Pacific Rehouse Corp. v.

CA

Summary: Judgment was rendered against EIB Securities. This case reached the SC which ruled
in favor of the petitioners, for the return of the DMCI shares of stock to them. The writ of execution
went unsatisfied, so they filed an alias writ, which was sought to be enforced against Export Bank,
the alleged parent corporation of EIB. The SC did not allow this, saying the court did not acquire
jurisdiction over Export Bank, and that the alter ego doctrine did not apply.

Doctrine: there must be a perpetuation of fraud or at least a fraudulent or illegal purpose behind
the control to justify piercing the veil of corporate fiction.

EIB Securities sold 32,180,000 shares of DMCI belonging to respondents. The lower court
rendered judgment, ordering EIB to return the shares to the respondents. This ruling reached the
SC and attained finality. Writ of execution issued, but was unsatisfiied.

Respondents then filed for issuance of an alias writ to hold Export and Industry Bank liable
because EIB Securities is a wholly-owned controlled and dominated subsidiary of Export snd
Industry Bank, and is thus a mere alter ego and business conduit.

EIB Securities opposed, saying it has a separate corporate personality, distinct from Export Bank.

RTC ruled that E-securities is a mere business conduit of Export Bank and pierced the veil of
corporate fiction.

Respondent questioned this, saying it was not impleaded as a party to the case. This was denied,
and directed garnishment of P1.4B, the total amount of the 32.18M DMCI shares. RTC said that
since they are the same entity, service of summons upon E-Securities bestowed jurisdiction over
the parent and subsidiary.

CA issued 60-day TRO enjoining the execution of the RTC orders granting ther alias writ. Then
they issued writ of preliminary injunction. Then they ruled in the merits, saying that the alter ego
theory cannot be sustained because ownership by a parent corporation of a subsidiary is not
enough justification to pierce the veil. Proof must be shown, apart from mere ownership, that
Export Bank misused the corporate fiction of E-Securities.
Mere interlocking of directors not enough
Export Bank does not have complete control over business policies and affairs
They went to the SC.

Issue: W/N CA erred in ruling that alter ego doctrine is inapplicable – NO. CA is correct.

Export Bank argues that it was never impleaded in the earlier case between E-Securities and
Pacific Rehouse.

However, the SC held that in the case of Kukan International v. Reyes, compliance with the
recognized modes of acquiring jurisdiction cannot be dispensed with even in piercing the veil of
corporate fiction:
Piercing the veil is applied only to determine liability. It is not available to confer jurisdiction it has
not acquired over a party not impleaded in the case.
In other words, a corporation not impleaded in a suit cannot be subject to the court’s process of
piercing the veil of its corporate fiction.
Court must first acquire jurisdiction over the parties before piercing its corporate veil; otherwise,
it cannot pierce because such action offends the corporation’s right to due process. Jurisdiction
is acquire by service of summons. Without summons or voluntary submission, any judgment over
such person is null and void.

In this case, Export Bank was not served with summons, nor voluntarily appeared before the
court.
Export Bank has consistently disputed RTC jurisdiction by filing of Omnibus Motion by way of
special appearance
It was not pleaded as a party
It was never served with summons
It did not voluntarily appear before RTC

Alter ego doctrine is not applicable

Where one corporation is organized and controlled, and its affairs conducted so that it is in fact a
mere instrumentality of the other, the fiction of the instrumentality may be disregarded.
Stock control not enough. Must be such domination of finances, policies, and practices, that the
controlled corporation has no separate mind, will or existence of its own. Control must be
exercised at the time the acts complained of took place. Three pronged test
Complete domination (above mentioned) Control must have been used to commit fraud or wrong,
to perpetuate violation of a statutory or other positive legal duty, or dishonest and unjust act in
contravention of plaintiff’s legal right The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of Absence of any one of these prevents
piercing of the corporate veil in applying the alter ego doctrine.
The RTC said alter ego because of the ff:
EIB Securities was only reactivated in 2002-2003 to serve as the securities brokerage arm of said
parent corporation bank, its capital was supplied by Export Bank because EIB was cash strapped
Offices located in the same building.
They share key directors and corporate officers. It was admitted in the Bank’s financial statements
that EIB is a controlled subsidiary. Same lawyers Control was prevailing during the time the acts
complained of happened. However, these were not pleaded properly in accordance with ROC,
and were merely raised in the Motion for Issuance of Alias writ.
Nonetheless, there must be a perpetuation of fraud or at least a fraudulent or illegal purpose
behind the control to justify piercing the veil. In this case, there is none.
The 32.8 M shares were originally bought at 0.38 per share, and were sold at 0.24. The proceeds
were used to buy back 61M KPP shares. Unexpectedly, the total amount of the DMCI shares
ballooned to 1.4B, which did not inure to E-Securities benefit nor Export Bank.
Ownership by single stockholder of all or substantially all stock is not sufficient, in the absence of
fraud and other public policy considerations.

