at the end of
March 1997 is
unconstitutional. For
prescinding from this
premise, petitioner suggests
that "we simply go back to the
transition period, price
control will be revived
through the automatic pricing
mechanism based on
Singapore Posted Prices. The
Energy Regulatory Board . . .
would play a limited and
ministerial role of computing
the monthly price ceiling of
each and every petroleum fuel
product, using the automatic
pricing formula. While the
OPSF would return, this
coverage would be limited to
monthly price increases in
excess of P0.50 per liter.
We are not impressed by
petitioner Garcia's
submission. Petitioner has no
basis in condemning as
unconstitutional per se the
date fixed by Congress for the
beginning of the full
deregulation of the
downstream oil industry. Our
Decision merely faulted the
Executive for factoring the
depletion of OPSF in
advancing the date of full
deregulation to February
1997. Nonetheless, the error
of the Executive is now a non-
issue for the full deregulation
set by Congress itself at the
end of March 1997 has
already come to pass. March
1997 is not an arbitrary date.
By that date, the transition
period has ended and it was
expected that the people
would have adjusted to the
role of market forces in
shaping the prices of
petroleum and its products.
The choice of March 1997 as
the date of full deregulation is
a judgment of Congress and
its judgment call cannot be
impugned by this Court.8
Reduced to its basic arguments, it can be seen
that the challenge in this petition is not against
the legality of deregulation. Petitioner does not
expressly challenge deregulation. The issue,
quite simply, is the timeliness or the wisdom of
the date when full deregulation should be
effective.
In this regard, what constitutes reasonable time
is not for judicial determination. Reasonable
time involves the appraisal of a great variety of
relevant conditions, political, social and
economic. They are not within the appropriate
range of evidence in a court of justice. It would
be an extravagant extension of judicial authority
to assert judicial notice as the basis for the
determination.9
We repeat that what petitioner decries as
unsuccessful is not a final result. It is only a
beginning. The Court is not inclined to stifle
deregulation as enacted by Congress from its
very start. We leave alone the program of
deregulation at this stage. Reasonable time will
prove the wisdom or folly of the deregulation
program for which Congress and not the Court is
accountable.
Petitioner argues further that the public interest
requires price controls while the oligopoly exists,
for that is the only way the public can be
protected from monopoly or oligopoly pricing.
But is indefinite price control the only feasible
and legal way to enforce the constitutional
mandate against oligopolies?
Art. 186 of the Revised Penal Code, as amended,
punishes as a felony the creation of monopolies
and combinations in restraint of trade. The
Solicitor General, on the other hand, cites
provisions of R.A. 8479 intended to prevent
competition from being corrupted or
manipulated. Section 11, entitled "Anti-Trust
Safeguards", defines and prohibits cartelization
and predatory pricing. It penalizes the persons
and officers involved with imprisonment of three
(3) to seven (7) years and fines ranging from One
million to Two million pesos. For this purpose, a
Joint Task Force from the Department of Energy
and Department of Justice is created under
Section 14 to investigate and order the
prosecution of violations.
Sec. 8 and 9 of the Act, meanwhile, direct the
Departments of Foreign Affairs, Trade and
Industry, and Energy to undertake strategies,
incentives and benefits, including international
information campaigns, tax holidays and various
other agreements and utilizations, to invite and
encourage the entry of new participants. Section
6 provides for uniform tariffs at three percent
(3%).
Sec. 13 of the Act provides for "Remedies", under
which the filing of actions by government
prosecutors and the investigation of private
complaints by the Task Force is provided.
Sections 14 and 15 provide how the Department
of Energy shall monitor and prevent the
occurrence of collusive pricing in the industry.
It can be seen, therefore, that instead of the price
controls advocated by the petitioner, Congress
has enacted anti-trust measures which it
believes will promote free and fair competition.
Upon the other hand, the disciplined,
determined, consistent and faithful execution of
the law is the function of the President. As stated
by public respondents, the remedy against
unreasonable price increases is not the
nullification of Section 19 of R.A. 8479 but the
setting into motion of its various other
provisions.
For this Court to declare unconstitutional the key
provision around which the law's anti-trust
measures are clustered would mean a
constitutionally interdicted distrust of the
wisdom of Congress and of the determined
exercise of executive power.
Having decided that deregulation is the policy to
follow, Congress and the President have the duty
to set up the proper and effective machinery to
ensure that it works. This is something which
cannot be adjudicated into existence. This Court
is only an umpire of last resort whenever the
Constitution or a law appears to have been
violated. There is no showing of a constitutional
violation in this case.
WHEREFORE, the petition is DISMISSED.
SO ORDERED.
Bellosillo, Melo, Puno, Kapunan, Mendoza,
Quisumbing, Purisima, Pardo, Buena and De Leon,
Jr., JJ., concur.
Davide, Jr., C.J., in the result. I also join Mr. Justice
Panganiban in his separate opinion.
Vitug, J., in the result.
Panganiban, J., please see Separate Opinion.
Gonzaga-Reyes, J., took no part. Spouse with
counsel for intervenors.
Separate Opinions
PANGANIBAN, J., separate opinion;
In essence, deregulation shifts the burden of
price control from the government to the
"market forces" in order (1) to eliminate
government intervention that may "do more
harm than good"1 and (2) to achieve a truly
competitive market of fair prices.2 It is also
aimed at removing government abuse and
corruption in price-setting. At bottom,
deregulation is supposed to provide the best
goods and services at the cheapest prices.
The policy, however, is not an infallible cure to
abuse, for the evil sought to be avoided may well
pass on to the market players, particularly when
they combine to restrain trade or engage in
unfair competition. In the words of Prof. Romulo
L. Neri of the Asian Institute of Management,
"[t]he marker is motivated by price and profits
(and sadly, not by moral values [or public
interest]). The market does not automatically
supply those who need (no matter how badly
they need it) but only those who have the money
to buy."3
The buzz words of the third millennium are
"deregulation," "globalization" and
"liberalization." Territorial frontiers are virtually
erased by these schemes, as goods and services
are exchanged across borders unhampered by
traditional tariffs, taxes, currency controls,
quantitative restrictions and other protective
barriers. Thus, states and governments tend to
surrender some of their authorities and powers
to the "market" and to the renewed energy of
laissez faire, such that the threats to civil
liberties and human rights, including economic
rights, may shift from government abuses to the
more bedeviling market forces that transcend
boundaries and sovereignties. In developing
countries more than in developed ones, such
threats are real and ever present.
