G.R. No.

L-63558 May 19, 1987

SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC. TRONIC SYSTEMS, INC., petitioners,
vs.
HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL COURT (NATIONAL CAPITAL
JUDICIAL REGION, BRANCH CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA
BRAGA, VIRGILIO BRAGA AND NORBERTO BRAGA, respondents.

No. L-68450-51 May 19, 1987

POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA, VIRGILIO T. BRAGA, NORBERTO

BRAGA, and VIRGINIA BRAGA, petitioners,
vs.
THE HONORABLE SECURITIES AND EXCHANGE COMMISSION, TELECTRONIC SYSTEMS,
INC., JOSE ABEJO, JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE, SR., ANDRES T. VELARDE
AND L. QUIDATO BANDOLINO, respondents.

TEEHANKEE, C.J.:

These two cases, jointly heard, are jointly herein decided. They involve the question of who, between the
Regional Trial Court and the Securities and Exchange Commission (SEC), has original and exclusive
jurisdiction over the dispute between the principal stockholders of the corporation Pocket Bell Philippines,
Inc. (Pocket Bell), a "tone and voice paging corporation," namely, the spouses Jose Abejo and Aurora Abejo
(hereinafter referred to as the Abejos) and the purchaser, Telectronic Systems, Inc. (hereinafter referred to as
Telectronics) of their 133,000 minority shareholdings (for P5 million) and of 63,000 shares registered in the
name of Virginia Braga and covered by five stock certificates endorsed in blank by her (for P1,674,450.00), and
the spouses Agapito Braga and Virginia Braga (hereinafter referred to as the Bragas), erstwhile majority
stockholders. With the said purchases, Telectronics would become the majority stockholder, holding 56% of the
outstanding stock and voting power of the corporation Pocket Bell.

With the said purchases in 1982, Telectronics requested the corporate secretary of the corporation, Norberto
Braga, to register and transfer to its name, and those of its nominees the total 196,000 Pocket Bell shares in the
corporation's transfer book, cancel the surrendered certificates of stock and issue the corresponding new
certificates of stock in its name and those of its nominees.

Norberto Braga, the corporate secretary and son of the Bragas, refused to register the aforesaid transfer of
shares in t e corporate oo s, asserting that the Bragas claim preemptive rights over the 133,000 Abejo shares
and that Virginia Braga never transferred her 63,000 shares to Telectronics but had lost the five stock
certificates representing those shares.

This triggered off the series of intertwined actions between the protagonists, all centered on the question of
jurisdiction over the dispute, which were to culminate in the filing of the two cases at bar.

The Bragas assert that the regular civil court has original and exclusive jurisdiction as against the Securities
and Exchange Commission, while the Abejos claim the contrary. A summary of the actions resorted to by the
parties follows:

A. ABEJOS ACTIONS IN SEC

1. The Abejos and Telectronics and the latter's nominees, as new majority shareholders, filed SEC Cases Nos.
02379 and 02395 against the Bragas on December 17, 1982 and February 14, 1983, respectively.

2. In SEC Case No. 02379, they prayed for mandamus from the SEC ordering Norberto Braga, as corporate
secretary of Pocket Bell to register in their names the transfer and sale of the aforesaid 196,000 Pocket Bell
shares (of the Abejos 1 and Virginia Braga 2, cancel the surrendered certificates as duly endorsed and to issue
new certificates in their names.

3. In SEC Case No.02395, they prayed for injunction and a temporary restraining order that the SEC enjoin the
Bragas from disbursing or disposing funds and assets of Pocket Bell and from performing such other acts
pertaining to the functions of corporate officers.

4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion to Dismiss the mandamus case (SEC Case
No. 02379) contending that the SEC has no jurisdiction over the nature of the action since it does not involve
an intracorporate controversy between stockholders, the principal petitioners therein, Telectronics, not being a
stockholder of record of Pocket Bell.

5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay denied the motion. On January 14, 1983, the
corporate secretary filed a Motion for Reconsideration. On March 21, 1983, SEC Hearing Officer Joaquin
Garaygay issued an order granting Braga's motion for reconsideration and dismissed SEC Case No. 02379.

6. On February 11, 1983, the Bragas filed their Motion to Dismiss the injunction case, SEC Case No. 02395. On
April 8, 1985, the SEC Director, Eugenio Reyes, acting upon the Abejos'ex-parte motion, created a three-man
committee composed of Atty. Emmanuel Sison as Chairman and Attys. Alfredo Oca and Joaquin Garaygay as
members, to hear and decide the two SEC cases (Nos. 02379 and 02395).

7. On April 13, 1983, the SEC three-man committee issued an order reconsidering the aforesaid order of March
21, 1983 of the SEC Hearing Officer Garaygay (dismissing the mandamus petition SEC Case No. 02379) and
directing corporate secretary Norberto Braga to file his answer to the petitioner therein.

B. BRAGAS' ACTION IN SEC

8. On December 12, 1983, the Bragas filed a petition for certiorari, prohibition and mandamus with the SEC en
banc, SEC Case No. EB #049, seeking the dismissal of SEC Cases Nos.' 02379 and 02395 for lack of
jurisdiction of the Comn-iission and the setting aside of the various orders issued by the SEC three-man
committee in the course of the proceedings in the two SEC cases.

9. On May 15, 1984, the SEC en banc issued an order dismissing the Bragas' petition in SEC Case No. EB#049
for lack of merit and at the same time ordering the SEC Hearing Committee to continue with the hearings of
the Abejos and Telectronics SEC Cases Nos. 02379 and 02395, ruhng that the "issue is not the ownership of
shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of recording transfers
of shares of stock of the corporation of which he is secretary."

10. On May 15, 1984 the Bragas filed a motion for reconsideration but the SEC en banc denied the same on
August 9, 1984.

C. BRAGAS' ACTION IN CFI (NOWRTC)

11. On November 25, 1982, following the corporate secretary's refusal to register the transfer of the shares in
question, the Bragas filed a complaint against the Abejos and Telectronics in the Court of First Instance of
Pasig, Branch 21 (now the Regional Trial Court, Branch 160) docketed as Civil Case No. 48746 for: (a)
rescission and annulment of the sale of the shares of stock in Pocket Bell made by the Abejos in favor of
Telectronics on the ground that it violated the Bragas' alleged pre-emptive right over the Abej os' shareholdings
and an alleged perfected contract with the Abejos to sell the same shares in their (Bragas) favor, (Ist cause of
action); plus damages for bad faith; and (b) declaration ofnullity of any transfer, assignment or endorsement
of Virginia Bragas' stock certificates for 63,000 shares in Pocket Ben to Telectronics for want of consent and
consideration, alleging that said stock certificates, which were intended as security for a loan application and
were thus endorsed by her in blank, had been lost (2nd cause of action).

12. On January 4, 1983, the Abejos filed a Motion to Dismiss the complaint on the ground that it is the SEC that
is vested under PD 902-A with original and exclusive jurisdiction to hear and decide cases involving, among
others, controversies "between and among stockholders" and that the Bragas' suit is such a controversy as the
issues involved therein are the stockholders' alleged pre-emptive rights, the validity of the transfer and
endorsement of certificates of stock, the election of corporate officers and the management and control of the
corporation's operations. The dismissal motion was granted by Presiding Judge G. Pineda on January 14, 1983.

13. On January 24, 1983, the Bragas filed a motion for reconsideration. The Abejos opposed. Meanwhile,
respondent Judge Rafael de la Cruz was appointed presiding judge of the court (renamed Regional Trial Court)
in place of Judge G. Pineda.

14. On February 14, 1983, respondent Judge de la Cruz issued an order rescinding the January 14, 1983 order
and reviving the temporary restraining order previously issued on December 23, 1982 restraining Telectronics'
agents or representatives from enforcing their resolution constituting themselves as the new set of officers of
Pocket Bell and from assuming control of the corporation and discharging their functions.

15. On March 2, 1983, the Abejos filed a motion for reconsideration, which motion was duly opposed by the
Bragas. On March 11, 1983, respondent Judge denied the motion for reconsideration.

D. ABEJOS' PETITION AT BAR

16. On March 26, 1983, the Abejos, alleging that the acts of respondent Judge in refusing to dismiss the
complaint despite clear lack of jurisdiction over the action and in refusing to reconsider his erroneous position
were performed without jurisdiction and with grave abuse of discretion, filed their herein Petition for certiorari
and Prohibition with Preliminary Injunction. They prayed that the challenged orders of respondent Judge
dated February 14, 1983 and March 11, 1983 be set aside for lack of jurisdiction and that he be ordered to
permanently desist from further proceedings in Civil Case No. 48746. Respondent judge desisted from further
proceedings in the case, dispensing with the need of issuing any restraining order.

E. BRAGAS' PETITION AT BAR

17. On August 29, 1984, the Bragas, alleging in turn that the SEC has no jurisdiction over SEC Cases Nos.
02379 and 02395 and that it acted arbitrarily, whimsically and capriciously in dismissing their petition (in SEC
Case No. EB #049) for dismissal of the said cases, filed their herein Petition for certiorari and Prohibition with
Preliminary Injunction or TRO. The petitioner seeks the reversal and/or setting aside of the SEC Order dated
May 15, 1984 dismissing their petition in said SEC Case No. EB #049 and sustaining its jurisdiction over SEC
Cases Nos. 02379 and 02395, filed by the Abejos. On September 24, 1984, this Court issued a temporary
restraining order to maintain the status quo and restrained the SEC and/or any of its officers or hearing
committees from further proceeding with the hearings in SEC Cases Nos. 02379 and 02395 and from enforcing
any and all orders and/or resolutions issued in connection with the said cases.

The cases, having been given due course, were jointly heard by the Court on March 27, 1985 and the parties
thereafter filed on April 16, 1985 their respective memoranda in amplification of oral argument on the points of
law that were crystalled during the hearing,

The Court rules that the SEC has original and exclusive jurisdiction over the dispute between the principal
stockholders of the corporation Pocket Bell, namely, the Abejos and

Telectronics, the purchasers of the 56% majority stock (supra, at page 2) on the one hand, and the Bragas,
erstwhile majority stockholders, on the other, and that the SEC, through its en banc Resolution of May 15, 1984
co"ectly ruled in dismissing the Bragas' Petition questioning its jurisdiction, that "the issue is not the
ownership of shares but rather the nonperformance by the Corporate Secretary of the ministerial duty of
recording transfers of shares of stock of the Corporation of which he is secretary."

1. The SEC ruling upholding its primary and exclusive jurisdiction over the dispute is correctly premised on,
and fully supported by, the applicable provisions of P.D. No. 902-A which reorganized the SEC with additional
powers "in line with the government's policy of encouraging investments, both domestic and foreign, and more
active publicParticipation in the affairs of private corporations and enterprises through which desirable
activities may be pursued for the promotion of economic development; and, to promote a wider and more
meaningful equitable distribution of wealth," and accordingly provided that:

SEC. 3. The Commission shall have absolute jurisdiction, supervision and control ouer all
corporations, partnerships or associations, who are the grantees of primary franchise and/or a
license or permit issued by the government to operate in the Philippines; ...

SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it
as expressly granted under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:

a) Devices or schemes employed by or any acts, of the board of directors, business

associations, its officers or partners, amounting to fruud and
misrepresentation which may be detrimental to the interest of the public andlor
of the stockholder, partners, members of associations or organizations registered
with the Commission.

b) Controversies arising out of intracorporate or partnership relations, between

and among stockholders, members, or associates; between any andlor all of
them and the corporation, partnership or association of which they are
stockholders, members or assmiates, respectively; and between such corporation,
partnership or assmiation and the state insofar as it concems their individual
franchise or right to exist as such entity;

c) Controversies in the election or appointments of directors, trustees,

officers or managers of such corporations, partnerships or associations. 3

Section 6 further grants the SEC "in order to effectively exercise such jurisdiction," the power, inter alia, "to
issue preliminary or permanent injunctions, whether prohibitory or mandatory, in all cases in which it has
jurisdiction, and in which cases the pertinent provisions of the Rules of Court shall apply."

2. Basically and indubitably, the dispute at bar, as held by the SEC, is an intracorporate dispute that has arisen
between and among the principal stockholders of the corporation Pocket Bell due to the refusal of the
corporate secretary, backed up by his parents as erstwhile majority shareholders, to perform his "ministerial
duty" to record the transfers of the corporation's controlling (56%) shares of stock, covered by duly endorsed
certificates of stock, in favor of Telectronics as the purchaser thereof. mandamus in the SEC to compel the
corporate secretary to register the transfers and issue new certificates in favor of Telectronics and its nominees
was properly resorted to under Rule XXI, Section 1 of the SEC's New Rules of Procedure, 4 which provides for
the filing of such petitions with the SEC. Section 3 of said Rules further authorizes the SEC to "issue orders
expediting the proceedings ... and also [to] grant a preliminary injunction for the preservation of the rights of
the parties pending such proceedings, "

The claims of the Bragas, which they assert in their complaint in the Regional Trial Court, praying for
rescission and annulment of the sale made by the Abejos in favor of Telectronics on the ground that they had
an alleged perfected preemptive right over the Abejos' shares as well as for annulment of sale to Telectronics of
Virginia Braga's shares covered by street certificates duly endorsed by her in blank, may in no way deprive the
SEC of its primary and exclusive jurisdiction to grant or not the writ of mandamus ordering the registration of
the shares so transferred. The Bragas' contention that the question of ordering the recording of the transfers
ultimately hinges on the question of ownership or right thereto over the shares notwithstanding, the
jurisdiction over the dispute is clearly vested in the SEC.