Lanuza Jr. vs BF Corporation G.R. No. 174938 October 1, 2014

Facts: In 1993, BF Corporation filed a collection complaint with the Regional Trial Court against
Shangri-La and the members of its board of directors: Alfredo C. Ramos, Rufo B.Colayco, Antonio
O. Olbes, Gerardo Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos. BF Corporation
alleged in its complaint that on December 11, 1989 and May 30, 1991, it entered into agreements
with Shangri-La wherein it undertook to construct for Shangri-La a mall and a multilevel parking
structure along EDSA. Shangri-La had been consistent in paying BF Corporation in accordance
with its progress billing statements. However, by October 1991, Shangri-La started defaulting in
payment. BF Corporation alleged that Shangri-La induced BF Corporation to continue with the
construction of the buildings using its own funds and credit despite Shangri-La’s default.
According to BF Corporation, Shangri-La misrepresented that it had funds to pay for its obligations
with BF Corporation, and the delay in payment was simply a matter of delayed processing of BF
Corporation’s progress billing statements. BF Corporation eventually completed the construction
of the buildings. Shangri-La allegedly took possession of the buildings while still owing BF
Corporation an outstanding balance. BF Corporation alleged that despite repeated demands,
Shangri-La refused to pay the balance owed to it.It also alleged that the Shangri-La’s directors
were in bad faith in directing Shangri-La’s affairs. Therefore, they should be held jointly and
severally liable with Shangri-La for its obligations as well as for the damages that BF Corporation
incurred as a result of Shangri-La’s default. On August 3, 1993, Shangri-La, Alfredo C. Ramos,
Rufo B. Colayco, Maximo G. Licauco III, and Benjamin C. Ramos filed a motion to suspend the
proceedings in view of BF Corporation’s failure to submit its dispute to arbitration, in accordance
with the arbitration clause provided in its contract. Petitioners filed their comment on Shangri-La’s
and BF Corporation’s motions, praying that they be excluded from the arbitration proceedings for
being non-parties to Shangri-La’s and BF Corporation’s agreement.

Issue: Whether or not petitioners as directors of Shangri-La is personally liable for the contractual
obligations entered into by the corporation.

Held: No. Because a corporation’s existence is only by fiction of law, it can only exercise its rights
and powers through its directors, officers, or agents, who are all natural persons. A corporation
cannot sue or enter into contracts without them.

A consequence of a corporation’s separate personality is that consent by a corporation through

its representatives is not consent of the representative, personally. Its obligations, incurred
through official acts of its representatives, are its own. A stockholder, director, or representative
does not become a party to a contract just because a corporation executed a contract through
that stockholder, director or representative.

Hence, a corporation’s representatives are generally not bound by the terms of the contract
executed by the corporation. They are not personally liable for obligations and liabilities incurred
on or in behalf of the corporation.

A submission to arbitration is a contract. As such, the Agreement, containing the stipulation on

arbitration, binds the parties thereto, as well as their assigns and heirs.
When there are allegations of bad faith or malice against corporate directors or representatives,
it becomes the duty of courts or tribunals to determine if these persons and the corporation should
be treated as one. Without a trial, courts and tribunals have no basis for determining whether the
veil of corporate fiction should be pierced. Courts or tribunals do not have such prior knowledge.
Thus, the courts or tribunals must first determine whether circumstances exist towarrant the courts
or tribunals to disregard the distinction between the corporation and the persons representing it.
The determination of these circumstances must be made by one tribunal or court in a proceeding
participated in by all parties involved, including current representatives of the corporation, and
those persons whose personalities are impliedly the sameas the corporation. This is because
when the court or tribunal finds that circumstances exist warranting the piercing of the corporate
veil, the corporate representatives are treated as the corporation itself and should be held liable
for corporate acts. The corporation’s distinct personality is disregarded, and the corporation is
seen as a mere aggregation of persons undertaking a business under the collective name of the
corporation.

A corporation is an artificial entity created by fiction of law. This means that while it is not a person,
naturally, the law gives it a distinct personality and treats it as such. A corporation, in the legal
sense, is an individual with a personality that is distinct and separate from other persons including
its stockholders, officers, directors, representatives, and other juridical entities. The law vests in
corporations rights,powers, and attributes as if they were natural persons with physical existence
and capabilities to act on their own. For instance, they have the power to sue and enter into
transactions or contracts. Section 36 of the Corporation Code enumerates some of a corporation’s
powers, thus:

Section 36. Corporate powers and capacity.– Every corporation incorporated under this Code has
the power and capacity: 1. To sue and be sued in its corporate name; 2. Of succession by its
corporate name for the period of time stated in the articles of incorporation and the certificate
ofincorporation; 3. To adopt and use a corporate seal; 4. To amend its articles of incorporation in
accordance with the provisions of this Code; 5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in accordance with this Code; 6. In case of stock
corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the corporation if it be a non-stock
corporation; 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage
and otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution; 8. To enter
into merger or consolidation with other corporations as provided in this Code; 9. To make
reasonable donations, including those for the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for purposes of partisan political activity; 10.
To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers
and employees; and 11. To exercise such other powers as may be essential or necessary to carry
out its purpose or purposes as stated in its articles of incorporation.

Francisco Motors Corporation v. CA and Sps. Manuel (G.R. No. 100812)

Facts:
Petitioner Francisco Motors Corp filed a complaint to recover from respondent spouses Manuel
the unpaid balance of the jeepney bought by the latter from them. As their answer, respondent
spouses interposed a counterclaim for unpaid legal services by Gregorio Manuel which was not
paid by petitioner corporation’s directors and officers. Respondent Manuel alleges that he
represented members of the Francisco family who were directors and officers of herein petitioner
corporation in an intestate estate proceeding but even after its termination, his services were not
paid. The trial court ruled in favor of petitioner but also allowed respondent spouses’ counterclaim.
CA affirmed.
Issue:
Whether or not petitioner corporation may be held liable for the liability incurred by its directors
and officers in their personal capacity.

Ruling: NO.

