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PNB vs. ANDRADA ELECTRIC & ENGR. CO.
FACTS
- In October 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
- 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. 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
- In August 1975, PNB acquired the assets of PASUMIL that were
earlier foreclosed by DBP under LOI No. 311; while PNB organized
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
- ANDRADA demands payment of the obligation from PNB and
NASUDECO inasmuch as both entities owned and possessed the
assets of PASUMIL
- RTC ruled in favor of Andrada and held PND, PASUMIL and
NASUDECO jointly and severally liable, and affirmed by CA.
- Petitioners posit that they should not be held liable for the corporate
debts of PASUMIL, because their takeover of the latters foreclosed
assets did not make them assignees.
- Respondent asserts that petitioners and PASUMIL should be treated
as one entity and, as such, jointly and severally held liable for
PASUMILs unpaid obligation.
ISSUE: W/N PNB may be held liable for the unpaid debts of PASUMIL to
respondent
HELD
No. 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.
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
plaintiffs 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 petitioners
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, respondent was not defrauded or injured when petitioners acquired
the assets of PASUMIL.
DBP foreclosed the mortgage executed by PASUMIL and acquired the assets
as the highest bidder at the public auction conducted. The bank was justified
in foreclosing the mortgage, because the PASUMIL account had incurred

arrearages of more than 20 percent of the total outstanding obligation. Thus,
DBP had not only a right, but also a duty under the law to foreclose the
subject properties.
Pursuant to LOI No. 189-A as amended by LOI No. 311, PNB acquired
PASUMILs 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.
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL
assets pursuant to Section 6 of Act No. 3135. These assets were later
conveyed to PNB for a consideration, the terms of which were embodied in
the Redemption Agreement. PNB, as successor-in-interest, stepped into the
shoes of DBP as PASUMILs creditor. By way of a Deed of Assignment, PNB
then transferred to NASUDECO all its rights under the Redemption
Agreement.
ESTELITA
ESTELITA BURGOS LIPAT vs PACIFIC BANKING CORP.
FACTS
- Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat,
owned Belas Export Trading (BET), a single proprietorship engaged in
the manufacture of garments for domestic and foreign consumption,
as well as 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 1978, Estelita executed an SPA appointing Teresita as her
attorney-in-fact to obtain loans and other credit accommodations
from respondent Pacific Banking Corporation (Pacific Bank).
- Teresita was able to secure from Pacific Bank a loan of P583,854.00
for business operations which was secured by a Real Estate
Mortgage over their property located in QC.
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- The property was likewise made to secure other additional or new
loans, discounting lines, overdrafts and credit accommodations.
- In September 1979, BET was incorporated into a family corporation
named Belas Export Corporation (BEC);
- Eventually, the prior and subsequent loans were restructured in the
name of BEC with the corresponding promissory notes duly executed
by Teresita on behalf of the corporation.
- Trust receipt and export bills were also executed for additional
finances. All 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.
- Consequently, the real estate mortgage was foreclosed and the
mortgaged property was sold at public auction.
- Petitioners filed before the 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 (highest bidder).
- 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 corporations sole
obligation, it having a personality distinct and separate from spouses
Lipat.
- RTC pierced the veil of corporate fiction and held that Belas 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.
- CA dismissed the appeal
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ISSUE: W/N DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION
APPLIES IN THIS CASE.
Yes. 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 piercing 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. 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.
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 board of directors of BEC was composed of the Burgos and Lipat
family members;
- Estelita had full control over the activities of and decided business
matters of the corporation;
- Estelita Lipat had benefited from the loans secured from Pacific
Bank to finance her business abroad.
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 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 secured under the name of BEC on the pretext that it was
signed for the benefit and under the name of BET.

It is noted that:
- Lipat spouses are the owners and majority shareholders of BET and
BEC, respectively;
- Both firms were managed by their daughter, Teresita;
- Both firms were engaged in the garment business, supplying
products to Mystical Fashion, a U.S. firm established by Estelita
Lipat;
- Both firms held office in the same building owned by the Lipats;
- BEC is a family corporation with the Lipats as its majority
stockholders;
- The business operations of the BEC were so merged with those of
Mrs. Lipat such that they were practically indistinguishable;
- The corporate funds were held by Estelita Lipat and the corporation
itself had no visible assets;