3. The very complaint of the Bragas for annulment of the sales and transfers as filed by them in the regular
court questions the validity of the transfer and endorsement of the certificates of stock, claiming alleged pre-
emptive rights in the case of the Abejos' shares and alleged loss of thio certificates and lack of consent and
consideration in the case of Virginia Braga's shares. Such dispute c learly involve's controversies "between and
among stockholders, " as to the Abej os' right to sell and dispose of their shares to Telectronics, the validity of
the latter's acquisition of Virginia Braga's shares, who between the Bragas and the Abejos' transferee should be
recognized as the controlling shareholders of the corporation, with the right to elect the corporate officers and
the management and control of its operations. Such a dispute and case clearly fag within the original and
exclusive jurisdiction of the SEC to decide, under Section 5 of P.D. 902-A, above-quoted. The restraining order
issued by the Regional Trial Court restraining Telectronics agents and representatives from enforcing their
resolution constituting themselves as the new set of officers of Pocket Bell and from assuming control of the
corporation and discharging their functions patently encroached upon the SEC's exclusive jurisdiction over
such specialized corporate controversies calling for its special competence. As stressed by the Solicitor General
on behalf of the SEC, the Court has held that "Nowhere does the law [PD 902-A] empower any Court of First
Instance [now Regional Trial Court] to interfere with the orders of the Commission," 5 and consequently "any
ruling by the trial court on the issue of ownership of the shares of stock is not binding on the Commission 6 for
want of jurisdiction.

4. The dispute therefore clearly falls within the general classification of cases within the SEC's original and
exclusive jurisdiction to hear and decide, under the aforequoted governing section 5 of the law. Insofar as the
Bragas and their corporate secretary's refusal on behalf of the corporation Pocket Bell to record the transfer of
the 56% majority shares to Telectronics may be deemed a device or scheme amounting to fraud and
misrepresentation emplolyed by them to keep themselves in control of the corporation to the detriment of
Telectronics (as buyer and substantial investor in the corporate stock) and the Abejos (as substantial
stockholders-sellers), the case falls under paragraph (a). The dispute is likewise an intra-corporate controversy
between and among the majority and minority stockholders as to the transfer and disposition of the controlling
shares of the corporation, failing under paragraph (b). As stressed by the Court in DMRC Enterprises v. Este
del Sol Mountain Reserve, Inc, 7 Considering the announced policy of PD 902-A, the expanded jurisdiction of
the respondent Securities and Exchange Commission under said decree extends exclusively to matters arising
from contracts involving investments in private corporations, partnerships and associations." The dispute also
concerns the fundamental issue ofwhether the Bragas or Telectronics have the right to elect the corporate
directors and officers and manage its business and operations, which falls under paragraph (c).

5. Most of the cases that have come to this Court involve those under paragraph (b), i.e. whether the
controversy is an intra-corporate one, arising "between and among stockholders" or "between any or allof them
and the corporation." The parties have focused their arguments on this question. The Bragas' contention in his
field must likewise fail. In Philex Mining Corp. v. Reyes,  8 the Court spelled out that"'an intra-corporate
controversy is one which arises between a stockholder and the corporation. There is no distinction,
qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of controversies
between stockholders and corporations. The issue of whether or not a corporation is bound to replace a
stockholder's lost certificate of stock is a matter purely between a stockholder and the corporation. It is a
typical intra-corporate dispute. The quqsjion of damage's raised is merely incidental to that main issue. The
Court rejected the stockholders' theory of excluding his complaint (for replacement of a lost stock [dividend]
certificate which he claimed to have never received) from the classification of intra-corporate controversies as
one that "does not square with the intent of the law, which is to segregate from the general jurisdiction of
regular Courts controversies involving corporations and their stockholders and to bring them to the SEC for
exclusive resolution, in much the same way that labor disputes are now brought to the Ministry-of Labor and
Employment (MOLE) and the National Labor Relations Commission (NLRC), and not to the Courts."

(a) The Bragas contend that Telectronics, as buyertransferee of the 56% majority shares is not a
registered stockholder, because they, through their son the corporate secretary, appear to have
refused to perform "the ministerial duty of recording transfers of shares of stock of the
corporation of which he is the secretary," and that the dispute is therefore, not an intracorporate
one. This contention begs the question which must properly be resolved by the SEC, but which
they would prevent by their own act, through their son, of blocking the due recording of the
transfer and cannot be sanctioned. It can be seen from their very complaint in the regular courts
that they with their two sons constituting the plaintiffs are all stockholders while the defendants
are the Abejos who are also stockholders whose sale of the shares to Telectronics they would
annul.
 (b) There can be no question that the dispute between the Abejos and the Bragas as to the sale
and transfer of the former's shares to Telectronics for P5 million is an intracorporate one under
section 5 (b), prescinding from the applicability of section 5 (a) and (c), (supra, par. 4) lt is the
SEC which must resolve the Bragas' claim in their own complaint in the court case filed by them
of an alleged pre-emptive right to buy the Abejos' shares by virtue of "on-going negotiations,"
which they may submit as their defense to the mandamus petition to register the sale of the
shares to Telectronics. But asserting such preemptive rights and asking that the same be
enforced is a far cry from the Bragas' claim that "the case relates to questions of ownership" over
the shares in question. 9 (Not to mention, as pointed out by the Abejos, that the corporation is
not a close corporation, and no restriction over the free transferability of the shares appears in
the Articles of Incorporation, as well as in the by-laws 10 and the certificates of stock
themselves, as required by law for the enforcement of such restriction. See Go Soc & Sons, etc. v.
IAC, G.R. No. 72342, Resolution of February 19, 1987.)

(c) The dispute between the Bragas and Telectronics as to the sale and transfer for
P1,674,450.00 of Virginia Braga's 63.000 shares covered by Street certificates duly endorsed in
blank by her is within the special competence and jurisdiction of the SEC, dealing as it does with
the free transferability of corporate shares, particularly street certificates," as guaranteed by the
Corporation Code and its proclaimed policy of encouraging foreign and domestic investments in
Philippine private corpora. tions and more active public participation therein for the Promotion
of economic development. Here again, Virginia Braga's claim of loss of her street
certificates 11 or theft thereof (denounced by Telectronics as 11 perjurious" 12 ) must be pleaded
by her as a defense against Telectronics'petition for mandamus and recognition now as the
controlling stockholder of the corporation in the light of the joint affidavit of Geneml Cerefino S.
Carreon of the National Telecommunications Commission and private respondent Jose Luis
Santiago of Telectronics narrating the facts and circumstances of how the former sold and
delivered to Telectronics on behalf of his compadres, the Bragas, Virginia Braga's street
certificates for 63,000 shares equivalent to 18% of the corporation's outstanding stock and
received the cash price thereof. 13 But as to the sale and transfer of the Abejos' shares, the
Bragas cannot oust the SEC of its original and exclusive jurisdiction to hear and decide the case,
by blocking through the corporate secretary, their son, the due recording of the transfer and sale
of the shares in question and claiming that Telectronics is not a stockholder of the corporation –
which is the very issue that the SEC is called upon to resolve. As the SEC maintains, "There is no
requirement that a stockholder of a corporation must be a registered one in order that,the
Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights
as such stockholder." 14 This is because the SEC by express mandate has "absolute jurisdiction,
supervision and control over all corporations" and is called upon to enforce the provisions of the
Corporation Code, among which is the stock purchaser's right to secure the corresponding
certificate in his name under the provisions of Section 63 of the Code. Needless to say, any
problem encountered in securing the certificates of stock representing the investment made by
the buyer must be expeditiously dealt with through administrative mandamus proceedings with
the SEC, rather than through the usual tedious regular court procedure. Furthermore, as stated
in the SEC order of April 13, 1983, notice given to the corporation of the sale of the shares and
presentation of the certificates for transfer is ,equivalent to registration: "Whether the refusal of
the (corporation) to effect the same is ivalid or not is still subject to the outcome of the hearing
on the merits of the case. 15

6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative commissions and
boards the power to resolve specialized disputes in the field of labor (as in corporations, public transportation
and public utilities) ruled that Congress in requiring the Industrial Court's intervention in the resolution of
labor-management controversies likely to cause strikes or lockouts meant such jurisdiction to be exclusive,
although it did not so expressly state in the law. The Court held that under the "sense-making and expeditious
doctrine of primary jurisdiction ... the courts cannot or will n6t determine a controversy involving a question
which is within the jurisdiction of an administrative tribunal, where the question demands the exercise of
sound administrative discretion requiring the special knowledge, experience, and seruices of the
administratiue tribunal to determine technical and intricate matters of fact, and a uniformity of ruling is
essential to comply uith the purposes of the regulatory statute administered " 16
In this era of clogged court dockets, the need for specialized administrative boards or commissions with the
special knowledge, experience and capability to hear and determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in case of grave abuse of discretion, has become well nigh
indispensable. Thus, in 1984, the Court noted that "between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been committed to
the view that unless the law speaks clearly and unequivocably, the choice should fall on [an administrative
agency.]' " 17 The Court in the earlier case of Ebon vs. De Guzman 18 noted that the lawmaking authority, in
restoring to the labor arbiters and the NLRC their jurisdiction to award all kinds of damages in labor cases, as
against the previous P.D. amendment splitting their jurisdiction with the regular courts, "evidently ... had
second thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages in
labor cases because that setup would mean duplicity of suits, splitting the cause of action and possible
conflicting findings and conclusions by two tribunals on one and the same claim."

7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, 1980 specifically vests the SEC with the Rule-
making power in the discharge of its task of implementing the provisions of the Code and particularly charges it
with the duty of preventing fraud and abuses on the part of controlling stockholders, directors and officers, as
follows:

SEC. 143. Rule-making power of the Securities and Exchange Commission. — The Securities and
Exchange Commission shall have the power and authority to implement the provisions of this
Code, and to promulgate rules and regulations reasonably necessary to enable it to perform its
duties hereunder, particularly in the prevention of fraud and abuses on the part of the
controlling stockholders, members, directors, trustees or officers. (Emphasis supplied)

The dispute between the contending parties for control of thecorporation manifestly fans within the primary
and exclusive jurisdiction of the SEC in whom the law has reserved such jurisdiction as an administrative
agency of special competence to deal promptly and expeditiously therewith.

As the Court stressed in Union Glass & Container Corp. v. SEC, 19 "This grant of jurisdiction [in Section 51
must be viewed in the light of the nature and functions of the SEC under the law. Section 3 of PD No. 902-A
confers upon the latter 'absolute jurisdiction, supervision, and control over all corporations, partnerships or
associations, who are grantees of primary franchise and/or license or permit issued by the government to
operate in the Philippines ... 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 pursued for the promotion of economic development.

"It is in aid of this office that the adjudicative power of the SEC must be exercised. Thus the law explicitly
specified and delin-dted its jurisdiction to matters intrinsically connected with the regulation of corporations,
partnerships and associations and those dealing with the internal affairs of such corporations, partnerships or
associations.

"Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of
the following relationships: [al between the corporation, partnership or association and the public; [b] between
the corporation, partnership or association and its stockholders, partners, members, or officers; [c] between
the corporation, partnership or association and the state in so far as its franchise, permit or license to operate is
concerned; and Id] among the stockholders, partners or associates themselves." 20

Parenthetically, the cited case of Union Glass illustrates by way of contrast what disputes do not fall within the
special jurisdiction of the SEC. In this case, the SEC had properly assumed jurisdiction over the dissenting
stockholders' com. Plaint against the corporation Pioneer Glass questioning its dacion en pago of its glass
plant and all its assets in favor of the DBP which was clearly an intra-corporate controversy dealing with its
internal affairs. But the Court held that the SEC had no jurisdiction over petitioner Union Glass Corp.,
imPle,aded as third party purchaser of the plant from DBP in the action to annul the dacion en pago. The
Court held that such action for recovery of the glass plant could be brought by the dissenting stockholder to the
regular courts only if and when the SE C rendered final judgment annulling the dacion en pago and
furthermore subject to Union Glass' defenses as a third party buyer in good faith. Similarly, in the DMRC case,
therein petitioner's,tomplaint for collection of the amounts due to it as payment of rentals for the lease of its
heavy equipment in the form mainly of cash and part in shares of stock of the debtor-defendant corporation
was held to be not covered by the SEC's exclusive jurisdiction over intracorporate disputes, since "to pass upon
a money claim under a lease contract would be beyond the competence Of the Securities and Exchange
Commission and to separate the claim for money from the claim for shares of stock would be splitting a single
cause of action resulting in a multiplicity of suitS." 21 Such an action for collection of a debt does not involve
enforcement Of rights and obligations under the Corporation Code nor the in. temal or intracorporate affairs of
the debtor corporation. But in aR disputes affecting and dealing With the interests of the corporation and its
stockholders, following the trend and clear legislative intent of entmsting all disputes of a specialized nature to
administrative agencies possessing. the requisite competence, special knowledge, experience and services and
facilities to expeditiously resolve them and determine the essential facts including technical and intricate
matters, as in labor and public utilities rates disputes, the SEC has been given "the original and exclusive
jurisdiction to hear anddecide" them (under section 5 of P.D. 902-A) "in addition to [its] regulatory and
adjudicative functions" (under Section 3, vesting in it "absolute jurisdiction, supervision and control over all
corporations" and the Rule-making power granted it in Section 143 of the Corporation Code, supra). As
stressed by the Court in the Philex case, supra, "(T)here is no distinction, qualification, nor any exemption
whatsoever. The provision is broad and covers all kinds of controversies between stockholders and
corporations."

It only remains now to deal with the Order dated April 15, 1983 (Annex H, Petition) 22 of the SEC's three-
member Hearing Conunittee granting Telectronics' motion for creation of a receivership or management
committee with the ample powers therein enumerated for the preservation pendente lite of the corporation's
assets and in discharge of its "power and duty to preserve the rights of the parties, the stockholders, the public
availing of the corporation's services and the rights of creditors," as well as "for reasons of equity and justice ...
(and) to prevent possible paralization of corporate business." The said Order has not been implemented
notwithstanding its having been upheld per the SEC en banc's Order of May 15, 1984 (Annex "V", Petition)
dismissing for lack of merit the petition for certiorari, prohibition and mandamus with prayer for restraining
order or injunction filed by the Bragas seeking the disbandment of the Hearing Committee and the setting
aside of its Orders, and its Resolution of August 9, 1984, denying reconsideration (Annex "X", Petition), due to
the Bragas' filing of the petition at bar.