In our view, however, given the facts and circumstances of this case, the doctrine of piercing the
corporate veil has no relevant application here. Respondent court erred in permitting the trial
court’s resort to this doctrine.
In the case at bar, instead of holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation which is being
ordered to answer for the personal liability of certain individual directors, officers and incorporators
concerned. Hence, it appears to us that the doctrine has been turned upside down because of its
erroneous invocation. Note that according to private respondent Gregorio Manuel his services
were solicited as counsel for members of the Francisco family to represent them in the intestate
proceedings over Benita Trinidad’s estate. These estate proceedings did not involve any business
of petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefore by piercing its corporate veil.

GOCHAN et al vs Young (Celicia Gochan Uy, Mike Uy, et al)

Nature: Petition for Review on Certiorari assailing the Decision of the Court of Appeals

FACTS:
Felix Gochan & Sons Realty Corporation (Gochan Realty) is registered in SEC with Felix Gochan
Sr. & 5 others as incorporators.

The daughter of Felix Gochan Sr. (& the mother of respondents), Alice, inherited 50 shares of
stock in Gochan Realty. When Alice died, she left the 50 shares to her husband John Young, Sr.

The RTC adjudicated 6/14 of these shares to the children of Alice.

Having earned dividends, these stocks numbered 179.

John Young Sr. requested Gochan Realty to partition the shares of his late wife by cancelling the
stock certificates in his name and issuing new stock certificates in the names of the children.

Petitioner Gochan Realty refused, citing as reason, the right of first refusal granted to the
remaining stockholders by the Articles of Incorporation.

John Young, Sr. died and left the shares to the respondents.

*SEC: Respondents Cecilia Gochan Uy and Miguel Uy filed a complaint for issuance of shares of
stock to the rightful owners, nullification of shares of stock, reconveyance of property impressed
with trust, accounting, removal of officers and directors and damages against Petitioner Gochan
Realty.

Petitioners Gochan et al filed a motion to dismiss the complaint alleging that: (1) the SEC has no
jurisdiction over the nature of the action; (2) the respondents were not the real parties-in-interest
and had no capacity to sue; and (3) respondents’ causes of action were barred by the Statute of
Limitations.

SEC Hearing Officer granted the motion to dismiss

According to the SEC Order:
(1) It has been shown that the complainant heirs of Alice and John, suing in THEIR OWN RIGHT
to the stocks, had never been stockholders of record of Gochan Realty to confer them with the
legal capacity to bring and maintain their action. Even though the heirs succeeded the estate,
they did not become automatically the stockholders of the corporation. Since they are not yet
stockholders, the case cannot be considered as an intra-corporate controversy. (outside the
jurisdiction of SEC).

(2) Due to the alleged wrongful acts of the corporation and its directors constitute fraudulent
devices or schemes which may be detrimental to the stockholders, the complainants brought this
action as a DERIVATIVE SUIT on their behalf and on behalf of Gochan Realty.

‘Section 5. Derivative Suit - No action shall be brought by stockholder in the right of a corporation
unless the complainant was a stockholder at the time the questioned transaction occurred as well
as at the time the action was filed and remains a stockholder during the pendency of the action.
x x x.’

According to jurisprudence, a stockholder bringing a derivative action must have been so (a

stockholder) at the time the transaction or act complained of took place. The failure to comply
with the jurisdictional requirement on derivative action must result in the dismissal of the instant
complaint.
-------------end of SEC order---------------

Respondents filed a motion for a reconsideration but it was denied for being pro-forma.

Respondents appealed to the SEC en banc, contending that the SEC has jurisdiction.

Petitioners contend that the appeal was 97 days late and beyond the 30-day period for appeals.

The SEC en banc ruled for the petitioners and holding that the respondents’ motion for
reconsideration did not interrupt the 30-day period for appeal because said motion was pro-forma.

*CA: Respondents filed a Petition for Review with the Court of Appeals.

CA ruled that the SEC had no jurisdiction as far as the heirs of Alice Gochan were concerned,
because they were not yet stockholders. BUT it upheld the capacity of Respondents Cecilia
Gochan Uy and Miguel Uy. It also upheld that the intestate Estate of John Young Sr. was an
indispensable party.

Moreover, it declared that respondents' Motion for Reconsideration before the SEC was not pro
forma; thus, its filing tolled the appeal period.

1. Sub-Issue: W/N the Spouses Uy have the personality to file an action before the SEC against
Gochan Realty Corporation. – YES!

Held: Petitioners argue that Spouses Cecilia and Miguel had no capacity to bring the suit since
they were no longer stockholders at the time. Allegedly, the corporation had already purchased
their stocks. Cecilia averred that the purchase contract of her stocks was null and void which the
court admitted. Thus, Cecilia remains to be a stockholder of the corporation. Although she was
no longer registered as a stockholder in the corporate records as of the filing of the case before
the SEC, the admitted allegations in the Complaint made her still a bona fide stockholder of
Gochan Realty, as between said parties.

However, petitioners contend that the statute of limitations already bars the spouses' action being
voidable. However, the sale of the stock was not voidable, but was void ab initio. The contention
that the action has prescribed cannot be sustained. Prescription cannot be invoked as a ground
if the contract is alleged to be void ab initio.

2. Main Issue: W/N the Spouses Uy could bring a derivative suit in the name of Gochan Realty to
redress wrongs allegedly committed against it for which the directors refused to sue – YES!
Held: Petitioners contend that the action filed by the Spouses was not a derivative suit, because
the spouses and not the corporation were the injured parties. The Court is not convinced!

