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Table of Contents

1. Monfort Hermanos Agricultural Development Corp vs 152542; 155472


Monfort III
2. PNB vs AEEC 142936
3. Tayag vs Benguet Consolidated Inc. L-23145
4. PSE vs CA 125469
5. Feliciano vs COA 147402
6. DBP vs NLRC 86293
7. Edward Keller vs COB Group Marketing L-68097
8. LBP vs CA 127181
9. General Credit Corp vs Alsons Development and 154975
Investment
10. Lipat vs Pacific Banking Corp 142435
11. Sta. Monica Industrial Development Corp vs DAR 164846
Regional Director of Region III
12. Martinez vs CA 131673
13. Secosa vs Heirs of Erwin Suarez Francisco 160039
14. Gala vs Ellice Agro-Industrial Corp 156819
15. R&E Transport Inc vs Latag 155214
16. Enriquez Security Services vs Cabotaje 147993
17. ASJ Corp vs Evangelista 158089
18. Mendoza vs Banco Real Development Bank 140923
19. Lafarge Cement Phils vs Continental Cement 155173
20. General Credit Corp vs Alsons development and 154975
inverstment corp
21. Sicam vs Jorge 159617
22. Jardine Davies Inc. vs JRB Realty INc 151438
23. De Leon vs NLRC 112661
24. PCGG vs Sandiganbayan 119609-10; 119623-25
25. JG Summit Holdings Inc vs CA 124293
26. People vs Quasha L-6055
27. PCI bank vs CA 121413; 121479;
128604
28. Ching vs Secretary of Justice 164317
29. MERALCO vs TEAM Electronics Corp 131723
30. ABECEDO Optical vs CA 100152
31. Sawadjaan vs CA 141735
32. Loxano vs De Los Santos 125221
33. International Express Travel vs CA 119002
34. Polytechnic University vs CA 143513
35. Baluyot vs Holganza 136374
36. Castillo vs Balinghasay 150976
37. Commissioner of Interna; Revenue vs CA 108576
38. Republic Planters Bank vs Agana 51765
39. Castillo vs Balinghasay 150976
40. Lanuza vs CA 131394
41. Ang mga Kaanib ng Iglesia ng Dios vs Iglesia ng Dios 137592
kay Kristo Hesus
42. Gala vs Ellice Agro-Industrial Corp 156819
43. Hyatt Elevators vs Goldstar Elevators Phils 161026
44. NHA vs CA 148830
45. Nautica canning Corp vs Yumul 164588
46. Lanuza vs CA 131394
47. China Banking Corp vs CA 117604
48. Sawadjaan vs CA 141735
49. Salafranca vs Philamlife(Pamplona) Vilage Homeowners 121791
Associantion

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50. PMI Colleges vs NLRC 121466
51. Filipinas Port Services vs GO 161886
52. Boyer-Roxas vs CA 100866
53. AF Realty Development Inc vs Dieselman Freight 111448
Services Co
54. San Juan Structual vs CA 129459
55. Phil Associate of Stock Transfer and Registry of Agencies 137321
Inc Vs CA
56. Islamic Directorate of Phils vs CA 129459
57. Lee vs CA 93695
58. Permium Marble Resources vs CA 96551
59. Raniel vs Jochico 153413
60. Tan vs Sycip 153468
61. Expertravel Tours vs CA 152392
62. Central Cooperative exchange vs Enciso L-35603
63. Pampalona Plantation Company vs Acosta 153193
64. Kwok vs Phil Carpet Mfg Corp 149252
65. Secosa vs Heirs of Erwin Suarez Francisco 160039
66. Rovels Enterprises vs Ocampo 136821
67. Ilusorio vs Ilusorio 171659
68. CSC vs Javier 173264
69. Atrium Management Corp Vs CA 109491
70. BPI vs Casa Montessoru Internationale 149454
71. Filipinas Port Services inc vs Go 161886
72. Gokongwei vs SEC L-45911
73. Cebu Country Club vs Eluzagague 160273
74. Malayang Samahan ng Manggagawa sa M. 113907
Greenfields vs Ramos
75. NPC vs CA 113103
76. SEC vs Cuenca 138544
77. AC Ranson Labor Union vs NLRC L-69494
78. Carag vs NLRC 147590
79. Yao Ka Sin Trading vs CA 53820
80. DBP vs CA 126200
81. BPI Leasing Corp vs CA 127624
82. Omictin vs CA 148004
83. CBC vs CA 117604
84. Woodchild Holdings vs Roxas Electric 140667
85. Atrium Management Corp vs CA 109491
86. Yasuma vs Heirs of Cecilio S De Villa 150350
87. NPC vs AlonzoLegasto 148318
88. Lipat vs PBC 142435
89. Peoples Aircargo vs CA 117847
90. Lapulapu Foundation vs CA 126006
91. Francisco vs GSIS L-18287
92. Kwok Phils vs Phil Carpet Mfg Corp 149252
93. Nyco Sakes Corp vs BA finance Corp 71694
94. BPI family savings bank vs FMIC 132390
95. Rovels Enterprises Inc vs Ocampo 136821
96. Alhanbra Cigar vs SEC L-23606
97. Caltex Phils vs PNOC Dipping and Transport Corp 150711
98. Ong Yong vs Tiu 144476
99. Asia’s Emering Dragon Corp vs DOTC 169914; 174166
100. Price and Sulu Development Co., vs Martin L-37281
101. Tan vs Sycip 153468
102. Cojuanco Jr vs Roxas 91925
103. Gochan vs Young 131889
104. Lee vs CA 93695

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105. Everett vs ABC 25241
106. JG Summt Holdingsvs CA 124293
107. Fleischer vs Botica Nolasco L-23241
108. Cyanamid Phil vs CA 108067
109. CIR vs Lincold Phil Lie Insurance Co 119176
110. NATUS vs Sec of Labor L-39889
111. Veraguth vs Isable Sugar Co L-37064
112. Gokongwei vs SEC L-45911
113. Gonzales vs PNB L-33320
114. RN Symaco Trading Corp vs Santos 142474
115. Chua vs CA 150793
116. Hornilla vs Salunat AC 5804
117. Gochan vs Young 131889
118. Lim vs Lim-Yu 138343
119. Evangelista vs Santos L-1721
120. President of PDIC vs Reyes 154973
121. Comissioner of Internal revenue vs CA 108576

Corp Law Cases

Monfort hermanos Agricultural development corporation vs Monfort


III

G.R. No. 152542 July 8, 2004

MONFORT HERMANOS AGRICULTURAL DEVELOPMENT


CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA,
petitioner,
vs.
ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,
ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M.
RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA
R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF APPEALS,
respondents.

G.R. No. 155472 July 8, 2004

ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON,


ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M.
RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA
R. PAYLADO, JOSE MARTIN M. RODRIGUEZ, petitioners,
vs.
HON. COURT OF APPEALS, MONFORT HERMANOS AGRICULTURAL
DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, and RAMON H. MONFORT, respondents.

DECISION

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YNARES-SANTIAGO, J.:

Before the Court are consolidated petitions for review of the


decisions of the Court of Appeals in the complaints for forcible entry
and replevin filed by Monfort Hermanos Agricultural Development
Corporation (Corporation) and Ramon H. Monfort against the
children, nephews, and nieces of its original incorporators
(collectively known as "the group of Antonio Monfort III").

The petition in G.R. No. 152542, assails the October 5, 2001 Decision 1
of the Special Tenth Division of the Court of Appeals in CA-G.R. SP
No. 53652, which ruled that Ma. Antonia M. Salvatierra has no legal
capacity to represent the Corporation in the forcible entry case
docketed as Civil Case No. 534-C, before the Municipal Trial Court of
Cadiz City. On the other hand, the petition in G.R. No. 155472, seeks
to set aside the June 7, 2002 Decision2 rendered by the Special
Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No.
49251, where it refused to address, on jurisdictional considerations,
the issue of Ma. Antonia M. Salvatierra's capacity to file a complaint
for replevin on behalf of the Corporation in Civil Case No. 506-C
before the Regional Trial Court of Cadiz City, Branch 60.

Monfort Hermanos Agricultural Development Corporation, a


domestic private corporation, is the registered owner of a farm,
fishpond and sugar cane plantation known as Haciendas San
Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in
Cadiz City.3 It also owns one unit of motor vehicle and two units of
tractors.4 The same allowed Ramon H. Monfort, its Executive Vice
President, to breed and maintain fighting cocks in his personal
capacity at Hacienda San Antonio.5

In 1997, the group of Antonio Monfort III, through force and


intimidation, allegedly took possession of the 4 Haciendas, the
produce thereon and the motor vehicle and tractors, as well as the
fighting cocks of Ramon H. Monfort.

In G.R. No. 155472:

On April 10, 1997, the Corporation, represented by its President, Ma.


Antonia M. Salvatierra, and Ramon H. Monfort, in his personal
capacity, filed against the group of Antonio Monfort III, a complaint 6
for delivery of motor vehicle, tractors and 378 fighting cocks, with
prayer for injunction and damages, docketed as Civil Case No. 506-
C, before the Regional Trial Court of Negros Occidental, Branch 60.

The group of Antonio Monfort III filed a motion to dismiss contending,


inter alia, that Ma. Antonia M. Salvatierra has no capacity to sue on
behalf of the Corporation because the March 31, 1997 Board

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Resolution7 authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation is void as the purported
Members of the Board who passed the same were not validly
elected officers of the Corporation.

On May 4, 1998, the trial court denied the motion to dismiss.8 The
group of Antonio Monfort III filed a petition for certiorari with the
Court of Appeals but the same was dismissed on June 7, 2002.9 The
Special Former Thirteenth Division of the appellate court did not
resolve the validity of the March 31, 1997 Board Resolution and the
election of the officers who signed it, ratiocinating that the
determination of said question is within the competence of the trial
court.

The motion for reconsideration filed by the group of Antonio Monfort


III was denied.10 Hence, they instituted a petition for review with this
Court, docketed as G.R. No. 155472.

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the


Corporation a complaint for forcible entry, preliminary mandatory
injunction with temporary restraining order and damages against the
group of Antonio Monfort III, before the Municipal Trial Court (MTC)
of Cadiz City.11 It contended that the latter through force and
intimidation, unlawfully took possession of the 4 Haciendas and
deprived the Corporation of the produce thereon.

In their answer,12 the group of Antonio Monfort III alleged that they
are possessing and controlling the Haciendas and harvesting the
produce therein on behalf of the corporation and not for
themselves. They likewise raised the affirmative defense of lack of
legal capacity of Ma. Antonia M. Salvatierra to sue on behalf of the
Corporation.

On February 18, 1998, the MTC of Cadiz City rendered a decision


dismissing the complaint.13 On appeal, the Regional Trial Court of
Negros Occidental, Branch 60, reversed the Decision of the MTCC
and remanded the case for further proceedings.14

Aggrieved, the group of Antonio Monfort III filed a petition for review
with the Court of Appeals. On October 5, 2001, the Special Tenth
Division set aside the judgment of the RTC and dismissed the
complaint for forcible entry for lack of capacity of Ma. Antonia M.
Salvatierra to represent the Corporation.15 The motion for
reconsideration filed by the latter was denied by the appellate
court.16

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Unfazed, the Corporation filed a petition for review with this Court,
docketed as G.R. No. 152542 which was consolidated with G.R. No.
155472 per Resolution dated January 21, 2004.17

The focal issue in these consolidated petitions is whether or not Ma.


Antonia M. Salvatierra has the legal capacity to sue on behalf of the
Corporation.

The group of Antonio Monfort III claims that the March 31, 1997
Board Resolution authorizing Ma. Antonia M. Salvatierra and/or
Ramon H. Monfort to represent the Corporation is void because the
purported Members of the Board who passed the same were not
validly elected officers of the Corporation.

A corporation has no power except those expressly conferred on it


by the Corporation Code and those that are implied or incidental to
its existence. In turn, a corporation exercises said powers through its
board of directors and/or its duly authorized officers and agents.
Thus, it has been observed that the power of a corporation to sue
and be sued in any court is lodged with the board of directors that
exercises its corporate powers. In turn, physical acts of the
corporation, like the signing of documents, can be performed only
by natural persons duly authorized for the purpose by corporate by-
laws or by a specific act of the board of directors.18

Corollary thereto, corporations are required under Section 26 of the


Corporation Code to submit to the SEC within thirty (30) days after
the election the names, nationalities and residences of the elected
directors, trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic
corporations properly informed of their organizational operational
status, the SEC issued the following rules:

xxx xxx xxx

2. A General Information Sheet shall be filed with this


Commission within thirty (30) days following the date of the
annual stockholders' meeting. No extension of said period shall
be allowed, except for very justifiable reasons stated in writing
by the President, Secretary, Treasurer or other officers, upon
which the Commission may grant an extension for not more
than ten (10) days.

2.A. Should a director, trustee or officer die, resign or in


any manner, cease to hold office, the corporation shall
report such fact to the Commission with fifteen (15) days
after such death, resignation or cessation of office.

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3. If for any justifiable reason, the annual meeting has to be
postponed, the company should notify the Commission in
writing of such postponement.

The General Information Sheet shall state, among others, the


names of the elected directors and officers, together with their
corresponding position title… (Emphasis supplied)

In the instant case, the six signatories to the March 31, 1997 Board
Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation, were: Ma. Antonia M.
Salvatierra, President; Ramon H. Monfort, Executive Vice President;
Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M.
Yusay; and Ester S. Monfort, Secretary.19 However, the names of the
last four (4) signatories to the said Board Resolution do not appear in
the 1996 General Information Sheet submitted by the Corporation
with the SEC. Under said General Information Sheet the composition
of the Board is as follows:

1. Ma. Antonia M. Salvatierra (Chairman);

2. Ramon H. Monfort (Member);

3. Antonio H. Monfort, Jr., (Member);

4. Joaquin H. Monfort (Member);

5. Francisco H. Monfort (Member) and

6. Jesus Antonio H. Monfort (Member).20

There is thus a doubt as to whether Paul M. Monfort, Yvete M.


Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed
duly elected Members of the Board legally constituted to bring suit in
behalf of the Corporation.21

In Premium Marble Resources, Inc. v. Court of Appeals,22 the Court


was confronted with the similar issue of capacity to sue of the
officers of the corporation who filed a complaint for damages. In the
said case, we sustained the dismissal of the complaint because it
was not established that the Members of the Board who authorized
the filing of the complaint were the lawfully elected officers of the
corporation. Thus –

The only issue in this case is whether or not the filing of the case
for damages against private respondent was authorized by a
duly constituted Board of Directors of the petitioner
corporation.

Petitioner, through the first set of officers, viz., Mario Zavalla,


Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and

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Rodolfo Millare, presented the Minutes of the meeting of its
Board of Directors held on April 1, 1982, as proof that the filing
of the case against private respondent was authorized by the
Board. On the other hand, the second set of officers, viz.,
Saturnino G. Belen, Jr., Alberto C. Nograles and Jose L.R. Reyes,
presented a Resolution dated July 30, 1986, to show that
Premium did not authorize the filing in its behalf of any suit
against the private respondent International Corporate Bank.

Later on, petitioner submitted its Articles of Incorporation dated


November 6, 1979 with the following as Directors: Mario C.
Zavalla, Pedro C. Celso, Oscar B. Gan, Lionel Pengson, and
Jose Ma. Silva.

However, it appears from the general information sheet and


the Certification issued by the SEC on August 19, 1986 that as of
March 4, 1981, the officers and members of the board of
directors of the Premium Marble Resources, Inc. were:

Alberto C. Nograles — President/Director

Fernando D. Hilario — Vice President/Director

Augusto I. Galace — Treasurer

Jose L.R. Reyes — Secretary/Director

Pido E. Aguilar — Director

Saturnino G. Belen, Jr. — Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982


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

We agree with the finding of public respondent Court of


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

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

Sec. 26 of the Corporation Code provides, thus:

"Sec. 26. Report of election of directors, trustees and


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

Evidently, the objective sought to be achieved by Section 26 is


to give the public information, under sanction of oath of
responsible officers, of the nature of business, financial
condition and operational status of the company together with
information on its key officers or managers so that those
dealing with it and those who intend to do business with it may
know or have the means of knowing facts concerning the
corporation's financial resources and business responsibility.

The claim, therefore, of petitioners as represented by Atty.


Dumadag, that Zaballa, et al., are the incumbent officers of
Premium has not been fully substantiated. In the absence of an
authority from the board of directors, no person, not even the
officers of the corporation, can validly bind the corporation.

In the case at bar, the fact that four of the six Members of the Board
listed in the 1996 General Information Sheet 23 are already dead24 at
the time the March 31, 1997 Board Resolution was issued, does not
automatically make the four signatories (i.e., Paul M. Monfort, Yvete
M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said
Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board.
This is because it was not established that they were duly elected to
replace the said deceased Board Members.

To correct the alleged error in the General Information Sheet, the


retained accountant of the Corporation informed the SEC in its
November 11, 1998 letter that the non-inclusion of the lawfully
elected directors in the 1996 General Information Sheet was
attributable to its oversight and not the fault of the Corporation.25
This belated attempt, however, did not erase the doubt as to
whether an election was indeed held. As previously stated, a
corporation is mandated to inform the SEC of the names and the

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change in the composition of its officers and board of directors
within 30 days after election if one was held, or 15 days after the
death, resignation or cessation of office of any of its director, trustee
or officer if any of them died, resigned or in any manner, ceased to
hold office. This, the Corporation failed to do. The alleged election of
the directors and officers who signed the March 31, 1997 Board
Resolution was held on October 16, 1996, but the SEC was informed
thereof more than two years later, or on November 11, 1998. The 4
Directors appearing in the 1996 General Information Sheet died
between the years 1984 – 1987,26 but the records do not show if such
demise was reported to the SEC.

What further militates against the purported election of those who


signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996 meeting
where the questioned officers were elected. The issue of legal
capacity of Ma. Antonia M. Salvatierra was raised before the lower
court by the group of Antonio Monfort III as early as 1997, but the
Minutes of said October 16, 1996 meeting was presented by the
Corporation only in its September 29, 1999 Comment before the
Court of Appeals.27 Moreover, the Corporation failed to prove that
the same October 16, 1996 Minutes was submitted to the SEC. In
fact, the 1997 General Information Sheet28 submitted by the
Corporation does not reflect the names of the 4 Directors claimed to
be elected on October 16, 1996.

Considering the foregoing, we find that Ma. Antonia M. Salvatierra


failed to prove that four of those who authorized her to represent the
Corporation were the lawfully elected Members of the Board of the
Corporation. As such, they cannot confer valid authority for her to
sue on behalf of the corporation.

The Court notes that the complaint in Civil Case No. 506-C, for
replevin before the Regional Trial Court of Negros Occidental,
Branch 60, has 2 causes of action, i.e., unlawful detention of the
Corporation's motor vehicle and tractors, and the unlawful detention
of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon
sought redress of the latter cause of action in his personal capacity,
the dismissal of the complaint for lack of capacity to sue on behalf
of the corporation should be limited only to the corporation's cause
of action for delivery of motor vehicle and tractors. In view, however,
of the demise of Ramon on June 25, 1999,29 substitution by his heirs is
proper.

WHEREFORE, in view of all the foregoing, the petition in G.R. No.


152542 is DENIED. The October 5, 2001 Decision of the Special Tenth
Division of the Court of Appeals in CA-G.R. SP No. 53652, which set
aside the August 14, 1998 Decision of the Regional Trial Court of
Negros Occidental, Branch 60 in Civil Case No. 822, is AFFIRMED.
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In G.R. No. 155472, the petition is GRANTED and the June 7, 2002
Decision rendered by the Special Former Thirteenth Division of the
Court of Appeals in CA-G.R. SP No. 49251, dismissing the petition filed
by the group of Antonio Monfort III, is REVERSED and SET ASIDE.

The complaint for forcible entry docketed as Civil Case No. 822
before the Municipal Trial Court of Cadiz City is DISMISSED. In Civil
Case No. 506-C with the Regional Trial Court of Negros Occidental,
Branch 60, the action for delivery of personal property filed by
Monfort Hermanos Agricultural Development Corporation is likewise
DISMISSED. With respect to the action filed by Ramon H. Monfort for
the delivery of 387 fighting cocks, the Regional Trial Court of Negros
Occidental, Branch 60, is ordered to effect the corresponding
substitution of parties.

No costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna, JJ.,


concur.

Monfort Hermanos Agricultural Development Corp. vs Monfort III


(GR No 152542, July 8, 2004, Santiago)

Facts:
Monfort Corp represented by its president, Antonia Salvatierra filed a
complaint against the respondents for the delivery of motor vehicles,
tractors and fighting cocks. The respondents filed a motion to dismiss
on the ground that Antonia does not have the authority to represent
the corporation in this particular case. Antonia contended that they
have submitted board resolutions signed by its directors. However,
this board resolution is being contested because four of the directors
who signed the resolution have not been duly elected by the
company.

Issue:
Whether or not Antonia has the authority to represent the
corporation in this case.

Held:
The SC said Antonia does not have the authority to represent the
corporation in this particular case. The board resolution in question
was held invalid because the general information sheet of the

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corporation readily indicated that four out of the six signatories in the
board resolution do not appear in the general information sheet. This
only showed there is now a doubt whether the four directors
appearing in the resolution were duly elected as directors of the
corporation.

PNB vs Andrada Electric & Engineering Co. 2002

G.R. No. 142936 April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT


CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.

PANGANIBAN, J.:

Basic is the rule that a corporation has a legal personality distinct


and separate from the persons and entities owning it. The corporate
veil may be lifted only if it has been used to shield fraud, defend
crime, justify a wrong, defeat public convenience, insulate bad faith
or perpetuate injustice. Thus, the mere fact that the Philippine
National Bank (PNB) acquired ownership or management of some
assets of the Pampanga Sugar Mill (PASUMIL), which had earlier
been foreclosed and purchased at the resulting public auction by
the Development Bank of the Philippines (DBP), will not make PNB
liable for the PASUMIL’s contractual debts to respondent.

Statement of the Case

Before us is a Petition for Review assailing the April 17, 2000 Decision1
of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal
portion of the challenged Decision reads as follows:

"WHEREFORE, the judgment appealed from is hereby


AFFIRMED."2

The Facts

The factual antecedents of the case are summarized by the Court of


Appeals as follows:

"In its complaint, the plaintiff [herein respondent] alleged that it


is a partnership duly organized, existing, and operating under
the laws of the Philippines, with office and principal place of
business at Nos. 794-812 Del Monte [A]venue, Quezon City,
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while the defendant [herein petitioner] Philippine National Bank
(herein referred to as PNB), is a semi-government corporation
duly organized, existing and operating under the laws of the
Philippines, with office and principal place of business at
Escolta Street, Sta. Cruz, Manila; whereas, the other defendant,
the National Sugar Development Corporation (NASUDECO in
brief), is also a semi-government corporation and the sugar arm
of the PNB, with office and principal place of business at the
2nd Floor, Sampaguita Building, Cubao, Quezon City; and the
defendant Pampanga Sugar Mills (PASUMIL in short), is a
corporation organized, existing and operating under the 1975
laws of the Philippines, and had its business office before 1975
at Del Carmen, Floridablanca, Pampanga; that the plaintiff is
engaged in the business of general construction for the repairs
and/or construction of different kinds of machineries and
buildings; that on August 26, 1975, the defendant PNB acquired
the assets of the defendant PASUMIL that were earlier
foreclosed by the Development Bank of the Philippines (DBP)
under LOI No. 311; that the defendant PNB organized the
defendant NASUDECO in September, 1975, to take ownership
and possession of the assets and ultimately to nationalize and
consolidate its interest in other PNB controlled sugar mills; that
prior to October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most of
which were partially paid by the defendant PASUMIL, leaving
several unpaid accounts with the plaintiff; that finally, on
October 29, 1971, the plaintiff and the defendant PASUMIL
entered into a contract for the plaintiff to perform the following,
to wit –

‘(a) Construction of one (1) power house building;

‘(b) Construction of three (3) reinforced concrete


foundation for three (3) units 350 KW diesel engine
generating set[s];

‘(c) Construction of three (3) reinforced concrete


foundation for the 5,000 KW and 1,250 KW turbo generator
sets;

‘(d) Complete overhauling and reconditioning tests sum


for three (3) 350 KW diesel engine generating set[s];

‘(e) Installation of turbine and diesel generating sets


including transformer, switchboard, electrical wirings and
pipe provided those stated units are completely supplied
with their accessories;

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‘(f) Relocating of 2,400 V transmission line, demolition of all
existing concrete foundation and drainage canals,
excavation, and earth fillings – all for the total amount of
P543,500.00 as evidenced by a contract, [a] xerox copy
of which is hereto attached as Annex ‘A’ and made an
integral part of this complaint;’

that aside from the work contract mentioned-above, the


defendant PASUMIL required the plaintiff to perform extra work,
and provide electrical equipment and spare parts, such as:

‘(a) Supply of electrical devices;

‘(b) Extra mechanical works;

‘(c) Extra fabrication works;

‘(d) Supply of materials and consumable items;

‘(e) Electrical shop repair;

‘(f) Supply of parts and related works for turbine


generator;

‘(g) Supply of electrical equipment for machinery;

‘(h) Supply of diesel engine parts and other related works


including fabrication of parts.’

that out of the total obligation of P777,263.80, the defendant


PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the PNB, a
machine copy of which is appended as Annex ‘C’ of the
complaint; that out of said unpaid balance of P527,263.80, the
defendant PASUMIL made a partial payment to the plaintiff of
P14,000.00, in broken amounts, covering the period from
January 5, 1974 up to May 23, 1974, leaving an unpaid balance
of P513,263.80; that the defendant PASUMIL and the defendant
PNB, and now the defendant NASUDECO, failed and refused to
pay the plaintiff their just, valid and demandable obligation;
that the President of the NASUDECO is also the Vice-President
of the PNB, and this official holds office at the 10th Floor of the
PNB, Escolta, Manila, and plaintiff besought this official to pay
the outstanding obligation of the defendant PASUMIL,
inasmuch as the defendant PNB and NASUDECO now owned
and possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as
well as the engineering and repairs, performed by the plaintiff;
that because of the failure and refusal of the defendants to

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pay their just, valid, and demandable obligations, plaintiff
suffered actual damages in the total amount of P513,263.80;
and that in order to recover these sums, the plaintiff was
compelled to engage the professional services of counsel, to
whom the plaintiff agreed to pay a sum equivalent to 25% of
the amount of the obligation due by way of attorney’s fees.
Accordingly, the plaintiff prayed that judgment be rendered
against the defendants PNB, NASUDECO, and PASUMIL, jointly
and severally to wit:

‘(1) Sentencing the defendants to pay the plaintiffs the


sum of P513,263.80, with annual interest of 14% from the
time the obligation falls due and demandable;

‘(2) Condemning the defendants to pay attorney’s fees


amounting to 25% of the amount claim;

‘(3) Ordering the defendants to pay the costs of the suit.’

"The defendants PNB and NASUDECO filed a joint motion to


dismiss the complaint chiefly on the ground that the complaint
failed to state sufficient allegations to establish a cause of
action against both defendants, inasmuch as there is lack or
want of privity of contract between the plaintiff and the two
defendants, the PNB and NASUDECO, said defendants citing
Article 1311 of the New Civil Code, and the case law ruling in
Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port
Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.

"The motion to dismiss was by the court a quo denied in its


Order of November 27, 1980; in the same order, that court
directed the defendants to file their answer to the complaint
within 15 days.

"In their answer, the defendant NASUDECO reiterated the


grounds of its motion to dismiss, to wit:

‘That the complaint does not state a sufficient cause of


action against the defendant NASUDECO because: (a)
NASUDECO is not x x x privy to the various electrical
construction jobs being sued upon by the plaintiff under
the present complaint; (b) the taking over by NASUDECO
of the assets of defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of defendant
PASUMIL pursuant to martial law powers of the President
under the Constitution; (c) nothing in the LOI No. 189-A (as
well as in LOI No. 311) authorized or commanded the PNB
or its subsidiary corporation, the NASUDECO, to assume
the corporate obligations of PASUMIL as that being
involved in the present case; and, (d) all that was
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mentioned by the said letter of instruction insofar as the
PASUMIL liabilities [were] concerned [was] for the PNB, or
its subsidiary corporation the NASUDECO, to make a study
of, and submit [a] recommendation on the problems
concerning the same.’

"By way of counterclaim, the NASUDECO averred that by


reason of the filing by the plaintiff of the present suit, which it
[labeled] as unfounded or baseless, the defendant NASUDECO
was constrained to litigate and incur litigation expenses in the
amount of P50,000.00, which plaintiff should be sentenced to
pay. Accordingly, NASUDECO prayed that the complaint be
dismissed and on its counterclaim, that the plaintiff be
condemned to pay P50,000.00 in concept of attorney’s fees as
well as exemplary damages.

"In its answer, the defendant PNB likewise reiterated the


grounds of its motion to dismiss, namely: (1) the complaint
states no cause of action against the defendant PNB; (2) that
PNB is not a party to the contract alleged in par. 6 of the
complaint and that the alleged services rendered by the
plaintiff to the defendant PASUMIL upon which plaintiff’s suit is
erected, was rendered long before PNB took possession of the
assets of the defendant PASUMIL under LOI No. 189-A; (3) that
the PNB take-over of the assets of the defendant PASUMIL
under LOI 189-A was solely for the purpose of reconditioning
the sugar central so that PASUMIL may resume its operations in
time for the 1974-75 milling season, and that nothing in the said
LOI No. 189-A, as well as in LOI No. 311, authorized or directed
PNB to assume the corporate obligation/s of PASUMIL, let alone
that for which the present action is brought; (4) that PNB’s
management and operation under LOI No. 311 did not refer to
any asset of PASUMIL which the PNB had to acquire and
thereafter [manage], but only to those which were foreclosed
by the DBP and were in turn redeemed by the PNB from the
DBP; (5) that conformably to LOI No. 311, on August 15, 1975,
the PNB and the Development Bank of the Philippines (DBP)
entered into a ‘Redemption Agreement’ whereby DBP sold,
transferred and conveyed in favor of the PNB, by way of
redemption, all its (DBP) rights and interest in and over the
foreclosed real and/or personal properties of PASUMIL, as
shown in Annex ‘C’ which is made an integral part of the
answer; (6) that again, conformably with LOI No. 311, PNB
pursuant to a Deed of Assignment dated October 21, 1975,
conveyed, transferred, and assigned for valuable
consideration, in favor of NASUDECO, a distinct and
independent corporation, all its (PNB) rights and interest in and
under the above ‘Redemption Agreement.’ This is shown in

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Annex ‘D’ which is also made an integral part of the answer; [7]
that as a consequence of the said Deed of Assignment, PNB on
October 21, 1975 ceased to managed and operate the
above-mentioned assets of PASUMIL, which function was now
actually transferred to NASUDECO. In other words, so asserted
PNB, the complaint as to PNB, had become moot and
academic because of the execution of the said Deed of
Assignment; [8] that moreover, LOI No. 311 did not authorize or
direct PNB to assume the corporate obligations of PASUMIL,
including the alleged obligation upon which this present suit
was brought; and [9] that, at most, what was granted to PNB in
this respect was the authority to ‘make a study of and submit
recommendation on the problems concerning the claims of
PASUMIL creditors,’ under sub-par. 5 LOI No. 311.

"In its counterclaim, the PNB averred that it was unnecessarily


constrained to litigate and to incur expenses in this case, hence
it is entitled to claim attorney’s fees in the amount of at least
P50,000.00. Accordingly, PNB prayed that the complaint be
dismissed; and that on its counterclaim, that the plaintiff be
sentenced to pay defendant PNB the sum of P50,000.00 as
attorney’s fees, aside from exemplary damages in such
amount that the court may seem just and equitable in the
premises.

"Summons by publication was made via the Philippines Daily


Express, a newspaper with editorial office at 371 Bonifacio
Drive, Port Area, Manila, against the defendant PASUMIL, which
was thereafter declared in default as shown in the August 7,
1981 Order issued by the Trial Court.

"After due proceedings, the Trial Court rendered judgment, the


decretal portion of which reads:

‘WHEREFORE, judgment is hereby rendered in favor of


plaintiff and against the defendant Corporation,
Philippine National Bank (PNB) NATIONAL SUGAR
DEVELOPMENT CORPORATION (NASUDECO) and
PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to
pay jointly and severally the former the following:

‘1. The sum of P513,623.80 plus interest thereon at the


rate of 14% per annum as claimed from September
25, 1980 until fully paid;

‘2. The sum of P102,724.76 as attorney’s fees; and,

‘3. Costs.

‘SO ORDERED.

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‘Manila, Philippines, September 4, 1986.

'(SGD) ERNESTO S. TENGCO


‘Judge’"3

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic
tenets of justice and equity for a corporation to take over and
operate the business of another corporation, while disavowing or
repudiating any responsibility, obligation or liability arising therefrom.4

Hence, this Petition.5

Issues

In their Memorandum, petitioners raise the following errors for the


Court’s consideration:

"I

The Court of Appeals gravely erred in law in holding the herein


petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners[’]
take-over of the management and operation of PASUMIL
pursuant to the mandates of LOI No. 189-A, as amended by LOI
No. 311.

"II

The Court of Appeals gravely erred in law in not applying [to]


the case at bench the ruling enunciated in Edward J. Nell Co.
v. Pacific Farms, 15 SCRA 415." 6

Succinctly put, the aforesaid errors boil down to the principal issue of
whether PNB is liable for the unpaid debts of PASUMIL to respondent.

This Court’s Ruling

The Petition is meritorious.

Main Issue:

Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition for


review under Rule 45 of the Rules of Court.7 To this rule, however,
there are some exceptions enumerated in Fuentes v. Court of
Appeals.8 After a careful scrutiny of the records and the pleadings
submitted by the parties, we find that the lower courts
misappreciated the evidence presented.9 Overlooked by the CA
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were certain relevant facts that would justify a conclusion different
from that reached in the assailed Decision.10

Petitioners posit that they should not be held liable for the corporate
debts of PASUMIL, because their takeover of the latter’s foreclosed
assets did not make them assignees. On the other hand, respondent
asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMIL’s unpaid
obligation.1âwphi1.nêt

As a rule, a corporation that purchases the assets of another will not


be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is present:
(1) where the purchaser expressly or impliedly agrees to assume the
debts, (2) where the transaction amounts to a consolidation or
merger of the corporations, (3) where the purchasing corporation is
merely a continuation of the selling corporation, and (4) where the
transaction is fraudulently entered into in order to escape liability for
those debts.11

Piercing the Corporate

Veil Not Warranted

A corporation is an artificial being created by operation of law. It


possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence.12 It
has a personality separate and distinct from the persons composing
it, as well as from any other legal entity to which it may be related.13
This is basic.

Equally well-settled is the principle that the corporate mask may be


removed or the corporate veil pierced when the corporation is just
an alter ego of a person or of another corporation.14 For reasons of
public policy and in the interest of justice, the corporate veil will
justifiably be impaled15 only when it becomes a shield for fraud,
illegality or inequity committed against third persons.16

Hence, any application of the doctrine of piercing the corporate veil


should be done with caution.17 A court should be mindful of the
milieu where it is to be applied.18 It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud,
or crime was committed against another, in disregard of its rights.19
The wrongdoing must be clearly and convincingly established; it
cannot be presumed.20 Otherwise, an injustice that was never
unintended may result from an erroneous application.21

This Court has pierced the corporate veil to ward off a judgment
credit,22 to avoid inclusion of corporate assets as part of the estate of

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the decedent,23 to escape liability arising from a debt,24 or to
perpetuate fraud and/or confuse legitimate issues25 either to
promote or to shield unfair objectives26 or to cover up an otherwise
blatant violation of the prohibition against forum-shopping.27 Only in
these and similar instances may the veil be pierced and
disregarded.28

The question of whether a corporation is a mere alter ego is one of


fact.29 Piercing the veil of corporate fiction may be allowed only if
the following elements concur: (1) control -- not mere stock control,
but complete domination -- not only of finances, but of policy and
business practice in respect to the transaction attacked, must have
been such 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 a fraud or a
wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of
plaintiff’s legal right; and (3) the said control and breach of duty
must have proximately caused the injury or unjust loss complained
of.30

We believe that the absence of the foregoing elements in the


present case precludes the piercing of the corporate veil. First, other
than the fact that petitioners acquired the assets of PASUMIL, there is
no showing that their control over it warrants the disregard of
corporate personalities.31 Second, there is no evidence that their
juridical personality was used to commit a fraud or to do a wrong; or
that the separate corporate entity was farcically used as a mere
alter ego, business conduit or instrumentality of another entity or
person.32 Third, respondent was not defrauded or injured when
petitioners acquired the assets of PASUMIL.33

Being the party that asked for the piercing of the corporate veil,
respondent had the burden of presenting clear and convincing
evidence to justify the setting aside of the separate corporate
personality rule.34 However, it utterly failed to discharge this burden;35
it failed to establish by competent evidence that petitioner’s
separate corporate veil had been used to conceal fraud, illegality or
inequity.36

While we agree with respondent’s claim that the assets of the


National Sugar Development Corporation (NASUDECO) can be
easily traced to PASUMIL,37 we are not convinced that the transfer of
the latter’s assets to petitioners was fraudulently entered into in order
to escape liability for its debt to respondent.38

A careful review of the records reveals that DBP foreclosed the


mortgage executed by PASUMIL and acquired the assets as the
highest bidder at the public auction conducted.39 The bank was

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justified in foreclosing the mortgage, because the PASUMIL account
had incurred arrearages of more than 20 percent of the total
outstanding obligation.40 Thus, DBP had not only a right, but also a
duty under the law to foreclose the subject properties.41

Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB


acquired PASUMIL’s assets that DBP had foreclosed and purchased
in the normal course. Petitioner bank was likewise tasked to manage
temporarily the operation of such assets either by itself or through a
subsidiary corporation.44

PNB, as the second mortgagee, redeemed from DBP the foreclosed


PASUMIL assets pursuant to Section 6 of Act No. 3135.45 These assets
were later conveyed to PNB for a consideration, the terms of which
were embodied in the Redemption Agreement.46 PNB, as successor-
in-interest, stepped into the shoes of DBP as PASUMIL’s creditor.47 By
way of a Deed of Assignment,48 PNB then transferred to NASUDECO
all its rights under the Redemption Agreement.

In Development Bank of the Philippines v. Court of Appeals,49 we


had the occasion to resolve a similar issue. We ruled that PNB, DBP
and their transferees were not liable for Marinduque Mining’s unpaid
obligations to Remington Industrial Sales Corporation (Remington)
after the two banks had foreclosed the assets of Marinduque Mining.
We likewise held that Remington failed to discharge its burden of
proving bad faith on the part of Marinduque Mining to justify the
piercing of the corporate veil.

In the instant case, the CA erred in affirming the trial court’s lifting of
the corporate mask.50 The CA did not point to any fact evidencing
bad faith on the part of PNB and its transferee.51 The corporate
fiction was not used to defeat public convenience, justify a wrong,
protect fraud or defend crime.52 None of the foregoing exceptions
was shown to exist in the present case.53 On the contrary, the lifting
of the corporate veil would result in manifest injustice. This we cannot
allow.

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for


the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and
311, which expressly authorized PASUMIL and PNB to merge or
consolidate. On the other hand, petitioners contend that their
takeover of the operations of PASUMIL did not involve any corporate
merger or consolidation, because the latter had never lost its
separate identity as a corporation.

A consolidation is the union of two or more existing entities to form a


new entity called the consolidated corporation. A merger, on the
other hand, is a union whereby one or more existing corporations are
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absorbed by another corporation that survives and continues the
combined business.54

The merger, however, does not become effective upon the mere
agreement of the constituent corporations.55 Since a merger or
consolidation involves fundamental changes in the corporation, as
well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them.56 For a valid merger or
consolidation, the approval by the Securities and Exchange
Commission (SEC) of the articles of merger or consolidation is
required.57 These articles must likewise be duly approved by a
majority of the respective stockholders of the constituent
corporations.58

In the case at bar, we hold that there is no merger or consolidation


with respect to PASUMIL and PNB. The procedure prescribed under
Title IX of the Corporation Code59 was not followed.

In fact, PASUMIL’s corporate existence, as correctly found by the CA,


had not been legally extinguished or terminated.60 Further, prior to
PNB’s acquisition of the foreclosed assets, PASUMIL had previously
made partial payments to respondent for the former’s obligation in
the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid
P250,000 to respondent and, from January 5, 1974 to May 23, 1974,
another P14,000.

Neither did petitioner expressly or impliedly agree to assume the


debt of PASUMIL to respondent.61 LOI No. 11 explicitly provides that
PNB shall study and submit recommendations on the claims of
PASUMIL’s creditors.62 Clearly, the corporate separateness between
PASUMIL and PNB remains, despite respondent’s insistence to the
contrary.63

WHEREFORE, the Petition is hereby GRANTED and the assailed


Decision SET ASIDE. No pronouncement as to costs.

SO ORDERED.

Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.


Melo, J., Abroad, on official leave.

PNB vs. Andrada Electric & Engineering Co.Case Digest

Philippine National Bank vs. Andrada Electric & Engineering Co.

[GR 142936, 17 April 2002]

Facts: On 26 August 1975, the Philippine national Bank (PNB)


acquired the assets of the Pampanga Sugar Mills (PASUMIL) that

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were earlier foreclosed by the Development Bank of the Philippines
(DBP) under LOI 311. The PNB organized the ational Sugar
Development Corporation (NASUDECO) in September 1975, to take
ownership and possession of the assets and ultimately to nationalize
and consolidate its interest in other PNB controlled sugar mills. Prior to
29 October 1971, PASUMIL engaged the services of the Andrada
Electric & Engineering Company (AEEC) for electrical rewinding and
repair, most of which were partially paid by PASUMIL, leaving several
unpaid accounts with AEEC. On 29 October 1971, AEEC and
PASUMIL entered into a contract for AEEC to perform the (a)
Construction of a power house building; 3 reinforced concrete
foundation for 3 units 350 KW diesel engine generating sets, 3
reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo
generator sets, among others. Aside from the work contract,
PASUMIL required AEEC to perform extra work, and provide electrical
equipment and spare parts. Out of the total obligation of
P777,263.80, PASUMIL had paid only P250,000.00, leaving an unpaid
balance, as of 27 June 1973, amounting to P527,263.80. Out of said
unpaid balance of P527,263.80, PASUMIL made a partial payment to
AEEC of P14,000.00, in broken amounts, covering the period from 5
January 1974 up to 23 May 1974, leaving an unpaid balance of
P513,263.80. PASUMIL and PNB, and now NASUDECO, allegedly
failed and refused to pay AEEC their just, valid and demandable
obligation (The President of the NASUDECO is also the Vice-President
of the PNB. AEEC besought said official to pay the outstanding
obligation of PASUMIL, inasmuch as PNB and NASUDECO now
owned and possessed the assets of PASUMIL, and these defendants
all benefited from the works, and the electrical, as well as the
engineering and repairs, performed by AEEC).

Because of the failure and refusal of PNB, PASUMIL and/or


NASUDECO to pay their obligations, AEEC allegedly suffered actual
damages in the total amount of P513,263.80; and that in order to
recover these sums, AEEC was compelled to engage the
professional services of counsel, to whom AEEC agreed to pay a sum
equivalent to 25% of the amount of the obligation due by way of
attorney's fees. PNB and NASUDECO filed a joint motion to dismiss on
the ground that the complaint failed to state sufficient allegations to
establish a cause of action against PNB and NASUDECO, inasmuch
as there is lack or want of privity of contract between the them and
AEEC. Said motion was denied by the trial court in its 27 November
order, and ordered PNB nad NASUDECO to file their answers within
15 days. After due proceedings, the Trial Court rendered judgment in
favor of AEEC and against PNB, NASUDECO and PASUMIL; the latter
being ordered to pay jointly and severally the former (1) the sum of
P513,623.80 plus interest thereon at the rate of 14% per annum as

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claimed from 25 September 1980 until fully paid; (2) the sum of
P102,724.76 as attorney's fees; and, (3) Costs. PNB and NASUDECO
appealed. The Court of Appeals affirmed the decision of the trial
court in its decision of 17 April 2000 (CA-GR CV 57610. PNB and
NASUDECO filed the petition for review.

Issue: Whether PNB and NASUDECO may be held liable for PASUMIL’s
liability to AEEC.

Held: Basic is the rule that a corporation has a legal personality


distinct and separate from the persons and entities owning it. The
corporate veil may be lifted only if it has been used to shield fraud,
defend crime, justify a wrong, defeat public convenience, insulate
bad faith or perpetuate injustice. Thus, the mere fact that the
Philippine National Bank (PNB) acquired ownership or management
of some assets of the Pampanga Sugar Mill (PASUMIL), which had
earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not
make PNB liable for the PASUMIL's contractual debts to Andrada
Electric & Engineering Company (AEEC). Piercing the veil of
corporate fiction may be allowed only if the following elements
concur: (1) control — not mere stock control, but complete
domination — not only of finances, but of policy and business
practice in respect to the transaction attacked, must have been
such 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 a fraud or a wrong to
perpetuate the violation of a statutory or other positive legal duty, or
a dishonest and an unjust act in contravention of plaintiff's legal
right; and (3) the said control and breach of duty must have
proximately caused the injury or unjust loss complained of. The
absence of the foregoing elements in the present case precludes
the piercing of the corporate veil. First, other than the fact that PNB
and NASUDECO acquired the assets of PASUMIL, there is no showing
that their control over it warrants the disregard of corporate
personalities. Second, there is no evidence that their juridical
personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego,
business conduit or instrumentality of another entity or person. Third,
AEEC was not defrauded or injured when PNB and NASUDECO
acquired the assets of PASUMIL. Hence, although the assets of
NASUDECO can be easily traced to PASUMIL, the transfer of the
latter's assets to PNB and NASUDECO was not fraudulently entered
into in order to escape liability for its debt to AEEC. Neither was there
any merger or consolidation with respect to PASUMIL and PNB. The
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procedure prescribed under Title IX of the Corporation Code 59 was
not followed. In fact, PASUMIL's corporate existence had not been
legally extinguished or terminated. Further, prior to PNB's acquisition
of the foreclosed assets, PASUMIL had previously made partial
payments to AEEC for the former's obligation in the amount of
P777,263.80. As of 27 June 1973, PASUMIL had paid P250,000 to AEEC
and, from 5 January 1974 to 23 May 1974, another P14,000. Neither
did PNB expressly or impliedly agree to assume the debt of PASUMIL
to AEEC. LOI 11 explicitly provides that PNB shall study and submit
recommendations on the claims of PASUMIL's creditors. Clearly, the
corporate separateness between PASUMIL and PNB remains, despite
AEEC's insistence to the contrary.

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

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represents a response and expresses a policy, to paraphrase
Frankfurter, arising out of a specific problem, 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 certain
requirements of its by-laws before new 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?

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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 inherent in his duty to settle her estate
and 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
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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.
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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

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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."17 As 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

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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 of such order, the Administrator relied on an
American federal statute making his decisions "final and conclusive
on all questions of law or fact" precluding any other American
official to examine the matter anew, "except a judge or judges of
the United States court."23 Reconsideration was denied, and the
Administrator appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court.


Thus: "We are of the opinion that the appeal should be rejected. The
provisions of the U.S. Code, invoked by the appellant, make the
decisions of the U.S. Veterans' Administrator final and conclusive
when made on claims property submitted to him for resolution; but
they are not applicable to the present case, where the Administrator
is not acting as a judge but as a litigant. There is a great difference
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between actions against the Administrator (which must be filed
strictly in accordance with the conditions that are imposed by the
Veterans' Act, including the exclusive review by United States
courts), and those actions where the Veterans' Administrator seeks 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 does not succeed. The deplorable consequences
attendant on appellant prevailing attest to the necessity of negative
response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal
cannot succeed. It is always easy to conjure extreme and even
oppressive possibilities. That is not decisive. It does not settle the issue.
What carries weight and conviction is the result arrived at, the just
solution obtained, grounded in the soundest of legal doctrines and
distinguished by its correspondence with what a sense of realism
requires. For through the appealed order, the imperative
requirement of justice according to law is satisfied and national
dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos,


the Judge of the Court of First Instance, dated May 18, 1964, is
affirmed. With costs against oppositor-appelant Benguet
Consolidated, Inc.

Makalintal, Zaldivar and Capistrano, JJ., concur.


Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ.,
concur in the result.

G.R. No. L-23145 November 29, 1968

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Lessons Applicable: Theory of Concession (Corporate Law)

FACTS:

 March 27, 1960: Idonah Slade Perkins died in New York City

 August 12, 1960: Prospero Sanidad instituted ancillary


administration proceedings appointing ancillary
administrator Lazaro A. Marquez later on substituted by Renato
D. Tayag

 On January 27, 1964: CFI ordered domiciliary


administrator County Trust Company of New York to surrender
to the ancillary administrator in the Philippines 33,002 shares
of stock certificates owned by her in a Philippine corporation,
Benguet Consolidated, Inc., to satisfy the legitimate claims of
local creditors

 When County Trust Company of New York refused the court


ordered Benguet Consolidated, Inc. to declare the stocks lost
and required it to issue new certificates in lieu thereof

 Appeal was taken by Benguet Consolidated, Inc. alleging the


failure to comply with its by-laws setting forth the procedure to
be followed in case of a lost, stolen or destroyed so it cannot
issue new stock certs.

ISSUE: W/N Benguet Consolidated, Inc. can ignore a court order


because of its by-laws

HELD: NO. CFI Affirmed

 Fear of contigent liability - obedience to a lawful order = valid


defense

 Benguet Consolidated, Inc. is a Philippine corporation owing full


allegiance and subject to the unrestricted jurisdiction of local
courts

 Assuming that a contrariety exists between the above by-law


and the command of a court decree, the latter is to be
followed.

 corporation is an artificial being created by operation of


law...."It owes its life to the state, its birth being purely
dependent on its will. Cannot ignore the source of its very
existence

Tayag vs. Benguet Consolidated, Inc.

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G.R. No. L-23145, Nov. 29, 1968

 PRIVATE INTERNATIONAL LAW: Situs of Shares of Stock: domicile


of the corporation

 SUCCESSION: Ancillary Administration: 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.

 SUCCESSION: Probate: Probate court has authority to issue the


order enforcing the ancillary administrator’s right to the stock
certificates when the actual situs of the shares of stocks is in the
Philippines.

FACTS:

Idonah Slade Perkins, an American citizen who died in New York


City, left among others, two stock certificates issued by Benguet
Consolidated, a corporation domiciled in the Philippines. As ancillary
administrator of Perkins’ estate in the Philippines, Tayag now wants to
take possession of these stock certificates but County Trust Company
of New York, the domiciliary administrator, refused to part with them.
Thus, the probate court of the Philippines was forced to issue an
order declaring the stock certificates as lost and ordering Benguet
Consolidated to issue new stock certificates representing Perkins’
shares. Benguet Consolidated appealed the order, arguing that the
stock certificates are not lost as they are in existence and currently in
the possession of County Trust Company of New York.

ISSUE: Whether or not the order of the lower court is proper

HELD:

The appeal lacks merit.

Tayag, as ancillary administrator, has the power to gain control and


possession of all assets of the decedent within the jurisdiction of the
Philippines

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.

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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."

Probate court has authority to issue the order enforcing the ancillary
administrator’s right to the stock certificates when the actual situs of
the shares of stocks is in the Philippines.

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


Revenue 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.

PSE vs. CA (281 SCRA 232 [1997])

G.R. No. 125469 October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,


vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.

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TORRES, JR., J.:

The Securities and Exchange Commission is the government agency,


under the direct general supervision of the Office of the President, 1
with the immense task of enforcing the Revised Securities Act, and all
other duties assigned to it by pertinent laws. Among its inumerable
functions, and one of the most important, is the supervision of all
corporations, partnerships or associations, who are grantees of
primary franchise and/or a license or permit issued by the
government to operate in the Philippines. 2 Just how far this
regulatory authority extends, particularly, with regard to the
Petitioner Philippine Stock Exchange, Inc. is the issue in the case at
bar.

In this Petition for Review on Certiorari, petitioner assails the resolution


of the respondent Court of Appeals, dated June 27, 1996, which
affirmed the decision of the Securities and Exchange Commission
ordering the petitioner Philippine Stock Exchange, Inc. to allow the
private respondent Puerto Azul Land, Inc. to be listed in its stock
market, thus paving the way for the public offering of PALI's shares.

The facts of the case are undisputed, and are hereby restated in
sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation,
had sought to offer its shares to the public in order to raise funds
allegedly to develop its properties and pay its loans with several
banking institutions. In January, 1995, PALI was issued a Permit to Sell
its shares to the public by the Securities and Exchange Commission
(SEC). To facilitate the trading of its shares among investors, PALI
sought to course the trading of its shares through the Philippine Stock
Exchange, Inc. (PSE), for which purpose it filed with the said stock
exchange an application to list its shares, with supporting documents
attached.

On February 8, 1996, the Listing Committee of the PSE, upon a


perusal of PALI's application, recommended to the PSE's Board of
Governors the approval of PALI's listing application.

On February 14, 1996, before it could act upon PALI's application,


the Board of Governors of the PSE received a letter from the heirs of
Ferdinand E. Marcos, claiming that the late President Marcos was
the legal and beneficial owner of certain properties forming part of
the Puerto Azul Beach Hotel and Resort Complex which PALI claims
to be among its assets and that the Ternate Development
Corporation, which is among the stockholders of PALI, likewise
appears to have been held and continue to be held in trust by one
Rebecco Panlilio for then President Marcos and now, effectively for

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his estate, and requested PALI's application to be deferred. PALI was
requested to comment upon the said letter.

PALI's answer stated that the properties forming part of the Puerto
Azul Beach Hotel and Resort Complex were not claimed by PALI as
its assets. On the contrary, the resort is actually owned by Fantasia
Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct
from PALI. Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their claim is not
confined to the facilities forming part of the Puerto Azul Hotel and
Resort Complex, thereby implying that they are also asserting legal
and beneficial ownership of other properties titled under the name
of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol


Gunigundo of the Presidential Commission on Good Government
(PCGG) requesting for comments on the letters of the PALI and the
Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same
date, enjoining the Marcoses from, among others, "further impeding,
obstructing, delaying or interfering in any manner by or any means
with the consideration, processing and approval by the PSE of the
initial public offering of PALI." The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil Case No.
65561, pending in Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of


Governors of the PSE reached its decision to reject PALI's application,
citing the existence of serious claims, issues and circumstances
surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the
then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's
attention the action taken by the PSE in the application of PALI for
the listing of its shares with the PSE, and requesting that the SEC, in
the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's
action on PALI's listing application and institute such measures as are
just and proper under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE,
attaching thereto the letter of PALI and directing the PSE to file its
comments thereto within five days from its receipt and for its
authorized representative to appear for an "inquiry" on the matter.
On April 22, 1996, the PSE submitted a letter to the SEC containing its
comments to the April 11, 1996 letter of PALI.

Corporation Law/alfred0 Page 37 of 1509


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On April 24, 1996, the SEC rendered its Order, reversing the PSE's
decision. The dispositive portion of the said order reads:

WHEREFORE, premises considered, and invoking the


Commissioner's authority and jurisdiction under Section 3
of the Revised Securities Act, in conjunction with Section 3,
6(j) and 6(m) of Presidential Decree No. 902-A, the
decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul
Land, Inc., is hereby set aside, and the PSE is hereby
ordered to immediately cause the listing of the PALI shares
in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it
deems necessary for the protection of the investigating
public.

This Order shall take effect immediately.

SO ORDERED.

PSE filed a motion for reconsideration of the said order on April 29,
1996, which was, however denied by the Commission in its May 9,
1996 Order which states:

WHEREFORE, premises considered, the Commission finds


no compelling reason to reconsider its order dated April
24, 1996, and in the light of recent developments on the
adverse claim against the PALI properties, PSE should
require PALI to submit full disclosure of material facts and
information to protect the investing public. In this regard,
PALI is hereby ordered to amend its registration
statements filed with the Commission to incorporate the
full disclosure of these material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on
May 17, 1996 a Petition for Review (with Application for Writ of
Preliminary Injunction and Temporary Restraining Order), assailing the
above mentioned orders of the SEC, submitting the following as
errors of the SEC:

I. SEC COMMITTED SERIOUS ERROR AND GRAVE


ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;

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II. SEC COMMITTED SERIOUS ERROR AND GRAVE
ABUSE OF DISCRETION IN FINDING THAT PSE
ACTED IN AN ARBITRARY AND ABUSIVE MANNER
IN DISAPPROVING PALI'S LISTING APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL


AND VOID FOR ALLOWING FURTHER
DISPOSITION OF PROPERTIES IN CUSTODIA LEGIS
AND WHICH FORM PART OF NAVAL/MILITARY
RESERVATION; AND

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT


PROPERLY PROMULGATED AND ITS
IMPLEMENTATION AND APPLICATION IN THIS
CASE VIOLATES THE DUE PROCESS CLAUSE OF
THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review
and subsequently, a Comment and Motion to Dismiss. On June 10,
1996, PSE fled its Reply to Comment and Opposition to Motion to
Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution


dismissing the PSE's Petition for Review. Hence, this Petition by the
PSE.

The appellate court had ruled that the SEC had both jurisdiction and
authority to look into the decision of the petitioner PSE, pursuant to
Section 3 3 of the Revised Securities Act in relation to Section 6(j) and
6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised Securities
Act, and for the purpose of ensuring fair administration of the
exchange. Both as a corporation and as a stock exchange, the
petitioner is subject to public respondent's jurisdiction, regulation and
control. Accepting the argument that the public respondent has the
authority merely to supervise or regulate, would amount to serious
consequences, considering that the petitioner is a stock exchange
whose business is impressed with public interest. Abuse is not remote
if the public respondent is left without any system of control. If the
securities act vested the public respondent with jurisdiction and
control over all corporations; the power to authorize the
establishment of stock exchanges; the right to supervise and
regulate the same; and the power to alter and supplement rules of
the exchange in the listing or delisting of securities, then the law
certainly granted to the public respondent the plenary authority
over the petitioner; and the power of review necessarily comes
within its authority.

All in all, the court held that PALI complied with all the requirements
for public listing, affirming the SEC's ruling to the effect that:

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. . . the Philippine Stock Exchange has acted in an
arbitrary and abusive manner in disapproving the
application of PALI for listing of its shares in the face of the
following considerations:

1. PALI has clearly and admittedly complied with the


Listing Rules and full disclosure requirements of the
Exchange;

2. In applying its clear and reasonable standards on the


suitability for listing of shares, PSE has failed to justify why it
acted differently on the application of PALI, as compared
to the IPOs of other companies similarly situated that were
allowed listing in the Exchange;

3. It appears that the claims and issues on the title to PALI's


properties were even less serious than the claims against
the assets of the other companies in that, the assertions of
the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome
the strength of a title to properties issued under the Torrens
System as evidence of ownership thereof;

4. No action has been filed in any court of competent


jurisdiction seeking to nullify PALI's ownership over the
disputed properties, neither has the government instituted
recovery proceedings against these properties. Yet the
import of PSE's decision in denying PALI's application is
that it would be PALI, not the Marcoses, that must go to
court to prove the legality of its ownership on these
properties before its shares can be listed.

In addition, the argument that the PALI properties belong to the


Military/Naval Reservation does not inspire belief. The point is, the
PALI properties are now titled. A property losses its public character
the moment it is covered by a title. As a matter of fact, the titles
have long been settled by a final judgment; and the final decree
having been registered, they can no longer be re-opened
considering that the one year period has already passed. Lastly, the
determination of what standard to apply in allowing PALI's
application for listing, whether the discretion method or the system of
public disclosure adhered to by the SEC, should be addressed to the
Securities Commission, it being the government agency that
exercises both supervisory and regulatory authority over all
corporations.

On August 15, 19961 the PSE, after it was granted an extension, filed
the instant Petition for Review on Certiorari, taking exception to the
rulings of the SEC and the Court of Appeals. Respondent PALI filed its

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Comment to the petition on October 17, 1996. On the same date,
the PCGG filed a Motion for Leave to file a Petition for Intervention.
This was followed up by the PCGG's Petition for Intervention on
October 21, 1996. A supplemental Comment was filed by PALI on
October 25, 1997. The Office of the Solicitor General, representing
the SEC and the Court of Appeals, likewise filed its Comment on
December 26, 1996. In answer to the PCGG's motion for leave to file
petition for intervention, PALI filed its Comment thereto on January
17, 1997, whereas the PSE filed its own Comment on January 20,
1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the
comments of respondent PALI (October 17, 1996) and the Solicitor
General (December 26, 1996). On May 16, 1997, PALI filed its
Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC
had authority to order the PSE to list the shares of PALI in the stock
exchange. Under presidential decree No. 902-A, the powers of the
SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations. In connection with this, the
powers of the SEC over stock exchanges under the Revised
Securities Act are specifically enumerated, and these do not include
the power to reverse the decisions of the stock exchange. Authorities
are in abundance even in the United States, from which the
country's security policies are patterned, to the effect of giving the
Securities Commission less control over stock exchanges, which in
turn are given more lee-way in making the decision whether or not
to allow corporations to offer their stock to the public through the
stock exchange. This is in accord with the "business judgment rule"
whereby the SEC and the courts are barred from intruding into
business judgments of corporations, when the same are made in
good faith. the said rule precludes the reversal of the decision of the
PSE to deny PALI's listing application, absent a showing of bad faith
on the part of the PSE. Under the listing rules of the PSE, to which PALI
had previously agreed to comply, the PSE retains the discretion to
accept or reject applications for listing. Thus, even if an issuer has
complied with the PSE listing rules and requirements, PSE retains the
discretion to accept or reject the issuer's listing application if the PSE
determines that the listing shall not serve the interests of the investing
public.

Moreover, PSE argues that the SEC has no jurisdiction over


sequestered corporations, nor with corporations whose properties
are under sequestration. A reading of Republic of the Philippines vs.
Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the
properties of PALI, which were derived from the Ternate
Development Corporation (TDC) and the Monte del Sol

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Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan.
This ruling of the Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the assets of
these corporations were sequestered by the PCGG on March 10,
1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appeals' sanction that PALI's
ownership over its properties can no longer be questioned, since
certificates of title have been issued to PALI and more than one year
has since lapsed, is erroneous and ignores well settled jurisprudence
on land titles. That a certificate of title issued under the Torrens
System is a conclusive evidence of ownership is not an absolute rule
and admits certain exceptions. It is fundamental that forest lands or
military reservations are non-alienable. Thus, when a title covers a
forest reserve or a government reservation, such title is void.

PSE, likewise, assails the SEC's and the Court of Appeals reliance on
the alleged policy of "full disclosure" to uphold the listing of PALI's
shares with the PSE, in the absence of a clear mandate for the
effectivity of such policy. As it is, the case records reveal the truth
that PALI did not comply with the listing rules and disclosure
requirements. In fact, PALI's documents supporting its application
contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's
properties and the fact that the same form part of
military/naval/forest reservations were not reflected in PALI's
application.

It is undeniable that the petitioner PSE is not an ordinary corporation,


in that although it is clothed with the markings of a corporate entity,
it functions as the primary channel through which the vessels of
capital trade ply. The PSE's relevance to the continued operation
and filtration of the securities transactions in the country gives it a
distinct color of importance such that government intervention in its
affairs becomes justified, if not necessarily. Indeed, as the only
operational stock exchange in the country today, the PSE enjoys a
monopoly of securities transactions, and as such, it yields an
immense influence upon the country's economy.

Due to this special nature of stock exchanges, the country's


lawmakers has seen it wise to give special treatment to the
administration and regulation of stock exchanges. 6

These provisions, read together with the general grant of jurisdiction,


and right of supervision and control over all corporations under Sec.
3 of P.D. 902-A, give the SEC the special mandate to be vigilant in
the supervision of the affairs of stock exchanges so that the interests
of the investing public may be fully safeguard.

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Section 3 of Presidential Decree 902-A, standing alone, is enough
authority to uphold the SEC's challenged control authority over the
petitioner PSE even as it provides that "the Commission shall have
absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to
operate in the Philippines. . ." The SEC's regulatory authority over
private corporations encompasses a wide margin of areas, touching
nearly all of a corporation's concerns. This authority springs from the
fact that a corporation owes its existence to the concession of its
corporate franchise from the state.

The SEC's power to look into the subject ruling of the PSE, therefore,
may be implied from or be considered as necessary or incidental to
the carrying out of the SEC's express power to insure fair dealing in
securities traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control over
corporations, partnerships and associations with the end in view that
investment in these entities may be encouraged and protected, and
their activities for the promotion of economic development. 8

Thus, it was in the alleged exercise of this authority that the SEC
reversed the decision of the PSE to deny the application for listing in
the stock exchange of the private respondent PALI. The SEC's action
was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether
or not securities, including shares of stock of a corporation, may be
traded or not in the stock exchange. This is in line with the SEC's
mission to ensure proper compliance with the laws, such as the
Revised Securities Act and to regulate the sale and disposition of
securities in the country. 9 As the appellate court explains:

Paramount policy also supports the authority of the public


respondent to review petitioner's denial of the listing.
Being a stock exchange, the petitioner performs a
function that is vital to the national economy, as the
business is affected with public interest. As a matter of
fact, it has often been said that the economy moves on
the basis of the rise and fall of stocks being traded. By its
economic power, the petitioner certainly can dictate
which and how many users are allowed to sell securities
thru the facilities of a stock exchange, if allowed to
interpret its own rules liberally as it may please. Petitioner
can either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless accompanied
by control, becomes subject to abuse; hence,

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considering public interest, then it should be subject to
government regulation.

The role of the SEC in our national economy cannot be minimized.


The legislature, through the Revised Securities Act, Presidential
Decree No. 902-A, and other pertinent laws, has entrusted to it the
serious responsibility of enforcing all laws affecting corporations and
other forms of associations not otherwise vested in some other
government office. 10

This is not to say, however, that the PSE's management prerogatives


are under the absolute control of the SEC. The PSE is, alter all, a
corporation authorized by its corporate franchise to engage in its
proposed and duly approved business. One of the PSE's main
concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations,
including the right to sue and be sued, to hold property in its own
name, to enter (or not to enter) into contracts with third persons, and
to perform all other legal acts within its allocated express or implied
powers.

A corporation is but an association of individuals, allowed to transact


under an assumed corporate name, and with a distinct legal
personality. In organizing itself as a collective body, it waives no
constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore,
the state will generally not interfere with the same. Questions of
policy and of management are left to the honest decision of the
officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board
of directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by
the courts. 12

Thus, notwithstanding the regulatory power of the SEC over the PSE,
and the resultant authority to reverse the PSE's decision in matters of
application for listing in the market, the SEC may exercise such
power only if the PSE's judgment is attended by bad faith. In Board of
Liquidators vs. Kalaw, 13 it was held that bad faith does not simply
connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious doing of wrong. It
means a breach of a known duty through some motive or interest of
ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the
PSE considered important facts, which, in the general scheme, brings
to serious question the qualification of PALI to sell its shares to the
public through the stock exchange. During the time for receiving
objections to the application, the PSE heard from the representative

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of the late President Ferdinand E. Marcos and his family who claim
the properties of the private respondent to be part of the Marcos
estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and
suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and MSDC
to Rebecco Panlilio, and to the private respondent PALI, in only a
short span of time, are not yet explained to the Court, but it is clear
that such circumstances give rise to serious doubt as to the integrity
of PALI as a stock issuer. The petitioner was in the right when it
refused application of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised Securities
Act, after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false promises,
and the imposition of worthless ventures. 14

It is to be observed that the U.S. Securities Act emphasized its


avowed protection to acts detrimental to legitimate business, thus:

The Securities Act, often referred to as the "truth in


securities" Act, was designed not only to provide investors
with adequate information upon which to base their
decisions to buy and sell securities, but also to protect
legitimate business seeking to obtain capital through
honest presentation against competition from crooked
promoters and to prevent fraud in the sale of securities.
(Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).

As has been pointed out, the effects of such an act are


chiefly (1) prevention of excesses and fraudulent
transactions, merely by requirement of that their details be
revealed; (2) placing the market during the early stages of
the offering of a security a body of information, which
operating indirectly through investment services and
expert investors, will tend to produce a more accurate
appraisal of a security, . . . Thus, the Commission may
refuse to permit a registration statement to become
effective if it appears on its face to be incomplete or
inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the
effectiveness of any registration statement which is found
to include any untrue statement of a material fact or to
omit to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading. (Idem).

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Also, as the primary market for securities, the PSE has established its
name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who
choose to transact through its facilities. It was reasonable for the PSE,
therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled
upon, and public welfare is safeguarded.

In this connection, it is proper to observe that the concept of


government absolutism is a thing of the past, and should remain so.