Judicial Review
to Checks Abuses
This is where the power of judicial review comes
in — to examine the legal effects of these new
economic paradigms and, in the present
controversy, to check whether the present Oil
Deregulation Law (RA 8479) restrains rather
than promotes free trade, in contravention of the
Constitution. True, the President and Congress,
not this Court, have the power and the
prerogative to determine whether to adopt such
market policies and, if so, under what conditions
and circumstances. However, all such policies
and their ramifications must conform to the
Constitution. Otherwise, this Court has the duty
to strike them down, not because they are
unwise or inconvenient, but because they are
constitutionally impermissible.
Doctrinally, policies and acts of the political
departments of government may be voided by
this Court on either of two grounds —
infringement of the Constitution or grave abuse
of discretion.4 An infringement may be proven by
demonstrating that the words of the law directly
contradict a provision of the fundamental law, or
by presenting proof that the law authorizes or
enables the respondents to violate the
Constitution.
Petitioner Garcia's Thesis on
Unconstitutionality Concerns Policy
Having set down the doctrinal legal parameters,
let me now discuss the petitioner's thesis.
Petitioner Enrique T. Garcia anchors his position
on the alleged unconstitutionality of Section 19
of RA 8479, 5 which sets the full deregulation of
the oil industry five months from the effectivity
of the law, on the argument that said provision
directly violates Section 19, Article XII of the
Constitution, which reads as follows:
Sec. 19. The State shall
regulate or prohibit
monopolies when the public
interest so requires. No
combinations in restraint of
trade or unfair competition
shall be allowed.
He maintains that once Section 19 of RA 8479 is
struck down, the government will be able to fix
and lower petroleum prices indefinitely while
awaiting the advent of "real" competition in the
market.
Petitioner contends that the three largest oil
companies (the "Big Three") comprise an
oligopoly of the downstream oil industry.
Oligopolies, he claims, "negate free market
competition and fair prices." He submits that
"regulation through price control . . . is patently
required by the public interest [and] the failure
to regulate the oligopoly through price control is
patently inimical to the national interest and
patently negates, circumvents and contravenes
Section 19, Article XII of the Constitution."
In Tatad v. Secretary of the Department of
Energy,6 this Court defined a monopoly and a
combination in restraint of trade as follows:
A monopoly is a privilege or
peculiar advantage vested in
one or more persons or
companies, consisting in the
exclusive right or power to
carry on a particular business
or trade, manufacture a
particular article, or control
the sale or the whole supply
of a particular commodity. It
is a form of market structure
in which one or only a few
firms dominate the total sales
of a product or service. On the
other hand, a combination in
restraint of trade is an
agreement or understanding
between two or more
persons, in the form of a
contract, trust, pool, holding
company, or other form of
association, for the purpose of
unduly restricting
competition, monopolizing
trade and commerce in a
certain commodity,
controlling its production,
distribution and price, or
otherwise interfering with
freedom of trade without
statutory authority.
Combination in restraint of
trade refers to the means,
while monopoly refers to the
end.
In that case, RA 8180, the predecessor of RA
8479, was struck down by this Court for being
contrary to Section 19, Article XII of the
Constitution. We took this action because we
found that its provisions on (1) tariff differential,
(2) minimum inventory and (3) predatory
pricing "inhibit fair competition, encourage
monopolistic power and interfere with the free
interaction of market forces." We concluded,
"The aftermath of R.A. No. 8180 is a deregulated
market where competition can be corrupted and
where market forces can be manipulated by
oligopolies."
In my Concurring Opinion in Tatad, I labeled RA
8180 as "a pseudo deregulation law which in
reality restrains free trade and perpetuates a
cartel, an oligopoly" because of the aforecited
three provisions, and because petitioners therein
demonstrated to the Court "that the Big Three oil
companies were producing and processing
almost identical products which they were
selling to the general public at identical prices.
When one company adjusted its prices upwards
or downwards, the other two followed suit at the
same time and by the same amount." 7
In his present Petition, petitioner persistently
alleges that "[i]t is self-evident truth that public
interest requires the prevention of
monopolistic/oligopolitic pricing . . . ," and that
such "monopolistic/oligopolistic pricing may be
prevented only through price control during the
regime of monopoly/oligopoly or through a truly
competitive market under a regime of fair
prices." In support of his allegations, he cites
"self-evident truths [which] have
. . . been officially recognized and implemented
during more than 20 years of price control
before the passage of the two oil deregulation
laws" and which "have also been recognized and
upheld by no less than the Supreme Court En
Banc in the Tatad and Lagman cases . . . ." He
contends that "the Big 3 remain as strong and
dominant as ever."
In other words, petitioner believes that there is
no valid reason to lift price control at this time
when allegedly there still exists an oligopoly in
the industry. He proposes instead that
government control should stand for an
indefinite period until the new players are able
to capture a substantial part of the market.
Unfortunately, however, the foregoing thematic
statements and economic theory of Petitioner
Garcia are policy in nature and are arguments
supporting the wisdom of interim government
price control. Indeed, "self-evident truths,"
economic theories, deeply-held beliefs,
speculative assumptions and generalizations
may be the bases of legislative and executive
actions, but they cannot be substitutes for
evidence and legal arguments in a judicial
proceeding. Considered judgment calls of the
legislative and the executive departments are the
issues of whether the country should adopt the
policy of complete or partial deregulation, and
when such policy should take effect and over
what products or services. These issues come
within judicial determination only when there is
clear and substantial proof that said policy and
its concomitant variations are violative of the
Constitution or are made by those agencies in
grave abuse of their discretion.
The Legal Issue Is Whether Petitioner
Has Submitted Sufficient Proof That the
Big Three Have Violated the Constitution
To be more specific, the pivotal issue before this
Court is not whether it is wiser and more
beneficial to empower the government to fix fuel
prices; rather, it is whether petitioner has
submitted enough factual bases to justify the
legal conclusion that the Big Three — Petron,
Shell and Caltex — have combined themselves
"in restraint of trade or [to cause] unfair
competition," to such an extent as to legally
justify a striking down of Section 19 of RA 8479.
The task of proving this issue is not easy; in fact,
it is formidable and daunting. This is because
laws areprima facie presumed constitutional
and, unless clearly shown to be infirm, they will
always be upheld.8 So, too, regularity in the
performance of official functions is the postulate,
and any allegation of grave abuse or irregularity
must be proven cogently.
Deregulation per se Is
Not Constitutionally Infirm
A close perusal of the assailed Section 19 of RA
8479 and Section 19 of Article XII of the
Constitution does not readily reveal their
irreconcilability. Indeed, even petitioner admits
that the deregulation policy per se is not contrary
to the Constitution. Neither could it be
successfully argued that the implementation of
such policy within the five-month phase-in
period is per se anathema to our fundamental
law. It is his imperative task therefore to adduce
before the Court factual and legal bases to
demonstrate clearly and cogently the
unconstitutionality of the acts of Congress and
the President in adopting and implementing full
deregulation of petroleum prices at this time.