The Complaint shows allegations of injury to the corporation itself:

(1) There was conspiracy and fraud in depressing the value of the stock of the Corporation and
to induce the minority stockholders to sell their shares of stock for an inadequate consideration.
Petitioner Esteban Gochan et al unlawfully and fraudulently appropriated for themselves the funds
of the Corporation by drawing excessive amounts in the form of salaries and cash advances and
charging their purely personal expenses to the Corporation.
(2) The payment of P1,200,000 by the Corporation to Respondent Cecilia for her shares of stock
constituted an unlawful and partial liquidation and distribution of assets to a stockholder, resulting
in the impairment of the capital of the Corporation and prevented it from otherwise utilizing said
amount for its regular and lawful business, to the damage and prejudice of the Corporation, its
creditors, and of complainants as minority stockholders

As early as 1911, this Court has recognized the right of a single stockholder to file derivative suits.
In its words:

Where corporate directors have committed a breach of trust either by their frauds, ultra vires acts,
or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a
single stockholder may institute that suit, suing on behalf of himself and other stockholders and
for the benefit of the corporation, to bring about a redress of the wrong done directly to the
corporation and indirectly to the stockholders.

The allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation.
The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on
behalf of the corporation.

Doctrine: The fact that certain persons are not registered as stockholders in the books of the
corporation will not bar them from filing a derivative suit, if it is evident from the allegations in the
complaint that they are bona fide stockholders

3. Sub-Issue W/N the intestate estate of John Young Sr. is an indispensable party in the SEC
case considering that the individual heirs' shares are still in the decedent stockholder's name.

Held: Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable
party, as it not benefited or injured by any court judgment.

It would be useful to point out that one of the causes of action stated in the Complaint filed with
the SEC refers to the registration, in the name of the other heirs of Alice Gochan Young, of 6/14th
of the shares still registered under the name of John D. Young Sr. Since all the shares that
belonged to Alice are still in his name, no final determination can be had without his estate being
impleaded in the suit. His estate is thus an indispensable party with respect to dealing with the
registration of the shares in the names of the heirs of Alice.
4. Sub-Issue Whether or not the cancellation of notice of lis pendens was justified considering
that the suit did not involve real properties owned by Gochan Realty. -- NO
Held: The Court found no reason to disturb the ruling of the Court of Appeals.
There were allegations of breach of trust and confidence and usurpation of business opportunities
in conflict with petitioners' fiduciary duties to the corporation, resulting in damage to the
Corporation. Under these causes of action, respondents are asking for the delivery to the
Corporation of possession of the parcels of land and their corresponding certificates of
title. Hence, the suit necessarily affects the title to or right of possession of the real property sought
to be reconveyed. The Rules of Court allows the annotation of a notice of lis pendens in actions
affecting the title or right of possession of real property. Thus, the Court of Appeals was correct
in reversing the SEC Order for the cancellation of the notice of lis pendens.
Effect of RA 8799: Intra-corporate controversies are now within the jurisdiction of courts of general
jurisdiction, no longer of the Securities and Exchange Commission.

DISPOSITION: Petition DENIED!

PNB vs. RITRATTO GROUP, INC.

Facts:

Petitioner PNB is a domestic corporation organized and existing under the Philippine law.
Respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise
are domestic corporations organized and existing under Philippine law.
May 29, 1996 – PNB International Finance Ltd. (PNB-IFL), a subsidiary company of PNB,
organized and doing business in Hongkong, extended a letter of credit in favor of the respondents
in the amount of US$300,000 secured by real estate mortgages constituted over four parcels of
land in Makati City. This credit facility was later increased successively to US$1,290,000 in
November 1996; to US$1,425,000 in February 1997; and decreased to US$1,421,316.18 in April
1998. Respondents made repayments of the loan incurred by remitting those amounts to their
loan account with PNB-IFL in Hongkong. As of April 30,1998, their outstanding obligations stood
at US$1,497,274.70.
PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the
real estate mortgages and that the properties subject thereof were to be sold at a public auction.
Respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary
injunction and/or TRO before the RTC of Makati.
Petitioner filed a motion to dismiss on the grounds of failure to state a cause of action and the
absence of any privity between the petitioner and respondents.
TC issued an order for the issuance of writ of prelim injunction. Motion to Dismiss denied.
CA dismissed. Hence, this petition.

Issue: WON PNB is privy to the loan contracts entered into by the respondent. WON PNB is an
alter ego of PNB-IFL.

HELD:
The contract is one entered into between respondent and PNB-IFL, not PNB. Respondents admit
that petitioner is a mere attorney-in-fact for the PNB IFL with full power and authority to, inter alia,
foreclose on the properties mortgaged to secure their loan obligations with PNB-IFL. Petitioner is
an agent with limited authority and specific duties under a special power of attorney incorporated
in the real estate mortgage. It is not privy to the loan contracts entered into by respondents and
PNB-IFL.
The mere fact that a corporation owns all of the stocks of another corporation, taken alone is not
sufficient to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiary’s separate existence may be respected, and the liability of the parent corporation as
well as the subsidiary will be confined to those arising in their respective business. The courts
may, in the exercise of judicial discretion, step in to prevent the abuses of separate entity privilege
and pierce the veil of corporate entity.
Doctrine of Piercing the corporate evil is an equitable doctrine developed to address situations
where the separate corporate personality of a corporation is abused or used for wrongful
purposes. It applies when the corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime, or when it is made a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely
an instrumentality, agency, conduit or adjunct of another corporation.
Test in determining the applicability of the doctrine of piercing the veil:
Control, not mere majority or complete control, but complete xdomination, not only of finances but
of policy and business practice.
Such control must have been used by the defendant to commit fraud or wrong
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 the operation.
Doctrine of piercing the veil based on alter ego or instrumentality finds no application in this case.
PNB-IFL is a wholly owned subsidiary of petitioner PNB.
There is no showing of the indicative factors that the former corporation is a mere instrumentality
of the latter.
There is no demonstration that any of the evils sought to be prevented by the doctrine of piercing
the corporate veil exists.