Prescinding from the great concern of damage and prejudice expressed by Telectronics due to the Bragas
having remained in control of the corporation and having allegedly committed acts of gross mismanagement
and misapplication of funds, the Court finds that under the facts and circumstances of record, it is but fair and
just that the SEC's order creating a receivership committee be implemented forthwith, in accordance with its
terms, as follows:

The three-man receivership committee shall be composed of a representative from the

commission, in the person of the Director, Examiners and Appraisers Department or his
designated representative, and a representative from the petitioners and a representative of the
respondent.

The petitioners and respondent are therefore directed to sub. mit to the Commission the name
of their designated representative within three (3) days from receipt of this order. The
Conunission shall appoint the other representatives if either or both parties fafl to comply with
the requirement within the stated time.

ACCORDINGLY, judgment is hereby rendered:

(a) Granting the petition in G.R. No. 63558, annulling the challenged Orders of respondent
Judge clated February 14, 1983 and March i 1, 1983 (Annexes "L" and "P" of the Abejos' petition)
and prohibiting respondent Judge from further proceeding in Civil Case No. 48746 filed in his
Court other than to dismiss the same for lack or jurisdiction over the subject-matter;

(b) Dismissing the petition in G.R. Nos. 68450-51 and lifting the temporary restraining order
issued on September 24, 1984, effective immediately upon promulgation hereof,
 (c) Directing the SEC through its Hearing Committee to proceed immediately with hearing and
resolving the pending mandamus petition for recording in the corporate books the transfer to
Telectronics and its nominees of the majority (56%) shares of stock of the corporation Pocket
Bell pertaining to the Abejos and Virginia Braga and all related issues, taking into consideration,
without need of resubmittal to it, the pleadings, annexes and exhibits filed by the contending
parties in the cases at bar; and

(d) Likewise directing the SEC through its Hearing Committee to proceed immediately with the
implementation of its receivership or management committee Order of April 15, 1983 in SEC
Case No. 2379 and for the purpose, the contending parties are ordered to submit to said Hearing
Committee the name of their designated representatives in the receivership/management
committee within three (3) days from receipt of this decision, on pain of forfeiture of such right
in case of failure to comply herewith, as provided in the said Order; and ordering theBragas to
perform only caretaker acts in the corporation pending the organization of such
receivership/management committee and assumption of its functions.

This decision shall be immediately executory upon its promulgation.

SO ORDERED.
G.R. No. 87135 May 22, 1992

ALMA MAGALAD, petitioner,
vs.
PREMIERE FINANCING CORP., respondent.

PARAS, J.:

This is an appeal originally filed with the Court of Appeals but certified to this court for disposition since it
involves purely questions of law from the decision of the Regional Trial Court (RTC), Branch LXXXV, Quezon
City, dated May 22, 1984, in Civil Case No. Q-40392, ordering the defendant-appellant Premiere Financing
Corporation (Premiere for short) to pay to the plaintiff-appellee Alma Magalad (Magalad for short) the sum of:
(a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12, 1983, until the full
amount is paid; (b) P10,000.00, both for moral and exemplary damages; (c) P5,000.00, for and as attorney's
fees and (d) the costs of suit.

The antecedent facts of the case are as follows:

Premiere is a financing company engaged in soliciting and accepting money market placements or deposits
(Original Record, p. 29).

On September 12, 1983 with expired permit to issue commercial papers (Ibid., p. 8) and with intention not to
pay or defraud its creditors, Premiere induced and misled Magalad into making a money market placement of
P50,000.00 at 22% interest per annum for which it issued a receipt (Ibid., Exh. "B", p. 8). Aside from the
receipt, Premier likewise issued two (2) post-dated checks in the total sum of P51,079.00 (Ibid., Exh. "C", p. 9)
and assigned to Magalad its receivable from a certain David Saman for the same amount (Ibid., Exh. "C", p.
10).

When the said checks were presented for payment on their due dates, the drawee bank dishonored the checks
for lack of sufficient funds to cover the amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12). Despite demands by
Magalad for the replacement of said checks with cash, Premiere, for no valid reason, failed and refused to
honor such demands and due to fraudulent acts of Premiere, Magalad suffered sleepless nights, mental
anguish, fright, serious anxiety, considering the fact that the money she invested is blood money and is the only
source of support for her family (Ibid., p. 4).

Magalad in order to seek redress and retrieve her blood money, availed of the service of counsel for which she
agreed to pay twenty percent (20%) of the amount due as and for attorney's fees (Ibid.)

On January 10, 1984, Magalad filed a complaint for damages with prayer for writ of preliminary attachment
with the RTC, Branch LXXXV, Quezon City, docketed as Civil Case No. Q-40392 against herein Premiere
(Ibid., p. 3-6).

Premiere having failed to file an answer and acting on Magalad's motion, the lower court declared Premiere in
default by virtue of an order dated April 5, 1984 allowing Magalad to present evidence ex-parte (Ibid., pp. 21;
22)

On May 22, 1984 the lower court rendered a default judgment against Premiere, the dispositive portion of
which reads:

From the foregoing evidence, the court finds that plaintiff has fully established her claim that
defendant had indeed acted fraudulently in incurring the obligation and considering that no
evidence has been adduced by the defendant to contradict the same, judgment is hereby
rendered ordering the defendant to pay plaintiff as follows:
 (a) P50,000.00, the principal obligation, plus interest at the legal rate from September 12, 1983
until the full amount is paid;

(b) P10,000.00 both for moral and exemplary damages;

(c) P5,000.00 for and as attorney's fees; and

(d) the costs of suit.

SO ORDERED. (Ibid., p. 30)

Premiere filed a motion for reconsideration of the foregoing decision, based principally on a question of law
alleging that the Securities and Exchange Commission (SEC) has exclusive and original jurisdiction over a
corporation under a state of suspension of payments (Ibid., pp. 32-41).

Magalad filed an opposition to the motion for reconsideration on January 8, 1985 alleging among others that
the regular court has jurisdiction over the case to the exclusion of the SEC. (Ibid., pp. 51-53).

On May 28, 1986 the lower court issued an order denying the motion for reconsideration (Ibid., p. 61).

On June 11, 1986 Premiere filed his notice of appeal which led to the issuance of the order of the lower court
dated July 29, 1986 elevating the case to the Court of Appeals (CA) (Ibid., pp. 62-63).

The Court of Appeals in its resolution dated September 8, 1987 dismissed the case for failure of Premiere to file
its brief despite the ninety-day extension granted to it, which expired on June 10, 1987 (Rollo, p. 16).

An omnibus motion for reconsideration and admission of late filing of Premiere's brief was filed on September
22, 1987 (Rollo, pp. 17-19; 32).

On September 30, 1987 the Court of Appeals issued a resolution which reconsidered its previous resolution
dated September 5, 1987 and admitted the Premiere's brief (Rollo, p. 26).

On January 31, 1989 the Court of Appeals issued a resolution certifying the instant case to this Court on the
ground that the case involves a question of law, the dispositive part of which stating:

ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the Judiciary Act of 1948, Sec. 17,
par. 4(3) (4), the Appeal in this case is hereby certified to the Supreme Court on the ground that
the only issue raised concerns the jurisdiction of the trial court and only a question of law.
(Rollo, p. 33)

Hence, this appeal.

The pivotal issue in this case is whether or not the court a quo had jurisdiction to try the instant case.

At the very core of this appeal assailing the aforesaid pronouncement of the lower court, and around which
revolve the arguments of the parties, is the applicability of Presidential Decree No. 902-A (Reorganization of
the SEC with Additional Powers), as amended by Presidential Decrees Nos. 1653, 1758 and 1799. Magalad
submits that the legal suit which she has brought against Premiere is an ordinary action for damages with the
preliminary attachment cognizable solely by the RTC. Premiere, on the other hand, espouses the original and
exclusive jurisdiction of the Securities and Exchange Commission.

Presidential Decree No. 902-A, Section 3, provides:

Sec. 3. 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; and in the exercise of
its authority, it shall have the power to enlist the aid and support of and to deputize any and all
enforcement agencies of the government, civil or military as well as any private institution,
corporation, firm, association or person. (As amended by Presidential Decree No. 1758).

Sec. 3 of Pres. Decree No. 902-A should also be read in conjunction with Sec. 5 of the same law, providing:

Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over corporations, partnerships and other forms of associations registered with it
as expressly granted under the existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:

a) Devises or schemes employed by or any acts of the Board of Directors, business

associates, its officers or partners, amounting to fraud and misrepresentation
which may be detrimental to the public and/or to the stockholders, partners,
members of associations or organizations registered with the Commission.
(Emphasis supplied)

Considering that Magalad's complaint sufficiently alleges acts amounting to fraud and misrepresentation
committed by Premiere, the SEC must be held to retain its original and exclusive jurisdiction over the case,
despite the fact that the suit involves collection of sums of money paid to said corporation, the recovery of
which would ordinarily fall within the jurisdiction of regular courts. The fraud committed is detrimental to the
interest of the public and, therefore, encompasses a category of relationship within the SEC jurisdiction.

Otherwise stated, in order that the SEC can take cognizance of a case, the controversy must pertain to any of
the following relationships: (a) between the corporation, partnership or association and the public; (b) between
the corporation, partnership or association and its stockholders, partners, members or officers; (c) between the
corporation, partnership or association and the state so far as its franchise, permit or license to operate is
concerned; and (d) among the stockholders, partners or associates themselves (Union Glass & Container Corp.
v. SEC, 126 SCRA 31; 38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).

In this case, the recitals of the complaint sufficiently allege that devices or schemes amounting to fraud and
misrepresentation detrimental to the interest of the public have been resorted to by Premiere Corporation. It
can not but be conceded, therefore, that the SEC may exercise its adjudicative powers pursuant to Sec. 5(a) of
Pres. Decree No. 902-A (Supra).

The fact that Premiere's authority to engage in financing already expired will not have the effect of divesting the
SEC of its original and exclusive jurisdiction. The expanded jurisdiction of the SEC was conceived primarily to
protect the interest of the investing public. That Magalad's money placements were in the nature of
investments in Premiere can not be gainsaid. Magalad had reasonably expected to receive returns from moneys
she had paid to Premiere. Unfortunately, however, she was the victim of alleged fraud and misrepresentation.

Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 SCRA 293) and Union Glass & Container Corp.
v. SEC (126 SCRA 31), where the jurisdiction of the ordinary Courts was upheld, is misplaced for, as explicitly
stated in those cases, nowhere in the complaints therein is found any averment of fraud or misrepresentation
committed by the respective corporations involved. The causes of action, therefore, were nothing more than
simple money claims.

Further bolstering the jurisdiction of the SEC in this case is the fact that said agency had already appointed a
Rehabilitation Receiver for Premiere and has directed all proceedings or claims against it be suspended. This,
pursuant to Sec. 6(c) of Pres. Decree No. 902-A providing that "upon appointment of a . . . rehabilitation
receiver . . . all actions for claims against corporations . . . under receivership pending before any court,
tribunal, board or body shall be suspended accordingly."

By so doing, SEC has exercised its original and exclusive jurisdiction to hear and decide cases involving:
 a) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when
they respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities but is under the management of a Rehabilitation Receiver
or Management of a Rehabilitation Receiver or Management Committee created pursuant to
this Decree. (Section 5(d) of Pres. Decree No. 902-A as added by Pres. Decree 1758).

In fine, the adjudicative powers of the SEC being clearly defined by law, its jurisdiction over this case has to be
upheld.

PREMISES CONSIDERED, the instant appeal is GRANTED, and the order of the Presiding Judge of the
Regional Trial Court, Quezon City, Branch LXXXV dated May 22, 1984, in Civil Case No. Q-40392 is
REVERSED and SET ASIDE, without prejudice to the filing by Alma Magalad of the appropriate complaint
against Premiere Financing Corporation with the Securities and Exchange Commission.

SO ORDERED.
G.R. No. L-57767 January 31, 1984

ALBERTO S. SUNIO and ILOCOS COMMERCIAL CORPORATION, petitioners,

vs.
NATIONAL LABOR RELATIONS COMMISSION, NEMESIO VALENTON, SANTOS DEL
ROSARIO, VICENTE TAPUCOL, ANDRES SOLIS, CRESCENCIO SOLLER, CECILIO LABUNI,
SOTERO L. TUMANG, in his capacity as Asst. Regional Director for Arbitration, Regional Office
No. 1, Ministry of Labor & Employment, and AMBROSIO B. SISON, in his capacity as Acting
Regional Sheriff, Regional Office No. 1, Ministry of Labor & Employment, respondents.

Yolanda Bustamante for petitioners.

The Solicitor General for respondent NLRC.

Benjamin F. Baterina for private respondents,

MELENCIO-HERRERA, J.:

In this special civil action for certiorari and Prohibition with Preliminary Injunction, petitioners Alberto Sunio
and Ilocos Commercial Corporation seek to set aside the Resolution of March 24, 1981 of the National Labor
Relations Commission (NLRC), which affirmed the Decision of the Assistant Regional Director, dated
November 5, 1979, in NLRC Case No. RB-1-1228-78, directing petitioners and Cabugao Ice Plant Incorporated
to reinstate private respondents to their former position without loss of seniority and privileges and to pay
them backwages from February 1, 1978 to the date of their actual reinstatement.

The controversy arose from the following antecedents:

On July 30,1973, EM Ramos & Company, Inc. (EMRACO for brevity) and Cabugao Ice Plant, Inc. (CIPI for
short), sister corporations, sold an ice plant to Rizal Development and Finance Corporation RDFC with a
mortgage on the same properties constituted by the latter in favor of the former to secure the payment of the
balance of the purchase price. 1

By virtue of that sale, EMRACO-CIPI terminated the services of all their employees including private
respondents herein, and paid them their separation pay. RDFC hired its own own employees and operated the
plant.