In this context, I have pored over the records of
this case and searched long and wide for such
factual and legal bases but, other than
presumptions and generalizations that are
unsupported by hard evidence, I could not find
any. Petitioner fails to substantiate his
allegations that the three oil giants have
engaged, directly or indirectly, in an unholy
alliance to fix prices and restrain trade.
True, retail prices of petroleum products have
been increased, to the consternation of the
public, but petitioner has not shown by specific
fact or clear proof how the questioned provision
of RA 8479 has been used to transgress the
Constitution. He has not demonstrated that the
Big Three arbitrarily dictate and corrupt the
price of oil in a manner violative of the
Constitution.
Petitioner merely resurrects and relies heavily
on the arguments, the statistics and the proofs he
submitted two years ago in the first oil
deregulation case, Tatad v. Secretary of the
Department of Energy. Needless to state, those
reasons were taken into consideration in said
case, and they indeed helped show the
unconstitutionality of RA 8180. But exactly the
same old grounds cannot continue to support
petitioner's present allegation that the major oil
companies — Petron, Shell and Caltex — persist
to this date in their oligopolistic practices, as a
consequence of the current Oil Deregulation Law
and in violation of the Constitution. In brief, the
legal cause and effect relationship has not been
amply shown.
Petitioner Has Not Proven
Arbitrariness or Despotism
Petitioner harps at the five-month period of
transition from price control to full deregulation
provided under Section 19 of RA 8479. He claims
that such short period is not enough to ensure a
"truly competitive market" in the supposed
oligopoly of the oil industry. Again, his statement
is not backed up by evidentiary basis. He offers
no substantial proof that Congress, in deciding to
lift price controls five months from the effectivity
of RA 8475, gravely abused its discretion. To
repeat, it is not within the province of the
judiciary to determine whether five months is
indeed short and, for that matter, what length of
time is adequate. That is a matter of legislation
addressed to the discretion of our policy makers.
It is basic to our form of government that the
Court cannot inquire into the wisdom or
expediency of the acts of the executive or the
legislative department, unless there is a clear
showing of constitutional infirmity or grave
abuse of discretion amounting to lack or excess
of jurisdiction.9 "By grave abuse of discretion is
such capricious and whimsical exercise of
judgment as is equivalent to lack of jurisdiction.
Mere abuse of discretion is not enough. It must
be grave abuse of discretion, as when the power
is exercised in an arbitrary or despotic manner
by reason of passion or personal hostility, and
must be so patent and so gross as to amount to
an evasion of a positive duty or to a virtual
refusal to perform the duty enjoined or to act at
all in contemplation of law." 10 These
jurisprudential elements of arbitrariness,
despotism, passion and hostility have not been
shown to exist under the present circumstances.
Market Share of New Players
Has Increased Under RA 8479
Historically, deregulation as a policy in the
downstream oil industry was begun in 1996
when new players started to set up and operate
their businesses in the country. That was
practically a full three years of operations, the
last two of which saw no significant barriers in
terms of tariff differential, minimum inventory
or predatory pricing.
Obviously, the conditions prevailing when the
Court struck down RA 8180 two years ago have
not been proven to be prevalent at present. In
1996, the new players had a market share of
barely one percent. 11 The new players have
since expanded or increased in number (46 as of
June 30, 1999), and they now have about nine
percent share of the market. 12 Significantly,
these new players have intervened in this case in
defense of the law. These are the little Davids
who claim that with RA 8479 as their slingshot,
they can, given enough time, fight and win
against the three erstwhile unbeatable Goliaths.
Indeed, they believe that the questioned
provision has given them the impetus to
compete and thereby eventually show the
benefits of deregulation; namely, the best
products at the cheapest prices.
With this factual backdrop and in the dire
absence of contrary proof, it would be specious
to conclude that under the aegis of Section 19 of
RA 8479, the Big Three have restrained trade or
unduly restricted competition.
Moreover, the three provisions in RA 8180 which
were adjudged abhorrent to the fundamental
principles of free enterprise are no longer found
in RA 8479. The depletion of the Oil Price
Stabilization Fund, the extraneous factor that
was considered by the President in accelerating
the implementation of full deregulation under
RA 8180, was no longer taken into account in the
present milieu. The Court's reasons for declaring
the unconstitutionality of RA 8180 are, therefore,
not germane to the validity of RA 8479. The
petitioner cannot rely on the same rationale for
the purpose of successfully assailing RA 8479.
Indeed, he admits that "the Tatad and Lagman
cases . . . did not consider and adjudicate on the
lifting of price control per se, under RA 8180, as
an issue."
Epilogue
In sum, I make no secret of my sympathy for
petitioner's frustration at the inability of our
government to arrest the spiraling cost of fuel
and energy. 13 I hear the cry of the poor that life
has become more miserable day by day. I feel
their anguish, pain and seeming hopelessness in
securing their material needs.
However, the power to lower petroleum prices
through the adoption or the rejection of viable
economic policies or theories does not lie in the
Court or its members. Furthermore, absent
sufficient factual evidence and legal moorings, I
cannot vote to declare a law or any provision
thereof to be unconstitutional simply because,
theoretically, such action may appear to be wise
or beneficial or practical. Neither can I attribute
grave abuse of discretion to another branch of
government without an adequate showing of
patent arbitrariness, whim or caprice. Should I
do so, I myself will be gravely abusing my
discretion, the very evil that petitioner attributes
to the legislature.
WHEREFORE, I vote to DISMISS the Petition.
QUISUMBING, J., concurring opinion;
I fully concur in the ponencia of Justice Consuelo
Ynares-Santiago. What I would like to stress here
and now is that, contrary to certain ill-informed
comments in media, petitioner's pleadings were
thoroughly dissected at the hearing where he
and his counsel as well as the respondents amply
presented their arguments. Questions of law and
policy were also illuminated from different
perspectives in sessions and in memoranda
internally exchanged by members of the Court.
Right away, it must be added, no delay attended
the resolution of this petition. For while the
Constitution allows two years, this case was
decided en banc in less than half that period,
from the time of submission of the parties'
memoranda. Below is a full presentation of my
view on the controversy generated by
petitioner's insistence that the Court overturn an
act passed by his own branch of government and
approved by the Chief Executive.
At issue in this special civil action
for certiorari under Rule 65 is the
constitutionality of Sec. 19 of Republic Act No.