Umali vs Court of Appeals

189 SCRA 529 [GR No. 89561 September 13, 1990]
Facts: Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Mur Vda. de Castillo. The
Castillo family are the owners of parcel of land located in Lucena City which was given as security
for a loan from the development Bank of the Philippines (DBP) for their failure to pay the
amortization, foreclosure of the said property was about to be initiated. This problem was made
known to Santiago Rivera, who proposed to them the conversion into subdivision of the four
parcels of land adjacent to the mortgaged property to raise the necessary fund. The idea was
accepted by the Castillo family and to carry out the project, a memorandum of agreement was
executed by and between Slobec Realty and Development Inc. represented by its president
Santiago Rivera and Castillo family. In this agreement, Santiago Rivera obliged himself to pay the
Castillo family the sum of P70,000 immediately after the execution of the agreement and to pay
additional amount of P40,000 after the property has been converted into a subdivision. Rivera,
with agreement approached Mr. Modesto Cervantes, president of defendant Bormaheco and
proposed to purchase from Bormaheco two tractors model D7 and D8 subsequently a sales
agreement was executed on December 28, 1970. On January 3, 1971, Slobec, through Rivera,
executed in favor of Bormaheco a chattel mortgage over the said equipment as security for the
payment of the aforesaid balance of P180,000. As further security of the aforementioned unpaid
balance, Slobec obtained from insurance corporation of the Philippines a security bond, with
Insurance Corporation of the Philippines (ICP) as surety and Slobec as principal, in favor of
Bormaheco, as borne out of by Exhibit 8. The aforesaid surety bond was in turn secured by an
agreement of counter-guaranty with real estate mortgage executed by Rivera as President of
Slobec and Mauricia Mur Vda. de Castillo, Buenaflor Castillo Umali, Bertilla Castillo-Rada, Victoria
Castillo, Marietta Castillo and Leovina Castillo Jalbuena as mortgagors and insurance corporation
of the Philippines as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with
Bormaheco in the amount of P180,000. In giving the bond, ICP required that the Castillos
mortgage to them the properties in question, namely, four parcels of land covered by TCT in the
name of the aforementioned mortgagors, namely TCT no. 13114, 13115, 13116, and 13117 all of
the Register of Deeds of Lucena City. Meanwhile, for violation of the terms and conditions of the
counter-guaranty agreement, the properties of the Castillos were foreclosed by ICP as the highest
bidder with a bid of P285,212, a certificate of sale was issued by the provincial sheriff of Lucena
City and TCT over the subject parcels of land were issued.
Issue: Whether or not the foreclosure is proper so as to apply the doctrine of piercing the veil of
corporate entity.
Held: No. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore
exists, the legal fiction that a corporation is an entity with a juridical personality separate and
distinct from its members or stockholders may be disregarded. In such cases, the corporation will
be considered as a mere association of persons. The members or stockholders of the corporation
will be considered as the corporation, that is, liability will attach directly to the officers and
stockholders. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, on when it is made as a shield to
confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
In the case at bar, petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and
PM parts, alleging that these corporations employed fraud in causing the foreclosure and
subsequent sale of the real properties belonging to petitioners while we do not discount the
possibility of existence of fraud in the foreclosure proceeding, neither are we inclined to apply the
doctrine invoked by petitioners in granting the relief sought. It is our considered opinion that
piercing the veil of corporate entity is not the proper remedy in order that the foreclosure
proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar.
The mere fact, therefore, that the business 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.

SIAIN ENTERPRISES v. CUPERTINO

G.R. No. 170782 | June 22, 2009

This is a is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the
decision of the Court of Appeals which affirmed the decision of the Regional Trial Court
Siain Enterprises, Inc. obtained a loan of P37,000,000.00 from respondent Cupertino Realty
Corporation (Cupertino) covered by a promissory note signed by both petitioner’s and Cupertino’s
respective presidents, Cua Le Leng and Wilfredo Lua. The parties then executed an amendment
to promissory note which provided for a seventeen percent (17%) interest per annum on the
P37,000,000.00 loan. The amendment to promissory note was likewise signed by Cua Le Leng
and Wilfredo Lua on behalf of petitioner and Cupertino, respectively.
Another promissory note was signed by Cua Le Leng in favor of Cupertino for P160,000,000.00.
Cua Le Leng signed the second promissory note as maker, on behalf of petitioner, and as co-
maker, liable to Cupertino in her personal capacity.
However, on March 11, 1996, through counsel, wrote Cupertino and demanded the release of the
P160,000,000.00 loan. In complete refutation, Cupertino, likewise through counsel, responded
and denied that it had yet to release the P160,000,000.00 loan. Cupertino maintained that
petitioner had long obtained the proceeds of the aforesaid loan. With this, Cupertino instituted
extrajudicial foreclosure proceedings over the properties subject of the amended real estate
mortgage.
RTC rendered a decision dismissing petitioner’s complaint and ordering it to pay Cupertino
P100,000.00 each for actual and exemplary damages, and P500,000.00 as attorney’s fees. The
RTC recalled and set aside its previous order declaring the notarial foreclosure of the mortgaged
properties as null and void. On appeal, the CA, as previously adverted to, affirmed the RTC’s
ruling.
In this regard, the lower courts applied the doctrine of “piercing the veil of corporate fiction” to
preclude petitioner from disavowing receipt of the P160,000,000.00 and paying its obligation
under the amended real estate mortgage.