The observation that the title of PALI over its properties is absolute
and can no longer be assailed is of no moment. At this juncture,
there is the claim that the properties were owned by TDC and MSDC
and were transferred in violation of sequestration orders, to Rebecco
Panlilio and later on to PALI, besides the claim of the Marcoses that
such properties belong to the Marcos estate, and were held only in
trust by Rebecco Panlilio. It is also alleged by the petitioner that
these properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established to be
true, the certificates of title over the subject properties now held by
PALI map be disregarded, as it is an established rule that a
registration of a certificate of title does not confer ownership over
the properties described therein to the person named as owner. The
inscription in the registry, to be effective, must be made in good
faith. The defense of indefeasibility of a Torrens Title does not extend
to a transferee who takes the certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted


correctly in refusing the application of PALI, the true ownership of the
properties of PALI need not be determined as an absolute fact.
What is material is that the uncertainty of the properties' ownership
and alienability exists, and this puts to question the qualification of
PALI's public offering. In sum, the Court finds that the SEC had acted
arbitrarily in arrogating unto itself the discretion of approving the
application for listing in the PSE of the private respondent PALI, since
this is a matter addressed to the sound discretion of the PSE, a
corporation entity, whose business judgments are respected in the
absence of bad faith.

The question as to what policy is, or should be relied upon in


approving the registration and sale of securities in the SEC is not for
the Court to determine, but is left to the sound discretion of the
Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other
functions under pertinent laws, the Revised Securities Act, under
Section 3 thereof, gives the SEC the power to promulgate such rules
and regulations as it may consider appropriate in the public interest
for the enforcement of the said laws. The second paragraph of
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Section 4 of the said law, on the other hand, provides that no
security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless
registered in accordance with the rules and regulations that shall be
promulgated in the public interest and for the protection of investors
by the Commission. Presidential Decree No. 902-A, on the other
hand, provides that the SEC, as regulatory agency, has supervision
and control over all corporations and over the securities market as a
whole, and as such, is given ample authority in determining
appropriate policies. Pursuant to this regulatory authority, the SEC
has manifested that it has adopted the policy of "full material
disclosure" where all companies, listed or applying for listing, are
required to divulge truthfully and accurately, all material information
about themselves and the securities they sell, for the protection of
the investing public, and under pain of administrative, criminal and
civil sanctions. In connection with this, a fact is deemed material if it
tends to induce or otherwise effect the sale or purchase of its
securities. 15 While the employment of this policy is recognized and
sanctioned by the laws, nonetheless, the Revised Securities Act sets
substantial and procedural standards which a proposed issuer of
securities must satisfy. 16 Pertinently, Section 9 of the Revised
Securities Act sets forth the possible Grounds for the Rejection of the
registration of a security:

— The Commission may reject a registration statement


and refuse to issue a permit to sell the securities included
in such registration statement if it finds that —

(1) The registration statement is on its face incomplete or


inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make
the statements therein not misleading; or

(2) The issuer or registrant —

(i) is not solvent or not in sound financial


condition;

(ii) has violated or has not complied with the


provisions of this Act, or the rules promulgated
pursuant thereto, or any order of the
Commission;

(iii) has failed to comply with any of the


applicable requirements and conditions that
the Commission may, in the public interest and
for the protection of investors, impose before
the security can be registered;

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(iv) has been engaged or is engaged or is
about to engage in fraudulent transaction;

(v) is in any way dishonest or is not of good


repute; or

(vi) does not conduct its business in


accordance with law or is engaged in a
business that is illegal or contrary to
government rules and regulations.

(3) The enterprise or the business of the issuer is not shown


to be sound or to be based on sound business principles;

(4) An officer, member of the board of directors, or


principal stockholder of the issuer is disqualified to be such
officer, director or principal stockholder; or

(5) The issuer or registrant has not shown to the satisfaction


of the Commission that the sale of its security would not
work to the prejudice of the public interest or as a fraud
upon the purchasers or investors. (Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the


lawmakers to make the registration and issuance of securities
dependent, to a certain extent, on the merits of the securities
themselves, and of the issuer, to be determined by the Securities and
Exchange Commission. This measure was meant to protect the
interests of the investing public against fraudulent and worthless
securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The
absolute reliance on the full disclosure method in the registration of
securities is, therefore, untenable. As it is, the Court finds that the
private respondent PALI, on at least two points (nos. 1 and 5) has
failed to support the propriety of the issue of its shares with unfailing
clarity, thereby lending support to the conclusion that the PSE acted
correctly in refusing the listing of PALI in its stock exchange. This does
not discount the effectivity of whatever method the SEC, in the
exercise of its vested authority, chooses in setting the standard for
public offerings of corporations wishing to do so. However, the SEC
must recognize and implement the mandate of the law, particularly
the Revised Securities Act, the provisions of which cannot be
amended or supplanted by mere administrative issuance.

In resume, the Court finds that the PSE has acted with justified
circumspection, discounting, therefore, any imputation of
arbitrariness and whimsical animation on its part. Its action in refusing
to allow the listing of PALI in the stock exchange is justified by the law
and by the circumstances attendant to this case.

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ACCORDINGLY, in view of the foregoing considerations, the Court
hereby GRANTS the Petition for Review on Certiorari. The Decisions of
the Court of Appeals and the Securities and Exchange Commission
dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED,
affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land, Inc.

SO ORDERED.

Regalado and Puno, JJ., concur.

Mendoza, J., concurs in the result.

Footnotes

1 Section 1, Presidential Decree No. 902-A.

2 Section 3, Ibid.

3 Sec. 3. Administrative Agency. — This Act shall be


administered by the (Securities and Exchange)
Commission which shall continue to have the
organization, powers, and functions provided by
Presidential Decree Numbered 902-A, 1653, 1758, and
1799 and Executive Order No. 708. The Commission shall,
except as otherwise expressly provided, have the power
to promulgate such rules and regulations as it may
consider appropriate in the public interest for the
enforcement of the provisions hereof.

4 Sec. 6. In order to effectively exercise such jurisdiction,


the (Securities and Exchange) Commission shall possess
the following powers:

xxx xxx xxx

(j) To authorize the establishment and operation of stock


exchanges, commodity exchanges and such other similar
organizations and to supervise and regulale the same;
including the authority to determine their number, size
and location, in the light of national or regional
requirements for such activities with the view to promote,
conserve or rationalize investment;

xxx xxx xxx

(m) To exercise such other powers as may be provided by


law as well as those which may be implied from, or which
are necessary or incidental to the carrying out of, the

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express powers granted to the Commission or to achieve
the objectives and purposes of this Decree.

5 Sec. 38. Powers with respect to exchanges and


securities. — (a) . . .

(b) The Commission is further authorized, if after making


appropriate request in writing to a securities exchange
that such exchange effect on its own behalf specified
changes in the rules and practices and, after appropriate
notice and opportunity for hearing, it determines that
such exchange has not made the changes so requested,
and that such changes are necessary or appropriate for
the protection of investors or to insure fair dealing in
securities traded upon such exchange, by rules or
regulations or by order, to alter or supplement the rules of
such exchange (insofar as necessary or appropriate to
effect such changes) in respect of such matters as

(1) Safeguards in respect of the financial responsibility of


members and adequate provision against the evasion of
financial responsibility through the use of corporate forms
or special partnerships;

(2) The limitation or prohibition of the registration or trading


in any security within a specified period after the issuance
or primary distribution thereof;

(3) The listing or striking from listing of any security;

(4) Hours of trading;

(5) The manner, method, and place of soliciting business;

(6) Fictitious accounts;

(7) The time and method of making settlements,


payments, and deliveries, and of closing accounts;

(8) he reporting of transactions on the exchange upon


tickets maintained by or with the consent of the
exchange, including the method of reporting short sales,
stopped sales, sales of securities of issuers in default,
bankruptcy or receivership, and sales involving other
special circumstances;

(9) The fixing of reasonable rates of commission, interests,


listing, and other charges;

(10) Minimum units of trading;

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(11) Odd-lot purchases and sales; and

(12) Minimum deposits on margin accounts.

6 See Sec. 6(j), PD. 902-A; Sec. 8, Revised Securities Act.

7 Section 6(m), Presidential Decree No. 902-A.

8 Abad vs. CFI of Pangasinan, Branch VIII, et. al., G.R. Nos.
58507-08, February 26, 1992, 206 SCRA 567.

9 Securities and Exchange Commission vs Court of


Appeals, G.R. Nos. 106425 & 106431-32, July 21,1995, 246
SCRA 738.

10 Pineda vs. Lantin, No. L-15350, November 30, 1962, 6


SCRA 757.

11 Bache & Co. (Phil.), Inc. vs. Hon. Judge Ruiz, et al., No.
L-32409, February 27, 1971, 37 SCRA 823.

12 Sales vs. Securities and Exchange Commission, G.R. No.


54330, January 13, 1989, 169 SCRA 109.

13 No. L-18805, August 14, 1967, 20 SCRA 987.

14 Makati Stock Exchange, Inc. vs. Securities and


Exchange Commission, No. L-23004, June 30, 1965, 14
SCRA 620.

15 See SEC Rules Requiring Disclosure of Material Facts by


Corporations Whose Securities are Listed in Any Stock
Exchange or Registered/Licensed under the Revised
Securities Act. (Approved by the SEC Chairman on
February 8, 1973, and published in the Bulletin Today on
February 19, 1973).

16 See Sections 4, 8, 9, 10, and 11, Revised Securities Act.

Puerto Azul Land, Inc. (PALI) is a corporation engaged in the real


estate business. PALI was granted permission by the Securities and
Exchange Commission (SEC) to sell its shares to the public in order for
PALI to develop its properties.

PALI then asked the Philippine Stock Exchange (PSE) to list PALI’s
stocks/shares to facilitate exchange. The PSE Board of Governors
denied PALI’s application on the ground that there were multiple
claims on the assets of PALI. Apparently, the Marcoses, Rebecco
Panlilio (trustee of the Marcoses), and some other corporations were
claiming assets if not ownership over PALI.

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PALI then wrote a letter to the SEC asking the latter to review PSE’s
decision. The SEC reversed PSE’s decisions and ordered the latter to
cause the listing of PALI shares in the Exchange.

ISSUE: Whether or not it is within the power of the SEC to reverse


actions done by the PSE.

HELD: Yes. The SEC has both jurisdiction and authority to look into the
decision of PSE pursuant to the Revised Securities Act and for the
purpose of ensuring fair administration of the exchange. PSE, as a
corporation itself and as a stock exchange is subject to SEC’s
jurisdiction, regulation, and control. In order to insure fair dealing of
securities and a fair administration of exchanges in the PSE, the SEC
has the authority to look into the rulings issued by the PSE. The SEC is
the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in
the stock exchange.

HOWEVER, in the case at bar, the Supreme Court emphasized that


the SEC may only reverse decisions issued by the PSE if such are
tainted with bad faith. In this case, there was no showing that PSE
acted with bad faith when it denied the application of PALI. Based
on the multiple adverse claims against the assets of PALI, PSE
deemed that granting PALI’s application will only be contrary to the
best interest of the general public. It was reasonable for the PSE to
exercise its judgment in the manner it deems appropriate for its
business identity, as long as no rights are trampled upon, and public
welfare is safeguarded.

Feliciano vs. Commission on Audit (419 SCRA 363 [2004])

G.R. No. 147402 January 14, 2004

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager


of the Leyte Metropolitan Water District (LMWD), Tacloban City,
petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN,
Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and
Regional Director of COA Region VIII, respondents.

DECISION

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CARPIO, J.:

The Case

This is a petition for certiorari1 to annul the Commission on Audit’s


("COA") Resolution dated 3 January 2000 and the Decision dated 30
January 2001 denying the Motion for Reconsideration. The COA
denied petitioner Ranulfo C. Feliciano’s request for COA to cease all
audit services, and to stop charging auditing fees, to Leyte
Metropolitan Water District ("LMWD"). The COA also denied
petitioner’s request for COA to refund all auditing fees previously
paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the
accounts of LMWD. Subsequently, LMWD received a letter from COA
dated 19 July 1999 requesting payment of auditing fees. As General
Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COA’s Regional Director that the water district could not
pay the auditing fees. Petitioner cited as basis for his action Sections
6 and 20 of Presidential Decree 198 ("PD 198")2, as well as Section 18
of Republic Act No. 6758 ("RA 6758"). The Regional Director referred
petitioner’s reply to the COA Chairman on 18 October 1999.

On 19 October 1999, petitioner wrote COA through the Regional


Director asking for refund of all auditing fees LMWD previously paid
to COA.

On 16 March 2000, petitioner received COA Chairman Celso D.


Gangan’s Resolution dated 3 January 2000 denying his requests.
Petitioner filed a motion for reconsideration on 31 March 2000, which
COA denied on 30 January 2001.

On 13 March 2001, petitioner filed this instant petition. Attached to


the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts
(PAWD) supporting the petition.

The Ruling of the Commission on Audit

The COA ruled that this Court has already settled COA’s audit
jurisdiction over local water districts in Davao City Water District v.
Civil Service Commission and Commission on Audit,3 as follows:

The above-quoted provision [referring to Section 3(b) PD 198]


definitely sets to naught petitioner’s contention that they are
private corporations. It is clear therefrom that the power to
appoint the members who will comprise the members of the
Board of Directors belong to the local executives of the local

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subdivision unit where such districts are located. In contrast, the
members of the Board of Directors or the trustees of a private
corporation are elected from among members or stockholders
thereof. It would not be amiss at this point to emphasize 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 who will compose the governing body of their
corporation. But this is not the case here and this clearly
indicates that petitioners are not private corporations.

The COA also denied petitioner’s request for COA to stop charging
auditing fees as well as petitioner’s request for COA to refund all
auditing fees already paid.

The Issues

Petitioner contends that COA committed grave abuse of discretion


amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following issues
for resolution:

1. Whether a Local Water District ("LWD") created under PD 198,


as amended, is a government-owned or controlled corporation
subject to the audit jurisdiction of COA;

2. Whether Section 20 of PD 198, as amended, prohibits COA’s


certified public accountants from auditing local water districts;
and

3. Whether Section 18 of RA 6758 prohibits the COA from


charging government-owned and controlled corporations
auditing fees.

The Ruling of the Court

The petition lacks merit.

The Constitution and existing laws4 mandate COA to audit all


government agencies, including government-owned and controlled
corporations ("GOCCs") with original charters. An LWD is a GOCC
with an original charter. Section 2(1), Article IX-D of the Constitution
provides for COA’s audit jurisdiction, as follows:

SECTION 2. (1) 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

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and controlled corporations with original charters, and on a
post-audit basis: (a) constitutional bodies, commissions and
offices that have been granted fiscal autonomy under this
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)

The COA’s audit jurisdiction extends not only to government


"agencies or instrumentalities," but also to "government-owned and
controlled corporations with original charters" as well as "other
government-owned or controlled corporations" without original
charters.

Whether LWDs are Private or Government-Owned


and Controlled Corporations with Original Charters

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-


examination of a doctrine backed by a long line of cases
culminating in Davao City Water District v. Civil Service Commission5
and just recently reiterated in De Jesus v. Commission on Audit.6
Petitioner maintains that LWDs are not government-owned and
controlled corporations with original charters. Petitioner even argues
that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would
give a "new perspective to the issue of the true character of water
districts."7

Petitioner theorizes that what PD 198 created was the Local Waters
Utilities Administration ("LWUA") and not the LWDs. Petitioner claims
that LWDs are created "pursuant to" and not created directly by PD
198. Thus, petitioner concludes that PD 198 is not an "original charter"
that would place LWDs within the audit jurisdiction of COA as
defined in Section 2(1), Article IX-D of the Constitution. Petitioner
elaborates that PD 198 does not create LWDs since it does not
expressly direct the creation of such entities, but only provides for
their formation on an optional or voluntary basis.8 Petitioner adds
that the operative act that creates an LWD is the approval of the
Sanggunian Resolution as specified in PD 198.

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Petitioner’s contention deserves scant consideration.

We begin by explaining the general framework under the


fundamental law. The Constitution recognizes two classes of
corporations. The first refers to private corporations created under a
general law. The second refers to government-owned or controlled
corporations created by special charters. Section 16, Article XII of the
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.

The Constitution emphatically prohibits the creation of private


corporations except by a general law applicable to all citizens.9 The
purpose of this constitutional provision is to ban private corporations
created by special charters, which historically gave certain
individuals, families or groups special privileges denied to other
citizens.10

In short, Congress cannot enact a law creating a private


corporation with a special charter. Such legislation would be
unconstitutional. Private corporations may exist only under a general
law. If the corporation is private, it must necessarily exist under a
general law. Stated differently, only corporations created under a
general law can qualify as private corporations. Under existing laws,
that general law is the Corporation Code,11 except that the
Cooperative Code governs the incorporation of cooperatives.12

The Constitution authorizes Congress to create government-owned


or controlled corporations through special charters. Since private
corporations cannot have special charters, it follows that Congress
can create corporations with special charters only if such
corporations are government-owned or controlled.

Obviously, LWDs are not private corporations because they are not
created under the Corporation Code. LWDs are not registered with
the Securities and Exchange Commission. Section 14 of the
Corporation Code states that "[A]ll corporations organized under this
code shall file with the Securities and Exchange Commission articles
of incorporation x x x." LWDs have no articles of incorporation, no
incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in
the case of all corporations registered with the Securities and
Exchange Commission. The local mayor or the provincial governor
appoints the directors of LWDs for a fixed term of office. This Court

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has ruled that LWDs are not created under the Corporation Code,
thus:

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.13 (Emphasis
supplied)

LWDs exist by virtue of PD 198, which constitutes their special charter.


Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if
they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their
existence is constitutionally infirm.

Unlike private corporations, which derive their legal existence and


power from the Corporation Code, LWDs derive their legal existence
and power from PD 198. Sections 6 and 25 of PD 19814 provide:

Section 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.

(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".

(b) A description of the boundary of the district. In the case of a


city or municipality, such boundary may include all lands within
the city or municipality. A district may include one or more
municipalities, cities or provinces, or portions thereof.

(c) A statement completely transferring any and all waterworks


and/or sewerage facilities managed, operated by or under the
control of such city, municipality or province to such district
upon the filing of resolution forming the district.

(d) A statement identifying the purpose for which the district is


formed, which shall include those purposes outlined in Section 5
above.

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(e) The names of the initial directors of the district with the date
of expiration of term of office for each.

(f) A statement that the district may only be dissolved on the


grounds and under the conditions set forth in Section 44 of this
Title.

(g) A statement acknowledging the powers, rights and


obligations as set forth in Section 36 of this Title.

Nothing in the resolution of formation shall state or infer that the


local legislative body has the power to dissolve, alter or affect
the district beyond that specifically provided for in this Act.

If two or more cities, municipalities or provinces, or any


combination thereof, desire to form a single district, a similar
resolution shall be adopted in each city, municipality and
province.

xxx

Sec. 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. (Emphasis supplied)

Clearly, LWDs exist as corporations only by virtue of PD 198, which


expressly confers on LWDs corporate powers. Section 6 of PD 198
provides that LWDs "shall exercise the powers, rights and privileges
given to private corporations under existing laws." Without PD 198,
LWDs would have no corporate powers. Thus, PD 198 constitutes the
special enabling charter of LWDs. The ineluctable conclusion is that
LWDs are government-owned and controlled corporations with a
special charter.

The phrase "government-owned and controlled corporations with


original charters" means GOCCs created under special laws and not
under the general incorporation law. There is no difference between
the term "original charters" and "special charters." The Court clarified
this in National Service Corporation v. NLRC15 by citing the
deliberations in the Constitutional Commission, as follows:

THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.

Commissioner Romulo is recognized.

MR. ROMULO. Mr. Presiding Officer, I am amending my original


proposed amendment to now read as follows: "including
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government-owned or controlled corporations WITH ORIGINAL
CHARTERS." The purpose of this amendment is to indicate that
government corporations such as the GSIS and SSS, which have
original charters, fall within the ambit of the civil service.
However, corporations which are subsidiaries of these
chartered agencies such as the Philippine Airlines, Manila Hotel
and Hyatt are excluded from the coverage of the civil service.

THE PRESIDING OFFICER (Mr. Trenas). What does the Committee


say?

MR. FOZ. Just one question, Mr. Presiding Officer. By the term
"original charters," what exactly do we mean?

MR. ROMULO. We mean that they were created by law, by an


act of Congress, or by special law.

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. FOZ. With that understanding and clarification, the


Committee accepts the amendment.

MR. NATIVIDAD. Mr. Presiding Officer, so those created by the


general corporation law are out.

MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service Commission,16 the


Court reiterated the meaning of the phrase "government-owned
and controlled corporations with original charters" in this wise:

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 of
Lumanta 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 the 1986 Constitutional
Commission in respect of the intent and meaning of the
new phrase ‘with original charter,’ 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 Corporation
Code. In NASECO, the company involved had been
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organized under the general incorporation statute and
was a subsidiary 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)

Petitioner’s contention that the Sangguniang Bayan resolution


creates the LWDs assumes that the Sangguniang Bayan has the
power to create corporations. This is a patently baseless assumption.
The Local Government Code17 does not vest in the Sangguniang
Bayan the power to create corporations.18 What the Local
Government Code empowers the Sangguniang Bayan to do is to
provide for the establishment of a waterworks system "subject to
existing laws." Thus, Section 447(5)(vii) of the Local Government
Code provides:

SECTION 447. Powers, Duties, Functions and Compensation. —


(a) The sangguniang bayan, as the legislative body of the
municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality
and its inhabitants pursuant to Section 16 of this Code and in
the proper exercise of the corporate powers of the municipality
as provided for under Section 22 of this Code, and shall:

xxx

(vii) Subject to existing laws, provide for the establishment,


operation, maintenance, and repair of an efficient
waterworks system to supply water for the inhabitants;
regulate the construction, maintenance, repair and use of
hydrants, pumps, cisterns and reservoirs; protect the purity
and quantity of the water supply of the municipality and,
for this purpose, extend the coverage of appropriate
ordinances over all territory within the drainage area of
said water supply and within one hundred (100) meters of
the reservoir, conduit, canal, aqueduct, pumping station,
or watershed used in connection with the water service;
and regulate the consumption, use or wastage of water;

x x x. (Emphasis supplied)

The Sangguniang Bayan may establish a waterworks system only in


accordance with the provisions of PD 198. The Sangguniang Bayan
has no power to create a corporate entity that will operate its
waterworks system. However, the Sangguniang Bayan may avail of
existing enabling laws, like PD 198, to form and incorporate a water
district. Besides, even assuming for the sake of argument that the

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Sangguniang Bayan has the power to create corporations, the LWDs
would remain government-owned or controlled corporations subject
to COA’s audit jurisdiction. The resolution of the Sangguniang Bayan
would constitute an LWD’s special charter, making the LWD a
government-owned and controlled corporation with an original
charter. In any event, the Court has already ruled in Baguio Water
District v. Trajano19 that the Sangguniang Bayan resolution is not the
special charter of LWDs, thus:

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.

Petitioner further contends that a law must create directly and


explicitly a GOCC in order that it may have an original charter. In
short, petitioner argues that one special law cannot serve as
enabling law for several GOCCs but only for one GOCC. Section 16,
Article XII of the Constitution mandates that "Congress shall not,
except by general law,"20 provide for the creation of private
corporations. Thus, the Constitution prohibits one special law to
create one private corporation, requiring instead a "general law" to
create private corporations. In contrast, the same Section 16 states
that "Government-owned or controlled corporations may be
created or established by special charters." Thus, the Constitution
permits Congress to create a GOCC with a special charter. There is,
however, no prohibition on Congress to create several GOCCs of
the same class under one special enabling charter.

The rationale behind the prohibition on private corporations having


special charters does not apply to GOCCs. There is no danger of
creating special privileges to certain individuals, families or groups if
there is one special law creating each GOCC. Certainly, such
danger will not exist whether one special law creates one GOCC, or
one special enabling law creates several GOCCs. Thus, Congress
may create GOCCs either by special charters specific to each
GOCC, or by one special enabling charter applicable to a class of
GOCCs, like PD 198 which applies only to LWDs.

Petitioner also contends that LWDs are private corporations because


Section 6 of PD 19821 declares that LWDs "shall be considered quasi-
public" in nature. Petitioner’s rationale is that only private
corporations may be deemed "quasi-public" and not public
corporations. Put differently, petitioner rationalizes that a public
corporation cannot be deemed "quasi-public" because such
corporation is already public. Petitioner concludes that the term
"quasi-public" can only apply to private corporations. Petitioner’s
argument is inconsequential.
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Petitioner forgets that the constitutional criterion on the exercise of
COA’s audit jurisdiction depends on the government’s ownership or
control of a corporation. The nature of the corporation, whether it is
private, quasi-public, or public is immaterial.

The Constitution vests in the COA audit jurisdiction over "government-


owned and controlled corporations with original charters," as well as
"government-owned or controlled corporations" without original
charters. GOCCs with original charters are subject to COA pre-audit,
while GOCCs without original charters are subject to COA post-
audit. GOCCs without original charters refer to corporations created
under the Corporation Code but are owned or controlled by the
government. The nature or purpose of the corporation is not material
in determining COA’s audit jurisdiction. Neither is the manner of
creation of a corporation, whether under a general or special law.

The determining factor of COA’s audit jurisdiction is government


ownership or control of the corporation. In Philippine Veterans Bank
Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even
ruled that the criterion of ownership and control is more important
than the issue of original charter, thus:

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. 3518,23 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.
(Emphasis supplied)

Certainly, the government owns and controls LWDs. The government


organizes LWDs in accordance with a specific law, PD 198. There is
no private party involved as co-owner in the creation of an LWD. Just
prior to the creation of LWDs, the national or local government owns
and controls all their assets. The government controls LWDs because
under PD 198 the municipal or city mayor, or the provincial governor,
appoints all the board directors of an LWD for a fixed term of six
years.24 The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors
and other personnel of LWDs are government employees subject to
civil service laws25 and anti-graft laws.26

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While Section 8 of PD 198 states that "[N]o public official shall serve
as director" of an LWD, it only means that the appointees to the
board of directors of LWDs shall come from the private sector. Once
such private sector representatives assume office as directors, they
become public officials governed by the civil service law and anti-
graft laws. Otherwise, Section 8 of PD 198 would contravene Section
2(1), Article IX-B of the Constitution declaring that the civil service
includes "government-owned or controlled corporations with original
charters."

If LWDs are neither GOCCs with original charters nor GOCCs without
original charters, then they would fall under the term "agencies or
instrumentalities" of the government and thus still subject to COA’s
audit jurisdiction. However, the stark and undeniable fact is that the
government owns LWDs. Section 4527 of PD 198 recognizes
government ownership of LWDs when Section 45 states that the
board of directors may dissolve an LWD only on the condition that
"another public entity has acquired the assets of the district and has
assumed all obligations and liabilities attached thereto." The
implication is clear that an LWD is a public and not a private entity.

Petitioner does not allege that some entity other than the
government owns or controls LWDs. Instead, petitioner advances the
theory that the "Water District’s owner is the District itself." 28 Assuming
for the sake of argument that an LWD is "self-owned,"29 as petitioner
describes an LWD, the government in any event controls all LWDs.
First, government officials appoint all LWD directors to a fixed term of
office. Second, any per diem of LWD directors in excess of P50 is
subject to the approval of the Local Water Utilities Administration,
and directors can receive no other compensation for their services
to the LWD.30 Third, the Local Water Utilities Administration can
require LWDs to merge or consolidate their facilities or operations.31
This element of government control subjects LWDs to COA’s audit
jurisdiction.

Petitioner argues that upon the enactment of PD 198, LWDs became


private entities through the transfer of ownership of water facilities
from local government units to their respective water districts as
mandated by PD 198. Petitioner is grasping at straws. Privatization
involves the transfer of government assets to a private entity.
Petitioner concedes that the owner of the assets transferred under
Section 6 (c) of PD 198 is no other than the LWD itself.32 The transfer of
assets mandated by PD 198 is a transfer of the water systems facilities
"managed, operated by or under the control of such city,
municipality or province to such (water) district."33 In short, the
transfer is from one government entity to another government entity.
PD 198 is bereft of any indication that the transfer is to privatize the
operation and control of water systems.

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Finally, petitioner claims that even on the assumption that the
government owns and controls LWDs, Section 20 of PD 198 prevents
COA from auditing LWDs. 34 Section 20 of PD 198 provides:

Sec. 20. System of Business Administration. — The Board shall, as


soon as practicable, prescribe and define by resolution a
system of business administration and accounting for the
district, which shall be patterned upon and conform to the
standards established by the Administration. Auditing shall be
performed by a certified public accountant not in the
government service. The Administration may, however,
conduct annual audits of the fiscal operations of the district to
be performed by an auditor retained by the Administration.
Expenses incurred in connection therewith shall be borne
equally by the water district concerned and the
Administration.35 (Emphasis supplied)

Petitioner argues that PD 198 expressly prohibits COA auditors, or any


government auditor for that matter, from auditing LWDs. Petitioner
asserts that this is the import of the second sentence of Section 20 of
PD 198 when it states that "[A]uditing shall be performed by a
certified public accountant not in the government service." 36

PD 198 cannot prevail over the Constitution. No amount of clever


legislation can exclude GOCCs like LWDs from COA’s audit
jurisdiction. Section 3, Article IX-C of the Constitution outlaws any
scheme or devise to escape COA’s audit jurisdiction, thus:

Sec. 3. No law shall be passed exempting any entity of the


Government or its subsidiary in any guise whatever, or any
investment of public funds, from the jurisdiction of the
Commission on Audit. (Emphasis supplied)

The framers of the Constitution added Section 3, Article IX-D of the


Constitution precisely to annul provisions of Presidential Decrees, like
that of Section 20 of PD 198, that exempt GOCCs from COA audit.
The following exchange in the deliberations of the Constitutional
Commission elucidates this intent of the framers:

MR. OPLE: I propose to add a new section on line 9, page 2 of


the amended committee report which reads: NO LAW SHALL
BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF
PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.

May I explain my reasons on record.

We know that a number of entities of the government took


advantage of the absence of a legislature in the past to obtain

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presidential decrees exempting themselves from the
jurisdiction of the Commission on Audit, one notable example
of which is the Philippine National Oil Company which is really
an empty shell. It is a holding corporation by itself, and strictly
on its own account. Its funds were not very impressive in
quantity but underneath that shell there were billions of pesos in
a multiplicity of companies. The PNOC — the empty shell —
under a presidential decree was covered by the jurisdiction of
the Commission on Audit, but the billions of pesos invested in
different corporations underneath it were exempted from the
coverage of the Commission on Audit.

Another example is the United Coconut Planters Bank. The


Commission on Audit has determined that the coconut levy is a
form of taxation; and that, therefore, these funds attributed to
the shares of 1,400,000 coconut farmers are, in effect, public
funds. And that was, I think, the basis of the PCGG in
undertaking that last major sequestration of up to 94 percent of
all the shares in the United Coconut Planters Bank. The charter
of the UCPB, through a presidential decree, exempted it from
the jurisdiction of the Commission on Audit, it being a private
organization.

So these are the fetuses of future abuse that we are slaying


right here with this additional section.

May I repeat the amendment, Madam President: NO LAW


SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT
OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE
COMMISSION ON AUDIT.

THE PRESIDENT: May we know the position of the Committee on


the proposed amendment of Commissioner Ople?

MR. JAMIR: If the honorable Commissioner will change the


number of the section to 4, we will accept the amendment.

MR. OPLE: Gladly, Madam President. Thank you.

MR. DE CASTRO: Madam President, point of inquiry on the new


amendment.

THE PRESIDENT: Commissioner de Castro is recognized.

MR. DE CASTRO: Thank you. May I just ask a few questions of


Commissioner Ople.

Is that not included in Section 2 (1) where it states: "(c)


government-owned or controlled corporations and their

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subsidiaries"? So that if these government-owned and
controlled corporations and their subsidiaries are subjected to
the audit of the COA, any law exempting certain government
corporations or subsidiaries will be already unconstitutional.

So I believe, Madam President, that the proposed amendment


is unnecessary.

MR. MONSOD: Madam President, since this has been


accepted, we would like to reply to the point raised by
Commissioner de Castro.

THE PRESIDENT: Commissioner Monsod will please proceed.

MR. MONSOD: I think the Commissioner is trying to avoid the


situation that happened in the past, because the same
provision was in the 1973 Constitution and yet somehow a law
or a decree was passed where certain institutions were
exempted from audit. We are just reaffirming, emphasizing, the
role of the Commission on Audit so that this problem will never
arise in the future.37

There is an irreconcilable conflict between the second sentence of


Section 20 of PD 198 prohibiting COA auditors from auditing LWDs
and Sections 2(1) and 3, Article IX-D of the Constitution vesting in
COA the power to audit all GOCCs. We rule that the second
sentence of Section 20 of PD 198 is unconstitutional since it violates
Sections 2(1) and 3, Article IX-D of the Constitution.

On the Legality of COA’s


Practice of Charging Auditing Fees

Petitioner claims that the auditing fees COA charges LWDs for audit
services violate the prohibition in Section 18 of RA 6758,38 which
states:

Sec. 18. Additional Compensation of Commission on Audit


Personnel and of other Agencies. – In order to preserve the
independence and integrity of the Commission on Audit
(COA), its officials and employees are prohibited from receiving
salaries, honoraria, bonuses, allowances or other emoluments
from any government entity, local government unit,
government-owned or controlled corporations, and
government financial institutions, except those compensation
paid directly by COA out of its appropriations and contributions.

Government entities, including government-owned or


controlled corporations including financial institutions and local
government units are hereby prohibited from assessing or billing
other government entities, including government-owned or

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controlled corporations including financial institutions or local
government units for services rendered by its officials and
employees as part of their regular functions for purposes of
paying additional compensation to said officials and
employees. (Emphasis supplied)

Claiming that Section 18 is "absolute and leaves no doubt," 39


petitioner asks COA to discontinue its practice of charging auditing
fees to LWDs since such practice allegedly violates the law.

Petitioner’s claim has no basis.

Section 18 of RA 6758 prohibits COA personnel from receiving any


kind of compensation from any government entity except
"compensation paid directly by COA out of its appropriations and
contributions." Thus, RA 6758 itself recognizes an exception to the
statutory ban on COA personnel receiving compensation from
GOCCs. In Tejada v. Domingo,40 the Court declared:

There can be no question that Section 18 of Republic Act No.


6758 is designed to strengthen further the policy x x x to
preserve the independence and integrity of the COA, by
explicitly PROHIBITING: (1) COA officials and employees from
receiving salaries, honoraria, bonuses, allowances or other
emoluments from any government entity, local government
unit, GOCCs and government financial institutions, except such
compensation paid directly by the COA out of its
appropriations and contributions, and (2) government entities,
including GOCCs, government financial institutions and local
government units from assessing or billing other government
entities, GOCCs, government financial institutions or local
government units for services rendered by the latter’s officials
and employees as part of their regular functions for purposes of
paying additional compensation to said officials and
employees.

xxx

The first aspect of the strategy is directed to the COA itself,


while the second aspect is addressed directly against the
GOCCs and government financial institutions. Under the first,
COA personnel assigned to auditing units of GOCCs or
government financial institutions can receive only such salaries,
allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to
are the cost of audit services earlier mentioned which cannot
include the extra emoluments or benefits now claimed by
petitioners. The COA is further barred from assessing or billing
GOCCs and government financial institutions for services

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rendered by its personnel as part of their regular audit functions
for purposes of paying additional compensation to such
personnel. x x x. (Emphasis supplied)

In Tejada, the Court explained the meaning of the word


"contributions" in Section 18 of RA 6758, which allows COA to charge
GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost


of audit services which are based on the actual cost of the
audit function in the corporation concerned plus a reasonable
rate to cover overhead expenses. The actual audit cost shall
include personnel services, maintenance and other operating
expenses, depreciation on capital and equipment and out-of-
pocket expenses. In respect to the allowances and fringe
benefits granted by the GOCCs to the COA personnel
assigned to the former’s auditing units, the same shall be
directly defrayed by COA from its own appropriations x x x. 41

COA may charge GOCCs "actual audit cost" but GOCCs must pay
the same directly to COA and not to COA auditors. Petitioner has
not alleged that COA charges LWDs auditing fees in excess of
COA’s "actual audit cost." Neither has petitioner alleged that the
auditing fees are paid by LWDs directly to individual COA auditors.
Thus, petitioner’s contention must fail.

WHEREFORE, the Resolution of the Commission on Audit dated 3


January 2000 and the Decision dated 30 January 2001 denying
petitioner’s Motion for Reconsideration are AFFIRMED. The second
sentence of Section 20 of Presidential Decree No. 198 is declared
VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of
the Constitution. No costs.

SO ORDERED.

Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-


Santiago, Sandoval-Gutierrez, Austria-Martinez, Corona, Carpio-
Morales, Callejo, Sr., and Azcuna, and Tinga, JJ., concur.

Footnotes
1 Under Rule 64 of the 1997 Revised Rules of Court.
2 As amended by Presidential Decrees Nos. 768 and 1479.
3 G.R. No. 95237-38, 13 September 1991, 201 SCRA 593.
4 Section 26, Government Auditing Code of the Philippines.

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5 Supra note 3.
6 G.R. No. 149154, 10 June 2003.
7 Rollo, p. 7.
8 Ibid., p. 29.
9See National Development Company v. Philippine Veterans
Bank, G.R. Nos. 84132-33, 10 December 1990, 192 SCRA 257.
10BERNAS, THE 1987 CONSTITUTION OF THE REPUBLIC OF THE
PHILIPPINES: A COMMENTARY 1181 (2003).
11 Batas Pambansa Blg. 68.

Republic Act. No. 6938. See also Republic Act No. 6939 or the
12

Cooperative Development Authority Law.


13 Supra note 3.
14 As amended by PD 1479.
15 G.R. No. L-69870, 29 November 1988, 168 SCRA 122.
16 Supra note 3.
17 Republic Act No. 7160.

See Section 447 of the Local Government Code on the


18

powers of the Sangguniang Bayan.


19 212 Phil. 674 (1984).
20 Emphasis supplied.
21 As amended by PD 1479.
22 G.R. No. 67125, 24 August 1990, 189 SCRA 14.
23 Under Section 3 of Republic Act No. 7169 which took effect
on 2 January 1992, the "operations and changes in the capital
structure of the Veterans Bank, as well as other amendments to
its articles of incorporation and by-laws as prescribed under
Republic Act No. 3518, shall be in accordance with the
Corporation Code, the General Banking Act, and other related
laws."
24 Section 3 (b) of PD 198 provides:

"(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

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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 local water districts
are within the boundary of any city or municipality, the
appointing authority shall be the mayor of the 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
as herein.

If portions of more than one province are included within


the boundary of the district, and the appointing authority
is to be the governor, 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."

G. R. No. 147402, January 14, 2004

A Special Audit Team from COA Regional Office No. VIII audited the
accounts of Leyte Metropolitan Water District (LMWD). For its
auditing services, COA requested payment but was denied by
Petitioner Feliciano as General Manager of LMWD, citing PD198 and
Section 18 of RA 6758. He further requested that COA cease all audit
services, stop charging auditing fees and refund all auditing fees
previously paid by LMWD.

On March 16, 2000, petitioner received the Resolution of COA


Chairman Celso Gangan, holding that local water districts are not
private corporations, and are therefore under its audit jurisdiction, as
pronounced by the Supreme Court in the case of Davao City Water
District vs. CSC and COA.

Issues:
1. Whether or not a local water district created under PD198, as
amended, is a government-owned or controlled corporation subject
to the audit jurisdiction of COA;

2. Whether or not Section 20 of PD 198, as amended, prohibits COA’s


certified public accountants from auditing local water districts; and

3. Whether or not Section 18 of RA 6758 prohibits COA from charging


government-owned and controlled corporations auditing fees.

Ruling:

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The petition lacks merit.

A local water district is considered a GOCC with an original charter.


It exists as a corporation only by virtue of PD198, which expressly
confers on LWDs corporate powers. Without PD198, LWDs would
have no corporate powers. PD 198 constitutes the special enabling
charter of LWDs. Thus, LWDs are government-owned and controlled
corporations with a special charter, and not private corporations
created under the Corporation Code.

LWDs, therefore, are subject to the audit jurisdiction of COA, as


provided under Section 2(1), Article IX-D of the Constitution, which
mandates the latter to audit all government agencies or
instrumentalities, including government-owned and controlled
corporations (GOCCs) with original charters, as well as other
government-owned or controlled corporations without original
charters.

As regards the second issue, the petitioner argues that PD 198


expressly prohibits COA auditors, or any government auditor for that
matter, from auditing LWDs, as stated in Section 18 of the
aforementioned law, which provides in part that “auditing shall be
performed by a certified public accountant not in the government
service.”

The Supreme Court however ruled that PD 198 cannot prevail over
the Constitution, as it provides in Section 3, Article IX-C that “no law
shall be passed exempting any entity of the government or its
subsidiary in any guise whatever, or any investment of public funds,
from the jurisdiction of the Commission on Audit. And since there is
an irreconcilable conflict between Section 20 of PD 198, prohibiting
COA auditors from auditing LWDs, and Sections 2(1) and 3, Article IX-
D of the Constitution, vesting in COA the power to audit all GOCCs,
it is ruled that the second sentence of Section 20 of PD 198 is
unconstitutional since it violates the aforementioned section of the
Constitution.

The third issue is likewise bereft of merit. COA is not prohibited from
charging GOCCs auditing fees. As opposed to petitioner’s
contention, COA may charge GOCCs actual audit cost, but the
same must be paid directly to COA and not to COA auditors. What
Section 18 of RA 6758 prohibits is the receiving of COA personnel of
any kind of compensation from any government entity except
“compensation paid directly by COA out of its appropriations and
contributions.” Petitioner has not alleged that COA charges LWDs
auditing fees in excess of COA’s actual audit cost. Neither has he
alleged that the auditing fees are paid by LWDs directly to individual
COA auditors.

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Facts: COA assessed Leyte Metropolitan Water District (LMWD)
auditing fees. Petitioner Feliciano, as General Manager of LMWD,
contended that the water district could not pay the said fees on the
basis of Sections 6 and 20 of P.D. No. 198 as well as Section 18 of R.A.
No. 6758. He primarily claimed that LMWD is a private corporation
not covered by COA's jurisdiction. Petitioner also asked for refund of
all auditing fees LMWD previously paid to COA. COA Chairman
denied petitioner’s requests. Petitioner filed a motion for
reconsideration which COA denied. Hence, this petition.

Issue: Whether a Local Water District (“LWD”) created under PD 198,


as amended, is a government-owned or controlled corporation
subject to the audit jurisdiction of COA or a private corporation
which is outside of COA’s audit jurisdiction.

Held: Petition lacks merit. The Constitution under Sec. 2(1), Article IX-
D and existing laws mandate COA to audit all government
agencies, including government-owned and controlled corporations
with original charters. An LWD is a GOCC with an original charter.

The Constitution recognizes two classes of corporations. The first


refers to private corporations created under a general law. The
second refers to government-owned or controlled corporations
created by special charters. Under existing laws, that general law is
the Corporation Code.

Obviously, LWD’s are not private corporations because they are not
created under the Corporation Code. LWD’s are not registered with
the Securities and Exchange Commission. Section 14 of the
Corporation Code states that “all corporations organized under this
code shall file with the SEC articles of incorporation x x x.” LWDs have
no articles of incorporation, no incorporators and no stockholders or
members. There are no stockholders or members to elect the board
directors of LWDs as in the case of all corporations registered with
the SEC. The local mayor or the provincial governor appoints the
directors of LWDs for a fixed term of office. The board directors of
LWDs are not co-owners of the LWDs. The board directors and other
personnel of LWDs are government employees subject to civil service
laws and anti-graft laws. Clearly, an LWD is a public and not a
private entity, hence, subject to COA’s audit jurisdiction.

DBP vs. NLRC (186 SCRA 841 [1990])

G.R. No. 86932 June 27, 1990


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DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION and DOROTHY S.
ANCHETA, MA. MAGDALENA Y. ARMARILLE, CONSTANTE A. ANCHETA,
CONSTANTE B. BANAYOS, EVELYN BARRIENTOS, JOSE BENAVIDEZ,
LEONARDO BUENAAGUA, BENJAMIN BAROT, ERNESTO S. CANTILLER,
EDUARDO CANDA, ARMANDO CANDA, AIDA DE LUNA, PACIFICO M.
DE JESUS, ALFREDO ESTRERA, AURELIO A. FARINAS, FRANCISCO
GREGORIO, DOMELINA GONZALES, JUANA JALANDONI, MANUEL
MALUBAY, FELICIANO OCAMPO, MABEL PADO, GEMINIANO PLETA,
ERNESTO S. SALAMAT, JULIAN TRAQUENA, JUSFIEL SILVERIO, JAMES
CRISTALES, FRANCISCO BAMBIO, JOSE T. MARCELO, JR., SUSAN M.
OLIVAR, ERNESTO JULIO, CONSTANTE ANCHETA, JR., ENRIQUE NABUA
and JAVIER P. MATARO, respondents.

The Legal Counsel for petitioner.

CA. Ancheta & C.B. Banayos for private respondents.

REGALADO, J.:

The present petition for certiorari seeks the reversal of the decision of
the National Labor Relations Commission (NLRC) in, NLRC-NCR Case
No. 00-07-02500-87, dated January 16, 1986, 1 which dismissed the
appeal of the Development Bank of the Philippines (DBP) from the
decision of the labor arbiter ordering it to pay the unpaid wages,
13th month pay, incentive pay and separation pay of herein private
respondents.

Philippine Smelters Corporation (PSC), a corporation registered under


Philippine law, obtained a loan in 1983 from the Development Bank
of the Philippines, a government-owned financial institution created
and operated in accordance with Executive Order No. 81, to finance
its iron smelting and steel manufacturing business. To secure said
loan, PSC mortgaged to DBP real properties with all the buildings and
improvements thereon and chattels, with its President, Jose T.
Marcelo, Jr., as co-obligor.

By virtue of the said loan agreement, DBP became the majority


stockholder of PSC, with stockholdings in the amount of
P31,000,000.00 of the total P60,226,000.00 subscribed and paid up
capital stock. Subsequently, it took over the management of PSC.

When PSC failed to pay its obligation with DBP, which amounted to
P75,752,445.83 as of March 31, 1986, DBP foreclosed and acquired
the mortgaged real estate and chattels of PSC in the auction sales
held on February 25, 1987 and March 4, 1987.

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On February 10, 1987, forty (40) petitioners filed a Petition for
Involuntary Insolvency in the Regional Trial Court, Branch 61 at
Makati, Metropolitan Manila, docketed therein as Special
Proceeding No. M-1359, 2 against PSC and DBP, impleading as co-
respondents therein Olecram Mining Corporation, Jose Panganiban
Ice Plant and Cold Storage, Inc. and PISO Bank, with said petitioners
representing themselves as unpaid employees of said private
respondents, except PISO Bank.

On February 13, 1987, herein private respondents filed a complaint


with the Department of Labor against PSC for nonpayment of salaries,
13th month pay, incentive leave pay and separation pay. On
February 20, 1987, the complaint was amended to include DBP as
party respondent. The case was thereafter indorsed to the Arbitration
Branch of the National Labor Relations Commission (NLRC). DBP filed
its position paper on September 7, 1987, invoking the absence of
employer-employee relationship between private respondents and
DBP and submitting that when DBP foreclosed the assets of PSC, it did
so as a foreclosing creditor.

On January 30, 1988, the labor arbiter rendered a decision, the


dispositive portion of which directed that "DBP as foreclosing creditor
is hereby ordered to pay all the unpaid wages and benefits of the
workers which remain unpaid due to PSC's foreclosure." 3

On appeal by DBP, the NLRC sustained the ruling of the labor arbiter,
holding DBP liable for unpaid wages of private respondents "not as a
majority stockholder of respondent PSC, but as the foreclosing
creditor who possesses the assets of said PSC by virtue of the auction
sale it held in 1987." In addition, the NLRC held that the labor arbiter is
correct in assuming jurisdiction because "the worker's preference to
the amount secured by DBP by virtue of said foreclosure sales of PSC
properties arose out of or are connected or interwoven with the labor
dispute brought forth by appellees against PSC and DBP. 4 Hence,
the present petition by DBP.

DBP contends that the labor arbiter and the NLRC committed a grave
abuse of discretion (1) in assuming jurisdiction over DBP; (2) in
applying the provisions of Article 110 of the Labor Code, as
amended; and (3) in not enforcing and applying Section 14 of
Executive Order No. 81.

We find merit in the petition.

It is to be noted that in their comment, private respondents tried to


prove the existence of employer-employee relationship based on
the fact that DBP is the majority stockholder of PSC and that the
majority of the members of the board of directors of PSC are from
DBP. 5 We do not believe that these circumstances are sufficient

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indicia of the existence of an employer-employee relationship as
would confer jurisdiction over the case on the labor arbiter,
especially in the light of the express declaration of said labor arbiter
and the NLRC that DBP is being held liable as a foreclosing creditor.
At any rate, this jurisdictional defect was cured when DBP appealed
the labor arbiter's decision to the NLRC and thereby submitted to its
jurisdiction.

The pivotal issue for resolution is whether DBP, as foreclosing creditor,


could be held liable for the unpaid wages, 13th month pay, incentive
leave pay and separation pay of the employees of PSC.

We rule in the negative.

During the dates material to the foregoing proceedings, Article 110


of the Labor Code read:

Art. 110. Worker preference in case of bankruptcy. — In


the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as regards
wages due them for services rendered during the period
prior to the bankruptcy or liquidation, any provision of law
to the contrary notwithstanding. Unpaid wages shall be
paid in full before other creditors may establish any claim
to a share in the assets of the employer.

In conjunction therewith, Section 10, Rule VIII, Book III of the


Implementing Rules and Regulations of the Labor Code provided:

Sec. 10. Payment of wages in mm 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.

Interpreting the above provisions, this Court, in Development Bank of


the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., 6
explicated as follows:

It is quite clear from the provisions that a declaration of


bankruptcy or a judicial liquidation must be present
before the worker's preference may be enforced. ... .

xxx xxx xxx

Moreover, the reason behind the necessity for a judicial


proceeding or a proceeding in rem before the
concurrence and preference of credits may be applied

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was explained by this Court in the case of Philippine
Savings Bank v. Lantin (124 SCRA 476 [1983]). We said:

The proceedings in the court below do not


partake of the nature of the insolvency
proceedings or settlement of a decedent's
estate. The action filed by Ramos was only to
collect the unpaid cost of the construction of
the duplex apartment. It is far from being a
general liquidation of the estate of the Tabligan
spouses.

Insolvency proceedings and settlement of a


decedent's estate are both proceedings in rem
which are binding against the whole world. All
persons having interest in the subject matter
involved, whether they were notified or not, are
equally bound. Consequently, a liquidation of
similar import or 'other equivalent general
liquidation must also necessarily be a
proceeding in rem so that all interested persons
whether known to the parties or not may be
bound by such proceeding.

In the case at bar, although the lower court


found that 'there were no known creditors other
than the plaintiff and the defendant herein,' this
can not be conclusive. It will not bar other
creditors in the event they show up and present
their claim against the petitioner bank,
claiming that they also have preferred liens
against the property involved. Consequently,
Transfer Certificate of Title No. 101864 issued in
favor of the bank which is supposed to be
indefeasible would remain constantly unstable
and questionable. Such could not have been
the intention of Article 2243 of the Civil Code
although it considers claims and credits under
Article 2242 as statutory fines. Neither does the
De Barreto case ...

The claims of all creditors whether preferred or non-


preferred, the Identification of the preferred ones and the
totality of the employer's asset should be brought into the
picture. There can then be an authoritative, fair, and
binding adjudication instead of the piece meal settlement
which would result from the questioned decision in this
case.

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Republic Act No. 6715, which took effect on March 21, 1989,
amended Article 110 of the Labor Code to read as follows:

Art. 110. Worker preference in case of bankruptcy. — In


the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as regards
their unpaid wages and other monetary claims, any
provision of law to the contrary notwithstanding. Such
unpaid wages and monetary claims shall be paid in full
before the claims of the Government and other creditors
may be paid.

As a consequence, Section 1 0, Rule VIII, Book III of the


Implementing Rules and Regulations of the Labor Code was likewise
amended, to wit:

Sec. 10. Payment of wages and other monetary claims in


case of bankruptcy. — In case of bankruptcy or
liquidation of the employer's business, the unpaid wages
and other monetary claims of the employees shall be
given first preference and shall be paid in full before the
claims of government and other creditors may be paid.

Despite said amendments, however, the same interpretation of


Article 110 as applied in the aforesaid case of Development Bank of
the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was
adopted by this Court in the recent case of Development Bank of the
Philippines vs. National Labor Relations Commission, et. al., 7 For
facility of reference, especially the rationalization for the conclusions
reached therein, we reproduce the salient portions of the decision in
this later case.

Notably, the terms "declaration" of bankruptcy or


"judicial" liquidation have been eliminated. Does this
means then that liquidation proceedings have been done
away with?

We opine m the negative, upon the following


considerations:

1. Because of its impact on the entire system of credit,


Article 110 of the Labor Code cannot be viewed in
isolation but must be read in relation to the Civil Code
scheme on classification and preference of credits.

Article 110 of the Labor Code, in determining


the reach of its terms, cannot be viewed in
isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code
concerning the classification, concurrence and

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preference of credits which provisions find
particular application in insolvency
proceedings where the claims of all creditors,
preferred or non-preferred, may be
adjudicated in a binding manner ... (Republic
vs. Peralta (G.R. No. L-56568, May 20, 1987, 150
SCRA 37).

2. In the same way that the Civil Code provisions on


classification of credits and the Insolvency Law have been
brought into harmony, so also must the kindred provisions
of the Labor Law be made to harmonize with those laws.

3. In the event of insolvency, a principal objective should


be to effect an equitable distribution of the insolvent's
property among his creditors. To accomplish this there
must first be some proceeding where notice to all of the
insolvent's creditors may be given and where the claims
of preferred creditors may be bindingly adjudicated (De
Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6
SCRA 928). The rationale therefor has been expressed in
the recent case of DBP vs. Secretary of Labor (G.R. No.
79351, 28 November 1989), which we quote:

A preference of credit bestows upon the


preferred creditor an advantage of having his
credit satisfied first ahead of other claims which
may be established against the debtor.
Logically, it becomes material only when the
properties and assets of the debtors are
insufficient to pay his debts in full; for if the
debtor is amply able to pay his various
creditors, in full, how can the necessity exist to
determine which of his creditors shall be paid
first or whether they shall be paid out of the
proceeds of the sale of the debtor's specific
property? Indubitably, the preferential right of
credit attains significance only after the
properties of the debtor have been inventoried
and liquidated, and the claims held by his
various creditors have been established
(Kuenzle & Streiff [Ltd.] vs. Villanueva, 41 Phil.
611 [1916]; Barretto vs. Villanueva, G.R. No.
14038, 29 December 1962, 6 SCRA 928;
Philippine Savings Bank vs. Lantin, G.R. 33929, 2
September 1983,124 SCRA 476).

4. A distinction should be made between a preference of


credit and a lien. A preference applies only to claims
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which do not attach to specific properties. A hen creates
a charge on a particular property. The right of first
preference as regards unpaid wages recognize by Article
110 does not constitute a hen on the property of the
insolvent debtor in favor of workers. It is but a preference
of credit in their favor, a preference in application. It is a
met-hod adopted to determine and specify the order in
which credits should be paid in the final distribution of the
proceeds of the insolvent's assets- It is a right to a first
preference in the discharge of the funds of the judgment
debtor. in the words of Republic vs. Peralta, supra:

Article 110 of the Labor Code does not purport


to create a lien in favor of workers or
employees for unpaid wages either upon all of
the properties or upon any particular property
owned by their employer. Claims for unpaid
wages do not therefore fall at all within the
category of specially preferred claims
established under Articles 2241 and 2242 of the
Civil Code, except to the extent that such
claims for unpaid wages are already covered
by Article 2241, number 6: 'claims for laborers'
wages, on the goods manufactured or the work
done; or by Article 2242, number 3: 'claims of
laborers and other workers engaged in the
construction, reconstruction or repair of
buildings, canals and other works, upon said
buildings, canals or other works.' To the extent
that claims for unpaid wages fall outside the
scope of Article 2241, number 6 and Article
2242, number 3, they would come within the
ambit of the category of ordinary preferred
credits under Article 2244.'

5. The DBP anchors its claim on a mortgage credit. A


mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be,
to the fulfillment of the obligation for whose security it was
constituted (Article 2176, Civil Code). It creates a real right
which is enforceable against the whole world. It is a lien
on an Identified immovable property, which a preference
is not. A recorded mortgage credit is a special preferred
credit under Article 2242 (5) of the Civil Code on
classification of credits. The preference given by Article
110, when not falling within Article 2241 (6) and Article
2242 (3) of the Civil Code and not attached to any
specific property, is an ordinary preferred credit although

Corporation Law/alfred0 Page 79 of 1509


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its impact is to move it from second priority to first priority
in the order of preference established by Article 2244 of
the Civil Code (Republic vs. Peralta, supra).

In fact, under the Insolvency Law (Section 29) a creditor


holding a mortgage or hen of any kind as security is not
permitted to vote in the election of the assignee in
insolvency proceedings unless the value of his security is
first fixed or he surrenders all such property to the receiver
of the insolvent's estate.

6. Even if Article 110 and its Implementing Rule, as


amended, should be interpreted to mean 'absolute
preference,' the same should be given only prospective
effect in line with the cardinal rule that laws shall have no
retroactive effect, unless the contrary is provided (Article
4, Civil Code). Thereby, any infringement on the
constitutional guarantee on non-impairment of obligation
of contracts (Section 10, Article III, 1987 Constitution) is
also avoided. In point of fact, DBP's mortgage credit
antedated by several years the amendatory law, RA No.
6715. To give Article 110 retroactive effect would be to
wipe out the mortgage in DBPs favor and expose it to a
risk which it sought to protect itself against by requiring a
collateral in the form of real property.

In fine, the right to preference given to workers under


Article 110 of the Labor Code cannot exist in any effective
way prior to the time of its presentation in distribution
proceedings. It will find application when, in proceedings
such as insolvency, such unpaid wages shall be paid in
full before the 'claims of the Government and other
creditors' may be paid. But, for an orderly settlement of a
debtor's assets, all creditors must be convened, their
claims ascertained and inventoried, and thereafter the
preference determined in the course of judicial
proceedings which have for their object the subjection of
the property of the debtor to the payment of his debts or
other lawful obligations. Thereby, an orderly determination
of preference of creditors' claims is assured (Philippine
Savings Bank vs. Lantin, No. L-33929, September 2, 1983,
124 SCRA 476); the adjudication made will be binding on
all parties-in-interest, since those proceedings are
proceedings in rem; and the legal scheme of
classification, concurrence and preference of credits in
the Civil Code, the Insolvency Law, and the Labor Code is
preserved in harmony.

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On the foregoing considerations and it appearing that an involuntary
insolvency proceeding has been instituted against PSC, private
respondents should properly assert their respective claims in said
proceeding. .

WHEREFORE, the petition is GRANTED. The decision of public


respondent is hereby ANNULLED and SET ASIDE.

SO ORDERED.

Melencio-Herrera (Chairperson) and Paras, JJ., concur.

Separate Opinions

SARMIENTO, J., dissenting:

As I held in DBP v. NLRC 1 and more recently, in Bolinao v. Padolina, 2


that on account of the amendment introduced by Republic Act No.
6715, workers now enjoy "absolute preference" in the payment of
labor claims, above and beyond taxes due from the Government,
and credits belonging to private persons. As I said therein, Republic
Act No. 6715 was enacted, precisely, to work more favorable terms
to labor-because prior to the amendment, labor enjoyed no
preference. I am afraid that the majority has misread the clear intent
of the legislature.

PADILLA, J., dissenting:

I dissent for the same reasons stated in my dissenting opinion in DBP


vs. NLRC, et al., G.R. Nos. 82763-64,19 March 1990.

Separate Opinions

SARMIENTO, J., dissenting:

As I held in DBP v. NLRC 1 and more recently, in Bolinao v. Padolina, 2


that on account of the amendment introduced by Republic Act No.
6715, workers now enjoy "absolute preference" in the payment of
labor claims, above and beyond taxes due from the Government,
and credits belonging to private persons. As I said therein, Republic
Act No. 6715 was enacted, precisely, to work more favorable terms
Corporation Law/alfred0 Page 81 of 1509
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to labor-because prior to the amendment, labor enjoyed no
preference. I am afraid that the majority has misread the clear intent
of the legislature.

PADILLA, J., dissenting:

I dissent for the same reasons stated in my dissenting opinion in DBP


vs. NLRC, et al., G.R. Nos. 82763-64,19 March 1990.

Edward A. Keller vs. COB Group Marketing (141 SCRA 86 [1986])

G.R. No. L-68097 January 16, 1986

EDWARD A. KELLER & CO., LTD., petitioner-appellant,


vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOÑEZ, TRINIDAD C.
ORDOÑEZ, MAGNO C. ORDOÑEZ, ADORACION C. ORDOÑEZ, TOMAS
C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-
appellees.

Sycip, Salazar, Feliciano & Hernandez Law Office for petitioner.

Vicente G. Gregorio for private respondents.

Roberto P. Vega for respondent Asuncion Manahan.

AQUINO, C.J.:

This case is about the liability of a marketing distributor under its sales
agreements with the owner of the products. The petitioner presented
its evidence before Judges Castro Bartolome and Benipayo.
Respondents presented their evidence before Judge Tamayo who
decided the case.

A review of the record shows that Judge Tamayo acted under a


misapprehension of facts and his findings are contradicted by the
evidence. The Appellate Court adopted the findings of Judge
Tamayo. This is a case where this Court is not bound by the factual
findings of the Appellate Court. (See Director of Lands vs. Zartiga, L-
46068-69, September 30, 1982, 117 SCRA 346, 355).

Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc.
as exclusive distributor of its household products, Brite and Nuvan in
Panay and Negros, as shown in the sales agreement dated March

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14, 1970 (32-33 RA). Under that agreement Keller sold on credit its
products to COB Group Marketing.

As security for COB Group Marketing's credit purchases up to the


amount of P35,000, one Asuncion Manahan mortgaged her land to
Keller. Manahan assumed solidarily with COB Group Marketing the
faithful performance of all the terms and conditions of the sales
agreement (Exh. D).

In July, 1970 the parties executed a second sales agreement


whereby COB Group Marketing's territory was extended to Northern
and Southern Luzon. As security for the credit purchases up to
P25,000 of COB Group Marketing for that area, Tomas C. Lorenzo, Jr.
and his father Tomas, Sr. (now deceased) executed a mortgage on
their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily
liable with COB Group Marketing for its obligations under the sales
agreement (Exh. E).

The credit purchases of COB Group Marketing, which started on


October 15, 1969, limited up to January 22, 1971. On May 8, the
board of directors of COB Group Marketing were apprised by Jose E.
Bax the firm's president and general manager, that the firm owed
Keller about P179,000. Bax was authorized to negotiate with Keller for
the settlement of his firm's liability (Exh. 1, minutes of the meeting).

On the same day, May 8, Bax and R. Oefeli of Keller signed the
conditions for the settlement of COB Group Marketing's liability,
Exhibit J, reproduced as follows:

This formalizes our conditions for the settlement of C.O.B.'s


account with Edward Keller Ltd.

1. Increase of mortgaged collaterals to the full market


value (estimated by Edak at P90,000.00).

2. Turn-over of receivables (estimated outstandings


P70,000.00 to P80,000.00).

3. Turn-over of 4 (four) trucks for outright sale to Edak, to


be credited against C.0.B.'s account.

4. Remaining 8 (eight) trucks to be assigned to Edak,


C.O.B will continue operation with these 8 trucks. They win
be returned to COB after settlement of full account.

5. C.O.B has to put up securities totalling P200,000.00.


P100,000.00 has to be liquidated within one year. The
remaining P100,000.00 has to be settled within the second
year.

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6. Edak wig agree to allow C.O.B. to buy goods to the
value of the difference between P200,000.00 and their
outstandings, provided C.O.B. is in a position to put up
securities amounting to P200,000.00.

Discussion held on May 8, 1971.

Twelve days later, or on May 20, COB Group Marketing, through Bax
executed two second chattel mortgages over its 12 trucks (already
mortgaged to Northern Motors, Inc.) as security for its obligation to
Keller amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ).
However, the second mortgages did not become effective because
the first mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the
liability COB Group Marketing to Keller.

The stockholders of COB Group Marketing, Moises P. Adao and


Tomas C. Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's
counsel, proposed to pay Keller P5,000 on November 30, 1971 and
thereafter every thirtieth day of the month for three years until COB
Group Marketing's mortgage obligation had been fully satisfied. They
also proposed to substitute the Manahan mortgage with a
mortgage on Adao's lot at 72 7th Avenue, Cubao, Quezon City (Exh.
L).

These pieces of documentary evidence are sufficient to prove the


liability of COB Group Marketing and to justify the foreclosure of the
two mortgages executed by Manahan and Lorenzo (Exh. D and E).

Section 22, Rule 130 of the Rules of Court provides that the act,
declaration or omission of a party as to a relevant fact may be given
in evidence against him "as admissions of a party".

The admissions of Bax are supported by the documentary evidence.


It is noteworthy that all the invoices, with delivery receipts, were
presented in evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-
149-a, together with a tabulation thereof, Exhibit KK, covering the
period from October 15, 1969 to January 22, 1971. Victor A. Mayo,
Keller's finance manager, submitted a statement of account
showing that COB Group Marketing owed Keller P184,509.60 as of
July 31, 1971 (Exh. JJ). That amount is reflected in the customer's
ledger, Exhibit M.

On the other hand, Bax although not an accountant, presented his


own reconciliation statements wherein he showed that COB Group
Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed
overpayment although in his answer he did not allege at all that
there was an overpayment to Keller.

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The statement of the Appellate Court that COB Group Marketing
alleged in its answer that it overpaid Keller P100,596.72 is manifestly
erroneous first, because COB Group Marketing did not file any
answer, having been declared in default, and second, because Bax
and the other stockholders, who filed an answer, did not allege any
overpayment. As already stated, even before they filed their answer,
Bax admitted that COB Group Marketing owed Keller around
P179,000 (Exh. 1).

Keller sued on September 16, 1971 COB Group Marketing, its


stockholders and the mortgagors, Manahan and Lorenzo.

COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente


were declared in default (290 Record on Appeal).

After trial, the lower court (1) dismissed the complaint; (2) ordered
Keller to pay COB Group Marketing the sum of P100,596.72 with 6%
interest a year from August 1, 1971 until the amount is fully paid: (3)
ordered Keller to pay P100,000 as moral damages to be allocated
among the stockholders of COB Group Marketing in proportion to
their unpaid capital subscriptions; (4) ordered the petitioner to pay
Manahan P20,000 as moral damages; (5) ordered the petitioner to
pay P20,000 as attomey's fees to be divided among the lawyers of
all the answering defendants and to pay the costs of the suit; (6)
declared void the mortgages executed by Manahan and Lorenzo
and the cancellation of the annotation of said mortgages on the
Torrens titles thereof, and (7) dismissed Manahan's cross-claim for
lack of merit.

The petitioner appealed. The Appellate Court affirmed said


judgment except the award of P20,000 as moral damages which it
eliminated. The petitioner appealed to this Court.

Bax and the other respondents quoted the six assignments of error
made by the petitioner in the Appellate Court, not the four
assignments of error in its brief herein. Manahan did not file any
appellee's brief.

We find that the lower courts erred in nullifying the admissions of


liability made in 1971 by Bax as president and general manager of
COB Group Marketing and in giving credence to the alleged
overpayment computed by Bax .

The lower courts not only allowed Bax to nullify his admissions as to
the liability of COB Group Marketing but they also erroneously
rendered judgment in its favor in the amount of its supposed
overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact
that COB Group Marketing was declared in default and did not file
any counterclaim for the supposed overpayment.

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The lower courts harped on Keller's alleged failure to thresh out with
representatives of COB Group Marketing their "diverse statements of
credits and payments". This contention has no factual basis. In Exhibit
J, quoted above, it is stated by Bax and Keller's Oefeli that
"discussion (was) held on May 8, 1971."

That means that there was a conference on the COB Group


Marketing's liability. Bax in that discussion did not present his
reconciliation statements to show overpayment. His Exhibits 7 and 8
were an afterthought. He presented them long after the case was
filed. The petitioner regards them as "fabricated" (p. 28, Appellant's
Brief).

Bax admitted that Keller sent his company monthly statements of


accounts (20-21 tsn, September 2, 1976) but he could not produce
any formal protest against the supposed inaccuracy of the said
statements (22). He lamely explained that he would have to dig up
his company's records for the formal protest (23-24). He did not make
any written demand for reconciliation of accounts (27-28).