8479,1 entitled "An Act Deregulating the
Downstream Oil Industry and for other
Purposes". The law was enacted pursuant to the
policy of the State to liberalize and deregulate
the downstream oil industry. R.A. 8479 is the
remedial legislation passed by Congress to cure
the infirmities found in Republic Act No. 8180,
the first oil industry deregulation law, otherwise
known as the "Downstream Oil Industry
Deregulation Act of 1996".
In a banc decision promulgated on November 5,
1997, the Court declared R.A. 8180
unconstitutional for having transgressed the
constitutional prohibition against monopolies
and combinations in restraint of trade,
specifically mandated in Section 19, Article XII of
the Constitution. Consequently, Executive Order
No. 392 (E.O. 392) implementing the provision of
said law was voided. On December 3, 1997, the
motions for reconsideration were denied for
utter lack of merit.
Now before us is a challenge to the second oil
industry deregulation law, R.A. 8479. The
relevant factual and procedural antecedents of
the present petition are as follows:
In 1992, the Philippine government welcomed
more liberal economic policies and started the
ground work for privatization of some
government-owned or controlled corporations
and deregulation of the oil industry. In due time,
Congress enacted Republic Act No. 7638 on
December 9, 1992. It created the Department of
Energy (DOE). Among others, it was tasked, at
the end of four years from the effectivity of R.A.
No. 7638 and upon approval of the President, to
institute the "programs and the timetable for the
deregulation of appropriate projects and
activities of the energy industry."2
Following the intent of R.A. 7638, the Philippine
National Oil Company (PNOC) sold 40% of its
equity in Petron Corporation to the Aramco
Overseas Company.
Sometime in March 1996, Congress made that
daring step towards the realization of liberating
the oil industry from government regulation and
enacted R.A. 8180. On February 8, 1997,
President Fidel V. Ramos issued E.O. 392, which
signaled the implementation or start of
deregulation in the oil industry.
Senator Francisco Tatad and Congressmen
Enrique Garcia, Edcel Lagman, Joker Arroyo and
Wigberto Tañada, among others, filed separate
petitions docketed as G.R. Nos. 124360 and
127867, before the Court. The petitioners
contended that some of the provisions of R.A. No.
8180 violated Section 19 of Article XII of the
1987 Constitution, which states:
The State shall regulate or
prohibit monopolies when the
public interest so requires. No
combinations in restraint of
trade or unfair competition
shall be allowed.
The challenged provisions in R.A. 8180 were:
(1) the provision on tariff differential found in
Section 5 (b) which states:
Sec. 5 (b) — Any law to the
contrary notwithstanding and
starting with the effectivity of
this Act, tariff duty shall be
imposed and collected on
imported crude oil at the rate
of three percent (3%) and
imported refined petroleum
products at the rate of seven
percent (7%), except fuel oil
and LPG, the rate for which
shall be the same as that for
imported crude oil: Provided,
that beginning on January 1,
2004 the tariff rate on
imported crude oil and
refined petroleum products
shall be the
same.Provided, further, That
this provision may be
amended only by an Act of
Congress.
(2) the minimum inventory clause, in Section 6
which provides:
Sec. 6 — To ensure the
security and continuity of
petroleum crude and products
supply, the DOE shall require
the refiners and importers to
maintain a minimum
inventory equivalent to ten
percent (10%) of their
respective annual sales
volume or forty (40) days of
supply, whichever is lower.
(3) the predatory pricing scheme in Section 9:
Sec. 9 — To ensure fair
competition and prevent
cartels and monopolies in the
downstream oil industry, the
following acts shall be
prohibited:
xxx xxx xxx
(b) Predatory pricing which
means selling or offering to
sell any product at a price
unreasonably below the
industry average cost so as to
attract customers to the
detriment of competitors.
In declaring provisions of R.A. 8180
unconstitutional, the Court held:
. . . Petron, Shell and Caltex
stand as the only major league
players in the oil market. . . .
The tariff differential of 4%
therefore works to their
immense benefit. . . . New
players that intend to equalize
the market power of Petron,
Shell and Caltex by building
refineries of their own will
have to spend billions of
pesos. Those who will not
build refineries but compete
with them will suffer the huge
disadvantage of increasing
their product cost by 4%.
They will be competing on an
uneven field.
The provision on inventory
widens the balance of
advantage of Petron, Shell and
Caltex against prospective
new players. Petron, Shell and
Caltex can easily comply with
the inventory requirement of
R.A. No. 8180 in view of their
existing storage facilities.
Prospective competitors again
will find compliance with this
requirement difficult as it will
entail a prohibitive cost. . . .
Finally, we come to the
provision on predatory
pricing which is defined as ". .
. selling or offering to sell any
product at a price
unreasonably below the
industry average cost so as to
attract customers to the
detriment of competitors." . . .
The ban on predatory pricing
cannot be analyzed in
isolation. Its validity is
interlocked with the barriers
imposed by R.A. No. 8180 on
the entry of new players. 3
That decision came under sharp attack by critics
who accused the Court of improvidently
intervening in the economic affairs of the State.
Economists and businessmen remarked that the
decision was a major blow to economic reforms
and an additional burden to the government's
already huge budget deficit as it would require
reinstating a subsidy on oil products. 4 Pertinent
portions of the Decision decreed:
With this Decision, some
circles will chide the Court for
interfering with an economic
decision of Congress. Such
criticism is charmless for the
Court is annulling R.A. No.
8180 not because it disagrees
with deregulation as an
economic policy but because
as cobbled by Congress in its
present form, the law violates
the Constitution. The right call
therefor should be for
Congress to write a new oil
deregulation law that
conforms with the
Constitution and not for this
Court to shirk its duty of
striking down a law that
offends the Constitution. . . .
Indeed when confronted by a
law violating the Constitution,
the Court has no option but to
strike it down dead. . . . Hence,
for as long as the Constitution
reigns supreme so long will
this Court be vigilant in
upholding the economic rights
of our people especially from
the onslaught of the powerful.
Our defense of the people's
economic rights may appeal
 heartless because it cannot be
half-hearted.
IN VIEW WHEREFORE, the
petitions are granted. R.A. No.
8180 is declared
unconstitutional and E.O. No.
372 [392] void. 5
Public respondents filed their consolidated
motion for reconsideration. Some of the new
players, in the industry: Eastern Petroleum
Corp., Seaoil Petroleum Corp., Subic Bay
Distribution, Inc., TWA, Inc., and Dubphil Gas
moved to intervene and aired their stand against
the total nullification of R.A. 8180. They also
averred that they were in favor of declaring the
three offensive provisions unconstitutional.