Issue: Petitioner asseverates that the lower courts erroneously applied the doctrine of “piercing
the veil of corporate fiction” when both gave credence to Cupertino’s evidence showing that
petitioner’s affiliates were the previous recipients of part of the P160,000,000.00 indebtedness of
petitioner to Cupertino. Is this valid?

HELD:

Yes. As a general rule, a corporation will be deemed a separate legal entity until sufficient reason
to the contrary appears. But the rule is not absolute. A corporation’s separate and distinct legal
personality may be disregarded and the veil of corporate fiction pierced when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In this
case, Cupertino presented overwhelming evidence that petitioner and its affiliate corporations had
received the proceeds of the P160,000,000.00 loan increase which was then made the
consideration for the Amended Real Estate Mortgage. The facts established in the case at bar
has convinced the Court of the propriety to apply the principle by virtue of which, the juridical
personalities of the various corporations involved are disregarded and the ensuing liability of the
corporation to attach directly to its responsible officers and stockholders

These are as follows:

That the checks, debit memos and the pledges of the jewelries, condominium units and trucks
were constituted not exclusively in the name of [petitioner] but also either in the name of Yuyek
Manufacturing Corporation, Siain Transport, Inc., Cua Leleng and Alberto Lim is of no moment.
Siain and Yuyek have [a] common set of [incorporators], stockholders and board of directors;
They have the same internal bookkeeper and accountant in the person of Rosemarie Ragodon;
They have the same office address at 306 Jose Rizal St., Mandaluyong City;
They have the same majority stockholder and president in the person of Cua Le Leng; and
In relation to Siain Transport, Cua Le Leng had the unlimited authority by and on herself, without
authority from the Board of Directors, to use the funds of Siain Trucking to pay the obligation
incurred by the [petitioner] corporation.
As such, [petitioner] corporation is now estopped from denying the above apparent authorities of
Cua Le Leng who holds herself to the public as possessing the power to do those acts, against
any person who dealt in good faith as in the case of Cupertino.
General Credit Corp v. Alsons Dev. and Investment Corp
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. 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 money8 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 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 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.

Concept Builders Inc. vs National Labor Relations Commission

257 SCRA 149 [G.R. No. 108734. May 29, 1996]
Facts: Petitioner Concept Builders Inc., a domestic corporation with principal office at 355 Maysan
Road, Valenzuela, Metro Manila is engaged in the construction business. Private respondents
were employed by said company as laborers, carpenters, and niggers. On November 1981,
private respondents were served with individual written notices of termination of employment by
petitioner, effective on November 30, 1981. It was stated in the individual notices that their
contracts of employment had expired and the project in which they were hired had been
completed. Public respondent found it to be the fact, however, at the time of the termination of
private respondents’ employment, the project in which they were hired had not yet been finished
and completed. Petitioner had to engage the services of the subcontractors whose workers
performed the functions of private respondents. Aggrieved, private respondents filed a complaint
for illegal dismissal, unfair labor practices and non-payment of their holiday pay, overtime pay,
and 13th month pay against petitioners. The labor arbiter rendered decision in favor of the private
respondents. When the same became final and executory, a writ of execution was issued,
however, the same was refused by the security guard on duty on the ground that the petitioners
no longer occupied the premises. A break-open order was then recommended.
Issue: Whether or not the alias writ of execution can be issued against the sister company of the
petitioners, HPPI.
Held: Yes. It is a fundamental principle of corporation law that a corporation is an entity separate
and distinct from its stockholders and from other corporations to which it may be connected. But,
this separate and distinct personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate juridical personality is used
to defeat public convenience, justify wrong, protect fraud, or defend crime, or is used as a device
to defeat labor laws, this separate personality of the corporation may be disregarded or the veil
of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation.
The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and in circumstances laid down, but certainly there are some probative factors of identity
that will justify the application of the doctrine of piercing the corporate veil, to wit:
Stock ownership by one or common ownership of both corporations.
Identity of directors and officers.
The names of keeping corporate books and records
Methods of conducting the business.
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 instances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own and is but
a conduit for its principal. It must be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control and breach of duty
must proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction as
follows:
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 on exercise of its own;
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.
The aforesaid control and breach of duty must proximately cause the injury or unjust loss
complained of.
The absence of any of these elements prevents “piercing the corporate veil” of the corporation. 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.

Lipat v. Pacific Banking Corporation (G.R. No. 142435)

Facts:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned “Bela’s Export Trading”
(BET), a single proprietorship engaged in the manufacture of garments for domestic and foreign
consumption, which was managed by their daughter Teresita B. Lipat. The spouses also owned
the “Mystical Fashions” in the United States, which sells goods imported from the Philippines
through BET, managed by Mrs. Lipat. In order to facilitate the convenient operation of BET, a
special power of attorney was executed appointing Teresita Lipat to obtain loans and other credit
accommodations from respondent Pacific Banking Corporation (Pacific Bank) and to execute
mortgage contracts on properties owned or co-owned by her as security for the obligations. By
virtue of the special power of attorney, a loan was secured for and in behalf of Mrs. Lipat and
BET, a Real Estate Mortgage was executed over their property.
BET was then incorporated into a family corporation named Bela’s Export Corporation (BEC)
engaged in the business of manufacturing and exportation of all kinds of garments and utilized
the same machineries and equipment previously used by BET. Eventually, the loan was later
restructured in the name of BEC and subsequent loans were obtained with the corresponding
promissory notes duly executed by Teresita on behalf of the corporation. BEC defaulted in
payments when it became due and demandable. Consequently, the real estate mortgage was
foreclosed and was sold at public auction to respondent Eugenio D. Trinidad as the highest bidder.
The spouses Lipat filed a complaint alleging, 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. They 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 the spouses.
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.
The Lipats timely appealed which however, was dismissed by the appellate court for lack of merit.
Hence, this petition.