As to the liability of the stockholders, it is settled that a stockholder is


personally liable for the financial obligations of a corporation to the
extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103
Phil. 757, 763; 18 CJs 1311-2).

While the evidence shows that the amount due from COB Group
Marketing is P184,509.60 as of July 31, 1971 or P186,354.70 as of
August 31, 1971 (Exh. JJ), the amount prayed for in Keller's complaint
is P182,994.60 as of July 31, 1971 (18-19 Record on Appeal). This latter
amount should be the one awarded to Keller because a judgment
entered against a party in default cannot exceed the amount
prayed for (Sec. 5, Rule 18, Rules of Court).

WHEREFORE, the decisions of the trial court and the Appellate Court
are reversed and set aside.

COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co.,
Ltd. the sum of P182,994.60 with 12% interest per annum from August
1, 1971 up to the date of payment plus P20,000 as attorney's fees.

Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay


solidarity with COB Group Marketing the sums of P35,000 and
P25,000, respectively.

The following respondents are solidarity liable with COB Group


Marketing up to the amounts of their unpaid subscription to be
applied to the company's liability herein: Jose E. Bax P36,000;
Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio
C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000; Magno C.

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Ordonez, P3,000; Adoracion C. Ordonez P3,000; Tomas C. Lorenzo,
Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.

If after ninety (90) days from notice of the finality of the judgment in
this case the judgment against COB Group Marketing has not been
satisfied fully, then the mortgages executed by Manahan and
Lorenzo should be foreclosed and the proceeds of the sales applied
to the obligation of COB Group Marketing. Said mortgage
obligations should bear six percent legal interest per annum after the
expiration of the said 90-day period. Costs against the private
respondents.

SO ORDERED.

Concepcion, Jr. (Chairman), Escolin, Cuevas and Alampay, JJ.,


concur.

Abad Santos, J., took no part.

Edward Keller & Co vs COB Group Marketing Inc., (G.R. No. L-68097)

Facts:

 Edward Keller & Co., Ltd. Appointed COB Group Marketing,


Inc. as exclusive distributor of its household products. Under the
agreement, Keller sold on credit its products to COB Group
Marketing

 Asuncion Manahan mortgaged her land to Keller as security for


COB’s credit purchases

 July 1970 – the parties executed a second sales agreement


where Tomas C Lorenzo Jr and Sr executed a mortgage on
their land as security for COB Group Marketing

 8 May– Bax, COB’s president and general manager, stated in a


BoD meeting that they owed Keller about P179,000. He was
authorized to negotiate with Keller for the settlement of the
firm’s liability. On the same day, Bax and Oefeli of Keller signed
the conditions for the settlement of COB’s liability

 Victor A. Mayo, Keller’s finance manager, submitted a


statement of account showing that COB Group Marketing
owed Keller P184,509.60 as of July 31, 1971; whereas

 Bax although not an accountant, presented his own


reconciliation statements wherein he showed that COB Group
Marketing overpaid Keller P100,596.72. He claimed
overpayment although in his answer he did not allege at all
that there was an overpayment to Keller.

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 16 September 1971 – Keller sued COB Group Marketing, its
stockholders and the mortgagors, Manahan and Lorenzo. COB
was declared in default.

 The lower court released a decision in favor of COB Group


Marketing and Keller filed an appeal.

Issue:

 Whether or not the lower court’s decision was erroneous

 Who owes who?

Ruling:

 We find that the lower courts erred in nullifying the admissions


of liability made in 1971 by Bax as president and general
manager of COB Group Marketing and in giving credence to
the alleged overpayment computed by Bax .

 The lower courts not only allowed Bax to nullify his admissions as
to the liability of COB Group Marketing but they also
erroneously rendered judgment in its favor in the amount of its
supposed overpayment in the sum of P100, 596.72, in spite of
the fact that COB Group Marketing was declared in default
and did not file any counterclaim for the supposed
overpayment.

 The decisions of the trial court and the Appellate Court are
reversed and set aside.

 COB Group marketing, Inc. is ordered to pay Edward A. Keller &


Co., Ltd. the sum of P182,994.60 with 12% interest per annum
from August 1, 1971 up to the date of payment plus P20,000 as
attorney’s fees.

 Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to


pay solidarity with COB Group Marketing the sums of P35,000
and P25,000, respectively.

 The following respondents are solidarity liable with COB Group


Marketing up to the amounts of their unpaid subscription to be
applied to the company’s liability herein: Jose E. Bax P36,000;
Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000;
Sergio C. Ordonez, P12,000; Trinidad C. Ordonez, P3,000;
Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000;
Tomas C. Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao, P6,000.

 If after ninety (90) days from notice of the finality of the


judgment in this case the judgment against COB Group
Marketing has not been satisfied fully, then the mortgages

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executed by Manahan and Lorenzo should be foreclosed and
the proceeds of the sales applied to the obligation of COB
Group Marketing. Said mortgage obligations should bear six
percent legal interest per annum after the expiration of the said
90-day period. Costs against the private respondents.

Land Bank of the Phils. vs. CA (364 SCRA 375 [2001])

G.R. No. 127181 September 4, 2001

LAND BANK OF THE PHILIPPINES, petitioner,


vs.
THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and
EMMANUEL C. OÑATE, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks to reverse and set aside the
decision1 promulgated on June 17, 1996 in CA-GR No. CV-43239 of
public respondent and its resolution2 dated November 29, 1996
denying petitioner’s motion for reconsideration.3

The facts of this case as found by the Court of Appeals and which
we find supported by the records are as follows:

On various dates in September, October, and November, 1980,


appellant Land Bank of the Philippines (LBP) extended a series
of credit accommodations to appellee ECO, using the trust
funds of the Philippine Virginia Tobacco Administration (PVTA)
in the aggregate amount of P26,109,000.00. The proceeds of
the credit accommodations were received on behalf of ECO
by appellee Oñate.

On the respective maturity dates of the loans, ECO failed to


pay the same. Oral and written demands were made, but ECO
was unable to pay. ECO claims that the company was in
financial difficulty for it was unable to collect its investments
with companies which were affected by the financial crisis
brought about by the Dewey Dee scandal.

xxx

On October 20, 1981, ECO proposed and submitted to LBP a


"Plan of Payment" whereby the former would set up a financing
company which would absorb the loan obligations. It was
proposed that LBP would participate in the scheme through
the conversion of P9,000,000.00 which was part of the total
loan, into equity.

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On March 4, 1982, LBP informed ECO of the action taken by the
former’s Trust Committee concerning the "Plan of Payment"
which reads in part, as follows:

xxx

Please be informed that the Bank’s Trust Committee has


deliberated on the plan of payment during its meetings
on November 6, 1981 and February 23, 1982. The
Committee arrived at a decision that you may proceed
with your Plan of Payment provided Land Bank shall not
participate in the undertaking in any manner whatsoever.

In view thereof, may we advise you to make necessary


revision in the proposed Plan of Payment and submit the
same to us as soon as possible. (Records, p. 428)

On May 5, 1982, ECO submitted to LBP a "Revised Plan of


Payment" deleting the latter’s participation in the proposed
financing company. The Trust Committee deliberated on the
"Revised Plan of Payment" and resolved to reject it. LBP then
sent a letter to the PVTA for the latter’s comments. The letter
stated that if LBP did not hear from PVTA within five (5) days
from the latter’s receipt of the letter, such silence would be
construed to be an approval of LBP’s intention to file suit
against ECO and its corporate officers. PVTA did not respond to
the letter.

On June 28, 1982, Landbank filed a complaint for Collection of


Sum of Money against ECO and Emmanuel C. Oñate before
the Regional Trial Court of Manila, Branch 50.

After trial on the merits, a judgment was rendered in favor of


LBP; however, appellee Oñate was absolved from personal
liability for insufficiency of evidence.

Dissatisfied, both parties filed their respective Motions for


Reconsideration. LBP claimed that there was an error in
computation in the amounts to be paid. LBP also questioned
the dismissal of the case with regard to Oñate.

On the other hand, ECO questioned its being held liable for the
amount of the loan. Upon order of the court, both parties
submitted Supplemental Motions for Reconsideration and their
respective Oppositions to each other’s Motions.

On February 3, 1993, the trial court rendered an Amended


Decision, the dispositive portion of which reads as follows:

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ACCORDINGLY, the Decision, dated December 3, 1990, is
hereby modified to read as follows:

WHEREFORE, judgment is rendered ordering defendant


Eco Management Corporation to pay plaintiff Land Bank
of the Philippines:

A. The sum of P26,109,000.00 representing the total


amount of the ten (10) loan accommodations plus 16%
interest per annum computed from the dates of their
respective maturities until fully paid, broken down as
follows:

1. the principal amount of P4,000,000.00 with interest


at 16% computed from September 18, 1981;

2. the principal amount of P5,000,000.00 with interest


at 16% computed from September 21, 1981;

3. the principal amount of P1,000,000.00 with interest


rate at 16% computed from September 28, 1981;

4. the principal amount of P1,000,000.00 with interest


at 15% computed from October 5, 1981;

5. the principal amount of P2,000,000.00 with interest


rate at of 16% computed from October 8, 1981;

6. the principal amount of P2,000,000.00 with interest


rate at of 16% from October 23, 1981;

7. the principal amount of P814,000.00 with interest


rate at of 16% computed from November 1, 1981;

8. the principal amount of P2,295,000.00 with interest


rate at of 16% computed from November 6, 1981;

9. the principal amount of P3,000,000.00 with interest


rate at of 16% computed from November 7, 1981;

10. the principal amount of P5,000,000.00 with


interest rate at 16% computed from November 9,
1981;

B. The sum of P260,000.00 as attorney’s fees; and

C. The costs of the suit.

The case as against defendant Emmanuel Oñate is


dismissed for insufficiency of evidence.

SO ORDERED. (Records, p. 608)4

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The Court of Appeals affirmed in toto the amended decision of
the trial court.5

On June 9, 1996, petitioner filed a motion for reconsideration, which


was denied in a resolution dated November 29, 1996. Hence, this
present petition, assigning the following errors allegedly committed
by the Court of Appeals:

THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT


BASED ON THE FACTS AS ESTABLISHED BY EVIDENCE, THERE EXISTS
A SUBSTANTIAL AND JUSTIFIABLE GROUND UPON WHICH THE
LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT
ECO MANAGEMENT CORPORATION MAY BE PIERCED.

THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING


LIABILITY TO RESPONDENT EMMANUEL C. OÑATE JOINTLY AND
SEVERALLY WITH RESPONDENT ECO MANAGEMENT
CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST
THEREON.

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE


RULING OF THE LOWER COURT THE SAME NOT BEING SUPPORTED
BY THE EVIDENCE AND APPLICABLE LAWS AND JURISPRUDENCE.6

The primary issues for resolution here are (1) whether or not the
corporate veil of ECO Management Corporation should be pierced;
and (2) whether or not Emmanuel C. Oñate should be held jointly
and severally liable with ECO Management Corporation for the
loans incurred from Land Bank.

Petitioner contends that the personalities of Emmanuel Oñate and of


ECO Management Corporation should be treated as one, for the
particular purpose of holding respondent Oñate liable for the loans
incurred by corporate respondent ECO from Land Bank. According
to petitioner, the said corporation was formed ostensibly to allow
Oñate to acquire loans from Land Bank which he used for his
personal advantage.

Petitioner submits the following arguments to support its stand: (1)


Respondent Oñate owns the majority of the interest holdings in
respondent corporation, specifically during the crucial time when
appellees applied for and obtained the loan from LANDBANK,
sometime in September to November, 1980. (2) The acronym ECO
stands for the initials of Emmanuel C. Oñate, which is the logical,

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sensible and concrete explanation for the name ECO, in the
absence of evidence to the contrary. (3) Respondent Oñate has
always referred to himself as the debtor, not merely as an officer or a
representative of respondent corporation. (4) Respondent Oñate
personally paid P1 Million taken from trust accounts in his name. (5)
Respondent Oñate made a personal offering to pay his personal
obligation. (6) Respondent Oñate controlled respondent corporation
by simultaneously holding two (2) corporate positions, viz., as
Chairman and as treasurer, beginning from the time of respondent
corporation’s incorporation and continuously thereafter without
benefit of election. (7) Respondent corporation had not held any
meeting of the stockholders or of the Board of Directors, as shown by
the fact that no proceeding of such corporate activities was filed
with or borne by the record of the Securities and Exchange
Commission (SEC). The only corporate records respondent
corporation filed with the SEC were the following: Articles of
Incorporation, Treasurer’s Affidavit, Undertaking to Change
Corporate Name, Statement of Assets and Liabilities.7

Private respondents, in turn, contend that Oñate’s only participation


in the transaction between petitioner and respondent ECO was his
execution of the loan agreements and promissory notes as
Chairman of the corporation’s Board of Directors. There was nothing
in the loan agreement nor in the promissory notes which would
indicate that Oñate was binding himself jointly and severally with
ECO. Respondents likewise deny that ECO stands for Emmanuel C.
Oñate. Respondents also note that Oñate is no longer a majority
stockholder of ECO and that the payment by a third person of the
debt of another is allowed under the Civil Code. They also alleged
that there was no fraud and/or bad faith in the transactions
between them and Land Bank. Hence, private respondents
conclude, there is no legal ground to pierce the veil of respondent
corporation’s personality.8

At the outset, we find the matters raised by petitioner in his


argumentation are mainly questions of fact which are not proper in
a petition of this nature.9 Petitioner is basically questioning the
evaluation made by the Court of Appeals of the evidence
submitted at the trial. The Court of Appeals had found that
petitioner’s evidence was not sufficient to justify the piercing of
ECO’s corporate personality.10 Petitioner contended otherwise. It is
basic that where what is being questioned is the sufficiency of
evidence, it is a question of fact.11 Nevertheless, even if we regard
these matters as tendering an issue of law, we still find no reason to
reverse the findings of the Court of Appeals.

A corporation, upon coming into existence, is invested by law with a


personality separate and distinct from those persons composing it as

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well as from any other legal entity to which it may be related.12 By
this attribute, a stockholder may not, generally, be made to answer
for acts or liabilities of the said corporation, and vice versa.13 This
separate and distinct personality is, however, merely a fiction
created by law for convenience and to promote the ends of
justice.14 For this reason, it may not be used or invoked for ends
subversive to the policy and purpose behind its creation15 or which
could not have been intended by law to which it owes its being.16
This is particularly true when the fiction is used to defeat public
convenience, justify wrong, protect fraud, defend crime,17 confuse
legitimate legal or judicial issues,18 perpetrate deception or
otherwise circumvent the law.19 This is likewise true where the
corporate entity is being used as an alter ego, adjunct, or business
conduit for the sole benefit of the stockholders or of another
corporate entity.20 In all these cases, the notion of corporate entity
will be pierced or disregarded with reference to the particular
transaction involved.21

The burden is on petitioner to prove that the corporation and its


stockholders are, in fact, using the personality of the corporation as a
means to perpetrate fraud and/or escape a liability and
responsibility demanded by law. In order to disregard the separate
juridical personality of a corporation, the wrongdoing must be
clearly and convincingly established.22 In the absence of any malice
or bad faith, a stockholder or an officer of a corporation cannot be
made personally liable for corporate liabilities.23

The mere fact that Oñate owned the majority of the shares of ECO is
not a ground to conclude that Oñate and ECO is one and the
same. Mere ownership by a single stockholder of all or nearly all of
the capital stock of a corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate personalities.24 Neither
is the fact that the name "ECO" represents the first three letters of
Oñate’s name sufficient reason to pierce the veil. Even if it did, it
does not mean that the said corporation is merely a dummy of
Oñate. A corporation may assume any name provided it is lawful.
There is nothing illegal in a corporation acquiring the name or as in
this case, the initials of one of its shareholders.

That respondent corporation in this case was being used as a mere


alter ego of Oñate to obtain the loans had not been shown. Bad
faith or fraud on the part of ECO and Oñate was not also shown. As
the Court of Appeals observed, if shareholders of ECO meant to
defraud petitioner, then they could have just easily absconded
instead of going out of their way to propose "Plans of Payment." 25
Likewise, Oñate volunteered to pay a portion of the corporation’s
debt.26 This offer demonstrated good faith on his part to ease the
debt of the corporation of which he was a part. It is understandable

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that a shareholder would want to help his corporation and in the
process, assure that his stakes in the said corporation are secured. In
this case, it was established that the P1 Million did not come solely
from Oñate. It was taken from a trust account which was owned by
Oñate and other investors.27 It was likewise proved that the P1 Million
was a loan granted by Oñate and his co-depositors to alleviate the
plight of ECO.28 This circumstance should not be construed as an
admission that he was really the debtor and not ECO.

In sum, we agree with the Court of Appeals’ conclusion that the


evidence presented by the petitioner does not suffice to hold
respondent Oñate personally liable for the debt of co-respondent
ECO. No reversible error could be attributed to respondent court’s
decision and resolution which petitioner assails.

WHEREFORE, the petition is DENIED for lack of merit. The decision and
resolution of the Court of Appeals in CA-G.R. CV No. 43239 are
AFFIRMED. Costs against petitioner.

SO ORDERED.

Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.

In 1980, ECO Management Corporation (ECO) obtained loans


amounting to about P26 million from Land Bank. ECO defaulted in its
payment but in 1981, ECO submitted a Payment Plan with the hope
of restructuring its loan. The plan was rejected and Land Bank sued
ECO. It impleaded Emmanuel C. Oñate, the majority stockholder of
ECO who is serving as the Chairman and treasurer of ECO.

The trial court ruled in favor of Land Bank but Oñate was absolved
from liabilities. The Court of Appeals affirmed the decision of the trial
court.

Land Bank appealed as it wanted Oñate to be personally liable on


the following grounds (among others): a) ECO stands for Emmanuel
C. Oñate, b) Oñate is the majority stockholder, c) ECO was formed
ostensibly to allow Oñate to acquire loans from Land Bank which he
used for his personal advantage, d) Oñate holds two positions in the
corporation, and e) ECO never held any board meeting which just
shows only Oñate was in control of the corporation.

ISSUE: Whether or not Oñate should be held personally.

HELD: No. Land Bank was not able to produce sufficient evidence to
prove its claim. A corporation, upon coming into existence, is
invested by law with a personality separate and distinct from those
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persons composing it as well as from any other legal entity to which it
may be related. The corporate fiction is only disregarded when the
fiction is used to defeat public convenience, justify wrong, protect
fraud, defend crime, confuse legitimate legal or judicial issues,
perpetrate deception or otherwise circumvent the law. This is likewise
true where the corporate entity is being used as an alter ego,
adjunct, or business conduit for the sole benefit of the stockholders
or of another corporate entity. None of the foregoing was proved by
Land Bank.

The mere fact that Oñate owned the majority of the shares of ECO is
not a ground to conclude that Oñate and ECO is one and the
same. Mere ownership by a single stockholder of all or nearly all of
the capital stock of a corporation is not by itself sufficient reason for
disregarding the fiction of separate corporate personalities.

Anent the issue of the corporate name, the fact that Oñate’s initials
coincide with the corporate name ECO is not sufficient to disregard
the corporate fiction. Even if ECO does stand for “Emmanuel C.
Oñate”, it does not mean that the said corporation is merely a
dummy of Oñate. A corporation may assume any name provided it
is lawful. There is nothing illegal in a corporation acquiring the name
or as in this case, the initials of one of its shareholders.

General Credit Corp. vs. Alsons Dev. & Investment (513 SCRA 225
[2007])

G.R. No. 154975 January 29, 2007

GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE


CORPORATION), Petitioner,
vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC
EQUITY CORPORATION, Respondents.

DECISION

GARCIA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of


Court, petitioner General Credit Corporation, now known as Penta
Capital Finance Corporation, seeks to annul and set aside the
Decision1 and Resolution2 dated April 11, 2002 and August 20, 2002,
respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 31801,
affirming the November 8, 1990 decision of the Regional Trial Court
(RTC) of Makati City in its Civil Case No. 12707, an action for a sum of

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money thereat instituted by the herein respondent Alsons
Development and Investment Corporation against the petitioner
and respondent CCC Equity Corporation.

The facts:

Shortly after its incorporation in 1957 as a finance and investment


company, petitioner General Credit Corporation (GCC, for short),
then known as Commercial Credit Corporation (CCC), established
CCC franchise companies in different urban centers of the country.3
In furtherance of its business, GCC had, as early as 1974, applied for
and was able to secure license from the then Central Bank (CB) of
the Philippines and the Securities and Exchange Commission (SEC) to
engage also in quasi-banking activities.4 On the other hand,
respondent CCC Equity Corporation (EQUITY, for brevity) was
organized in November 1994 by GCC for the purpose of, among
other things, taking over the operations and management of the
various franchise companies. At a time material hereto, respondent
Alsons Development and Investment Corporation (ALSONS,
hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all
surnamed Alcantara, and Alfredo de Borja (hereinafter the
Alcantara family, for convenience), each owned, just like GCC,
shares in the aforesaid GCC franchise companies, e.g., CCC Davao
and CCC Cebu.

In December 1980, ALSONS and the Alcantara family, for a


consideration of Two Million (P2,000,000.00) Pesos, sold their
shareholdings – a total of 101,953 shares, more or less – in the CCC
franchise companies to EQUITY.[5] On January 2, 1981, EQUITY issued
ALSONS et al., a "bearer" promissory note for P2,000,000.00 with a
one-year maturity date, at 18% interest per annum, with provisions for
damages and litigation costs in case of default.6

Some four years later, the Alcantara family assigned its rights and
interests over the bearer note to ALSONS which thenceforth became
the holder thereof.7 But even before the execution of the assignment
deal aforestated, letters of demand for interest payment were
already sent to EQUITY, through its President, Wilfredo Labayen, who
pleaded inability to pay the stipulated interest, EQUITY no longer
then having assets or property to settle its obligation nor being
extended financial support by GCC.

What happened next, as narrated in the assailed Decision of the CA,


may be summarized, as follows:

1. On January 14, 1986, before the RTC of Makati, ALSONS,


having failed to collect on the bearer note aforementioned,
filed a complaint for a sum of money8 against EQUITY and
GCC. The case, docketed as Civil Case No. 12707, was

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eventually raffled to Branch 58 of the court. As stated in par. 4
of the complaint, GCC is being impleaded as party-defendant
for any judgment ALSONS might secure against EQUITY and,
under the doctrine of piercing the veil of corporate fiction,
against GCC, EQUITY having been organized as a tool and
mere conduit of GCC.

2. Answering with a cross-claim against GCC, EQUITY stated by


way of special and affirmative defenses that it (EQUITY):

a) was purposely organized by GCC for the latter to avoid


CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it
acted merely as intermediary or bridge for loan
transactions and other dealings of GCC to its franchises
and the investing public; and

b) is solely dependent upon GCC for its funding


requirements, to settle, among others, equity purchases
made by investors on the franchises; hence, GCC is solely
and directly liable to ALSONS, the former having failed to
provide …EQUITY the necessary funds to meet its
obligations to ALSONS.

3. GCC filed its ANSWER to Cross-claim, stressing that it is a


distinct and separate entity from EQUITY and alleging, in
essence that the business relationships with each other were
always at arm’s length. And following the denial of its motion to
dismiss ALSONS’ complaint, on the ground of lack of jurisdiction
and want of cause of action, GCC filed its Answer thereto and
set up affirmative defenses with counterclaim for exemplary
damages and attorney’s fees.

Issues having been joined, trial ensued. Presented by ALSONS, but


testifying as adverse witnesses, were CB and GCC officers. Among
other things, ALSONS’ evidence, which included the EQUITY-issued
"bearer" promissory note marked as Exhibit "K" and over sixty (60)
other marked and subsequently admitted documents,9 were to the
effect that five (5) incorporators, each contributing P100,000.00 as
the initial paid up capital of the company, organized EQUITY to
manage, as it did manage, various GCC franchises through
management contracts. Before EQUITY’s incorporation, however,
GCC was already into the financing business as it was in fact
managing and operating various CCC franchises. Presented in
evidence, too, was the September 29, 1982 letter-reply of one G.
Villanueva, then GCC President, to EQUITY President Wilfredo
Labayen, bearing on the sale of EQUITY shares to third parties, part of
the proceeds of which the Alcantaras wanted applied to liquidate
the promissory note in question. In said letter, Mr. Villanueva

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explained that the GCC Board denied the Alcantaras’ request to be
paid out of such proceeds, but nonetheless authorized EQUITY to
pay them interest out of EQUITY’s operation income, in preference
over what was due GCC.10

Albeit EQUITY presented its president, it opted to adopt the testimony


of some of ALSONS’ witnesses, inclusive of the documentary exhibits
testified to by each of them, as its evidence.

For its part, GCC called only Wilfredo Labayen to testify. It stuck to its
underlying defense of separateness and presented documentary
evidence detailing the organizational structures of both GCC and
EQUITY. And in a bid to negate the notion that it was conducting its
business illegally, GCC presented CB and SEC-issued licenses
authoring it to engage in financing and quasi-banking activities. It
also adduced evidence to prove that it was never a party to any of
the actionable documents ALSONS and its predecessors-in-interest
had in their possession and that the November 27, 1985 deed of
assignment of rights over the promissory note was unenforceable.

Eventually, the trial court, on its finding that EQUITY was but an
instrumentality or adjunct of GCC and considering the legal
consequences and implications of such relationship, came out with
its decision on November 8, 1990, rendering judgment for ALSONS, to
wit:

WHEREFORE, the foregoing premises considered, judgment is hereby


rendered in favor of plaintiff [ALSONS] and against the defendants
[EQUITY and GCC] who are hereby ordered, jointly and severally, to
pay plaintiff:

1. the principal sum of Two Million Pesos (P2,000,000.00)


together with the interest due thereon at the rate of eighteen
percent (18%) annually computed from Jan. 2, 1981 until the
obligation is fully paid;

2. liquidated damages due thereon equivalent to three


percent (3%) monthly computed from January 2, 1982 until the
obligation is fully paid;

3. attorney’s fees in an amount equivalent to twenty four


percent (24%) of the total obligation due; and

4. the costs of suit.

IT IS SO ORDERED. (Words in brackets added.)

Therefrom, GCC went on appeal to the CA where its appellate


recourse was docketed as CA-G.R. CV No. 31801, ascribing to the
trial court the commission of the following errors:

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1. In holding that there is a "Parent-Subsidiary" corporate
relationship between EQUITY and GCC;

2. In not holding that EQUITY and GCC are distinct and


separate corporate entities;

3. In applying the doctrine of "Piercing the Veil of Corporate


Fiction" in the case at bar; and

4. In not holding ALSONS in estoppel to question the corporate


personality of EQUITY.

On April 11, 2002, the appellate court rendered the herein assailed
Decision,11 affirming that of the trial court, thus:

WHEREFORE, premises considered, the Decision of the Regional Trial


Court, Branch 58, Makati in Civil Case No. 12707 is hereby AFFIRMED.

SO ORDERED.

In time, GCC moved for reconsideration followed by a motion for


oral argument, but both motions were denied by the CA in its
equally assailed Resolution of August 20, 2002.12

Hence, GCC’s present recourse anchored on the following


arguments, issues and/or submissions:

1. The motion for oral argument with motion for reconsideration


and its supplement were perfunctorily denied by the CA
without justifiable basis;

2. There is absolutely no basis for piercing the veil of corporate


fiction;

3. Respondent Alsons is not a real party-in-interest as the


promissory note payable to bearer subject of the collection suit
is but a simulated document and/or refers to another party.
Moreover, the subject promissory note is not admissible in
evidence because it has not been duly authenticated and it is
an altered document;

4. The fact of full payment stated in the ten (10) deeds of sale
of the shares of stock is conclusive on the sellers, and by the
patrol evidence rule, the alleged fact of its non-payment
cannot be introduced in evidenced; and

5. The counter-claim filed by GCC against Alsons should be


granted in the interest of justice.

The petition and the arguments and/or issues holding it together are
without merit. The desired reversal of the assailed decision and
resolution of the appellate court is accordingly DENIED.
Corporation Law/alfred0 Page 100 of 1509
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Instead of raising distinctly formulated questions of law, as is
expected of one seeking a review under Rule 45 of the Rules of
Court of a final CA judgment,13 petitioner GCC starts off by voicing
disappointment over the "perfunctory" denial by the CA of its twin
motions for reconsideration and oral argument. Petitioner, to be sure,
cannot plausibly expect a reversal action premised on the cursory
way its motions were denied, if such indeed were the case. Such
manner of denial, while perhaps far from ideal, is not even a
recognized ground for appeal by certiorari, unless a denial of due
process ensues, which is not the case here. And lest it be overlooked,
the CA prefaced its assailed denial resolution with the clause:
"[F]inding no reversible error committed to warrant the modification
and/or reversal of the April 11, 2002 Decision," suggesting that the
appellate court gave the petitioner’s motion for reconsideration the
attention it deserved. At the very least, the petitioner was duly
apprised of the reasons why reconsideration could not be favorably
considered. An extended resolution was not really necessary to
dispose of the motion for reconsideration in question.

Petitioner’s lament about being deprived of procedural due process


owing to the denial of its motion for oral argument is simply specious.
Under the CA Internal Rules, the appellate court may tap any of the
three (3) alternatives therein provided to aid the court in resolving
appealed cases before it. It may rely on available records alone,
require the submission of memoranda or set the case for oral
argument. The option the Internal Rules thus gives the CA necessarily
suggests that the appellate court may, at its sound discretion,
dispense with a tedious oral argument exercise. Rule VI, Section 6 of
the 2002 Internal Rules of the CA, provides:

SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for review,


after the receipt of the respondent’s comment on the petition, …
the Court [of Appeals] may dismiss the petition if it finds the same to
be patently without merit …, otherwise, it shall give due course to it.

xxx xxx xxx

If the petition is given due course, the Court may consider the case
submitted for decision or require the parties to submit their
memorandum or set the case for oral argument. xxx. After the oral
argument or upon submission of the memoranda … the case shall
be deemed submitted for decision.

In the case at bench, records reveal that the appellate court, in line
with the prescription of its own rules, required the parties to just
submit, as they did, their respective memoranda to properly
ventilate their separate causes. Under this scenario, the petitioner
cannot be validly heard, having been deprived of due process.

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Just like the first, the last three (3) arguments set forth in the petition
will not carry the day for the petitioner. In relation therewith, the
Court notes that these arguments and the issues behind them were
not raised before the trial court. This appellate maneuver cannot be
allowed. For, well-settled is the rule that issues or grounds not raised
below cannot be resolved on review in higher courts.14 Springing
surprises on the opposing party is antithetical to the sporting idea of
fair play, justice and due process; hence, the proscription against a
party shifting from one theory at the trial court to a new and different
theory in the appellate level. On the same rationale, points of law,
theories, issues not brought to the attention of the lower court or, in
fine, not interposed during the trial cannot be raised for the first time
on appeal.15

There are, to be sure, exceptions to the rule respecting what may be


raised for the first time on appeal. Lack of jurisdiction over when the
issues raised present a matter of public policy16 comes immediately
to mind. None of the well-recognized exceptions obtain in this case,
however.

Lest it be overlooked vis-à-vis the same last three arguments thus


pressed, both the trial court and the CA, based on the evidence
adduced, adjudged the petitioner and respondent EQUITY jointly
and severally liable to pay what respondent ALSONS is entitled to
under the "bearer" promissory note. The judgment argues against the
notion of the note being simulated or altered or that respondent
ALSONS has no standing to sue on the note, not being the payee of
the "bearer" note. For, the declaration of liability not only
presupposes the duly established authenticity and due execution of
the promissory note over which ALSONS, as the holder in due course
thereof, has interest, but also the untenability of the petitioner’s
counterclaim for attorney’s fees and exemplary damages against
ALSONS. At bottom, the petitioner predicated such counter-claim on
the postulate that respondent ALSONS had no cause of action, the
supposed promissory note being, according to the petitioner, either
a simulated or an altered document.

In net effect, the definitive conclusion of the appellate court –


affirmatory of that of the trial court – was that the bearer promissory
note (Exh. "K") was a genuine and authentic instrument payable to
the holder thereof. This factual determination, as a matter of long
and sound appellate practice, deserves great weight and shall not
be disturbed on appeal, save for the most compelling reasons,17
such as when that determination is clearly without evidentiary
support or when grave abuse of discretion has been committed.18
This is as it should be since the Court, in petitions for review of CA
decisions under Rule 45 of the Rules of Court, usually limits its inquiry
only to questions of law. Stated otherwise, it is not the function of the

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Court to analyze and weigh all over again the evidence or premises
supportive of the factual holdings of lower courts.19

As nothing in the record indicates any of the exceptions adverted to


above, the factual conclusion of the CA that the P2 Million
promissory note in question was authentic and was issued at the first
instance to respondent ALSONS and the Alcantara family for the
amount stated on its face, must be affirmed. It should be stressed in
this regard that even the issuing entity, i.e., respondent EQUITY, never
challenged the genuineness and due execution of the note.

This brings us to the remaining but core issue tendered in this case
and aptly raised by the petitioner, to wit: whether there is absolutely
no basis for piercing GCC’s veil of corporate identity.

A corporation is an artificial being vested by law with a personality


distinct and separate from those of the persons composing it 20 as
well as from that of any other entity to which it may be related.21 The
first consequence of the doctrine of legal entity of the separate
personality of the corporation is that a corporation may not be
made to answer for acts and liabilities of its stockholders or those of
legal entities to which it may be connected or vice versa.22

The notion of separate personality, however, may be disregarded


under the doctrine – "piercing the veil of corporate fiction" – as in
fact the court will often look at the corporation as a mere collection
of individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the
corporation unifying the group. Another formulation of this doctrine is
that when two (2) business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or one and the same.23

Whether the separate personality of the corporation should be


pierced hinges on obtaining facts, appropriately pleaded or proved.
However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice.24
After all, the concept of corporate entity was not meant to promote
unfair objectives.

Authorities are agreed on at least three (3) basic areas where


piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related, is
allowed.25 These are: 1) defeat of public convenience,26 as when the
corporate fiction is used as vehicle for the evasion of an existing
obligation;27 2) fraud cases or when the corporate entity is used to

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justify a wrong, protect fraud, or defend a crime;28 or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.29

The CA found valid grounds to pierce the corporate veil of petitioner


GCC, there being justifiable basis for such action. When the
appellate court spoke of a justifying factor, the reference was to
what the trial court said in its decision, namely: the existence of
"certain circumstances [which], taken together, gave rise to the
ineluctable conclusion that … [respondent] EQUITY is but an
instrumentality or adjunct of [petitioner] GCC."

The Court agrees with the disposition of the appellate court on the
application of the piercing doctrine to the transaction subject of this
case. Per the Court’s count, the trial court enumerated no less than
20 documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit of
petitioner GCC. This relation, in turn, provides a justifying ground to
pierce petitioner’s corporate existence as to ALSONS’ claim in
question. Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC
and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle
the funds of the latter; the virtual domination if not control wielded
by the petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY by
the petitioner to circumvent CB rules. For a perspective, the following
are some relevant excerpts from the trial court’s decision setting forth
in some detail the tipping circumstances adverted to therein:

It must be noted that as characterized by their business relationship,


[respondent] EQUITY and [petitioner] GCC had common directors
and/or officers as well as stockholders. This is revealed by the
proceedings recorded in SEC Case No. 25-81 entitled "Avelina
Ramoso, et al., vs. GCC, et al., where it was established, thru the
testimony of EQUITY’s own President … that more than 90% of the
stockholders of … EQUITY were also stockholders of … GCC …..
Disclosed likewise is the fact that when [EQUITY’s President] Labayen
sold the shareholdings of EQUITY in said franchise companies,
practically the entire proceeds thereof were surrendered to GCC,
and not received by EQUITY (EXHIBIT "RR") xxx.

It was likewise shown by a preponderance of evidence that not only


had …GCC financed … EQUITY and that the latter was heavily
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indebted to the former but EQUITY was, in fact, a wholly owned
subsidiary of …GCC. Thus, as affirmed by EQUITY’s President, … the
funds invested by EQUITY in the CCC franchise companies actually
came from CCC Phils. or GCC (Exhibit "Y-5")…. that, as disclosed by
the Auditor’s report for 1982, past due receivables alone of GCC
exceeded P101,000,000.00 mostly to GCC affiliates especially CCC
EQUITY. …; that [CB’s] Report of Examination dated July 14, 1977
shows that … EQUITY which has a paid-up capital of only P500,000.00
was the biggest borrower of GCC with a total loan of P6.70 Million ….

xxx xxx xxx

It has likewise been amply substantiated by [respondent ALSONS’]


evidence that not only did … GCC cause the incorporation of …
EQUITY, but, the latter had grossly inadequate capital for the pursuit
of its line of business to the extent that its business affairs were
considered as GCC’s own business endeavors. xxx.

xxx xxx xxx

ALSONS has likewise shown …that the bonuses of the officers and
directors of … EQUITY was based on its total financial performance
together with all its affiliates… both firms were sharing one and the
same office when both were still operational … and that the
directors and executives of … EQUITY never acted independently …
but took their orders from … GCC….

The evidence has also indubitably established that … EQUITY was


organized by … GCC for the purpose of circumventing [CB] rules
and regulations and the Anti-Usury Law. Thus, as disclosed by the
Advance Report … on the result of Central Bank’s Operations
Examination conducted on … GCC as of March 31, 1977 (EXHIBITS
"FFF" etc.), the latter violated [CB] rules and regulations by : (a) using
as a conduit its non-quasi bank affiliates …. (b) issuing without
recourse facilities to enable GCC to extend credit to affiliates like …
EQUITY which go beyond the single borrower’s limit without the need
of showing outstanding balance in the book of accounts. (Emphasis
over words in brackets added.)

It bears to stress at this point that the facts and the inferences drawn
therefrom, upon which the two (2) courts below applied the piercing
doctrine, stand, for the most part, undisputed. Among these is, to
reiterate, the matter of EQUITY having been incorporated to serve,
as it did serve, as an instrumentality or adjunct of GCC. With the view
we take of this case, GCC did not adduce any evidence, let alone
rebut the testimonies and documents presented by ALSONS, to
establish the prevailing circumstances adverted to that provided the
justifying occasion to pierce the veil of corporate fiction between
GCC and EQUITY. We quote the trial court:

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Verily, indeed, as the relationships binding herein [respondent EQUITY
and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily and
indubitably shown that the said relationships had been used to
perform certain functions not characterized with legitimacy, this
Court … feels amply justified to "pierce the veil of corporate entity"
and disregard the separate existence of the percent (sic) and
subsidiary the latter having been so controlled by the parent that its
separate identity is hardly discernible thus becoming a mere
instrumentality or alter ego of the former. Consequently, as the
parent corporation, [petitioner] GCC maybe (sic) held responsible
for the acts and contracts of its subsidiary – [respondent] EQUITY -
most especially if the latter (who had anyhow acknowledged its
liability to ALSONS) maybe (sic) without sufficient property with which
to settle its obligations. For, after all, GCC was the entity which
initiated and benefited immensely from the fraudulent scheme
perpetrated in violation of the law. (Words in parenthesis in the
original; emphasis and bracketed words added).

Given the foregoing considerations, it behooves the petitioner, as a


matter of law and equity, to assume the legitimate financial
obligation of a cash-strapped subsidiary corporation which it virtually
controlled to such a degree that the latter became its instrument or
agent. The facts, as found by the courts a quo, and the applicable
law call for this kind of disposition. Or else, the Court would be
allowing the wrong use of the fiction of corporate veil.

WHEREFORE, the instant petition is DENIED and the appealed


Decision and Resolution of the Court of Appeals are accordingly
AFFIRMED.

Costs against the petitioner.

SO ORDERED.

CANCIO C. GARCIA
Associate Justice

WE CONCUR:

REYNATO S. PUNO
Chief Justice
Chairperson

ANGELINA SANDOVAL-GUTIERREZ RENATO C. CORONA


Associate Justice Asscociate Justice

ADOLFO S. AZCUNA
Associate Justice

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CERTIFICATION

Pursuant to Article VIII, Section 13 of the Constitution, it is hereby


certified that the conclusions in the above decision had been
reached in consultation before the case was assigned to the writer
of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice

GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE


CORPORATION), vs. ALSONS DEVELOPMENT and INVESTMENT
CORPORATION and CCC EQUITY CORPORATION

G.R. No. 154975 January 29, 2007

Facts:

Petitioner General Credit Corporation (GCC), then known as


Commercial Credit Corporation (CCC), established CCC franchise
companies in different urban centers of the country. In furtherance
of its business, GCC was able to secure license from Central Bank
(CB) and SEC to engage also in quasi-banking activities. On the
other hand, respondent CCC Equity Corporation (EQUITY) was
organized in by GCC for the purpose of, among other things, taking
over the operations and management of the various franchise
companies. At a time material hereto, respondent Alsons
Development and Investment Corporation (ALSONS) and the
Alcantara family, each owned, just like GCC, shares in the aforesaid
GCC franchise companies, e.g., CCC Davao and CCC Cebu.

ALSONS and the Alcantara family, for a consideration of P2M, sold


their shareholdings (101,953 shares), in the CCC franchise companies
to EQUITY. EQUITY issued ALSONS et al., a "bearer" promissory note
for P2M with a one-year maturity date.

4 years later, the Alcantara family assigned its rights and interests
over the bearer note to ALSONS which became the holder thereof.

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But even before the execution of the assignment deal aforestated,
letters of demand for interest payment were already sent to EQUITY.
EQUITY no longer then having assets or property to settle its
obligation nor being extended financial support by GCC, pleaded
inability to pay.

ALSONS, having failed to collect on the bearer note


aforementioned, filed a complaint for a sum of money 8 against
EQUITY and GCC. GCC is being impleaded as party-defendant for
any judgment ALSONS might secure against EQUITY and, under the
doctrine of piercing the veil of corporate fiction, against GCC,
EQUITY having been organized as a tool and mere conduit of GCC.

According to EQUITY (cross-claim against GCC): it acted merely as


intermediary or bridge for loan transactions and other dealings of
GCC to its franchises and the investing public; and is solely
dependent upon GCC for its funding requirements. Hence, GCC is
solely and directly liable to ALSONS, the former having failed to
provide …EQUITY the necessary funds to meet its obligations to
ALSONS.

GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and


separate entity from EQUITY.

RTC, finding that EQUITY was but an instrumentality or adjunct of


GCC and considering the legal consequences and implications of
such relationship, rendered judgment for Alson. CA affirmed.

Issue: WON the doctrine of "Piercing the Veil of Corporate Fiction"


should be applied in the case at bar.

Held:

YES. The notion of separate personality, however, may be


disregarded under the doctrine – "piercing the veil of corporate
fiction" – as in fact the court will often look at the corporation as a
mere collection of individuals or an aggregation of persons
undertaking business as a group, disregarding the separate juridical
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personality of the corporation unifying the group. Another
formulation of this doctrine is that when two (2) business enterprises
are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third
parties, disregard the legal fiction that two corporations are distinct
entities and treat them as identical or one and the same.

Authorities are agreed on at least three (3) basic areas where


piercing the veil, with which the law covers and isolates the
corporation from any other legal entity to which it may be related, is
allowed. These are: 1) defeat of public convenience, as when the
corporate fiction is used as vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it is a mere alter
ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of
another corporation.

The Court agrees with the disposition of the CA on the application of


the piercing doctrine to the transaction subject of this case. Per the
Court’s count, the trial court enumerated no less than 20
documented circumstances and transactions, which, taken as a
package, indeed strongly supported the conclusion that respondent
EQUITY was but an adjunct, an instrumentality or business conduit of
petitioner GCC. This relation, in turn, provides a justifying ground to
pierce petitioner’s corporate existence as to ALSONS’ claim in
question. Foremost of what the trial court referred to as "certain
circumstances" are the commonality of directors, officers and
stockholders and even sharing of office between petitioner GCC
and respondent EQUITY; certain financing and management
arrangements between the two, allowing the petitioner to handle
the funds of the latter; the virtual domination if not control wielded
by the petitioner over the finances, business policies and practices of
respondent EQUITY; and the establishment of respondent EQUITY by
the petitioner to circumvent CB rules.

Verily, indeed, as the relationships binding herein [respondent EQUITY


and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable
applicability in the case at bar; and, it having been satisfactorily and
indubitably shown that the said relationships had been used to

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perform certain functions not characterized with legitimacy, this
Court … feels amply justified to "pierce the veil of corporate entity"
and disregard the separate existence of the parent and subsidiary
the latter having been so controlled by the parent that its separate
identity is hardly discernible thus becoming a mere instrumentality or
alter ego of the former.

Lipat vs. Pacific Banking Corp. (402 SCRA 339 [2003])

G.R. No. 142435 April 30, 2003

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners,


vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-
OFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D.
TRINIDAD, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision1
dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No.
41536 which dismissed herein petitioners' appeal from the Decision2
dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon
City, Branch 84, in Civil Case No. Q-89-4152. The trial court had
dismissed petitioners' complaint for annulment of real estate
mortgage and the extra-judicial foreclosure thereof. Likewise
brought for our review is the Resolution3 dated February 23, 2000 of
the Court of Appeals which denied petitioners' motion for
reconsideration.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat,


owned "Bela's Export Trading" (BET), a single proprietorship with
principal office at No. 814 Aurora Boulevard, Cubao, Quezon City.
BET was engaged in the manufacture of garments for domestic and
foreign consumption. The Lipats also owned the "Mystical Fashions" in
the United States, which sells goods imported from the Philippines
through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to
manage BET in the Philippines while she was managing "Mystical
Fashions" in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat


executed on December 14, 1978, a special power of attorney
appointing Teresita Lipat as her attorney-in-fact to obtain loans and
other credit accommodations from respondent Pacific Banking
Corporation (Pacific Bank). She likewise authorized Teresita to
execute mortgage contracts on properties owned or co-owned by

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her as security for the obligations to be extended by Pacific Bank
including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of


attorney, was able to secure for and in behalf of her mother, Mrs.
Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to
buy fabrics to be manufactured by BET and exported to "Mystical
Fashions" in the United States. As security therefor, the Lipat spouses,
as represented by Teresita, executed a Real Estate Mortgage over
their property located at No. 814 Aurora Blvd., Cubao, Quezon City.
Said property was likewise made to secure "other additional or new
loans, discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may
subsequently obtain from the Mortgagee as well as any renewal or
extension by the Mortgagor and/or Debtor of the whole or part of
said original, additional or new loans, discounting lines, overdrafts
and other credit accommodations, including interest and expenses
or other obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly, principal or secondary, as
appears in the accounts, books and records of the Mortgagee." 4

On September 5, 1979, BET was incorporated into a family


corporation named Bela's Export Corporation (BEC) in order to
facilitate the management of the business. BEC was engaged in the
business of manufacturing and exportation of all kinds of garments of
whatever kind and description5 and utilized the same machineries
and equipment previously used by BET. Its incorporators and
directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20
shares, and other close relatives and friends of the Lipats.6 Estelita
Lipat was named president of BEC, while Teresita became the vice-
president and general manager.

Eventually, the loan was later restructured in the name of BEC and
subsequent loans were obtained by BEC with the corresponding
promissory notes duly executed by Teresita on behalf of the
corporation. A letter of credit was also opened by Pacific Bank in
favor of A. O. Knitting Manufacturing Co., Inc., upon the request of
BEC after BEC executed the corresponding trust receipt therefor.
Export bills were also executed in favor of Pacific Bank for additional
finances. These transactions were all secured by the real estate
mortgage over the Lipats' property.

The promissory notes, export bills, and trust receipt eventually


became due and demandable. Unfortunately, BEC defaulted in its
payments. After receipt of Pacific Bank's demand letters, Estelita
Lipat went to the office of the bank's liquidator and asked for
additional time to enable her to personally settle BEC's obligations.

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The bank acceded to her request but Estelita failed to fulfill her
promise.

Consequently, the real estate mortgage was foreclosed and after


compliance with the requirements of the law the mortgaged
property was sold at public auction. On January 31, 1989, a
certificate of sale was issued to respondent Eugenio D. Trinidad as
the highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon
City RTC a complaint for annulment of the real estate mortgage,
extrajudicial foreclosure and the certificate of sale issued over the
property against Pacific Bank and Eugenio D. Trinidad. The
complaint, which was docketed as Civil Case No. Q-89-4152,
alleged, among others, that the promissory notes, trust receipt, and
export bills were all ultra vires acts of Teresita as they were executed
without the requisite board resolution of the Board of Directors of
BEC. The Lipats also averred that assuming said acts were valid and
binding on BEC, the same were the corporation's sole obligation, it
having a personality distinct and separate from spouses Lipat. It was
likewise pointed out that Teresita's authority to secure a loan from
Pacific Bank was specifically limited to Mrs. Lipat's sole use and
benefit and that the real estate mortgage was executed to secure
the Lipats' and BET's P583,854.00 loan only.

In their respective answers, Pacific Bank and Trinidad alleged in


common that petitioners Lipat cannot evade payments of the value
of the promissory notes, trust receipt, and export bills with their
property because they and the BEC are one and the same, the
latter being a family corporation. Respondent Trinidad further
claimed that he was a buyer in good faith and for value and that
petitioners are estopped from denying BEC's existence after holding
themselves out as a corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained


in the record, the complaint filed in this case must be, as is
hereby, dismissed. Plaintiffs however has five (5) months and
seventeen (17) days reckoned from the finality of this decision
within which to exercise their right of redemption. The writ of
injunction issued is automatically dissolved if no redemption is
effected within that period.

The counterclaims and cross-claim are likewise dismissed for


lack of legal and factual basis.

No costs.

IT IS SO ORDERED.7

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The trial court ruled that there was convincing and conclusive
evidence proving that BEC was a family corporation of the Lipats. As
such, it was a mere extension of petitioners' personality and business
and a mere alter ego or business conduit of the Lipats established for
their own benefit. Hence, to allow petitioners to invoke the theory of
separate corporate personality would sanction its use as a shield to
further an end subversive of justice.8 Thus, the trial court pierced the
veil of corporate fiction and held that Bela's Export Corporation and
petitioners (Lipats) are one and the same. Pacific Bank had
transacted business with both BET and BEC on the supposition that
both are one and the same. Hence, the Lipats were estopped from
disclaiming any obligations on the theory of separate personality of
corporations, which is contrary to principles of reason and good
faith.

The Lipats timely appealed the RTC decision to the Court of Appeals
in CA-G.R. CV No. 41536. Said appeal, however, was dismissed by
the appellate court for lack of merit. The Court of Appeals found
that there was ample evidence on record to support the application
of the doctrine of piercing the veil of corporate fiction. In affirming
the findings of the RTC, the appellate court noted that Mrs. Lipat had
full control over the activities of the corporation and used the same
to further her business interests.9 In fact, she had benefited from the
loans obtained by the corporation to finance her business. It also
found unnecessary a board resolution authorizing Teresita Lipat to
secure loans from Pacific Bank on behalf of BEC because the
corporation's by-laws allowed such conduct even without a board
resolution. Finally, the Court of Appeals ruled that the mortgage
property was not only liable for the original loan of P583,854.00 but
likewise for the value of the promissory notes, trust receipt, and
export bills as the mortgage contract equally applies to additional or
new loans, discounting lines, overdrafts, and credit
accommodations which petitioners subsequently obtained from
Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by
the appellate court in its Resolution of February 23, 2000.10

Hence, this petition, with petitioners submitting that the court a quo
erred —

1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF


CORPORATE FICTION APPLIES IN THIS CASE.

2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD


LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE
AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL VALUE OF
PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS OF
BELA'S EXPORT CORPORATION.

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3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S
FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS
COURT'S JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST
TIME IN THIS APPEAL."

4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE


DISPUTED PROMISSORY NOTES, THE DOLLAR
ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE EVIDENT
FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE ARE
NOT VALID OR ARE NOT BINDING TO HIM.

5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION


AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS
"AN UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH
CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE TO
APPELLANTS."11

In sum, the following are the relevant issues for our resolution:

1. Whether or not the doctrine of piercing the veil of corporate


fiction is applicable in this case;

2. Whether or not petitioners' property under the real estate


mortgage is liable not only for the amount of P583,854.00 but also for
the value of the promissory notes, trust receipt, and export bills
subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney's fees
stipulated in the deed of real estate mortgage.

On the first issue, petitioners contend that both the appellate and
trial courts erred in holding them liable for the obligations incurred by
BEC through the application of the doctrine of piercing the veil of
corporate fiction absent any clear showing of fraud on their part.

Respondents counter that there is clear and convincing evidence to


show fraud on part of petitioners given the findings of the trial court,
as affirmed by the Court of Appeals, that BEC was organized as a
business conduit for the benefit of petitioners.

Petitioners' contentions fail to persuade this Court. A careful reading


of the judgment of the RTC and the resolution of the appellate court
show that in finding petitioners' mortgaged property liable for the
obligations of BEC, both courts below relied upon the alter ego
doctrine or instrumentality rule, rather than fraud in piercFing the veil
of corporate fiction. When the corporation is the mere alter ego or
business conduit of a person, the separate personality of the
corporation may be disregarded.12 This is commonly referred to as
the "instrumentality rule" or the alter ego doctrine, which the courts

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have applied in disregarding the separate juridical personality of
corporations. As held in one case,

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.
x x x .13

We find that the evidence on record demolishes, rather than


buttresses, petitioners' contention that BET and BEC are separate
business entities. Note that Estelita Lipat admitted that she and her
husband, Alfredo, were the owners of BET14 and were two of the
incorporators and majority stockholders of BEC.15 It is also undisputed
that Estelita Lipat executed a special power of attorney in favor of
her daughter, Teresita, to obtain loans and credit lines from Pacific
Bank on her behalf.16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC,
respectively.17 We note further that: (1) Estelita and Alfredo Lipat are
the owners and majority shareholders of BET and BEC, respectively;18
(2) both firms were managed by their daughter, Teresita;19 (3) both
firms were engaged in the garment business, supplying products to
"Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both
firms held office in the same building owned by the Lipats;20 (5) BEC is
a family corporation with the Lipats as its majority stockholders; (6)
the business operations of the BEC were so merged with those of Mrs.
Lipat such that they were practically indistinguishable; (7) the
corporate funds were held by Estelita Lipat and the corporation itself
had no visible assets; (8) the board of directors of BEC was
composed of the Burgos and Lipat family members;21 (9) Estelita had
full control over the activities of and decided business matters of the
corporation;22 and that (10) Estelita Lipat had benefited from the
loans secured from Pacific Bank to finance her business abroad 23
and from the export bills secured by BEC for the account of "Mystical
Fashion."24 It could not have been coincidental that BET and BEC are
so intertwined with each other in terms of ownership, business
purpose, and management. Apparently, BET and BEC are one and
the same and the latter is a conduit of and merely succeeded the
former. Petitioners' attempt to isolate themselves from and hide
behind the corporate personality of BEC so as to evade their
liabilities to Pacific Bank is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy. In
our view, BEC is a mere continuation and successor of BET, and
petitioners cannot evade their obligations in the mortgage contract

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secured under the name of BEC on the pretext that it was signed for
the benefit and under the name of BET. We are thus constrained to
rule that the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.

On the second issue, petitioners contend that their mortgaged


property should not be made liable for the subsequent credit lines
and loans incurred by BEC because, first, it was not covered by the
mortgage contract of BET which only covered the loan of
P583,854.00 and which allegedly had already been paid; and,
second, it was secured by Teresita Lipat without any authorization or
board resolution of BEC.

We find petitioners' contention untenable. As found by the Court of


Appeals, the mortgaged property is not limited to answer for the
loan of P583,854.00. Thus:

Finally, the extent to which the Lipats' property can be held


liable under the real estate mortgage is not limited to
P583,854.00. It can be held liable for the value of the promissory
notes, trust receipt and export bills as well. For the mortgage
was executed not only for the purpose of securing the Bela's
Export Trading's original loan of P583,854.00, but also for "other
additional or new loans, discounting lines, overdrafts and credit
accommodations, of whatever amount, which the Mortgagor
and/or Debtor may subsequently obtain from the mortgagee
as well as any renewal or extension by the Mortgagor and/or
Debtor of the whole or part of said original, additional or new
loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other
obligations of the Mortgagor and/or Debtor owing to the
Mortgagee, whether directly, or indirectly principal or
secondary, as appears in the accounts, books and records of
the mortgagee.25

As a general rule, findings of fact of the Court of Appeals are final


and conclusive, and cannot be reviewed on appeal by the
Supreme Court, provided they are borne out by the record or based
on substantial evidence.26 As noted earlier, BEC merely succeeded
BET as petitioners' alter ego; hence, petitioners' mortgaged property
must be held liable for the subsequent loans and credit lines of BEC.

Further, petitioners' contention that the original loan had already


been paid, hence, the mortgaged property should not be made
liable to the loans of BEC, is unsupported by any substantial
evidence other than Estelita Lipat's self-serving testimony. Two
disputable presumptions under the rules on evidence weigh against
petitioners, namely: (a) that a person takes ordinary care of his
concerns;27 and (b) that things have happened according to the

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ordinary course of nature and the ordinary habits of life.28 Here, if the
original loan had indeed been paid, then logically, petitioners would
have asked from Pacific Bank for the required documents
evidencing receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the
cancellation of the mortgage in the ordinary course of things.
However, the records are bereft of any evidence contradicting or
overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property should not


bind the loans and credit lines obtained by BEC as they were
secured without any proper authorization or board resolution. They
also blame the bank for its laxity and complacency in not requiring a
board resolution as a requisite for approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board
resolution since per admissions by both petitioner Estelita Lipat and
Alice Burgos, petitioners' rebuttal witness, no business or stockholder's
meetings were conducted nor were there election of officers held
since its incorporation. In fact, not a single board resolution was
passed by the corporate board29 and it was Estelita Lipat and/or
Teresita Lipat who decided business matters.30

Secondly, the principle of estoppel precludes petitioners from


denying the validity of the transactions entered into by Teresita Lipat
with Pacific Bank, who in good faith, relied on the authority of the
former as manager to act on behalf of petitioner Estelita Lipat and
both BET and BEC. While the power and responsibility to decide
whether the corporation should enter into a contract that will bind
the corporation is lodged in its board of directors, subject to the
articles of incorporation, by-laws, or relevant provisions of law, yet,
just as a natural person may authorize another to do certain acts for
and on his behalf, the board of directors may validly delegate some
of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally
derived from law, corporate by-laws, or authorization from the
board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business.31 Apparent
authority, is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act
or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof,
whether within or beyond the scope of his ordinary powers.32

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In this case, Teresita Lipat had dealt with Pacific Bank on the
mortgage contract by virtue of a special power of attorney
executed by Estelita Lipat. Recall that Teresita Lipat acted as the
manager of both BEC and BET and had been deciding business
matters in the absence of Estelita Lipat. Further, the export bills
secured by BEC were for the benefit of "Mystical Fashion" owned by
Estelita Lipat.33 Hence, Pacific Bank cannot be faulted for relying on
the same authority granted to Teresita Lipat by Estelita Lipat by virtue
of a special power of attorney. It is a familiar doctrine that if a
corporation knowingly permits one of its officers or any other agent
to act within the scope of an apparent authority, it holds him out to
the public as possessing the power to do those acts; thus, the
corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent's
authority.34

We find no necessity to extensively deal with the liability of Alfredo


Lipat for the subsequent credit lines of BEC. Suffice it to state that
Alfredo Lipat never disputed the validity of the real estate mortgage
of the original loan; hence, he cannot now dispute the subsequent
loans obtained using the same mortgage contract since it is, by its
very terms, a continuing mortgage contract.

On the third and final issue, petitioners assail the decision of the
Court of Appeals for not taking cognizance of the issue on attorney's
fees on the ground that it was raised for the first time on appeal. We
find the conclusion of the Court of Appeals to be in accord with
settled jurisprudence. Basic is the rule that matters not raised in the
complaint cannot be raised for the first time on appeal.35 A close
perusal of the complaint yields no allegations disputing the attorney's
fees imposed under the real estate mortgage and petitioners
cannot now allege that they have impliedly disputed the same
when they sought the annulment of the contract.

In sum, we find no reversible error of law committed by the Court of


Appeals in rendering the decision and resolution herein assailed by
petitioners.

WHEREFORE, the petition is DENIED. The Decision dated October 21,


1999 and the Resolution dated February 23, 2000 of the Court of
Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs against
petitioners.

SO ORDERED.

Bellosillo, Austria-Martinez and Callejo, Sr., JJ ., concur.

Lipat vs. Pacific Banking Corporation Case Digest

Lipat vs. Pacific Banking Corporation

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[GR 142435, 30 April 2003]

Facts: The spouses Alfredo Lipat and Estelita Burgos Lipat, owned
"Bela's Export Trading" (BET), a single proprietorship with principal
office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was
engaged in the manufacture of garments for domestic and foreign
consumption. The Lipats also owned the "Mystical Fashions" in the
United States, which sells goods imported from the Philippines
through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to
manage BET in the Philippines while she was managing "Mystical
Fashions" in the United States. In order to facilitate the convenient
operation of BET, Estelita Lipat executed on 14 December 1978, a
special power of attorney appointing Teresita Lipat as her attorney-
in-fact to obtain loans and other credit accommodations from
Pacific Banking Corporation (Pacific Bank). She likewise authorized
Teresita to execute mortgage contracts on properties owned or co-
owned by her as security for the obligations to be extended by
Pacific Bank including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of


attorney, was able to secure for and in behalf of her mother, Mrs.
Lipat and BET, a loan from Pacific Bank amounting to P583,854.00 to
buy fabrics to be manufactured by BET and exported to "Mystical
Fashions" in the United States. As security therefor, the Lipat spouses,
as represented by Teresita, executed a Real Estate Mortgage over
their property located at No. 814 Aurora Blvd., Cubao, Quezon City.
Said property was likewise made to secure other additional or new
loans, etc. On 5 September 1979, BET was incorporated into a family
corporation named Bela's Export Corporation (BEC) in order to
facilitate the management of the business. BEC was engaged in the
business of manufacturing and exportation of all kinds of garments of
whatever kind and description and utilized the same machineries
and equipment previously used by BET. Its incorporators and
directors included the Lipat spouses who owned a combined 300
shares out of the 420 shares subscribed, Teresita Lipat who owned 20
shares, and other close relatives and friends of the Lipats. Estelita
Lipat was named president of BEC, while Teresita became the vice-
president and general manager. Eventually, the loan was later
restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly
executed by Teresita on behalf of the corporation. A letter of credit
was also opened by Pacific Bank in favor of A. O. Knitting
Manufacturing Co., Inc., upon the request of BEC after BEC
executed the corresponding trust receipt therefor. Export bills were
also executed in favor of Pacific Bank for additional finances. These
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transactions were all secured by the real estate mortgage over the
Lipats' property. The promissory notes, export bills, and trust receipt
eventually became due and demandable. Unfortunately, BEC
defaulted in its payments. After receipt of Pacific Bank's demand
letters, Estelita Lipat went to the office of the bank's liquidator and
asked for additional time to enable her to personally settle BEC's
obligations. The bank acceded to her request but Estelita failed to
fulfill her promise. Consequently, the real estate mortgage was
foreclosed and after compliance with the requirements of the law
the mortgaged property was sold at public auction.

On 31 January 1989, a certificate of sale was issued to respondent


Eugenio D. Trinidad as the highest bidder. On 28 November 1989, the
spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and
the certificate of sale issued over the property against Pacific Bank
and Eugenio D. Trinidad. The complaint alleged, among others, that
the promissory notes, trust receipt, and export bills were all ultra vires
acts of Teresita as they were executed without the requisite board
resolution of the Board of Directors of BEC. The Lipats also averred
that assuming said acts were valid and binding on BEC, the same
were the corporation's sole obligation, it having a personality distinct
and separate from spouses Lipat. It was likewise pointed out that
Teresita's authority to secure a loan from Pacific Bank was
specifically limited to Mrs. Lipat's sole use and benefit and that the
real estate mortgage was executed to secure the Lipats' and BET's
P583,854.00 loan only. In their respective answers, Pacific Bank and
Trinidad alleged in common that petitioners Lipat cannot evade
payments of the value of the promissory notes, trust receipt, and
export bills with their property because they and the BEC are one
and the same, the latter being a family corporation. Trinidad further
claimed that he was a buyer in good faith and for value and that
the Lipat spouses are estopped from denying BEC's existence after
holding themselves out as a corporation. After trial on the merits, the
RTC dismissed the complaint. The Lipats timely appealed the RTC
decision to the Court of Appeals in CA-G.R. CV 41536. Said appeal,
however, was dismissed by the appellate court for lack of merit. The
Lipats then moved for reconsideration, but this was denied by the
appellate court in its Resolution of 23 February 2000. The Lipat
spouses filed the petition for review on certiorari.

Issue: Whether BEC and BET are separate business entities, and thus
the Lipt spouses can isolate themselves behind the corporate
personality of BEC.

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Held: When the corporation is the mere alter ego or business conduit
of a person, the separate personality of the corporation may be
disregarded. This is commonly referred to as the "instrumentality rule"
or the alter ego doctrine, which the courts have applied in
disregarding the separate juridical personality of corporations. As
held in one case, 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. The
evidence on record shows BET and BEC are not separate business
entities. (1) Estelita and Alfredo Lipat are the owners and majority
shareholders of BET and BEC, respectively; (2) both firms were
managed by their daughter, Teresita; 19 (3) both firms were
engaged in the garment business, supplying products to "Mystical
Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held
office in the same building owned by the Lipats; (5) BEC is a family
corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs.
Lipat such that they were practically indistinguishable; (7) the
corporate funds were held by Estelita Lipat and the corporation itself
had no visible assets; (8) the board of directors of BEC was
composed of the Burgos and Lipat family members; (9) Estelita had
full control over the activities of and decided business matters of the
corporation; and that (10) Estelita Lipat had benefited from the loans
secured from Pacific Bank to finance her business abroad and from
the export bills secured by BEC for the account of "Mystical Fashion."
It could not have been coincidental that BET and BEC are so
intertwined with each other in terms of ownership, business purpose,
and management. Apparently, BET and BEC are one and the same
and the latter is a conduit of and merely succeeded the former. The
spouses' attempt to isolate themselves from and hide behind the
corporate personality of BEC so as to evade their liabilities to Pacific
Bank is precisely what the classical doctrine of piercing the veil of
corporate entity seeks to prevent and remedy. BEC is a mere
continuation and successor of BET, and the Lipat spouses cannot
evade their obligations in the mortgage contract secured under the
name of BEC on the pretext that it was signed for the benefit and
under the name of BET.

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Sta. Monica Industrial & Dev. Corp. vs. DAR Regional Director for
Region III (555 SCRA 97 [2008])

STA. MONICA INDUSTRIAL G.R. No. 164846

AND DEVELOPMENT

CORPORATION,

Petitioner, Present:

YNARES-SANTIAGO, J.,

- versus - Chairperson,

AUSTRIA-MARTINEZ,

CHICO-NAZARIO,

THE DEPARTMENT OF REYES, and

AGRARIAN REFORM REGIONAL BRION,* JJ.

DIRECTOR FOR REGION III,

PROVINCIAL AGRARIAN

REFORM OFFICER OF

BULACAN, MUNICIPAL

AGRARIAN REFORM OFFICER

OF CALUMPIT, BULACAN, Promulgated:

and BASILIO DE GUZMAN,

Respondents. June 18, 2008

x--------------------------------------------------x

DECISION

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REYES, R.T., J.:

ANG Malawak na Batas sa Repormang Pangsakahan ay binuo


upang makalaya ang mga magsasaka mula sa tali ng kahirapan at
paghahari ng may-ari ng lupa.

Kapag ang kathang-isip na korporasyon ay ginamit na tabing


sa katulad na pyudal na pang-aalipin, ang matayog na hangarin ng
batas pambukid ay nabibigo at ang mismong suliranin na nais
lunasan nito ay nananatili.

Ang belo ng kathang-isip na korporasyon ay pupunitin kapag


ito ay ginamit sa maling hangarin at di-tapat na layunin.

The Comprehensive Agrarian Reform Law1[1] was designed


precisely to liberate peasant-farmers from the clutches of
landlordism and poverty.

When corporate fiction is used as a mere smokescreen to the


same form of feudal servitude, the lofty aim of the agrarian law is
thwarted and the very problem which the law seeks to solve is
perpetrated.

The veil of corporate fiction will be pierced when used for


improper purposes and unfair objectives.

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Before Us is a petition for review on certiorari of the Decision2[2]
of the Court of Appeals (CA) dismissing the petition of Sta. Monica
Industrial and Development Corporation (Sta. Monica) to annul the
Order3[3] of the Regional Director, Region III, Department of
Agrarian Reform (DAR) placing the landholdings of Asuncion Trinidad
under the Comprehensive Agrarian Reform Program (CARP).4[4]

The Facts

Trinidad is the owner of five parcels of land with a total area of


4.69 hectares in Iba Este, Calumpit, Bulacan. Private respondent
Basilio De Guzman is the agricultural leasehold tenant of Trinidad.