Petitioner Enrique T. Garcia, likewise, filed a
partial motion for reconsideration and pushed
for a return only to partial deregulation in which
the main features of deregulation would be
allowed free reign, but the retail price of oil
products would still be regulated through the
Energy Regulatory Board.
The Court found no merit in the motion for
reconsideration, motion for intervention, and
partial motion for reconsideration. Despite the
separability clause, the Court ruled that the three
questioned provisions cannot be struck down
alone, for they were the ones intended to carry
out the policy of the law as embodied in Section
2.6
On the question of the validity of E.O. 392, the
Court held that the Executive Department failed
to follow faithfully the standards set by R.A. 8180
when it considered the extraneous factor of
depletion of the Oil Price Stabilization Fund
(OPSF) fund, instead of limiting the basis for the
acceleration of full deregulation of the industry
to only two factors, viz: (1) the time when the
prices of crude oil and petroleum products in the
world market are declining, and (2) the time
when the exchange rate of the peso in relation to
the US dollar is stable. 7By considering another
factor, the Executive Department rewrote the
standards set forth in R.A. 8180.8In light of
the uncertainty of the consideration given by
the Executive department to the depletion of
the OPSF fund for the full deregulation of the
oil industry, we ruled that E.O. 392
constituted a misapplication of R.A. 8180. In
sum, the implementing order was found void,
while the basic law was held
unconstitutional.
On reconsideration, our December 3, 1997
Resolution stressed that R.A. 8180 is
unconstitutional because (1) it gave more
power to an already powerful oil oligopoly;
(2) it blocked the entry of effective
competitors; and (3) it will sire an even more
powerful oligopoly whose unchecked power
will prejudice the interest of the consumers
and compromise the general welfare.9 The
Court reiterated, however, that there was no
impediment in re-enacting R.A. 8180 minus
the provisions which are anti-competition.
Consequently, Congress fast-tracked a new
oil deregulation law, R.A. 8479, which was
approved and duly signed on February 10,
1998. It took effect an February 12, 1998
upon the completion of its publication in a
newspaper of general circulation.
Dissatisfied with the amendments
incorporated into the new law by his own
colleagues in Congress, Honorable Enrique T.
Garcia filed the instant petition.
The Court is the ultimate guardian of our
Constitution. By virtue of its power of judicial
review, it is duty-bound in an appropriate
case to ascertain whether a law is free from
constitutional flaws. While favoring free
competition in the oil industry, the Court
struck down R.A. 8180 because of provisions
therein that contravened the basic law, our
Constitution. Before dwelling into the issues
now raised by the petitioner, we must
determine whether R.A. 8479 truly cured the
invalid portions of R.A. 8180. When we
advocated vigilance in upholding the
economic rights of our people, we truly
hoped that Congress would address the
defects of R.A. 8180 and not re-enact R.A. on his judgment such
8180 through the guise of R.A. 8479. reduction is warranted,
pursuant to Republic Act
It bears recalling, however, that when the No. 1937, as amended,
Supreme Court mediates to allocate otherwise known as the
constitutional boundaries or invalidates the "Tariff and Customs
acts of a coordinate body, what it is Code": Provided, further,
upholding is not its own supremacy but the That beginning January 1,
supremacy of the Constitution. With this in 2004 or upon
mind, we now focus on the provisions of R.A. implementation of the
Uniform Tariff Program
8479, in particular the 4% tariff differential,
minimum inventory level, and predatory under the World Trade
Organization and ASEAN
pricing provisions, which aim to prevent the
big three oil companies from taking Free Trade Area
commitments, the tariff rate
advantage of deregulation as a means of
cartelizing their operations, and thereby shall be automatically
adjusted to the appropriate
result in monopolistic and oligopolistic
practices condemned by the basic law of the level notwithstanding the
provisions under this
land.
Section.
First, the 4% tariff differential. On December
31, 1997, after the Court declared with Second, the minimum inventory level
finality that R.A. 8180 is unconstitutional, requirement. R.A. 8479 eliminated the
President Ramos issued Executive Order No. provision in R.A. 8180 requiring the refiners
461. The Order imposed a three percent (3%) and importers to maintain a minimum
import duty on petroleum products inventory equivalent to ten percent (10%) of
enumerated therein. The President's move their respective annual sales volume or forty
(40) days' supply. The minimum inventory
avoided the revival of the old tariff rates of
10% on crude oil and 20% on refined oil requirement was removed, giving the new
entrants opportunities to use their resources
while the legislative department was in the
process of crafting a new oil deregulation to be more competitive.
law. Noteworthy, Sec. 6 of R.A. 8479 imposed
the same tariff treatment on petroleum Third, predatory pricing. In the December 3,
products. Section 6 reads: 1997 Resolution of the Court in G.R. Nos.
124360 and 127867, we expressed the view
that the definition of predatory pricing was
Sec. 6 — a) Any law to the
contrary notwithstanding too loose to be a real
deterrent. 10 Congressman Dante O. Tinga
and starting with the
effectivity of this Act, a acknowledged in his explanatory note of House
Bill 10057 (H.B. 10057) that the definition of
single and uniform tariff
duty shall be imposed and predatory pricing needed specificity, particularly
with respect to the definitive benchmark price
collected both on imported
crude oil and imported and the express anti-competitive intent. He
suggested the Areeda-Turner test and proposed
refined petroleum products
at the rate of three percent to redefine predatory pricing. Section 11 par. (b)
of R.A. 8479 adopted Congressman Tinga's
(3%):Provided, however,
That the President of the recommendation, to wit:
Philippines may, in the
exercise of his powers, b)
reduce such tariff rate when Predatory
pricing purposes investigate complaints for violations of R.A. and the value of the peso in
which of this 8479. They assert that the mere dominance of relation to the US dollar is
means prohibition Petron, Pilipinas Shell, and Caltex, is not per se a stable, taking into account
selling or , "variable combination in restraint of trade. Combination in relevant trends and
offering to cost" as restraint of trade, they claim, is the means to prospects: Provided,
sell any oil distinguish achieve monopoly. further, That the foregoing
product at ed from provision notwithstanding,
a price "fixed Petitioner Garcia adverts to oil deregulation in the five (5)-month Transition
below the cost", phases. The new oil deregulation law has two Phase shall continue to apply
seller's or refers to phases: (1) the transition phase and (2) the full to LPG, regular gasoline and
offeror's costs such deregulation phase. kerosene as socially-sensitive
average as utilities petroleum products and said
variable or raw petroleum products shall be
cost for the materials, During the transition period, all non-pricing covered by the automatic
purpose of which vary aspects were lifted. Although the Oil Price pricing mechanism during the
destroying as the Stabilization Fund was abolished, a buffer said period. 12
competitio output fund 11 was created to cover increases in the
n, increases prices of petroleum products, except premium
gasoline. The Automatic Oil Pricing Mechanism Note that the abovecited transition phase of five
eliminating or months could be abbreviated when public
a decreases was maintained to approximate the domestic
prices of petroleum products in the international interest so requires. The President's power to
competitor and accelerate the start of full deregulation, however,
or "average market. The Energy Regulatory Board (ERB)
approved a market-oriented formula to depended upon the recommendation of the
discouragi variable Departments of Energy and Finance.