Issue:
Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case.

Ruling:

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 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.
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 BET and were two of the incorporators and majority
stockholders of BEC. 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.
Incidentally, Teresita was designated as executive-vice president and general manager of both
BET and BEC, respectively. We note further that: (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; (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. 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 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.
Wherefore, the petition is denied.
 121 Phil. 276

BAUTISTA ANGELO, J.:

In a complaint for unfair labor practice filed before the Court of Industrial Relations on June 6,
1956 by a Prosecutor of the latter court, Emilio, Ariston and Rodolfo, all surnamed Cano, were
made respondents in their capacity as president and proprietor, field supervisor and manager
respectively, of Emilio Cano Enterprises, Inc.
After trial, Presiding Judge Jose S. Bautista rendered decision finding Emilio Cano and Rodolfo
Cano guilty of unfair labor practice charge, but absolved Ariston for insufficiency of evidence. As
a consequence, the two were ordered, jointly and severally, to reinstate HonorataCruz to her
former position with payment of back wages from the time of her dismissal up to her reinstatement,
together with all other rights and privileges thereunto appertaining.
Meanwhile, Emilio Cano died on November 14, 1958, and the attempt to have the case dismissed
against him having failed, the case was appealed to the court en banc, which in due course
affirmed the decision of Judge Bautista. An order of execution was issued on August 23, 1961
the dispositive part of which reads: (1) to reinstate Honorata Cruz to her former position as
ordered in the decision; and (2) to deposit with the court the amount of P7,222.58 within ten days
from receipt of the order, failing which the court will order either a levy on respondents' properties
or the filing of an action for contempt of court.
The order of execution having been directed against the properties of Emilio Cano Enterprises,
Inc. instead of those of the respondents named in the decision, said corporation filed
an ex parte motion to quash the writ on the ground that the judgment sought to be enforced was
not rendered against it which is a juridical entity separate and distinct from its officials. This motion
was denied. And having failed to have it reconsidered, the corporation interposed the present
petition for certiorari.
The issue posed before us is: Can the judgment rendered against Emilio and Rodolfo Cano in
their capacity as officials of the corporation Emilio Cano Enterprises, Inc. be made effective
against the property of the latter which was not a party to the case?
The answer must be in the affirmative. While it is an undisputed rule that a corporation has a
personality separate and distinct from its member or stockholders because of a fiction of the law,
here we should not lose sight of fact that the Emilio Cano Enterprises, Inc. is a closed family
corporation where the incorporators and directors belong to one single family. Thus, the following
are its incorporators: Emilio Cano, his wife Juliana, Rodolfo and Carlos, and his daughter-in-law
Ana D. Caño Hero is an instance where the corporation and its members can be considered as
one. And to hold such entity liable for the acts of its members is not to ignore the legal fiction but
merely to give meaning to the principle that such fiction cannot be invoked if its purpose is to use
it as a shield to further an end subversive of justice.[1] And so it has been held that while a
corporation is a legal entity existing separate and apart from the persons composing it, that
concept cannot be extended to a point beyond its reason and policy, and when invoked in support
of an end subversive of this policy it should be disregarded by the courts (12 Am. Jur., 160-161).
A factor that should not be overlooked is that Emilio and Rodolfo Cano are here indicated, not in
their private capacity, but as president and manager, respectively, of Emilio Cano Enterprises,
Inc. Having been sued officially their connection with the case must be deemed to be impressed
with the representation of the corporation. In fact, the court's order is for them to
reinstate Honorata Cruz to her former position in the corporation and incidentally pay her the
wages she had been deprived of during her separation. Verily, the order against them is in effect
against the corporation. No benefit can be attained if this case were to be remanded to the court a
quo merely in response to a technical substitution of parties for such would only cause an
unwarranted delay that would work to Honorata's prejudice. This is contrary to the spirit °f the law
which enjoins a speedy adjudication of labor cases disregarding as much as possible the
technicalities of procedure. We, therefore, find unmeritorious the relief herein prayed for.
WHEREFORE, petition is dismissed, with costs.
VILLA REY TRANSIT, INC., plaintiff-appellant, vs. EUSEBIO E. FERRER, PANGASINAN
TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION,defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-
appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant, vs. JOSE M.
VILLARAMA, third-party defendant-appellee.
Ponente: Angeles, J.

Doctrine: The doctrine that a corporation is a legal entity distinct and separate from the members
and stockholders who compose it is recognized and respected in all cases which are within reason
and the law. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement
or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which
the law covers and isolates the corporation from the members or stockholders who compose it
will be lifted to allow for its consideration merely as an aggregation of individuals.

FACTS: Previous case: Prior to 1959, Jose M. Villarama was an operator of a bus transportation,
under the business name of Villa Rey Transit, pursuant to certificates of public convenience
granted him by the Public Service Commission (PSC) in Cases 44213 and 104651, which
authorized him to operate a total of 32 units on various routes or lines from Pangasinan to Manila,
and vice-versa. On 8 January 1959, he sold the two certificates of public convenience to the
Pangasinan Transportation Company, Inc. (Pantranco), for P350,000.00 with the condition,
among others, that the seller (Villarama) "shall not for a period of 10 years from the date of this
sale, apply for any TPU service identical or competing with the buyer."