On April 29, 1976, a leasehold contract denominated as


Kasunduan ng Buwisan sa Sakahan was executed between Trinidad
and De Guzman.5[5] As an agricultural leasehold tenant, De
Guzman was issued Certificates of Land Transfer on July 22, 1981.6[6]

Desiring to have an emancipation patent over the land under


his tillage, De Guzman filed a petition for the issuance of patent in his
name with the Office of the Regional Director of the DAR.7[7] The
Legal Services Division of the DAR duly sent notices to Trinidad
requiring her to comment. Instead of complying, Trinidad filed a
motion for bill of particulars.8[8]

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After due proceedings, the Regional Director issued the
Order9[9] granting the petition of De Guzman, with the following
disposition:

WHEREFORE, in light of the foregoing analysis and the


reasons indicated thereon, an ORDER is hereby issued as
follows:

1. PLACING under the coverage of Operation Land


Transfer (OLT) pursuant to PD 27/Executive Order No. 228
the landholdings of Asuncion Trinidad with an area of
10.6800 hectares, more or less, located at Iba Este,
Calumpit, Bulacan, without prejudice to the exercise of
her retention rights if qualified under the law.

2. DIRECTING the MARO of Calumpit, Bulacan and


the PARO of Baliuag, Bulacan to cause the generation
and issuance of Emancipation Patent in favor of the
petitioner and other qualified farmer-beneficiaries over
the said landholding in accordance with the actual area
of tillages.10[10]

Trinidad filed a motion for reconsideration but her motion was


denied.11[11]

A year later, petitioner Sta. Monica filed a petition for certiorari


and prohibition with the CA assailing the order of the Regional
Director. In its petition, Sta. Monica claimed that while it is true that
Asuncion Trinidad was the former registered owner of a parcel of
land with an area of 83,689 square meters, the said landholding was
sold on January 27, 1986.12[12]

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Petitioner was able to acquire 39,547 square meters of the
Trinidad property. After the sale, petitioner sought the registration of
the portion pertaining to it before the Register of Deeds of the
Province of Bulacan. Consequently, a corresponding Transfer
Certificate of Title, with No. 301408 (now TCT No. RT 70512) was issued
in favor of petitioner.13[13]

It was asserted that there was a denial of due process of law


because it was not furnished a notice of coverage under the CARP
law.14[14]

In his comment on the petition, De Guzman argued that the


alleged sale of the landholding is illegal due to the lack of requisite
clearance from the DAR. The said clearance is required under P.D.
No. 27,15[15] the Tenant Emancipation Decree, which prohibits
transfer of covered lands except to tenant-beneficiaries. According
to De Guzman, since no clearance was sought from, and granted
by, the DAR, the sale in favor of petitioner by Trinidad is inexistent
and void. Hence, Trinidad remained the owner of the disputed
property.

CA Disposition

On May 26, 2004, the CA rendered a decision dismissing the


petition of Sta. Monica, disposing as follows:

WHEREFORE, premises considered, the instant


petition is hereby DENIED for lack of merit.

SO ORDERED.16[16]

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The CA held that Sta. Monica is not a real party-in-interest
because it cannot be considered as an owner of the land it bought
from Trinidad, thus:17[17]

It appears from the records of this case that the sale


between Trinidad and the petitioner is enjoined by
Department Memorandum Circular No. 2-A,
implementing the provisions of Presidential Decree (P.D.)
No. 27, which prohibits the transfer of ownership of
landholdings covered by P.D. No. 27 after 21 October
1972 without the requisite clearance from the DAR except
to the tenant-beneficiary. Thus, the title to the subject
landholding remained with the previous owner, Asuncion
Trinidad. This effectively deprives the petitioner of interest
to question the orders of the Regional Director of the DAR
relative to the latters directive placing the subject
landholding under the coverage of Operation Land
Transfer and the subsequent issuance of an Emancipation
Patent in favor of private respondent De Guzman. One
having no right or interest to protect cannot invoke the
jurisdiction of the court as a party plaintiff (in this case
petitioner) in an action. A real party in interest is the party
who stands to be benefited or injured by the judgment in
the suit, or the party entitled to the avails of the suit.18[18]
(Citations omitted)

The CA added that even assuming that Sta. Monica is a real


party-in-interest, it was not denied due process because it had
constructive notice of the proceeding which involved its property:

Even assuming, without admitting, that petitioner is


the real party in interest by reason of the sale of the
subject landholding in its favor, it cannot be said that
petitioner was denied due process because of lack of
notice of the proceedings before the DAR. It is significant
to note that Asuncion Trinidad is the treasurer of petitioner,
based on the corporations General Information Sheet.
While it cannot be said that there was proper notice to

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the corporation, being a corporate officer of the
petitioner, there was at least constructive notice of the
fact that there was a proceeding which involved the
property of the corporation of which it may be deprived
should an adverse decision be rendered by the
DAR.19[19]

The CA also ruled that the assailed orders of the Regional


Director have already attained finality because it was not appealed
to the DAR Secretary.

Furthermore, the assailed orders have long become


final and executory, there being no appeal undertaken to
the Secretary of the Department of Agrarian Reform.
Citing Fortich vs. Corona, et al., the Supreme Court aptly
ruled in this wise:

The orderly administration of justice


requires that the judgments/resolutions of a
court or quasi-judicial body must reach a point
of finality set by law, rules and regulations. The
noble purpose is to write finis to disputes once
and for all. This is a fundamental principle in our
justice system, without which there would be no
end to litigations. Utmost respect and
adherence to this principle must always be
maintained by those who wield the power of
adjudication. Any act which violates such
principle must immediately be struck down.

The rule on finality of decisions, orders or resolutions


of a judicial, quasi-judicial, or administrative body is not a
question of technicality but of substance and merit, the
underlying consideration therefore being the protection of
the substantive rights of the winning party. Just as a losing
party has the right to file an appeal within the prescribed
period, the winning party also has the correlative right to
enjoy the finality of the resolution of his/her case.20[20]

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Sta. Monica sought reconsideration but it was denied. Hence,
the present recourse.21[21]

Issue

Sta. Monica seeks reversal of the CA decision on the lone


ground that THE ASSAILED DECISION AND RESOLUTION OF THE COURT
OF APPEALS ARE CONTRARY TO EXISTING LAWS, RELEVANT
JURISPRUDENCE ON THE MATTER AND THE FACTUAL
CIRCUMSTANCES.22[22]

Our Ruling

The petition is bereft of merit.

Trinidad is still deemed the owner of


the agricultural land sold to Sta.
Monica; no need for separate notice
of coverage under the CARP law.

The crux of the petition lies in the requirement of notice of


coverage under the CARP law. The statute requires a notice of
coverage to be furnished and sent to the landowner.23[23] Notice is
part of the constitutional right to due process of law. It informs the
landowner of the States intention to acquire a private land upon
payment of just compensation and gives him the opportunity to
present evidence that his landholding is not covered or is otherwise
excused from the agrarian law.

There is no dispute that a notice of coverage was duly sent to


Trinidad. Records show that she participated in the DAR

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proceedings. As to her, the constitutional requirement of due
process was met and satisfied.

Petitioner Sta. Monica, however, claims that it is the owner of


the agricultural land awarded to De Guzman. It acquired the land
from Trinidad by sale in 1986 and it was issued a transfer certificate of
title. Sta. Monica claims denial of due process of law because it was
not furnished the required notice of coverage under the CARP law.

Respondent De Guzman, on the other hand, contends that the


sale between Trinidad and Sta. Monica is null and void because it is
a prohibited transaction under Presidential Decree No. 27 (P.D. No.
27), as amended.24[24] De Guzman also claims that Trinidad is a
corporate officer of Sta. Monica. It was her duty to inform Sta.
Monica of the pending proceeding with the DAR.25[25] He
maintains that Sta. Monica was not denied due process because
there was constructive notice. Sta. Monica was sufficiently informed
of the pending DAR proceedings.26[26]

Records disclose that there was indeed a deed of sale


between Trinidad and Sta. Monica over the agricultural land
awarded to De Guzman. Sta. Monica was also issued a new transfer
certificate of title over the land. If We rely solely on the sale, it is a
foregone conclusion that Sta. Monica was denied due process of
law. As the owner on record of the agricultural land, it should have
been given a notice of coverage.

However, there is much to be said of the attendant


circumstances that lead Us to conclude that notice of coverage to
Trinidad is also sufficient notice to Sta. Monica. Moreover, We find
that the sale between Trinidad and Sta. Monica was a mere ruse to
frustrate the implementation of the agrarian law.

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First, the sale to Sta. Monica is prohibited. P.D. No. 27, as
amended, forbids the transfer or alienation of covered agricultural
lands after October 21, 1972 except to the tenant-beneficiary. The
agricultural land awarded to De Guzman is covered by P.D. No. 27.
He was awarded a certificate of land transfer in July 22, 1981. The
sale to Sta. Monica in 1986 is void for being contrary to law.27[27]
Trinidad remained the owner of the agricultural land.

In Heirs of Batongbacal v. Court of Appeals,28[28] involving the


similar issue of sale of a covered agricultural land under P.D. No. 27,
this Court held:

Clearly, therefore, Philbanking committed breach of


obligation as an agricultural lessor. As the records show,
private respondent was not informed about the sale
between Philbanking and petitioner, and neither was he
privy to the transfer of ownership from Juana Luciano to
Philbanking. As an agricultural lessee, the law gives him
the right to be informed about matters affecting the land
he tills, without need for him to inquire about it.

xxxx

In other words, transfer of ownership over tenanted


rice and/or corn lands after October 21, 1972 is allowed
only in favor of the actual tenant-tillers thereon. Hence,
the sale executed by Philbanking on January 11, 1985 in
favor of petitioner was in violation of the aforequoted
provision of P.D. 27 and its implementing guidelines, and
must thus be declared null and void.29[29] (Underscoring
supplied)

Second, buyer Sta. Monica is owned and controlled by Trinidad


and her family. Records show that Trinidad, her husband and two
sons own more than 98%30[30] of the outstanding capital stock of

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Sta. Monica. They are all officers of the corporation.31[31] There are
only two non-related incorporators who own less than one percent
of the outstanding capital stock of Sta. Monica and who are not
officers of the corporation.

To be sure, Trinidad and her family exercise absolute control of


the corporate affairs of Sta. Monica. As owners of 98% of the
outstanding capital stock, they are the beneficial owners of all the
assets of the company, including the agricultural land sold by
Trinidad to Sta. Monica.

Third, Trinidad and her counsel failed to notify the DAR of the
prior sale to Sta. Monica during the administrative proceedings.
Worse, Trinidad feigned ignorance of the sale by filing a motion for
bill of particulars seeking specifics from De Guzman of her alleged
landholdings which are subject of his petition with the DAR.

It is highly unusual and unbelievable for her not to know, or at


least be aware, of the sale to Sta. Monica. She herself signed the
deed of sale as seller. She is also a stockholder and officer of Sta.
Monica. More importantly, she cannot feign ignorance of De
Guzmans claim because he was her agricultural tenant since the
1970s. She knows, or at least ought to know, that the subject matter
of the petition with the DAR was her own landholding, which she sold
to Sta. Monica in direct violation of P.D. No. 27.

The apparent lack of candor is heightened by the fact that


both Trinidad and Sta. Monica are represented by the same counsel,
Atty. Ramon Gutierrez. We cannot stretch Our credulity on how
Trinidad filed a motion for bill of particulars with the DAR seeking
specifics on the sale to Sta. Monica when she herself signed for the
vendor as a party to the transaction.

It is the duty of Atty. Gutierrez to inform the DAR, at the very first
opportunity, of the sale to Sta. Monica. He was utterly remiss of this
duty. Instead of informing the DAR, Trinidad and her counsel
engaged in wild goose chase and stonewalling, feigning ignorance
when they ought to have informed the DAR of the sale to Sta.

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Monica. Atty. Gutierrez is reminded that, as an officer of the court,
he owes it the duty of candor, honesty and fairness.32[32]

Fourth, it was only after an adverse decision against Trinidad


that Sta. Monica suddenly filed a petition for certiorari with the CA
questioning the lack of notice of coverage under the CARP law. It is
highly unlikely that Sta. Monica, an artificial being acting only
through its duly authorized representatives, was not sufficiently
informed or had no constructive knowledge of the DAR
proceedings.

Trinidad and by extension, her family members, were informed


or should be sufficiently aware of the DAR proceedings. They are all
stockholders and corporate officers of Sta. Monica. They knew, they
ought to know, that Sta. Monica would suffer damage should the
DAR award, as it awarded, the agricultural land to De Guzman.

As directors and corporate officers, they owe a duty of care to


the corporation to inform it of the pending proceedings with the
DAR.

Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is
the continued payment of lease rentals by De Guzman. Records
show that De Guzman paid and continued to pay lease rentals to
Trinidad even after she sold the land to Sta. Monica. The
receipt33[33] dated May 30, 2002 discloses that De Guzman paid 40
cavans of palay to Clodinaldo dela Cruz, the authorized
representative of Trinidad, as lease rentals for the agricultural land.

It is incredible that Trinidad would still continue to collect lease


rentals from De Guzman if she had long sold the agricultural land to
Sta. Monica in 1986. The continued payment of lease rentals
indicates that Trinidad never sold the agricultural land to Sta.
Monica. Evidently, the sale was a mere ruse to skirt coverage under
the comprehensive agrarian reform law.

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All these circumstances indicate that Trinidad has remained as
the real owner of the agricultural land sold to Sta. Monica. The sale
to Sta. Monica is not valid because it is prohibited under P.D. No. 27.
More importantly, it must be deemed as a mere ploy to evade the
applicable provisions of the agrarian law.

But it is a fiat that the corporate vehicle cannot be used as a


shield to protect fraud or justify wrong. Thus, the veil of corporate
fiction will be pierced when it is used to defeat public convenience
and subvert public policy.

Considering that Trinidad remained to be the true and legal


owner of the agricultural land, there is no need for another notice of
coverage to be sent or furnished to Sta. Monica. At the very least,
the notice to her is already notice to Sta. Monica because the
corporation acted as a mere conduit of Trinidad. The CA correctly
dismissed the petition of Sta. Monica to annul the orders of the
Regional Director placing the agricultural land of Trinidad under the
agrarian reform law.

Final Note

This case can be viewed as a microcosm of the persistent


agrarian reform problem in Our country. For one, it illustrates the
arduous legal battle that tenant-farmers have to endure in order to
be finally freed from the bondage of the soil. De Guzman battled for
almost eight years to acquire the agricultural land from Trinidad.
Others are not as equally lucky. For another, it shows the subtle but
illegal measures taken by landowners to evade coverage under the
CARP law.

Of course, there are also tales of landowners who unduly suffer


either the abuse of some farmers or the harsh consequences of the
law.

In hindsight, it is quite ironic that We are still faced with the


same agrarian reform problem which We have sought to eradicate
several years ago when the CARP law was first introduced. Feudal
system of land ownership still persists in the countryside and most

Corporation Law/alfred0 Page 134 of 1509


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farmers are still tied to their bondage. It is more ironic when the
problem is taken in its historical context, the CARP law being the fifth
land reform law passed since President Quezon.

To Our mind, part of the problem lies with the CARP law itself. As
crafted, the law has its own loopholes. It provides for a long list of
exclusions. Some landowners used these exclusions to go around the
law. There is now a growing trend of land conversion in the
countryside suspiciously to evade coverage under the CARP law. Of
course, the solution to this problem lies with Congress. It is high time
We sounded the call for a more realistic, rational comprehensive
agrarian reform law.

The dubious use of seemingly legal means to sidestep the CARP


law persists. Corporate law is resorted to by way of circling around
the agrarian law. As this case illustrates, agricultural lands are being
transferred, simulated or otherwise, to corporations which are fully or
at least predominantly controlled by former landowners, now called
stockholders. Through this strategy, it is anticipated that the
corporation, by virtue of its corporate fiction, will shield the
landowners from agricultural claims of tenant-farmers.

The use of corporate fiction as a means to evade legal liability


is not new. This scheme or device has long been perceived to be
used in other fields of law, notably taxation to minimize payment of
tax with varying degrees of success and acceptability. But the
continued employment of the scheme in agrarian cases is not only
deplorable; it is alarming. It is time to put a lid on the cap.

WHEREFORE, the petition is DENIED. The appealed Decision of


the Court of Appeals is AFFIRMED.

Sta. Monica Industrial & Dev. Corp. vs. DAR Regional Director for
Region III (555 SCRA 97 [2008])

STA. MONICA INDUSTRIAL AND DEVELOPMENT CORPORATION v. THE

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DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR FOR
REGION III, et. al.

G.R. No. 164846, 18 June 2008, THIRD DIVISION (Reyes, R.T., J.)

Considering that Trinidad remained to be the true and legal owner


of the agricultural land, there

is no need for another notice of coverage to be sent or furnished to


Sta. Monica. At the very least, the

notice to her is already notice to Sta. Monica because the


corporation acted as a mere conduit of

Trinidad.

Trinidad is the owner of five parcels of land with a total area of 4.69
hectares in Calumpit,

Bulacan. Private respondent Basilio De Guzman is the agricultural


leasehold tenant of Trinidad. A

leasehold contract was executed between Trinidad and De


Guzman. As an agricultural leasehold tenant,

De Guzman was issued Certificates of Land Transfer. Desiring to have


an emancipation patent over the

land under his tillage, De Guzman filed a petition for the issuance of
patent in his name with the Office

of the Regional Director of the DAR. DAR duly sent notices to Trinidad
requiring her to comment.

Instead of complying, Trinidad filed a motion for bill of particulars.


After due proceedings, the Regional

Director issued the Order granting the petition of De Guzman.


Trinidad filed a motion for

reconsideration but her motion was denied.

A year later, petitioner Sta. Monica filed a petition for certiorari and
prohibition with the CA

assailing the order of the Regional Director. Sta. Monica claimed that
a portion of the Trinidad

landholding was sold to it. Sta. Monica asserted that there was a
denial of due process of law because it

was not furnished a notice of coverage under the CARP law. De


Guzman argued that the alleged sale of

Corporation Law/alfred0 Page 136 of 1509


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the landholding is illegal due to the lack of requisite clearance from
the DAR. The said clearance is

required under P.D. No. 27, the Tenant Emancipation Decree, which
prohibits transfer of covered lands

except to tenant-beneficiaries.

CA dismissed Sta. Monica’s petition to annul the DAR Order, holding


that Sta. Monica is not a

real party-in-interest because it cannot be considered as an owner


of the land it bought from Trinidad.

CA added that even assuming that Sta. Monica is a real party-in-


interest, it was not denied due process

because it had constructive notice of the proceeding which


involved its property, due to the fact

“Asuncion Trinidad is the treasurer of petitioner, based on the


corporation’s General Information Sheet.

While it cannot be said that there was proper notice to the


corporation, being a corporate officer of the

petitioner, there was at least constructive notice of the fact that


there was a proceeding which involved

the property of the corporation of which it may be deprived should


an adverse decision be rendered by

the DAR”.

ISSUE:

Whether Sta. Monica was denied due process for not receiving a
notice of coverage from DAR

HELD: CA Decision AFFIRMED.

First, the sale to Sta. Monica is prohibited. P.D. No. 27, as amended,
forbids the transfer or

alienation of covered agricultural lands after October 21, 1972


except to the tenant-beneficiary. The

agricultural land awarded to De Guzman is covered by P.D. No. 27.


He was awarded a certificate of land

transfer in July 22, 1981. The sale to Sta. Monica in 1986 is void for
being contrary to law. Trinidad

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transfer in July 22, 1981. The sale to Sta. Monica in 1986 is void for
being contrary to law. Trinidad

remained the owner of the agricultural land.

Second, buyer Sta. Monica is owned and controlled by Trinidad and


her family. Records show

that Trinidad, her husband and two sons own more than 98% of the
outstanding capital stock of Sta.

Monica. They are all officers of the corporation. There are only two
non-related incorporators who own

less than one percent of the outstanding capital stock of Sta.


Monica and who are not officers of the

corporation.

To be sure, Trinidad and her family exercise absolute control of the


corporate affairs of Sta.

Monica. As owners of 98% of the outstanding capital stock, they are


the beneficial owners of all the

assets of the company, including the agricultural land sold by


Trinidad to Sta. Monica.

Third, Trinidad and her counsel failed to notify the DAR of the prior
sale to Sta. Monica during

the administrative proceedings. Worse, Trinidad feigned ignorance


of the sale by filing a motion for bill

of particulars seeking specifics from De Guzman of her alleged


landholdings which are subject of his

petition with the DAR.

It is highly unusual and unbelievable for her not to know, or at least


be aware, of the sale to Sta.

Monica. She herself signed the deed of sale as seller. She is also a
stockholder and officer of Sta.

Monica. More importantly, she cannot feign ignorance of De


Guzman’s claim because he was her

agricultural tenant since the 1970s. She knows, or at least ought to


know, that the subject matter of the

petition with the DAR was her own landholding, which she sold to
Sta. Monica in direct violation of

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P.D. No. 27.

The apparent lack of candor is heightened by the fact that both


Trinidad and Sta. Monica are

represented by the same counsel, Atty. Ramon Gutierrez. We cannot


stretch Our credulity on how

Trinidad filed a motion for bill of particulars with the DAR seeking
specifics on the sale to Sta. Monica

when she herself signed for the vendor as a party to the transaction.

Fourth, it was only after an adverse decision against Trinidad that Sta.
Monica suddenly filed a

petition for certiorari with the CA questioning the lack of notice of


coverage under the CARP law. It is

highly unlikely that Sta. Monica, an artificial being acting only


through its duly authorized

representatives, was not sufficiently informed or had no constructive


knowledge of the DAR

proceedings.

Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is the
continued payment of lease

rentals by De Guzman. Records show that De Guzman paid and


continued to pay lease rentals to

Trinidad even after she sold the land to Sta. Monica. The receipt
dated May 30, 2002 discloses that De

Guzman paid 40 cavans of palay to Clodinaldo dela Cruz, the


authorized representative of Trinidad, as

lease rentals for the agricultural land.

All these circumstances indicate that Trinidad has remained as the


real owner of the agricultural

land sold to Sta. Monica. The sale to Sta. Monica is not valid because
it is prohibited under P.D. No. 27.

More importantly, it must be deemed as a mere ploy to evade the


applicable provisions of the agrarian

law.

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It is a fiat that the corporate vehicle cannot be used as a shield to
protect fraud or justify wrong.

Thus, the veil of corporate fiction will be pierced when it is used to


defeat public convenience and

subvert public policy.

Considering that Trinidad remained to be the true and legal owner


of the agricultural land, there

is no need for another notice of coverage to be sent or furnished to


Sta. Monica. At the very least, the

notice to her is already notice to Sta. Monica because the


corporation acted as a mere conduit of

Trinidad. The CA correctly dismissed the petition of Sta. Monica to


annul the orders of the Regional

Director placing the agricultural land of Trinidad under the agrarian


reform law.

Martinez vs. CA (438 SCRA 139 [2004])

G.R. No. 131673 September 10, 2004

RUBEN MARTINEZ,* substituted by his heirs, MENA CONSTANTINO


MARTINEZ, WILFRIDO C. MARTINEZ, EMMA M. NAVA, and EDNA M.
SAKHRANI, petitioners,
vs.
COURT OF APPEALS and BPI INTERNATIONAL FINANCE, respondents.

DECISION

CALLEJO, SR., J.:

Before us is a petition for review on certiorari of the Decision1 of the


Court of Appeals, in CA-G.R. CV No. 43985, modifying the Decision 2
of the Regional Trial Court of Kalookan City, Branch 122, in Civil Case
No. C-10811.

The antecedents are as follows:

Respondent BPI International Finance3 is a foreign corporation not


doing business in the Philippines, with office address at the Bank of
America Tower, 12 Harcourt Road, Central Hongkong. It was a

Corporation Law/alfred0 Page 140 of 1509


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deposit-taking company organized and existing under and by virtue
of the laws of Hongkong, and was also engaged in investment
banking operations therein.

Cintas Largas, Ltd. (CLL) was also a foreign corporation, established


in Hongkong, with a paid-up capital of HK$10,000. The registered
shareholders of the CLL in Hongkong were the Overseas Nominee,
Ltd. and Shares Nominee, Ltd., which were mainly nominee
shareholders. In Hongkong, the nominee shareholder of CLL was
Baker & McKenzie Nominees, Ltd., a leading solicitor firm. However,
beneficially, the company was equally owned by Messrs. Ramon Siy,
Ricardo Lopa, Wilfrido C. Martinez, and Miguel J. Lacson.4 The
registered office address of CLL in Hongkong was 22/F, Prince’s
Building, also the office address of Price Waterhouse & Co., a large
accounting firm in Hongkong.

The bulk of the business of the CLL was the importation of molasses
from the Philippines, principally from the Mar Tierra Corporation, and
the resale thereof in the international market.5 However, Mar Tierra
Corporation also sold molasses to its customers.6 Wilfrido C. Martinez
was the president of Mar Tierra Corporation, while its executive vice-
president was Blamar Gonzales. The business operations of both the
CLL and Mar Tierra Corporation were run by Wilfrido Martinez and
Gonzales.

About 42% of the capital stock of Mar Tierra Corporation was owned
by RJL Martinez Fishing Corporation (RJL), the leading tuna fishing
outfit in the Philippines. Petitioner Ruben Martinez was the president
of RJL and a member of the board of directors thereof. The majority
stockholders of RJL were Ruben Martinez and his brothers, Jose and
Luis Martinez. Sixty-eight (68) percent of the total assets of Ruben
Martinez were in the RJL.

In 1979, respondent BPI International Finance (then AIFL) granted CLL


a letter of credit in the amount of US$3,000,000. Wilfrido Martinez
signed the letter agreement with the respondent for the CLL. The
respondent and the CLL had made the following arrangements:

Cintas Largas, Ltd. will purchase molasses from the Philippines,


mainly from Mar Tierra Corporation, and then sell the molasses
to foreign countries. Both the purchase of the molasses from the
Philippines and the subsequent sale thereof to foreign
customers were effected by means of Letters of Credit. A Letter
of Credit would be opened by Cintas Largas, Ltd. in favour of
Mar Tierra Corporation or any other seller in the Philippines.
Upon the sale of the molasses to foreign buyers, a Letter of
Credit would then be opened by such buyers, in favour of
Cintas Largas, Ltd. The Letters of Credit were effected through
the Letter of Credit Facility of Cintas Largas, Ltd. in plaintiff. The

Corporation Law/alfred0 Page 141 of 1509


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profits of Cintas Largas, Ltd. from these transactions were then
deposited in either the deposit account of Cintas Largas, Ltd.
with plaintiff or the Money Market Placement Account Nos. 063
and 084, depending upon the instructions of Wilfrido C.
Martinez and Blamar C. Gonzales, principally.7

On January 24, 1979, the CLL opened a money market placement


with the respondent bearing MMP No. 063, with an initial placement
of US$390,000.8 The CLL also opened and maintained a foreign
currency account and a deposit account with the respondent. The
authorized signatory in both accounts of CLL was Wilfrido C.
Martinez. Some instructions also came from Gonzales, to be
confirmed by Wilfrido Martinez.9 On March 21, 1980, petitioner Ruben
Martinez and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson
affixed their signatures on the two signature cards furnished by the
respondent which became MMP No. 063 and MMP No. 084. On the
face of the cards, the signatories became joint account holders of
the said money market placements.10

On March 25, 1980, the CLL opened a money market placement


account with the respondent bearing MMP No. 084 with an initial
placement of US$68,768.60, transferred from MMP No. 063.11 At times,
funds in MMP Nos. 063 and 084 were transferred to the CLL’s deposit
account, and vice versa.

On May 19, 1980, the CLL, through Wilfrido Martinez, and the
respondent, through Senen L. Matoto and Michael Sung, Senior
Manager of the Money Management Division of the respondent,
executed a letter-agreement in which the existing back-to-back
credit facility granted to the CLL way back in 1979 was extended up
to July 1980, and increased to US$5,000,000. The credit facility was to
be secured as follows:

SECURITY: (i) Back-to-Back L/C – to be secured by an L/C


issued, by a bank acceptable to AFHK, in favor of Cintas
Largas.

(ii) AFHK L/C issued prior to receipt of Backing L/C – to be


secured by a 10% margin by way of a hold out on cash deposit
with AFHK with interest at LIBOR. The Backing L/C, however,
shall be opened not later than 120 days after the issuance of
AFHK’s L/C.

(iii) JSS of Messrs. Ramon Siy, Wilfrido C. Martinez, Ricardo Lopa


and Miguel J. Lacson for both of the above cases.

DOCUMENTATION: Standard AFHK L/C documentation.12

The facility was designed to finance the purchases of molasses


made by the CLL from the Philippines for re-export.13

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In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel
J. Lacson, Ricardo Lopa, and Ramon Siy executed a continuing
suretyship agreement in which they bound and obliged themselves,
jointly and severally, with the CLL to pay the latter’s obligation under
the said credit facility.14

As of September 26, 1980, the balance of the deposit account of the


CLL with the respondent was US$1,025,052.06.15 On the other hand,
the balance of the money placement in MMP No. 063, as of
September 25, 1980 was US$312,708.43,16 while the balance of the
money market placement in MMP No. 084 as of September 8, 1980
stood at US$768,258.24.17

On October 10, 1980, Blamar Gonzales, acting for Mar Tierra


Corporation, sent to the respondent a telex confirming his telephone
conversation with Michael Sung/Bing Matoto requesting the
respondent to transfer US$340,000 to Account No. FCD SA 18402-7,
registered in the name of Mar Tierra Corporation, Philippine Banking
Corporation, Union Cement Building, Port Area, Manila, as payee,
with the following specific instructions: (a) there should be no
mention of Wilfrido Martinez or Mar Tierra Corporation; (b) the telex
instruction should be signed only by Wilfrido Martinez and sent only
through the telex machine of Mar Tierra Corporation; and, (c) the
final confirmation of the transfer should be made by telephone
call.18 Gonzales requested the respondent, in the same telex, to
confirm its total available account so that instructions on the transfer
of the funds to FCD SA 18402-7 could be formalized.19

On October 13, 1980, Sung sent a telex to Gonzales informing the


latter of the balances of the MMP Nos. 063 and 084 and in the CLL
account deposit, with the corresponding maturity dates thereof,
thus:

1. DETAIL OF PLACEMENT IN VARIOUS A/C.

MMP – 063

VALUE MATURIT DAT


AMOUNT MATURITY VALUE
DATE Y DATE E

12- USD306,043.4
25/9/80 28/11/80 USD 312,708.43
1/4 8

MMP –
084

25/09/8 12- USD751,883.8


28/11/80 USD 768,258.24
0 1/4 8

Corporation Law/alfred0 Page 143 of 1509


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--------------
USD1080,966.67
=============
=

CINTAS LARGAS

VALUE MATURITY MATURITY


DATE AMOUNT
DATE DATE VALUE

1 DAY 10-
15/9/80 USD 46,131.26
CALL 7/8

1 DAY 11-
25/9/80 USD500,000.00
CALL 1/4

(RATE ADJ: TO 12-1/4 VALUE 7/10/80)

12- USD
26/9/80 31/10/80 USD420,831.45
1/4 425,843.44

2. ACCORDING TO AIDC, O/S OF PESO LOAN IS 10,930,000.00,


AND THE HOLDOUT REQUIRED IS 120 PCT

COMPUTATION: PESO 10,930,000.00


7.89 (EXCHANGE
RATE)
1.20 (120 PCT)
-----------------
1,662,357.00
==========

3. ACCORDINGLY, THE FUND AVAILABLE IS APPROX.


USD340,000.00. PLS REVERT.20

Sung informed Gonzales that the account available was


approximately US$340,000, considering the CLL deposit account and
the money market placements.21 On October 14, 1980, the
respondent received a telex from Wilfrido C. Martinez requesting that
the transfer of US$340,000 from the deposit account of the CLL or
any deposit available be effected by telegraphic transfer as soon as
possible to their account, payee FCD SA 18402-7, Philippine Banking
Corporation, Port Area, Manila.22 On October 21, 1980, Wilfrido
Martinez wrote the respondent confirming his request for the transfer
of US$340,000 to "their" account, FCD SA 18402-7, with the Philippine
Banking Corporation, through Wells Fargo Bank of New York,

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Philippine Banking Corporation Account No. FCDU SA No. 003-
019205.23

The respondent complied with the request of the CLL, through


Wilfrido Martinez and Gonzales, and remitted US$340,000 as
instructed.24 However, instead of deducting the amount from the
funds in the CLL foreign currency or deposit accounts and/or MMP
Nos. 063 and 084, the respondent merely "posted" the US$340,000 as
an account receivable of the CLL since, at that time, the money
market placements had not yet matured.25 When the money market
placements matured, however, the respondent did not collect the
US$340,000 therefrom. Instead, the respondent allowed the CLL
and/or Wilfrido C. Martinez to withdraw, up to July 3, 1981, the bulk
of the CLL deposit account and MMP Nos. 084 and 063;26 hence, it
failed to secure reimbursement for the US$340,000 from the said
deposit account and/or money market placements.

In the meantime, problems ensued in the reconciliation of the


transactions involving the funds of the CLL, including the MMP Nos.
063 and 084 with the respondent, as well as the receivables of Mar
Tierra Corporation. There was also a need to audit the said funds.
Sometime in July 1982, conferences were held between the
executive committee of Mar Tierra Corporation and some of its
officers, including Miguel J. Lacson, where the means to reduce the
administrative expenses and accountants’ fees, and the possibility of
placing the CLL on an "inactive status" were discussed.27 The
respondent pressured the CLL, Wilfrido Martinez, and Gonzales to
pay the US$340,000 it remitted to Account No. FCD SA 18402-7.28
Eventually, Wilfrido C. Martinez and Blamar Gonzales engaged the
services of the auditing firm, the Jacinto, Belano, Castro & Co., to
review the flow of the CLL’s funds and the receivables of Mar Tierra
Corporation.

On August 16, 1982, the CLL, through its certified public accountant,
wrote the respondent requesting the latter to furnish its accountant
with a copy of the financial report prepared by its auditors.29 An
audit was, thereafter, conducted by the Jacinto, Belano, Castro &
Co., certified public accountants of the CLL and Mar Tierra
Corporation. Based on their report, the auditors found that the CLL
owed the respondent US$340,000.30

In the meantime, the respondent demanded from the CLL, Wilfrido


Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, the
payment of the US$340,000 remitted by it to FCD SA 18402-7, per
instructions of Gonzales and Wilfrido Martinez. No remittance was
made to the respondent. Petitioner Ruben Martinez denied
knowledge of any such remittance, as well as any liability for the
amount thereof.

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On June 17, 1983, the respondent filed a complaint against the CLL,
Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez,
with the RTC of Kaloocan City for the collection of the principal
amount of US$340,000, with a plea for a writ of preliminary
attachment. Two alternative causes of action against the
defendants were alleged therein, viz:

FIRST ALTERNATIVE CAUSE OF ACTION

2.1 The allegations contained in the foregoing paragraphs are


repleaded herein by reference.

2.2 The remittance by plaintiff of the sum of US$340,000.00 as


previously explained in the foregoing paragraphs was made
upon the express instructions of defendants GONZALES and
WILFRIDO C. MARTINEZ acting for and in behalf of the
defendant CINTAS, defendants GONZALES and WILFRIDO C.
MARTINEZ being the duly authorized representatives of
defendant CINTAS to transact any and all of its business with
plaintiff.

2.3 The remittance of US$340,000.00 was made under an


agreement for plaintiff to advance the said amount and for
defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS to
repay plaintiff all such monies so advanced to said defendants
or to their order.

2.4 In making said remittance, plaintiff acted as the agent of


the foregoing defendants in meeting the latter’s liability to the
recipient/s of the amount so remitted.

2.5 The remittance of US$340,000.00 which remains unsettled to


date is a just, binding and lawful obligation of the defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS.

2.6 Defendant CINTAS is a reinvoicing or paper company with


nominee shareholders in Hongkong. The real and beneficial
shareholders of the foregoing defendants are the defendants
LACSON and WILFRIDO C. MARTINEZ.

2.7 Defendant CINTAS is being used by the foregoing


defendants as an alter ego or business conduit for their sole
benefit and/or to defeat public convenience.

2.8 Defendant CINTAS, being a mere alter ego or business


conduit for the foregoing defendants, has no corporate
personality distinct and separate from that of its beneficial
shareholders and, likewise, has no substantial assets in its own
name.

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2.9 The remittance of US$340,000.00 as referred to previously,
although made upon the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance
made for the benefit of the beneficial shareholders of
defendant CINTAS.

2.10 Any and all obligations of defendant CINTAS are the


obligations of its beneficial shareholders since the former is
being used by the latter as an alter ego or business conduit for
their sole benefit and/or to defeat public convenience.

SECOND ALTERNATIVE CAUSE OF ACTION

3.1 The allegations contained in the foregoing paragraphs are


incorporated herein by reference.

3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and


LACSON are joint account holders of Money Market Placement
Account Nos. 063 and 084 (hereinafter referred to as MMP 063
and 084 for brevity) opened and maintained by said
defendants with the plaintiff.

3.3 Said money market placement accounts, although


nominally opened and maintained by said defendants, were in
reality for the account and benefit of all the defendants.

3.4 Defendant CINTAS likewise opened and maintained a


deposit account with plaintiff.

3.5 Defendants W.C. Martinez and Gonzales upon giving


instructions to plaintiff to remit the amount of US$340,000.00 as
previously discussed also instructed plaintiff to reimburse itself
from available funds in MMP Account Nos. 063 and 084 and the
defendant CINTAS’ deposit account.

3.6 Due to excusable mistake, plaintiff was unable to obtain


reimbursement for the remittance it made from MMP Account
Nos. 063, 084 and from the deposit account of defendant
CINTAS.

3.7 As a consequence of said mistake, plaintiff delivered to the


foregoing defendants and/or to third parties upon orders of the
defendants substantially all the funds in MMP Account Nos. 063,
084 and the deposit account of defendant CINTAS.

3.8 The amount of US$340,000.00 delivered by plaintiff to the


foregoing defendants constituted an overpayment and/or
erroneous payment as defendants had no right to demand the
same; further, said amount having been unduly delivered by
mistake, the foregoing defendants were obliged to return it.

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3.9 Since the foregoing defendants had no legal right to the
overpayment or erroneous payment of US$340,000.00 they,
therefore, hold said money in trust for the plaintiff.

3.10 Despite numerous demands to the defendants WILFRIDO


C. MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS for
restitution of the funds erroneously paid or overpaid to said
defendants, they have failed and continue to fail to make any
restitution.31

The respondent prayed therein that, after due proceedings,


judgment be rendered in its favor, viz:

ON THE FIRST ALTERNATIVE CAUSE OF ACTION

4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ


and CINTAS, jointly and severally, liable to pay plaintiff the
amount of US$340,000.00 with interests thereon from February
20, 1982 until fully paid.

4.2 Declaring that defendant CINTAS is a mere alter ego or


business conduit of defendants LACSON and WILFRIDO C.
MARTINEZ; hence, the foregoing defendants are, jointly and
severally, liable to pay plaintiff the amount of US$340,000.00
with interests thereon.

4.3 Ordering the foregoing defendants to be, jointly and


severally, liable for the amount of P100,000.00 as and for
attorney’s fees; and

4.4 Ordering the foregoing defendants to be, jointly and


severally, liable to plaintiff for actual damages in an amount to
be proved at the trial. Or -

ON THE SECOND ALTERNATIVE CAUSE OF ACTION

5.1 Declaring that plaintiff made an erroneous payment in the


amount of US$340,000.00 to defendants LACSON, WILFRIDO C.
MARTINEZ, RUBEN MARTINEZ and CINTAS.

5.2 Declaring the foregoing defendants to be, jointly and


severally, liable to reimburse plaintiff the amount of
US$340,000.00 with interest thereon from February 20, 1982 until
fully paid.

5.3 Ordering defendants to be, jointly and severally, liable for


the amount of P100,000.00 as and for attorney’s fees; and

5.4 Ordering defendants to be, jointly and severally, liable to


plaintiff for actual damages in an amount to be proved at the
trial.

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5.5 A writ of preliminary attachment be issued against the
properties of the defendants WILFRIDO C. MARTINEZ, RUBEN
MARTINEZ, LACSON and CINTAS as a security for the satisfaction
of any judgment that may be recovered.

Plaintiff further prays for such other relief as may be deemed


just and equitable in the premises.32

In his answer to the complaint, petitioner Ruben Martinez interposed


the following special and affirmative defenses:

BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering


defendant respectfully states:

2. Defendant is not the holder, owner, depositor, trustee and


has no interest whatsoever in the account in Philippine Banking
Corporation (FCD SA 18402-7) where the plaintiff remitted the
amount sought to be recovered. Hence, he did not benefit
directly or indirectly from the said remittance;

3. Defendant did not participate in any manner whatsoever in


the remittance of funds from the plaintiff to the alleged FCD
Account in the Philippine Banking Corporation;

4. Defendant has not received nor benefited from the alleged


remittance, "payment," "overpayment" or "erroneous payment"
allegedly made by plaintiff; hence, insofar as he is concerned,
there is nothing to return to or to "hold in trust" for the plaintiff;

5. Plaintiff’s alleged remittance of the amount by mere telex or


telephone instruction was highly irregular and questionable
considering that the undertaking was that no remittance or
transfer could be done without the prior signature of the
authorized signatories;

6. The alleged telex instructions to the plaintiff was for it to


confirm the amounts that are "free and available" which it did;

7. Plaintiff is guilty of estoppel or laches by making it appear


that the funds so remitted are "free and available" and by not
acting within reasonable time to correct the alleged mistake;

8. The alleged remittance, "overpayment" and "erroneous


payment" was manipulated by plaintiff’s own employees,
officers or representatives without connivance or collusion on
the part of the answering defendant; hence, plaintiff has only
itself to blame for the same; likewise, its recourse is not against
answering defendant;

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9. Plaintiff’s Complaint is defective in that it has failed to state
the facts constituting the "mistake" regarding its failure to obtain
reimbursement from MMP 063 and 084;

10. Plaintiff is guilty of gross negligence and it only has itself to


blame for its alleged loss;

11. Sometime on or about 1980, defendant was made to sign


blank forms concerning opening of money market placements
and perhaps, this is how he became a "joint account holder" of
MMP 063 and 084; defendant at that time did not realize the
import or significance of his act; afterwards, defendant did not
do any act or omission by which he could be implicated in this
case;

12. Assuming that defendant is a "joint account holder" of said


MMP 063 and 084, plaintiff has failed to plead defendant’s
obligations, if any, by being said "joint account holder;" likewise,
the Complaint fails to attach the corresponding documents
showing defendant’s being a "joint account holder." 33

The CLL was declared in default for its failure to file an answer to the
complaint.

After trial, the RTC rendered its decision, the dispositive portion of
which reads as follows:

PREMISES CONSIDERED, judgment is hereby rendered as follows:

1. Ordering all the defendants, jointly and severally, to pay


plaintiff the amount of US$340,000.00 or its equivalent in
Philippine currency measured at the Central Bank
prevailing rate of exchange in October 1980 and with
legal interest thereon computed from the filing of
plaintiff’s complaint on June 17, 1983 until fully paid;

2. Declaring that defendant Cintas Largas Ltd. is a mere


business conduit and alter ego of the individual
defendants, thereby holding the individual defendants,
jointly and severally, liable to pay plaintiff the aforesaid
amount of US$340,000.00 or its equivalent in Philippine
Currency measured at the Central Bank prevailing rate of
exchange in October 1980, with interest thereon as
above-stated;

3. Ordering all defendants to, jointly and severally, pay


unto plaintiff the amount of P50,000.00 as and for
attorney’s fees, plus costs.

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All counterclaims and cross-claims are dismissed for lack of
merit.

SO ORDERED.34

The trial court ruled that the CLL was a mere paper company with
nominee shareholders in Hongkong. It ruled that the principle of
piercing the veil of corporate entity was applicable in this case, and
held the defendants liable, jointly and severally, for the claim of the
respondent, on its finding that the defendants merely used the CLL
as their business conduit. The trial court declared that the majority
shareholder of Mar Tierra Corporation was the RJL, controlled by
petitioner Ruben Martinez and his brothers, Jose and Luis Martinez, as
majority shareholders thereof. Moreover, petitioner Ruben Martinez
was a joint account holder of MMP Nos. 063 and 084. The trial court,
likewise, found that the auditors of Mar Tierra Corporation and the
CLL confirmed that the defendants owed US$340,000. The trial court
concluded that the respondent had established its causes of action
against Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben
Martinez; hence, held all of them liable for the claim of the
respondent.

The decision was appealed to the CA. On June 27, 1997, the CA
rendered its decision, the dispositive portion of which reads:

WHEREFORE, the decision of the Court a quo dated December


[19], 1991 is hereby MODIFIED, by exonerating appellant Blamar
Gonzales from any liability to appellee and the complaint
against him is DISMISSED. The decision appealed from is
AFFIRMED in all other respect.

SO ORDERED.35

The appellate court exonerated Gonzales of any liability, reasoning


that he was not a stockholder of the CLL nor of Mar Tierra
Corporation, but was a mere employee of the latter corporation.36
Petitioner Ruben Martinez sought a reconsideration of the decision of
the CA, to no avail.37

Dissatisfied with the decision and resolution of the appellate court,


the petitioner, filed the petition at bar, on the following grounds:

RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT


HEREIN PETITIONER RUBEN MARTINEZ IS LIABLE TO RESPONDENT
BPI INTERNATIONAL FINANCE FOR REIMBURSEMENT OF THE
US$340,000.00 REMITTED BY SAID RESPONDENT BPI
INTERNATIONAL FINANCE TO FCD SA ACCOUNT NO. 18402-7 AT
THE PHILIPPINE BANKING CORPORATION, PORT AREA BRANCH.

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II

RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING THE


COUNTER-CLAIM OF PETITIONER RUBEN MARTINEZ CONSIDERING
THE EVIDENCE ON RECORD THAT PROVES THE SAME.38

The paramount issue posed for resolution is whether or not the


petitioner is obliged to reimburse to the respondent the principal
amount of US$340,000.

The petitioner asserts that the trial and appellate courts erred when
they held him liable for the reimbursement of US$340,000 to the
respondent. He contends that he is not in actuality a stockholder of
Mar Tierra Corporation, nor a stockholder of the CLL. He was not
involved in any way in the operations of the said corporations. He
added that while he may have signed the signature cards of MMP
Nos. 063 and 084 in blank, he never had any involvement in the
management and disposition of the said accounts, nor of any
deposits in or withdrawals from either or both accounts. He was not
aware of any transactions between the respondent, Wilfrido
Martinez, and Gonzales, with reference to the remittance of the
US$340,000 to FCD SA 18402-7; nor did he oblige himself to pay the
said amount to the respondent. According to the petitioner, there is
no evidence that he had benefited from any of the following: (a)
the remittance by the respondent of the US$340,000 to Account No.
FCD SA 18402-7 owned by Mar Tierra Corporation; (b) the money
market placements in MMP Nos. 063 and 084, or, (c) from any
deposits in or withdrawals from the said account and money market
placements.

On the other hand, the appellate court found the petitioner and his
co-defendants, jointly and severally, liable to the respondent for the
payment of the US$340,000 based on the following findings of the
trial court:

The Court finds that defendant Cintas Largas (Ltd.) with


capitalization of $10,000.00 divided into 1,000 shares at HK$10
per share, is a mere paper company with nominee
shareholders in Hongkong, namely: Overseas Nominees Ltd.
and Shares Nominees Ltd., with defendants Wilfrido and Miguel
J. Lacson as the sole directors (Exh. A). Since the said
shareholders are mere nominee companies, it would appear
that the said defendants Wilfrido and Miguel J. Lacson who are
the sole directors are the real and beneficial shareholders
(t.s.n., 9-1-87, p. 5). Further, defendant Cintas Largas Ltd. has no
real office in Hongkong as it is merely being accommodated
by Price Waterhouse, a large accounting office in Hongkong
(t.s.n., 9-1-87, pp. 7-8).

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Defendant Cintas Largas Ltd., being a mere alter ego or
business conduit for the individual defendants with no
corporate personality distinct and separate from that of its
beneficial shareholders and with no substantial assets in its own
name, it is safe to conclude that the remittance of
US$340,000.00 was, in fact, a remittance made for the benefit
of the individual defendants. Plaintiff was supposed to deduct
the US$340,000.00 remitted to the foreign currency deposit
account from Cintas Largas (Ltd.) funds or from money market
placement account Nos. 063 and 084 as well as Cintas Largas
Ltd. deposit account (Exh. FF-24).

Defendant Cintas Largas Ltd. was established only for financing


(t.s.n., 12-19-88, pp. 25-26) and the active owners of Cintas are
defendants Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-
19-88, p. 22). Mar Tierra Corporation of which defendant
Wilfrido Martinez is the President and one of its owners and
defendant Blamar Gonzales as the Vice President, sells
molasses to defendant Cintas Largas Ltd. Defendant Miguel J.
Lacson is a business partner in purchasing molasses for Mar
Tierra Corporation. Mar Tierra Corporation was selling molasses
to Cintas Largas Ltd. which were purchased by Miguel Lacson
and Wilfrido C. Martinez (t.s.n., 12-19-88, pp. 23-24). The majority
owner of Mar Tierra Corporation is RJL Martinez Fishing
Corporation which is owned by brothers Ruben Martinez, Jose
Martinez and Luis Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-
88, pp. 11-12). The FCD SA-18402-7 account at Philippine
Banking Corporation, Port Area Branch, where the
US$340,000.00 was remitted by the plaintiff is the account of
Mar Tierra Corporation, and with the interlapping connection of
the defendants to each other, these could be the reason why
the funds of Cintas Largas Ltd. were being co-mingled and
controlled by defendants more particularly defendants Blamar
Gonzales and Wilfrido C. Martinez (Exhs. D, E, F, G, H, I, J, L, M,
N, O, P, R, S, and T).

On the basis of the evidence, the Court finds and so holds that
the cause of action of the plaintiff against the defendants has
been established.39

We do not agree with the trial court and appellate court.

We note that the question of whether or not a corporation is merely


an alter ego is purely one of fact.40 So is the question of whether or
not a corporation is a paper company or a sham or subterfuge or
whether the respondent adduced the requisite quantum of
evidence warranting the piercing of the veil of corporate entity of

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the CLL.41 The Court is not a trier of facts. Hence, the factual findings
of the trial court, as affirmed by the appellate court, are generally
conclusive upon this Court.42 However, the rule is subject to the
following exceptions: (a) where the conclusion is a finding grounded
entirely on speculation, surmise and conjectures; (b) where the
information made is manifestly mistaken; (c) where there is grave
abuse of discretion; (d) where the judgment is based on a
misapplication of facts, and the findings of facts of the trial court
and the appellate court are contradicted by the evidence on
record; and (e) when certain material facts and circumstances had
been overlooked by the trial court which, if taken into account,
would alter the result of the case.

We have reviewed the records and find that some substantial


factual findings of the trial court and the appellate court and,
consequently, their conclusions based on the said findings, are not
supported by the evidence on record.

The general rule is that a corporation is clothed with a personality


separate and distinct from the persons composing it. Such
corporation may not be held liable for the obligation of the persons
composing it; and neither can its stockholders be held liable for such
obligation.43 A corporation has a separate personality distinct from its
stockholders and from other corporation to which it may be
connected.44 This separate and distinct personality of a corporation
is a fiction created by law for convenience and to prevent
injustice.45

Nevertheless, being a mere fiction of law, peculiar situations or valid


grounds can exist to warrant, albeit sparingly, the disregard of its
independent being and the piercing of the corporate veil.46 Thus,
the veil of separate corporate personality may be lifted when such
personality is used to defeat public convenience, justify wrong,
protect fraud or defend crime; or used as a shield to confuse the
legitimate issues; or when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation 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;47 or when the corporation is used
as a cloak or cover for fraud or illegality, or to work injustice, or where
necessary to achieve equity or for the protection of the creditors.48 In
such cases where valid grounds exist for piercing the veil of
corporate entity, the corporation will be considered as a mere
association of persons.49 The liability will directly attach to them.50

However, mere ownership by a single stockholder or by another


corporation of all or nearly all of the capital stocks of a corporation is
not by itself a sufficient ground to disregard the separate corporate
personality. The substantial identity of the incorporators of two or
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more corporations does not warrantly imply that there was fraud so
as to justify the piercing of the writ of corporate fiction.51 To disregard
the said separate juridical personality of a corporation, the
wrongdoing must be proven clearly and convincingly.52

The test in determining the application of the instrumentality or alter


ego doctrine 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 plaintiff’s 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 defendant’s
relationship to that operation.53

In this case, the respondent failed to adduce the quantum of


evidence necessary to prove any valid ground for the piercing of
the veil of corporate entity of Mar Tierra Corporation, or of RJL for
that matter, and render the petitioner liable for the respondent’s
claim, jointly and severally, with Wilfrido Martinez and Lacson. The
mere fact that the majority stockholder of Mar Tierra Corporation is
the RJL, and that the petitioner, along with Jose and Luis Martinez,
owned about 42% of the capital stock of RJL, do not constitute
sufficient evidence that the latter corporation, and/or the petitioner
and his brothers, had complete domination of Mar Tierra
Corporation. It does not automatically follow that the said
corporation was used by the petitioner for the purpose of
committing fraud or wrong, or to perpetrate an injustice on the
respondent. There is no evidence on record that the petitioner had
any involvement in the purchases of molasses by Wilfrido Martinez,
Gonzales and Lacson, and the subsequent sale thereof to the CLL,
through Mar Tierra Corporation. On the contrary, the evidence on
record shows that the CLL purchased molasses from Mar Tierra
Corporation and paid for the same through the credit facility
granted by the respondent to the CLL. The CLL, thereafter, made
remittances to Mar Tierra Corporation from its deposit account and

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MMP Nos. 063 and 084 with the respondent. The close business
relationship of the two corporations does not warrant a finding that
Mar Tierra Corporation was but a conduit of the CLL.

Likewise, the respondent failed to adduce preponderant evidence


to prove that the Mar Tierra Corporation and the RJL were so
organized and controlled, its affairs so conducted as to make the
latter corporation merely an instrumentality, agency, conduit or
adjunct of the former or of Wilfrido Martinez, Gonzales, and Lacson
for that matter, or that such corporations were organized to defraud
their creditors, including the respondent. The mere fact, therefore,
that the businesses of two or more corporations are interrelated is not
a justification for disregarding their separate personalities, absent
sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights.54

Also, the mere fact that part of the proceeds of the sale of molasses
made by Mar Tierra Corporation to the CLL may have been used by
the latter as deposits in its deposit account with the respondent or in
the money market placements in MMP Nos. 063 and 084, or that the
funds of Mar Tierra Corporation and the CLL with the respondent
were mingled, and their disposition controlled by Wilfrido Martinez,
does not constitute preponderant evidence that the petitioner,
Wilfrido Martinez and Lacson used the Mar Tierra Corporation and
the RJL to defraud the respondent. The respondent treated the CLL
and Mar Tierra Corporation as separate entities and considered
them as one and the same entity only when Wilfrido C. Martinez
and/or Blamar Gonzales failed to pay the US$340,000 remitted by
the respondent to FCD SA 18402-7. This being the case, there is no
factual and legal basis to hold the petitioner liable to the respondent
for the said amount.

Contrary to the ruling of the trial court and the appellate court, the
auditors of the CLL and the Mar Tierra Corporation, in their report, did
not find the petitioner liable for the respondent’s claim in their report.
The auditors, in fact, found the CLL alone liable for the said
amount.55 Even a cursory reading of the report will show that the
name of the petitioner was not mentioned therein.

The respondent failed to adduce evidence that the petitioner had


any involvement in the transactions between the CLL, through
Wilfrido Martinez and Gonzales, and the respondent, with reference
to the remittance of the US$340,000 to FCD SA 18402-7. In fact, the
said transaction was so confidential that Gonzales even suggested
to the respondent that the name of Wilfrido Martinez or Mar Tierra
Corporation be not made of record, and to authorize only Wilfrido
Martinez to sign the telex instruction:

OCT. 10, 1980

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TO: AYALA FINANCE

ATTN: MICHAEL SUNG/BING MATOTO

FR: B. GONZALES

RE: TRANSFER OF FUNDS

THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT WE


WLD LIKE TO SUGGEST THE FF PROCEDURES FOR FUND TRANSFER.

1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO OUR


FCD ACCT BY TELEGRAPHIC TRANSFER.

2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF


PHILBANKING CORPORATION, PORT AREA BRANCH, UNION
CEMENT BLDG, BONIFACIO DRIVE, PORT AREA, METRO
MANILA, PHILS.

3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF


W.C. MARTINEZ OR MAR TIERRA CORP. TLX INSTRUCTION
SHLD BE SIGNED BY W.C. MARTINEZ AND WILL BE SENT
ONLY THRU TLX MACHINE OF MAR TIERRA CORP.

4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE


CALL.

PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND AVAILABLE


SO WE CAN FORMALIZE INSTRUCTION OF TRANSFER IF THE
ABOVE PROCEDURE IS APPROVED BY YOU. PLS CONFRM ALSO
LIST OF CORRESPONDENT BANK IN HK.

IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE FF


PROCEDURE:

1. WELLS FARGO HK WIL SEND A TLX TO MANILA


INSTRUCTING PHIL BANKING CORP TO CREDIT FCD SA
18402-7.

2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME WELLS


FARGO HK WIL REQUEST WELLS FARGO NEW YORK TO
CREDIT FCDU NO. 003-019205 FOR THE ACCT OF PHIL
BANKING CORP.56

Even the respondent admitted, in its complaint, that the CLL,


Gonzales, and Wilfrido Martinez, bound and obliged themselves to
repay the US$340,000, viz:

2.2 The remittance by plaintiff of the sum of US$340,000.00 as


previously explained in the foregoing paragraphs was made
upon the express instructions of defendants GONZALES and
WILFRIDO C. MARTINEZ acting for and in behalf of the
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defendant CINTAS, defendants GONZALES and WILFRIDO C.
MARTINEZ being the duly authorized representatives of
defendant CINTAS to transact any and all of its business with
plaintiff.

2.3 The remittance of US$340,000.00 was made under an


agreement for plaintiff to advance the said amount and for
defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS to
repay plaintiff all such monies so advanced to said defendants
or to their order.

2.4 In making said remittance, plaintiff acted as the agent of


the foregoing defendants in meeting the latter’s liability to the
recipient/s of the amount so remitted.

2.5 The remittance of US$340,000.00 which remains unsettled to


date is a just, binding and lawful obligation of the defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS.

2.6 Defendant CINTAS is a reinvoicing or paper company with


nominee shareholders in Hongkong. The real and beneficial
shareholders of the foregoing defendants are the defendants
LACSON, and WILFRIDO C. MARTINEZ.

2.7 Defendant CINTAS is being used by the foregoing


defendants as an alter ego or business conduit for their sole
benefit and/or to defeat public convenience.

2.8 Defendant CINTAS, being a mere alter ego or business


conduit for the foregoing defendants, has no corporate
personality distinct and separate from that of its beneficial
shareholders and likewise has no substantial assets in its own
name.

2.9 The remittance of US$340,000.00 as referred to previously,


although made upon the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance
made for the benefit of the beneficial shareholders of
defendant CINTAS.57

The admissions made by the respondent in its complaint are judicial


admissions which cannot be contradicted unless there is a showing
that it was made through palpable mistake or that no such
admission was made.58

The respondent impleaded the petitioner only in its second


alternative cause of action, on its allegation that the latter was a
joint account holder of MMP Nos. 063 and 084, simply because he
signed the signature cards with Wilfrido Martinez and/or Lacson in
blank. The trial court found the submission of the respondent duly

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established, based on Wilfrido Martinez’s answer to the complaint,
and held the petitioner liable for the said amount based on the
signature cards in this language:

Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel


Lacson are joint account holders of the money market
placement account Nos. 063 and 084 (par. 17 page 4 Answer
of defendant Wilfrido C. Martinez; par. 2, page 5, Amended
Answer of defendant Lacson; t.s.n., 4-18-88, p. 7).59

The appellate court affirmed the ruling of the trial court without
making any specific reference to the aforequoted ruling of the trial
court.60

We do not agree. The judicial admissions made by Wilfrido Martinez


in his answer to the complaint are not binding on the petitioner.61 The
evidence on record shows that the petitioner affixed his signatures
on the signature cards merely upon the request of his son, Wilfrido
Martinez. The signature cards were printed forms of the respondent
with the names of the signatories and the supposed account holders
typewritten thereon and, except for the account number, were
similarly worded, viz:

SIGNATURE CARD

Account Name: Mr. Ruben Account Number: MMP-


Martinez and/or 063
Mr. Wilfrido C.
Martinez
and/or Mr. Miguel
J. Lacson

I.D. Card/Passport No.:


_____________________________________________

Residence Address:
________________________________________________

_________________________________________ Tel.:
___________________

Office Address:
____________________________________________________

_________________________________________ Tel.:
___________________

Number of signature required to withdraw funds:


_________________________

Corporation Law/alfred0 Page 159 of 1509


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Confirmation/Correspondence to ___ Office
be mailed to:
___ Residence

___ Others:
________________

_________________________
_

Other Instructions:
_______________________________________________

_____________________________________________________________
____

_____________________________________________________________
____

Specimen of signature:

(Ruben (Wilfrido
1. Sgd. 3. Sgd.
Martinez) Martinez)

SIGNATURE NAME SIGNATURE NAME

(Ruben (Miguel J.
2. Sgd. 4. Sgd.
Martinez) Lacson)

SIGNATURE NAME SIGNATURE NAME62

The respondent failed to adduce any evidence, testimonial or


documentary, including the relevant laws63 of Hongkong where the
placements were made to hold the petitioner liable for the
respondent’s claims. Other than the signature cards, the respondent
failed to adduce a shred of evidence to prove (a) the terms and
conditions of the money market placements of the CLL in MMP Nos.
063 and 084; and, (b) the rights and obligations of the petitioner,
Wilfrido Martinez and Lacson, over the money market placements. In
light of the evidence on record, the CLL and/or Wilfrido Martinez
never surrendered their ownership over the funds in favor of the
petitioner when the latter co-signed the signature cards. The CLL
and/or Wilfrido Martinez retained complete control and dominion
over the funds.

By merely affixing his signatures on the signature cards, the petitioner


did not necessarily become a joint and solidary creditor of the

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respondent over the said placements. Neither did the petitioner bind
himself to pay to the respondent the US$340,000 which was
borrowed by the CLL and/or Wilfrido Martinez, and later remitted to
FCD SA 18402-7.

The respondent has no one but itself to blame for its failure to deduct
the US$340,000 from the foreign currency and deposit accounts and
money market placements of the CLL. The evidence on record
shows that the respondent was supposed to deduct the said amount
from the money market placements of the CLL in MMP Nos. 063 and
084, but failed to do so. The respondent remitted the amount from its
own funds and, by its negligence, merely posted the amount in the
account of the CLL. Worse, the respondent allowed the CLL and
Wilfrido Martinez to withdraw the entirety of the deposits in the said
accounts, without first deducting the US$340,000. By the time the
respondent realized its mistakes, the funds in the said accounts had
already been withdrawn solely by the CLL and/or Wilfrido Martinez.
This was the testimony of Michael Sung, the witness for the
respondent.

Q: Do you know whether this US$340,000 was really transferred


to Foreign Currency Deposit Account No. 18402-7 of the
Philippine Banking Corporation in Manila?

A: Yes.

Q: Pursuant to the procedure for fund transfer as contained in


Exhs. B, C, D and E, after having made such remittance of
US$340,000.00, what was plaintiff supposed to do, if any, in
order to get reimbursement for such transfer?

A: Plaintiff was supposed to deduct the US$340,000.00 remitted


to the foreign currency deposit account from the Cintas Largas
funds or from Money Market Placement Account Nos. 063 and
084 as well as the Cintas Largas, Ltd. deposit account.

Q: Do you know if plaintiff was able to obtain reimbursement of


the US$340,000 remitted to the Philippine Banking Corporation
in Manila?

A: No, because instead of deducting the remittance of


US$340,000 from the funds in the money market placement
accounts and/or the Cintas Largas Deposit Account, we
posted the US$340,000 remittance as an account receivable of
Cintas Largas, Ltd. since at that time the money market
placement deposits have not yet matured. Subsequently, we
failed to charge the deposit and MMP accounts when they
matured and Cintas Largas, Ltd. and/or Wilfrido C. Martinez
had already withdrawn the bulk of the funds contained in
Money Market Placement Account No. 063 and the Cintas
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Largas, Ltd. Deposit Account thus, we were unable to obtain
reimbursement therefrom.64

It cannot even be argued that if the petitioner would not be


adjudged liable for the respondent’s claim, he would thereby be
enriching himself at the expense of the respondent. There is no
evidence on record that the petitioner withdrew a single centavo
from or was personally benefited by the funds in MMP Nos. 063 and
084. The testimonial and documentary evidence of the respondent
clearly shows that the CLL and/or Wilfrido Martinez used and
disposed of the said funds without the knowledge, involvement, and
consent of the petitioner. Furthermore, the documentary evidence
of the respondent shows the following:

MMP – 063
Statement of Accounts (Deposit)

Value
Funds In Funds Out Remarks
Date

28/11/80 6,664.95 Interests earned

29/12/80 4,779.66 " "

21/01/81 4,024.83 " "

21/01/81 119,478.51 Purchase


HK$632,041.33
@5.29 &
transferred to its
statement A/C

13/02/81 2,321.99 Interests earned

" 100,015.00 Transfer to Cintas


Largas’ A/C
Receivable.

17/02/81 55.07 Interests earned

18/03/81 1,317.27 " "

" 100,000.00 Purchase

Corporation Law/alfred0 Page 162 of 1509


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HK$525,000.00
@5.25 cheque
made payable
to Grand Solid
Enterprises Co.,
Ltd.

" 5,713.74 Transfer to A/C


Receivable
(MMP-063)

_____________ _____________
US$443,975.85 US$443,975.85 65

============ ============


MMP – 084
Statement of Accounts (Deposit)

Value
Funds In Funds Out Remarks
Date

28/11/80 16,374.36 Interests earned

01/12/80 488.16 " "

04/12/80 1,089.06 " "

Transfer to A/C
" US$250,000.00
of Cintas Largas

09/12/80 1,290.56 Interests earned

Transfer to Cintas
" 200,000.00
Largas’ A/R.

18/12/80 1,545.42 Interests earned

T/T to Chase
" 200,000.00
Manhattan NY

Corporation Law/alfred0 Page 163 of 1509


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for

Credit A/C Allied


Capital F/O

Frank Chan B/O


Grand Solid.

02/03/81 4,608.27 Interests earned

Transfer to A/C
" 20,470.74
of Grand Solid

09/03/81 321.91 Interests earned

Transfer to A/C
" 60,000.00
of Trinisia Ltd.

20/03/81 213.40 Interests earned

T/T to Nitto
" 45,286.26
Trading & Josho

Ind. Co., Ltd.,


Japan.

Transfer to A/C
" 2,028.02
Receivable

(MMP-084)

" 30.00 Cable Charges

_____________ _____________
US$777,815.02 US$777,815.02 66

============ ============


CINTAS LARGAS
Statement of Accounts (Deposit)

Corporation Law/alfred0 Page 164 of 1509


suigeneris
Value
Funds In Funds Out Remarks
Date

31/10/80 5,011.99 Interests earned

17/11/80 8,067.70 " "

Transfer to A/C
" 350,000.00
of Grand Solid

09/11/80 3,062.23 Interests earned

" 350,000.00 Purchase


HK$1,789,200.00
@5.112, Cheque
made payable
to Grand Solid.

26/11/80 3,264.34 Interests earned

" 300,000.00 Purchase


HK$1,535,100.00
@5.117, Cheque
made payable
to Grand Solid

21/01/81 1,299.80 Interests earned

Remittance from
" 81,415.00
C. Itoh & Co., NY

02/03/81 2,445.49 Interests earned

Transfer to
" 129,529.26 Grand Solid’s
A/C Receivable

Transfer from
02/04/81 143,000.00 CL’s Statement
A/C

Corporation Law/alfred0 Page 165 of 1509


suigeneris
10/04/81 456.81 Interests earned

" 50,000.00 Purchase


HK$267,150.00
@5.343, Cheque
made payable
to Grand Solid.

13/04/81 US$ 40.89 Interests earned

21/04/81 311.66 " "

" US$ 50,000.00 Purchase


HK$268,850.00
@5.377, cheque
made payable
to Grand Solid.