On November 28, 1973, RDFC sold the ice plant to petitioner Ilocos Commercial Corporation ICC headed by its
President and General Manager, petitioner Alberto S. Sunio. Petitioners also hired their own employees as
private respondents were no longer in the plant. The sale was subject to the mortgage in favor of EMRACO-
CIPI. Both RDFC-ICC failed to pay the balance of the purchase price, as a consequence of which, EMRACO-
CIPI instituted extrajudicial foreclosure proceedings. The properties were sold at public auction on August 30,
1974, the highest bidders being EMRACO CIPI. On the same date, said companies obtained an ex-parte Writ of
Possession from the Court of First Instance of Ilocos Sur in Civil Case No. 3026-V.

On the same date, August 30, 1974, EMRACO-CIPI sold the ice plant to Nilo Villanueva, suspect to the right of
redemption of RDFC. Nilo Villanueva then re-hired private respondents.

On August 27, 1975, RDFC redeemed the ice plant. Because of the gate to Nilo Villanueva, EMRACO-CIPI were
unable to turn over possession to RDFC and/or petitioners, prompting the latter to file a complaint for recovery
of possession against EMRACO-CIPI with the then Court of First Instance of Ilocos Sur (Civil Case No. 81-KC).
Nilo Villanueva intervened
Said Court ordered the issuance of a Writ of Preliminary Mandatory Injunction placing RDFC in possession of
the ice plant. EMPRACO-CIPI and Villanueva appealed to the Court of Appeals (CA-GR No. 05880- SP which
upheld the questionee, Order. A Petition for certiorari with this Court (L-46376) assailing that Resolution was
denied for lack of merit or January 6, 1978.

On February 1, 1978, RDFC and petitioners finally obtains possession of the ice plant by virtue of the
Mandatory Injunction previously issued, which ordered defendant "particularly Nilo C. Villanueva and his
agents representatives, or any person found in the premises to vacate and surrender the property in
litigation." 2 Petitioners did not re-employ private respondents.

Private respondents filed complaints against petitioners for illegal dismissal with the Regional Office, Ministry
of Labor & Employment, San Fernando, La Union.

On November 5, 1979, the Assistant Regional Director rendered a decision the decretal portion of which reads:

IN VIEW OF THE FOREGOING CONSIDERATIONS, respondents Cabugao Ice Plant, Inc.,

Ilocos Commercial Corporation and/or Alberto Sunio, are hereby directed to reinstate the
complainants to their former positions without loss of seniority privileges and to pay their
backwages from February 1, 1978 to the date when they are actually reinstated

Petitioners appealed to the NLRC, which affirmed the Regional Director's decision and dismissed the appeal
for lack of merit on March 24, 1981 reasoning that when RDFC took possession of the property and private
respondents were terminated in 1973, the latter already had a vested right to their security of tenure, and when
they were rehired those rights continued. 3

Petitioners are now before us assailing the Asst. Regional Director's Decision, dated November 5, 1979, the
Resolution of the NLRC, Second Division, dated March 24, 1981, as well as the Writ of Execution issued
pursuant thereto dated July 14, 1981, for P156,720.80 representing backwages. They raise as lone issue:

That respondent National Labor Relations Commission and/or Asst. Regional Director Sotero
Tumang acted in excess of jurisdiction and/or with grave abuse of discretion amounting to lack
of jurisdiction in rendering the decision and the resolution in NLRC Case No. RB-1-1228-78, and
in ordering the execution of said decision

We issued a Temporary Restraining Order to maintain the status quo, resolved to give due course to the
Petition, and required the parties to submit their respective Briefs. Only petitioners have complied.

Did public respondents' act with grave abuse of on amounting to lack of jurisdiction in ordering the
reinstatement of private respondents and the payment of their backwages?

Petitioners deny any employer-employee relationship with private respondents arguing that no privity of
contract exists between them, the latter being the employees of Nilo Villanueva who re-hired them when he
took over the operation of the ice plant from CIPI; that private respondents should go after Nilo Villanueva for
whatever rights they may be entitled to, or the CIPI which is still existing, that no succession of rights and
obligations took place between Villanueva and petitioners as the transfer of possession was a consequence of
the exercise of the right of redemption; that the amount of backwages was determined without petitioners
being given a chance to be heard and that granting that respondents are entitled to the reliefs adjudged, such
award cannot be enforced against petitioner Sunio, who was impleaded in the complaint as the General
Manager of ICC.

Public respondent, in its Comment, countered that the sale of a business of 'a going concern does not ipso
facto terminate employer-employee relations when the successor-employer continues the business operation of
the predecessor-employer in an essentially unchanged manner. Private respondents argue that the change of
management or ownership of a business entity is not one of the just causes for the termination of services of
employees under Article 283 of the Labor Code, as amended. Both respondents additionally claim that
petitioner Sunio, as the General Manager of ICC and owner of one half (1/2) of its interest, is personally liable
for his malicious act of illegally dismissing private respondents, for no ground exists to justify their
termination.

We sustain petitioners.

It is true that the sale of a business of a going concern does not ipso facto terminate the employer-employee
relations insofar as the successor-employer is concerned, and that change of ownership or management of an
establishment or company is not one of the just causes provided by law for termination of employment. The
situation here, however, was not one of simple change of ownership. Of note is the fact that when, on July 30,
1973, EMRACO-CIPI sold the plant to RDFC, CIPI had terminated the services of its employees, including
herein private respondents, giving them their separation pay which they had accepted. When RDFC took over
ownership and management, therefore, it hired its own employees, not the private respondents, who were no
longer there. RDFC subsequently sold the property to petitioners on November 28, 1973. But by reason of their
failure to pay the balance of the purchase price, EMRACO-CIPI foreclosed on the mortgage over the ice plant;
the property was sold at public auction to EMRACO-CIPI as the highest bidders, and they eventually re-
possessed the plant on August 30, 1974. During all the period that RDFC and petitioners were operating the
plant from July 30, 1973 to August 30, 1974, they had their own employees. CIPI-EMRACO then sold the plant,
also on August 30, 1974, to Nilo Villanueva, subject to RDFC's right of redemption. Nilo Villanueva then
rehired private respondents as employees of the plant, also in 1974.

In 1975, RDFC redeemed the property and demanded possession but EMRACO-CIPI and Nilo Villanueva
resisted so that petitioners were compelled to sue for recovery of possession, obtaining it, however, only in
1978.

Under those circumstances, it cannot be justifiably said that the plant together with its staff and personnel
moved from one ownership to another. No succession of employment rights and obligations can be said to have
taken place between EMRACO-CIPI-Nilo Villanueva, on the one hand, and petitioners on the other. Petitioners
eventually acquired possession by virtue of the exercise of their right of redemption and of a Mandatory
Injunction in their favor which ordered Nilo Villanueva and "any person found in the premises" to vacate. What
is more, when EMRACO-CIPI sold the ice plant to RDFC in 1973, private respondents' employment was
terminated by EMRACO-CIPI and they were given their separation pay, which they accepted. During the
thirteen months, therefore, that RDFC and petitioners were in possession and operating the plant up to August,
1974, they hired their own employees, not the private respondents. In fact, it may even be said that private
respondents had slept on their rights when they failed to contest such termination at the time of sale, if they
believed they had rights to protect. Further, Nilo Villanueva rehired private respondents in August, 1974,
subject to a resolutory condition. That condition having arisen, the rights of private respondents who claim
under him mast be deemed to have also ceased.

Private respondents can neither successfully invoke security of tenure in their favor. Their tenure should not be
reckoned from 1967 because they were already terminated in 1973. Private respondents were only rehired in
1974 by Nilo Villanueva. Petitioners took over by judicial process in 1978 so that private respondents had
actually only four years of rehired employment with Nilo Villanueva, during all of which period, petitioners
fought hard against Nilo Villanueva to recover possession of the plant. Insofar as petitioners are concerned
therefore, there was no tenurial security to speak of that would entitle private respondents to reinstatement
and backwages. We come now to the personal liability of petitioner, Sunio, who was made jointly and severally
responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is
reversible error. The Assistant Regional Director's Decision failed to disclose the reason why he was made
personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (1/2)
interest of said corporation, and his alleged arbitrary dismissal of private respondents. Petitioner Sunio was
impleaded in the Complaint his capacity as General Manager of petitioner corporation. where appears to be no
evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents.
His act, therefore, was within the scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it may be related. 4 Mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not
of itself sufficient ground for disregarding the separate corporate personality. 5 Petitioner Sunio, therefore,
should not have been made personally answerable for the payment of private respondents' back salaries.

WHEREFORE, the assailed Decision and Resolution, dated November 5, 1979 and March 24, 1981,
respectively, and the consequent Writ of Execution are hereby SET ASIDE and the Temporary Restraining
Order heretofore issued by this Court hereby made permanent. Public respondents are hereby ordered to
return to petitioners the latter's levied properties in their possession. No costs.

SO ORDERED.
G.R. No. 153886             January 14, 2004

MEL V. VELARDE, petitioner,
vs.
LOPEZ, INC., respondent.

DECISION

CARPIO-MORALES, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court, which seeks to review the
decision1 and resolution2 of the Court of Appeals, raises the issue of whether the defendant in a complaint for
collection of sum of money can raise a counterclaim for retirement benefits, unpaid salaries and incentives, and
other benefits arising from services rendered by him in a subsidiary of the plaintiff corporation.

On January 6, 1997, Eugenio Lopez Jr., then President of respondent Lopez, Inc., as LENDER, and petitioner
Mel Velarde, then General Manager of Sky Vision Corporation (Sky Vision), a subsidiary of respondent, as
BORROWER, forged a notarized loan agreement covering the amount of ten million (P10,000,000.00) pesos.
The agreement expressly provided for, among other things, the manner of payment and the circumstances
constituting default which would give the lender the right to declare the loan together with accrued interest
immediately due and payable.3

Sec. 6 of the agreement detailed what constituted an "event of default" as follows:

Section 6

Each of the following events and occurrences shall constitute an Event of Default ("Event of Default")
under this Agreement:

a) the BORROWER fails to make payment when due and payable of any amount he is obligated
to pay under this Agreement;

b) the BORROWER fails to mortgage in favor of the LENDER real property sufficient to cover
the amount of the LOAN.4

As petitioner failed to pay the installments as they became due, respondent, apparently in answer to a proposal
of petitioner respecting the settlement of the loan, advised him by letter dated July 15, 1998 that he may use his
retirement benefits in Sky Vision in partial settlement of his loan after he settles his accountabilities to the
latter and gives his written instructions to it (Sky Vision). 5

Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting that the imputed
unliquidated advances from Sky Vision had already been properly liquidated. 6

On August 18, 1998, respondent filed a complaint for collection of sum of money with damages at the Regional
Trial Court (RTC) of Pasig City against petitioner, alleging that petitioner violated the above-quoted Section 6
of the loan agreement as he failed to put up the needed collateral for the loan and pay the installments as they
became due, and that despite his receipt of letters of demand dated December 1, 1997 7 and January 13,
1998,8 he refused to pay.

In his answer, petitioner alleged that the loan agreement did not reflect his true agreement with respondent, it
being merely a "cover document" to evidence the reward to him of ten million pesos (P10,000,000.00) for his
loyalty and excellent performance as General Manager of Sky Vision and that the payment, if any was expected,
was in the form of continued service; and that it was when he was compelled by respondent to retire that the
form of payment agreed upon was rendered impossible, prompting the late Eugenio Lopez, Jr. to agree that his
retirement benefits from Sky Vision would instead be applied to the loan. 9
By way of compulsory counterclaim, petitioner claimed that he was entitled to retirement benefits from Sky
Vision in the amount of P98,280,000.00, unpaid salaries in the amount of P2,740,000.00, unpaid incentives
in the amount of P500,000, unpaid share from the "net income of Plaintiff corporation," equity in his service
vehicle in the amount of P1,500,000, reasonable return on the stock ownership plan for services rendered as
General Manager, and moral damages and attorney’s fees.10

Petitioner thus prayed for the dismissal of the complaint and the award of the following sums of money in the
form of compulsory counterclaims:

1. P103,020,000.00, PLUS the value of Defendant’s stock options and unpaid share from the net
income with Plaintiff corporation (to be computed) as actual damages;

2. P15,000,000.00, as moral damages; and

3. P1,500,000.00, as attorney’s fees plus appearance fees and the costs of suit. 11

Respondent filed a manifestation and a motion to dismiss the counterclaim for want of jurisdiction, which

drew petitioner to assert in his comment and opposition thereto that the veil of corporate fiction must be
pierced to hold respondent liable for his counterclaims.

By Order of January 3, 2000, Branch 155 of the RTC of Pasig denied respondent’s motion to dismiss the
counterclaim on the following premises: A counterclaim being essentially a complaint, the principle that a
motion to dismiss hypothetically admits the allegations of the complaint is applicable; the counterclaim is
compulsory, hence, within its jurisdiction; and there is identity of interest between respondent and Sky Vision
to merit the piercing of the veil of corporate fiction.12

Respondent’s motion for reconsideration of the trial court’s Order of January 3, 2000 having been denied, it
filed a Petition for Certiorari at the Court of Appeals which held that respondent is not the real party-in-interest
on the counterclaim and that there was failure to show the presence of any of the circumstances to justify the
application of the principle of "piercing the veil of corporate fiction." The Orders of the trial court were thus set
aside and the counterclaims of petitioner were accordingly dismissed. 13

The Court of Appeals having denied petitioner’s motion for reconsideration, the instant Petition for Review was
filed which assigns the following errors:

I.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE RTC BRANCH 155 ALLEGEDLY
ACTED WITH GRAVE ABUSE OF DISCRETION IN ISSUING THE ORDERS DATED JANUARY 3, 2000 AND
OCTOBER 9, 2000 CONSIDERING THAT THE GROUNDS RAISED BY RESPONDENT LOPEZ, INC. IN ITS
PETITION FOR CERTIORARI INVOLVED MERE ERRORS OF JUDGMENT AND NOT ERRORS OF
JURISDICTION.