ng a cost" refers determine the Wholesale Posted Price of
potential to the sum petroleum products based solely on the changes
competitor of all of either the Singapore Posting of refined Accordingly as recommended, on March 14,
from variable petroleum products, the Singapore Import Parity 1998, President Ramos issued E.O. 471 to
entering costs or the crude landed cost. accelerate the implementation of full
the divided by deregulation. Partinently the E.O., which
market: Pr the number After the transition phase comes full implements R.A. 8479, provides:
ovided, how of units of deregulation as provided by Sec. 19 of R.A. 8479,
ever, That outputs. which reads thus: WHEREAS, Republic Act No.
pricing 7638, otherwise known as the
below To strengthen the anti-trust safeguards of R.A. Sec. 19. Start of Full "Department of Energy Act of
average 8479, respondents argue that there are enough Deregulation. — Full 1992," provides that, "at the
variable provisions to encourage entry of new deregulation of the Industry end of four years from its
cost in participants. For instance, R.A. 8479 allows for shall start five (5) months effectivity last December
order to active participation of the private sector and following the effectivity of this 1992, the Department [of
match the cooperatives in the retail of petroleum through Act: Provided however, That Energy] shall, upon approval
lower price joint ventures to establish gasoline stations. when the public interest so of the President, institute the
of the Moreover, R.A. 8479 requires initial public requires, the President may programs and timetable of
competitor offering of shares equivalent to 10% of the accelerate the start of full deregulation of appropriate
and not for capital investments by oil companies. deregulation upon the energy projects and activities
the Respondents also cite that the enforcement of recommendation of the of the energy sector;"
purpose of monitoring activities by the DOE encourages Department of Energy (DOE)
destroying consumer vigilance over unwarranted increase and the Department of WHEREAS, Section 19 of
competitio in the prices of petroleum products. Another Finance (DOF) when the Republic Act No. 8479,
n shall not safeguard against collusion among oligopolists is prices of crude oil and otherwise known as the
be deemed the creation of a task force with members from petroleum products in the "Downstream Oil Industry
predatory the DOE and the Department of Justice (DOJ) to world market are declining Deregulation Act of 1998,"
pricing. For
provides that [T]hat "when WHEREAS, Executive Order the automatic pricing mechanism until July of d
the public interest so No. 377 dated 31 October 1998. Only then was full deregulation of the e
requires, the President may 1996 provides for an industry effected, and the automatic pricing s
accelerate the start of full institutional framework for mechanism was also lifted for LPG, regular gas
deregulation upon the the administration of the and kerosene. f
recommendation of the deregulated industry by o
Department of Energy (DOE) defining the functions and Turning now to herein petition, Congressman r
and the Department of responsibilities of various Enrique Garcia raised the following issues to
Finance (DOF) when the government agencies; assail the provision implementing full f
prices of crude oil and deregulation of the oil industry: u
petroleum products in the WHEREAS, pursuant to l
world market are declining Republic Act No. 8479, the l
and the value of the peso in I
deregulation of the industry .
relation to the US dollar is will foster a truly competitive d
stable, taking into account market which can better e
relevant trends and S r
achieve the social policy e
prospects: Provided, further, objectives of fair prices and e
That the foregoing provision c g
adequate, continuous supply .
notwithstanding, the five (5)- of environmentally-clean and u
month Transition Phase shall high quality petroleum l
continue to apply to LPG, 1 a
products; 9
regular gasoline and kerosene t
as socially-sensitive i
petroleum products and said NOW, THEREFORE, I, FIDEL V. O o
petroleum products shall be RAMOS, President of the F n
covered by the automatic Philippines, by the powers
pricing mechanism during vested in me by law, do R f
said period; hereby declare the full . i
deregulation of the A v
downstream oil . e
WHEREAS, pursuant to the industry; provided, however,
joint recommendation of the that LPG, regular gasoline and N
Department of Energy and the (
kerosene shall be covered by O 5
Department of Finance, and in the Automatic Pricing .
the interest of the consuming )
Formula pursuant to R.A. No.
public, recent developments 8479. 13 8
favor the acceleration of the m
4 o
start of full deregulation of 7
the downstream oil industry The implementing guidelines for the acceleration n
of full deregulation of the industry, set forth in 9 t
because: (i) the prices of
crude oil and petroleum E.O. 471, required the concurrence of two h
conditions, viz.: (1) the downtrend of prices of oil w s
products in the world market h
are beginning to be stable and and petroleum products, and (2) stability of
exchange rate of peso in relation to US dollar, i o
on a downtrend since January c
1998; and (ii) the exchange taking into account relevant trends and r
prospects. h
rate of the peso in relation to
the US dollar has been stable e
p a
for the past three months, However, E.O. 471 carried an additional proviso, r
averaging at around P40.00 to the transition phase was continued for LPG, r
o l
one US dollar; regular gas and kerosene. These socially v
sensitive products continued to be covered by i
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a e h These issues may be synthesized into one:
l e Whether or not the full implementation of
p deregulating the downstream oil industry as
d r b provided in Section 19 of R.A. 8479 violates the
e o i Constitutional mandate of free competition in a
r t g liberalized oil industry under Section 19, Article
e e XII of the 1987 Philippine Constitution?
g c 3
u t
l i o Petitioner Garcia principally faults Section 19 of
a o l the new R.A. 8479 as well as E.O. 471 now for
t n i violating the constitutional prohibition against
i g monopoly, and being anti-competition.
o o o
n f p Petitioner claims that there was a premature full
o deregulation under Section 19 of R.A. 8479. He
w t l protests the acceleration of the full
i h y implementation of deregulation decreed under
t e ' E.O. 471. Petitioner insists that the short
h s transition period is pro-oligopoly, anti-
p competition and anti-people and is patently
p u p unconstitutional because the period is too short
r b r to establish true competition in the local oil
i l i industry. True competition, he claims, exists only
c i c when there can be a sizable number of players,
e c e and at present, the new players comprise only
- 3% of the market share which does not put up
c i f real competition against the "Big Three" oil
o n i companies (Caltex, Shell and Petron). What he
n t x suggests is to prolong the transition phase or
t e i partial deregulation with price controls while the
r r n big oil companies are still dominating the
o e g market, to ensure the protection of the public
l s interest and prevent the big three oligopolies
s t a from fixing the price or overpricing. He further
n contends that the automatic oil pricing
t b d mechanism will enable the domestic price of
h y petroleum products to approximate and
a o promptly reflect the price of oil in the
t p v international market. He also stressed that new
r e players may come under an indefinite or open-
e e r ended transition phase.