28/04/81 132.04 Interests earned

" 40,000.00 Purchase


HK$214,480.00
@5.362, cheque
made payable
to Grand Solid.

" 52,692.00 Remittance from


Dai Ichi Kangyo
Bank NY. REF.
KOMEIMARU

Transfer from
19/05/81 178,465.18 CL’s A/C
Receivable

Remittance from
C. Itoh & Co., NY
22/05/81 46,472.00
Re. Pacific
Geory.

26/05/81 28.40 Interests earned

04/06/81 1,242.80 " "

Corporation Law/alfred0 Page 166 of 1509


suigeneris
" 50,000.00 Purchase
HK$275,750.00
@5.515, Cheque
made payable
to Grand Solid

11/06/81 2,252.36 Interests earned

" 66,400.00 T/T to Security


Pacific Nat’l
Bank LA for A/C
of Twentieth
Century Fox Int’l
Corp.

" 15.00 Cable Charge

" 31.65 Purchase


HK$175.00 @5.53
for payment of
Business
Registration Fee.

25/06/81 1,192.24 Interests earned

" 60,000.00 Purchase


HK$331,500.00
@5.525, cheque
made payable
to Grand Solid.

" 22,656.88 T/T to Daiwa


Bank, Los
Angeles for A/C
of OAC
Equipment Corp.

T/T to Josho Ind.


" 45,800.00
Co. Ltd., Japan

" 15.00 Cable Charge

03/07/81 165.47 Interests earned

Corporation Law/alfred0 Page 167 of 1509


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" 11,870.00 T/T to Bank of
Tokyo, Kobe
Branch for A/C
of Furuno
Electric Co. Ref.:
Mar Tierra
Takashiro Maru,
Eatelite Nav.
and Radar.

" 15.00 Cable Charge

06/07/81 17.60 Interests earned

07/07/81 14.83 " "

" 16,000.00 T/T to Dai Ichi


Kangyo Bank,
Shimizu Branch
for A/C of
Takashiro Maru.

" 15.00 Cable Charge

15/09/81 US$ 482.29 Interests earned

" US$ 1,250.00 Reimbursement


of expenses paid
to Price
Waterhouse &
Co.

17/09/81 11.91 Interests earned

" 237.43 Purchase


HK$1,421.50 for
cheque
payment to
Price
Waterhouse &
Co.

Remittance from
08/01/82 70,360.00
C. Itoh & Co., NY

Corporation Law/alfred0 Page 168 of 1509


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19/01/82 268.74 Interests earned

" 3,064.81 Transfer to CL’s


Margin A/C

" 50,000.00 Purchase


HK$295,100.00,
cheque made
payable to
Grand Solid.

Transfer to A/C
" 5,952.38
of Trinisia Ltd.

_____________ ______________
TOTAL : US$1,756,387.32 US$1,732,103.25

Outstanding
- 24,284.07
deposits

______________ ______________
US$1,756,387.32 US$1,756,387.32 67

============== ==============

Clearly from the foregoing, the withdrawals from the deposit and
foreign currency accounts and MMP Nos. 063 and 084 of the CLL,
after the respondent remitted the US$340,000, were for the account
of the CLL and/or Wilfrido Martinez, and not of the petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The


Decision of the Court of Appeals is REVERSED AND SET ASIDE. The
complaint of the respondent against the petitioner in Civil Case No.
C-10811 is DISMISSED. No costs.

SO ORDERED.

Puno, Austria-Martinez**, Tinga, and Chico-Nazario***, JJ., concur.

Secosa vs. Heirs of Erwin Suarez Francisco (433 SCRA 273 [2004])

[G.R. No. 160039. June 29, 2004]

RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD


WAREHOUSING and PORT SERVICES, INCORPORATED, petitioners, vs.
HEIRS OF ERWIN SUAREZ FRANCISCO, respondents.

Corporation Law/alfred0 Page 169 of 1509


suigeneris
DECISION

YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court seeking
the reversal of the decision34[1] of the Court of Appeals dated
February 27, 2003 in CA-G.R. CV No. 61868, which affirmed in toto
the June 19, 1998 decision35[2] of Branch 20 of the Regional Trial
Court of Manila in Civil Case No. 96-79554.

The facts are as follows:

On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an


eighteen year old third year physical therapy student of the Manila
Central University, was riding a motorcycle along Radial 10 Avenue,
near the Veteran Shipyard Gate in the City of Manila. At the same
time, petitioner, Raymundo Odani Secosa, was driving an Isuzu
cargo truck with plate number PCU-253 on the same road. The truck
was owned by petitioner, Dassad Warehousing and Port Services,
Inc.

Traveling behind the motorcycle driven by Francisco was a sand


and gravel truck, which in turn was being tailed by the Isuzu truck
driven by Secosa. The three vehicles were traversing the southbound
lane at a fairly high speed. When Secosa overtook the sand and
gravel truck, he bumped the motorcycle causing Francisco to fall.
The rear wheels of the Isuzu truck then ran over Francisco, which
resulted in his instantaneous death. Fearing for his life, petitioner
Secosa left his truck and fled the scene of the collision.36[3]

Respondents, the parents of Erwin Francisco, thus filed an action for


damages against Raymond Odani Secosa, Dassad Warehousing
and Port Services, Inc. and Dassads president, El Buenasucenso Sy.
The complaint was docketed as Civil Case No. 96-79554 of the RTC
of Manila, Branch 20.

On June 19, 1998, after a full-blown trial, the court a quo rendered a
decision in favor of herein respondents, the dispositive portion of
which states:

WHEREFORE, premised on the foregoing, judgment is hereby


rendered in favor of the plaintiffs ordering the defendants to pay
plaintiffs jointly and severally:

1. The sum of P55,000.00 as actual and compensatory damages;

Corporation Law/alfred0 Page 170 of 1509


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2. The sum of P20,000.00 for the repair of the motorcycle;

3. The sum of P100,000.00 for the loss of earning capacity;

4. The sum of P500,000.00 as moral damages;

5. The sum of P50,000.00 as exemplary damages;

6. The sum of P50,000.00 as attorneys fees plus cost of suit.

SO ORDERED.

Petitioners appealed the decision to the Court of Appeals, which


affirmed the appealed decision in toto.37[4]

Hence the present petition, based on the following arguments:

I.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE


DECISION OF THE TRIAL COURT THAT PETITIONER DASSAD DID NOT
EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE
SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE AND
RELATED JURISPRUDENCE ON THE MATTER.

II.

THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE


DECISION OF THE TRIAL COURT IN HOLDING PETITIONER EL
BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND
SECOSA IN VIOLATION OF THE CORPORATION LAW AND RELATED
JURISPRUDENCE ON THE MATTER.

III.

THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF


APPEALS AWARDING P500,000.00 AS MORAL DAMAGES IS
MANIFESTLY ABSURD, MISTAKEN AND UNJUST.38[5]

The petition is partly impressed with merit.

On the issue of whether petitioner Dassad Warehousing and Port


Services, Inc. exercised the diligence of a good father of a family in
the selection and supervision of its employees, we find the assailed
decision to be in full accord with pertinent provisions of law and
established jurisprudence.

Article 2176 of the Civil Code provides:

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Whoever by act or omission causes damage to another, there being
fault or negligence, is obliged to pay for the damage done. Such
fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.

On the other hand, Article 2180, in pertinent part, states:

The obligation imposed by article 2176 is demandable not only for


ones own acts or omissions, but also for those of persons for whom
one is responsible x x x.

Employers shall be liable for the damages caused by their


employees and household helpers acting within the scope of their
assigned tasks, even though the former are not engaged in any
business or industry x x x.

The responsibility treated of in this article shall cease when the


persons herein mentioned prove that they observed all the diligence
of a good father of a family to prevent damage.

Based on the foregoing provisions, when an injury is caused by the


negligence of an employee, there instantly arises a presumption that
there was negligence on the part of the employer either in the
selection of his employee or in the supervision over him after such
selection. The presumption, however, may be rebutted by a clear
showing on the part of the employer that it exercised the care and
diligence of a good father of a family in the selection and
supervision of his employee. Hence, to evade solidary liability for
quasi-delict committed by an employee, the employer must adduce
sufficient proof that it exercised such degree of care.39[6]

How does an employer prove that he indeed exercised the


diligence of a good father of a family in the selection and
supervision of his employee? The case of Metro Manila Transit
Corporation v. Court of Appeals40[7] is instructive:

In fine, the party, whether plaintiff or defendant, who asserts the


affirmative of the issue has the burden of presenting at the trial such
amount of evidence required by law to obtain a favorable
judgment41[8] . . . In making proof in its or his case, it is paramount
that the best and most complete evidence is formally entered.42[9]

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Coming now to the case at bar, while there is no rule which requires
that testimonial evidence, to hold sway, must be corroborated by
documentary evidence, inasmuch as the witnesses testimonies dwelt
on mere generalities, we cannot consider the same as sufficiently
persuasive proof that there was observance of due diligence in the
selection and supervision of employees. Petitioners attempt to prove
its deligentissimi patris familias in the selection and supervision of
employees through oral evidence must fail as it was unable to
buttress the same with any other evidence, object or documentary,
which might obviate the apparent biased nature of the
testimony.43[10]

Our view that the evidence for petitioner MMTC falls short of the
required evidentiary quantum as would convincingly and
undoubtedly prove its observance of the diligence of a good father
of a family has its precursor in the underlying rationale pronounced in
the earlier case of Central Taxicab Corp. vs. Ex-Meralco Employees
Transportation Co., et al.,44[11] set amidst an almost identical
factual setting, where we held that:

The failure of the defendant company to produce in court any


record or other documentary proof tending to establish that it had
exercised all the diligence of a good father of a family in the
selection and supervision of its drivers and buses, notwithstanding the
calls therefor by both the trial court and the opposing counsel,
argues strongly against its pretensions.

We are fully aware that there is no hard-and-fast rule on the


quantum of evidence needed to prove due observance of all the
diligence of a good father of a family as would constitute a valid
defense to the legal presumption of negligence on the part of an
employer or master whose employee has by his negligence, caused
damage to another. x x x (R)educing the testimony of Albert to its
proper proportion, we do not have enough trustworthy evidence left
to go by. We are of the considered opinion, therefore, that the
believable evidence on the degree of care and diligence that has
been exercised in the selection and supervision of Roberto Leon y
Salazar, is not legally sufficient to overcome the presumption of
negligence against the defendant company.

The above-quoted ruling was reiterated in a recent case again


involving the Metro Manila Transit Corporation,45[12] thus:

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In the selection of prospective employees, employers are required to
examine them as to their qualifications, experience, and service
records.46[13] On the other hand, with respect to the supervision of
employees, employers should formulate standard operating
procedures, monitor their implementation, and impose disciplinary
measures for breaches thereof. To establish these factors in a trial
involving the issue of vicarious liability, employers must submit
concrete proof, including documentary evidence.

In this case, MMTC sought to prove that it exercised the diligence of


a good father of a family with respect to the selection of employees
by presenting mainly testimonial evidence on its hiring procedure.
According to MMTC, applicants are required to submit professional
driving licenses, certifications of work experience, and clearances
from the National Bureau of Investigation; to undergo tests of their
driving skills, concentration, reflexes, and vision; and, to complete
training programs on traffic rules, vehicle maintenance, and
standard operating procedures during emergency cases.

xxx xxx xxx

Although testimonies were offered that in the case of Pedro Musa all
these precautions were followed, the records of his interview, of the
results of his examinations, and of his service were not presented. . .
[T]here is no record that Musa attended such training programs and
passed the said examinations before he was employed. No proof
was presented that Musa did not have any record of traffic
violations. Nor were records of daily inspections, allegedly
conducted by supervisors, ever presented. . . The failure of MMTC to
present such documentary proof puts in doubt the credibility of its
witnesses.

Jurisprudentially, therefore, the employer must not merely present


testimonial evidence to prove that he observed the diligence of a
good father of a family in the selection and supervision of his
employee, but he must also support such testimonial evidence with
concrete or documentary evidence. The reason for this is to obviate
the biased nature of the employers testimony or that of his
witnesses.47[14]

Applying the foregoing doctrines to the present case, we hold that


petitioner Dassad Warehousing and Port Services, Inc. failed to
conclusively prove that it had exercised the requisite diligence of a
good father of a family in the selection and supervision of its
employees.

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Edilberto Duerme, the lone witness presented by Dassad
Warehousing and Port Services, Inc. to support its position that it had
exercised the diligence of a good father of a family in the selection
and supervision of its employees, testified that he was the one who
recommended petitioner Raymundo Secosa as a driver to Dassad
Warehousing and Port Services, Inc.; that it was his duty to scrutinize
the capabilities of drivers; and that he believed petitioner to be
physically and mentally fit for he had undergone rigid training and
attended the PPA safety seminar.48[15]

Petitioner Dassad Warehousing and Port Services, Inc. failed to


support the testimony of its lone witness with documentary evidence
which would have strengthened its claim of due diligence in the
selection and supervision of its employees. Such an omission is fatal
to its position, on account of which, Dassad can be rightfully held
solidarily liable with its co-petitioner Raymundo Secosa for the
damages suffered by the heirs of Erwin Francisco.

However, we find that petitioner El Buenasenso Sy cannot be held


solidarily liable with his co-petitioners. While it may be true that Sy is
the president of petitioner Dassad Warehousing and Port Services,
Inc., such fact is not by itself sufficient to hold him solidarily liable for
the liabilities adjudged against his co-petitioners.

It is a settled precept in this jurisdiction that a corporation is invested


by law with a personality separate from that of its stockholders or
members.49[16] It has 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 in itself sufficient ground for disregarding the
separate corporate personality.50[17] A corporations authority to
act and its liability for its actions are separate and apart from the
individuals who own it.51[18]

The so-called veil of corporation fiction treats as separate and


distinct the affairs of a corporation and its officers and stockholders.
As a general rule, a corporation will be looked upon as a legal entity,
unless and until sufficient reason to the contrary appears. When the
notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the

Corporation Law/alfred0 Page 175 of 1509


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corporation as an association of persons.52[19] Also, the corporate
entity may be disregarded in the interest of justice in such cases as
fraud that may work inequities among members of the corporation
internally, involving no rights of the public or third persons. In both
instances, there must have been fraud and proof of it. For the
separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established.53[20] It
cannot be presumed.54[21]

The records of this case are bereft of any evidence tending to show
the presence of any grounds enumerated above that will justify the
piercing of the veil of corporate fiction such as to hold the president
of Dassad Warehousing and Port Services, Inc. solidarily liable with it.

The Isuzu cargo truck which ran over Erwin Francisco was registered
in the name of Dassad Warehousing and Port Services, Inc., and not
in the name of El Buenasenso Sy. Raymundo Secosa is an employee
of Dassad Warehousing and Port Services, Inc. and not of El
Buenasenso Sy. All these things, when taken collectively, point
toward El Buenasenso Sys exclusion from liability for damages arising
from the death of Erwin Francisco.

Having both found Raymundo Secosa and Dassad Warehousing


and Port Services, Inc. liable for negligence for the death of Erwin
Francisco on June 27, 1996, we now consider the question of moral
damages which his parents, herein respondents, are entitled to
recover. Petitioners assail the award of moral damages of
P500,000.00 for being manifestly absurd, mistaken and unjust. We are
not persuaded.

Under Article 2206, the spouse, legitimate and illegitimate


descendants and ascendants of the deceased may demand moral
damages for mental anguish for the death of the deceased. The
reason for the grant of moral damages has been explained in this
wise:

. . . the award of moral damages is aimed at a restoration, within the


limits possible, of the spiritual status quo ante; and therefore, it must
be proportionate to the suffering inflicted. The intensity of the pain
experienced by the relatives of the victim is proportionate to the
intensity of affection for him and bears no relation whatsoever with
the wealth or means of the offender.55[22]

Corporation Law/alfred0 Page 176 of 1509


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In the instant case, the spouses Francisco presented evidence of the
searing pain that they felt when the premature loss of their son was
relayed to them. That pain was highly evident in the testimony of the
father who was forever deprived of a son, a son whose untimely
death came at that point when the latter was nearing the
culmination of every parents wish to educate their children. The
death of Francis has indeed left a void in the lives of the
respondents. Antonio Francisco testified on the effect of the death
of his son, Francis, in this manner:

Q: (Atty. Balanag): What did you do when you learned that your
son was killed on June 27, 1996?

A: (ANTONIO FRANCISCO): I boxed the door and pushed the


image of St. Nio telling why this happened to us.

Q: Mr. Witness, how did you feel when you learned of the untimely
death of your son, Erwin Suares (sic)?

A: Masakit po ang mawalan ng anak. Its really hard for me, the
thought that my son is dead.

xxx xxx xxx

Q: How did your family react to the death of Erwin Suarez


Francisco?

A: All of my family and relatives were felt (sic) sorrow because


they knew that my son is (sic) good.

Q: We know that it is impossible to put money terms(s) [on] the life


of [a] human, but since you are now in court and if you were to ask
this court how much would you and your family compensate? (sic)

A: Even if they pay me millions, they cannot remove the anguish


of my son (sic).56[23]

Moral damages are emphatically not intended to enrich a plaintiff


at the expense of the defendant. They are awarded to allow the
former to obtain means, diversion or amusements that will serve to
alleviate the moral suffering he has undergone due to the
defendants culpable action and must, perforce, be proportional to
the suffering inflicted.57[24] We have previously held as proper an
award of P500,000.00 as moral damages to the heirs of a deceased
family member who died in a vehicular accident. In our 2002
decision in Metro Manila Transit Corporation v. Court of Appeals, et

Corporation Law/alfred0 Page 177 of 1509


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al.,58[25] we affirmed the award of moral damages of P500,000.00
to the heirs of the victim, a mother, who died from injuries she
sustained when a bus driven by an employee of the petitioner hit
her. In the case at bar, we likewise affirm the portion of the assailed
decision awarding the moral damages.

Since the petitioners did not question the other damages adjudged
against them by the court a quo, we affirm the award of these
damages to the respondents.

WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED


with the MODIFICATION that petitioner El Buenasenso Sy is ABSOLVED
from any liability adjudged against his co-petitioners in this case.

Costs against petitioners.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Panganiban, Carpio, and Azcuna, JJ.,


concur.

Facts: Francisco, an 18 year old 3rd year physical therapy student


was riding a motorcycle. A sand and gravel truck was traveling
behind the motorcycle, which in turn was being tailed by the Isuzu
truck driven by Secosa. The Isuzu cargo truck was owned by Dassad
Warehousing and Port Services, Inc.. The three vehicles were
traversing the southbound lane at a fairly high speed. When Secosa
overtook the sand and gravel truck, he bumped the motorcycle
causing Francisco to fall. The rear wheels of the Isuzu truck then ran
over Francisco, which resulted in his instantaneous death. Secosa left
his truck and fled the scene of the collision.

The parents of Francisco, respondents herein, filed an action for


damages against Secosa, Dassad Warehousing and Port Services,
Inc. and Dassad’s president, El Buenasucenso Sy.

The court a quo rendered a decision in favor of herein respondents;


thus petitioners appealed the decision to the Court of Appeals,
which unfortunately affirmed the appealed decision in toto. Hence,
the present petition.

Issues:

Corporation Law/alfred0 Page 178 of 1509


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(1) Whether or not Dassad Warehousing and Port Services, Inc.
exercised the diligence of a good father of a family in the selection
and supervision of its employees; hence it cannot be held solidary
liable with the negligence of its employee.

(2) Whether or not Dassad’s president, El Buenasucenso Sy, can be


held solidary liable with co-petitioners.

Held:

(1) No. Dassad Warehousing and Port Services, Inc. did not exercise
the required diligence of a good father of a family in the selection
and supervision of its employees. Hence, it cannot be held solidary
liable with the negligence of its employee.

Article 2176 of the Civil Code provides:

Whoever by act or omission causes damage to another, there being


fault or negligence, is obliged to pay for the damage done. Such
fault or negligence, if there is no pre-existing contractual relation
between the parties, is called a quasi-delict and is governed by the
provisions of this Chapter.

On the other hand, Article 2180, in pertinent part, states:

The obligation imposed by article 2176 is demandable not only for


one’s own acts or omissions, but also for those of persons for whom
one is responsible x x x.

Employers shall be liable for the damages caused by their


employees and household helpers acting within the scope of their
assigned tasks, even though the former are not engaged in any
business or industry x x x.

The responsibility treated of in this article shall cease when the


persons herein mentioned prove that they observed all the diligence
of a good father of a family to prevent damage.
Corporation Law/alfred0 Page 179 of 1509
suigeneris
Based on the foregoing provisions, when an injury is caused by the
negligence of an employee, there instantly arises a presumption that
there was negligence on the part of the employer, which however,
may be rebutted by a clear evidence showing on the part of the
employer that it exercised the care and diligence of a good father
of a family in the selection and supervision of his employee.

In the selection of prospective employees, employers are required to


examine them as to their qualifications, experience, and service
records. On the other hand, with respect to the supervision of
employees, employers should formulate standard operating
procedures, monitor their implementation, and impose disciplinary
measures for breaches thereof. To establish these factors in a trial
involving the issue of explicit liability, employers must submit concrete
proof, including documentary evidence. The reason for this is to
obviate the biased nature of the employer’s testimony or that of his
witnesses.

In the case at bar, Dassad Warehousing and Port Services, Inc. failed
to conclusively prove that it had exercised the requisite diligence of
a good father of a family in the selection and supervision of its
employees. Dassad Warehousing and Port Services, Inc. failed to
support the testimony of its lone witness, Edilberto Duerme, with
documentary evidence which would have strengthened its claim of
due diligence in the selection and supervision of its employees. Such
an omission is fatal on account of which, Dassad can be rightfully
held solidarily liable with its co-petitioner Secosa for the damages
suffered by the heirs of Francisco.

(2) No. Sy cannot be held solidarily liable with his co-petitioners.


While it may be true that Sy is the president of Dassad Warehousing
and Port Services, Inc., such fact is not by itself sufficient to hold him
solidarily liable for the liabilities adjudged against his co-petitioners.

A corporation has a personality separate from that of its stockholders


or members. The doctrine of ‘veil of corporation’ treats as separate
and distinct the affairs of a corporation and its officers and
stockholders. As a rule, a corporation will be looked upon as a legal
entity, unless and until sufficient reason to the contrary appears.
When the notion of legal entity is used to defeat public

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convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of persons. Also, the
corporate entity may be disregarded in the interest of justice in such
cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third
persons. In both instances, there must have been fraud and proof of
it.

The records of the case does not point toward the presence of any
grounds enumerated above that will justify the piercing of the veil of
corporate entity such as to hold Sy, the president of Dassad
Warehousing and Port Services, Inc., solidarily liable with it.

Furthermore, the Isuzu cargo truck which ran over Francisco was
registered in the name of Dassad and not in the name of Sy. Secosa
is an employee of Dassad and not of Sy. These facts showed Sy’s
exclusion from liability for damages arising from the death of
Francisco.

Gala vs. Ellice Agro-Industrial Corp. (418 SCRA 431 [2003])

G.R. No. 156819 December 11, 2003

ALICIA E. GALA, GUIA G. DOMINGO and RITA G. BENSON, petitioners,


vs.
ELLICE AGRO-INDUSTRIAL CORPORATION, MARGO MANAGEMENT
AND DEVELOPMENT CORPORATION, RAUL E. GALA, VITALIANO N.
AGUIRRE II, ADNAN V. ALONTO, ELIAS N. CRESENCIO, MOISES S.
MANIEGO, RODOLFO B. REYNO, RENATO S. GONZALES, VICENTE C.
NOLAN, NESTOR N. BATICULON, respondents.

DECISION

YNARES-SANTIAGO, J.:

This is a petition for review under Rule 45 of the Rules of Court,


seeking the reversal of the decision dated November 8, 2002 1 and
the resolution dated December 27, 20022 of the Court of Appeals in
CA-G.R. SP No. 71979.

On March 28, 1979, the spouses Manuel and Alicia Gala, their
children Guia Domingo, Ofelia Gala, Raul Gala, and Rita Benson,
and their encargados Virgilio Galeon and Julian Jader formed and
organized the Ellice Agro-Industrial Corporation.3 The total

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subscribed capital stock of the corporation was apportioned as
follows:

Name Number of Shares Amount

Manuel R. Gala 11, 700 1,170,000.00

Alicia E. Gala 23,200 2,320,000.00

Guia G. Domingo 16 1,600.00

Ofelia E. Gala 40 4,000.00

Raul E. Gala 40 4,000.00

Rita G. Benson 2 200.00

Virgilio Galeon 1 100.00

Julian Jader 1 100.00

TOTAL 35,000 P3,500,000.004

As payment for their subscriptions, the Gala spouses transferred


several parcels of land located in the provinces of Quezon and
Laguna to Ellice. 5

In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed to an


additional 3,299 shares, 10,652.5 shares and 286.5 shares,
respectively. 6

On June 28, 1982, Manuel Gala and Alicia Gala acquired an


additional 550 shares and 281 shares, respectively. 7

Subsequently, on September 16, 1982, Guia Domingo, Ofelia Gala,


Raul Gala, Virgilio Galeon and Julian Jader incorporated the Margo
Management and Development Corporation (Margo). 8 The total
subscribed capital stock of Margo was apportioned as follows:

Name Number of Shares Amount

Raul E. Gala 6,640 66,400.00

Ofelia E. Gala 6,640 66,400.00

Guia G. Domingo 6,640 66,400.00

Virgilio Galeon 40 40.00

Julian Jader 40 40.00

TOTAL 20,000 P200,000.009

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On November 10, 1982, Manuel Gala sold 13,314 of his shares in Ellice
to Margo. 10

Alicia Gala transferred 1,000 of her shares in Ellice to a certain Victor


de Villa on March 2, 1983. That same day, de Villa transferred said
shares to Margo. 11 A few months later, on August 28, 1983, Alicia
Gala transferred 854.3 of her shares to Ofelia Gala, 500 to Guia
Domingo and 500 to Raul Gala. 12

Years later, on February 8, 1988, Manuel Gala transferred all of his


remaining holdings in Ellice, amounting to 2,164 shares, to Raul Gala.
13

On July 20, 1988, Alicia Gala transferred 10,000 of her shares to


Margo. 14

Thus, as of the date on which this case was commenced, the


stockholdings in Ellice were allocated as follows:

Name Number of Shares Amount

Margo 24,312.5 2,431,250.00

Alicia Gala 21,480.2 2,148,020.00

Raul Gala 2,704.5 270,450.00

Ofelia Gala 980.8 98,080.00

Gina Domingo 516 51,600.00

Rita Benson 2 200.00

Virgilio Galeon 1 100.00

Julian Jader 1 100.00

Adnan Alonto 1 100.00

Elias Cresencio 1 100.00

TOTAL 50,000 P5,000,000.00

On June 23, 1990, a special stockholders’ meeting of Margo was


held, where a new board of directors was elected. 15 That same day,
the newly-elected board elected a new set of officers. Raul Gala
was elected as chairman, president and general manager. During
the meeting, the board approved several actions, including the
commencement of proceedings to annul certain dispositions of
Margo’s property made by Alicia Gala. The board also resolved to
change the name of the corporation to MRG Management and
Development Corporation. 16
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Similarly, a special stockholders’ meeting of Ellice was held on
August 24, 1990 to elect a new board of directors. In the ensuing
organizational meeting later that day, a new set of corporate
officers was elected. Likewise, Raul Gala was elected as chairman,
president and general manager.

On March 27, 1990, respondents filed against petitioners with the


Securities and Exchange Commission (SEC) a petition for the
appointment of a management committee or receiver, accounting
and restitution by the directors and officers, and the dissolution of
Ellice Agro-Industrial Corporation for alleged mismanagement,
diversion of funds, financial losses and the dissipation of assets,
docketed as SEC Case No. 3747. 17 The petition was amended to
delete the prayer for the appointment of a management
committee or receiver and for the dissolution of Ellice. Additionally,
respondents prayed that they be allowed to inspect the corporate
books and documents of Ellice. 18

In turn, petitioners initiated a complaint against the respondents on


June 26, 1991, docketed as SEC Case No. 4027, praying for, among
others, the nullification of the elections of directors and officers of
both Margo Management and Development Corporation and Ellice
Industrial Corporation; the nullification of all board resolutions issued
by Margo from June 23, 1990 up to the present and all board
resolutions issued by Ellice from August 24, 1990 up to the present;
and the return of all titles to real property in the name of Margo and
Ellice, as well as all corporate papers and records of both Margo
and Ellice which are in the possession and control of the
respondents. 19

The two cases were consolidated in an Order dated November 23,


1993. 20

Meanwhile, during the pendency of the SEC cases, the shares of


stock of Alicia and Ofelia Gala in Ellice were levied and sold at
public auction to satisfy a judgment rendered against them by he
Regional Trial Court of Makati, Branch 66, in Civil Case No. 42560,
entitled "Regines Condominium v. Ofelia (Gala) Panes and Alicia
Gala." 21

On November 3, 1998, the SEC rendered a Joint Decision in SEC


Cases Nos. 3747 and 4027, the dispositive portion of which states:

WHEREFORE, premises considered, judgment is hereby rendered, as


follows:

1. Dismissing the petition in SEC Case No. 3747,

2. Issuing the following orders in SEC Case No. 4027;

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(a) Enjoining herein respondents to perform corporate acts of both
Ellice and Margo, as directors and officers thereof.

(b) Nullifying the election of the new sets of Board of Directors and
Officers of Ellice and Margo from June 23, 1990 to the present, and
that of Ellice from August 24, 1990 to the present.

(c) Ordering the respondent Raul Gala to return all the titles of real
properties in the names of Ellice and Margo which were unlawfully
taken and held by him.

(d) Directing the respondents to return to herein petitioners all


corporate papers, records of both Ellice and Margo which are in
their possession and control.

SO ORDERED. 22

Respondents appealed to the SEC En Banc, which, on July 4, 2002,


rendered its Decision, the decretal portion of which reads:

WHEREFORE, the Decision of the Hearing Officer dated November 3,


1998 is hereby REVERSED and SET ASIDE and a new one hereby
rendered granting the appeal, upholding the Amended Petition in
SEC Case No. 3747, and dismissing the Petition with Prayer for
Issuance of Preliminary Restraining Order and granting the
Compulsory Counterclaim in SEC Case No. 4027.

Accordingly, appellees Alicia Gala and Guia G. Domingo are


ordered as follows:

(1) jointly and solidarily pay ELLICE and/or MARGO the amount of
P700,000.00 representing the consideration for the unauthorized sale
of a parcel of land to Lucky Homes and Development Corporation
(Exhs. "N" and "CCC");

(2) jointly and severally pay ELLICE and MARGO the proceeds of
sales of agricultural products averaging P120,000.00 per month from
February 17, 1988;

(3) jointly and severally indemnify the appellants P90,000.00 as


attorney’s fees;

(4) jointly and solidarily pay the costs of suit;

(5) turn over to the individual appellants the corporate records of


ELLICE and MARGO in their possession; and

(6) desist and refrain from interfering with the management of ELLICE
and MARGO.

SO ORDERED. 23

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Petitioners filed a petition for review with the Court of Appeals which
dismissed the petition for review and affirmed the decision of the SEC
En Banc. 24

Hence, this petition, raising the following issues:

WHETHER OR NOT THE LOWER COURT ERRED IN NOT DECLARING AS


ILLEGAL AND CONTRARY TO PUBLIC POLICY THE PURPOSES AND
MANNER IN WHICH RESPONDENT CORPORATIONS WERE ORGANIZED
– WHICH WERE, E.G. TO (1) "PREVENT THE GALA ESTATE FROM BEING
BROUGHT UNDER THE COVERAGE (SIC)" OF THE COMPREHENSIVE
AGRARIAN REFORM PROGRAM (CARP) AND (2) PURPORTEDLY FOR
"ESTATE PLANNING."

II

WHETHER OR NOT THE LOWER COURT ERRED (1) IN SUSPICIOUSLY


RESOLVING THE CASE WITHIN TWO (2) DAYS FROM RECEIPT OF
RESPONDENTS’ COMMENT; AND (2) IN NOT MAKING A
DETERMINATION OF THE ISSUES OF FACTS AND INSTEAD RITUALLY
CITING THE FACTUAL FINDINGS OF THE COMMISSION A QUO WITHOUT
DISCUSSION AND ANALYSIS;

III

WHETHER OR NOT THE LOWER COURT ERRED IN RULING THAT THE


ORGANIZATION OF RESPONDENT CORPORATIONS WAS NOT ILLEGAL
FOR DEPRIVING PETITIONER RITA G. BENSON OF HER LEGITIME.

IV

WHETHER OR NOT THE LOWER COURT ERRED IN NOT PIERCING THE


VEILS OF CORPORATE FICTION OF RESPONDENTS CORPORATIONS
ELLICE AND MARGO. 25

In essence, petitioners want this Court to disregard the separate


juridical personalities of Ellice and Margo for the purpose of treating
all property purportedly owned by said corporations as property
solely owned by the Gala spouses.

The petitioners’ first contention in support of this theory is that the


purposes for which Ellice and Margo were organized should be
declared as illegal and contrary to public policy. They claim that the
respondents never pursued exemption from land reform coverage in
good faith and instead merely used the corporations as tools to
circumvent land reform laws and to avoid estate taxes. Specifically,
they point out that respondents have not shown that the transfers of
the land in favor of Ellice were executed in compliance with the
requirements of Section 13 of R.A. 3844.26 Furthermore, they alleged
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that respondent corporations were run without any of the
conventional corporate formalities. 27

At the outset, the Court holds that petitioners’ contentions


impugning the legality of the purposes for which Ellice and Margo
were organized, amount to collateral attacks which are prohibited in
this jurisdiction. 28

The best proof of the purpose of a corporation is its articles of


incorporation and by-laws. The articles of incorporation must state
the primary and secondary purposes of the corporation, while the
by-laws outline the administrative organization of the corporation,
which, in turn, is supposed to insure or facilitate the accomplishment
of said purpose. 29

In the case at bar, a perusal of the Articles of Incorporation of Ellice


and Margo shows no sign of the allegedly illegal purposes that
petitioners are complaining of. It is well to note that, if a
corporation’s purpose, as stated in the Articles of Incorporation, is
lawful, then the SEC has no authority to inquire whether the
corporation has purposes other than those stated, and mandamus
will lie to compel it to issue the certificate of incorporation. 30

Assuming there was even a grain of truth to the petitioners’ claims


regarding the legality of what are alleged to be the corporations’
true purposes, we are still precluded from granting them relief. We
cannot address here their concerns regarding circumvention of land
reform laws, for the doctrine of primary jurisdiction precludes a court
from arrogating unto itself the authority to resolve a controversy the
jurisdiction over which is initially lodged with an administrative body
of special competence.31 Since primary jurisdiction over any
violation of Section 13 of Republic Act No. 3844 that may have been
committed is vested in the Department of Agrarian Reform
Adjudication Board (DARAB),32 then it is with said administrative
agency that the petitioners must first plead their case. With regard to
their claim that Ellice and Margo were meant to be used as mere
tools for the avoidance of estate taxes, suffice it say that the legal
right of a taxpayer to reduce the amount of what otherwise could
be his taxes or altogether avoid them, by means which the law
permits, cannot be doubted. 33

The petitioners’ allegation that Ellice and Margo were run without
any of the typical corporate formalities, even if true, would not merit
the grant of any of the relief set forth in their prayer. We cannot
disregard the corporate entities of Ellice and Margo on this ground.
At most, such allegations, if proven to be true, should be addressed
in an administrative case before the SEC. 34

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Thus, even if Ellice and Margo were organized for the purpose of
exempting the properties of the Gala spouses from the coverage of
land reform legislation and avoiding estate taxes, we cannot
disregard their separate juridical personalities.

Next, petitioners make much of the fact that the Court of Appeals
promulgated its assailed Decision a mere two days from the time the
respondents filed their Comment. They alleged that the appellate
court could not have made a deliberate study of the factual
questions in the case, considering the sheer volume of evidence
available. 35 In support of this allegation, they point out that the
Court of Appeals merely adopted the factual findings of the SEC En
Banc verbatim, without deliberation and analysis. 36

In People v. Mercado, 37 we ruled that the speed with which a lower


court disposes of a case cannot thus be attributed to the injudicious
performance of its function. Indeed, magistrates are not supposed to
study a case only after all the pertinent pleadings have been filed. It
is a mark of diligence and devotion to duty that jurists study a case
long before the deadline set for the promulgation of their decision
has arrived. The two-day period between the filing of petitioners’
Comment and the promulgation of the decision was sufficient time
to consider their arguments and to incorporate these in the decision.
As long as the lower court does not sacrifice the orderly
administration of justice in favor of a speedy but reckless disposition
of a case, it cannot be taken to task for rendering its decision with
due dispatch. The Court of Appeals in this intra-corporate
controversy committed no reversible error and, consequently, its
decision should be affirmed. 38 Verily, if such swift disposition of a
case is considered a non-issue in cases where the life or liberty of a
person is at stake, then we see no reason why the same principle
cannot apply when only private rights are involved.

Furthermore, well-settled is the rule that the factual findings of the


Court of Appeals are conclusive on the parties and are not
reviewable by the Supreme Court. They carry even more weight
when the Court of Appeals affirms the factual findings of a lower
fact-finding body.39 Likewise, the findings of fact of administrative
bodies, such as the SEC, will not be interfered with by the courts in
the absence of grave abuse of discretion on the part of said
agencies, or unless the aforementioned findings are not supported
by substantial evidence. 40

However, in the interest of equity, this Court has reviewed the factual
findings of the SEC En Banc, which were affirmed in toto by the Court
of Appeals, and has found no cogent reason to disturb the same.
Indeed, we are convinced that the arguments raised by the
petitioners are nothing but unwarranted conclusions of law.
Specifically, they insist that the Gala spouses never meant to part
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with the ownership of the shares which are in the names of their
children and encargados, and that all transfers of property to these
individuals are supposedly void for being absolutely simulated for
lack of consideration.41 However, as correctly held by the SEC En
Banc, the transfers were only relatively simulated, inasmuch as the
evident intention of the Gala spouses was to donate portions of their
property to their children and encargados. 42

In an attempt to bolster their theory that the organization of the


respondent corporations was illegal, the petitioners aver that the
legitime pertaining to petitioners Rita G. Benson and Guia G.
Domingo from the estate of their father had been subject to
unwarranted reductions as a result thereof. In sum, they claim that
stockholdings in Ellice which the late Manuel Gala had assigned to
them were insufficient to cover their legitimes, since Benson was only
given two shares while Domingo received only sixteen shares out of
a total number of 35,000 issued shares. 43

Moreover, the reliefs sought by petitioners should have been raised


in a proceeding for settlement of estate, rather than in the present
intra-corporate controversy. If they are genuinely interested in
securing that part of their late father’s property which has been
reserved for them in their capacity as compulsory heirs, then they
should simply exercise their actio ad supplendam legitimam, or their
right of completion of legitime.44 Such relief must be sought during
the distribution and partition stage of a case for the settlement of the
estate of Manuel Gala, filed before a court which has taken
jurisdiction over the settlement of said estate. 45

Finally, the petitioners pray that the veil of corporate fiction that
shroud both Ellice and Margo be pierced, consistent with their earlier
allegation that both corporations were formed for purposes contrary
to law and public policy. In sum, they submit that the respondent
corporations are mere business conduits of the deceased Manuel
Gala and thus may be disregarded to prevent injustice, the distortion
or hiding of the truth or the "letting in" of a just defense. 46

However, to warrant resort to the extraordinary remedy of piercing


the veil of corporate fiction, there must be proof that the corporation
is being used as a cloak or cover for fraud or illegality, or to work
injustice, 47 and the petitioners have failed to prove that Ellice and
Margo were being used thus. They have not presented any
evidence to show how the separate juridical entities of Ellice and
Margo were used by the respondents to commit fraudulent, illegal or
unjust acts. Hence, this contention, too, must fail.

On June 5, 2003, the petitioners filed a Reply, where, aside from


reiterating the contentions raised in their Petition, they averred that
there is no proof that either capital gains taxes or documentary

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stamp taxes were paid in the series of transfers of Ellice and Margo
shares. Thus, they invoke Sections 176 and 201 of the National
Internal Revenue Code, which would bar the presentation or
admission into evidence of any document that purports to transfer
any benefit derived from certificates of stock if the requisite
documentary stamps have not been affixed thereto and cancelled.

Curiously, the petitioners never raised this issue before the SEC
Hearing Officer, the SEC En Banc or the Court of Appeals. Thus, we
are precluded from passing upon the same for, as a rule, no
question will be entertained on appeal unless it has been raised in
the court below, for points of law, theories, issues and arguments not
brought to the attention of the lower court need not be, and
ordinarily will not be, considered by a reviewing court, as they
cannot be raised for the first time at that late stage. Basic
considerations of due process impel this rule.48 Furthermore, even if
these allegations were proven to be true, such facts would not
render the underlying transactions void, for these instruments would
not be the sole means, much less the best means, by which the
existence of these transactions could be proved. For this purpose,
the books and records of a corporation, which include the stock and
transfer book, are generally admissible in evidence in favor of or
against the corporation and its members. They can be used to prove
corporate acts, a corporation’s financial status and other matters,
including one’s status as a stockholder. Most importantly, these
books and records are, ordinarily, the best evidence of corporate
acts and proceedings.49 Thus, reference to these should have been
made before the SEC Hearing Officer, for this Court will not entertain
this belated questioning of the evidence now.

It is always sad to see families torn apart by money matters and


property disputes.1âwphi1 The concept of a close corporation
organized for the purpose of running a family business or managing
family property has formed the backbone of Philippine commerce
and industry. Through this device, Filipino families have been able to
turn their humble, hard-earned life savings into going concerns
capable of providing them and their families with a modicum of
material comfort and financial security as a reward for years of hard
work. A family corporation should serve as a rallying point for family
unity and prosperity, not as a flashpoint for familial strife. It is hoped
that people reacquaint themselves with the concepts of mutual aid
and security that are the original driving forces behind the formation
of family corporations and use these tenets in order to facilitate
more civil, if not more amicable, settlements of family corporate
disputes.

WHEREFORE, in view of the foregoing, the petition is DENIED. The


Decision dated November 8, 2002 and the Resolution dated

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December 27, 2002, both of the Court of Appeals, are AFFIRMED.
Costs against petitioners.

SO ORDERED.

Davide, Jr., C.J., Panganiban, Carpio, and Azcuna, JJ., concur.

Gala vs Ellice Agro Industrial Corp. Doctrine:

The legal right of a taxpayer to reduce the amount of what


otherwise, could be his taxes or altogether to avoid them, by means
which the law permits, could be doubted

Facts:

The spouses Manuel and Alicia Gala and their children Guia
Domingo, Ofelia Gala, Raul Gala and Rita Benson, and their
encargados (rough translation; representatives) VirgilioGaleon and
Julian Jader, formed and organized Ellice Agro Industrial Corporation
(Ellice). As payment for their subscriptions the Spouses Gala
transferred several parcles of land to Ellice. Subsequently, the
children and the encargados formed and organized another
corporation, Margo Management and Development Corporation
(Margo). The father, Manuel Gala, sold his shares in Ellice to Margo.
Subsequently, Alicia transferred her shares to Margo.

In 1990, a special stockholder’s meeting of Margo was held where a


new board of directors was elected. Raul Gala was elected

as chairman, president, and general manager. During the meeting,


the board approved the commencement of proceeding to annul
the

dispositions of Margos’s property made by Alicia Gala. Similarity, a


special stockholder’s meeting was held in Ellice. A new

board was elected and Raul Gala also became chairman,


president and GM of Ellice, Raul Gala along with the respondents
filed a case against the petitiones in the SEC for accounting and
restitution for alleged mismanagement of funds of Ellice. In turn the
petitioners filed in the SEC a petition for the nullification of the
election of directors of officers of both Margo and Ellice. Essentially,
petitioners sought to disregard the separate juridical personalities of
two corporations, namely, Ellice Agro-Industrial Corporation and
Margo Management and Development Corporation, for the
purpose of treating all property purportedly owned by said
corporations as properly solely owned by the Gala Spouses. Among
their arguments were: (1) said corporations were organized for
purpose of exempting the property the property of the Gala Spouses
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from the coverage of land reform laws, and (2) the two corporations
were meant to be used as mere tools for the avoidance of estate
taxes.

Issue:

Whether the separate juridical personalities of Ellice and Margo


could be disregard on the grounds that they were meant to be tools
to avoid land reform laws and estate taxes.

Held:

NO, a perusal of the Articles of Incorporation of Ellice and Margo


shows no sign of the allegedly illegal purposes that petitioners are

complaining of. And even assuming that the petitioner’s allegations


were true, the legality of the purposes for which the two

corporations were formed should be first threshed out in an


administrative case before the Securities and Exchange Commission.
(Doctrine of Primary Jurisdiction). Moreover, on the contention that
Ellice and Margo were meant to be tools for the avoidance of
estate taxes, the court said th

at “…the legal

right of a taxpayer to reduce the amount of what otherwise could


be his taxes or altogether avoid them, by means which the law
permits,

cannot be doubted. (citing: Liddel& Co., Inc c. CIR)”

Note: Simplified, this case is about a feud between family members


who organized two corporation. Petitioners are Alicia Gala (mother),
Guia Domingo (sister), and Rita Benson (Sister), Respondents are Raul
Gala (brother), Ellice Inc., and Margo Inc. (the family corporations).

Gala v. Ellice

GR. No. 156819, December 11, 2003

Justice Ynares-Santiago

Facts: The spouses Manuel and Alicia Gala, their children Guia
Domingo, Ofelia Gala, Raul Gala, and Rita Benson, and their
encargados Virgilio Galeon and Julian Jader formed and organized
the Ellice Agro-Industrial Corporation. The total subscribed capital
stock of the corporation was apportioned as follows:

Name Number of Shares Amount

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Manuel R. Gala 11, 700 1,170,000.00

Alicia E. Gala 23,200 2,320,000.00

Guia G. Domingo 16 1,600.00

Ofelia E. Gala 40 4,000.00

Raul E. Gala 40 4,000.00

Rita G. Benson 2 200.00

Virgilio Galeon 1 100.00

Julian Jader 1 100.00

TOTAL 35,000 P3,500,000.00

As payment for their subscriptions, the Gala spouses transferred


several parcels of land located in the provinces of Quezon and
Laguna to Ellice.

In 1982, Manuel Gala, Alicia Gala and Ofelia Gala subscribed


to an additional 3,299 shares, 10,652.5 shares and 286.5 shares,
respectively.

On June 28, 1982, Manuel Gala and Alicia Gala acquired an


additional 550 shares and 281 shares, respectively.

Subsequently, on September 16, 1982, Guia Domingo, Ofelia


Gala, Raul Gala, Virgilio Galeon and Julian Jader incorporated the
Margo Management and Development Corporation (Margo). The
total subscribed capital stock of Margo was apportioned as follows:

Name Number of Shares Amount

Raul E. Gala 6,640 66,400.00

Ofelia E. Gala 6,640 66,400.00

Guia G. Domingo 6,640 66,400.00

Virgilio Galeon 40 40.00

Julian Jader 40 40.00

TOTAL 20,000 P200,000.00

On November 10, 1982, Manuel Gala sold 13,314 of his shares in


Ellice to Margo.

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Alicia Gala transferred 1,000 of her shares in Ellice to a certain
Victor de Villa on March 2, 1983. That same day, de Villa transferred
said shares to Margo. A few months later, Alicia Gala transferred
854.3 of her shares to Ofelia Gala, 500 to Guia Domingo and 500 to
Raul Gala.

Years later, Manuel Gala transferred all of his remaining


holdings in Ellice, amounting to 2,164 shares, to Raul Gala.

On July 20, 1988, Alicia Gala transferred 10,000 of her shares to


Margo.

Thus, as of the date on which this case was commenced, the


stockholdings in Ellice were allocated as follows:

Name Number of Shares Amount

Margo 24,312.5 2,431,250.00

Alicia Gala 21,480.2 2,148,020.00

Raul Gala 2,704.5 270,450.00

Ofelia Gala 980.8 98,080.00

Gina Domingo 516 51,600.00

Rita Benson 2 200.00

Virgilio Galeon 1 100.00

Julian Jader 1 100.00

Adnan Alonto 1 100.00

Elias Cresencio 1 100.00

TOTAL 50,000 P5,000,000.00

On June 23, 1990, a special stockholders’ meeting of Margo


was held, where a new board of directors was elected. That same
day, the newly-elected board elected a new set of officers. Raul
Gala was elected as chairman, president and general manager.
During the meeting, the board approved several actions, including
the commencement of proceedings to annul certain dispositions of
Margo’s property made by Alicia Gala. The board also resolved to
change the name of the corporation to MRG Management and
Development Corporation.

Similarly, a special stockholders’ meeting of Ellice was held on


August 24, 1990 to elect a new board of directors. In the ensuing

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organizational meeting later that day, a new set of corporate
officers was elected. Likewise, Raul Gala was elected as chairman,
president and general manager.

Ellice filed against Gala with the Securities and Exchange


Commission (SEC) a petition for the appointment of a management
committee or receiver, accounting and restitution by the directors
and officers, and the dissolution of Ellice Agro-Industrial Corporation
for alleged mismanagement, diversion of funds, financial losses and
the dissipation of assets. The petition was amended to delete the
prayer for the appointment of a management committee or
receiver and for the dissolution of Ellice. Additionally, respondents
prayed that they be allowed to inspect the corporate books and
documents of Ellice.

In turn, Gala initiated a complaint against Ellice praying for,


among others, the nullification of the elections of directors and
officers of both Margo Management and Development Corporation
and Ellice Industrial Corporation; the nullification of all board
resolutions issued by Margo from June 23, 1990 up to the present and
all board resolutions issued byEllice from August 24, 1990 up to the
present; and the return of all titles to real property in the name of
Margo and Ellice, as well as all corporate papers and records of
both Margo and Ellicewhich are in the possession and control of the
respondents.

The two cases were consolidated.

Meanwhile, during the pendency of the SEC cases, the shares of


stock of Alicia and Ofelia Gala in Ellice were levied and sold at
public auction to satisfy a judgment rendered against them by he
Regional Trial Court of Makati.

SEC rendered a Joint Decision in SEC Cases dismissing the petition


of Ellice and ruling in favor of Gala.

Respondents appealed to the SEC En Banc, which reversed and


set aside the decision of SEC

Issue: WON the lower court erre in ruling that the organization of
Ellice and Margo was not illegeal for depriving Rita G. Benson, one of
the petitioners, her legitime.

Held: In an attempt to bolster their theory that the organization of


the respondent corporations was illegal, the petitioners aver that the
legitime pertaining to petitioners Rita G. Benson and Guia G.
Domingo from the estate of their father had been subject to
unwarranted reductions as a result thereof. In sum, they claim that

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stockholdings in Ellice which the late Manuel Gala had assigned to
them were insufficient to cover theirlegitimes, since Benson was only
given two shares while Domingo received only sixteen shares out of
a total number of 35,000 issued shares.

The reliefs sought by petitioners should have been raised in a


proceeding for settlement of estate, rather than in the present intra-
corporate controversy. If they are genuinely interested in securing
that part of their late father’s property which has been reserved for
them in their capacity as compulsory heirs, then they should simply
exercise their actio ad supplendam legitimam, or their right of
completion of legitime. Such relief must be sought during the
distribution and partition stage of a case for the settlement of the
estate of Manuel Gala, filed before a court which has taken
jurisdiction over the settlement of said estate

R & E Transport, Inc. vs. Latag (422 SCRA 698 [2004])

G.R. No. 155214 February 13, 2004

R & E TRANSPORT, INC., and HONORIO ENRIQUEZ, petitioners,


vs.
AVELINA P. LATAG, representing her deceased husband,
PEDRO M. LATAG, respondents.

DECISION

PANGANIBAN, J.:

Factual issues may be reviewed by the Court of Appeals (CA) when


the findings of fact of the National Labor Relations Commission
(NLRC) conflict with those of the labor arbiter. By the same token, this
Court may review factual conclusions of the CA when they are
contrary to those of the NLRC or of the labor arbiter.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court,


seeking to nullify the June 3, 2002 Decision2 and the August 28, 2002
Resolution3 of the Court of Appeals in CA-GR SP No. 67998. The
appellate court disposed as follows:

"WHEREFORE, premises considered, the petition is hereby GRANTED.


The assailed Order of public respondent NLRC is SET ASIDE. The
March 14, 20014 [D]ecision of the Labor Arbiter a quo is REINSTATED." 5

The challenged Resolution denied petitioners’ Motion for


Reconsideration.

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The Factual Antecedents

The antecedents of the case are narrated by the CA as follows:

"Pedro Latag was a regular employee x x x of La Mallorca Taxi since


March 1, 1961. When La Mallorca ceased from business operations,
[Latag] x x x transferred to [petitioner] R & E Transport, Inc. x x x. He
was receiving an average daily salary of five hundred pesos
(P500.00) as a taxi driver.

"[Latag] got sick in January 1995 and was forced to apply for partial
disability with the SSS, which was granted. When he recovered, he
reported for work in September 1998 but was no longer allowed to
continue working on account of his old age.

"Latag thus asked Felix Fabros, the administrative officer of


[petitioners], for his retirement pay pursuant to Republic Act 7641 but
he was ignored. Thus, on December 21, 1998, [Latag] filed a case for
payment of his retirement pay before the NLRC.

"Latag however died on April 30, 1999. Subsequently, his wife,


Avelina Latag, substituted him. On January 10, 2000, the Labor
Arbiter rendered a decision in favor of [Latag], the dispositive portion
of which reads:

‘WHEREFORE, judgment is hereby rendered ordering x x x LA


MALLORCA TAXI, R & E TRANSPORT, INC. and their owner/chief
executive officer HONORIO ENRIQUEZ to jointly and severally pay
MRS. AVELINA P. LATAG the sum of P277,500.00 by way of retirement
pay for her deceased husband, PEDRO M. LATAG.

‘SO ORDERED.’

"On January 21, 2000, [Respondent Avelina Latag,] with her then
counsel[,] was invited to the office of [petitioners’] counsel and was
offered the amount of P38,500.00[,] which she accepted.
[Respondent] was also asked to sign an already prepared quitclaim
and release and a joint motion to dismiss the case.

"After a day or two, [respondent] received a copy of the January 10,


2000 [D]ecision of the Labor Arbiter.

"On January 24, 2000, [petitioners] filed the quitclaim and motion to
dismiss. Thereafter, on May 23, 2000, the Labor Arbiter issued an
order, the relevant portion of which states:

‘WHEREFORE, the decision stands and the Labor Arbitration


Associate of this Office is directed to prepare the Writ of Execution in
due course.

‘SO ORDERED.’

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"On January 21, 2000, [petitioners] interposed an appeal before the
NLRC. On March 14, 2001, the latter handed down a [D]ecision[,] the
decretal portion of which provides:

‘WHEREFORE, in view of the foregoing, respondents’ Appeal is


hereby DISMISSED for failure to post a cash or surety bond, as
mandated by law.

‘SO ORDERED.’

"On April 10, 2001, [petitioners] filed a motion for reconsideration of


the above resolution. On September 28, 2001, the NLRC came out
with the assailed [D]ecision, which gave due course to the motion
for reconsideration."6 (Citations omitted)

Respondent appealed to the CA, contending that under Article 223


of the Labor Code and Section 3, Rule VI of the New Rules of
Procedure of the NLRC, an employer’s appeal of a decision
involving monetary awards may be perfected only upon the posting
of an adequate cash or surety bond.

Ruling of the Court of Appeals

The CA held that the labor arbiter’s May 23, 2000 Order had referred
to the earlier January 10, 2000 Decision awarding respondent
P277,500 as retirement benefit.

According to the appellate court, because petitioners’ appeal


before the NLRC was not accompanied by an appropriate cash or
surety bond, such appeal was not perfected. The CA thus ruled that
the labor arbiter’s January 10, 2000 Decision and May 23, 2000 Order
had already become final and executory.

Hence, this Petition.7

Issues

Petitioners submit the following issues for our consideration:

"I

Whether or not the Court should respect the findings of fact [of] the
NLRC as against [those] of the labor arbiter.

"II

Whether or not, in rendering judgment in favor of petitioners, the


NLRC committed grave abuse of discretion.

"III

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Whether or not private respondent violated the rule on forum-
shopping.

"IV

Whether or not the appeal of petitioners from the Order of the labor
arbiter to the NLRC involves [a] monetary award." 8

In short, petitioners raise these issues: (1) whether the CA acted


properly when it overturned the NLRC’s factual findings; (2) whether
the rule on forum shopping was violated; and (3) whether the labor
arbiter’s Order of May 23, 2000 involved a monetary award.

The Court’s Ruling

The Petition is partly meritorious.

First Issue:

Factual Findings of the NLRC

Petitioners maintain that the CA erred in disregarding the factual


findings of the NLRC and in deciding to affirm those of the labor
arbiter. Allegedly, the NLRC findings were based on substantial
evidence, while those of the labor arbiter were groundless.
Petitioners add that the appellate court should have refrained from
tackling issues of fact and, instead, limited itself to those of
jurisdiction or grave abuse of discretion on the part of the NLRC.

The power of the CA to review NLRC decisions via a Rule 65 petition


is now a settled issue. As early as St. Martin Funeral Homes v. NLRC,9
we have definitively ruled that the proper remedy to ask for the
review of a decision of the NLRC is a special civil action for certiorari
under Rule 65 of the Rules of Court,10 and that such petition should
be filed with the CA in strict observance of the doctrine on the
hierarchy of courts.11 Moreover, it has already been explained that
under Section 9 of Batas Pambansa (BP) 129, as amended by
Republic Act 7902,12 the CA -- pursuant to the exercise of its original
jurisdiction over petitions for certiorari -- was specifically given the
power to pass upon the evidence, if and when necessary, to resolve
factual issues.13

Likewise settled is the rule that when supported by substantial


evidence,14 factual findings made by quasi-judicial and
administrative bodies are accorded great respect and even finality
by the courts. These findings are not infallible, though; when there is
a showing that they were arrived at arbitrarily or in disregard of the
evidence on record, they may be examined by the courts.15 Hence,
when factual findings of the NLRC are contrary to those of the labor
arbiter, the evidentiary facts may be reviewed by the appellate

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court.16 Such is the situation in the present case; thus, the doors to a
review are open.17

The very same reason that behooved the CA to review the factual
findings of the NLRC impels this Court to take its own look at the
findings of fact. Normally, the Supreme Court is not a trier of facts.18
However, since the findings of fact in the present case are
conflicting,19 it waded through the records to find out if there was
enough basis for the appellate court’s reversal of the NLRC Decision.

Number of Creditable Years of Service for Retirement Benefits

Petitioners do not dispute the fact that the late Pedro M. Latag is
entitled to retirement benefits. Rather, the bone of contention is the
number of years that he should be credited with in computing those
benefits. On the one hand, we have the findings of the labor
arbiter,20 which the CA affirmed. According to those findings, the 23
years of employment of Pedro with La Mallorca Taxi must be added
to his 14 years with R & E Transport, Inc., for a total of 37 years. On the
other, we also have the findings of the NLRC21 that Pedro must be
credited only with his service to R & E Transport, Inc., because the
evidence shows that the aforementioned companies are two
different entities.

After a careful and painstaking review of the evidence on record,


we support the NLRC’s findings. The labor arbiter’s conclusion -- that
La Mallorca Taxi and R & E Transport, Inc., are one and the same
entity -- is negated by the documentary evidence presented by
petitioners. Their evidence22 sufficiently shows the following facts: 1) R
& E Transport, Inc., was established only in 1978; 2) Honorio Enriquez,
its president, was not a stockholder of La Mallorca Taxi; and 3) none
of the stockholders of the latter company hold stocks in the former.
In the face of such evidence, which the NLRC appreciated in its
Decision, it seems that mere surmises and self-serving assertions of
Respondent Avelina Latag formed the bases for the labor arbiter’s
conclusions as follows:

"While [Pedro M. Latag] claims that he worked as taxi driver since


March 1961 since the days of the La Mallorca Taxi, which was later
renamed R & E Transport, Inc., [petitioners] limit the employment
period to 14 years.

"Resolving this matter, we note [respondent’s] ID (Annex "A", [Latag]


position paper), which appears to bear the signature of Miguel
Enriquez on the front portion and the date February 27, 1961 when [x
x x Latag] started with the company. We also note an SSS document
(Annex ‘C’) which shows that the date of initial coverage of Pedro
Latag, with SSS No. 03-0772155, is February 1961.

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"Viewed against [petitioners’] non-disclaimer [sic] that La Mallorca
preceded R & E Taxi, Inc.[;] x x x that both entities were/are owned
by the Enriquez family, with [petitioner] Honorio [Enriquez] as the
latter’s President[; and] x x x that La Mallorca was a different entity
(page 2, [petitioners’] position paper), we are of the conclusion that
[Latag’s] stint with the Enriquez family dated back since February
1961 and thus, he should be entitled to retirement benefits for 37
years, as of the date of the filing of this case on December 12,
1998."23

Furthermore, basic is the rule that the corporate veil may be pierced
only if it becomes a shield for fraud, illegality or inequity committed
against a third person.24 We have thus cautioned against the
inordinate application of this doctrine. In Philippine National Bank v.
Andrada Electric & Engineering Company,25 we said:

"x x x [A]ny application of the doctrine of piercing the corporate veil


should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction
was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing
must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may
result from an erroneous application.

xxx xxx xxx

"The question of whether a corporation is a mere alter ego is one of


fact. Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control -- not mere stock control, but
complete domination -- not only of finances, but of policy and
business practice in respect to the transaction attacked, must have
been such 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 a fraud or a
wrong to perpetuate the violation of a statutory or other positive
legal duty, or a dishonest and an unjust act in contravention of
plaintiff’s legal right; and (3) the said control and breach of duty
must have proximately caused the injury or unjust loss complained
of."26

Respondent has not shown by competent evidence that one taxi


company had stock control and complete domination over the
other or vice versa. In fact, no evidence was presented to show the
alleged renaming of "La Mallorca Taxi" to "R & E Transport, Inc." The
seven-year gap between the time the former closed shop and the
date when the latter came into being also casts doubt on any
alleged intention of petitioners to commit a wrong or to violate a
statutory duty. This lacuna in the evidence compels us to reverse the

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Decision of the CA affirming the labor arbiter’s finding of fact that
the basis for computing Pedro’s retirement pay should be 37 years,
instead of only 14 years.

Validity of the Quitclaim and Waiver

As to the Quitclaim and Waiver signed by Respondent Avelina


Latag, the appellate court committed no error when it ruled that the
document was invalid and could not bar her from demanding the
benefits legally due her husband. This is not to say that all quitclaims
are invalid per se. Courts, however, are wary of schemes that
frustrate workers’ rights and benefits, and look with disfavor upon
quitclaims and waivers that bargain these away.

Courts have stepped in to annul questionable transactions,


especially where there is clear proof that a waiver, for instance, was
wangled from an unsuspecting or a gullible person; or where the
agreement or settlement was "unconscionable on its face." 27 A
quitclaim is ineffective in barring recovery of the full measure of a
worker’s rights, and the acceptance of benefits therefrom does not
amount to estoppel.28 Moreover, a quitclaim in which the
consideration is "scandalously low and inequitable" cannot be an
obstacle to the pursuit of a worker’s legitimate claim.29

Undisputably, Pedro M. Latag was credited with 14 years of service


with R & E Transport, Inc. Article 287 of the Labor Code, as amended
by Republic Act No. 7641,30 provides:

"Art. 287. Retirement. - x x x

"x x x x x x x x x

"In the absence of a retirement plan or agreement providing for


retirement benefits of employees in the establishment, an employee
upon reaching the age of sixty (60) years or more, but not beyond
sixty-five (65) years which is hereby declared the compulsory
retirement age, who has served at least five (5) years in said
establishment, may retire and shall be entitled to retirement pay
equivalent to at least one-half (1/2) month salary for every year of
service, a fraction of at least six (6) months being considered as one
whole year.

"Unless the parties provide for broader inclusions, the term one half-
month salary shall mean fifteen (15) days plus one-twelfth (1/12) of
the 13th month pay and the cash equivalent of not more than five
(5) days of service incentive leaves.

x x x x x x x x x" (Italics supplied)

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The rules implementing the New Retirement Law similarly provide the
above-mentioned formula for computing the one-half month
salary.31 Since Pedro was paid according to the "boundary" system,
he is not entitled to the 13th month32 and the service incentive pay;33
hence, his retirement pay should be computed on the sole basis of
his salary.

It is accepted that taxi drivers do not receive fixed wages, but retain
only those sums in excess of the "boundary" or fee they pay to the
owners or operators of their vehicles.34 Thus, the basis for computing
their benefits should be the average daily income. In this case, the
CA found that Pedro was earning an average of five hundred pesos
(P500) per day. We thus compute his retirement pay as follows: P500
x 15 days x 14 years of service equals P105,000. Compared with this
amount, the P38,850 he received, which represented just over one
third of what was legally due him, was unconscionable.

Second Issue:

Was There Forum Shopping?

Also assailed are the twin appeals that two different lawyers filed for
respondent before the CA. Petitioners argue that instead of
accepting her explanation, the appellate court should have
dismissed the appeals outright for violating the rule on forum
shopping.

Forum shopping is the institution of two or more actions or


proceedings grounded on the same cause, on the supposition that
one or the other court would render a favorable disposition.35 Such
act is present when there is an identity of parties, rights or causes of
action, and reliefs sought in two or more pending cases.36 It is usually
resorted to by a party against whom an adverse judgment or order
has been issued in one forum, in an attempt to seek and possibly to
get a favorable opinion in another forum, other than by an appeal
or a special civil action for certiorari.37

We find, as the CA38 did, that respondent has adequately explained


why she had filed two appeals before the appellate court. In the
August 5, 2002 Affidavit39 that she attached as Annex "A" to her
Compliance to Show Cause Order with Comment on petitioners’
Motion for Reconsideration,40 she averred that she had sought the
services of another counsel to file her Petition for certiorari before the
CA. She did so after her original counsel had asked for an extension
of time to file the Petition because of time constraints and a
tremendous workload, only to discover later that the original counsel
had filed a similar Petition.

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We cannot fault respondent for her tenacity. Besides, to disallow her
appeal would not be in keeping with the policy of labor laws41 to
shun highly technical procedural laws in the higher interest of justice.

Third Issue:

Monetary Award

Petitioners’ contention is that the labor arbiter’s January 10, 2000


Decision was supplanted by the Compromise Agreement that had
preceded the former’s official release42 to, and receipt43 by, the
parties. It appears from the records that they had entered into an
Amicable Settlement on January 21, 2000; that based on that
settlement, respondent filed a Motion to Dismiss on January 24, 2000,
before the labor arbiter who officially released on the same day his
Decision dated January 10, 2000; that upon receipt of a copy
thereof, respondent filed a Manifestation and Motion to Set Aside
the Motion to Dismiss; and that the labor arbiter subsequently
calendared the case for conference, held hearings thereon, and
required the parties to exchange positions -- by way of comments,
replies and rejoinders -- after which he handed down his May 23,
2000 Order.

Under the circumstances, the case was in effect reopened by the


proceedings held after respondent had filed her Manifestation and
Motion to Set Aside the Motion to Dismiss. This ruling is in accordance
with the fourth paragraph of Section 2, Rule V of the New Rules of
Procedure of the NLRC,44 which therefore correctly held as follows:

"x x x Thus, the further hearings conducted thereafter, to determine


the validity of complainant’s manifestation and motion are but mute
confirmation that indeed the 10 January 2000 decision in this case
has not as yet attained finality. Finally, the appealed order of 23 May
2000 itself declaring [that] ‘the decision stands and the Labor
Arbitration Associate of this office is directed to prepare the Writ of
Execution in due course,’ obviously, is a conclusion that the decision
in this case has been supplanted and rendered functus officio by the
herein parties’ acts. Thus, when the Labor Arbiter a quo found in his
appealed order that the amount of P38,850.00 is ‘unconscionable
viewed against the amount awarded in the decision,’ the same
became appealable independently of the 10 January 2000
decision, which has not attained finality, in the first place." 45

We cannot concur, however, in petitioners’ other contention that


the May 23, 2000 Order did not involve a monetary award. If the
amicable settlement between the parties had rendered the January
10, 2000 Decision functus oficio, then it follows that the monetary
award stated therein was reinstated -- by reference -- by the
aforementioned Order. The appeal from the latter should perforce

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have followed the procedural requirements under Article 223 of the
Labor Code.