II.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENT LOPEZ, INC. IS NOT THE
REAL PARTY-IN-INTEREST AS PARTY-DEFENDANT ON THE COUNTERCLAIMS OF PETITIONER
VELARDE CONSIDERING THAT THE FILING OF RESPONDENT LOPEZ, INC.’S MANIFESTATION AND
MOTION TO DISMISS COUNTERCLAIM HAD THE EFFECT OF HYPOTHETICALLY ADMITTING THE
TRUTH OF THE MATERIAL AVERMENTS OF THE ANSWER, WHICH MATERIAL AVERMENTS
SUFFICIENTLY ALLEGED THAT RESPONDENT LOPEZ, INC. COMMITTED ACTS WHICH SHOW THAT
ITS SUBSIDIARY, SKY VISION, WAS A MERE BUSINESS CONDUIT OR ALTER EGO OF THE FORMER,
THUS, JUSTIFYING THE PIERCING OF THE VEIL OF CORPORATE FICTION.

III.
THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE COUNTERCLAIMS OF PETITIONER
VELARDE ARE NOT COMPULSORY.14

While petitioner correctly invokes the ruling in Atienza v. Court of Appeals15 to postulate that not every denial
of a motion to dismiss can be corrected by certiorari under Rule 65 and that, as a general rule, the remedy from
such denial is to appeal in due course after a decision has been rendered on the merits, there are exceptions
thereto, as when the court in denying the motion to dismiss acted without or in excess of jurisdiction or with
patent grave abuse of discretion,16 or when the assailed interlocutory order is patently erroneous and the
remedy of appeal would not afford adequate and expeditious relief, 17 or when the ground for the motion to
dismiss is improper venue,18 res judicata,19 or lack of jurisdiction20 as in the case at bar.

Early on, it bears noting, when the case was still with the trial court, respondent filed a motion to dismiss the
counterclaims to assail its jurisdiction, respondent asserting that the counterclaims, being money claims
arising from a labor relationship, are within the exclusive competence of the National Labor Relations
Commission.21 On the other hand, petitioner alleged that due to the tortuous manner he was coerced into
retirement, it is the Regional Trial Courts (RTCs) and not the National Labor Relations Commission which has
exclusive jurisdiction over his counterclaims.

In determining which has jurisdiction over a case, the averments of the complaint/counterclaim, taken as a
whole, are considered.22 In his counterclaim, petitioner alleged that:

xxx

29. It was only on July 15, 1998 that Lopez, Inc. submitted a computation of the retirement benefit due
to the Defendant. (Copy attached as ANNEX 4). Immediately after receiving this computation,
Defendant immediately informed Plaintiff of the erroneous figure used as salary in the computation of
benefits. This was done in a telephone conversation with a certain Atty. Amina Amado of Lopez, Inc.

29.1 The Defendant also informed her that the so called "unliquidated advances amounting to
P422,922.87 since 1995" had all been properly liquidated as reflected in all the reports of the company.
The Defendant reminded Atty. Amado of unpaid incentives and salaries for 1997.

29.2 Defendant likewise informed Plaintiff that the one month for every year of service as a basis for the

computation of the Defendant’s retirement benefit is erroneous. This computation is even less than
what the rank and file employees get. That CEO’s, COO’s and senior executives of the level of ABS-CBN,
Sky Vision, Benpres, Meralco and other Lopez companies had and have received a lot more than the
regular rank and file employees. All these retired executives and records can be summoned for
verification.

29.3 The circumstances of the retirement of the Defendant are not those for a simple and ordinary rank
and file employee. Mr. Lopez, III admitted that he and the Defendant have had problems which
accumulated through time and that they chose to part ways in a manner that was dignified for both of
them. Treating the Defendant as a rank and file employee is hardly dignified not just to the Defendant
but also to the Lopezes whose existing executives serving them will draw lessons from the Defendant’s
experience.

29.4 These circumstances hardly reflect a simple retirement. The Defendant, who is known in the local
and international media community, is hardly considered a rank and file employee. Defendant was a
stockholder of the Corporation and a duly-elected member of the Board of Directors. Certain
government officials can attest to the sensitivity of issues and matters the Defendant had represented
for the Lopezes that are hardly issues handled by a simple rank and file employee. Respectable
individuals in government and industry are willing to testify to this regard.x x x 23 (Underscoring and
italics supplied).
At the heart of petitioner’s counterclaim is his alleged forced retirement which is also the basis of his claim for,
among other things, unpaid salaries, unpaid incentives, reasonable return on the stock ownership plan, and
other benefits from a subsidiary company of the respondent.

Section 5(c) of P.D. 902-A (as amended by R.A. 8799, the Securities Regulation Code) applies to a corporate
officer’s dismissal. For a corporate officer’s dismissal is always a corporate act and/or an intra-corporate
controversy and that its nature is not altered by the reason or wisdom which the Board of Directors may have
in taking such action.24

With regard to petitioner’s claim for unpaid salaries, unpaid share in net income, reasonable return on the
stock ownership plan and other benefits for services rendered to Sky Vision, jurisdiction thereon pertains to the
Securities Exchange Commission even if the complaint by a corporate officer includes money claims since such
claims are actually part of the prerequisite of his position and, therefore, interlinked with his relations with the
corporation.25 The question of remuneration involving a person who is not a mere employee but a stockholder
and officer of the corporation is not a simple labor problem but a matter that comes within the area of
corporate affairs and management, and is in fact a corporate controversy in contemplation of the Corporation
Code.26

While petitioner’s counterclaims were filed on December 1, 1998, the second challenged order of the trial court
denying respondent’s motion for reconsideration of the denial of its motion to dismiss was issued on October 9,
2000 at which time P.D. 902-A had been amended by R.A. 8799 (approved on July 19, 2000) which mandated
the transfer of jurisdiction over intra-corporate controversies, subject of the counterclaims, to RTCs.

But even if the subject matter of the counterclaims is now cognizable by RTCs, the filing thereof against
respondent is improper, it not being the real party-in-interest, for it is petitioner’s employer Sky Vision,
respondent’s subsidiary.

It cannot be gainsaid 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.

Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing the veil of corporate
fiction. Piercing the veil of corporate fiction is warranted, however, only in cases when the separate legal entity
is used to defeat public convenience, justify wrong, protect fraud, or defend crime, such that in the case of two
corporations, the law will regard the corporations as merged into one. 27 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.28

In applying the doctrine of piercing the veil of corporate fiction, 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. 29

Nowhere, however, in the pleadings and other records of the case can it be gathered that respondent has
complete control over Sky Vision, not only of finances but of policy and business practice in respect to the
transaction attacked, so that Sky Vision had at the time of the transaction no separate mind, will or existence of
its own. The existence of interlocking directors, corporate officers and shareholders is not enough justification
to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.

This Court is thus not convinced that the real party-in-interest with regard to the counterclaim for damages
arising from the alleged tortuous manner by which petitioner was forced to retire as General Manager of Sky
Vision is respondent.

Petitioner muddles the issues by arguing that respondent fraudulently took advantage of the control over the
matter of compensation and benefits of an employee of Sky Vision to deceive petitioner into signing the loan
agreement on the misleading assurance that it was merely for the purpose of documenting the reward to him of
ten million pesos. This argument does not persuade. Petitioner, being a lawyer, is presumed to know the legal
and binding effects of loan agreements.

It bears emphasis that Sky Vision’s involvement in the transaction subject of the case sprang only after a
proposal was apparently proffered by petitioner that his retirement benefits from Sky Vision be used in partial
payment of his loan from respondent as gathered from the July 15, 1998 letter 30 of Rommel Duran, Vice-
President and General Manager of respondent, to petitioner reading:

Dear Mr. Velarde:

As requested, we have made computations on the outstanding amount of your loan with Lopez, Inc.
should your retirement benefits from Sky Vision Corporation/Central CATV, Inc. ""Sky/Central") be
applied to the partial payment of your loan. Please note that in order to effect the application of your
retirement benefits to the partial payment of your loan, you will need to give
Sky/Central written instructions on the same in the soonest possible time.

As you will see in the attached computation, the amount of P4,077,077.13 will be applied to the payment
of your loan to retroact on January 1, 1998. The amount of P422,922.87, representing unliquidated
advances made by Sky/Central to you (see attached listing), has been deducted from your retirement
pay of P4.5 million. Should you be able to liquidate the advances as requested by Sky/Central, the said
amount will be applied to the partial payment of your loan and we shall adjust the amount of principal
and interest due from you accordingly. After the application of the amount of P4,077,077.13 to the
partial payment of your loan, the amount of P7,585,912.86 will be immediately due and demandable.
The amount of P7,585,912.86 represents the outstanding principal and interest due as of July 15, 1998.

Without the application of your retirement benefits to the partial payment of your loan, the amount of
P11,850,000.00 is due as of July 15, 1998. We reiterate our demand for full payment of your
outstanding obligation immediately. (Underscoring supplied)

As for the trial court’s ruling that the agreement to set-off is an amendment of the loan agreement resulting to
an identity of interest between respondent and Sky Vision and, therefore, sufficient to pierce the veil of
corporate fiction, it is untenable. The abovequoted letter is clear that, to effect a set-off, it is a condition sine
qua non that the approval thereof by "Sky/Central" must be obtained, and that petitioner liquidate his
advances from Sky Vision. These conditions hardly manifest that respondent possessed that degree of control
over Sky Vision as to make the latter its mere instrumentality, agency or adjunct.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED.

G.R. No. 82797             February 27, 1991

GOOD EARTH EMPORIUM INC., and LIM KA PING, petitioners,

vs.
HONORABLE COURT OF APPEALS and ROCES-REYES REALTY INC., respondents.

A.E. Dacanay for petitioners.

Antonio Quintos Law Office for private respondent.

PARAS, J.:

This is a petition for review on certiorari of the December 29, 1987 decision * of the Court of Appeals in CA-
G.R. No. 11960 entitled "ROCES-REYES REALTY, INC. vs. HONORABLE JUDGE REGIONAL TRIAL COURT
OF MANILA, BRANCH 44, GOOD EARTH EMPORIUM, INC. and LIM KA PING" reversing the decision of
respondent Judge ** of the Regional Trial Court of Manila, Branch 44 in Civil Case No. 85-30484, which
reversed the resolution of the Metropolitan Trial Court Of Manila, Branch 28 in Civil Case No.
09639, *** denying herein petitioners' motion to quash the alias writ of execution issued against them.

As gathered from the records, the antecedent facts of this case, are as follows:

A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-REYES REALTY, INC., as
lessor, and GOOD EARTH EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981
and ending October 31, 1984 at a monthly rental of P65,000.00 (Rollo, p. 32; Annex "C" of Petition). The
building which was the subject of the contract of lease is a five-storey building located at the corner of Rizal
Avenue and Bustos Street in Sta. Cruz, Manila.

From March 1983, up to the time the complaint was filed, the lessee had defaulted in the payment of rentals, as
a consequence of which, private respondent ROCES-REYES REALTY, INC., (hereinafter designated as ROCES
for brevity) filed on October 14, 1984, an ejectment case (Unlawful Detainer) against herein petitioners, GOOD
EARTH EMPORIUM, INC. and LIM KA PING, hereinafter designated as GEE, (Rollo, p. 21; Annex "B" of the
Petition). After the latter had tendered their responsive pleading, the lower court (MTC, Manila) on motion of
Roces rendered judgment on the pleadings dated April 17, 1984, the dispositive portion of which states:

Judgment is hereby rendered ordering defendants (herein petitioners) and all persons claiming title
under him to vacate the premises and surrender the same to the plaintiffs (herein respondents);
ordering the defendants to pay the plaintiffs the rental of P65,000.00 a month beginning March 1983
up to the time defendants actually vacate the premises and deliver possession to the plaintiff; to pay
attorney's fees in the amount of P5,000.00 and to pay the costs of this suit. (Rollo, p. 111; Memorandum
of Respondents)

On May 16, 1984, Roces filed a motion for execution which was opposed by GEE on May 28, 1984 simultaneous
with the latter's filing of a Notice of Appeal (Rollo, p. 112, Ibid.). On June 13, 1984, the trial court resolved such
motion ruling:

After considering the motion for the issuance of a writ of execution filed by counsel for the plaintiff
(herein respondents) and the opposition filed in relation thereto and finding that the defendant failed to
file the necessary supersedeas bond, this court resolved to grant the same for being meritorious. (Rollo,
p. 112)
On June 14, 1984, a writ of execution was issued by the lower court. Meanwhile, the appeal was assigned to the
Regional Trial Court (Manila) Branch XLVI. However, on August 15, 1984, GEE thru counsel filed with the
Regional Trial Court of Manila, a motion to withdraw appeal citing as reason that they are satisfied with the
decision of the Metropolitan Trial Court of Manila, Branch XXVIII, which said court granted in its Order of
August 27, 1984 and the records were remanded to the trial court (Rollo, p. 32; CA Decision). Upon an ex-
parte Motion of ROCES, the trial court issued an Alias Writ of Execution dated February 25, 1985 (Rollo, p.
104; Annex "D" of Petitioner's Memorandum), which was implemented on February 27, 1985. GEE thru
counsel filed a motion to quash the writ of execution and notice of levy and an urgent Ex-parte Supplemental
Motion for the issuance of a restraining order, on March 7, and 20, 1985, respectively. On March 21, 1985, the
lower court issued a restraining order to the sheriff to hold the execution of the judgment pending hearing on
the motion to quash the writ of execution (Rollo, p. 22; RTC Decision). While said motion was pending
resolution, GEE filed a Petition for Relief from judgment before another court, Regional Trial Court of Manila,
Branch IX, which petition was docketed as Civil Case No. 80-30019, but the petition was dismissed and the
injunctive writ issued in connection therewith set aside. Both parties appealed to the Court of Appeals; GEE on
the order of dismissal and Roces on denial of his motion for indemnity, both docketed as CA-G.R. No. 15873-
CV. Going back to the original case, the Metropolitan Trial Court after hearing and disposing some other
incidents, promulgated the questioned Resolution, dated April 8, 1985, the dispositive portion of which reads
as follows:

Premises considered, the motion to quash the writ is hereby denied for lack of merit.