Commenting on the petition, respondents claim
that the propriety of full deregulation involves
the wisdom of Congress and is therefore, a non-
justiciable issue. They counter petitioner's
arguments by pointing out that the shortening of
the transition period and acceleration of full
deregulation were decreed pursuant to the joint
recommendation of the DOE and DOF, based on
the concurring conditions of a downtrend of
crude oil in world market and the stability of the
exchange rate of P40.00 to US$1.
The respondents argue that the short transition
period is not violative of the Constitution
because the new players were given until July
1998 to set up their businesses as they have in
fact, and they have captured at least 3% of the
total oil market.
Respondent Petron asserts that full deregulation
protects the public from the greed and
exploitation of business. Petron further contends
that competition can be ushered in only with the
certainty of price deregulation and the short
transition period would guarantee the investors
that within a manageable period, they would be
able to set prices, taking into account their
investment and operating costs. It claims an
indefinite transition period would discourage
new investors because the new players had
hoped that within a reasonable time, price
regulation would be lifted.
The Solicitor General filed a comment on behalf
of the public respondents, interposing economic
arguments that price regulation reduces
economic efficiency and is prejudicial to the
public. 14 Public respondents assert that the
acceleration of full deregulation is based on
existing conditions and sound economic theory.
Respondent Shell filed a rejoinder, stating that to
prolong the transition period will revive the
automatic pricing mechanism which means that
it will only replace the mode of price regulation
by still another regulatory scheme. It argues that
if Sec. 19 of R.A. 8479 were to be struck down,
full deregulation will never take place and it
would render the entire law different from what
was passed by Congress.
Petitioner counters that he is questioning the
constitutionality rather than the wisdom of Sec.
19 of R.A. 8479; it is pro-oligopoly, hence
patently unconstitutional. Petitioner further
avers that condemnation against monopolies and
combination in restraint of trade should be given
legal sanction by the Court. Petitioner maintains
that the nullification of Sec. 19 of R.A. 8479 will
result in partial deregulation, where there will be
no regulation as regards the importation of
petroleum products and the establishment of gas
station, but oil pricing would be regulated based
on the Automatic Pricing Mechanism.
Note that during the review of R.A. 8180 by the
Court in G.R. No. 127867, petitioners Edcel C.
Lagman, Arroyo,et al., likewise questioned the
constitutionality of Section 15 of R.A. No.
8180 15 as well as E.O. No. 392 16which provided
for the implementation of full deregulation. The
Court decreed thus:
. . . Full deregulation at the
end of March 1997 is
mandatory and the Executive
has no discretion to postpone
it for any purported reason.
Thus, the law is complete on
the question of the final date
of full deregulation. The
discretion given to the
President is to advance the
date of full deregulation
before the end of March 1997.
Section 15 lays down the
standard to guide the
judgment of the President —
he is to time it as far as
practicable when the prices of
crude oil and petroleum
products in the world market
are declining and when the
exchange rate of the peso in
relation to the US dollar is
stable.
xxx xxx xxx
It ought to follow that the
argument that E.O. No. 392 is
null and void as it was based
on indeterminate standards
set by R.A. 8180 must likewise
fail. If that were all to the
attack against the validity of
E.O. No. 392, the issue need
not further detain our
discourse. 17
In G.R. No. 127867, Congressman Garcia filed an
Urgent Motion for Partial Reconsideration from
the November 5, 1997, decision of the Court. He
sought to strike down only the premature full
deregulation but maintain partial deregulation
under R.A. No. 8180 with price controls and
price mechanism based on Singapore Posted
Prices. The Court resolved the issue this way:
We shall first resolve
petitioner Garcia's linchpin
contention that the full
deregulation decreed by R.A.
No. 8180 to start at the end of
March 1997 is
unconstitutional. For
prescinding from this premise
petitioner suggests that "we
simply go back to the
transition period under R.A.
No. 8180." Under the
transition period, price
control will be revived
through the automatic pricing
mechanism based on
Singapore Posted Prices. The
Energy Regulatory Board . . .
would play a limited and
ministerial role of computing
the monthly price ceiling of
each and every petroleum fuel
product, using the automatic
pricing formula. . . .
We are not impressed by
petitioner Garcia's
submission. Petitioner has no
basis in condemning as
unconstitutional per se the
date fixed by Congress for the
beginning of the full
deregulation of the
downstream oil industry. . . .
The choice of March 1997 as
the date of full deregulation is
a judgment of Congress and
its judgment call cannot be
impugned by this Court. 18
Now in the present petition, Garcia insists on his
old plea for a return only to partial deregulation
of the downstream oil industry, wherein the
main features of deregulation would be
permitted but the retail prices of oil products
would still be regulated through an Automatic
Pricing Mechanism.
However, I find his contentions to be lacking
legal basis, even if his proposal appears to be
expedient, or even beneficial, especially to the
poor. As the Court said Tañada
vs. Tuvera, 19 "[T]his Court is not called upon to
rule on the wisdom of the law or to repeal it or
modify it if we find it impractical. That is not our
function. That function belongs to the legislator.
Our task is merely to interpret and apply the law
as conceived and approved by the political
departments of the government in accordance
with the prescribed procedure." 20
For if we allow an open-ended transition period
to maintain government pricing regulation, we
would have suspended the much-needed
liberalization of the downstream oil industry. It
would certainly run counter to the government's
policy of allowing free interplay of market forces,
with minimal government supervision. In fact, it
could defeat full deregulation to ensure fair
competition in the downstream oil industry,
where new and prospective players are on even
level playing field with the Big Three.
Furthermore, to base the implementation of full
deregulation on the presence of a sizable number
of new investors, as petitioner would want us to
do, would be to legislate a floating provision
dependent on the happening of a contingent
event. To do so, would be to undermine the very
purpose of the law, which is to liberalize and
deregulate the downstream oil industry in order
to ensure a truly competitive market under a
regime of fair prices, adequate and continuous
supply, environmentally clean and high-quality
petroleum products.