As amended, this provision explicitly provides that an appeal from


the labor arbiter’s decision, award or order must be made within ten
(10) calendar days from receipt of a copy thereof by the party
intending to appeal it; and, if the judgment involves a monetary
award, an appeal by the employer may be perfected only upon the
posting of a cash or surety bond. Such cash or bond must have
been issued by a reputable bonding company duly accredited by
the NLRC in the amount equivalent to the monetary award stated in
the judgment. Sections 1, 3 and 6 of Rule VI of the New Rules of
Procedure of the NLRC implement this Article.

Indeed, this Court has repeatedly ruled that the perfection of an


appeal in the manner and within the period prescribed by law is not
only mandatory but jurisdictional, and the failure to perfect an
appeal has the effect of rendering the judgment final and
executory.46 Nonetheless, procedural lapses may be disregarded
because of fundamental considerations of substantial justice;47 or
because of the special circumstances of the case combined with its
legal merits or the amount and the issue involved.48

The requirement to post a bond to perfect an appeal has also been


relaxed in cases when the amount of the award has not been
included in the decision of the labor arbiter.49 Besides, substantial
justice will be better served in the present case by allowing
petitioners’ appeal to be threshed out on the merits,50 especially
because of serious errors in the factual conclusions of the labor
arbiter as to the award of retirement benefits.

WHEREFORE, this Petition is partly GRANTED. The Decision of the Court


of Appeals is MODIFIED by crediting Pedro M. Latag with 14 years of
service. Consequently, he is entitled to retirement pay, which is
hereby computed at P105,000 less the P38,850 which has already
been received by respondent, plus six (6) percent interest thereon
from December 21, 1998 until its full payment. No costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna,


JJ., concur.

Footnotes
1 Rollo, pp. 8-33.

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2Id., pp. 36-44. Penned by Justice Eliezer R. de los Santos, with
the concurrence of acting Presiding Justice Cancio C. Garcia
and Justice Marina L. Buzon.
3 Rollo, p. 46.
4 This date should be January 10, 2000.
5 CA Decision, p. 8; rollo, p. 43.
6 Id., pp. 2-4 & 37-39.
7 The Petition was deemed submitted for decision on May 27,
2003, upon the Court’s receipt of private respondent’s
Memorandum signed by Atty. Ernesto R. Arellano. Petitioners’
Memorandum, which was signed by Atty. Roberto T. Neri, was
received by the Court on May 26, 2003.
8Petitioners’ Memorandum, p. 4; rollo, p. 193. Original in upper
case.
9 356 Phil. 811, September 16, 1998.
10 Id., p. 823.
11 Id., p. 824.
12"An Act Expanding the Jurisdiction of the Court of Appeals,
amending for the purpose Section Nine of Batas Pambansa Blg.
129, as amended, known as the Judiciary Reorganization Act
of 1980." Effective March 18, 1995.
13Tanjuan v. PPSBI, GR No. 155278, September 16, 2003, pp. 13-
14.
14Pabu-aya v. Court of Appeals, 356 SCRA 651, 657, April 18,
2001; Philtranco Service Enterprises, Inc. v. NLRC, 351 Phil. 827,
835, April 1, 1998; Philippine Airlines, Inc. v. NLRC, 344 Phil. 860,
873, September 25, 1997.
15Columbus Philippines Bus Corp. v. NLRC, 417 Phil. 81, 99,
September 7, 2001; Zarate Jr. v. Hon. Olegario, 331 Phil. 278,
288-289, October 7, 1996.
16Gonzales v. NLRC, 355 SCRA 195, 204, March 26, 2001; Aklan
Electric Cooperative Incorporated v. NLRC, 380 Phil. 225, 237,
January 25, 2000; San Jose v. NLRC, 355 Phil. 759, August 17,
1998; Manila Electric Company v. NLRC, 331 Phil. 838, 846,
October 24, 1996.
17 Asuncion v. NLRC, 414 Phil. 329, 336, July 31, 2001.

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18 Dico Jr. v. Court of Appeals, 365 Phil. 184, 193, April 14, 1999.
19 The instances in which factual issues may be resolved by this
Court are as follows: (1) the conclusion is a finding grounded
entirely on speculation, surmise and conjecture; (2) the
inference made is manifestly mistaken; (3) there is grave abuse
of discretion; (4) the judgment is based on a misapprehension
of facts; (5) the findings of fact are conflicting; (6) the Court of
Appeals goes beyond the issues of the case, and its findings
are contrary to the admissions of both appellant and
appellees; (7) the findings of fact of the Court of Appeals are
contrary to those of the trial court; (8) said findings of fact are
conclusions without citation of specific evidence on which they
are based; (9) the facts set forth in the petition as well as in the
petitioner’s main and reply briefs are not disputed by the
respondent; and (10) the findings of fact of the Court of
Appeals are premised on the supposed absence of evidence
and contradicted by the evidence on record. (Sarmiento v.
Court of Appeals, 353 Phil. 834, 846, July 2, 1998)
20Decision of Labor Arbiter Ernesto S. Dinopol dated January
10, 2000, p. 3; rollo, p.53.
21NLRC Decision dated September 28, 2001, pp. 7-8; rollo, pp.
121-122.
22See the Articles of Incorporation of La Mallorca Taxi and R & E
Transport, Inc., which was appended to the Petition for Review
on Certiorari as Annexes "N-1" and "N-2"; rollo, pp. 63-83.
23Labor Arbiter’s Decision dated January 10, 2000, pp. 3-4; rollo,
p. 52-53.
24Philippine National Bank & National Sugar Development
Corporation v. Andrada Electric & Engineering Company, 381
SCRA 244, 254, April 17, 2002; Francisco Motors Corporation v.
CA, 368 Phil. 374, 384, June 25, 1999; San Juan Structural and
Steel Fabricators, Inc. v. CA, 357 Phil. 631, 648-649, September
29, 1998.
25 Supra.
26 Id., pp. 254-255, per Panganiban, J.
27 Periquet v. NLRC, 186 SCRA 724, 731, June 22, 1990, per Cruz,
J.
28 Galicia v. NLRC, 342 Phil. 342, 348, July 28, 1997.
29Principe v. Philippine Singapore Transport Services, Inc., 176
SCRA 514, 521, August 16, 1989, per Gancayco, J.
Corporation Law/alfred0 Page 207 of 1509
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30 Effective July 7, 1993.

Section 5, Rule II of the Rules Implementing RA 7641 or the


31

New Retirement Law.


32Section 3 of the Rules and Regulations Implementing
Presidential Decree (PD) 851 reads:

"Section 3. Employers Covered. - The Decree shall apply to


all employers except to:

xxx xxx xxx

(d) Employers of those who are paid on purely


commission, boundary, or task basis, and those who are
paid a fixed amount for performing specific work,
irrespective of the time consumed in the performance
thereof, except where the workers are paid on piece-rate
basis in which case the employer shall be covered by this
issuance insofar as such workers are concerned.

xxx xxx x x x"


33Section 1 of Rule V, Book III of the Omnibus Rules
Implementing the Labor Code provides:

"Section 1. Coverage. - This rule shall apply to all


employees except:

xxx xxx xxx

(d) Field personnel and other employees whose


performance is unsupervised by the employer including
those who are engaged on task or contract basis, purely
commission basis, or those who are paid a fixed amount
for performing work irrespective of the time consumed in
the performance.

xxx xxx x x x"


34 Jardin v. NLRC, 383 Phil. 187, 196, February 23, 2000; Martinez
v. NLRC, 339 Phil. 176, 182, May 29, 1997; National Labor Union
v. Dinglasan, 98 Phil. 649, 652, March 3, 1956.
35Government Service Insurance System v. Bengson
Commercial Buildings, Inc., 375 SCRA 431, 440, January 31,
2002; Gatmaytan v. CA, 335 Phil. 155, 167, February 3, 1997.
36International School, Inc. (Manila) v. CA, 368 Phil. 791, 798,
June 29, 1999.
37 Cabarrus Jr. v. Bernas, 344 Phil. 802, 808, September 24, 1997.

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38 CA Resolution dated August 28, 2002; rollo, p. 46.
39 Id., pp. 128-133 & 267-272.
40 Rollo, pp. 267-275.
41See Article 221 of the Labor Code; and Section 9 of Rule V
and Section 10 of Rule VII of the New Rules of Procedure of the
NLRC.

The January 10, 2000 Decision was officially released to the


42

parties on January 24, 2000.


43Petitioners received a copy of the Decision on January 27,
2000, while respondent received her copy on January 28, 2000.
44The pertinent portion of Sec. 2, Rule V, The New Rules of the
NLRC, provides:

"Section 1. Mandatory Conciliation/Mediation


Conference. - x x x

xxx xxx xxx

"A compromise agreement entered into by the parties not


in the presence of the Labor Arbiter before whom the
case is pending shall be approved by him if, after
confronting the parties, particularly the complainants, he
is satisfied that they understand the terms and conditions
of the settlement and that it was entered into freely and
voluntarily by them and the agreement is not contrary to
law, morals, and public policy.

"A compromise agreement duly entered in accordance


with this Section shall be final and binding upon the
parties and the Order approving it shall have the effect of
a judgment rendered by the Labor Arbiter.

xxx xxx x x x"


45NLRC Decision dated September 28, 2001, pp. 6-7; rollo, pp.
120-121.
46 Philippine Airlines v. NLRC, 331 Phil. 937, 961, October 28, 1996.
47Kathy-O Enterprises v. NLRC, 350 Phil. 380, 391, March 2, 1998;
Aurora Land Projects Corp. v. NLRC, 334 Phil. 44, 59, January 2,
1997.
48 Philippine Airlines, Inc. v. NLRC, supra.

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49Taberrah v. NLRC, 342 Phil. 394, 402-403,July 29, 1997; National
Federation of Labor Unions v. Ladrido III, 196 SCRA 833, 844,
May 8, 1991.
50 Manila Mandarin Employees Union v. NLRC, 332 Phil. 354, 364,
November 19, 1996; Oriental Mindoro Electric Cooperative, Inc.
v. NLRC, 316 Phil. 959, 968, July 31, 1995.

R&E Transport Inc. vs. Latag Case Digest

R&E Transport, Inc. & Honorio Enriquez vs. Avelina Latag

G.R. No. 155214

February 13, 2004

Facts: Pedro Latag was a regular employee of La Mallorca Taxi since


March 1, 1961. When La Mallorca ceased from business operations,
Latag transferred to R & E Transport, Inc. He was receiving an
average daily salary of five hundred pesos (P500.00) as a taxi driver.
Latag got sick in January 1995 and was forced to apply for partial
disability with the SSS, which was granted. When he recovered, he
reported for work in September 1998 but was no longer allowed to
continue working on account of his old age. Latag thus asked Felix
Fabros, the administrative officer of [petitioners], for his retirement
pay pursuant to Republic Act 7641 but he was ignored.

Thus, on December 21, 1998, Latagfiled a case for payment of his


retirement pay before the NLRC. Latag however died on April 30,
1999. Subsequently, his wife, Avelina Latag, substituted him. On
January 10, 2000, the Labor Arbiter rendered a decision in favor of
Latag.

Issue: Whether or not Latag is entitled to retirement benefits


considering she signed a waiver of quitclaim.

Ruling: The respondent is entitled to retirement benefits despite of


the waiver of quitclaims. There is no dispute the fact that the late
Pedro M. Latag is entitled to retirement benefits. Rather, the bone of
contention is the number of years that he should be credited with in

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computing those benefits. The findings of the NLRC that Pedro must
be credited only with his service to R & E Transport, Inc., because the
evidence shows that the aforementioned companies are two
different entities. After a careful and painstaking review of the
evidence on record, the court supports the NLRC's findings.

As to the Quitclaim and Waiver signed by Respondent Latag, the CA


committed no error when it ruled that the document was invalid and
could not bar her from demanding the benefits legally due her
husband. This is not say that all quitclaims are invalid per se. Courts,
however, are wary of schemes that frustrate workers' rights and
benefits, and look with disfavor upon quitclaims and waivers that
bargain these away.

Undisputably, Pedro M. Latag was credited with 14 years of service


with R & E Transport, Inc. Article 287 of the Labor Code, as amended
by Republic Act No. 7641, 30 provides: Retirement. — In the absence
of a retirement plan or agreement providing for retirement benefits
of employees in the establishment, an employee upon reaching the
age of sixty (60) years or more, but not beyond sixty-five (65) years
which is hereby declared the compulsory retirement age, who has
served at least five (5) years in said establishment, may retire and
shall be entitled to retirement pay equivalent to at least one-half
(1/2) month salary for every year of service, a fraction of at least six
(6) months being considered as one whole year. Unless the parties
provide for broader inclusions, the term one half-month salary shall
mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay
and the cash equivalent of not more than five (5) days of service
incentive leaves

The rules implementing the New Retirement Law similarly provide the
above-mentioned formula for computing the one-half month salary.
Since Pedro was paid according to the "boundary" system, he is not
entitled to the 13th month 32 and the service incentive pay; hence,
his retirement pay should be computed on the sole basis of his
salary.

It is accepted that taxi drivers do not receive fixed wages, but retain
only those sums in excess of the "boundary" or fee they pay to the
owners or operators of their vehicles. Thus, the basis for computing
their benefits should be the average daily income. In this case, the
CA found that Pedro was earning an average of five hundred pesos

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(P500) per day. We thus compute his retirement pay as follows: P500
x 15 days x 14 years of service equals P105,000.

G.R. No. 147993 July 21, 2006

ENRIQUEZ SECURITY SERVICES, INC., petitioner,


vs.
VICTOR A. CABOTAJE, respondent.

DECISION

CORONA, J.:

Sometime in January 1979, respondent Victor A. Cabotaje was


employed as a security guard by Enriquez Security and Investigation
Agency (ESIA). On November 13, 1985, petitioner Enriquez Security
Services, Inc. (ESSI) was incorporated. Respondent continued to work
as security guard in petitioner’s agency.

On reaching the age of 60 in July 1997,1 respondent applied for


retirement.

Petitioner acknowledged that respondent was entitled to retirement


benefits but opposed his claim that the computation of such
benefits must be reckoned from January 1979 when he started
working for ESIA. It claimed that the benefits must be computed only
from November 13, 1985 when ESSI was incorporated.

Respondent consequently filed a complaint in the National Labor


Relations Commission (NLRC) seeking the payment of retirement
benefits under Republic Act No. (RA) 7641, otherwise known as the
Retirement Pay Law.2

On January 15, 1999, labor arbiter Eduardo Carpio decided in


respondent’s favor:

Complainant is entitled to retirement pay. This entitlement was


not denied by respondents. xxx The computation of this benefits
shall cover the entire period of his employment from January
1979 up to July 16, 1997 based on his latest monthly salary of
P5,383.15 per the payroll sheet submitted by respondents. While
respondents claim that respondent corporation was merely
registered with the DOTC on November 13, 1985, they did not
deny however that complainant was an employee of the then
Enriquez Security and Investigation Agency, and that
complainant’s services with the said security agency up to the
present respondent corporation was uninterrupted. The
obligation of the new company involves not only to absorb the
workers of the dissolved company, but also to include the
length of service earned by the absorbed employee with their

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former employer as well. To rule otherwise would be manifestly
less than fair, certainly less than just and equitable.

xxx xxx xxx

WHEREFORE, judgment is hereby rendered ordering


respondents to pay complainant the grand total amount of
P228,581.00 representing his retirement benefits and other
money claims.

SO ORDERED.3

On appeal, the NLRC set aside the labor arbiter’s award of one-
month salary for every year of service for being excessive. It ruled
that under RA 7641, respondent Cabotaje was entitled to retirement
pay equivalent only to one-half month salary for every year of
service. Thus:

WHEREFORE, the assailed decision is hereby set aside and a


new one entered ordering respondents to pay complainant
the amount of P76,710.60 representing his retirement benefits.

SO ORDERED.4

On March 15, 2000, the NLRC denied petitioner’s motion for


reconsideration.5

On May 25, 2000, petitioner filed a special civil action for certiorari 6
with the Court of Appeals.

On September 26, 2000, the appellate court affirmed the NLRC


decision.7 It also denied the motion for reconsideration on May 8,
2001.8

Hence, this petition for review on certiorari 9 on the following issues:

1. [w]hether or not the Retirement [Pay] Law has retroactive


effect.

2. [w]hether the whole 5 days service incentive leave or just a


portion thereof equivalent to 1/12 should be included in the ½
month salary for purposes of computing the retirement pay.

3. [w]hether or not the length of service of a retired employee


in a dissolved company (his former employer) should be
included in his length of service with his last employer for
purposes of computing the retirement pay.10

We find no merit in the petition.

First. Petitioner’s contention that RA 7641 cannot be applied


retroactively has long been settled in the Guidelines for Effective

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Implementation of RA 7641 issued on October 24, 1996 by the
Department of Labor and Employment. Paragraph B of the
guidelines provides:

In reckoning the length of service, the period of employment


with the same employer before the effectivity date of the law
on January 7, 1993 should be included.

Thus, in Rufina Patis Factory v. Lucas, Sr.,11 we held:

RA 7641 is undoubtedly a social legislation. The law has been


enacted as a labor protection measure and as a curative
statute that – absent a retirement plan devised by, an
agreement with, or a voluntary grant from, an employer – can
respond, in part at least, to the financial well-being of workers
during their twilight years soon following their life of labor. There
should be little doubt about the fact that the law can apply to
labor contracts still existing at the time the statute has taken
effect, and that its benefits can be reckoned not only from the
date of the law’s enactment but retroactively to the time said
employment contracts have started. (emphasis ours)

Second. Petitioner’s insistence that only 1/12 of the service incentive


leave (SIL) should be included in the computation of the retirement
benefit has no basis. Section 1, RA 7641 provides:

x x x Unless the parties provide for broader inclusions, the term


one-half (1/2) month salary shall mean fifteen (15) days plus
one-twelfth (1/12) of the 13th month pay and the cash
equivalent of not more than five (5) days of service incentive
leave. x x x

Section 5.2, Rule II of the Implementing Rules of Book VI of the Labor


Code further clarifies what comprises the "1/2 month salary" due a
retiring employee:

5.2 Components of One-half (1/2) Month Salary. – For the


purpose of determining the minimum retirement pay due an
employee under this Rule, the term "one-half month salary" shall
include all the following:

(a) Fifteen (15) days salary of the employee based on his latest
salary rate. x x x;

(b) The cash equivalent of not more than five (5) days of
service incentive leave;

(c) One-twelfth of the 13th month pay due an employee;

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(d) All other benefits that the employer and employee may
agree upon that should be included in the computation of the
employee’s retirement pay.

The foregoing rules are clear that the whole 5 days of SIL are
included in the computation of a retiring employees’ pay.

Third. It is a well-entrenched doctrine that the Supreme Court does


not pass upon questions of fact in an appeal by certiorari under Rule
45.12 It is not our function to assess and evaluate the evidence all
over again13 where the findings of the quasi-judicial agency and the
appellate court on the matter coincide.

The consistent rulings of the labor arbiter, the NLRC and the
appellate court should be respected and petitioner’s veil of
corporate fiction should likewise be pierced. These are based on the
following uncontroverted facts: (1) respondent worked with ESIA and
petitioner ESSI; (2) his employment with both security agencies was
continuous and uninterrupted; (3) both agencies were owned by the
Enriquez family and (4) petitioner ESSI maintained its office in the
same place where ESIA previously held office.14

The attempt to make the security agencies appear as two separate


entities, when in reality they were but one, was a devise to defeat
the law and should not be permitted. Although respect for
corporate personality is the general rule, there are exceptions. In
appropriate cases, the veil of corporate fiction may be pierced as
when it is used as a means to perpetrate a social injustice or as a
vehicle to evade obligations. Petitioner was thus correctly ordered to
pay respondent’s retirement under RA 7641, computed from January
1979 up to the time he applied for retirement in July 1997.

WHEREFORE, the petition is hereby DENIED. Theassailed decision and


resolution of the Court of Appeals are AFFIRMED.

Costs against petitioner.

SO ORDERED.

Puno, Chairperson, Sandoval-Gutierrez, Azcuna, Garcia, J.J., concur.

ASJ Corp. vs. Evangelista (545 SCRA 300 [2006])

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ASJ CORPORATION and G.R. No. 158086
ANTONIO SAN JUAN,

Petitioners,
Present:

QUISUMBING, J.,
Chairperson,

CARPIO,
- versus -
CARPIO MORALES,

TINGA, and

VELASCO, JR., JJ.

SPS. EFREN & MAURA Promulgated:


EVANGELISTA,

Respondents.
February 14, 2008

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - -x

DECISION

QUISUMBING, J.:

For review on certiorari is the Decision59[1] dated April 30, 2003


of the Court of Appeals in CA-G.R. CV No. 56082, which had affirmed
the Decision60[2] dated July 8, 1996 of the Regional Trial Court (RTC)

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of Malolos, Bulacan, Branch 9 in Civil Case No. 745-M-93. The Court of
Appeals, after applying the doctrine of piercing the veil of corporate
fiction, held petitioners ASJ Corporation (ASJ Corp.) and Antonio San
Juan solidarily liable to respondents Efren and Maura Evangelista for
the unjustified retention of the chicks and egg by-products covered
by Setting Report Nos. 108 to 113.61[3]

The pertinent facts, as found by the RTC and the Court of


Appeals, are as follows:

Respondents, under the name and style of R.M. Sy Chicks, are


engaged in the large-scale business of buying broiler eggs, hatching
them, and selling their hatchlings (chicks) and egg by-products62[4]
in Bulacan and Nueva Ecija. For the incubation and hatching of
these eggs, respondents availed of the hatchery services of ASJ
Corp., a corporation duly registered in the name of San Juan and his
family.

Sometime in 1991, respondents delivered to petitioners various


quantities of eggs at an agreed service fee of 80 centavos per egg,
whether successfully hatched or not. Each delivery was reflected in
a Setting Report indicating the following: the number of eggs
delivered; the date of setting or the date the eggs were delivered
and laid out in the incubators; the date of candling or the date the
eggs, through a lighting system, were inspected and determined if
viable or capable of being hatched into chicks; and the date of
hatching, which is also the date respondents would pick-up the
chicks and by-products. Initially, the service fees were paid upon
release of the eggs and by-products to respondents. But as their
business went along, respondents delays on their payments were
tolerated by San Juan, who just carried over the balance, as there

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may be, into the next delivery, out of keeping goodwill with
respondents.

From January 13 to February 3, 1993, respondents had


delivered to San Juan a total of 101,3[50]63[5] eggs, detailed as
follows:64[6]

Date Set SR Number No. of eggs delivered Date hatched/Pick-


up date

1/13/1993 SR 108 32,566 eggs February


3, 1993

1/20/1993 SR 109 21,485 eggs February


10, 1993

1/22/1993 SR 110 7,213 eggs February


12, 1993

1/28/1993 SR 111 14,495 eggs February


18, 1993

1/30/1993 SR 112 15,346 eggs February


20, 1993

2/3/1993 SR 113 10,24[5]65[7] eggs February 24, 1993

TOTAL 101,350 eggs

On February 3, 1993, respondent Efren went to the hatchery to


pick up the chicks and by-products covered by Setting Report No.
108, but San Juan refused to release the same due to respondents
failure to settle accrued service fees on several setting reports
starting from Setting Report No. 90. Nevertheless, San Juan accepted
from Efren 10,245 eggs covered by Setting Report No. 113 and

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P15,000.0066[8] in cash as partial payment for the accrued service
fees.

On February 10, 1993, Efren returned to the hatchery to pick up


the chicks and by-products covered by Setting Report No. 109, but
San Juan again refused to release the same unless respondents fully
settle their accounts. In the afternoon of the same day, respondent
Maura, with her son Anselmo, tendered P15,000.0067[9] to San Juan,
and tried to claim the chicks and by-products. She explained that
she was unable to pay their balance because she was hospitalized
for an undisclosed ailment. San Juan accepted the P15,000.00, but
insisted on the full settlement of respondents accounts before
releasing the chicks and by-products. Believing firmly that the total
value of the eggs delivered was more than sufficient to cover the
outstanding balance, Maura promised to settle their accounts only
upon proper accounting by San Juan. San Juan disliked the idea
and threatened to impound their vehicle and detain them at the
hatchery compound if they should come back unprepared to fully
settle their accounts with him.

On February 11, 1993, respondents directed their errand boy,


Allan Blanco, to pick up the chicks and by-products covered by
Setting Report No. 110 and also to ascertain if San Juan was still
willing to settle amicably their differences. Unfortunately, San Juan
was firm in his refusal and reiterated his threats on respondents.
Fearing San Juans threats, respondents never went back to the
hatchery.

The parties tried to settle amicably their differences before


police authorities, but to no avail. Thus, respondents filed with the

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RTC an action for damages based on petitioners retention of the
chicks and by-products covered by Setting Report Nos. 108 to 113.

On July 8, 1996, the RTC ruled in favor of respondents and


made the following findings: (1) as of Setting Report No. 107,
respondents owed petitioners P102,336.80;68[10] (2) petitioners
withheld the release of the chicks and by-products covered by
Setting Report Nos. 108-113;69[11] and (3) the retention of the chicks
and by-products was unjustified and accompanied by threats and
intimidations on respondents.70[12] The RTC disregarded the
corporate fiction of ASJ Corp.,71[13] and held it and San Juan
solidarily liable to respondents for P529,644.80 as actual damages,
P100,000.00 as moral damages, P50,000.00 as attorneys fees, plus
interests and costs of suit. The decretal portion of the decision reads:

WHEREFORE, based on the evidence on record and


the laws/jurisprudence applicable thereon, judgment is
hereby rendered ordering the defendants to pay, jointly
and severally, unto the plaintiffs the amounts of
P529,644.80, representing the value of the hatched chicks
and by-products which the plaintiffs on the average
expected to derive under Setting Reports Nos. 108 to 113,
inclusive, with legal interest thereon from the date of this
judgment until the same shall have been fully paid,
P100,000.00 as moral damages and P50,000.00 as
attorneys fees, plus the costs of suit.

SO ORDERED.72[14]

Both parties appealed to the Court of Appeals. Respondents


prayed for an additional award of P76,139.00 as actual damages for

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the cost of other unreturned by-products and P1,727,687.52 as
unrealized profits, while petitioners prayed for the reversal of the trial
courts entire decision.

On April 30, 2003, the Court of Appeals denied both appeals for
lack of merit and affirmed the trial courts decision, with the slight
modification of including an award of exemplary damages of
P10,000.00 in favor of respondents. The Court of Appeals, applying
the doctrine of piercing the veil of corporate fiction, considered ASJ
Corp. and San Juan as one entity, after finding that there was no
bona fide intention to treat the corporation as separate and distinct
from San Juan and his wife Iluminada. The fallo of the Court of
Appeals decision reads:

WHEREFORE, in view of the foregoing, the Decision


appealed from is hereby AFFIRMED, with the slight
modification that exemplary damages in the amount of
P10,000.00 are awarded to plaintiffs.

Costs against defendants.

SO ORDERED.73[15]

Hence, the instant petition, assigning the following errors:

I.

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN


HOLDING, AS DID THE COURT A QUO, THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-
PRODUCTS COVERED BY SETTING REPORT NOS. 108 AND
109.

II.

THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING


THE HEARSAY TESTIMONY OF MAURA EVANGELISTA
SUPPORTIVE OF ITS FINDINGS THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-

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PRODUCTS COVERED BY SETTING REPORT NOS. 108 AND
109.

III.

THE HONORABLE COURT OF APPEALS, AS DID THE COURT A


QUO, ERRED IN NOT FINDING THAT RESPONDENTS FAILED
TO RETURN TO THE PLANT TO GET THE CHICKS AND BY-
PRODUCTS COVERED BY SETTING REPORT NOS. 110, 111,
112 AND 113.

IV.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING,


AS DID THE COURT A QUO, THAT THE PIERCING OF THE VEIL
OF CORPORATE ENTITY IS JUSTIFIED, AND CONSEQUENTLY
HOLDING PETITIONERS JOINTLY AND SEVERALLY LIABLE TO
PAY RESPONDENTS THE SUM OF P529,644.[80].

V.

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING


THAT PETITIONERS HAVE VIOLATED THE PRINCIPLES
ENUNCIATED IN ART. 19 OF THE NEW CIVIL CODE AND
CONSEQUENTLY IN AWARDING MORAL DAMAGES,
EXEMPLARY DAMAGES AND ATTORNEYS FEES.

VI.

THE HONORABLE COURT OF APPEALS ERRED IN NOT


AWARDING PETITIONERS COUNTERCLAIM.74[16]

Plainly, the issues submitted for resolution are: First, did the Court
of Appeals err when (a) it ruled that petitioners withheld or failed to
release the chicks and by-products covered by Setting Report Nos.
108 and 109; (b) it admitted the testimony of Maura; (c) it did not
find that it was respondents who failed to return to the hatchery to
pick up the chicks and by-products covered by Setting Report Nos.
110 to 113; and (d) it pierced the veil of corporate fiction and held
ASJ Corp. and Antonio San Juan as one entity? Second, was it

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proper to hold petitioners solidarily liable to respondents for the
payment of P529,644.80 and other damages?

In our view, there are two sets of issues that the petitioners have
raised.

The first set is factual. Petitioners seek to establish a set of facts


contrary to the factual findings of the trial and appellate courts.
However, as well established in our jurisprudence, only errors of law
are reviewable by this Court in a petition for review under Rule
45.75[17] The trial court, having had the opportunity to personally
observe and analyze the demeanor of the witnesses while testifying,
is in a better position to pass judgment on their credibility.76[18] More
importantly, factual findings of the trial court, when amply supported
by evidence on record and affirmed by the appellate court, are
binding upon this Court and will not be disturbed on appeal.77[19]
While there are exceptional circumstances78[20] when these
findings may be set aside, none of them is present in this case.

Based on the records, as well as the parties own admissions, the


following facts were uncontroverted: (1) As of Setting Report No. 107,
respondents were indebted to petitioners for P102,336.80 as accrued
service fees for Setting Report Nos. 90 to 107;79[21] (2) Petitioners,
based on San Juans own admission,80[22] did not release the chicks
and by-products covered by Setting Report Nos. 108 and 109 for
failure of respondents to fully settle their previous accounts; and (3)
Due to San Juans threats, respondents never returned to the

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hatchery to pick up those covered by Setting Report Nos. 110 to
113.81[23]

Furthermore, although no hard and fast rule can be accurately


laid down under which the juridical personality of a corporate entity
may be disregarded, the following probative factors of identity justify
the application of the doctrine of piercing the veil of corporate
fiction82[24] in this case: (1) San Juan and his wife own the bulk of
shares of ASJ Corp.; (2) The lot where the hatchery plant is located is
owned by the San Juan spouses; (3) ASJ Corp. had no other
properties or assets, except for the hatchery plant and the lot where
it is located; (4) San Juan is in complete control of the corporation;
(5) There is no bona fide intention to treat ASJ Corp. as a different
entity from San Juan; and (6) The corporate fiction of ASJ Corp. was
used by San Juan to insulate himself from the legitimate claims of
respondents, defeat public convenience, justify wrong, defend
crime, and evade a corporations subsidiary liability for
damages.83[25] These findings, being purely one of fact,84[26]
should be respected. We need not assess and evaluate the
evidence all over again where the findings of both courts on these
matters coincide.

On the second set of issues, petitioners contend that the


retention was justified and did not constitute an abuse of rights since it
was respondents who failed to comply with their obligation.
Respondents, for their part, aver that all the elements on abuse of
rights were present. They further state that despite their offer to
partially satisfy the accrued service fees, and the fact that the value

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of the chicks and by-products was more than sufficient to cover their
unpaid obligations, petitioners still chose to withhold the delivery.

The crux of the controversy, in our considered view, is simple


enough. Was petitioners retention of the chicks and by-products on
account of respondents failure to pay the corresponding service
fees unjustified? While the trial and appellate courts had the same
decisions on the matter, suffice it to say that a modification is proper.
Worth stressing, petitioners act of withholding the chicks and by-
products is entirely different from petitioners unjustifiable acts of
threatening respondents. The retention had legal basis; the threats
had none.

To begin with, petitioners obligation to deliver the chicks and


by-products corresponds to three dates: the date of hatching, the
delivery/pick-up date and the date of respondents payment. On
several setting reports, respondents made delays on their payments,
but petitioners tolerated such delay. When respondents accounts
accumulated because of their successive failure to pay on several
setting reports, petitioners opted to demand the full settlement of
respondents accounts as a condition precedent to the delivery.
However, respondents were unable to fully settle their accounts.

Respondents offer to partially satisfy their accounts is not


enough to extinguish their obligation. Under Article 124885[27] of the
Civil Code, the creditor cannot be compelled to accept partial
payments from the debtor, unless there is an express stipulation to
that effect. More so, respondents cannot substitute or apply as their
payment the value of the chicks and by-products they expect to
derive because it is necessary that all the debts be for the same
kind, generally of a monetary character. Needless to say, there was
no valid application of payment in this case.

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Furthermore, it was respondents who violated the very essence
of reciprocity in contracts, consequently giving rise to petitioners
right of retention. This case is clearly one among the species of non-
performance of a reciprocal obligation. Reciprocal obligations are
those which arise from the same cause, wherein each party is a
debtor and a creditor of the other, such that the performance of
one is conditioned upon the simultaneous fulfillment of the
other.86[28] From the moment one of the parties fulfills his obligation,
delay by the other party begins.87[29]

Since respondents are guilty of delay in the performance of


their obligations, they are liable to pay petitioners actual damages
of P183,416.80, computed as follows: From respondents outstanding
balance of P102,336.80, as of Setting Report No. 107, we add the
corresponding services fees of P81,080.0088[30] for Setting Report
Nos. 108 to 113 which had remain unpaid.

Nonetheless, San Juans subsequent acts of threatening


respondents should not remain among those treated with impunity.
Under Article 1989[31] of the Civil Code, an act constitutes an abuse
of right if the following elements are present: (a) the existence of a
legal right or duty; (b) which is exercised in bad faith; and (c) for the
sole intent of prejudicing or injuring another.90[32] Here, while
petitioners had the right to withhold delivery, the high-handed and
oppressive acts of petitioners, as aptly found by the two courts
below, had no legal leg to stand on. We need not weigh the
corresponding pieces of evidence all over again because factual

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findings of the trial court, when adopted and confirmed by the
appellate court, are binding and conclusive and will not be
disturbed on appeal.91[33]

Since it was established that respondents suffered some


pecuniary loss anchored on petitioners abuse of rights, although the
exact amount of actual damages cannot be ascertained,
temperate damages are recoverable. In arriving at a reasonable
level of temperate damages of P408,852.10, which is equivalent to
the value of the chicks and by-products, which respondents, on the
average, are expected to derive, this Court was guided by the
following factors: (a) award of temperate damages will cover only
Setting Report Nos. 109 to 113 since the threats started only on
February 10 and 11, 1993, which are the pick-up dates for Setting
Report Nos. 109 and 110; the rates of (b) 41% and (c) 17%,
representing the average rates of conversion of broiler eggs into
hatched chicks and egg by-products as tabulated by the trial court
based on available statistical data which was unrebutted by
petitioners; (d) 68,784 eggs,92[34] or the total number of broiler eggs
under Setting Report Nos. 109 to 113; and (e) P14.00 and (f) P1.20, or
the then unit market price of the chicks and by-products,
respectively.

Thus, the temperate damages of P408,852.10 is computed as


follows:

[b X (d X e) + c X (d X f)] = Temperate Damages

41% X (68,784 eggs X P14) = P394,820.16

17% X (68,784 eggs X P1.20) = P 14,031.94

[P394,820.16 + P14,031.94] = P408,852.10

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At bottom, we agree that petitioners conduct flouts the norms
of civil society and justifies the award of moral and exemplary
damages. As enshrined in civil law jurisprudence: Honeste vivere,
non alterum laedere et jus suum cuique tribuere. To live virtuously,
not to injure others and to give everyone his due.93[35] Since
exemplary damages are awarded, attorneys fees are also proper.
Article 2208 of the Civil Code provides that:

In the absence of stipulation, attorneys fees and


expenses of litigation, other than judicial costs, cannot be
recovered, except:

(1) When exemplary damages are awarded;

xxxx

WHEREFORE, the petition is PARTLY GRANTED. The Decision


dated April 30, 2003 of the Court of Appeals in CA-G.R. CV No. 56082
is hereby MODIFIED as follows:

a. Respondents are ORDERED to pay petitioners


P183,416.80 as actual damages, with interest of 6% from
the date of filing of the complaint until fully paid, plus
legal interest of 12% from the finality of this decision until
fully paid.

b. The award of actual damages of P529,644.80 in favor


of respondents is hereby REDUCED to P408,852.10, with
legal interest of 12% from the date of finality of this
judgment until fully paid.

c. The award of moral damages, exemplary damages


and attorneys fees of P100,000.00, P10,000.00,
P50,000.00, respectively, in favor of respondents is
hereby AFFIRMED.

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d. All other claims are hereby DENIED.

No pronouncement as to costs.

SO ORDERED.

Mendoza vs. Banco Real Dev. Bank (470 SCRA 86 [2005])

G.R. No. 140923. September 16, 2005

MANUEL M. MENDOZA and EDGARDO A. YOTOKO, Petitioners,


vs.
BANCO REAL DEVELOPMENT BANK (now LBC Development Bank),
Respondent.

DECISION

SANDOVAL-GUTIERREZ, J.:

Before us is a petition for review on certiorari1, assailing the Decision2


of the Court of Appeals dated September 21, 1998 in CA-G.R. No.
41544, entitled "Banco Real Development Bank, plaintiff, versus,
Technica Video Inc., et. al., Manuel M. Mendoza, et. al., defendants"
and Resolution dated December 3, 1999.

The petition alleges inter alia that on August 7, 1985, the Board of
Directors of Technical Video, Inc. (TVI) passed a Resolution
authorizing its President, Eduardo A. Yotoko, petitioner, or its General
Manager-Secretary-Treasurer, Manuel M. Mendoza, also a petitioner,
to apply for and secure a loan from the Pasay City Banco Real

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Development Bank (now LBC Development Bank), herein
respondent.

On September 11, 1985, respondent bank extended a loan of


P500,000.00 to TVI. In his capacity as General Manager, petitioner
Mendoza executed a promissory note and chattel mortgage over
195 units of Beta video machines and their equipment and
accessories belonging to TVI in favor of respondent bank.

On October 3, 1986, TVI and two other video firms, Fox Video and
Galactica Video, organized a new corporation named FGT Video
Network Inc. (FGT). It was registered with the Securities and
Exchange Commission.3 Petitioner Mendoza was the concurrent
President of FGT and Operating General Manager of TVI. Thus, the
office of TVI had to be transferred to the building of FGT for easier
monitoring of the distribution and marketing aspects of the business.

For TVI’s failure to pay its loan upon maturity, respondent bank, on
January 26, 1987, filed with the Office of the Clerk of Court of the
Regional Trial Court (RTC), Pasay City, a petition for Extra Judicial
Foreclosure and Sale of Chattel Mortgage.

However, the Sheriff’s Report/Return4 dated January 27, 1987 shows


that TVI is no longer doing business at its given address; that its
General Manager, Mr. Manuel M. Mendoza, is presently employed
at FGT Video Network with offices at the Philcemcor Bldg., No. 4
Edsa cor. Connecticut St., Greenhills, San Juan, Metro Manila; that
when asked about the whereabouts of the video machines, in the
presence of the representative of respondent bank and its counsel,
Mr. Mendoza denied any knowledge of their whereabouts; and that
action on respondent’s petition is indefinitely postponed until further
notice from the bank.

Respondent then wrote TVI demanding the surrender of the video


machines. In his letter dated February 19, 1987, petitioner Mendoza
requested the bank to give him "additional time to enable us to pay
our total obligations" and proposed a repayment scheme to start not
later than March 10, 1987.5 Still, no payment was received by the
bank. TVI simply refused and ignored the demand and kept silent as
to the whereabouts of the video machines.

Meanwhile, in a case entitled "Republic of the Philippines, plaintiff vs.


FGT Video Network Inc., Manuel Mendoza, Alfredo C. Ongyangco,
Eric Apolonio, Susan Yang ang Eduardo A. Yotoko, defendants," the
RTC, Branch 167, Pasig City issued a search warrant. The agents of
the National Bureau of Investigation (NBI) confiscated at the offices
of FGT 638 machines and equipment including the 195 Beta
machines mortgaged with respondent bank.

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On May 29, 1987, upon motion of FGT and herein petitioners, the
same court issued another Order directing the NBI to release and
return the said machines to them.

However, Columbia Pictures Inc., Orion Pictures Corp., Paramount


Pictures Corp., Universal City Studios Inc., The Walt Disney Company
and Warner Bros. filed with this Court a petition for certiorari6 assailing
the Order of the lower court.

On June 18, 1987, this Court issued a temporary restraining order


enjoining the RTC from enforcing its assailed order. The machines
and equipment were left in the custody of the NBI until the petition
for certiorari shall have been resolved with finality.

On July 13, 1990, respondent bank filed with the RTC, Branch 110,
Pasig City,7 a complaint for collection of a sum of money8 against
TVI, FGT and petitioners. Only petitioners filed their joint answer to the
complaint.

In their joint answer, petitioners specifically denied the allegations in


the complaint, raising the defense that the loan is purely a corporate
indebtedness of TVI.

On April 29, 1991, the trial court rendered a Decision, holding that:

"As by these considerations, the Court finds that TVI was the mere
alter ego or business conduit of Yotoko and Mendoza, and
additionally considering 1) that Mendoza disclaimed knowledge of
the whereabouts of the TVI mortgaged property at the time
plaintiff’s petition for extrajudicial foreclosure was being effected,
and 2) that Mendoza and Yotoko transferred the mortgaged
property to FGT without first securing plaintiff’s consent despite their
awareness that under the chattel mortgage, such consent was
necessary, the doctrine of corporate entity must be pierced and the
two must be held personally liable for TVI’s obligation to plaintiff for
said doctrine cannot be used to defeat public convenience, justify
wrong, protect fraud or avoid a legal obligation."

The dispositive portion of the trial court’s Decision reads:

"WHEREFORE, judgment is hereby rendered in favor of plaintiff and


against defendants TECHNICA VIDEO, INC., Mendoza and Yotoko,
ordering them,

1) to pay plaintiff the sum of P500,000.00 plus interests, charges and


penalties as agreed upon in the promissory note of September 11,
1985, until the same is fully paid;

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2) to pay plaintiff the sum equivalent to ten (10%) of the total unpaid
obligation as and for attorney’s fees, and

3) to pay the costs.

SO ORDERED."

Upon appeal by herein petitioners, the Court of Appeals rendered its


Decision dated September 21, 1998, affirming in toto the Decision of
the trial court. Petitioners’ motion for reconsideration was denied in
its Resolution dated December 3, 1999.

Hence, the instant petition.

The basic issue for our resolution is whether herein petitioners are
personally liable for TVI’s indebtedness of P500,000.00 with
respondent bank.

Both the trial court and the Appellate Court found that the
petitioners transferred the Beta video machines from TVI to FGT
without the consent of respondent bank. Also, upon inquiry of the
sheriff, petitioner Mendoza declined knowledge of the whereabouts
of the mortgaged video machines. Moreover, the fact that the NBI
seized the video machines from FGT glaringly shows that petitioners
transferred the same from TVI. More importantly, a comparison of the
list of video machines in the Chattel Mortgage Contract and the list
of video machines seized by the NBI from FGT shows that they have
the same serial numbers.

The courts below also found that TVI is petitioners’ mere alter ego or
business conduit. They control the affairs of TVI. Among its
stockholders or directors, they were the only ones who became
incorporators of FGT. They transferred the assets of TVI to FGT.

The general rule is that obligations incurred by a corporation, acting


through its directors, officers or employees, are its sole liabilities.
However, the veil with which the law covers and isolates the
corporation from its directors, officers or employees will be lifted
when the corporation is used by any of them as a cloak or cover for
fraud or illegality or injustice.9 Here, the fraud was committed by
petitioners to the prejudice of respondent bank. It bears emphasis
that as reported by the sheriff, TVI is no longer doing business at its
given address and its whereabouts cannot be established as yet.

Both the trial court and the Court of Appeals thus concluded that
petitioners succeeded to hide the chattels, preventing the sheriff to
foreclose the mortgage. Obviously, they acted in bad faith to
defraud respondent bank.

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In fine, we hold that the Appellate Court, in affirming the Decision of
the trial court, correctly ruled that petitioners, not TVI, are the ones
personally liable to respondent bank for the payment of the loan.

WHEREFORE, the petition is DENIED. Costs against petitioners.

SO ORDERED.

Panganiban, (Chairman), Corona, Carpio-Morales, and Garcia, JJ.,


concur.

Lafarge Cement Phils. vs. Continental Cement (443 SCRA 522


[2004])

G.R. No. 155173 November 23, 2004

LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge Philippines,


Inc.), LUZON CONTINENTAL LAND CORPORATION, CONTINENTAL
OPERATING CORPORATION and PHILIP ROSEBERG, petitioners,
vs.
CONTINENTAL CEMENT CORPORATION, GREGORY T. LIM and
ANTHONY A. MARIANO, respondents.

DECISION

PANGANIBAN, J.:

May defendants in civil cases implead in their counterclaims persons


who were not parties to the original complaints? This is the main
question to be answered in this controversy.

The Case

Before us is a Petition for Review1 under Rule 45 of the Rules of Court,


seeking to nullify the May 22, 20022 and the September 3, 2002
Orders3 of the Regional Trial Court (RTC) of Quezon City (Branch 80)
in Civil Case No. Q-00-41103. The decretal portion of the first assailed
Order reads:

"WHEREFORE, in the light of the foregoing as earlier stated, the


plaintiff's motion to dismiss claims is granted. Accordingly, the
defendants' claims against Mr. Lim and Mr. Mariano captioned
as their counterclaims are dismissed."4

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The second challenged Order denied petitioners' Motion for
Reconsideration.

The Facts

Briefly, the origins of the present controversy can be traced to the


Letter of Intent (LOI) executed by both parties on August 11, 1998,
whereby Petitioner Lafarge Cement Philippines, Inc. (Lafarge) -- on
behalf of its affiliates and other qualified entities, including Petitioner
Luzon Continental Land Corporation (LCLC) -- agreed to purchase
the cement business of Respondent Continental Cement
Corporation (CCC). On October 21, 1998, both parties entered into
a Sale and Purchase Agreement (SPA). At the time of the foregoing
transactions, petitioners were well aware that CCC had a case
pending with the Supreme Court. The case was docketed as GR No.
119712, entitled Asset Privatization Trust (APT) v. Court of Appeals and
Continental Cement Corporation.

In anticipation of the liability that the High Tribunal might adjudge


against CCC, the parties, under Clause 2 (c) of the SPA, allegedly
agreed to retain from the purchase price a portion of the contract
price in the amount of P117,020,846.84 -- the equivalent of
US$2,799,140. This amount was to be deposited in an interest-bearing
account in the First National City Bank of New York (Citibank) for
payment to APT, the petitioner in GR No. 119712.

However, petitioners allegedly refused to apply the sum to the


payment to APT, despite the subsequent finality of the Decision in GR
No. 119712 in favor of the latter and the repeated instructions of
Respondent CCC. Fearful that nonpayment to APT would result in
the foreclosure, not just of its properties covered by the SPA with
Lafarge but of several other properties as well, CCC filed before the
Regional Trial Court of Quezon City on June 20, 2000, a "Complaint
with Application for Preliminary Attachment" against petitioners.
Docketed as Civil Case No. Q-00-41103, the Complaint prayed,
among others, that petitioners be directed to pay the "APT Retained
Amount" referred to in Clause 2 (c) of the SPA.

Petitioners moved to dismiss the Complaint on the ground that it


violated the prohibition on forum-shopping. Respondent CCC had
allegedly made the same claim it was raising in Civil Case No. Q-00-
41103 in another action, which involved the same parties and which
was filed earlier before the International Chamber of Commerce.
After the trial court denied the Motion to Dismiss in its November 14,
2000 Order, petitioners elevated the matter before the Court of
Appeals in CA-GR SP No. 68688.

In the meantime, to avoid being in default and without prejudice to


the outcome of their appeal, petitioners filed their Answer and
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Compulsory Counterclaims ad Cautelam before the trial court in
Civil Case No. Q-00-41103. In their Answer, they denied the
allegations in the Complaint. They prayed -- by way of compulsory
counterclaims against Respondent CCC, its majority stockholder and
president Gregory T. Lim, and its corporate secretary Anthony A.
Mariano -- for the sums of (a) P2,700,000 each as actual damages,
(b) P100,000,000 each as exemplary damages, (c) P100,000,000
each as moral damages, and (d) P5,000,000 each as attorney's fees
plus costs of suit.

Petitioners alleged that CCC, through Lim and Mariano, had filed
the "baseless" Complaint in Civil Case No. Q-00-41103 and procured
the Writ of Attachment in bad faith. Relying on this Court's
pronouncement in Sapugay v. CA,5 petitioners prayed that both Lim
and Mariano be held "jointly and solidarily" liable with Respondent
CCC.

On behalf of Lim and Mariano who had yet to file any responsive
pleading, CCC moved to dismiss petitioners' compulsory
counterclaims on grounds that essentially constituted the very issues
for resolution in the instant Petition.

Ruling of the Trial Court

On May 22, 2002, the Regional Trial Court of Quezon City (Branch 80)
dismissed petitioners' counterclaims for several reasons, among
which were the following: a) the counterclaims against Respondents
Lim and Mariano were not compulsory; b) the ruling in Sapugay was
not applicable; and c) petitioners' Answer with Counterclaims
violated procedural rules on the proper joinder of causes of action.6

Acting on the Motion for Reconsideration filed by petitioners, the trial


court -- in an Amended Order dated September 3, 20027 -- admitted
some errors in its May 22, 2002 Order, particularly in its
pronouncement that their counterclaim had been pleaded against
Lim and Mariano only. However, the RTC clarified that it was
dismissing the counterclaim insofar as it impleaded Respondents Lim
and Mariano, even if it included CCC.

Hence this Petition.8

Issues

In their Memorandum, petitioners raise the following issues for our


consideration:

"[a] Whether or not the RTC gravely erred in refusing to rule that
Respondent CCC has no personality to move to dismiss

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petitioners' compulsory counterclaims on Respondents Lim and
Mariano's behalf.

"[b] Whether or not the RTC gravely erred in ruling that (i)
petitioners' counterclaims against Respondents Lim and
Mariano are not compulsory; (ii) Sapugay v. Court of Appeals is
inapplicable here; and (iii) petitioners violated the rule on
joinder of causes of action."9

For clarity and coherence, the Court will resolve the foregoing in
reverse order.

The Court's Ruling

The Petition is meritorious.

First Issue:

Counterclaims and Joinder of Causes of Action.

Petitioners' Counterclaims Compulsory

Counterclaims are defined in Section 6 of Rule 6 of the Rules of Civil


Procedure as "any claim which a defending party may have against
an opposing party." They are generally allowed in order to avoid a
multiplicity of suits and to facilitate the disposition of the whole
controversy in a single action, such that the defendant's demand
may be adjudged by a counterclaim rather than by an
independent suit. The only limitations to this principle are (1) that the
court should have jurisdiction over the subject matter of the
counterclaim, and (2) that it could acquire jurisdiction over third
parties whose presence is essential for its adjudication.10

A counterclaim may either be permissive or compulsory. It is


permissive "if it does not arise out of or is not necessarily connected
with the subject matter of the opposing party's claim."11 A permissive
counterclaim is essentially an independent claim that may be filed
separately in another case.

A counterclaim is compulsory when its object "arises out of or is


necessarily connected with the transaction or occurrence
constituting the subject matter of the opposing party's claim and
does not require for its adjudication the presence of third parties of
whom the court cannot acquire jurisdiction."12

Unlike permissive counterclaims, compulsory counterclaims should


be set up in the same action; otherwise, they would be barred
forever. NAMARCO v. Federation of United Namarco Distributors13
laid down the following criteria to determine whether a
counterclaim is compulsory or permissive: 1) Are issues of fact and
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law raised by the claim and by the counterclaim largely the same?
2) Would res judicata bar a subsequent suit on defendant's claim,
absent the compulsory counterclaim rule? 3) Will substantially the
same evidence support or refute plaintiff's claim as well as
defendant's counterclaim? 4) Is there any logical relation between
the claim and the counterclaim? A positive answer to all four
questions would indicate that the counterclaim is compulsory.

Adopted in Quintanilla v. CA14 and reiterated in Alday v. FGU


Insurance Corporation,15 the "compelling test of compulsoriness"
characterizes a counterclaim as compulsory if there should exist a
"logical relationship" between the main claim and the counterclaim.
There exists such a relationship when conducting separate trials of
the respective claims of the parties would entail substantial
duplication of time and effort by the parties and the court; when the
multiple claims involve the same factual and legal issues; or when
the claims are offshoots of the same basic controversy between the
parties.

We shall now examine the nature of petitioners' counterclaims


against respondents with the use of the foregoing parameters.

Petitioners base their counterclaim on the following allegations:

"Gregory T. Lim and Anthony A. Mariano were the persons


responsible for making the bad faith decisions for, and causing
plaintiff to file this baseless suit and to procure an unwarranted
writ of attachment, notwithstanding their knowledge that
plaintiff has no right to bring it or to secure the writ. In taking
such bad faith actions, Gregory T. Lim was motivated by his
personal interests as one of the owners of plaintiff while
Anthony A. Mariano was motivated by his sense of personal
loyalty to Gregory T. Lim, for which reason he disregarded the
fact that plaintiff is without any valid cause.

"Consequently, both Gregory T. Lim and Anthony A. Mariano


are the plaintiff's co-joint tortfeasors in the commission of the
acts complained of in this answer and in the compulsory
counterclaims pleaded below. As such they should be held
jointly and solidarily liable as plaintiff's co-defendants to those
compulsory counterclaims pursuant to the Supreme Court's
decision in Sapugay v. Mobil.

xxx xxx xxx

"The plaintiff's, Gregory T. Lim and Anthony A. Mariano's bad


faith filing of this baseless case has compelled the defendants
to engage the services of counsel for a fee and to incur costs
of litigation, in amounts to be proved at trial, but in no case less
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than P5 million for each of them and for which plaintiff Gregory
T. Lim and Anthony A. Mariano should be held jointly and
solidarily liable.

"The plaintiff's, Gregory T. Lim's and Anthony A. Mariano's


actions have damaged the reputations of the defendants and
they should be held jointly and solidarily liable to them for moral
damages of P100 million each.

"In order to serve as an example for the public good and to


deter similar baseless, bad faith litigation, the plaintiff, Gregory
T. Lim and Anthony A. Mariano should be held jointly and
solidarily liable to the defendants for exemplary damages of
P100 million each." 16

The above allegations show that petitioners' counterclaims for


damages were the result of respondents' (Lim and Mariano) act of
filing the Complaint and securing the Writ of Attachment in bad
faith. Tiu Po v. Bautista17 involved the issue of whether the
counterclaim that sought moral, actual and exemplary damages
and attorney's fees against respondents on account of their
"malicious and unfounded" complaint was compulsory. In that case,
we held as follows:

"Petitioners' counterclaim for damages fulfills the necessary


requisites of a compulsory counterclaim. They are damages
claimed to have been suffered by petitioners as a
consequence of the action filed against them. They have to be
pleaded in the same action; otherwise, petitioners would be
precluded by the judgment from invoking the same in an
independent action. The pronouncement in Papa vs. Banaag
(17 SCRA 1081) (1966) is in point:

"Compensatory, moral and exemplary damages, allegedly


suffered by the creditor in consequence of the debtor's action,
are also compulsory counterclaim barred by the dismissal of
the debtor's action. They cannot be claimed in a subsequent
action by the creditor against the debtor."

"Aside from the fact that petitioners' counterclaim for damages


cannot be the subject of an independent action, it is the same
evidence that sustains petitioners' counterclaim that will refute
private respondent's own claim for damages. This is an
additional factor that characterizes petitioners' counterclaim as
compulsory."18

Moreover, using the "compelling test of compulsoriness," we find that,


clearly, the recovery of petitioners' counterclaims is contingent upon
the case filed by respondents; thus, conducting separate trials
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thereon will result in a substantial duplication of the time and effort of
the court and the parties.

Since the counterclaim for damages is compulsory, it must be set up


in the same action; otherwise, it would be barred forever. If it is filed
concurrently with the main action but in a different proceeding, it
would be abated on the ground of litis pendentia; if filed
subsequently, it would meet the same fate on the ground of res
judicata.19

Sapugay v. Court of Appeals Applicable to the Case at Bar

Sapugay v. Court of Appeals finds application in the present case. In


Sapugay, Respondent Mobil Philippines filed before the trial court of
Pasig an action for replevin against Spouses Marino and Lina Joel
Sapugay. The Complaint arose from the supposed failure of the
couple to keep their end of their Dealership Agreement. In their
Answer with Counterclaim, petitioners alleged that after incurring
expenses in anticipation of the Dealership Agreement, they
requested the plaintiff to allow them to get gas, but that it had
refused. It claimed that they still had to post a surety bond which,
initially fixed at P200,000, was later raised to P700,000.

The spouses exerted all efforts to secure a bond, but the bonding
companies required a copy of the Dealership Agreement, which
respondent continued to withhold from them. Later, petitioners
discovered that respondent and its manager, Ricardo P. Cardenas,
had intended all along to award the dealership to Island Air Product
Corporation.

In their Answer, petitioners impleaded in the counterclaim Mobil


Philippines and its manager -- Ricardo P. Cardenas -- as defendants.
They prayed that judgment be rendered, holding both jointly and
severally liable for pre-operation expenses, rental, storage, guarding
fees, and unrealized profit including damages. After both Mobil and
Cardenas failed to respond to their Answer to the Counterclaim,
petitioners filed a "Motion to Declare Plaintiff and its Manager
Ricardo P. Cardenas in Default on Defendant's Counterclaim."

Among the issues raised in Sapugay was whether Cardenas, who


was not a party to the original action, might nevertheless be
impleaded in the counterclaim. We disposed of this issue as follows:

"A counterclaim is defined as any claim for money or other


relief which a defending party may have against an opposing
party. However, the general rule that a defendant cannot by a
counterclaim bring into the action any claim against persons
other than the plaintiff admits of an exception under Section
14, Rule 6 which provides that 'when the presence of parties
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other than those to the original action is required for the
granting of complete relief in the determination of a
counterclaim or cross-claim, the court shall order them to be
brought in as defendants, if jurisdiction over them can be
obtained.' The inclusion, therefore, of Cardenas in petitioners'
counterclaim is sanctioned by the rules."20

The prerogative of bringing in new parties to the action at any stage


before judgment is intended to accord complete relief to all of them
in a single action and to avert a duplicity and even a multiplicity of
suits thereby.

In insisting on the inapplicability of Sapugay, respondents argue that


new parties cannot be included in a counterclaim, except when no
complete relief can be had. They add that "[i]n the present case,
Messrs. Lim and Mariano are not necessary for petitioners to obtain
complete relief from Respondent CCC as plaintiff in the lower court.
This is because Respondent CCC as a corporation with a separate
[legal personality] has the juridical capacity to indemnify petitioners
even without Messrs. Lim and Mariano."21

We disagree. The inclusion of a corporate officer or stockholder --


Cardenas in Sapugay or Lim and Mariano in the instant case -- is not
premised on the assumption that the plaintiff corporation does not
have the financial ability to answer for damages, such that it has to
share its liability with individual defendants. Rather, such inclusion is
based on the allegations of fraud and bad faith on the part of the
corporate officer or stockholder. These allegations may warrant the
piercing of the veil of corporate fiction, so that the said individual
may not seek refuge therein, but may be held individually and
personally liable for his or her actions.

In Tramat Mercantile v. Court of Appeals,22 the Court held that


generally, it should only be the corporation that could properly be
held liable. However, circumstances may warrant the inclusion of the
personal liability of a corporate director, trustee, or officer, if the said
individual is found guilty of bad faith or gross negligence in directing
corporate affairs.

Remo Jr. v. IAC23 has stressed that while a corporation is an entity


separate and distinct from its stockholders, the corporate fiction may
be disregarded if "used to defeat public convenience, justify a
wrong, protect fraud, or defend crime." In these instances, "the law
will regard the corporation as an association of persons, or in case of
two corporations, will merge them into one." Thus, there is no debate
on whether, in alleging bad faith on the part of Lim and Mariano the
counterclaims had in effect made them "indispensable parties"

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thereto; based on the alleged facts, both are clearly parties in
interest to the counterclaim.24

Respondents further assert that "Messrs. Lim and Mariano cannot be


held personally liable [because their assailed acts] are within the
powers granted to them by the proper board resolutions; therefore, it
is not a personal decision but rather that of the corporation as
represented by its board of directors."25 The foregoing assertion,
however, is a matter of defense that should be threshed out during
the trial; whether or not "fraud" is extant under the circumstances is
an issue that must be established by convincing evidence.26

Suability and liability are two distinct matters. While the Court does
rule that the counterclaims against Respondent CCC's president and
manager may be properly filed, the determination of whether both
can in fact be held jointly and severally liable with respondent
corporation is entirely another issue that should be ruled upon by the
trial court.

However, while a compulsory counterclaim may implead persons


not parties to the original complaint, the general rule -- a defendant
in a compulsory counterclaim need not file any responsive pleading,
as it is deemed to have adopted the allegations in the complaint as
its answer -- does not apply. The filing of a responsive pleading is
deemed a voluntary submission to the jurisdiction of the court; a new
party impleaded by the plaintiff in a compulsory counterclaim
cannot be considered to have automatically and unknowingly
submitted to the jurisdiction of the court. A contrary ruling would
result in mischievous consequences whereby a party may be
indiscriminately impleaded as a defendant in a compulsory
counterclaim; and judgment rendered against it without its
knowledge, much less participation in the proceedings, in blatant
disregard of rudimentary due process requirements.

The correct procedure in instances such as this is for the trial court,
per Section 12 of Rule 6 of the Rules of Court, to "order [such
impleaded parties] to be brought in as defendants, if jurisdiction over
them can be obtained," by directing that summons be served on
them. In this manner, they can be properly appraised of and answer
the charges against them. Only upon service of summons can the
trial court obtain jurisdiction over them.

In Sapugay, Cardenas was furnished a copy of the Answer with


Counterclaim, but he did not file any responsive pleading to the
counterclaim leveled against him. Nevertheless, the Court gave due
consideration to certain factual circumstances, particularly the trial
court's treatment of the Complaint as the Answer of Cardenas to the
compulsory counterclaim and of his seeming acquiescence thereto,

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as evidenced by his failure to make any objection despite his active
participation in the proceedings. It was held thus:

"It is noteworthy that Cardenas did not file a motion to dismiss


the counterclaim against him on the ground of lack of
jurisdiction. While it is a settled rule that the issue of jurisdiction
may be raised even for the first time on appeal, this does not
obtain in the instant case. Although it was only Mobil which
filed an opposition to the motion to declare in default, the fact
that the trial court denied said motion, both as to Mobil and
Cardenas on the ground that Mobil's complaint should be
considered as the answer to petitioners' compulsory
counterclaim, leads us to the inescapable conclusion that the
trial court treated the opposition as having been filed in behalf
of both Mobil and Cardenas and that the latter had adopted
as his answer the allegations raised in the complaint of Mobil.
Obviously, it was this ratiocination which led the trial court to
deny the motion to declare Mobil and Cardenas in default.
Furthermore, Cardenas was not unaware of said incidents and
the proceedings therein as he testified and was present during
trial, not to speak of the fact that as manager of Mobil he
would necessarily be interested in the case and could readily
have access to the records and the pleadings filed therein.

"By adopting as his answer the allegations in the complaint


which seeks affirmative relief, Cardenas is deemed to have
recognized the jurisdiction of the trial court over his person and
submitted thereto. He may not now be heard to repudiate or
question that jurisdiction."27

Such factual circumstances are unavailing in the instant case.


The records do not show that Respondents Lim and Mariano
are either aware of the counterclaims filed against them, or
that they have actively participated in the proceedings
involving them. Further, in dismissing the counterclaims against
the individual respondents, the court a quo -- unlike in Sapugay
-- cannot be said to have treated Respondent CCC's Motion to
Dismiss as having been filed on their behalf.

Rules on Permissive Joinder of Causes


of Action or Parties Not Applicable

Respondent CCC contends that petitioners' counterclaims violated


the rule on joinder of causes of action. It argues that while the
original Complaint was a suit for specific performance based on a
contract, the counterclaim for damages was based on the tortuous
acts of respondents.28 In its Motion to Dismiss, CCC cites Section 5 of

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Rule 2 and Section 6 of Rule 3 of the Rules of Civil Procedure, which
we quote:

"Section 5. Joinder of causes of action. – A party may in one


pleading assert, in the alternative or otherwise, as many causes
of action as he may have against an opposing party, subject
to the following conditions:

(a) The party joining the causes of action shall comply with the
rules on joinder of parties; x x x"

Section 6. Permissive joinder of parties. – All persons in whom or


against whom any right to relief in respect to or arising out of
the same transaction or series of transactions is alleged to exist
whether jointly, severally, or in the alternative, may, except as
otherwise provided in these Rules, join as plaintiffs or be joined
as defendants in one complaint, where any question of law or
fact common to all such plaintiffs or to all such defendants may
arise in the action; but the court may make such orders as may
be just to prevent any plaintiff or defendant from being
embarrassed or put to expense in connection with any
proceedings in which he may have no interest."

The foregoing procedural rules are founded on practicality and


convenience. They are meant to discourage duplicity and
multiplicity of suits. This objective is negated by insisting -- as the court
a quo has done -- that the compulsory counterclaim for damages
be dismissed, only to have it possibly re-filed in a separate
proceeding. More important, as we have stated earlier,
Respondents Lim and Mariano are real parties in interest to the
compulsory counterclaim; it is imperative that they be joined therein.
Section 7 of Rule 3 provides:

"Compulsory joinder of indispensable parties. – Parties in interest


without whom no final determination can be had of an action shall
be joined either as plaintiffs or defendants."

Moreover, in joining Lim and Mariano in the compulsory


counterclaim, petitioners are being consistent with the solidary
nature of the liability alleged therein.

Second Issue:

CCC's Personality to Move to Dismiss the Compulsory Counterclaims

Characterizing their counterclaim for damages against Respondents


CCC, Lim and Mariano as "joint and solidary," petitioners prayed:

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"WHEREFORE, it is respectfully prayed that after trial judgment
be rendered:

"1. Dismissing the complaint in its entirety;

"2. Ordering the plaintiff, Gregory T. Lim and Anthony A.


Mariano jointly and solidarily to pay defendant actual
damages in the sum of at least P2,700,000.00;

"3. Ordering the plaintiff, Gregory T. Lim and Anthony A,


Mariano jointly and solidarily to pay the defendants LPI, LCLC,
COC and Roseberg:

"a. Exemplary damages of P100 million each;

"b. Moral damages of P100 million each; and

"c. Attorney's fees and costs of suit of at least P5 million each.

Other reliefs just and equitable are likewise prayed for."29

Obligations may be classified as either joint or solidary. "Joint" or


"jointly" or "conjoint" means mancum or mancomunada or pro rata
obligation; on the other hand, "solidary obligations" may be used
interchangeably with "joint and several" or "several." Thus, petitioners'
usage of the term "joint and solidary" is confusing and ambiguous.

The ambiguity in petitioners' counterclaims notwithstanding,


respondents' liability, if proven, is solidary. This characterization finds
basis in Article 1207 of the Civil Code, which provides that obligations
are generally considered joint, except when otherwise expressly
stated or when the law or the nature of the obligation requires
solidarity. However, obligations arising from tort are, by their nature,
always solidary. We have assiduously maintained this legal principle
as early as 1912 in Worcester v. Ocampo,30 in which we held:

"x x x The difficulty in the contention of the appellants is that


they fail to recognize that the basis of the present action is tort.
They fail to recognize the universal doctrine that each joint tort
feasor is not only individually liable for the tort in which he
participates, but is also jointly liable with his tort feasors. x x x

"It may be stated as a general rule that joint tort feasors are all
the persons who command, instigate, promote, encourage,
advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if
done for their benefit. They are each liable as principals, to the
same extent and in the same manner as if they had performed
the wrongful act themselves. x x x

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"Joint tort feasors are jointly and severally liable for the tort
which they commit. The persons injured may sue all of them or
any number less than all. Each is liable for the whole damages
caused by all, and all together are jointly liable for the whole
damage. It is no defense for one sued alone, that the others
who participated in the wrongful act are not joined with him as
defendants; nor is it any excuse for him that his participation in
the tort was insignificant as compared to that of the others. x x
x

"Joint tort feasors are not liable pro rata. The damages can not
be apportioned among them, except among themselves. They
cannot insist upon an apportionment, for the purpose of each
paying an aliquot part. They are jointly and severally liable for
the whole amount. x x x

"A payment in full for the damage done, by one of the joint tort
feasors, of course satisfies any claim which might exist against
the others. There can be but satisfaction. The release of one of
the joint tort feasors by agreement generally operates to
discharge all. x x x

"Of course the court during trial may find that some of the
alleged tort feasors are liable and that others are not liable. The
courts may release some for lack of evidence while
condemning others of the alleged tort feasors. And this is true
even though they are charged jointly and severally."