The restraining orders issued on March 11 and 23, 1985 are hereby recalled, lifted and set aside. (Rollo,
p. 20, MTC Decision)

GEE appealed and by coincidence. was raffled to the same Court, RTC Branch IX. Roces moved to dismiss the
appeal but the Court denied the motion. On certiorari, the Court of Appeals dismissed Roces' petition and
remanded the case to the RTC. Meantime, Branch IX became vacant and the case was re-raffled to Branch
XLIV.

On April 6, 1987, the Regional Trial Court of Manila, finding that the amount of P1 million evidenced by
Exhibit "I" and another P1 million evidenced by the pacto de retro sale instrument (Exhibit "2") were in full
satisfaction of the judgment obligation, reversed the decision of the Municipal Trial Court, the dispositive
portion of which reads:

Premises considered, judgment is hereby rendered reversing the Resolution appealed from quashing
the writ of execution and ordering the cancellation of the notice of levy and declaring the judgment debt
as having been fully paid and/or Liquidated. (Rollo, p. 29).

On further appeal, the Court of Appeals reversed the decision of the Regional Trial Court and reinstated the
Resolution of the Metropolitan Trial Court of Manila, the dispositive portion of which is as follows:

WHEREFORE, the judgment appealed from is hereby REVERSED and the Resolution dated April 8,
1985, of the Metropolitan Trial Court of Manila Branch XXXIII is hereby REINSTATED. No
pronouncement as to costs. (Rollo, p. 40).

GEE's Motion for Reconsideration of April 5, 1988 was denied (Rollo, p. 43). Hence, this petition.

The main issue in this case is whether or not there was full satisfaction of the judgment debt in favor of
respondent corporation which would justify the quashing of the Writ of Execution.

A careful study of the common exhibits (Exhibits 1/A and 2/B) shows that nowhere in any of said exhibits was
there any writing alluding to or referring to any settlement between the parties of petitioners' judgment
obligation (Rollo, pp. 45-48).

Moreover, there is no indication in the receipt, Exhibit "1", that it was in payment, full or partial, of the
judgment obligation. Likewise, there is no indication in the pacto de retro sale which was drawn in favor of
Jesus Marcos Roces and Marcos V. Roces and not the respondent corporation, that the obligation embodied
therein had something to do with petitioners' judgment obligation with respondent corporation.

Finding that the common exhibit, Exhibit 1/A had been signed by persons other than judgment creditors
(Roces-Reyes Realty, Inc.) coupled with the fact that said exhibit was not even alleged by GEE and Lim Ka Ping
in their original motion to quash the alias writ of execution (Rollo, p. 37) but produced only during the hearing
(Ibid.) which production resulted in petitioners having to claim belatedly that there was an "overpayment" of
about half a million pesos (Rollo, pp. 25-27) and remarking on the utter absence of any writing in Exhibits
"1/A" and "2/B" to indicate payment of the judgment debt, respondent Appellate Court correctly concluded
that there was in fact no payment of the judgment debt. As aptly observed by the said court:

What immediately catches one's attention is the total absence of any writing alluding to or referring to
any settlement between the parties of private respondents' (petitioners') judgment obligation. In
moving for the dismissal of the appeal Lim Ka Ping who was then assisted by counsel simply stated that
defendants (herein petitioners) are satisfied with the decision of the Metropolitan Trial Court (Records
of CA, p. 54).

Notably, in private respondents' (petitioners') Motion to Quash the Writ of Execution and Notice of
Levy dated March 7, 1985, there is absolutely no reference to the alleged payment of one million pesos
as evidenced by Exhibit 1 dated September 20, 1984. As pointed out by petitioner (respondent
corporation) this was brought out by Linda Panutat, Manager of Good Earth only in the course of the
latter's testimony. (Rollo, p. 37)

Article 1240 of the Civil Code of the Philippines provides that:

Payment shall be made to the person in whose favor the obligation has been constituted, or his
successor in interest, or any person authorized to receive it.

In the case at bar, the supposed payments were not made to Roces-Reyes Realty, Inc. or to its successor in
interest nor is there positive evidence that the payment was made to a person authorized to receive it. No such
proof was submitted but merely inferred by the Regional Trial Court (Rollo, p. 25) from Marcos Roces having
signed the Lease Contract as President which was witnessed by Jesus Marcos Roces. The latter, however, was
no longer President or even an officer of Roces-Reyes Realty, Inc. at the time he received the money (Exhibit
"1") and signed the sale with pacto de retro (Exhibit "2"). He, in fact, denied being in possession of authority to
receive payment for the respondent corporation nor does the receipt show that he signed in the same capacity
as he did in the Lease Contract at a time when he was President for respondent corporation (Rollo, p. 20, MTC
decision).

On the other hand, Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt (Exhibit
"1") is the payment for a loan extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is
home by the receipt itself whereby they acknowledged payment of the loan in their names and in no other
capacity.

A corporation has a personality distinct and separate from its individual stockholders or members. Being an
officer or stockholder of a corporation does not make one's property also of the corporation, and vice-versa, for
they are separate entities (Traders Royal Bank v. CA-G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152
SCRA 482). Shareowners are in no legal sense the owners of corporate property (or credits) which is owned by
the corporation as a distinct legal person (Concepcion Magsaysay-Labrador v. CA-G.R. No. 58168, December
19, 1989). As a consequence of the separate juridical personality of a corporation, the corporate debt or credit is
not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of the corporation (Prof.
Jose Nolledo's "The Corporation Code of the Philippines, p. 5, 1988 Edition, citing Professor Ballantine).

The absence of a note to evidence the loan is explained by Jesus Marcos Roces who testified that the IOU was
subsequently delivered to private respondents (Rollo, pp. 97-98). Contrary to the Regional Trial Court's
premise that it was incumbent upon respondent corporation to prove that the amount was delivered to the
Roces brothers in the payment of the loan in the latter's favor, the delivery of the amount to and the receipt
thereof by the Roces brothers in their names raises the presumption that the said amount was due to
them.1âwphi1 There is a disputable presumption that money paid by one to the other was due to the latter
(Sec. 5(f) Rule 131, Rules of Court). It is for GEE and Lim Ka Ping to prove otherwise. In other words, it is for
the latter to prove that the payments made were for the satisfaction of their judgment debt and not vice versa.

The fact that at the time payment was made to the two Roces brothers, GEE was also indebted to respondent
corporation for a larger amount, is not supportive of the Regional Trial Court's conclusions that the payment
was in favor of the latter, especially in the case at bar where the amount was not receipted for by respondent
corporation and there is absolutely no indication in the receipt from which it can be reasonably inferred, that
said payment was in satisfaction of the judgment debt. Likewise, no such inference can be made from the
execution of the pacto de retro sale which was not made in favor of respondent corporation but in favor of the
two Roces brothers in their individual capacities without any reference to the judgment obligation in favor of
respondent corporation.

In addition, the totality of the amount covered by the receipt (Exhibit "1/A") and that of the sale with pacto de
retro (Exhibit "2/B") all in the sum of P2 million, far exceeds petitioners' judgment obligation in favor of
respondent corporation in the sum of P1,560,000.00 by P440,000.00, which militates against the claim of
petitioner that the aforesaid amount (P2M) was in full payment of the judgment obligation.

Petitioners' explanation that the excess is interest and advance rentals for an extension of the lease contract
(Rollo, pp. 25-28) is belied by the absence of any interest awarded in the case and of any agreement as to the
extension of the lease nor was there any such pretense in the Motion to Quash the Alias Writ of Execution.

Petitioners' averments that the respondent court had gravely abused its discretion in arriving at the assailed
factual findings as contrary to the evidence and applicable decisions of this Honorable Court are therefore,
patently unfounded. Respondent court was correct in stating that it "cannot go beyond what appears in the
documents submitted by petitioners themselves (Exhibits "1" and "2") in the absence of clear and convincing
evidence" that would support its claim that the judgment obligation has indeed been fully satisfied which would
warrant the quashal of the Alias Writ of Execution.

It has been an established rule that when the existence of a debt is fully established by the evidence (which has
been done in this case), the burden of proving that it has been extinguished by payment devolves upon the
debtor who offers such a defense to the claim of the plaintiff creditor (herein respondent corporation) (Chua
Chienco v. Vargas, 11 Phil. 219; Ramos v. Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30 Phil. 365). For indeed,
it is well-entrenched in Our jurisprudence that each party in a case must prove his own affirmative allegations
by the degree of evidence required by law (Stronghold Insurance Co. v. CA, G.R. No. 83376, May 29,1989; Tai
Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366).

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

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

SO ORDERED.
 SALVADOR O. BOOC v. MALAYO B. BANTUAS +

RESOLUTION

406 Phil. 740

DE LEON, JR., J.:

An affidavit-complaint dated August 31, 1999 was filed before the Office of the Court Administrator (OCA) by
Salvador Booc charging Malayo B. Bantuas, Sheriff IV of the Regional Trial Court (RTC), Branch 3, Iligan City
with Gross Ignorance of the Law and Grave Abuse of Authority relative to Civil Case No. 1718 entitled, "Felipe
G. Javier, Jr. vs. Rufino Booc."

Complainant is the President of five Star Marketing Corporation. On August 22, 1994 herein respondent Sheriff
Malayo B. Bantuas, pursuant to a Writ of Execution issued in Civil Case No. 1718 filed a Notice of Levy with the
Register of Deeds, Iligan City over a parcel of land covered by TCT No. T-19209 and owned by Five Star
Marketing Corporation. Complainant alleged that respondent sheriff, at the instance of plaintiff, former Judge
Felipe Javier, proceeded to file the Notice of Levy despite respondent sheriff's knowledge that the property is
owned by the corporation which was not a party to the civil case.

On July 31, 1995, the corporation through the complainant reiterated to respondent sheriff that it was the
owner of the property and Rufino Booc had no share or interest in the corporation. Hence, the corporation
demanded that respondent sheriff cancel the notice of levy, otherwise the corporation would take the
appropriate legal steps to protect its interest.

Respondent sheriff, however, did not heed the corporation's demand inasmuch as on August 20, 1999 the
corporation received a "Notice of Sale on Execution of Real Property," dated August 11, 1999, covering the
subject property. Respondent sheriff scheduled the public auction on August 31, 1999. Consequently, the
corporation, to protect its rights and interests, was compelled to file an action for Quieting of Title with the
RTC, Branch 4 of Iligan City.

Respondent sheriff, in his answer to the complaint filed against him before the OCA, said that he filed a Notice
of Levy with the Register of Deeds of Iligan City on the share, rights, interest and participation of Rufino Booc
in the parcel of land owned by Five Star Marketing Corporation. Respondent sheriff claimed that Rufino Booc
is the owner of around 200 shares of stock in said corporation according to a document issued by the Securities
and Exchange Commission.

Respondent sheriff stressed that the levy was made on the share, rights and/or interest and participation which
Rufino Booc, as president and stockholder, may have in the parcel of land owned by Five Star Marketing
Corporation. Claiming that he was only acting pursuant to his duties as sheriff, respondent cited Section 15,
Rule 39 of the Rules of Court which states that

x x x The officer must enforce an execution of a money judgment by levying on all the property, real and
personal of every name and nature whatsoever, and which may be disposed of for value of the judgment
debtor not exempt from execution.

Real property stocks, shares, debts, credits, and other personal property, or any interest in either real or
personal property, may be levied upon in like manner and with like effect as under a writ of execution.
Respondent sheriff said that while complainant Salvador Booc made a demand for the cancellation of levy
made, the former deemed it wise to have the judgment satisfied in accordance with Section 39 of the Rules of
Court. Respondent sheriff added that the trial court where the case for Quieting of Title filed by the corporation
was pending ordered the auction sale of the shares of stock of Rufino Booc. The corporation allegedly never
questioned said order of the RTC.
Finally, respondent sheriff averred that the corporation is merely a dummy of Rufino Booc and his brother
Sheikding Booc. Respondnet sheriff submitted as an exhibit an affidavit executed by Sheikding Booc wherein
the latter admitted that when Judge Felipe Javier won in the civil case against Rufino Booc, the latter simulated
a transfer of his shares of stock in Five Star Marketing Corporation so that the property may not be levied
upon.[1]

Complainant, in his reply to respondent sheriff's comment belied the latter's allegation that the corporation
never questioned the auction sale. Complainant averred that contrary to the respondent sheriff's assertion, the
trial court in fact issued a restraining order which was withdrawn after plaintiff's counsel manifested that the
respondent sheriff would only auction Rufino Booc's shares of stock in the corporation and not the subject
property.

The OCA found respondent sheriff liable for the charges filed against him, stating that respondent sheriff acted
in bad faith when he auctioned the subject property inasmuch as Judge Mangotara had already warned him
that the public auction should pertain only to shares of stock owned by Rufino Booc in Five Star Marketing
Corporation. Respondent sheriff, however, in violation of the order issued by Judge Mangotara and in
disregard of the manifestation filed by plaintiff's counsel that the sale should involve only the shares of stock,
proceeded to auction the subject property. The OCA, thus, made the recommendation that:

1) The instant case be RE-DOCKETED as a regular administrative matter; and

Respondent Sheriff Malayo B. Bantuas be FINED in the amount of Ten Thousand Pesos
(P10,000.00) for conducting the auction sale in violation of the terms of the order issued by Acting
2)
Presiding Judge Mamindiara P. Mangotara with a STERN WARNING that a commission of the
same or similar acts in the future shall be dealt with more severely.
A careful scrutiny of the records shows that respondent sheriff, in filing a notice of levy on the subject property
as well as in the certificate of sale, did not fail to mention that what was being levied upon and sold was
whatever shares, rights, interests and participation Rufino Booc, as president and stockholder in Five Star
Marketing Corporation may have on subject property. Respondent sheriff, however, overstepped his authority
when he disregarded the distinct and separate personality of the corporation from that of Rufino Booc as
stockholder of the corporation by levying on the property of the corporation. Respondent sheriff should not
have made the levy based on mere conjecture that since Rufino Booc is a stockholder and officer of the
corporation, then he might have an interest or share in the subject property.

