PNB v. Ritratto

University of the Philippines College of Law | Corporation Law | D2021
Topic Transferability of Shares of Stock

Case Name PNB v. Rittrato
Case No. & Date July 31, 2001
Ponente KAPUNAN, j.
Petitioners PNP, a domestic corporation, acting as agent of PNB-IFL (PNB’s subsidiary; Hong Kong based)
Respondents Ritratto Group, Inc., a domestic corporation
Summary (recit- PNB-IFL and Ritratto entered into a loan agreement for US300,000 secured by REM. This loan was
friendly) later increased successively and reached US1,425,000. Ritratto failed to pay. PNB-IFL, through its
agent PNB, foreclosed the REM. Ritratto then filed a complaint for Injunction against PNB (not against
PNB-IFL). PNB filed a MTD on the ground that it is not a real-party-in-interest since it is not a party to
the loan agreement. The Trial Court pierced the corporate veil on the ground that PNB-IFL is a wholly
owned subsidiary of PNB.
Doctrine/s The general rule is that as a legal entity, a corporation has a personality distinct and separate from
its individual stockholders or members, and is not affected by the personal rights, obligations and
transactions of the latter. 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.
RELEVANT FACTS
 PNB-IFL, a subsidiary of PNB, extended a letter of credit in favor of Ritratto in the amount US300,000. This was
successively increased and decreased till it reached the amount of US1,421,316. The outstanding obligation (unpaid)
stood at US1,497,247. This credit facility was secured by a REM on 4 parcels of land in Makati City.
 Upon Ritratto’s default, PNB-IFL, through its agent PNB, foreclosed the mortgage properties.
 Ritratto then filed a complaint for Injunction with a prayer for the issuance of a TRO against PNB. It anchored its
complaint for injunction on the alleged invalid provisions of the contract: (1) that the determination of the interest
rate was left to the sole discretion of PNB; (2) that the interest agreed upon may be unilaterally modified by PNB.
 PNB filed an opposition and a MTD, arguing that the complaint fails to state a cause of action considering the absence
of any privity between PNB and Ritratto (i.e., it was not party to the contract).
 The Trial Court ruled in favor of Ritratto, stating that:
o Since PNB-IFL is a wholly owned subsidiary of PNB, the suit against PNB is effectively a suit against PNB-
IFL. Citing Koppel, the corporate entity may be disregarded where a corporation is a mere alter-ego or
business conduit of another person or where the corporation is so organized and controlled as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
 The RTC ruling was affirmed by the CA. Hence, this appeal.
ARGUMENTS
PNB: PNB prays that the Trial Court Order and CA Decision be set aside and the complaint for Injuction be dismissed on
the ground that it is not a real-party-in-interest.
RITRATTO: Even assuming that PNB-IFL and PNB are two separate entities, PNB is still the real-party-in-interest because
it is tasked to commit acts of foreclosing the properties. It also maintains that the doctrine of piercing the corporate veil
be applied considering that PNB-IFL is a wholly-owned subsidiary of PNB.
ISSUE AND RATIO DECIDENDI
Issue Ratio
W/N PNB is a real-party-in- NO, PNB is merely an agent of PNB-IFL.
interest
The contract questioned is one entered into between Ritratto and PNB-IFL, not PNB.
In their complaint, Ritratto admit that PNB is a mere attorney-in- fact for the PNB-IFL
with full power and authority to foreclose on the properties mort-gaged to secure
their loan obligations with PNB-IFL. In other words, PNB is merely 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
Ritratto and PNB-IFL. The issue of the validity of the loan agreements is a matter
between PNB-IFL, the creditor, and Ritratto, the debtor.
Re: Application of the Doctrine of Piercing the Corporate Veil

The general rule is that as a legal entity, a corporation has a personality distinct and
separate from its individual stockholders or members, and is not affected by the
personal rights, obligations and transactions of the latter. 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 Koppel case, as applied by the RTC, finds no application in this case. In Kopel, the
SC disregarded the separate existence of the parent and the subsidiary on the ground
that the latter was formed merely for the purpose of evading the payment of higher
taxes.
In this jurisdiction, we have held that the doctrine of piercing the corporate veil is an
equitable doctrine developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful purposes. The doctrine
applies when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or 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.
GENERAL RULE: The stockownership alone by one corporation of the stock of

another does not render the dominant corporation liable for the torts/breaches of
the subsidiary.
EXCEPTION: Where the separate corporate existence of the subsidiary is a mere
sham, or unless the control of the subsidiary is such that it is but an instrumentality
or adjunct of the dominant corporation.
Circumstances which may be useful in the determination of whether the subsidiary

is a mere instrumentality of the parent corporation [presence of one or more
circumstance does not guarantee piercing the corporate veil; court must still weigh]:
(a) The parent corporation owns all or most of the capital stock of the
subsidiary.
(b) The parent and subsidiary corporations have common directors or
officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary
or otherwise causes its incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of
the subsidiary.
(g) The subsidiary has substantially no business except with the parent
corporation or no assets except those conveyed to or by the parent
corporation.
(h) In the papers of the parent corporation or in the statements of its officers,
the subsidiary is described as a department or division of the parent
corporation, or its business or financial responsibility is referred to as the
parent corporation’s own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in
the interest of the subsidiary but take their orders from the parent
corporation.
(k) The formal legal requirements of the subsidiary are not observed.
In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the
significant legal relationship involved in this case since the petitioner was not sued
because it is the parent company of PNB-IFL. Rather, PNB was sued because it acted
as an agent of PNB-IFL. A suit against the agent cannot without compelling reasons
be considered a suit against the principal.
Test in determining applicability of the Doctrine:

1. Control, not mere majority or complete 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 alter ego doctrine, the courts are concerned with reality
and not form, with how the corporation operated and the individual defendants
relationship to the operation.
RULING: Case against PNB is DISMISSED.
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The assailed decision of the Court of Appeals is hereby
REVERSED. The Orders dated June 30, 1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch 147 in Civil
Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint in said case DISMISSED.

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University of the Philippines College of Law | Corporation Law | D2021

Topic Transferability of Shares of Stock

Re: Application of the Doctrine of Piercing the Corporate Veil

GENERAL RULE: The stockownership alone by one corporation of the stock of

Circumstances which may be useful in the determination of whether the subsidiary

Test in determining applicability of the Doctrine:

RULING: Case against PNB is DISMISSED.

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