In a "joint" obligation, each obligor answers only for a part of the


whole liability; in a "solidary" or "joint and several" obligation, the
relationship between the active and the passive subjects is so close
that each of them must comply with or demand the fulfillment of the
whole obligation.31 The fact that the liability sought against the CCC
is for specific performance and tort, while that sought against the
individual respondents is based solely on tort does not negate the
solidary nature of their liability for tortuous acts alleged in the
counterclaims. Article 1211 of the Civil Code is explicit on this point:

"Solidarity may exist although the creditors and the debtors


may not be bound in the same manner and by the same
periods and conditions."

The solidary character of respondents' alleged liability is precisely


why credence cannot be given to petitioners' assertion. According
to such assertion, Respondent CCC cannot move to dismiss the
counterclaims on grounds that pertain solely to its individual co-
debtors.32 In cases filed by the creditor, a solidary debtor may invoke
defenses arising from the nature of the obligation, from

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circumstances personal to it, or even from those personal to its co-
debtors. Article 1222 of the Civil Code provides:

"A solidary debtor may, in actions filed by the creditor, avail


itself of all defenses which are derived from the nature of the
obligation and of those which are personal to him, or pertain to
his own share. With respect to those which personally belong to
the others, he may avail himself thereof only as regards that
part of the debt for which the latter are responsible." (Emphasis
supplied).

The act of Respondent CCC as a solidary debtor -- that of filing a


motion to dismiss the counterclaim on grounds that pertain only to its
individual co-debtors -- is therefore allowed.

However, a perusal of its Motion to Dismiss the counterclaims shows


that Respondent CCC filed it on behalf of Co-respondents Lim and
Mariano; it did not pray that the counterclaim against it be
dismissed. Be that as it may, Respondent CCC cannot be declared
in default. Jurisprudence teaches that if the issues raised in the
compulsory counterclaim are so intertwined with the allegations in
the complaint, such issues are deemed automatically joined.33
Counterclaims that are only for damages and attorney's fees and
that arise from the filing of the complaint shall be considered as
special defenses and need not be answered.34

CCC's Motion to Dismiss the Counterclaim on Behalf of Respondents


Lim and Mariano Not Allowed

While Respondent CCC can move to dismiss the counterclaims


against it by raising grounds that pertain to individual defendants Lim
and Mariano, it cannot file the same Motion on their behalf for the
simple reason that it lacks the requisite authority to do so. A
corporation has a legal personality entirely separate and distinct
from that of its officers and cannot act for and on their behalf,
without being so authorized. Thus, unless expressly adopted by Lim
and Mariano, the Motion to Dismiss the compulsory counterclaim
filed by Respondent CCC has no force and effect as to them.

In summary, we make the following pronouncements:

1. The counterclaims against Respondents CCC, Gregory T. Lim


and Anthony A. Mariano are compulsory.

2. The counterclaims may properly implead Respondents


Gregory T. Lim and Anthony A. Mariano, even if both were not
parties in the original Complaint.

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3. Respondent CCC or any of the three solidary debtors (CCC,
Lim or Mariano) may include, in a Motion to Dismiss, defenses
available to their co-defendants; nevertheless, the same
Motion cannot be deemed to have been filed on behalf of the
said co-defendants.

4. Summons must be served on Respondents Lim and Mariano


before the trial court can obtain jurisdiction over them.

WHEREFORE, the Petition is GRANTED and the assailed Orders


REVERSED. The court of origin is hereby ORDERED to take cognizance
of the counterclaims pleaded in petitioners' Answer with Compulsory
Counterclaims and to cause the service of summons on
Respondents Gregory T. Lim and Anthony A. Mariano. No costs.

SO ORDERED.

Sandoval-Gutierrez, Carpio-Morales, and Garcia, JJ., concur.


Corona, J., on leave.

Lafarge vs. Continental

GR No. L-155173

FACTS:

1. Petition for review.

2. 1998, LETTER OF INTENT EXECUTED BY BOTH PARTIES

a. LAFARGE, in behalf of Luzon Continental Land


Corporation (LCLC), agreed to purchase the cement
business of respondent Continental Cement Corporation.

b. Parties entered into a Sale and Purchase Agreement


(SPA).

c. LAFARGE aware of CONTINENTAL pending case with the


Supreme Court (Asset Privatization Trust (APT) v. Court of
Appeals and Continental Cement Corporation)

i. In anticipation of the liability SC might


adjudge against CONTINENTAL, the parties, under Clause 2 (c) of the
SPA, allegedly agreed to retain from the purchase price a portion of
the contract price in the amount of P117,020,846.84 -- the equivalent
of US$2,799,140. This amount was to be deposited in an interest-
bearing account in the First National City Bank of New York
(Citibank) for payment to APT, the petitioner in Asset Privatization
Trust V. CA/Continental.

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ii. LAFARGE refused to apply the sum to
the payment to APT, despite decision in APT vs CONTINENTAL, in
favor of CONTINENTAL and the repeated instructions of
CONTINENTAL.

1. Fearful that nonpayment to APT would result in the foreclosure, not


just of its properties covered by the SPA with Lafarge but of several
other properties as well, CONTINENTAL filed “Complaint with
Application for Preliminary Attachment” against
LAFARGE. Docketed as Civil Case No. Q-00-41103,

a. For LAFARGE to pay the “APT Retained Amount” referred to in


Clause 2 (c) of the SPA.

b. LAFARGE moved to dismiss the Complaint on the ground that it


violated the prohibition on forum-shopping.

i. CONTINE
NTAL had allegedly made the same claim it was raising in Civil Case
No. Q-00-41103 in another action, which involved the same parties
and which was filed earlier before the International Chamber of
Commerce.

ii. Trial
court denied LAFARGE’s Motion to Dismiss

1. LAFARGE elevated the matter to CA.

3. LAFARGE to avoid being in default and without prejudice to


the outcome of their appeal, filed Answer and Compulsory
Counterclaims ad Cautelam before the trial court in Civil Case
No. Q-00-41103 (issued for them to pay APT Retained Amount).

a. Denied the allegations in the Complaint.

b. They prayed -- by way of compulsory counterclaims


against CONTINENTAL, its majority stockholder and
president Gregory T. Lim, and its corporate secretary
Anthony A. Mariano -- for the sums of (a) P2,700,000 each
as actual damages, (b) P100,000,000 each as exemplary
damages, (c) P100,000,000 each as moral damages, and
(d) P5,000,000 each as attorney’s fees plus costs of suit.

c. Prayed that both Lim and Mariano be held “jointly and


solidarily” liable with CONTINENTAL.

d. On behalf of Lim and Mariano, CONTINENTAL moved to


dismiss petitioners’ compulsory counterclaims on grounds
that essentially constituted the very issues for resolution in
the instant Petition.

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4. RTC dismissed LAFARGE counterclaims:

a. Counterclaims against Respondents Lim and Mariano


were not compulsory.

b. Ruling in Sapugay was not applicable.

c. LAFARGE’s Answer with Counterclaims violated


procedural rules on the proper joinder of causes of action.

5. LAFARGE Motion for Reconsideration:

a. RTC admitted some errors in Order, particularly in its


pronouncement that their counterclaim had been
pleaded against Lim and Mariano only.

b. However, the RTC clarified that it was dismissing the


counterclaim as it impleaded Respondents Lim and
Mariano, even if it included CONTINENTAL.

ISSUE:

WON RTC gravely erred in refusing to rule that CONTINENTAL has no


personality to move to dismiss petitioners’ compulsory counterclaims
on Respondents Lim and Mariano’s behalf.

WON RTC gravely erred in ruling that (i) petitioners’ counterclaims


against Respondents Lim and Mariano are not compulsory; (ii)
Sapugay v. Court of Appeals is inapplicable here; and (iii) petitioners
violated the rule on joinder of causes of action.”

May defendants in civil cases implead in their counterclaims persons


who were not parties to the original complaints?

HELD:

Petition GRANTED and the assailed Orders REVERSED. The court of


origin is hereby ORDERED to take cognizance of the counterclaims
pleaded in petitioners’ Answer with Compulsory Counterclaims and
to cause the service of summons on Respondents Gregory T. Lim and
Anthony A. Mariano. No costs.

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1. WON RTC gravely erred in ruling that (i) petitioners’
counterclaims (claim to rebut a previous claim) against
Respondents Lim and Mariano are not compulsory---- YES,
COUNTERCLAIM IS CONSIDERED COMPULSARY:

a. SEC 6 of Rule 6 of the Rules of Civil Procedure: “any claim


which a defending party may have against an opposing
party.”

i. Purpose of this is to avoid a multiplicity


of suits and to facilitate the disposition of the whole controversy in a
single action, such that the defendant’s demand may be
considered by a counterclaim rather than by an independent suit.

ii. LIMITATIONS:

1. Court should have jurisdiction over the subject matter of the


counterclaim

2. It could acquire jurisdiction over third parties whose presence is


essential for its consideration.

b. PERMISSIVE COUNTERCLAIM: an independent claim that


may be filed separately in another case.

i. Does not arise out of or is not necessarily


connected with the subject matter of the opposing party’s claim.

c. COMPULSORY COUNTERCLAIM: does not require for its


adjudication (consideration) the presence of third parties
of whom the court cannot acquire jurisdiction.

i. Arises out of or is necessarily connected


with the transaction or occurrence constituting the subject matter of
the opposing party’s claim

ii. Should be set up in the same action;


otherwise, they would be barred forever.

d. COMPULSORY OR PERMISSIVE?

i. Issues of fact and law raised by the


claim and by the counterclaim largely the same?

ii. Would res judicata (judged matter;


matter considered by the court and may not be pursued further) bar
a subsequent suit on defendant’s claim, absent the compulsory
counterclaim rule?

iii. Will substantially the same evidence


support or refute plaintiff’s claim as well as defendant’s

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counterclaim?

iv. Is there any logical relation between the


claim and the counterclaim?

1. YES TO ALL four questions = COMPULSORY

e. LIM AND MARIANO were the persons responsible for


making the bad faith decisions:

i. Caused plaintiff to file this baseless suit


and to procure an unwarranted writ of attachment, notwithstanding
their knowledge that plaintiff has no right to bring it or to secure the
writ.

ii. LIM AND MARIANO ARE LAFARGE’S


TORTFEASOR (commits a tort; tort- infringement of right leading to
legal liability)

1. They should be held jointly and solidarily liable as plaintiff’s co-


defendants to those compulsory counterclaims pursuant to the
Supreme Court’s decision in Sapugay v. Mobil.

iii. Allegations show that LAFARGE’s


counterclaims for damages were the result of LIM AND MARIANO’s
act of filing the Complaint and securing the Writ of Attachment in
bad faith.

f. CASE AT HAND: LAFARGE’s counterclaim for damages


fulfills the necessary requisites of a compulsory
counterclaim.

i. Damages as a consequence of the


action filed against them.

ii. Papa vs. Banaag:

1. “Compensatory, moral and exemplary damages, allegedly suffered


by the creditor in consequence of the debtor’s action, are also
compulsory counterclaim barred by the dismissal of the debtor’s
action. They cannot be claimed in a subsequent action by the
creditor against the debtor.”

2. “Aside from the fact that petitioners’ counterclaim for damages


cannot be the subject of an independent action, it is the same
evidence that sustains petitioners’ counterclaim that will refute
private respondent’s own claim for damages. This is an additional
factor that characterizes petitioners’ counterclaim as compulsory.”

3. Since the counterclaim for damages is compulsory, it must be set up


in the same action; otherwise, it would be barred forever.

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4. If it is filed concurrently with the main action but in a different
proceeding, it would be abated on the ground of litis pendentia

5. If filed subsequently, it would meet the same fate on the ground of


res judicata.

2. WON RTC gravely erred in ruling that Sapugay v. Court of


Appeals is inapplicable here—YES. SAPUGAY VS. CA IS
APPLICABLE.

a. In Sapugay vs. MOBIL:

i. MOBIL filed before the trial court of


Pasig an action for replevin against SAPUGAY.

ii. Couple failed to keep Dealership


Agreement.

1. In their Answer with Counterclaim, SAPUGAY alleged that after


incurring expenses in anticipation of the Dealership Agreement, they
requested the plaintiff to allow them to get gas, but that it had
refused. It claimed that they still had to post a surety bond which,
initially fixed at P200,000, was later raised to P700,000.

2. The spouses exerted all efforts to secure a bond, but the bonding
companies required a copy of the Dealership Agreement, which
respondent continued to withhold from them.

3. Later, SAPUGAY discovered that MOBIL had intended all along to


award the dealership to Island Air Product Corporation.

iii. SAPUGAY impleaded in the


counterclaim Mobil Philippines and its manager -- Ricardo P.
Cardenas -- both jointly and severally liable.

iv. MOBIL and Cardenas failed to respond


to their Answer to the Counterclaim, SAPUGAY filed a “Motion to
Declare Plaintiff and its Manager Ricardo P. Cardenas in Default on
Defendant’s Counterclaim.”

v. ISSUES: WON Cardenas, who was not a


party to the original action, might nevertheless be impleaded in the
counterclaim.

1. COUNTERCLAIM is defined as any claim for money or other relief


which a defending party may have against an opposing party.

2. GENERAL RULE: DEFENDANT CANNOT BRING INTO ACTION ANY


CLAIMS AGAINST PERSONS UNDER THIS EXCEPTION: ‘when the
presence of parties other than those to the original action is required
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for the granting of complete relief in the determination of a
counterclaim or cross-claim, the court shall order them to be brought
in as defendants, if jurisdiction over them can be obtained.’

a. Prerogative of bringing in new parties to the action at any stage


before judgment is intended to accord complete relief to all of them
in a single action and to avert a duplicity and even a multiplicity of
suits thereby.

b. CASE AT HAND:

i. CONTINENTAL argue that new parties


cannot be included in a counterclaim, except when no complete
relief can be had: CONTINENTAL as a corporation with a separate
[legal personality] has the juridical capacity to indemnify petitioners
even without Messrs. Lim and Mariano.

1. COURT DISAGREES.

a. Inclusion is due to allegations of fraud and bad faith on the part of


the corporate officer or stockholder. These allegations may warrant
the piercing of the veil of corporate fiction, so that the said individual
may not seek refuge therein, but may be held individually and
personally liable for his or her actions.

ii. CONTINENTAL ASSERTS THAT Lim and


Mariano cannot be held personally liable [because their assailed
acts] are within the powers granted to them by the proper board
resolutions; therefore, it is not a personal decision but rather that of
the corporation as represented by its board of directors.”

1. Matter of defense that should be threshed out during the trial;


whether or not “fraud” is extant under the circumstances is an issue
that must be established by convincing evidence.

c. SUABILITY AND LIABILITY NOT THE SAME.

i. While the Court does rule that the


counterclaims against CONTINENTAL president and manager may
be properly filed, the determination of whether both can in fact be
held jointly and severally liable with respondent corporation is
entirely another issue that should be ruled upon by the trial court.

d. However, GENERAL RULE IN RESPONDING TO


COMPULSORY CLAIM:

i. Defendant need not file any responsive


pleading, answers, adopting allegations in the complaint, does not
apply.

ii. New party impleaded by the plaintiff in


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a compulsory counterclaim cannot be considered to have
automatically and unknowingly submitted to the jurisdiction of the
court.

iii. Court may consider possibility that new


party is unaware of counterclaims filed against it.

e. RECORDS SHOW THAT LIM AND MARIANO ARE UNAWARE


OF COUNTERCLAIMS FILED AGAINST THEM. THEREFORE,
CONTINENTAL’S MOTION TO DISMISS CANNOT BE TREATED
AS BEING FILED IN THEIR BEHALF.

3. WON RTC gravely erred in ruling that petitioners violated


the rule on joinder of causes of action. –NO. LIM AND
MARIANO ARE REAL PARTIES IN INTEREST TO COMPULSARY
COUNTERCLAIM. IT IS IMPERATIVE THEY BE JOINED.

a. Section 6. Permissive joinder of parties.

i. All persons in whom or against whom


any right to relief in respect to or arising out of the same
transaction or series of transactions is alleged to exist whether jointly,
severally, or in the alternative, may, except as otherwise provided in
these Rules, join as plaintiffs or be joined as defendants in one
complaint, where any question of law or fact common to all such
plaintiffs or to all such defendants may arise in the action; but the
court may make such orders as may be just to prevent any plaintiff
or defendant from being embarrassed or put to expense in
connection with any proceedings in which he may have no
interest.”

b. This is for practicality and convenience; meant to


discourage duplicity and multiplicity of suits.

c. SEC 7 of Rule 3 provides:

i. “Compulsory joinder of indispensable


parties. – Parties in interest without whom no final determination can
be had of an action shall be joined either as plaintiffs or
defendants.”

4. WON RTC gravely erred in refusing to rule that


CONTINENTAL has no personality to move to dismiss
petitioners’ compulsory counterclaims on Respondents Lim
and Mariano’s behalf. –YES.

a. COUNTERCLAIM FOR DAMAGES TO LIM AND MARIANO


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AND CONTINENTAL ARE JOINT AND SOLIDARY.

b. Obligations are generally considered joint, except when


otherwise expressly stated or when the law or the nature of
the obligation requires solidarity. However, obligations
arising from tort are, by their nature, always solidary.

i. JOINT TORTFEASORS (JOINT


OBLIGATION) are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done for
their benefit. They are each liable as principals, to the same extent
and in the same manner as if they had performed the wrongful act
themselves.

1. The damages can not be apportioned among them, except


among themselves.

2. They cannot insist upon an apportionment, for the purpose of each


paying an aliquot part. They are jointly and severally liable for the
whole amount.

3. Each obligor answers only for a part of the whole liability.

ii. SOLIDARY OR JOINT/SEVERAL


OBLIGATION, the relationship between the active and the passive
subjects is so close that each of them must comply with or demand
the fulfillment of the whole obligation.

c. CASE AT HAND: LIABILITY SOUGHT AGAINST CONTINENTAL


IS FOR SPECIFIC PERFORMANCE/TORT; LIM AND
MARIANO’S TORT DOES NOT NEGATE THE SOLIDARY
NATURE FOR THE TORTUOUS ACTS ALLEGED IN
COUNTERCLAIMS.

i. Due to SOLIDARY CHARACTER of


obligation, LIM and MARIANO may avail themselves as regards to
part of the debt for which they are responsible.

ii. THEREFORE, the act of CONTINENTAL in


filing a motion to dismiss the counterclaim on grounds that pertain
only to its individual co-debtors -- is allowed.

iii. HOWEVER, SINCE MOTION TO DISMISS


COUNTERCLAIMS SHOW CONTINENTAL FILING IN BEHALF OF LIM AND
MARIANO, CONTINENTAL CANNOT BE DECLARED IN DEFAULT.

1. If issues raised in the compulsory counterclaim are so intertwined


with the allegations in the complaint, such issues are deemed
automatically joined.

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iv. Counterclaims that are only for
damages and attorney’s fees and that arise from the filing of the
complaint shall be considered as special defenses and need not be
answered.

5. CONTINENTAL’S MOTION TO DISMISS IN BEHALF OF LIM AND


MARIANO NOT ALLOWED.

a. It lacks the requisite authority to do so.

b. A corporation has a legal personality entirely separate


and distinct from that of its officers and cannot act for
and on their behalf, without being so authorized.

c. Thus, unless expressly adopted by Lim and Mariano, the


Motion to Dismiss the compulsory counterclaim filed by
Respondent CCC has no force and effect as to them.

d. Summons must be served on Respondents Lim and


Mariano before the trial court can obtain jurisdiction over
them.

General Credit Corp. vs. Alsons Dev. & Investment Corp. (513
SCRA 225 [2007])

Sicam vs. Jorge, 529 SCRA 443 , G.R. No. 159617, August 08, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners,

vs.

LULU V. JORGE and CESAR JORGE, respondents.

DECISION

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Roberto C.


Sicam, Jr. (petitioner Sicam) and Agencia de R.C. Sicam, Inc.
(petitioner corporation) seeking to annul the Decision1 of the Court

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of Appeals dated March 31, 2003, and its Resolution2 dated August
8, 2003, in CA G.R. CV No. 56633.

It appears that on different dates from September to October 1987,


Lulu V. Jorge (respondent Lulu) pawned several pieces of jewelry
with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF
Homes Parañaque, Metro Manila, to secure a loan in the total
amount of P59,500.00.

On October 19, 1987, two armed men entered the pawnshop and
took away whatever cash and jewelry were found inside the
pawnshop vault. The incident was entered in the police blotter of
the Southern Police District, Parañaque Police Station as follows:

Investigation shows that at above TDPO, while victims were inside the
office, two (2) male unidentified persons entered into the said office
with guns drawn. Suspects(sic) (1) went straight inside and poked his
gun toward Romeo Sicam and thereby tied him with an electric wire
while suspects (sic) (2) poked his gun toward Divina Mata and
Isabelita Rodriguez and ordered them to lay (sic) face flat on the
floor. Suspects asked forcibly the case and assorted pawned
jewelries items mentioned above.

Suspects after taking the money and jewelries fled on board a


Marson Toyota unidentified plate number.3

Petitioner Sicam sent respondent Lulu a letter dated October 19,


1987 informing her of the loss of her jewelry due to the robbery
incident in the pawnshop. On November 2, 1987, respondent Lulu
then wrote a letter4 to petitioner Sicam expressing disbelief stating
that when the robbery happened, all jewelry pawned were
deposited with Far East Bank near the pawnshop since it had been
the practice that before they could withdraw, advance notice must
be given to the pawnshop so it could withdraw the jewelry from the
bank. Respondent Lulu then requested petitioner Sicam to prepare
the pawned jewelry for withdrawal on November 6, 1987 but
petitioner Sicam failed to return the jewelry.

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On September 28, 1988, respondent Lulu joined by her husband,
Cesar Jorge, filed a complaint against petitioner Sicam with the
Regional Trial Court of Makati seeking indemnification for the loss of
pawned jewelry and payment of actual, moral and exemplary
damages as well as attorney's fees. The case was docketed as Civil
Case No. 88-2035.

Petitioner Sicam filed his Answer contending that he is not the real
party-in-interest as the pawnshop was incorporated on April 20, 1987
and known as Agencia de R.C. Sicam, Inc; that petitioner
corporation had exercised due care and diligence in the
safekeeping of the articles pledged with it and could not be made
liable for an event that is fortuitous.

Respondents subsequently filed an Amended Complaint to include


petitioner corporation.

Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is


concerned considering that he is not the real party-in-interest.
Respondents opposed the same. The RTC denied the motion in an
Order dated November 8, 1989.5

After trial on the merits, the RTC rendered its Decision6 dated
January 12, 1993, dismissing respondents’ complaint as well as
petitioners’ counterclaim. The RTC held that petitioner Sicam could
not be made personally liable for a claim arising out of a corporate
transaction; that in the Amended Complaint of respondents, they
asserted that "plaintiff pawned assorted jewelries in defendants'
pawnshop"; and that as a consequence of the separate juridical
personality of a corporation, the corporate debt or credit is not the
debt or credit of a stockholder.

The RTC further ruled that petitioner corporation could not be held
liable for the loss of the pawned jewelry since it had not been
rebutted by respondents that the loss of the pledged pieces of
jewelry in the possession of the corporation was occasioned by
armed robbery; that robbery is a fortuitous event which exempts the
victim from liability for the loss, citing the case of Austria v. Court of
Appeals;7 and that the parties’ transaction was that of a pledgor
and pledgee and under Art. 1174 of the Civil Code, the pawnshop

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as a pledgee is not responsible for those events which could not be
foreseen.

Respondents appealed the RTC Decision to the CA. In a Decision


dated March 31, 2003, the CA reversed the RTC, the dispositive
portion of which reads as follows:

WHEREFORE, premises considered, the instant Appeal is GRANTED,


and the Decision dated January 12, 1993,of the Regional Trial Court
of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering the
appellees to pay appellants the actual value of the lost jewelry
amounting to P272,000.00, and attorney' fees of P27,200.00.8

In finding petitioner Sicam liable together with petitioner corporation,


the CA applied the doctrine of piercing the veil of corporate entity
reasoning that respondents were misled into thinking that they were
dealing with the pawnshop owned by petitioner Sicam as all the
pawnshop tickets issued to them bear the words "Agencia de R.C.
Sicam"; and that there was no indication on the pawnshop tickets
that it was the petitioner corporation that owned the pawnshop
which explained why respondents had to amend their complaint
impleading petitioner corporation.

The CA further held that the corresponding diligence required of a


pawnshop is that it should take steps to secure and protect the
pledged items and should take steps to insure itself against the loss of
articles which are entrusted to its custody as it derives earnings from
the pawnshop trade which petitioners failed to do; that Austria is not
applicable to this case since the robbery incident happened in 1961
when the criminality had not as yet reached the levels attained in
the present day; that they are at least guilty of contributory
negligence and should be held liable for the loss of jewelries; and
that robberies and hold-ups are foreseeable risks in that those
engaged in the pawnshop business are expected to foresee.

The CA concluded that both petitioners should be jointly and


severally held liable to respondents for the loss of the pawned
jewelry.

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Petitioners’ motion for reconsideration was denied in a Resolution
dated August 8, 2003.

Hence, the instant petition for review with the following assignment
of errors:

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO


REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED
AS ITS OWN WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT
THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS
PALPABLY UNSUSTAINABLE.

THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF


TO REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED
UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS
OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING
MORE THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE
RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF
UNREBUTTED EVIDENCE ON RECORD.9

Anent the first assigned error, petitioners point out that the CA’s
finding that petitioner Sicam is personally liable for the loss of the
pawned jewelries is "a virtual and uncritical reproduction of the
arguments set out on pp. 5-6 of the Appellants’ brief."10

Petitioners argue that the reproduced arguments of respondents in


their Appellants’ Brief suffer from infirmities, as follows:

(1) Respondents conclusively asserted in paragraph 2 of their


Amended Complaint that Agencia de R.C. Sicam, Inc. is the present
owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA
cannot rule against said conclusive assertion of respondents;

(2) The issue resolved against petitioner Sicam was not among those
raised and litigated in the trial court; and

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(3) By reason of the above infirmities, it was error for the CA to have
pierced the corporate veil since a corporation has a personality
distinct and separate from its individual stockholders or members.

Anent the second error, petitioners point out that the CA finding on
their negligence is likewise an unedited reproduction of respondents’
brief which had the following defects:

(1) There were unrebutted evidence on record that petitioners had


observed the diligence required of them, i.e, they wanted to open a
vault with a nearby bank for purposes of safekeeping the pawned
articles but was discouraged by the Central Bank (CB) since CB rules
provide that they can only store the pawned articles in a vault inside
the pawnshop premises and no other place;

(2) Petitioners were adjudged negligent as they did not take


insurance against the loss of the pledged jelweries, but it is judicial
notice that due to high incidence of crimes, insurance companies
refused to cover pawnshops and banks because of high probability
of losses due to robberies;

(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39,


45-46), the victim of robbery was exonerated from liability for the sum
of money belonging to others and lost by him to robbers.

Respondents filed their Comment and petitioners filed their Reply


thereto. The parties subsequently submitted their respective
Memoranda.

We find no merit in the petition.

To begin with, although it is true that indeed the CA findings were


exact reproductions of the arguments raised in respondents’
(appellants’) brief filed with the CA, we find the same to be not
fatally infirmed. Upon examination of the Decision, we find that it
expressed clearly and distinctly the facts and the law on which it is
based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to
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justify the adoption of the arguments put forth by one of the parties,
as long as these are legally tenable and supported by law and the
facts on records.11

Our jurisdiction under Rule 45 of the Rules of Court is limited to the


review of errors of law committed by the appellate court. Generally,
the findings of fact of the appellate court are deemed conclusive
and we are not duty-bound to analyze and calibrate all over again
the evidence adduced by the parties in the court a quo.12 This rule,
however, is not without exceptions, such as where the factual
findings of the Court of Appeals and the trial court are conflicting or
contradictory13 as is obtaining in the instant case.

However, after a careful examination of the records, we find no


justification to absolve petitioner Sicam from liability.

The CA correctly pierced the veil of the corporate fiction and


adjudged petitioner Sicam liable together with petitioner
corporation. The rule is that the veil of corporate fiction may be
pierced when made as a shield to perpetrate fraud and/or confuse
legitimate issues. 14 The theory of corporate entity was not meant to
promote unfair objectives or otherwise to shield them.15

Notably, the evidence on record shows that at the time respondent


Lulu pawned her jewelry, the pawnshop was owned by petitioner
Sicam himself. As correctly observed by the CA, in all the pawnshop
receipts issued to respondent Lulu in September 1987, all bear the
words "Agencia de R. C. Sicam," notwithstanding that the pawnshop
was allegedly incorporated in April 1987. The receipts issued after
such alleged incorporation were still in the name of "Agencia de R.
C. Sicam," thus inevitably misleading, or at the very least, creating
the wrong impression to respondents and the public as well, that the
pawnshop was owned solely by petitioner Sicam and not by a
corporation.

Even petitioners’ counsel, Atty. Marcial T. Balgos, in his letter16 dated


October 15, 1987 addressed to the Central Bank, expressly referred
to petitioner Sicam as the proprietor of the pawnshop
notwithstanding the alleged incorporation in April 1987.

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We also find no merit in petitioners' argument that since respondents
had alleged in their Amended Complaint that petitioner corporation
is the present owner of the pawnshop, the CA is bound to decide
the case on that basis.

Section 4 Rule 129 of the Rules of Court provides that an admission,


verbal or written, made by a party in the course of the proceedings
in the same case, does not require proof. The admission may be
contradicted only by showing that it was made through palpable
mistake or that no such admission was made.

Thus, the general rule that a judicial admission is conclusive upon the
party making it and does not require proof, admits of two
exceptions, to wit: (1) when it is shown that such admission was
made through palpable mistake, and (2) when it is shown that no
such admission was in fact made. The latter exception allows one to
contradict an admission by denying that he made such an
admission.17

The Committee on the Revision of the Rules of Court explained the


second exception in this wise:

x x x if a party invokes an "admission" by an adverse party, but cites


the admission "out of context," then the one making the "admission"
may show that he made no "such" admission, or that his admission
was taken out of context.

x x x that the party can also show that he made no "such admission",
i.e., not in the sense in which the admission is made to appear.

That is the reason for the modifier "such" because if the rule simply
states that the admission may be contradicted by showing that "no
admission was made," the rule would not really be providing for a
contradiction of the admission but just a denial.18 (Emphasis
supplied).

While it is true that respondents alleged in their Amended Complaint


that petitioner corporation is the present owner of the pawnshop,
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they did so only because petitioner Sicam alleged in his Answer to
the original complaint filed against him that he was not the real
party-in-interest as the pawnshop was incorporated in April 1987.
Moreover, a reading of the Amended Complaint in its entirety shows
that respondents referred to both petitioner Sicam and petitioner
corporation where they (respondents) pawned their assorted pieces
of jewelry and ascribed to both the failure to observe due diligence
commensurate with the business which resulted in the loss of their
pawned jewelry.

Markedly, respondents, in their Opposition to petitioners’ Motion to


Dismiss Amended Complaint, insofar as petitioner Sicam is
concerned, averred as follows:

Roberto C. Sicam was named the defendant in the original


complaint because the pawnshop tickets involved in this case did
not show that the R.C. Sicam Pawnshop was a corporation. In
paragraph 1 of his Answer, he admitted the allegations in paragraph
1 and 2 of the Complaint. He merely added "that defendant is not
now the real party in interest in this case."

It was defendant Sicam's omission to correct the pawnshop tickets


used in the subject transactions in this case which was the cause of
the instant action. He cannot now ask for the dismissal of the
complaint against him simply on the mere allegation that his
pawnshop business is now incorporated. It is a matter of defense, the
merit of which can only be reached after consideration of the
evidence to be presented in due course.19

Unmistakably, the alleged admission made in respondents'


Amended Complaint was taken "out of context" by petitioner Sicam
to suit his own purpose. Ineluctably, the fact that petitioner Sicam
continued to issue pawnshop receipts under his name and not under
the corporation's name militates for the piercing of the corporate
veil.

We likewise find no merit in petitioners' contention that the CA erred


in piercing the veil of corporate fiction of petitioner corporation, as it
was not an issue raised and litigated before the RTC.

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Petitioner Sicam had alleged in his Answer filed with the trial court
that he was not the real party-in-interest because since April 20,
1987, the pawnshop business initiated by him was incorporated and
known as Agencia de R.C. Sicam. In the pre-trial brief filed by
petitioner Sicam, he submitted that as far as he was concerned, the
basic issue was whether he is the real party in interest against whom
the complaint should be directed.20 In fact, he subsequently moved
for the dismissal of the complaint as to him but was not favorably
acted upon by the trial court. Moreover, the issue was squarely
passed upon, although erroneously, by the trial court in its Decision in
this manner:

x x x The defendant Roberto Sicam, Jr likewise denies liability as far as


he is concerned for the reason that he cannot be made personally
liable for a claim arising from a corporate transaction.

This Court sustains the contention of the defendant Roberto C.


Sicam, Jr. The amended complaint itself asserts that "plaintiff
pawned assorted jewelries in defendant's pawnshop." It has been
held that " 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 a
corporation.21

Clearly, in view of the alleged incorporation of the pawnshop, the


issue of whether petitioner Sicam is personally liable is inextricably
connected with the determination of the question whether the
doctrine of piercing the corporate veil should or should not apply to
the case.

The next question is whether petitioners are liable for the loss of the
pawned articles in their possession.

Petitioners insist that they are not liable since robbery is a fortuitous
event and they are not negligent at all.

We are not persuaded.

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Article 1174 of the Civil Code provides:

Art. 1174. Except in cases expressly specified by the law, or when it is


otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen or which,
though foreseen, were inevitable.

Fortuitous events by definition are extraordinary events not


foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee
the same. 22

To constitute a fortuitous event, the following elements must concur:


(a) the cause of the unforeseen and unexpected occurrence or of
the failure of the debtor to comply with obligations must be
independent of human will; (b) it must be impossible to foresee the
event that constitutes the caso fortuito or, if it can be foreseen, it
must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal
manner; and, (d) the obligor must be free from any participation in
the aggravation of the injury or loss. 23

The burden of proving that the loss was due to a fortuitous event
rests on him who invokes it.24 And, in order for a fortuitous event to
exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss. 25

It has been held that an act of God cannot be invoked to protect a


person who has failed to take steps to forestall the possible adverse
consequences of such a loss. One's negligence may have
concurred with an act of God in producing damage and injury to
another; nonetheless, showing that the immediate or proximate
cause of the damage or injury was a fortuitous event would not
exempt one from liability. When the effect is found to be partly the
result of a person's participation -- whether by active intervention,
neglect or failure to act -- the whole occurrence is humanized and
removed from the rules applicable to acts of God. 26

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Petitioner Sicam had testified that there was a security guard in their
pawnshop at the time of the robbery. He likewise testified that when
he started the pawnshop business in 1983, he thought of opening a
vault with the nearby bank for the purpose of safekeeping the
valuables but was discouraged by the Central Bank since pawned
articles should only be stored in a vault inside the pawnshop. The
very measures which petitioners had allegedly adopted show that to
them the possibility of robbery was not only foreseeable, but actually
foreseen and anticipated. Petitioner Sicam’s testimony, in effect,
contradicts petitioners’ defense of fortuitous event.

Moreover, petitioners failed to show that they were free from any
negligence by which the loss of the pawned jewelry may have been
occasioned.

Robbery per se, just like carnapping, is not a fortuitous event. It does
not foreclose the possibility of negligence on the part of herein
petitioners. In Co v. Court of Appeals,27 the Court held:

It is not a defense for a repair shop of motor vehicles to escape


liability simply because the damage or loss of a thing lawfully placed
in its possession was due to carnapping. Carnapping per se cannot
be considered as a fortuitous event. The fact that a thing was
unlawfully and forcefully taken from another's rightful possession, as
in cases of carnapping, does not automatically give rise to a
fortuitous event. To be considered as such, carnapping entails more
than the mere forceful taking of another's property. It must be
proved and established that the event was an act of God or was
done solely by third parties and that neither the claimant nor the
person alleged to be negligent has any participation. In
accordance with the Rules of Evidence, the burden of proving that
the loss was due to a fortuitous event rests on him who invokes it —
which in this case is the private respondent. However, other than the
police report of the alleged carnapping incident, no other evidence
was presented by private respondent to the effect that the incident
was not due to its fault. A police report of an alleged crime, to which
only private respondent is privy, does not suffice to establish the
carnapping. Neither does it prove that there was no fault on the part
of private respondent notwithstanding the parties' agreement at the
pre-trial that the car was carnapped. Carnapping does not
foreclose the possibility of fault or negligence on the part of private
respondent.28
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Just like in Co, petitioners merely presented the police report of the
Parañaque Police Station on the robbery committed based on the
report of petitioners' employees which is not sufficient to establish
robbery. Such report also does not prove that petitioners were not at
fault.

On the contrary, by the very evidence of petitioners, the CA did not


err in finding that petitioners are guilty of concurrent or contributory
negligence as provided in Article 1170 of the Civil Code, to wit:

Art. 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.29

Article 2123 of the Civil Code provides that with regard to


pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions
on pledge, mortgage and antichresis.

The provision on pledge, particularly Article 2099 of the Civil Code,


provides that the creditor shall take care of the thing pledged with
the diligence of a good father of a family. This means that petitioners
must take care of the pawns the way a prudent person would as to
his own property.

In this connection, Article 1173 of the Civil Code further provides:

Art. 1173. The fault or negligence of the obligor consists in the


omission of that diligence which is required by the nature of the
obligation and corresponds with the circumstances of the persons,
of time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2 shall apply.

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If the law or contract does not state the diligence which is to be
observed in the performance, that which is expected of a good
father of a family shall be required.

We expounded in Cruz v. Gangan30 that negligence is the omission


to do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and
reasonable man would not do.31 It is want of care required by the
circumstances.

A review of the records clearly shows that petitioners failed to


exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty
of negligence in the operation of their pawnshop business. Petitioner
Sicam testified, thus:

Court:

Q. Do you have security guards in your pawnshop?

A. Yes, your honor.

Q. Then how come that the robbers were able to enter the premises
when according to you there was a security guard?

A. Sir, if these robbers can rob a bank, how much more a pawnshop.

Q. I am asking you how were the robbers able to enter despite the
fact that there was a security guard?

A. At the time of the incident which happened about 1:00 and 2:00
o'clock in the afternoon and it happened on a Saturday and
everything was quiet in the area BF Homes Parañaque they
pretended to pawn an article in the pawnshop, so one of my

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employees allowed him to come in and it was only when it was
announced that it was a hold up.

Q. Did you come to know how the vault was opened?

A. When the pawnshop is official (sic) open your honor the


pawnshop is partly open. The combination is off.

Q. No one open (sic) the vault for the robbers?

A. No one your honor it was open at the time of the robbery.

Q. It is clear now that at the time of the robbery the vault was open
the reason why the robbers were able to get all the items pawned to
you inside the vault.

A. Yes sir.32

revealing that there were no security measures adopted by


petitioners in the operation of the pawnshop. Evidently, no sufficient
precaution and vigilance were adopted by petitioners to protect
the pawnshop from unlawful intrusion. There was no clear showing
that there was any security guard at all. Or if there was one, that he
had sufficient training in securing a pawnshop. Further, there is no
showing that the alleged security guard exercised all that was
necessary to prevent any untoward incident or to ensure that no
suspicious individuals were allowed to enter the premises. In fact, it is
even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were
armed with caliber .45 pistols each, which were allegedly poked at
the employees.33 Significantly, the alleged security guard was not
presented at all to corroborate petitioner Sicam's claim; not one of
petitioners' employees who were present during the robbery incident
testified in court.

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Furthermore, petitioner Sicam's admission that the vault was open at
the time of robbery is clearly a proof of petitioners' failure to observe
the care, precaution and vigilance that the circumstances justly
demanded. Petitioner Sicam testified that once the pawnshop was
open, the combination was already off. Considering petitioner
Sicam's testimony that the robbery took place on a Saturday
afternoon and the area in BF Homes Parañaque at that time was
quiet, there was more reason for petitioners to have exercised
reasonable foresight and diligence in protecting the pawned
jewelries. Instead of taking the precaution to protect them, they let
open the vault, providing no difficulty for the robbers to cart away
the pawned articles.

We, however, do not agree with the CA when it found petitioners


negligent for not taking steps to insure themselves against loss of the
pawned jewelries.

Under Section 17 of Central Bank Circular No. 374, Rules and


Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114, Pawnshop
Regulation Act, it is provided that pawns pledged must be insured,
to wit:

Sec. 17. Insurance of Office Building and Pawns- The place of


business of a pawnshop and the pawns pledged to it must be
insured against fire and against burglary as well as for the latter(sic),
by an insurance company accredited by the Insurance
Commissioner.

However, this Section was subsequently amended by CB Circular No.


764 which took effect on October 1, 1980, to wit:

Sec. 17 Insurance of Office Building and Pawns – The office


building/premises and pawns of a pawnshop must be insured
against fire. (emphasis supplied).

where the requirement that insurance against burglary was deleted.


Obviously, the Central Bank considered it not feasible to require
insurance of pawned articles against burglary.

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The robbery in the pawnshop happened in 1987, and considering
the above-quoted amendment, there is no statutory duty imposed
on petitioners to insure the pawned jewelry in which case it was error
for the CA to consider it as a factor in concluding that petitioners
were negligent.

Nevertheless, the preponderance of evidence shows that petitioners


failed to exercise the diligence required of them under the Civil
Code.

The diligence with which the law requires the individual at all times to
govern his conduct varies with the nature of the situation in which he
is placed and the importance of the act which he is to perform.34
Thus, the cases of Austria v. Court of Appeals,35 Hernandez v.
Chairman, Commission on Audit36 and Cruz v. Gangan37 cited by
petitioners in their pleadings, where the victims of robbery were
exonerated from liability, find no application to the present case.

In Austria, Maria Abad received from Guillermo Austria a pendant


with diamonds to be sold on commission basis, but which Abad
failed to subsequently return because of a robbery committed upon
her in 1961. The incident became the subject of a criminal case filed
against several persons. Austria filed an action against Abad and her
husband (Abads) for recovery of the pendant or its value, but the
Abads set up the defense that the robbery extinguished their
obligation. The RTC ruled in favor of Austria, as the Abads failed to
prove robbery; or, if committed, that Maria Abad was guilty of
negligence. The CA, however, reversed the RTC decision holding
that the fact of robbery was duly established and declared the
Abads not responsible for the loss of the jewelry on account of a
fortuitous event. We held that for the Abads to be relieved from the
civil liability of returning the pendant under Art. 1174 of the Civil
Code, it would only be sufficient that the unforeseen event, the
robbery, took place without any concurrent fault on the debtor’s
part, and this can be done by preponderance of evidence; that to
be free from liability for reason of fortuitous event, the debtor must, in
addition to the casus itself, be free of any concurrent or contributory
fault or negligence.38

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We found in Austria that under the circumstances prevailing at the
time the Decision was promulgated in 1971, the City of Manila and its
suburbs had a high incidence of crimes against persons and
property that rendered travel after nightfall a matter to be
sedulously avoided without suitable precaution and protection; that
the conduct of Maria Abad in returning alone to her house in the
evening carrying jewelry of considerable value would have been
negligence per se and would not exempt her from responsibility in
the case of robbery. However we did not hold Abad liable for
negligence since, the robbery happened ten years previously; i.e.,
1961, when criminality had not reached the level of incidence
obtaining in 1971.

In contrast, the robbery in this case took place in 1987 when robbery
was already prevalent and petitioners in fact had already foreseen it
as they wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no negligence was
committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.

In Hernandez, Teodoro Hernandez was the OIC and special


disbursing officer of the Ternate Beach Project of the Philippine
Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to
Manila to encash two checks covering the wages of the employees
and the operating expenses of the project. However for some
reason, the processing of the check was delayed and was
completed at about 3 p.m. Nevertheless, he decided to encash the
check because the project employees would be waiting for their
pay the following day; otherwise, the workers would have to wait
until July 5, the earliest time, when the main office would open. At
that time, he had two choices: (1) return to Ternate, Cavite that
same afternoon and arrive early evening; or (2) take the money with
him to his house in Marilao, Bulacan, spend the night there, and
leave for Ternate the following day. He chose the second option,
thinking it was the safer one. Thus, a little past 3 p.m., he took a
passenger jeep bound for Bulacan. While the jeep was on Epifanio
de los Santos Avenue, the jeep was held up and the money kept by
Hernandez was taken, and the robbers jumped out of the jeep and
ran. Hernandez chased the robbers and caught up with one robber
who was subsequently charged with robbery and pleaded guilty.
The other robber who held the stolen money escaped. The
Commission on Audit found Hernandez negligent because he had
not brought the cash proceeds of the checks to his office in Ternate,
Cavite for safekeeping, which is the normal procedure in the
handling of funds. We held that Hernandez was not negligent in
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deciding to encash the check and bringing it home to Marilao,
Bulacan instead of Ternate, Cavite due to the lateness of the hour
for the following reasons: (1) he was moved by unselfish motive for his
co-employees to collect their wages and salaries the following day,
a Saturday, a non-working, because to encash the check on July 5,
the next working day after July 1, would have caused discomfort to
laborers who were dependent on their wages for sustenance; and
(2) that choosing Marilao as a safer destination, being nearer, and in
view of the comparative hazards in the trips to the two places, said
decision seemed logical at that time. We further held that the fact
that two robbers attacked him in broad daylight in the jeep while it
was on a busy highway and in the presence of other passengers
could not be said to be a result of his imprudence and negligence.

Unlike in Hernandez where the robbery happened in a public utility,


the robbery in this case took place in the pawnshop which is under
the control of petitioners. Petitioners had the means to screen the
persons who were allowed entrance to the premises and to protect
itself from unlawful intrusion. Petitioners had failed to exercise
precautionary measures in ensuring that the robbers were prevented
from entering the pawnshop and for keeping the vault open for the
day, which paved the way for the robbers to easily cart away the
pawned articles.

In Cruz, Dr. Filonila O. Cruz, Camanava District Director of


Technological Education and Skills Development Authority (TESDA),
boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to
Monumento when her handbag was slashed and the contents were
stolen by an unidentified person. Among those stolen were her
wallet and the government-issued cellular phone. She then reported
the incident to the police authorities; however, the thief was not
located, and the cellphone was not recovered. She also reported
the loss to the Regional Director of TESDA, and she requested that
she be freed from accountability for the cellphone. The Resident
Auditor denied her request on the ground that she lacked the
diligence required in the custody of government property and was
ordered to pay the purchase value in the total amount of P4,238.00.
The COA found no sufficient justification to grant the request for relief
from accountability. We reversed the ruling and found that riding the
LRT cannot per se be denounced as a negligent act more so
because Cruz’s mode of transit was influenced by time and money
considerations; that she boarded the LRT to be able to arrive in
Caloocan in time for her 3 pm meeting; that any prudent and
rational person under similar circumstance can reasonably be
expected to do the same; that possession of a cellphone should not
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hinder one from boarding the LRT coach as Cruz did considering that
whether she rode a jeep or bus, the risk of theft would have also
been present; that because of her relatively low position and pay,
she was not expected to have her own vehicle or to ride a taxicab;
she did not have a government assigned vehicle; that placing the
cellphone in a bag away from covetous eyes and holding on to that
bag as she did is ordinarily sufficient care of a cellphone while
traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be
presumed.

Unlike in the Cruz case, the robbery in this case happened in


petitioners' pawnshop and they were negligent in not exercising the
precautions justly demanded of a pawnshop.

WHEREFORE, except for the insurance aspect, the Decision of the


Court of Appeals dated March 31, 2003 and its Resolution dated
August 8, 2003, are AFFIRMED.

Costs against petitioners.

SO ORDERED.

Ynares-Santiago, Chairperson, Chico-Nazario, Nachura, JJ., concur.

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC. vs. SPOUSES


JORGE
G.R. No. 159617, August 8, 2007

FACTS: On different dates, Lulu Jorge pawned several pieces of


jewelry with Agencia de R. C. Sicam located in Parañaque to secure
a loan.

On October 19, 1987, two armed men entered the pawnshop and
took away whatever cash and jewelry were found inside the
pawnshop vault.
On the same date, Sicam sent Lulu a letter informing her of the loss
of her jewelry due to the robbery incident in the pawnshop.
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Respondent Lulu then wroteback expressing disbelief, then
requested Sicam to prepare the pawned jewelry for withdrawal on
November 6, but Sicam failed to return the jewelry.

Lulu, joined by her husband Cesar, filed a complaint against Sicam


with the RTC of Makati seeking indemnification for the loss of
pawned jewelry and payment of AD, MD and ED as well as AF.

The RTC rendered its Decision dismissing respondents’ complaint as


well as petitioners’ counterclaim. Respondents appealed the RTC
Decision to the CA which reversed the RTC, ordering the appellees
to pay appellants the actual value of the lost jewelry and AF.
Petitioners MR denied, hence the instant petition for review on
Certiorari.

ISSUE: are the petitioners liable for the loss of the pawned articles in
their possession? (Petitioners insist that they are not liable since
robbery is a fortuitous event and they are not negligent at all.)

HELD: The Decision of the CA is AFFIRMED.

YES

Article 1174 of the Civil Code provides:


Art. 1174. Except in cases expressly specified by the law, or when it is
otherwise declared by stipulation, or when the nature of the
obligation requires the assumption of risk, no person shall be
responsible for those events which could not be foreseen or which,
though foreseen, were inevitable.

Fortuitous events by definition are extraordinary events not


foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee
the same.
To constitute a fortuitous event, the following elements must concur:
(a) the cause of the unforeseen and unexpected occurrence or of
the failure of the debtor to comply with obligations must be
independent of human will;
(b) it must be impossible to foresee the event that constitutes the
caso fortuito or, if it can be foreseen, it must be impossible to avoid;
(c) the occurrence must be such as to render it impossible for the
debtor to fulfill obligations in a normal manner; and,
(d) the obligor must be free from any participation in the
aggravation of the injury or loss.

The burden of proving that the loss was due to a fortuitous event
rests on him who invokes it. And, in order for a fortuitous event to

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exempt one from liability, it is necessary that one has committed no
negligence or misconduct that may have occasioned the loss.
Sicam had testified that there was a security guard in their
pawnshop at the time of the robbery. He likewise testified that when
he started the pawnshop business in 1983, he thought of opening a
vault with the nearby bank for the purpose of safekeeping the
valuables but was discouraged by the Central Bank since pawned
articles should only be stored in a vault inside the pawnshop. The
very measures which petitioners had allegedly adopted show that to
them the possibility of robbery was not only foreseeable, but actually
foreseen and anticipated. Sicam’s testimony, in effect, contradicts
petitioners’ defense of fortuitous event.

Moreover, petitioners failed to show that they were free from any
negligence by which the loss of the pawned jewelry may have been
occasioned.

Robbery per se, just like carnapping, is not a fortuitous event. It does
not foreclose the possibility of negligence on the part of herein
petitioners.

Petitioners merely presented the police report of the Parañaque


Police Station on the robbery committed based on the report of
petitioners’ employees which is not sufficient to establish robbery.
Such report also does not prove that petitioners were not at fault. On
the contrary, by the very evidence of petitioners, the CA did not err
in finding that petitioners are guilty of concurrent or contributory
negligence as provided in Article 1170 of the Civil Code, to wit:

Art. 1170. Those who in the performance of their obligations are guilty
of fraud, negligence, or delay, and those who in any manner
contravene the tenor thereof, are liable for damages.

**
Article 2123 of the Civil Code provides that with regard to
pawnshops and other establishments which are engaged in making
loans secured by pledges, the special laws and regulations
concerning them shall be observed, and subsidiarily, the provisions
on pledge, mortgage and antichresis.

The provision on pledge, particularly Article 2099 of the Civil Code,


provides that the creditor shall take care of the thing pledged with
the diligence of a good father of a family. This means that petitioners
must take care of the pawns the way a prudent person would as to
his own property.

In this connection, Article 1173 of the Civil Code further provides:


Art. 1173. The fault or negligence of the obligor consists in the
omission of that diligence which is required by the nature of the
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obligation and corresponds with the circumstances of the persons,
of time and of the place. When negligence shows bad faith, the
provisions of Articles 1171 and 2201, paragraph 2 shall apply.

If the law or contract does not state the diligence which is to be


observed in the performance, that which is expected of a good
father of a family shall be required.

We expounded in Cruz v. Gangan that negligence is the omission to


do something which a reasonable man, guided by those
considerations which ordinarily regulate the conduct of human
affairs, would do; or the doing of something which a prudent and
reasonable man would not do. It is want of care required by the
circumstances.

A review of the records clearly shows that petitioners failed to


exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty
of negligence in the operation of their pawnshop business. Sicam’s
testimony revealed that there were no security measures adopted
by petitioners in the operation of the pawnshop. Evidently, no
sufficient precaution and vigilance were adopted by petitioners to
protect the pawnshop from unlawful intrusion. There was no clear
showing that there was any security guard at all. Or if there was one,
that he had sufficient training in securing a pawnshop. Further, there
is no showing that the alleged security guard exercised all that was
necessary to prevent any untoward incident or to ensure that no
suspicious individuals were allowed to enter the premises. In fact, it is
even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were
armed with caliber .45 pistols each, which were allegedly poked at
the employees. Significantly, the alleged security guard was not
presented at all to corroborate petitioner Sicam’s claim; not one of
petitioners’ employees who were present during the robbery
incident testified in court.

Furthermore, petitioner Sicam’s admission that the vault was open at


the time of robbery is clearly a proof of petitioners’ failure to observe
the care, precaution and vigilance that the circumstances justly
demanded.

The robbery in this case happened in petitioners’ pawnshop and


they were negligent in not exercising the precautions justly
demanded of a pawnshop.

NOTES:

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We, however, do not agree with the CA when it found petitioners
negligent for not taking steps to insure themselves against loss of the
pawned jewelries.

Under Section 17 of Central Bank Circular No. 374, Rules and


Regulations for Pawnshops, which took effect on July 13, 1973, and
which was issued pursuant to Presidential Decree No. 114, Pawnshop
Regulation Act, it is provided that pawns pledged must be insured,
to wit:

Sec. 17. Insurance of Office Building and Pawns- The place of


business of a pawnshop and the pawns pledged to it must be
insured against fire and against burglary as well as for the latter(sic),
by an insurance company accredited by the Insurance
Commissioner.
However, this Section was subsequently amended by CB Circular No.
764 which took effect on October 1, 1980, to wit:

Sec. 17 Insurance of Office Building and Pawns – The office


building/premises and pawns of a pawnshop must be insured
against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted.
Obviously, the Central Bank considered it not feasible to require
insurance of pawned articles against burglary.

The robbery in the pawnshop happened in 1987, and considering


the above-quoted amendment, there is no statutory duty imposed
on petitioners to insure the pawned jewelry in which case it was error
for the CA to consider it as a factor in concluding that petitioners
were negligent.

Nevertheless, the preponderance of evidence shows that petitioners


failed to exercise the diligence required of them under the Civil
Code.

SICAM vs. JORGE


G.R. No. 159617 August 8, 2007

Facts:

Lulu Jorge pawned several pieces of jewelry with Agencia de R. C.


Sicam to secure a loan.

On October 19, 1987, two armed men entered the pawnshop and
took away whatever cash and jewelry were found inside the
pawnshop vault.
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Sicam sent respondent Lulu a letter informing her of the loss of her
jewelry due to the robbery incident in the pawnshop. Respondent
Lulu expressed disbelief stating that when the robbery happened, all
jewelry pawned were deposited with Far East Bank near the
pawnshop since it had been the practice that before they could
withdraw, advance notice must be given to the pawnshop so it
could withdraw the jewelry from the bank. Respondent Lulu then
requested petitioner Sicam to prepare the pawned jewelry for
withdrawal on but petitioner Sicam failed to return the jewelry.

Respondent Lulu is seeking indemnification for the loss of pawned


jewelry and payment of damages. Petitioner is interposing the
defense of caso fortuito on the robber committed against the
pawnshop.

Issue:

WON Sicam is liable for the loss of the pawned articles in their
possession? YES

Held:

Fortuitous events by definition are extraordinary events not


foreseeable or avoidable. It is therefore, not enough that the event
should not have been foreseen or anticipated, as is commonly
believed but it must be one impossible to foresee or to avoid. The
mere difficulty to foresee the happening is not impossibility to foresee
the same.

Robbery per se, just like carnapping, is not a fortuitous event. It does
not foreclose the possibility of negligence on the part of herein
petitioners.

A review of the records clearly shows that petitioners failed to


exercise reasonable care and caution that an ordinarily prudent
person would have used in the same situation. Petitioners were guilty
of negligence in the operation of their pawnshop business. No
sufficient precaution and vigilance were adopted by petitioners to
protect the pawnshop from unlawful intrusion. There was no clear
showing that there was any security guard at all.

Sicam’s admission that the vault was open at the time of robbery is
clearly a proof of petitioners’ failure to observe the care, precaution
and vigilance that the circumstances justly demanded. Petitioner
Sicam testified that once the pawnshop was open, the combination
was already off. Instead of taking the precaution to protect them,
they let open the vault, providing no difficulty for the robbers to cart
away the pawned articles.

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In contrast, the robbery in this case took place in 1987 when robbery
was already prevalent and petitioners in fact had already foreseen it
as they wanted to deposit the pawn with a nearby bank for
safekeeping. Moreover, unlike in Austria, where no negligence was
committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.

Jardine Davies, Inc. vs. JRB Realty, Inc. (463 SCRA 555 [2005])

DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision1 of the Court of


Appeals (CA) in CA-G.R. CV No. 54201 affirming in toto that of the
Regional Trial Court (RTC) in Civil Case No. 90-237 for specific
performance; and the Resolution dated January 11, 2002 denying
the motion for reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building,


named Blanco Center, on its parcel of land located at 119 Alfaro St.,
Salcedo Village, Makati City. An air conditioning system was needed
for the Blanco Law Firm housed at the second floor of the building.
On March 13, 1980, the respondent’s Executive Vice-President, Jose
R. Blanco, accepted the contract quotation of Mr. A.G. Morrison,
President of Aircon and Refrigeration Industries, Inc. (Aircon), for two
(2) sets of Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air
conditioning equipment with a net total selling price of P99,586.00.2
Thereafter, two (2) brand new packaged air conditioners of 10 tons
capacity each to deliver 30,000 kcal or 120,000 BTUH 3 were installed
by Aircon. When the units with rotary compressors were installed,
they could not deliver the desired cooling temperature. Despite
several adjustments and corrective measures, the respondent
conceded that Fedders Air Conditioning USA’s technology for rotary
compressors for big capacity conditioners like those installed at the
Blanco Center had not yet been perfected. The parties thereby
agreed to replace the units with reciprocating/semi-hermetic
compressors instead. In a Letter dated March 26, 1981,4 Aircon
stated that it would be replacing the units currently installed with
new ones using rotary compressors, at the earliest possible time.
Regrettably, however, it could not specify a date when delivery
could be effected.

TempControl Systems, Inc. (a subsidiary of Aircon until 1987)


undertook the maintenance of the units, inclusive of parts and

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services. In October 1987, the respondent learned, through
newspaper ads,5 that Maxim Industrial and Merchandising
Corporation (Maxim, for short) was the new and exclusive licensee of
Fedders Air Conditioning USA in the Philippines for the manufacture,
distribution, sale, installation and maintenance of Fedders air
conditioners. The respondent requested that Maxim honor the
obligation of Aircon, but the latter refused. Considering that the ten-
year period of prescription was fast approaching, to expire on
March 13, 1990, the respondent then instituted, on January 29, 1990,
an action for specific performance with damages against Aircon &
Refrigeration Industries, Inc., Fedders Air Conditioning USA, Inc.,
Maxim Industrial & Merchandising Corporation and petitioner
Jardine Davies, Inc.6 The latter was impleaded as defendant,
considering that Aircon was a subsidiary of the petitioner. The
respondent prayed that judgment be rendered, as follows:

1. Ordering the defendants to jointly and severally at their account


and expense deliver, install and place in operation two
brand new units of each 10-tons capacity Fedders unitary packaged
air conditioners with Fedders USA’s technology perfected rotary
compressors to always deliver 30,000 kcal or 120,000 BTUH to the
second floor of the Blanco Center building at 119 Alfaro St., Salcedo
Village, Makati, Metro Manila;

2. Ordering defendants to jointly and severally reimburse plaintiff not


only the sums of P415,118.95 for unsaved electricity from 21st
October 1981 to 7th January 1990 and P99,287.77 for repair costs of
the two service units from 7th March 1987 to 11th January 1990, with
legal interest thereon from the filing of this Complaint until fully
reimbursed, but also like unsaved electricity costs and like repair
costs therefrom until Prayer No. 1 above shall have been complied
with;

3. Ordering defendants to jointly and severally pay plaintiff’s


P150,000.00 attorney’s fees and other costs of litigation, as well as
exemplary damages in an amount not less than or equal to Prayer 2
above; and

4. Granting plaintiff such other and further relief as shall be just and
equitable in the premises.7

Of the four defendants, only the petitioner filed its Answer. The court
did not acquire jurisdiction over Aircon because the latter ceased
operations, as its corporate life ended on December 31, 1986.8 Upon
motion, defendants Fedders Air Conditioning USA and Maxim were
declared in default.9

On May 17, 1996, the RTC rendered its Decision, the dispositive
portion of which reads:
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WHEREFORE, judgment is hereby rendered ordering defendants
Jardine Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim
Industrial and Merchandising Corporation, jointly and severally:

1. To deliver, install and place into operation the two (2) brand new
units of Fedders unitary packaged airconditioning units each of 10
tons capacity with rotary compressors to deliver 30,000 kcal or
120,000 BTUH to the second floor of the Blanco Center building, or to
pay plaintiff the current price for two such units;

2. To reimburse plaintiff the amount of P556,551.55 as and for the


unsaved electricity bills from October 21, 1981 up to April 30, 1995;
and another amount of P185,951.67 as and for repair costs;

3. To pay plaintiff P50,000.00 as and for attorney’s fees; and

4. Cost of suit.10

The petitioner filed its notice of appeal with the CA, alleging that the
trial court erred in holding it liable because it was not a party to the
contract between JRB Realty, Inc. and Aircon, and that it had a
personality separate and distinct from that of Aircon.

On March 23, 2000, the CA affirmed the trial court’s ruling in toto;
hence, this petition.

The petitioner raises the following assignment of errors:

I.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR THE


ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE THE
LATTER WAS FORMERLY JARDINE’S SUBSIDIARY.

II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS


JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING AIRCON’S OBLIGATION TO DELIVER THE TWO (2)
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY
COMPLIED WITH IN GOOD FAITH.

III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS


JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
DECLARING JRB’S CAUSES OF ACTION AS HAVING BEEN BARRED BY
LACHES.

IV.

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ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINE’S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN
FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED ELECTRICITY
EXPENSES.

V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY


ATTORNEY’S FEES.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO


JARDINE FOR DAMAGES.11

It is the well-settled rule that factual findings of the trial court, as


affirmed by the CA, are accorded high respect, even finality at
times. However, considering that the factual findings of the CA and
the RTC were based on speculation and conjectures, unsupported
by substantial evidence, the Court finds that the instant case falls
under one of the excepted instances. There is, thus, a need to
correct the error.

The trial court ruled that Aircon was a subsidiary of the petitioner,
and concluded, thus:

Plaintiff’s documentary evidence shows that at the time it


contracted with Aircon on March 13, 1980 (Exhibit "D") and on the
date the revised agreement was reached on March 26, 1981, Aircon
was a subsidiary of Jardine. The phrase "A subsidiary of Jardine
Davies, Inc." was printed on Aircon’s letterhead of its March 13, 1980
contract with plaintiff (Exhibit "D-1"), as well as the Aircon’s
letterhead of Jardine’s Director and Senior Vice-President A.G.
Morrison and Aircon’s President in his March 26, 1981 letter to plaintiff
(Exhibit "J-2") confirming the revised agreement. Aircon’s newspaper
ads of April 12 and 26, 1981 and a press release on August 30, 1982
(Exhibits "E," "F" and "L") also show that defendant Jardine publicly
represented Aircon to be its subsidiary.

Records from the Securities and Exchange Commission (SEC) also


reveal that as per Jardine’s December 31, 1986 and 1985 Financial
Statements that "The company acts as general manager of its
subsidiaries" (Exhibit "P"). Jardine’s Consolidated Balance Sheet as of
December 31, 1979 filed with the SEC listed Aircon as its subsidiary by
owning 94.35% of Aircon (Exhibit "P-1"). Also, Aircon’s reportorial
General Information Sheet as of April 1980 and April 1981 filed with
the SEC show that Jardine was 94.34% owner of Aircon (Exhibits "Q"
and "R") and that out of seven members of the Board of Directors of
Aircon, four (4) are also of Jardine.

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Defendant Jardine’s witness, Atty. Fe delos Santos-Quiaoit admitted
that defendant Aircon, renamed Aircon & Refrigeration Industries,
Inc. "is one of the subsidiaries of Jardine Davies" (TSN, September 22,
1995, p. 12). She also testified that Jardine nominated, elected, and
appointed the controlling majority of the Board of Directors and the
highest officers of Aircon (Ibid, pp. 10,13-14).

The foregoing circumstances provide justifiable basis for this Court to


disregard the fiction of corporate entity and treat defendant Aircon
as part of the instrumentality of co-defendant Jardine.12

The respondent court arrived at the same conclusion basing its ruling
on the following documents, to wit:

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh.


D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon,
to Atty. J.R. Blanco (Exh. J);

(d) News items of Bulletin Today dated August 30, 1982 (Exh. L);

(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979


listing Aircon as one of its subsidiaries (Exh. P);

(f) Financial Statement of Aircon as of December 31, 1982 and 1981


(Exh. S);

(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-


1).13

Applying the doctrine of piercing the veil of corporate fiction, both


the respondent and trial courts conveniently held the petitioner
liable for the alleged omissions of Aircon, considering that the latter
was its instrumentality or corporate alter ego. The petitioner is now
before us, reiterating its defense of separateness, and the fact that it
is not a party to the contract.

We find merit in the petition.

It is an elementary and fundamental principle of corporation law


that a corporation is an artificial being invested by law with a
personality separate and distinct from its stockholders and from other
corporations to which it may be connected. While a corporation is
allowed to exist solely for a lawful purpose, the law will regard it as
an association of persons or in case of two corporations, merge
them into one, when this corporate legal entity is used as a cloak for
fraud or illegality.14 This is the doctrine of piercing the veil of
Corporation Law/alfred0 Page 285 of 1509
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corporate
fiction which applies only when such corporate fiction is used to
defeat public convenience, justify wrong, protect fraud or defend
crime.15 The rationale behind piercing a corporation’s identity is to
remove the barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes of those
who use the corporate personality as a shield for undertaking certain
proscribed activities.16

While it is true that Aircon is a subsidiary of the petitioner, it does not


necessarily follow that Aircon’s corporate legal existence can just be
disregarded. In Velarde v. Lopez, Inc., 17 the Court categorically held
that a subsidiary has an independent and separate juridical
personality, distinct from that of its parent company; hence, any
claim or suit against the latter does not bind the former, and vice
versa. In applying the doctrine, the following requisites must be
established: (1) control, not merely majority or complete stock
control; (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 acts in contravention of
plaintiff’s legal rights; and (3) the aforesaid control and breach of
duty must proximately cause the injury or unjust loss complained of.18

The records bear out that Aircon is a subsidiary of the petitioner only
because the latter acquired Aircon’s majority of capital stock. It,
however, does not exercise complete control over Aircon; nowhere
can it be gathered that the petitioner manages the business affairs
of Aircon. Indeed, no management agreement exists between the
petitioner and Aircon, and the latter is an entirely different entity
from the petitioner.19

Jardine Davies, Inc., incorporated as early as June 28, 1946,20 is


primarily a financial and trading company. Its Articles of
Incorporation states among many others that the purposes for which
the said corporation was formed, are as follows:

(a) To carry on the business of merchants, commission merchants,


brokers, factors, manufacturers, and agents;

(b) Upon complying with the requirements of law applicable thereto,


to act as agents of companies and underwriters doing and
engaging in any and all kinds of insurance business.21

On the other hand, Aircon, incorporated on December 27, 1952,22 is


a manufacturing firm. Its Articles of Incorporation states that its
purpose is mainly -

To carry on the business of manufacturers of commercial and


household appliances and accessories of any form, particularly to
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manufacture, purchase, sell or deal in air conditioning and
refrigeration products of every class and description as well as
accessories and parts thereof, or other kindred articles; and to erect,
or buy, lease, manage, or otherwise acquire manufactories,
warehouses, and depots for manufacturing, assemblage, repair and
storing, buying, selling, and dealing in the aforesaid appliances,
accessories and products. …23

The existence of interlocking directors, corporate officers and


shareholders, which the respondent court considered, is not enough
justification to pierce the veil of corporate fiction, in the absence of
fraud or other public policy considerations.24 But even when there is
dominance over the affairs of the subsidiary, the doctrine of piercing
the veil of corporate fiction applies only when such fiction is used to
defeat public convenience, justify wrong, protect fraud or defend
crime.25 To warrant resort to this extraordinary remedy, there must be
proof that the corporation is being used as a cloak or cover for fraud
or illegality, or to work injustice.26 Any piercing of the corporate veil
has to be done with caution.27 The wrongdoing must be clearly and
convincingly established. It cannot just be presumed.28

In the instant case, there is no evidence that Aircon was formed or


utilized with the intention of defrauding its creditors or evading its
contracts and obligations. There was nothing fraudulent in the acts
of Aircon in this case. Aircon, as a manufacturing firm of air
conditioners, complied with its obligation of providing two air
conditioning units for the second floor of the Blanco Center in good
faith, pursuant to its contract with the respondent. Unfortunately, the
performance of the air conditioning units did not satisfy the
respondent despite several adjustments and corrective measures. In
a Letter29 dated October 22, 1980, the respondent even conceded
that Fedders Air Conditioning USA has not yet perhaps perfected its
technology of rotary compressors, and agreed to change the
compressors with the semi-hermetic type. Thus, Aircon substituted the
units with serviceable ones which delivered the cooling temperature
needed for the law office. After enjoying ten (10) years of its cooling
power, respondent cannot now complain about the performance of
these units, nor can it demand a replacement thereof.