Consequently, to heed the petitioner's prayer,
this Court would have to legislate, a power
granted only to Congress. The operation of a
statute may be duly suspended only by authority
of the legislature. 21 Indeed, a suspension of a
valid statute must rest upon legislative
action; 22 it may not be effected solely by a
judicial act. 23Clearly it is a policy decision of the
legislative and executive departments in whose
turf we must not tread, under the principle of
separation of powers. The term "political
question" connotes what it means in ordinary
parlance, namely, a question of policy. 24 It refers
to "those questions which, under the
Constitution, are to be decided by the people in
their sovereign capacity, or in regard to which
full discretionary authority has been delegated
to the legislative or executive of the
government." 25 If is concerned with issues
dependent upon the wisdom, not legality, of a
particular measure. 26 The judiciary does not
directly settle policy issues. Under our system of
government, policy issues are within the domain
of the political branches of government and of
the people themselves as the repository of all
state powers. 27
In PLDT vs. National Telecommunications
Commission, 28 the ultimate considerations cited
in matters affecting vital industries, are the
public need, public interest, and the common
good. In that case, the Court said:
Free competition in the
industry may also provide the
answer to a much-desired
improvement in the quality
and delivery of this type of
public utility, to improved
technology, fast and handy
mobile service, and reduced
user dissatisfaction. 29
Similarly, the above-mentioned considerations
could undergird the nation's energy and other
economic policies. The liberalization of the oil
industry is a reform program initiated by
Congress to free the government from the
obligation of infusing funds to subsidize
increases in the prices of oil products. Such funds
may now be utilized for other much needed
programs with a public purpose.
Well-established is the principle that every law
has in its favor the presumption of
constitutionality. 30 To declare a law
unconstitutional, the repugnancy of that law to
the Constitution must be clear and unequivocal.
But we recognize that even if a law is aimed at
the attainment of some public good, still its
provisions cannot infringe upon constitutional
rights. 31 That infringement, however, must be
proved and established persuasively to
invalidate a provision of a law, if not the entire
law itself.
Petitioner ought to have demonstrated the need
for the extension of the transition period. But, in
fact, he could not downplay the DOE report that
new players accounted for a sizable share of the
market, some 18.1 percent of the total product
imports, and competing companies are keen in
joining the Philippine oil industry since the full
implementation of deregulation. And, as stressed
by the public respondents in the rejoinder dated
January 7, 1999:
Since 1996, new players have
taken a significant share in
the market, to wit: (a) seven
(7) new players have entered
the downstream oil industry
before RA No. 8180; (b)
during the effectivity of RA
No. 8180, twenty eight (28)
new players have engaged in a
number of downstream oil
industry activities; and (c)
three (3) new players have
engaged in fuel bulk
marketing, while two (2) new
players have started to
establish gasoline service
stations immediately before
and during the effectivity of
RA No. 8479. At the same
time, many more companies
have indicated their intention
to enter the downstream oil
industry business. 32
The new players, according to industry
experts, are gradually making a dent in
the local market and their share is
expected to surge in a few years when
their retail stations are established. 33
However, the presence or entry of numerous
players in the oil industry is not a condition
precedent before a full deregulated petroleum
industry could be had. But we recognize that it is
precisely the implementation of full deregulation
that would serve to entice new players to
compete against the so-called Big Three.
Hopefully, this move would prevent the powerful
oil companies from manipulating prices, to the
prejudice of the consumers and the public in
general.
The petitioner strongly manifested his fears
concerning pernicious consequences of total
lifting of price control in the oil industry. His
main concern is that the government might be
helpless in case the Big 3 (Shell, Petron and
Caltex) overprice their petroleum products. But
the people are not without legal recourse. The
public can manifest outright objections to
overpricing and report to the Department of
Energy any unreasonable increase in the prices
of these oil products. The monitoring power of
the DOE is embodied in Sec. 14 of R.A. 8479, and
its implementing rule, Section 18 of DOE Circular
No. 98-03-004, thus:
R.A. 8479, Sec. 14 — Powers
and Functions of the DOE and
DOE Secretary:
Monitoring —
a) The DOE shall monitor and
publish daily international
crude oil prices, as well as
follow the movements of
domestic oil prices. It shall
likewise monitor the quality
of petroleum products and
stop the operation of business
involved in the sale of
petroleum products which do
not comply with the national
standards of quality that are
aligned with the national
standards/protocols of
quality. . . .
xxx xxx xxx
d) Any report from any
person of an unreasonable
rise in the prices of petroleum
products shall be immediately
acted upon. For this purpose,
the creation of DOE-DOJ Task
Force is hereby mandated to
determine within thirty (30)
days the merits of the report
and initiate the necessary
actions warranted under the
circumstances: Provided that
nothing herein shall prevent
the said task force from
investigating and/or filing the
necessary complaint with the
proper court or agency motu
propio.
Department Circular No. 98-
03-004, Sec. 18 — Powers and
Functions of the DOE and DOE
Secretary
Monitoring —
The DOE shall monitor the following pursuant to
Section 14 of the Act. Any misrepresentation,
mislabeling, concealment or fraud, shall be
subject to penalties under existing applicable
laws.
a. Prices
The DOE shall monitor and publish international
oil prices as well as follow the movement of
domestic oil prices.
(1) Price Display Boards
For the convenience of the
public, all retailers of
petroleum products shall
display the prices of each type
of petroleum product sold in
gasoline stations in
prominently installed price
display boards with
backgrounds preferably
conforming to the color
coding scheme for the
product, such as: green for
Unleaded Premium Gasoline,
red for Premium Low Lead
Gasoline, orange for Regular
Gasoline, yellow for Diesel
Fuel, and white for Kerosene.
In the case of LPG (which has
no product color), the price
display board may be light
blue in color. The numeric
entries in these boards shall
be at least six (6) inches in
height.
The price display boards shall
be properly installed and
labeled not later than June 30,
1998. Failure to comply with
this requirements shall be
penalized pursuant to Section
24 of the Act.
(2) Unreasonable Rise in
Prices
Any report from any person of
an unreasonable rise in the
prices of petroleum products
shall be immediately acted
upon by the DOE-DOJ Task
Force in accordance with
Section 17 of this IRR. The
said Task force shall
determine within thirty (30)
days the merits of the report
and shall initiate the
necessary actions warranted
under the circumstances.
A calculus of fear and pessimism, however, does
not justify the remedy petitioner seeks: that we
now overturn a law enacted by Congress and
approved by the Chief Executive. The Court must
act on valid legal reasons that will explain why
we should interfere with vital legislation. 34 To
strike down a provision of law we need a clear
showing that what the Constitution prohibits, the
statute has allowed to be done. 35 Since there is
no clear showing that Section 19 of R.A. 8479 has
violated the constitutional prohibition against
monopolies and combinations in restraint of
trade, I vote that the present petition be
DISMISSED.