It is settled that a corporation is clothed with a personality separate and distinct from that of its stockholders. It
may not be held liable for the personal indebtedness of its stockholders. In the case of Del Rosario vs. Bascar,
Jr.,[2] we imposed the fine of P5,000.00 on respondent sheriff Bascar for "allocating unto himself the power of
the court to `pierce the veil of corporate entity' and improvidently assuming that since complainant Esperanza
del Rosario is the treasurer of Miradel Development Corporation, they are one and the same." In the said case
we reiterated the principle that the mere fact that one is a president of the corporation does not render the
property he owns or possesses the property of the corporation since the president, as an individual, and the
corporation are separate entities.

Based on the foregoing, respondent Sheriff Bantuas has clearly acted beyond his authority when he levied the
property of Five Star Marketing Corporation. The fact, however, that respondent sheriff, in levying said
property, had stated in the notice of levy as well as in the certificate of sale that what was being levied upon and
sold was whatever rights, shares interest and/or participation Rufino Booc, as stockholder and president in the
corporation, may have on the subject property, shows that respondent sheriff's conduct was impelled partly by
ignorance of Corporation Law and partly by mere overzealousness to comply with his duties and not by bad
faith or blatant disregard of the trial court's order. Hence, we deem that the penalty of a fine of Five Thousand
Pesos (P5,000.00) to be imposed on respondent sheriff would suffice.

WHEREFORE, respondent Malayo B. Bantuas, Sheriff IV of the RTC of Iligan City , Branch 3, is
hereby FINED in the sum of Five Thousand Pesos (P5,000.00) with the STERN WARNING that a repetition
of the same or similar acts in the future will be dealt with more severely.

SO ORDERED.
G.R. No. L-42780             January 17, 1936
MANILA GAS CORPORATION, plaintiff-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
DeWitt, Perkins and Ponce Enrile for appellant.
Office of the Solicitor-General Hilado for appellee.
MALCOLM, J.:
This is an action brought by the Manila Gas Corporation against the Collector of Internal Revenue for the
recovery of P56,757.37, which the plaintiff was required by the defendant to deduct and withhold from the
various sums paid it to foreign corporations as dividends and interest on bonds and other indebtedness and
which the plaintiff paid under protest. On the trial court dismissing the complaint, with costs, the plaintiff
appealed assigning as the principal errors alleged to have been committed the following:
1. The trial court erred in holding that the dividends paid by the plaintiff corporation were subject to income
tax in the hands of its stockholders, because to impose the tax thereon would be to impose a tax on the plaintiff,
in violation of the terms of its franchise, and would, moreover, be oppressive and inequitable.
2. The trial court erred in not holding that the interest on bonds and other indebtedness of the plaintiff
corporation, paid by it outside of the Philippine Islands to corporations not residing therein, were not, on the
part of the recipients thereof, income from Philippine sources, and hence not subject to Philippine income tax.
The facts, as stated by the appellant and as accepted by the appellee, may be summarized as follows: The
plaintiff is a corporation organized under the laws of the Philippine Islands. It operates a gas plant in the City
of Manila and furnishes gas service to the people of the metropolis and surrounding municipalities by virtue of
a franchise granted to it by the Philippine Government. Associated with the plaintiff are the Islands Gas and
Electric Company domiciled in New York, United States, and the General Finance Company domiciled in
Zurich, Switzerland. Neither of these last mentioned corporations is resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paid by the plaintiff to the
Islands Gas and Electric Company in the capacity of stockholders upon which withholding income taxes were
paid to the defendant totalling P40,460.03 For the same years interest on bonds in the sum of P411,600 was
paid by the plaintiff to the Islands Gas and Electric Company upon which withholding income taxes were paid
to the defendant totalling P12,348. Finally for the stated time period, interest on other indebtedness in the sum
of P131,644,90 was paid by the plaintiff to the Islands Gas and Electric Company and the General Finance
Company respectively upon which withholding income taxes were paid to the defendant totalling P3,949.34.
Some uncertainty existing regarding the place of payment, we will not go into this factor of the case at this
point, except to remark that the bonds and other tokens of indebtedness are not to be found in the record.
However, Exhibits E, F, and G, certified correct by the Treasurer of the Manila Gas Corporation, purport to
prove that the place of payment was the United States and Switzerland.
The appeal naturally divides into two subjects, one covered by the first assigned error, and the other by the
second assigned error. We shall discuss these subjects and errors in order.
1. Appellant first contends that the dividends paid by it to its stockholders, the Islands Gas and Electric
Company , were not subject to tax because to impose a tax thereon would be to do so on the plaintiff
corporation, in violation of the terms of its franchise and would, moreover, be oppressive and inequitable. This
argument is predicated on the constitutional provision that no law impairing the obligation of contracts shall
be enacted. The particular portion of the franchise which is invoked provides:
The grantee shall annually on the fifth day of January of each year pay to the City of Manila and the
municipalities in the Province of Rizal in which gas is sold, two and one half per centum of the gross receipts
within said city and municipalities, respectively, during the preceding year. Said payment shall be in lieu of all
taxes, Insular, provincial and municipal, except taxes on the real estate, buildings, plant, machinery, and other
personal property belonging to the grantee.
The trial judge was of the opinion that the instant case was governed by our previous decision in the case
of Philippine Telephone and Telegraph Co., vs. Collector of Internal Revenue ([1933], 58 Phil. 639). In this
view we concur. It is true that the tax exemption provision relating to the Manila Gas Corporation hereinbefore
quoted differs in phraseology from the tax exemption provision to be found in the franchise of the Telephone
and Telegraph Company, but the ratio decidendi of the two cases is substantially the same. As there held and as
now confirmed, a corporation has a personality distinct from that of its stockholders, enabling the taxing power
to reach the latter when they receive dividends from the corporation. It must be considered as settled in this
jurisdiction that dividends of a domestic corporation, which are paid and delivered in cash to foreign
corporations as stockholders, are subject to the payment in the income tax, the exemption clause in the charter
of the corporation notwithstanding.
For the foreign reasons, we are led to sustain the decision of the trial court and to overrule appellant's first
assigned error.
2. In support of its second assignment of error, appellant contends that, as the Islands Gas and Electric
Company and the General Finance Company are domiciled in the United States and Switzerland respectively,
and as the interest on the bonds and other indebtedness earned by said corporations has been paid in their
respective domiciles, this is not income from Philippine sources within the meaning of the Philippine Income
Tax Law. Citing sections 10 (a) and 13 (e) of Act No. 2833, the Income Tax Law, appellant asserts that their
applicability has been squarely determined by decisions of this court in the cases of Manila Railroad Co. vs.
Collector of Internal Revenue (No. 31196, promulgated December 2, 1929, nor reported), and Philippine
Railway Co. vs. Posadas (No. 38766, promulgated October 30, 1933 [58 Phil., 968]) wherein it was held that
interest paid to non-resident individuals or corporations is not income from Philippine sources, and hence not
subject to the Philippine Income Tax. The Solicitor-General answers with the observation that the cited
decisions interpreted the Income Tax Law before it was amended by Act No. 3761 to cover the interest on
bonds and other obligations or securities paid "within or without the Philippine Islands." Appellant rebuts this
argument by "assuming, for the sake of the argument, that by the amendment introduced to section 13 of Act
No. 2833 by Act No. 3761 the Legislature intended the interest from Philippine sources and so is subject to
tax," but with the necessary sequel that the amendatory statute is invalid and unconstitutional as being the
power of the Legislature to enact.
Taking first under observation that last point, it is to be observed that neither in the pleadings, the decision of
the trial court, nor the assignment of errors, was the question of the validity of Act No. 3761 raised. Under such
circumstances, and no jurisdictional issue being involved, we do not feel that it is the duty of the court to pass
on the constitutional question, and accordingly will refrain from doing so. (Cadwaller-Gibson Lumber
Co. vs. Del Rosario [1913], 26 Phil., 192; Macondray and Co. vs. Benito and Ocampo, P. 137, ante;
State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican case of Domenech vs. United Porto Rican
Sugar co. ([1932], 62 F. [2d], 552), we need only observe that these cases announced good law, but that each he
must be decided on its particular facts. In other words, in the opinion of the majority of the court, the facts at
bar and the facts in those cases can be clearly differentiated. Also, in the case at bar there is some uncertainty
concerning the place of payment, which under one view could be considered the Philippines and under another
view the United States and Switzerland, but which cannot be definitely determined without the necessary
documentary evidence before, us.
The approved doctrine is that no state may tax anything not within its jurisdiction without violating the due
process clause of the constitution. The taxing power of a state does not extend beyond its territorial limits, but
within such it may tax persons, property, income, or business. If an interest in property is taxed, the situs of
either the property or interest must be found within the state. If an income is taxed, the recipient thereof must
have a domicile within the state or the property or business out of which the income issues must be situated
within the state so that the income may be said to have a situs therein. Personal property may be separated
from its owner, and he may be taxed on its account at the place where the property is although it is not the
place of his own domicile and even though he is not a citizen or resident of the state which imposes the tax. But
debts owing by corporations are obligations of the debtors, and only possess value in the hands of the creditors.
(Farmers Loan Co. vs. Minnesota [1930], 280 U.S., 204; Union Refrigerator Transit Co. vs. Kentucky [1905],
199 U.S., 194 State Tax on Foreign held Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206 U. S., 392;
State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis., 111; United States Revenue Act of 1932,
sec. 143.)
These views concerning situs for taxation purposes apply as well to an organized, unincorporated territory or to
a Commonwealth having the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits taxation of interest on bonds and other
indebtedness paid without the Philippine Islands, the question is if the income was derived from sources within
the Philippine Islands.
In the judgment of the majority of the court, the question should be answered in the affirmative. The Manila
Gas Corporation operates its business entirely within the Philippines. Its earnings, therefore come from local
sources. The place of material delivery of the interest to the foreign corporations paid out of the revenue of the
domestic corporation is of no particular moment. The place of payment even if conceded to be outside of tho
country cannot alter the fact that the income was derived from the Philippines. The word "source" conveys only
one idea, that of origin, and the origin of the income was the Philippines.
In synthesis, therefore, we hold that conditions have not been provided which justify the court in passing on
the constitutional question suggested; that the facts while somewhat obscure differ from the facts to be found
in the cases relied upon, and that the Collector of Internal Revenue was justified in withholding income taxes
on interest on bonds and other indebtedness paid to non-resident corporations because this income was
received from sources within the Philippine Islands as authorized by the Income Tax Law. For the foregoing
reasons, the second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on the first subject and the first assigned error
herein discussed is accurately set forth, but that his opinion on the second subject and the second assigned
error is not accurately reflected, because on this last division his views coincide with those of the appellant.
However, in the interest of the prompt disposition of this case, the decision has been written up in accordance
with instructions received from the court.
Judgment affirmed, with the cost of this instance assessed against the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.