Barely 3 months thereafter, or on 6 March 1959: a corporation called Villa Rey Transit, Inc. (the
Corporation) was organized with a capital stock of P500,000.00 divided into 5,000 shares of the
par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad R. Villarama (wife
of Jose M. Villarama) was one of the incorporators, and she subscribed for P1,000.00; the balance
of P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the
subscribed capital stock, P105,000.00 was paid to the treasurer of the corporation, who was
Natividad R. Villarama. In less than a month after its registration with the Securities and Exchange
Commission (10 March 1959), the Corporation, on 7 April 1959, bought 5 certificates of public
convenience, 49 buses, tools and equipment from one Valentin Fernando, for the sum of
P249,000.00, of which P100,000.00 was paid upon the signing of the contract; P50,000.00 was
payable upon the final approval of the sale by the PSC; P49,500.00 one year after the final
approval of the sale; and the balance of P50,000.00 "shall be paid by the BUYER to the different
suppliers of the SELLER."

The very same day that the contract of sale was executed, the parties thereto immediately applied
with the PSC for its approval, with a prayer for the issuance of a provisional authority in favor of
the vendee Corporation to operate the service therein involved. On 19 May 1959, the PSC granted
the provisional permit prayed for, upon the condition that "it may be modified or revoked by the
Commission at any time, shall be subject to whatever action that may be taken on the basic
application and shall be valid only during the pendency of said application." Before the PSC could
take final action on said application for approval of sale, however, the Sheriff of Manila, on 7 July
1959, levied on 2 of the five certificates of public convenience involved therein, namely, those
issued under PSC cases 59494 and 63780, pursuant to a writ of execution issued by the Court of
First Instance of Pangasinan in Civil Case 13798, in favor of Eusebio E. Ferrer against Valentin
Fernando. The Sheriff made and entered the levy in the records of the PSC. On 16 July 1959, a
public sale was conducted by the Sheriff of the said two certificates of public convenience. Ferrer
was the highest bidder, and a certificate of sale was issued in his name. Thereafter, Ferrer sold
the two certificates of public convenience to Pantranco, and jointly submitted for approval their
corresponding contract of sale to the PSC. Pantranco therein prayed that it be authorized
provisionally to operate the service involved in the said two certificates.

The applications for approval of sale, filed before the PSC, by Fernando and the Corporation,
Case 124057, and that of Ferrer and Pantranco, Case 126278, were scheduled for a joint hearing.
In the meantime, to wit, on 22 July 1959, the PSC issued an order disposing that during the
pendency of the cases and before a final resolution on the aforesaid applications, the Pantranco
shall be the one to operate provisionally the service under the two certificates embraced in the
contract between Ferrer and Pantranco. The Corporation took issue with this particular ruling of
the PSC and elevated the matter to the Supreme Court, which decreed, after deliberation, that
until the issue on the ownership of the disputed certificates shall have been finally settled by the
proper court, the Corporation should be the one to operate the lines provisionally.

Present Case: On 4 November 1959, the Corporation filed in the Court of First Instance of Manila,
a complaint for the annulment of the sheriff's sale of the aforesaid two certificates of public
convenience (PSC Cases 59494 and 63780) in favor of Ferrer, and the subsequent sale thereof
by the latter to Pantranco, against Ferrer, Pantranco and the PSC. The Corporation prayed therein
that all the orders of the PSC relative to the parties' dispute over the said certificates be annulled.
The CFI of Manila declared the sheriff's sale of two certificates of public convenience in favor of
Ferrer and the subsequent sale thereof by the latter to Pantranco null and void; declared the
Corporation to be the lawful owner of the said certificates of public convenience; and ordered
Ferrer and Pantranco, jointly and severally, to pay the Corporation, the sum of P5,000.00 as and
for attorney's fees. The case against the PSC was dismissed. All parties appealed.

ISSUE: Whether the stipulation, "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE
OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE
BUYER" in the contract between Villarama and Pantranco, binds the Corporation (the Villa Rey
Transit, Inc.).

RULING: Yes. This will be a subject of piercing the veil of corporate fiction. Villarama supplied
the organization expenses and the assets of the Corporation, such as trucks and equipment; there
was no actual payment by the original subscribers of the amounts of P95,000.00 and P100,000.00
as appearing in the books.

Villarama made use of the money of the Corporation and deposited them to his private accounts;
and the Corporation paid his personal accounts. Villarama himself admitted that he mingled the
corporate funds with his own money.

These circumstances are strong persuasive evidence showing that Villarama has been too much
involved in the affairs of the Corporation to altogether negative the claim that he was only a part-
time general manager. They show beyond doubt that the Corporation is his alter ego. The
interference of Villarama in the complex affairs of the corporation, and particularly its finances,
are much too inconsistent with the ends and purposes of the Corporation law, which, precisely,
seeks to separate personal responsibilities from corporate undertakings.

It is the very essence of incorporation that the acts and conduct of the corporation be carried out
in its own corporate name because it has its own personality. The doctrine that a corporation is a
legal entity distinct and separate from the members and stockholders who compose it is
recognized and respected in all cases which are within reason and the law. When the fiction is
urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime, the veil with which the law covers and isolates the
corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.

Hence, the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive
clause in the contract entered into by the latter and Pantranco is also enforceable and binding
against the said Corporation. For the rule is that a seller or promisor may not make use of a
corporate entity as a means of evading the obligation of his covenant. Where the Corporation is
substantially the alter ego of the covenantor to the restrictive agreement, it can be enjoined from
competing with the covenantee.