Moreover, it was reversible error to award the respondent the


amount of P556,551.55 representing the alleged 30% unsaved
electricity costs and P185,951.67 as maintenance cost without
showing any basis for such award. To justify a grant of actual or
compensatory damages, it is necessary to prove with a reasonable
degree of certainty, premised upon competent proof and on the
best evidence obtainable by the injured party, the actual amount of
loss.30 The respondent merely based its cause of action on Aircon’s
alleged representation that Fedders air conditioners with rotary

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compressors can save as much as 30% on electricity compared to
other brands. Offered in evidence were newspaper advertisements
published on April 12 and 26, 1981. The respondent then recorded its
electricity consumption from October 21, 1981 up to April 3, 1995
and computed 30% thereof, which amounted to P556,551.55. The
Court rules that this amount is highly speculative and merely
hypothetical, and for which the petitioner can not be held
accountable.

First. The respondent merely relied on the newspaper advertisements


showing the Fedders window-type air conditioners, which are far
different from the big capacity air conditioning units installed at
Blanco Center.

Second. After such print advertisements, the respondent informed


Aircon that it was going to install an electric meter to register its
electric consumption so as to determine the electric costs not saved
by the presently installed units with semi-hermetic compressors.
Contrary to the allegations of the respondent that this was in
pursuance to their Revised Agreement, no proof was adduced that
Aircon agreed to the respondent’s proposition. It was a unilateral act
on the part of the respondent, which Aircon did not oblige or
commit itself to pay.

Third. Needless to state, the amounts computed are mere estimates


representing the respondent’s self-serving claim of unsaved
electricity cost, which is too speculative and conjectural to merit
consideration. No other proofs, reports or bases of comparison
showing that Fedders Air Conditioning USA could indeed cut down
electricity cost by 30% were adduced.

Likewise, there is no basis for the award of P185,951.67 representing


maintenance cost. The respondent merely submitted a schedule31
prepared by the respondent’s accountant, listing the alleged repair
costs from March 1987 up to June 1994. Such evidence is self-serving
and can not also be given probative weight, considering that there
are no proofs of receipts, vouchers, etc., which would substantiate
the amounts paid for such services. Absent any more convincing
proof, the Court finds that the respondent’s claims are without basis,
and cannot, therefore, be awarded.

We sustain the petitioner’s separateness from that of Aircon in this


case. It bears stressing that the petitioner was never a party to the
contract. Privity of contracts take effect only between parties, their
successors-in-interest, heirs and assigns.32 The petitioner, which has a
separate and distinct legal personality from that of Aircon, cannot,
therefore, be held liable.

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IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed
decision of the Court of Appeals, affirming the decision of the
Regional Trial Court is REVERSED and SET ASIDE. The complaint of the
respondent is DISMISSED. Costs against the respondent.

SO ORDERED.

ROMEO J. CALLEJO, SR.


Associate Justice

WE CONCUR:

De Leon vs. NLRC (358 SCRA 274 [2001])

G.R. No. 112661 May 30, 2001

SIMEON DE LEON, EFREN ABAD, JAIME ABAD, JESSIE ABAY-ABAY,


ROLANDO ABIOLA, ALICIO ABISO, CELEDONIO ABSALON, JEREMIAS
ADO, VICENTE ADO, VICENTE AGGABAO, EFRAIN AGUIRRE,
ALEXANDER ALATA, ERNESTO ALCALDE, LORENZO ALCOY, ALMARIO
ALICIO, CESAR AMADOR, JOSE AMANTE, ESTELITO AMBROSIO,
VICENTE ANAPI, ARNEL ANCHETA, ROGELIO ANCHETA, WILFREDO
ANONUEVO, DOMINGO ANTIGRO, MARGARITO ANTIGRO, ROGELIO
ANZANO, ANTONIO APOSTOL, ORLANDO AQUINO, JUAN ARCALAS,
BONIFACIO ARIOLA, EDGAR ARIOLA, BONIFACIO ARMASA,
FERNANDO BACCAY, MARIO BACUD, RUPERTO BACUDAN, NILO
BALAG, ARGEL BALTAZAR, DEMETRIO BARAYOGA, FELIX BARNEDO,
FLORENTINO BARTE, SARRI BASIRUL, MARCELO BATANES, RECTO
BAYONA, VICTORIO BERMUNDO, ISMAEL BERNAL, LERIO BERSABE,
FIDEL BOSE, MARIANO BOTACION, DANILO BRAZIL, REYNALDO
BRUNIO, MARIO BUENAVENTURA, ARSENIO BULATAO, FRANCISCO
BULATAO, CARLOS CAJARA, ROSENDO CAMACHO, RUBEN
CAMACHO, NESTOR CAPILOS, DOMINGO CASTRO, MAXIMIANO DE
CASTO, EDINO CASTUERA, ZALDY CERDON, ANTONIO DERUJANO,
VICTOR CIPRIANO, JUANITO CORPUZ, ALFREDO CRUZ, FERNANDO
DELA CRUZ, MARIO CUSTOPAY, ROSAURO CUSTODIO, FRANKLIN
CUSTODIO, ALFREDO DAPROZA, RENATO DAVAG, NOEL DEMINGOY,
GENE DIESTRO, ESTEBAN DIONSON, RAMON DIZA, JEREMIAS
DOROMAL, MANUEL EDATO, FERNANDO EDORA, CONRADO
ENRIQUEZ, NICOMEDEZ ENRIQUEZ, ROLITO ESPIEL, LAURO ESPANOL,
NONITO ESPLANA, ELPIDIO ESPANOL, DIOLITO ESTOPEREZ, ODILON
EUSTE, HENRY FACTOR, VIRGILIO FAVORITO, ARISTOTLE FERNANDEZ,

Corporation Law/alfred0 Page 289 of 1509


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RODOFLO FORMALEJO, JUNE FULAY, RUIS FUTOL, JESUS GABA,
RODRIGO GABAT, ROSALIA GABAT, CLEMENTE GASPAR, RODRIGO
GAVIOLA, ELLEN GODELOSON, SALVADOR GUELA, EDUARDO
GUZMAN, BALTAZAR DE GUZMAN, ZOSIMO DE GUZMAN, REYANLDO
HAGUIRING, CARLOS GINDAP, BERNARDINO GIPIT, WILFREDO
HERNANDEZ, IMMANUEL IBRING, PEPITO IMPERIO, MAGTANGGOL
INSORIO, RODELYN JACUNTO, MARIO JARAPAN, MAXIMO JIMENEZ,
ALEJANDRO JUDLOMAN, JUAN LAOAGAN, DANTE LARIOSA, ELINO
LASAGA, JOSEPH LEGASPINA, ZOSIMO LEPALAM, BENJAMIN LIBAN,
EFREN LIGUE, CLETO LINGA, ROMEO LLAGAS, LUCIO LLARENA,
ALFREDO LOPEZ, FELIX LOPEZ, SANTOS LOPEZ, RUBEN LORENZO, NILO
LUGANA, CANCIO MAATUBANG, ANTONIO MACASIO, ROBERTO
MACATUNGGAL, VIRGILIO MACALINAO, RAMON MACOY, JOSE
MAGALONA, ALEJO MANAGUELOD, DOMINGO MANALO, EMILIANO
MANALO, SULPICIO MANTALABA, EDITO MANUEL, ROMULO MANUEL,
FELINO MARANA, CARLITO MARGAJA, ROMARES MARIANO,
CERMELO MARTINEZ, MODESTO MASULIT, ALMA MATUSALEM,
FLAVIANO MEDEL, DOLCIANO MEDINA, DOLOROSA MEDINA,
NORLINDO MEJARITO, PEDRITO MENDOZA, GUARDITO MERANO,
ALBERTO DE MESA, CHARLIE MINANO, JOSE MONTEROSO, ROSENDO
MORALES, CESAR NARDA, DOMINADOR NAGAL, EDEMIO NARISMA,
DINISIO NAVASCA, REGINO NEPICON, JR., JESSIE CRIS NILO, JERWYN
ORARIO, EUGENIO ORBEGOZO, IRENEO ORGANISTA, CATALINO
OJENDRAS, WILLIAM OLIVARES, JUANITO ORIO, WILLIAM ORTIZO,
ROQUE PAL-PALLATOC, ROGELIO PAEL, LORENZO PAMINTUAN,
VIRGILIO PANTALEON, ANTONIO PAPA, EMMANUEL PASCUAL,
FRANCISCO PECUNDO, RUFINO PELICER, LEONARDO PEPITO, PABLITO
PERALTA, EDILBERTO PEREZ, LOLITO PEREZ, PELAGIO PEREZ, JR.,
FERNANDO PINEDA, CARMEN PIO, ALEJANDRO QUIAMCO, VIRGILIO
QUILALANG, JEREMEAS QUINES, ZENAIDA RAQUINE, DOMINGO
RANOLA, SABINO RANULO, EDDIE RAZONABE, ALBERTO REBAULA,
BENIGNO REGIS, PERFECTO REBOYO, VITALIANO REYES, ZOSIMO
REYES, EDWIN ROBERTS, ROBERT ROJO, GODOFREDO ROLIO,
ANATALIA ROSANTO, DOMINADOR ROSANTO, RAMON ROSANTO, SR.,
RODRIGO ROSANTO, JULIO RUBIO, DANTE RUZOL, VENUS RUZOL,
ROMULO SABINO, CIPRIANO SACUILLES, SR., PRIMO SALAZAR,
GASPAR SAMUYA, ANTONIO SANCHEZ, CLAUDIO SANCHEZ,
YOLANDA SAN LUIS, ROBERTO SANTOS, BENITO SEGUDIENTE, EDGAR
SIBAL, GREGORIO SIBAL, VALENTINO SIBAL, SONNY SINGH, ROMEO
SOMERA, EDGAR TABAQUE, BENITO TACATA, MATILDE TACATA,
ANDRESITO TALAM, ANTOLIN TALISIC, PABLO TAMAYO, JULIE TAMIEZA,
ROGELIO TAYO, CELSO TE, ENRIQUE TRIPULCA, ARMANDO TUIBEO,
NICANOR TUMAMAO, EDUARDO TUMBALE, RAMON TURIRIT,
LONGENIO UMACAM, TOLENTINO UNDAUNDO, DIOLITO VALENCIA,
ERNESTO VARGAS, BILLY VASQUEZ, TOMAS VELINA, MARCOS DE VERA,
IRENEO VILELA, NICANDRO VILLAFRANCA, DANNY VILLANUEVA,
LOLITA VITALICO, ALIPIO YGOT, AGOSTO YROMA, FELIX ZAMBALES,

Corporation Law/alfred0 Page 290 of 1509


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and GUILLERMO ZIPANGAN, petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC), and FORTUNE
TOBACCO CORPORATION and/or MAGNUM INTEGRATED SERVICES,
INC. (formerly FORTUNE INTEGRATED SERVICES, INC.), respondents.

PUNO, J.:

This case stemmed from a complaint for illegal dismissal, unfair labor
practice and refund of cash bond filed by petitioners against
respondents before the Arbitration Branch of the National Labor
Relations Commission (NLRC). The petition at bar seeks the
annulment of the resolution of the NLRC dated July 5, 1993 reversing
the decision of the Labor Arbiter finding respondents liable for the
charges, and its resolution dated August 10, 1993 denying petitioners'
motion for reconsideration.

The undisputed facts are as follows:

On August 23, 1980, Fortune Tobacco Corporation (FTC) and Fortune


Integrated Services, Inc. (FISI) entered into a contract for security
services where the latter undertook to provide security guards for the
protection and security of the former. The petitioners were among
those engaged as security guards pursuant to the contract.

On February 1, 1991, the incorporators and stockholders of FISI sold


out lock, stock and barrel to a group of new stockholders by
executing for the purpose a "Deed of Sale of Shares of Stock". On the
same date, the Articles of Incorporation of FISI was amended
changing its corporate name to Magnum Integrated Services, Inc.
(MISI). A new by-laws was likewise adopted and approved by the
Securities and Exchange Commission on June 4, 1993.

On October 15, 1991, FTC terminated the contract for security


services which resulted in the displacement of some five hundred
eighty two (582) security guards assigned by FISI/MISI to FTC,
including the petitioners in this case. FTC engaged the services of
two (2) other security agencies, Asian Security Agency and Ligalig
Security Services, whose security guards were posted on October 15,
1991 to replace FISI's security guards.

Sometime in October 1991, the Fortune Tobacco Labor Union, an


affiliate of the National Federation of Labor Unions (NAFLU), and
claiming to be the bargaining agent of the security guards, sent a
Notice of Strike to FISI/MISI. On November 14, 1991, the members of
the union which include petitioners picketed the premises of FTC. The
Regional Trial Court of Pasig, however, issued a writ of injunction to
enjoin the picket.1âwphi1.nêt

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On November 29, 1991, Simeon de Leon, together with sixteen (16)
other complainants instituted the instant case before the Arbitration
Branch of the NLRC. The complaint was later amended to allow the
inclusion of other complainants.1âwphi1.nêt

The parties submitted the following issues for resolution:

(1) Whether petitioners were illegally dismissed;

(2) Whether respondents are guilty of unfair labor practice; and

(3) Whether petitioners are entitled to the refund of their cash


bond deposited with respondent FISI.

Petitioners alleged that they were regular employees of FTC which


was also using the corporate names Fortune Integrated Services, Inc.
and Magnum Integrated Services, Inc. They were assigned to work
as security guards at the company's main factory plant, its tobacco
redrying plant and warehouse. They averred that they performed
their duties under the control and supervision of FTC's security
supervisors. Their services, however, were severed in October 1991
without valid cause and without due process. Petitioners claimed
that their dismissal was part of respondents' design to bust their
newly-organized union which sought to enforce their rights under the
Labor Standards law.1

Respondent FTC, on the other hand, maintained that there was no


employer-employee relationship between FTC and petitioners. It said
that at the time of the termination of their services, petitioners were
the employees of MISI which was a separate and distinct
corporation from FTC. Hence, petitioners had no cause of action
against FTC.2

Respondent FISI, meanwhile, denied the charge of illegal dismissal


and unfair labor practice. It argued that petitioners were not
dismissed from service but were merely placed on floating status
pending re-assignment to other posts. It alleged that the temporary
displacement of petitioners was not due to its fault but was the result
of the pretermination by FTC of the contract for security services.3

The Labor Arbiter found respondents liable for the charges. Rejecting
FTC's argument that there was no employer-employee relationship
between FTC and petitioners, he ruled that FISI and FTC should be
considered as a single employer. He observed that the two
corporations have common stockholders and they share the same
business address. In addition, FISI had no client other than FTC and
other corporations belonging to the group of companies owned by
Lucio Tan. The Labor Arbiter thus found respondents guilty of union
busting and illegal dismissal. He observed that not long after the

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stockholders of FISI sold all their stocks to a new set of stockholders,
FTC terminated the contract of security services and engaged the
services of two other security agencies. FTC did not give any reason
for the termination of the contract. The Labor Arbiter gave credence
to petitioners' theory that respondents' precipitate termination of
their employment was intended to bust their union. Consequently,
the Labor Arbiter ordered respondents to pay petitioners their
backwages and separation pay, to refund their cash bond deposit,
and to pay attorney's fees.4

On appeal, the NLRC reversed and set aside the decision of the
Labor Arbiter. First, it held that the Labor Arbiter erred in applying the
"single employer" principle and concluding that there was an
employer-employee relationship between FTC and FISI on one hand,
and petitioners on the other hand. It found that at the time of the
termination of the contract of security services on October 15, 1991,
FISI which, at that time, had been renamed Magnum Integrated
Services, Inc. had a different set of stockholders and officers from
that of FTC. They also had separate offices. The NLRC held that the
principle of "single employer" and the doctrine of piercing the
corporate veil could not apply under the circumstances. It further
ruled that the proximate cause for the displacement of petitioners
was the termination of the contract for security services by FTC on
October 15, 1991. FISI could not be faulted for the severance of
petitioners' assignment at the premises of FTC. Consequently, the
NLRC held that the charge of illegal dismissal had no basis. As
regards the charge of unfair labor practice, the NLRC found that
petitioners who had the burden of proof failed to adduce any
evidence to support their charge of unfair labor practice against
respondents. Hence, it ordered the dismissal of petitioners'
complaint.5

The petitioners filed a motion for reconsideration of the resolution of


the NLRC but the same was denied.6 Hence, this petition.

We gave due course to the petition on May 15, 1995. Thus, the ruling
in St. Martin Funeral Home vs. NLRC7 remanding all petitions for
certiorari from the decision of the NLRC to the Court of Appeals does
not apply to the case at bar.

The petition is impressed with merit.

An examination of the facts of this case reveals that there is sufficient


ground to conclude that respondents were guilty of interfering with
the right of petitioners to self-organization which constitutes unfair
labor practice under Article 248 of the Labor Code.8 Petitioners have
been employed with FISI since the 1980s and have since been
posted at the premises of FTC -- its main factory plant, its tobacco

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redrying plant and warehouse. It appears from the records that FISI,
while having its own corporate identity, was a mere instrumentality of
FTC, tasked to provide protection and security in the company
premises. The records show that the two corporations had identical
stockholders and the same business address. FISI also had no other
clients except FTC and other companies belonging to the Lucio Tan
group of companies. Moreover, the early payslips of petitioners show
that their salaries were initially paid by FTC.9 To enforce their rightful
benefits under the laws on Labor Standards, petitioners formed a
union which was later certified as bargaining agent of all the security
guards. On February 1, 1991, the stockholders of FISI sold all their
participations in the corporation to a new set of stockholders which
renamed the corporation Magnum Integrated Services, Inc. On
October 15, 1991, FTC, without any reason, preterminated its
contract of security services with MISI and contracted two other
agencies to provide security services for its premises. This resulted in
the displacement of petitioners. As MISI had no other clients, it failed
to give new assignments to petitioners. Petitioners have remained
unemployed since then. All these facts indicate a concerted effort
on the part of respondents to remove petitioners from the company
and thus abate the growth of the union and block its actions to
enforce their demands in accordance with the Labor Standards
laws. The Court held in Insular Life Assurance Co., Ltd., Employees
Association-NATU vs. Insular Life Assurance Co., Ltd.:10

"The test of whether an employer has interfered with and


coerced employees within the meaning of section (a) (1) is
whether the employer has engaged in conduct which it may
reasonably be said tends to interfere with the free exercise of
employees' rights under section 3 of the Act, and it is not
necessary that there be direct evidence that any employee
was in fact intimidated or coerced by statements of threats of
the employer if there is a reasonable inference that anti-union
conduct of the employer does have an adverse effect on self-
organization and collective bargaining."11

We are not persuaded by the argument of respondent FTC denying


the presence of an employer-employee relationship. We find that
the Labor Arbiter correctly applied the doctrine of piercing the
corporate veil to hold all respondents liable for unfair labor practice
and illegal termination of petitioners' employment. It is a
fundamental principle in corporation law that a corporation is an
entity separate and distinct from its stockholders and from other
corporations to which it is connected. However, when the concept
of separate legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime, the law will regard the
corporation as an association of persons, or in case of two
corporations, merge them into one. The separate juridical personality

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of a corporation may also be disregarded when such corporation is
a mere alter ego or business conduit of another person.12 In the case
at bar, it was shown that FISI was a mere adjunct of FTC. FISI, by
virtue of a contract for security services, provided FTC with security
guards to safeguard its premises. However, records show that FISI
and FTC have the same owners and business address, and FISI
provided security services only to FTC and other companies
belonging to the Lucio Tan group of companies. The purported sale
of the shares of the former stockholders to a new set of stockholders
who changed the name of the corporation to Magnum Integrated
Services, Inc. appears to be part of a scheme to terminate the
services of FISI's security guards posted at the premises of FTC and
bust their newly-organized union which was then beginning to
become active in demanding the company's compliance with
Labor Standards laws. Under these circumstances, the Court cannot
allow FTC to use its separate corporate personality to shield itself
from liability for illegal acts committed against its employees.

Thus, we find that the termination of petitioners' services was without


basis and therefore illegal. Under Article 279 of the Labor Code, an
employee who is unjustly dismissed from work is entitled to
reinstatement without loss of seniority rights and other privileges, and
to his full backwages, inclusive of allowances, and to his other
benefits or their monetary equivalent computed from the time his
compensation was witheld from him up to the time of his actual
reinstatement. However, if reinstatement is no longer possible, the
employer has the alternative of paying the employee his separation
pay in lieu of reinstatement.13

IN VIEW WHEREOF, the petition is GRANTED. The assailed resolutions of


the NLRC are SET ASIDE. Respondents are hereby ordered to pay
petitioners their full backwages, and to reinstate them to their former
position without loss of seniority rights and privileges, or to award
them separation pay in case reinstatement is no longer
feasible.1âwphi1.nêt

SO ORDERED.

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

Kapunan J., on leave.

PCGG vs. Sandiganbayan (365 SCRA 538 [2001])

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G.R. Nos. 119609-10 September 21, 2001

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, OCEANIC


WIRELESS NETWORK, INC., DAVID M. CASTRO, MAXIMO A. MACEREN,
CAESAR PARLADE, MELQUIADES C. GUTIERREZ, EDUARDO M.
VILLANUEVA, and EDILBERTO S. ALEJANDRO, petitioners,
vs.
HONORABLE SANDIGANBAYAN (Third Division), JOSE L. AFRICA+,
MANUEL H. NIETO, JR., ANDRES L. AFRICA, AEROCOM INVESTORS AND
MANAGERS INC., POLYGON INVESTORS AND MANAGERS, INC., and
BELGOR INVESTMENT CORPORATION, respondents.

----------------------------------------

G.R. Nos. 119623-25 September 21, 2001

OCEANIC WIRELESS NETWORK, INC., MELQUIADES C. GUTIERREZ,


MAXIMO A. MACEREN, and CAESAR O. V. PARLADE, petitioners,
vs.
HONORABLE SANDIGANBAYAN (Third Division), and JOSE L. AFRICA, +
MANUEL H. NIETO, JR., ANDRES L. AFRICA, AEROCOM INVESTORS &
MANAGERS, INC., POLYGON INVESTORS & MANAGERS, INC.,
SILANGAN INVESTORS & MANAGERS INC., and BELGOR INVESTMENT
CORPORATION, respondents.

PARDO, J.:

What is before the Court is a joint petition1 to annul and set aside the
decision2 of the Sandiganbayan dismissing petitioners’ complaint for
injunction with damages against Victor A. Africa, Jose L. Africa, +
Manuel H. Nieto, Jr. and Juan de Ocampo3 and the resolution4
denying petitioners’ motion for reconsideration.

The Facts

On August 28, 1990, the Presidential Commission on Good


Government (PCGG) sent Corporate Secretary Victor A. Africa of
Oceanic Wireless Network, Inc. (OWNI), a letter dated August 3,
1990, directing him to send notices to all stockholders of record of
OWNI for special stockholders’ meeting to be held on September 17,
1990. He was required to issue one qualifying share each to PCGG
Commissioners Maximo A. Maceren and David M. Castro from the
unissued shares and to record the transfer in the stock and transfer
book of OWNI. Failure to comply within five (5) days from receipt
thereof, Assistant Solicitor General Ramon S. Desuasido would be
designated as acting corporate secretary.

On September 17, 1990, during the special stockholders’ meeting of


OWNI, PCGG voted all the Class "A" shares in the election of

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directors and elected to the board of directors Commissioners
Maximo A. Maceren, Cesar O. V. Parlade and Melquiades C.
Gutierrez representing the Class "A" shares and Colin Brooker and
Terry Miller representing Class "B" and "C" shares. The new board of
directors then elected Commissioner Maximo A. Maceren as
Chairman of the Board, Melquiades C. Gutierrez as President,
Assistant Solicitor General Ramon S. Desuasido as Acting Corporate
Secretary and Almario P. Velasco as Acting Treasurer. None of the
registered Class "A" shareholders of OWNI was present in that special
stockholders meeting.

PCGG sequestered the Class "A" shareholding in OWNI amounting to


63,573 shares out of the total 105,955 outstanding capital stock, or
about 60% of the outstanding capital stock, and PCGG voted all the
Class "A" shares by virtue of the following writs of sequestration, to wit:

(a) The order of sequestration, dated April 11, 1986, which


covers shares of Jose L. Africa, + Roberto S. Benedicto, + Andres
L. Africa and Victor A. Africa in OWNI. PCGG Commissioner
Mary Concepcion Bautista signed the sequestration order.

(b) The writs of sequestration, dated June 15, 1988, were issued
by the PCGG against Aerocom, Polygon on August 3, 1988 or
one day after the constitutional deadline as provided in
Section 26, Article XVIII of the 1987 Constitution. Furthermore, no
court case has been filed against Aerocom, Polygon, Belgor
Investment Corp., Silangan Investors & Manages, Inc. and
OWNI.

On October 9, 1990, Corporate Secretary Victor A. Africa wrote the


Securities Exchange Commission questioning the election of PCGG
nominees as directors of the OWNI board on the ground that they
were not stockholders of OWNI.

Upon instruction of the Africa group, Atty. Victor A. Africa sent


notices to all stockholders of OWNI advising them of a special
stockholders’ meeting of OWNI to be held on January 27, 1991, at
the Holiday Inn, Manila, for the purpose of the election of directors
and other matters.

On January 27, 1991, the special stockholders’ meeting of OWNI took


place. Stockholders owning 63,573 Class "A" shares were
represented. Atty. Juan de Ocampo was designated as acting
secretary to record the minutes of the meeting. An election of
directors for Class "A" shares was held. Manuel H. Nieto, Jr., Jose L.
Africa+ and Andres L. Africa were elected as directors for Class "A"
shares for 1991 until their successors are elected and qualified. Class
"B" and "C" shareholders did not attend the meeting. No new
directors for them were elected.
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The stockholders directed the new officers to dig deeper to the
reported OWNI-Digitel deal. Atty. Victor A. Africa, as corporate
secretary, was directed to furnish all the banks with said resolution.
The board formed an executive committee and appointed Manuel
H. Nieto, Jr. as chairman, Jose L. Africa+ as member and the
incumbent directors representing Class "B" and "C" shares.

On July 8, 1991, Manuel H. Nieto, Jr., in his capacity as OWNI


president, wrote the National Telecommunications Commission
(NTC), requesting the NTC to hold in abeyance the application, or if
granted, to withdraw and recall OWNI’s permit and frequency
allocations as the same were made by an unauthorized board.

On July 10, 1991, Manuel H. Nieto, Jr. wrote Melquiades C. Gutierrez


informing him of the new set of directors and requested for the
turnover of the management of OWNI, including all corporate
records to the new set of directors. Atty. Victor A. Africa, in
compliance with the directive of the OWNI board, wrote Traders
Royal Bank informing it of the new bank signatories.

On July 30, 1991, Manuel H. Nieto, Jr. and Jose L. Africa+ circularized
a letter to the staff and employees of OWNI informing them of the
new set of board of directors.

On July 29, 1991, PCGG, acting for itself and in behalf of OWNI, filed
with the Sandiganbayan a complaint for injunction with damages
against Victor A. Africa, Jose L. Africa, + Manuel H. Nieto, Jr. and
Juan de Ocampo.5 PCGG sought to enjoin the defendants from
interfering with PCGG’s management of OWNI and/or representing
themselves as directors.

On August 1, 1991, Jose L. Africa, + Manuel H. Nieto, Jr., Andres L.


Africa, Aerocom, Polygon, Belgor, and Silangan, including OWNI
itself, filed with the Sandiganbayan a separate petition for certiorari
and prohibition, with prayer for temporary restraining order (TRO)
and preliminary injunction, against the PCGG.6

By agreement of the parties, the Sandiganbayan jointly heard Civil


Cases Nos. 0126 and 0127.

On April 25, 1994, the Sandiganbayan promulgated a decision, the


dispositive portion of which reads:

"(1) declaring as null and void the PCGG writs of sequestration,


dated June 15, 1988 against Aerocom Investors & Managers
Inc., Polygon Investors & Managers, Inc., Silangan Investors &
Managers, Inc. and Belgor Investments, Inc. for the reason that
the said writs of sequestration were deemed automatically
lifted for failure of the PCGG to commence the necessary

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judicial action against the said corporations within the required
six-month period pursuant to Section 26 of Article XVIII of the
1987 Constitution.

"(2) declaring as null and void the order of sequestration, dated


April 11, 1986, relative to the OWNI shares owned by Jose L.
Africa and Victor A. Africa on the ground that the said order of
sequestration was signed only by PCGG Commissioner Mary
Concepcion Bautista in violation of Section 3 of the Rules &
Regulations of the PCGG requiring the signatures of at least two
Commissioners on such order of sequestration.

"(3) declaring as null and void the acts and conduct of PCGG,
its agents, nominees and representatives in reorganizing and
taking over the Board of Directors and management of OWNI,
including the acts of calling and holding a special
stockholders’ meeting of OWNI on September 17, 1990, the
election therein of OWNI chairman and directors, president,
acting secretary and acting treasurer and the appointment of
PCGG nominees as corporate officers of OWNI;

"(4) ordering all the PCGG nominees and representatives in the


present Board of Directors and management of OWNI
including but not limited to respondents Maximo A. Maceren,
David M. Castro, Cesar Parlade, Melquiades C. Gutierrez,
Eduardo M. Villanueva and Edilberto S. Alejandro as well as
their replacements, if any, to vacate their positions in OWNI;
and considering the interest of justice, respondents in Civil Case
No. 0127 are hereby ordered to REFRAIN and DESIST;

(a) from further implementing /acting on the basis of the


Writs of Sequestration such as operating, administering
and managing the affairs and business of OWNI, or
representing themselves as directors and officers of OWNI;

(b) from disbursing, utilizing, disposing and committing the


funds and assets of OWNI and/or entering into any
transactions for the benefit of Digitel;

(c) from excluding petitioners Jose L. Africa, Manuel H.


Nieto, Jr. and Andres L. Africa as Chairman of the Board,
President and Treasurer, respectively, of OWNI;

(d) from making any expenditures for the use and benefit
of Digitel and pursuing any and all papers/com-
munications filed by OWNI with the National
Telecommunications Commission relative to the
requirements of Digitel to comply with Digitel’s franchise;

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"(5) ordering the respondents in Civil Case No. 0127 their
officers, agents, representatives and other persons acting
under their orders/instructions: (a) to vacate OWNI’s office
premises at the Electra House, Esteban St., Legaspi Village,
Makati; (b) to turn over all the corporate records of OWNI to
petitioner Jose L. Africa, et al.; and (c) render an accounting of
all transactions undertaken by them in the name or in behalf of
OWNI, including disbursement of corporate funds;

"(6) dismissing the complaint as well as the compulsory


counterclaims in Civil Case No. 0126, with costs against the
petitioners therein, PCGG."

On May 6, 1994, petitioners filed with the Sandiganbayan a motion


for reconsideration7 of the decision; however, on March 30, 1995, the
Sandiganbayan denied the motion.8

Hence, this joint petition with prayer for consolidation.9

On August 21, 1995, we granted the consolidation.10

Petitioners contend that:

First: the OWNI board was dormant and inactive necessitating the
PCGG takeover. And in reorganizing the OWNI board on September
17, 1990, PCGG merely performed its duty of preventing further
dissipation of the assets of OWNI in light of a 5.7 million peso payroll
anomaly committed by the former Finance Manager of OWNI;

Second: the Sandiganbayan erred in declaring null and void the


writs of sequestration against respondents Polygon Investors and
Managers, Inc., Aerocom Investors and Managers, Inc., and
Silangan Investors and Managers, Inc., for failure of the PCGG to file
the required cases against these companies, as said ruling runs
counter to the recent decision of the Supreme Court in the PCGG
sequestration cases;

Third: the Sandiganbayan decided on non-issues or issues that were


not involved in the application for injunction, and compounded this
mistake when it granted the main reliefs prayed for in Case No. 0127,
although the hearings were only in connection with prayer for the
issuance of a writ of preliminary injunction.

Fourth: the Sandiganbayan erred in ordering the ouster of non-


PCGG respondents from the positions they were holding in OWNI
without first putting in place the safeguards required by the case of
Cojuangco v. Roxas.11

The Issue

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The main issue raised is whether or not the PCGG’s takeover of OWNI
is legal.

The Court’s Ruling

The petition must fail.

Petitioner PCGG explained that prior to September 17, 1990, OWNI


was a dormant and inactive corporation. There was no functioning
board which made possible the Finance Manager’s embezzlement
of company funds. And in the exercise of their powers pursuant to
Executive Order Nos. 1, 2, 14 and 14-A, PCGG sequestered a
majority of shares of stocks of OWNI. PCGG was only consistent with
its mission of preventing dissipation of assets of sequestered
corporations or businesses when it took over control of OWNI.

In Presidential Commission on Good Government v. Cojuanco, Jr.,12


the Court ruled that who should vote the sequestered shares requires
the determination of the ill-gotten character of those shares and
consequently the rightful ownership thereof. The issue was still
pending in the main case in the Sandiganbayan. This is only an
incident of the main case and is limited to the stockholders’ meeting
held on September 17, 1990. This is without prejudice to the final
disposition of the merits of the main suit. The ownership of the shares
is still under litigation. It is not known whether the shares are part of
the ill-gotten wealth of former President Marcos and his "cronies."

In Bataan Shipyard & Engineering Co., Inc. v. PCGG,13 we declared


the scope and extent of the powers that the PCGG may exercise
with regard to the property of businesses sequestered:

"x x x 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."

Petitioners contend that the Sandiganbayan should not have


nullified the writs of sequestration because there was no need to file
a separate action against OWNI, Polygon, Aerocom and Silangan
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since they had been included in the list of the ill-gotten wealth of
defendants Jose L. Africa+ and Manuel H. Nieto, Jr. in Civil Case No.
0009. Petitioners cited Republic v. Sandiganbayan (First Division),14 in
which the Court held:

"1) Section 26, Article XVIII of the Constitution does not, by its
terms or any fair interpretation thereof, require that
corporations or business enterprises alleged to be repositories of
"ill-gotten wealth," as the term is used in said provision, be
actually and formally impleaded in the actions for the recovery
thereof, in order to maintain in effect existing sequestrations
thereof;

"2) complaints for the recovery of ill-gotten wealth which


merely identify and/or allege said corporations or enterprises to
be the instruments, repositories or the fruits of ill-gotten wealth,
without more, come within the meaning of the phrase
"corresponding judicial action or proceeding" contemplated
by the constitutional provision referred to; the more so, that
normally, said corporations, as distinguished from their
stockholders or members, are not generally suable for the
latter’s illegal or criminal actuations in the acquisition of the
assets invested by them in the former;

"3) even assuming the impleading of said corporations to be


necessary and proper so that judgment may comprehensively
and effectively be rendered in the actions, amendment of the
complaints to implead them as defendants may, under existing
rules of procedure, be done at any time during the pendency
of the actions thereby initiated, and even during the pendency
of an appeal to the Supreme Court--a procedure that, in any
case, is not inconsistent with or proscribed by the constitutional
time limits to the filing of the corresponding complaints "for"--
i.e., with regard or in relation to, in respect of, or in connection
with, or concerning--orders of sequestration, freezing, or
provisional takeover."

In this case, the PCGG’s complaint15 for "Reconveyance, Reversion,


Accounting, Restitution and Damages" against Jose L. Africa, +
Manuel H. Nieto, Jr., the Marcos Spouses, Ferdinand Marcos, Jr.,
Roberto S. Benedicto, + Juan Ponce Enrile, Potenciano Ilusorio+ was
filed on July 22, 1987. In the complaint, Polygon, Silangan, Aerocom
and OWNI were included in the list of property as part of the
defendants’ ill-gotten wealth.

We find the writ of sequestration issued against OWNI not valid


because the suit in Civil Case No. 0009 against Manuel H. Nieto and
Jose L. Africa+ as shareholders in OWNI is not a suit against OWNI. This

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Court has held that "failure to implead these corporations as
defendants and merely annexing a list of such corporations to the
complaints is a violation of their right to due process for it would in
effect be disregarding their distinct and separate personality without
a hearing."16

Furthermore, PCGG issued the writs of sequestration on August 3,


1988, which was beyond the period set by the Constitution.

Article XVIII, Section 26, of the 1987 Constitution provides:

"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 shall 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."

The sequestration orders issued against respondents shall be


deemed automatically lifted due to the failure of PCGG to
commence the proper judicial action or to implead the respondents
therein within the period prescribed by Article XVIII, Section 26 of the
1987 Constitution.

The lifting of the writs of sequestration will not necessarily be fatal to


the main case since the lifting of the subject orders does not ipso
facto mean that the sequestered property are not ill-gotten. The
effect of the lifting of the sequestration against OWNI will merely be
the termination of the role of the government as conservator
thereof. In other words, the PCGG may no longer exercise
administrative or housekeeping powers17 and its nominees may no
longer vote the sequestered shares to enable them to sit on the
corporate board of the subject firm.1âwphi1.nêt

The Fallo

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WHEREFORE, the petitions are hereby DENIED. The decision and
resolution of the Sandiganbayan are hereby AFFIRMED.

No costs.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Kapunan, and Ynares-Santiago, JJ.,


concur.

Puno, J., on official leave.

PCGG vs. SANDIGANBAYAN, et al. [G.R. Nos. 119609-10, September


21, 2001]

FACTS OF THE CASE:

On August 28, 1990, PCGG sent Corporate Secretary


Victor A. Africa of Oceanic Wireless Network, Inc. (OWNI), a letter
dated August 3, 1990, directing him to send notices to all
stockholders of record of OWNI for special stockholders'
meeting. On September 17, 1990,during the special
stockholders' meeting of OWNI, PCGG voted all the Class "A"
shares in the election of directors and elected to the board of
directors Commissioners Maceren, Parlade and Gutierrez
representing the Class "A" shares and Brooker and Miller representing
Class "B" and "C" shares. None of the registered Class "A" shareholders
of OWNI was present in that,
specialstockholders meeting. PCGG sequestered th e Class
" A" shareholdi ng about 60% of th eoutstanding capital stock,
and PCGG voted all the Class "A" shares.

On October 9, 1990, Corporate Secretary Africa wrote the SEC


questioning the
electiono f P C G G n o m i n e e s a s d i r e c t o r s o f t h e O W N I b o
ard on the ground that they were not stockholders of
OWNI.

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O n Janu ary 2 7 , 199 1 , t he sp eci al sto ckhol d ers' me
e t i n g o f O W N I t o o k p l a c e . Stockholders owning 63,573
Class "A" shares were represented. An election of directors
for Class "A" shares was held. Nieto, Jr., J. Africa and A. Africa were
elected as directors for
Class" A " s h a r e s f o r 1 9 9 1 u n t i l t h e i r s u c c e s s o r s a r e e l e c t
e d a n d q u a l i f i e d . C l a s s " B " a n d " C " shareholders did not
attend the meeting. No new directors for them were elected.

On July 29, 1991, PCGG, acti ng for i tself and i n behalf


o f O W N I , f i l e d w i t h t h e Sandiganbayan a complaint for
injunction with damages against V. Africa, J. Africa, Nieto, Jr. and
Ocampo. PCGG sought to enjoin the defendants from interfering
with PCGG's management of OWNI and/or representing themselves
as director.

ISSUE:

Whether or not the PCGG's takeover of OWNI is legal.

HELD:

NO. In PCGG v. Cojuanco, Jr ., the Court ruled that who should


vote the sequestered shares requires the determination of the ill-
gotten character of those shares and consequently the rightful
ownership thereof. The issue was still pending in the main case in the
Sandiganbayan. This is only an incident of the main case and is
limited to the stockholders' meeting held on September 17,
1990. This is without prejudice to the final disposition of the merits of
the main suit. The ownership of the shares is still under litigation. It is
not known whether the shares are part of the ill-gotten wealth of
former President Marcos and his "cronies."

We find the writ of sequestration issued against OWNI not valid


because the suit in Civil Case No. 0009 against Nieto, Jr. and J.
Africa as shareholders in OWNI is not a suit against OWNI. This
Court has held that "failure to implead these corporations as

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defendants and merely annexing a list of such corporations to the
complaints is a violation of their right to due process for it would in
effect be disregarding their distinct and separate personality without
a hearing.

Furthermore, PCGG issued the writs of sequestration on August


3, 1988, which was beyond the period set by the Constitution. Article
XVIII, Section 26, of the 1987 Constitution provides.

Sec. 26.The authority to issue sequestration or freeze orders


under Proclamation No. 3dated March 25, 1986 in relation to the
recovery of ill-gotten wealth shall 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.

The sequestration orders issued against respondents shall be


deemed automatically lifted due to the failure of PCGG to
commence the proper judicial action or to implead the respondents
therein within the period prescribed by Article XVIII, Section 26 of the
1987 Constitution.

The lifting of the writs of sequestration will not necessarily be


fatal to the main case since the lifting of the subject orders does not
ipso facto mean that the sequestered property are not ill-gotten. The
effect of the lifting of the sequestration against OWNI will merely be

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the termination of the role of the government as conservator
thereof. In other words, the PCGG may no longer exercise
administrative or housekeeping powers and its nominees may no
longer vote the sequestered shares to enable them to sit on the
corporate board of the subject firm.

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT VS.

SANDIGANBAYAN

G.R. Nos. 119609-10

FACTS OF THE CASE

The PCGG issued writs of sequestration against OWNI. Then, it sent

Corporate Secretary Africa of Ocean Wireless Network, Inc. (OWNI)

a letter directing him to send notices to all stockholders of record of

OWNI for special stockholders’ meeting. He was required to issue

one qualifying share each to PCGG Commissioners Maceren and

Castro from the unissued shares and to record the transfer in the

stock and transfer book of OWNI. Failure to comply within 5 days

from receipt thereof, Assistant Solicitor General Desuasido would be

designated as acting corporate secretary.During the special

stockholders’ meeting of OWNI, PCGG voted all the Class A shares in

the election of directors and elected to the board of directors

Commissioners Maceren, Parlade and Gutierrez representing the

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Class A shares, and Brooker and Miller representing Class B and C

shares. The new board of directors then elected Maceren as

Chairman of the Board, Gutierrez as President, ASG Desuasido as

Acting Corporate Secretary and Velasco as Acting Treasurer. None

of the registered Class A shareholders of OWNI was present in that

special stockholders meeting.Corporate Secretary Africa wrote the

SEC questioning the election of the PCGG nominees as directors of

the OWNI board on the ground that they were not stockholders of

the OWNI. Then, a special stockholders’ meeting of OWNI took

place, were another election of directors for Class “A” shares were

held. Thus, the PCGG sought to enjoin the new directors from

interfering with PCGG’s management of OWNI and/or representing

themselves as directors. Sandiganbayan nullified the writs of

sequestration, stressing the need to file a separate action against

OWNI.

ISSUE

Whether or not the PCGG’s takeover of OWN is legal.

RULING

PCGG’s takeover of OWNI is not legal. It was previously ruled by the

Court that “the PCGG cannot exercise acts of dominion over

property sequestered, frozen or provisionally taken over.. the act of

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sequestration.. does not import or bring about a divestment of title

over said property; does not make the PCGG the owner thereof.”

Further, the writ of sequestration issued against OWNI is not valid

because the civil suit filed against its stockholders is not a suit against

OWNI. This Court has held that “failure to implead these corporations

as defendants and merely annexing a list of such corporations to the

complaints is a violation of their right to due process for it would in

effect be disregarding their distinct and separate personality without

a hearing.”

J.G. Summit Holdings, Inc. vs. CA (450 SCRA 169 [2005])

G.R. No. 124293 January 31, 2005

J.G. SUMMIT HOLDINGS, INC., petitioner,


vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and
Members; ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS,
INC., respondents.

RESOLUTION

PUNO, J.:

For resolution before this Court are two motions filed by the
petitioner, J.G. Summit Holdings, Inc. for reconsideration of our
Resolution dated September 24, 2003 and to elevate this case to the
Court En Banc. The petitioner questions the Resolution which
reversed our Decision of November 20, 2000, which in turn reversed
and set aside a Decision of the Court of Appeals promulgated on
July 18, 1995.

I. Facts

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The undisputed facts of the case, as set forth in our Resolution of
September 24, 2003, are as follows:

On January 27, 1997, the National Investment and Development


Corporation (NIDC), a government corporation, entered into a Joint
Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of
Kobe, Japan (KAWASAKI) for the construction, operation and
management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering
Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will
contribute P330 million for the capitalization of PHILSECO in the
proportion of 60%-40% respectively. One of its salient features is the
grant to the parties of the right of first refusal should either of them
decide to sell, assign or transfer its interest in the joint venture, viz:

1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [PHILSECO] to any third party without giving the other
under the same terms the right of first refusal. This provision shall not
apply if the transferee is a corporation owned or controlled by the
GOVERNMENT or by a KAWASAKI affiliate.

On November 25, 1986, NIDC transferred all its rights, title and interest
in PHILSECO to the Philippine National Bank (PNB). Such interests
were subsequently transferred to the National Government pursuant
to Administrative Order No. 14. On December 8, 1986, President
Corazon C. Aquino issued Proclamation No. 50 establishing the
Committee on Privatization (COP) and the Asset Privatization Trust
(APT) to take title to, and possession of, conserve, manage and
dispose of non-performing assets of the National Government.
Thereafter, on February 27, 1987, a trust agreement was entered into
between the National Government and the APT wherein the latter
was named the trustee of the National Government's share in
PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO
to settle its huge obligations to PNB, the National Government's
shareholdings in PHILSECO increased to 97.41% thereby reducing
KAWASAKI's shareholdings to 2.59%.

In the interest of the national economy and the government, the


COP and the APT deemed it best to sell the National Government's
share in PHILSECO to private entities. After a series of negotiations
between the APT and KAWASAKI, they agreed that the latter's right
of first refusal under the JVA be "exchanged" for the right to top by
five percent (5%) the highest bid for the said shares. They further
agreed that KAWASAKI would be entitled to name a company in
which it was a stockholder, which could exercise the right to top. On
September 7, 1990, KAWASAKI informed APT that Philyards Holdings,
Inc. (PHI)1 would exercise its right to top.

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At the pre-bidding conference held on September 18, 1993,
interested bidders were given copies of the JVA between NIDC and
KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for
the National Government's 87.6% equity share in PHILSECO. The
provisions of the ASBR were explained to the interested bidders who
were notified that the bidding would be held on December 2, 1993.
A portion of the ASBR reads:

1.0 The subject of this Asset Privatization Trust (APT) sale through
public bidding is the National Government's equity in PHILSECO
consisting of 896,869,942 shares of stock (representing 87.67% of
PHILSECO's outstanding capital stock), which will be sold as a whole
block in accordance with the rules herein enumerated.

xxx xxx xxx

2.0 The highest bid, as well as the buyer, shall be subject to the final
approval of both the APT Board of Trustees and the Committee on
Privatization (COP).

2.1 APT reserves the right in its sole discretion, to reject any or all bids.

3.0 This public bidding shall be on an Indicative Price Bidding basis.


The Indicative price set for the National Government's 87.67% equity
in PHILSECO is PESOS: ONE BILLION THREE HUNDRED MILLION
(P1,300,000,000.00).

xxx xxx xxx

6.0 The highest qualified bid will be submitted to the APT Board of
Trustees at its regular meeting following the bidding, for the purpose
of determining whether or not it should be endorsed by the APT
Board of Trustees to the COP, and the latter approves the same. The
APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. shall then have a period of thirty (30)
calendar days from the date of receipt of such advice from APT
within which to exercise their "Option to Top the Highest Bid" by
offering a bid equivalent to the highest bid plus five (5%) percent
thereof.

6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]


Holdings, Inc. exercise their "Option to Top the Highest Bid," they shall
so notify the APT about such exercise of their option and deposit with
APT the amount equivalent to ten percent (10%) of the highest bid
plus five percent (5%) thereof within the thirty (30)-day period
mentioned in paragraph 6.0 above. APT will then serve notice upon
Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc.

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declaring them as the preferred bidder and they shall have a period
of ninety (90) days from the receipt of the APT's notice within which
to pay the balance of their bid price.

6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS]


Holdings, Inc. fail to exercise their "Option to Top the Highest Bid"
within the thirty (30)-day period, APT will declare the highest bidder
as the winning bidder.

xxx xxx xxx

12.0 The bidder shall be solely responsible for examining with


appropriate care these rules, the official bid forms, including any
addenda or amendments thereto issued during the bidding period.
The bidder shall likewise be responsible for informing itself with
respect to any and all conditions concerning the PHILSECO Shares
which may, in any manner, affect the bidder's proposal. Failure on
the part of the bidder to so examine and inform itself shall be its sole
risk and no relief for error or omission will be given by APT or COP. . . .

At the public bidding on the said date, petitioner J.G. Summit


Holdings, Inc.2 submitted a bid of Two Billion and Thirty Million Pesos
(P2,030,000,000.00) with an acknowledgment of
KAWASAKI/[PHILYARDS'] right to top, viz:

4. I/We understand that the Committee on Privatization (COP) has


up to thirty (30) days to act on APT's recommendation based on the
result of this bidding. Should the COP approve the highest bid, APT
shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc. that the highest bid is acceptable to the
National Government. Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. shall then have a period of thirty (30)
calendar days from the date of receipt of such advice from APT
within which to exercise their "Option to Top the Highest Bid" by
offering a bid equivalent to the highest bid plus five (5%) percent
thereof.

As petitioner was declared the highest bidder, the COP approved


the sale on December 3, 1993 "subject to the right of Kawasaki
Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid
by 5% as specified in the bidding rules."

On December 29, 1993, petitioner informed APT that it was protesting


the offer of PHI to top its bid on the grounds that: (a) the
KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS],
Mitsui, Keppel, SM Group, ICTSI and Insular Life violated the ASBR
because the last four (4) companies were the losing bidders thereby
circumventing the law and prejudicing the weak winning bidder; (b)
only KAWASAKI could exercise the right to top; (c) giving the same
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option to top to PHI constituted unwarranted benefit to a third party;
(d) no right of first refusal can be exercised in a public bidding or
auction sale; and (e) the JG Summit consortium was not estopped
from questioning the proceedings.

On February 2, 1994, petitioner was notified that PHI had fully paid
the balance of the purchase price of the subject bidding. On
February 7, 1994, the APT notified petitioner that PHI had exercised its
option to top the highest bid and that the COP had approved the
same on January 6, 1994. On February 24, 1994, the APT and PHI
executed a Stock Purchase Agreement. Consequently, petitioner
filed with this Court a Petition for Mandamus under G.R. No. 114057.
On May 11, 1994, said petition was referred to the Court of Appeals.
On July 18, 1995, the Court of Appeals denied the same for lack of
merit. It ruled that the petition for mandamus was not the proper
remedy to question the constitutionality or legality of the right of first
refusal and the right to top that was exercised by KAWASAKI/PHI,
and that the matter must be brought "by the proper party in the
proper forum at the proper time and threshed out in a full blown
trial." The Court of Appeals further ruled that the right of first refusal
and the right to top are prima facie legal and that the petitioner, "by
participating in the public bidding, with full knowledge of the right to
top granted to KAWASAKI/[PHILYARDS] is…estopped from
questioning the validity of the award given to [PHILYARDS] after the
latter exercised the right to top and had paid in full the purchase
price of the subject shares, pursuant to the ASBR." Petitioner filed a
Motion for Reconsideration of said Decision which was denied on
March 15, 1996. Petitioner thus filed a Petition for Certiorari with this
Court alleging grave abuse of discretion on the part of the appellate
court.

On November 20, 2000, this Court rendered x x x [a] Decision ruling


among others that the Court of Appeals erred when it dismissed the
petition on the sole ground of the impropriety of the special civil
action of mandamus because the petition was also one of certiorari.
It further ruled that a shipyard like PHILSECO is a public utility whose
capitalization must be sixty percent (60%) Filipino-owned.
Consequently, the right to top granted to KAWASAKI under the Asset
Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity
of the National Government in PHILSECO is illegal — not only
because it violates the rules on competitive bidding — but more so,
because it allows foreign corporations to own more than 40% equity
in the shipyard. It also held that "although the petitioner had the
opportunity to examine the ASBR before it participated in the
bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions thereof." Thus, this
Court voided the transfer of the national government's 87.67% share

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in PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG
Summit, as the highest bidder, to take title to the said shares, viz:

WHEREFORE, the instant petition for review on certiorari is GRANTED.


The assailed Decision and Resolution of the Court of Appeals are
REVERSED and SET ASIDE. Petitioner is ordered to pay to APT its bid
price of Two Billion Thirty Million Pesos (P2,030,000,000.00), less its bid
deposit plus interests upon the finality of this Decision. In turn, APT is
ordered to:

(a) accept the said amount of P2,030,000,000.00 less bid


deposit and interests from petitioner;

(b) execute a Stock Purchase Agreement with petitioner;

(c) cause the issuance in favor of petitioner of the certificates


of stocks representing 87.6% of PHILSECO's total capitalization;

(d) return to private respondent PHGI the amount of Two Billion


One Hundred Thirty-One Million Five Hundred Thousand Pesos
(P2,131,500,000.00); and

(e) cause the cancellation of the stock certificates issued to


PHI.

SO ORDERED.

In separate Motions for Reconsideration, respondents submit[ted]


three basic issues for x x x resolution: (1) Whether PHILSECO is a public
utility; (2) Whether under the 1977 JVA, KAWASAKI can exercise its
right of first refusal only up to 40% of the total capitalization of
PHILSECO; and (3) Whether the right to top granted to KAWASAKI
violates the principles of competitive bidding.3 (citations omitted)

In a Resolution dated September 24, 2003, this Court ruled in favor of


the respondents. On the first issue, we held that Philippine Shipyard
and Engineering Corporation (PHILSECO) is not a public utility, as by
nature, a shipyard is not a public utility4 and that no law declares a
shipyard to be a public utility.5 On the second issue, we found
nothing in the 1977 Joint Venture Agreement (JVA) which prevents
Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) from
acquiring more than 40% of PHILSECO’s total capitalization.6 On the
final issue, we held that the right to top granted to KAWASAKI in
exchange for its right of first refusal did not violate the principles of
competitive bidding.7

On October 20, 2003, the petitioner filed a Motion for


Reconsideration8 and a Motion to Elevate This Case to the Court En
Banc.9 Public respondents Committee on Privatization (COP) and

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Asset Privatization Trust (APT), and private respondent Philyards
Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit
Holdings, Inc.’s (JG Summit’s) Motion for Reconsideration and Motion
to Elevate This Case to the Court En Banc on January 29, 2004 and
February 3, 2004, respectively.

II. Issues

Based on the foregoing, the relevant issues to resolve to end this


litigation are the following:

1. Whether there are sufficient bases to elevate the case at bar


to the Court en banc.

2. Whether the motion for reconsideration raises any new


matter or cogent reason to warrant a reconsideration of this
Court’s Resolution of September 24, 2003.

Motion to Elevate this Case to the

Court En Banc

The petitioner prays for the elevation of the case to the Court en
banc on the following grounds:

1. The main issue of the propriety of the bidding process


involved in the present case has been confused with the policy
issue of the supposed fate of the shipping industry which has
never been an issue that is determinative of this case.10

2. The present case may be considered under the Supreme


Court Resolution dated February 23, 1984 which included
among en banc cases those involving a novel question of law
and those where a doctrine or principle laid down by the Court
en banc or in division may be modified or reversed.11

3. There was clear executive interference in the judicial


functions of the Court when the Honorable Jose Isidro
Camacho, Secretary of Finance, forwarded to Chief Justice
Davide, a memorandum dated November 5, 2001, attaching a
copy of the Foreign Chambers Report dated October 17, 2001,
which matter was placed in the agenda of the Court and
noted by it in a formal resolution dated November 28, 2001. 12

Opposing J.G. Summit’s motion to elevate the case en banc,


PHILYARDS points out the petitioner’s inconsistency in previously
opposing PHILYARDS’ Motion to Refer the Case to the Court En Banc.
PHILYARDS contends that J.G. Summit should now be estopped from
asking that the case be referred to the Court en banc. PHILYARDS
further contends that the Supreme Court en banc is not an
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appellate court to which decisions or resolutions of its divisions may
be appealed citing Supreme Court Circular No. 2-89 dated February
7, 1989.13 PHILYARDS also alleges that there is no novel question of
law involved in the present case as the assailed Resolution was
based on well-settled jurisprudence. Likewise, PHILYARDS stresses that
the Resolution was merely an outcome of the motions for
reconsideration filed by it and the COP and APT and is "consistent
with the inherent power of courts to ‘amend and control its process
and orders so as to make them conformable to law and justice.’
(Rule 135, sec. 5)"14 Private respondent belittles the petitioner’s
allegations regarding the change in ponente and the alleged
executive interference as shown by former Secretary of Finance Jose
Isidro Camacho’s memorandum dated November 5, 2001 arguing
that these do not justify a referral of the present case to the Court en
banc.

In insisting that its Motion to Elevate This Case to the Court En Banc
should be granted, J.G. Summit further argued that: its Opposition to
the Office of the Solicitor General’s Motion to Refer is different from
its own Motion to Elevate; different grounds are invoked by the two
motions; there was unwarranted "executive interference"; and the
change in ponente is merely noted in asserting that this case should
be decided by the Court en banc.15

We find no merit in petitioner’s contention that the propriety of the


bidding process involved in the present case has been confused
with the policy issue of the fate of the shipping industry which,
petitioner maintains, has never been an issue that is determinative of
this case. The Court’s Resolution of September 24, 2003 reveals a
clear and definitive ruling on the propriety of the bidding process. In
discussing whether the right to top granted to KAWASAKI in
exchange for its right of first refusal violates the principles of
competitive bidding, we made an exhaustive discourse on the rules
and principles of public bidding and whether they were complied
with in the case at bar.16 This Court categorically ruled on the
petitioner’s argument that PHILSECO, as a shipyard, is a public utility
which should maintain a 60%-40% Filipino-foreign equity ratio, as it
was a pivotal issue. In doing so, we recognized the impact of our
ruling on the shipbuilding industry which was beyond avoidance.17

We reject petitioner’s argument that the present case may be


considered under the Supreme Court Resolution dated February 23,
1984 which included among en banc cases those involving a novel
question of law and those where a doctrine or principle laid down
by the court en banc or in division may be modified or reversed. The
case was resolved based on basic principles of the right of first
refusal in commercial law and estoppel in civil law. Contractual
obligations arising from rights of first refusal are not new in this

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jurisdiction and have been recognized in numerous cases.18 Estoppel
is too known a civil law concept to require an elongated discussion.
Fundamental principles on public bidding were likewise used to
resolve the issues raised by the petitioner. To be sure, petitioner leans
on the right to top in a public bidding in arguing that the case at bar
involves a novel issue. We are not swayed. The right to top was
merely a condition or a reservation made in the bidding rules which
was fully disclosed to all bidding parties. In Bureau Veritas,
represented by Theodor H. Hunermann v. Office of the President, et
al., 19 we dealt with this conditionality, viz:

x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v.


Aytona, et al., (L-18751, 28 April 1962, 4 SCRA 1245), that in an
"invitation to bid, there is a condition imposed upon the bidders to
the effect that the bidding shall be subject to the right of the
government to reject any and all bids subject to its discretion. In the
case at bar, the government has made its choice and unless an
unfairness or injustice is shown, the losing bidders have no cause to
complain nor right to dispute that choice. This is a well-settled
doctrine in this jurisdiction and elsewhere."

The discretion to accept or reject a bid and award contracts is


vested in the Government agencies entrusted with that function. The
discretion given to the authorities on this matter is of such wide
latitude that the Courts will not interfere therewith, unless it is
apparent that it is used as a shield to a fraudulent award (Jalandoni
v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of this discretion is a
policy decision that necessitates prior inquiry, investigation,
comparison, evaluation, and deliberation. This task can best be
discharged by the Government agencies concerned, not by the
Courts. The role of the Courts is to ascertain whether a branch or
instrumentality of the Government has transgressed its constitutional
boundaries. But the Courts will not interfere with executive or
legislative discretion exercised within those boundaries. Otherwise, it
strays into the realm of policy decision-making.

It is only upon a clear showing of grave abuse of discretion that the


Courts will set aside the award of a contract made by a government
entity. Grave abuse of discretion implies a capricious, arbitrary and
whimsical exercise of power (Filinvest Credit Corp. v. Intermediate
Appellate Court, No. 65935, 30 September 1988, 166 SCRA 155). The
abuse of discretion must be so patent and gross as to amount to an
evasion of positive duty or to a virtual refusal to perform a duty
enjoined by law, as to act at all in contemplation of law, where the
power is exercised in an arbitrary and despotic manner by reason of
passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-
40867, 26 July 1988, 163 SCRA 489).

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The facts in this case do not indicate any such grave abuse of
discretion on the part of public respondents when they awarded the
CISS contract to Respondent SGS. In the "Invitation to Prequalify and
Bid" (Annex "C," supra), the CISS Committee made an express
reservation of the right of the Government to "reject any or all bids or
any part thereof or waive any defects contained thereon and
accept an offer most advantageous to the Government." It is a well-
settled rule that where such reservation is made in an Invitation to
Bid, the highest or lowest bidder, as the case may be, is not entitled
to an award as a matter of right (C & C Commercial Corp. v. Menor,
L-28360, 27 January 1983, 120 SCRA 112). Even the lowest Bid or any
Bid may be rejected or, in the exercise of sound discretion, the
award may be made to another than the lowest bidder (A.C.
Esguerra & Sons v. Aytona, supra, citing 43 Am. Jur., 788). (emphases
supplied)1awphi1.nét

Like the condition in the Bureau Veritas case, the right to top was a
condition imposed by the government in the bidding rules which
was made known to all parties. It was a condition imposed on all
bidders equally, based on the APT’s exercise of its discretion in
deciding on how best to privatize the government’s shares in
PHILSECO. It was not a whimsical or arbitrary condition plucked from
the ether and inserted in the bidding rules but a condition which the
APT approved as the best way the government could comply with its
contractual obligations to KAWASAKI under the JVA and its
mandate of getting the most advantageous deal for the
government. The right to top had its history in the mutual right of first
refusal in the JVA and was reached by agreement of the
government and KAWASAKI.

Further, there is no "executive interference" in the functions of this


Court by the mere filing of a memorandum by Secretary of Finance
Jose Isidro Camacho. The memorandum was merely "noted" to
acknowledge its filing. It had no further legal significance. Notably
too, the assailed Resolution dated September 24, 2003 was decided
unanimously by the Special First Division in favor of the respondents.

Again, we emphasize that a decision or resolution of a Division is that


of the Supreme Court20 and the Court en banc is not an appellate
court to which decisions or resolutions of a Division may be
appealed.21

For all the foregoing reasons, we find no basis to elevate this case to
the Court en banc.

Motion for Reconsideration

Three principal arguments were raised in the petitioner’s Motion for


Reconsideration. First, that a fair resolution of the case should be
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based on contract law, not on policy considerations; the contracts
do not authorize the right to top to be derived from the right of first
refusal.22 Second, that neither the right of first refusal nor the right to
top can be legally exercised by the consortium which is not the
proper party granted such right under either the JVA or the Asset
Specific Bidding Rules (ASBR).23 Third, that the maintenance of the
60%-40% relationship between the National Investment and
Development Corporation (NIDC) and KAWASAKI arises from
contract and from the Constitution because PHILSECO is a
landholding corporation and need not be a public utility to be
bound by the 60%-40% constitutional limitation.24

On the other hand, private respondent PHILYARDS asserts that J.G.


Summit has not been able to show compelling reasons to warrant a
reconsideration of the Decision of the Court.25 PHILYARDS denies that
the Decision is based mainly on policy considerations and points out
that it is premised on principles governing obligations and contracts
and corporate law such as the rule requiring respect for contractual
stipulations, upholding rights of first refusal, and recognizing the
assignable nature of contracts rights.26 Also, the ruling that shipyards
are not public utilities relies on established case law and
fundamental rules of statutory construction. PHILYARDS stresses that
KAWASAKI’s right of first refusal or even the right to top is not limited
to the 40% equity of the latter.27 On the landholding issue raised by
J.G. Summit, PHILYARDS emphasizes that this is a non-issue and even
involves a question of fact. Even assuming that this Court can take
cognizance of such question of fact even without the benefit of a
trial, PHILYARDS opines that landholding by PHILSECO at the time of
the bidding is irrelevant because what is essential is that ultimately a
qualified entity would eventually hold PHILSECO’s real estate
properties.28 Further, given the assignable nature of the right of first
refusal, any applicable nationality restrictions, including landholding
limitations, would not affect the right of first refusal itself, but only the
manner of its exercise.29 Also, PHILYARDS argues that if this Court
takes cognizance of J.G. Summit’s allegations of fact regarding
PHILSECO’s landholding, it must also recognize PHILYARDS’ assertions
that PHILSECO’s landholdings were sold to another corporation.30 As
regards the right of first refusal, private respondent explains that
KAWASAKI’s reduced shareholdings (from 40% to 2.59%) did not
translate to a deprivation or loss of its contractually granted right of
first refusal.31 Also, the bidding was valid because PHILYARDS
exercised the right to top and it was of no moment that losing
bidders later joined PHILYARDS in raising the purchase price.32

In cadence with the private respondent PHILYARDS, public


respondents COP and APT contend:

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1. The conversion of the right of first refusal into a right to top by
5% does not violate any provision in the JVA between NIDC
and KAWASAKI.

2. PHILSECO is not a public utility and therefore not governed


by the constitutional restriction on foreign ownership.

3. The petitioner is legally estopped from assailing the validity of


the proceedings of the public bidding as it voluntarily
submitted itself to the terms of the ASBR which included the
provision on the right to top.

4. The right to top was exercised by PHILYARDS as the nominee


of KAWASAKI and the fact that PHILYARDS formed a consortium
to raise the required amount to exercise the right to top the
highest bid by 5% does not violate the JVA or the ASBR.

5. The 60%-40% Filipino-foreign constitutional requirement for the


acquisition of lands does not apply to PHILSECO because as
admitted by petitioner itself, PHILSECO no longer owns real
property.

6. Petitioner’s motion to elevate the case to the Court en banc


is baseless and would only delay the termination of this case.33

In a Consolidated Comment dated March 8, 2004, J.G. Summit


countered the arguments of the public and private respondents in
this wise:

1. The award by the APT of 87.67% shares of PHILSECO to


PHILYARDS with losing bidders through the exercise of a right to
top, which is contrary to law and the constitution is null and
void for being violative of substantive due process and the
abuse of right provision in the Civil Code.

a. The bidders[’] right to top was actually exercised by


losing bidders.

b. The right to top or the right of first refusal cannot co-


exist with a genuine competitive bidding.

c. The benefits derived from the right to top were


unwarranted.

2. The landholding issue has been a legitimate issue since the


start of this case but is shamelessly ignored by the respondents.

a. The landholding issue is not a non-issue.

b. The landholding issue does not pose questions of fact.

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