Separate Opinions
VILLA-REAL, J., concurring and dissenting:
I concur with the majority decision regarding the disposition of the second error, but dissent as to its
disposition of the first error. In my opinion, the exemption clause to be found in the charter of the plaintiff is
broader in scope than that to be found in the charter of the Philippine Telephone and Telegraph Company, thus
making inapplicable the decision of this court in the case of Philippine Telephone and Telegraph Co. vs.
Collector of Internal Revenue (58 Phil., 639).
ABAD SANTOS, J., concurring in part and dissenting in part:
I am of opinion that the first assignment of error should be sustained and the judgment below reversed in that
respect.
The franchise held by the appellant corporation contains a stipulation by the Government to the effect that the
payment by the corporation to the entities named in the franchise of two and one-half per centum of its gross
receipts, shall be in lieu of all taxes, except taxes on the real estate, buildings, plant, machinery and other
personal property belonging to the corporation. The dividends paid by the appellant corporation to its
stockholders were a part of its earnings and as such not subject to tax under the terms of the franchise. The
franchise in this case is a contract, the obligation of which can not be impaired.
I agree with the majority of the court that the second assignment of error should be overruled, and the
judgment affirmed in that particular.
Section 13 (e) of Act No. 2833, as amended by Act No. 3761, expressly provides for the imposition of a tax "...
upon the income derived from interest upon bonds and mortgages, or deeds of trust, notes, or other interest-
bearing obligations of a domestic or resident foreign corporation, ..." The income derived from the interest on
bonds and other indebtedness of the appellant corporation, is clearly within the purview of the statute. The
power of the legislature to impose such a tax must be recognized. As stated by Justice Bradley in United
States vs. Erie R. Co. (106 U.S., 327; 27 Law. ed., 151, 153) : "... The tax laid upon their bonds was intended to
affect the owners of the bonds, and whilst the companies were directed to pay it, they were authorized to retain
the amount from the installments due to the bondholders, whether citizens or aliens. The objection that
Congress had no power to tax non-resident aliens, is met by the fact that the tax was not assessed against them
personally, but against the rem, the credit, the debt due to them. Congress has the right to tax all property
within the jurisdiction of the United States, with certain exceptions not necessary to be noted. The money due
to non-resident bondholders in this case was in the United States in the hands of the company before it could
be transmitted to London, or other place where the bondholders resided. Whilst here it was liable to taxation.
Congress, by the internal revenue law, by way of tax., stopped a part of the money before its transmission,
namely; 5 per cent of it. Plausible grounds for levying such a tax might be assigned. It might be said that the
creditor is protected by our laws in the enjoyment of the debt; that the whole machinery of our courts and the
physical power of the government are placed at his disposal for its security and collection."
AVANCEÑA, C.J., dissenting:
I do not agree with the majority opinion with respect to the appellant's second assignment of error, which in
my opinion should be sustained. The question involved in this error has been clearly decided by this court in
the case of Manila Railroad Co. vs. Collector of Internal Revenue (G.R. No. 31196, promulgated December 2,
1929, not reported). In said case it was held that interest on bonds purchased outside the Philippine Islands by
non-residents of the Islands cannot be considered derived from sources within the Islands. The amendment of
the law introduced by Act no. 3761 as to the place of payment of interest does not affect the aspect of the
question raised in this error if the interest on which the tax in the present case has been collected is not derived
from sources within the Islands, as it is not so in fact, in accordance with the doctrine laid down in said case
of Manila Railroad Co. vs. Collector of Internal Revenue.
GODDARD, J., dissenting:
The tax exemption and commutation clause in the plaintiffs franchise provides that:
The grantee shall annually on the 5th day of January of each year pay to the City of Manila and to the
municipalities in the Province of Rizal in which gas is sold, two and one half per centum of the gross receipts
within said city and municipalities, respectively, during the preceding year. Said payment shall be in lieu of all
tax, Insular, provincial and municipal, except taxes on the real estate, buildings, plant, machinery, and other
personal property belonging to the grantee.
This franchise is a contract between the Government and the grantees thereof, whose rights have been acquired
by the plaintiff corporation. In Manila Railroad Co. vs. Rafferty (40 Phil., 224, 230), this court held that "...
Once granted, a charter becomes a private contract ...." Article 1091 of the Civil Code provides that "Obligations
arising from contract shall have the force of law between the contracting parties and must be performed in
accordance with their stipulations." It follows that as the plaintiff corporation has paid to the City of Manila
and to the municipalities of Rizal, where gas is sold by it, the franchise tax stipulated in the contract, the
Government has no legal right to impose another tax on its earnings.
The case of Farrington vs. Tennessee (95 U.S., 679; 24 Law. ed., 558), is almost in exact parallel with the case
at bar. The facts of that case were as follows: The Union and Planters' Bank of Memphis was duly organized
under the charter granted by the Legislature of Tennessee, by two Acts, respectively dated March 20, 1858, and
February 12, 1869. Since its organization it continued doing a regular banking business. Its capital subscribed
and paid in amounted to $675,000, divided into 6,750 shares of $100 each. Farrington, the plaintiff in error,
was the owner of 150 shares, of the value of $15,000.
The tenth section of the charter of the bank declared:
That said Company shall pay to the State an annual tax of one-half of one per cent on each share of the capital
stock subscribe, which shall be in lieu of all other taxes.
The State of Tennessee and the County of Shelby, claiming the right under the Revenue Law of the State, to tax
the stock of the plaintiff in error, a stockholder of the bank, assessed and taxed it for the year 1872. It was
assessed at its per value. The tax imposed by the State was forty cents on the $100, making the state tax $60.
The county tax was $1.20 on the $100, making the county tax $180.
The plaintiff in error denied the right of the State and County to impose these taxes. He claimed;
(1) That the 10th section of the charter was a contract between the State and the bank;
(2) That any other tax than that therein specified was expressly forbidden, and.
(3) That the revenue laws imposing the taxes in question impaired the obligation of the contract.
The Supreme Court of Tennessee adjudge the taxes to be valid and the plaintiff in error thereupon removed the
case to the Federal Supreme Court for review.
In upholding all of the contentions of the plaintiff in error, and pronouncing invalid the taxes involved as
impairing the obligation of the contract created by the franchise, the United States Supreme court said:
This case turns upon the construction to be given to the 10th section of the charter of the bank. . . .
xxx     xxx     xxx
When this charter was granted, the State might have been silent as to taxation. In that case, the power would
have been unfettered. (Bk. vs. Billings, 4 Pet., 514.) It might have reserved the power as to some things, and
yielded it as to others. It had the power to make its own terms or to refuse the charter. It chose to stipulate for a
specified tax on the and declared and bound itself that this tax should be "in lieu of all other taxes."
There is no question before us as to the tax imposed on the shares by the charter. But the State has by her
revenue imposed another and an additional tax on these same shares. This is one of those "other taxes" which it
had stipulated to forego. The identity of the thing doubly taxed is not affected by the fact that in one case the
tax is to be paid vicariously by the bank, and in the other by the owner of the share himself. The thing thus
taxed is to the same, and the second tax is expressly forbidden by the contract of the parties. After the most
careful consideration, we can come to no other conclusion. Such, we think, must have been the understanding
and intent of the parties when the charter was granted and the bank was organized. Any other view would
ignore the covenant that the tax specified should be "in lieu of all other taxes." It would blot those terms from
the context, and construe it as if they were not a part of it. . . .
xxx     xxx     xxx
The decree of the Supreme Court of Tennessee is reversed and the case will be remanded, with directions to
enter a decree in favor of the plaintiff in error. (Farrington vs. Tennessee, 95 U.S., 679; 24 Law. ed., 560, 561.)
That case, it will be observed, is almost in exact parallel with the case at bar. Both cases deal with tax
commutation provided for in a franchise granted by the State. In both cases the State covenanted that the tax
specified in the franchise should be in lieu of all other taxes. In both cases the additional tax which the tax
authorities sought to impose was a revenue tax. In both cases the tax provided for in the franchise was paid by
the corporation, and the tax which the authorities attempted to collect were imposed on the stockholders. In
the Farrington case the provision in the Federal Constitution that "No State shall ... pass any ... law impairing
the obligation of contracts" was applied; in this case the provision of our Organic Law that "no law impairing
the obligation of contracts shall be enacted" is involved. It will be observed further, that in the Farrington
case the franchise was granted to a corporation, yet the court held that the court mutation provision of the
franchise extended to the individual stockholders. In the case at bar, while the plaintiff the present owner of the
franchise. is a corporation, the original grantees were natural persons; hence there is more reason for holding
in the present case that the mutation provision in the franchise granted by the Philippine Government should
extend to the stockholders of plaintiff corporation.
The Farrington Case, decided in 1878, was by a divided court. Eighteen years — later in 1896 — the State of
Tennessee sought to have the decision in that case reviewed, on the ground that the court did not consider the
other portions of the charter which, according to the State, were material. The Supreme Court — this time
unanimously — declined to reverse its view as expressed in the Farrington decision, saying.
We do not think under the circumstances that we ought now to come to a different conclusion upon the
question of exemption from that which was arrived at by this court in the Farrington Case. As the whole
charter was then before the court, we are not prepared to say that its force was misunderstood, or that there
was an omission by the court to consider all the language of the exemption clause simply because a portion of
its omitted in the quotation from the record made in the opinion therein delivered. We are not inclined,
therefore, to overrule or distinguish the Farrington Case, and we must now told that the charter clause of
exemption limits the amount of tax on each share of stock in the hands of the shareholder, and that any
subsequent revenue law of the state which imposes an additional tax on such shares in the hands or
shareholders, impairs the obligation of the contract, and is void. This compels us to reverse the judgments
herein against the shareholders. (Bank of Commerce vs. Tennessee, 16 U.S. 134; 40 Law. ed., 645, 648.)
The doctrine of the Farrington Case is now the settled rule of the highest court of the United States. The first
assignment of error should therefore be sustained.
As to the second assignment of error I concur with the dissenting opinion of the Chief Justice for the reasons
set forth therein. Consequently that assignment of error should also be sustained.
The trial court erred in not holding that interest received by a non-resident corporation, outside the Philippine
Islands, is not income from Philippine sources and so not subject to income tax.
In view of the above I am of the opinion that the appealed decision should be reversed and another entered by
this courts ordering the defendant to pay the plaintiff the sum of P40,460.03, the amount of withholding taxes
paid on account of interest on bonds and other indebtedness, or a total of P56,757.37.
[G.R. No. 166282, February 13, 2013]
HEIRS OF FE TAN UY (REPRESENTED BY HER HEIR, MANLING UY
LIM), Petitioners, v. INTERNATIONAL EXCHANGE BANK, RESPONDENT.

[G.R. NO. 166283]

GOLDKEY DEVELOPMENT CORPORATION, PETITIONER. VS. INTERNATIONAL EXCHANGE

BANK, Respondents.
DECISION
MENDOZA, J.:
Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the l997 Revised Rules
of Civil Procedure, assailing the August 16, 2004 Decision 1 and the December 2, 2004 Resolution2 of the Court
of Appeals (CA) in CA-G.R. CV No. 69817 entitled “International Exchange Bank v. Hammer Garments Corp.,
et al.”
The Facts

On several occasions, from June 23, 1997 to September 3, 1997, respondent International Exchange Bank
(iBank), granted loans to Hammer Garments Corporation (Hammer), covered by promissory notes and deeds
of assignment, in the following amounts:3
Date of Promissory Note Amount
June 23, 1997 P 5,599,471.33  
July 24, 1997 2,700,000.00  
July 25, 1997 2,300,000.00  
August 1, 1997 2,938,505.04  
August 1, 1997 3,361,494.96  
August 14, 1997 980,000.00  
August 21, 1997 2,527,200.00  
August 21, 1997 3,146,715.00  
September 3, 1997          1,385,511.75      
Total P24,938,898.08  

These were made pursuant to the Letter-Agreement,4 dated March 23,

1996, between iBank and Hammer, represented by its President and General Manager, Manuel Chua (Chua)
a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus Line. 5 The loans were
secured by a P 9 Million-Peso Real Estate Mortgage6 executed on July 1, 1997 by Goldkey Development
Corporation (Goldkey) over several of its properties and a P 25 Million-Peso Surety Agreement 7 signed by Chua
and his wife, Fe Tan Uy (Uy), on April 15, 1996.
As of October 28, 1997, Hammer had an outstanding obligation of P25,420,177.62 to iBank. 8 Hammer
defaulted in the payment of its loans, prompting iBank to foreclose on Goldkey’s third-party Real Estate
Mortgage. The mortgaged properties were sold for P 12 million during the foreclosure sale, leaving an unpaid
balance of P 13,420,177.62.9 For failure of Hammer to pay the deficiency, iBank filed a Complaint 10 for sum of
money on December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati
City (RTC).11

Despite service of summons, Chua and Hammer did not file their respective answers and were declared in
default. In her separate answer, Uy claimed that she was not liable to iBank because she never executed a
surety agreement in favor of iBank. Goldkey, on the other hand, also denies liability, averring that it acted only
as a third-party mortgagor and that it was a corporation separate and distinct from Hammer. 12

Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which was granted by the RTC
in its December 17, 1997 Order.13

The Notice of Levy on Attachment of Real Properties, dated July 15, 1998, covering the properties under the
name of Goldkey, was sent by the sheriff to the Registry of Deeds of Quezon City. 14

The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank. While it made the
pronouncement that the signature of Uy on the Surety Agreement was a forgery, it nevertheless held her liable
for the outstanding obligation of Hammer because she was an officer and stockholder of the said corporation.
The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to the properties
mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the same entity for
the following reasons: (1) both were family corporations of Chua and Uy, with Chua as the President and Chief
Operating Officer; (2) both corporations shared the same office and transacted business from the same place,
(3) the assets of Hammer and Goldkey were co-mingled; and (4) when Chua absconded, both Hammer and
Goldkey ceased to operate. As such, the piercing of the veil of corporate fiction was warranted. Uy, as an officer
and stockholder of Hammer and Goldkey, was found liable to iBank together with Chua, Hammer and Goldkey
for the deficiency of P13,420,177.62.

Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On August 16, 2004, it
promulgated its decision affirming the findings of the RTC. The CA found that iBank was not negligent in
evaluating the financial stability of Hammer. According to the appellate court, iBank was induced to grant the
loan because petitioners, with intent to defraud the bank, submitted a falsified Financial Report for 1996 which
incorrectly declared the assets and cashflow of Hammer.16 Because petitioners acted maliciously and in bad
faith and used the corporate fiction to defraud iBank, they should be treated as one and the same as Hammer. 17

Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February 9, 2005, this Court ordered
the consolidation of the two cases.18
The Issues

Petitioners raise the following issues:

Whether or not a trial court, under the facts of this case, can go out of the issues raised by the
pleadings;19

Whether or not there is guilt by association in those cases where the veil of corporate fiction
may be pierced;20 and

Whether or not the “alter ego” theory in disregarding the corporate personality of a
corporation is applicable to Goldkey.21
Simplifying the issues in this case, the Court must resolve the following: (1) whether Uy can be held liable to
iBank for the loan obligation of Hammer as an officer and stockholder of the said corporation; and (2) whether
Goldkey can be held liable for the obligation of Hammer for being a mere alter ego of the latter.
The Court’s Ruling

The petitions are partly meritorious.

Uy is not liable; The piercing of the

veil of corporate fiction is not justified 

The heirs of Uy argue that the latter could not be held liable for being merely an officer of Hammer and
Goldkey because it was not shown that she had committed any actionable wrong 22 or that she had participated
in the transaction between Hammer and iBank. They further claim that she had cut all ties with Hammer and
her husband long before the execution of the loan. 23

The Court finds in favor of Uy.

Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal
personality separate and distinct from those acting for and in its behalf and, in general, from the people
comprising it. Following this principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the corporation. 24 Nevertheless, this legal fiction may be
disregarded if it is used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues. 25

This is consistent with the provisions of the Corporation Code of the Philippines, which states:
Sec. 31. Liability of directors, trustees or officers. – Directors or trustees who wilfully and knowingly vote for or
assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing
the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

Solidary liability will then attach to the directors, officers or employees of the corporation in certain
circumstances, such as:
1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to
patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate
affairs; and (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members,
and other persons;

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof,
did not forthwith file with the corporate secretary his written objection thereto;

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate
action.26
Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the
following requisites must concur: (1) the complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was guilty of gross negligence or bad
faith; and (2) the complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith.27

While it is true that the determination of the existence of any of the circumstances that would warrant the
piercing of the veil of corporate fiction is a question of fact which cannot be the subject of a petition for review
on certiorari under Rule 45, this Court can take cognizance of factual issues if the findings of the lower court
are not supported by the evidence on record or are based on a misapprehension of facts. 28

In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy committed an act
as an officer of Hammer that would permit the piercing of the corporate veil. A reading of the complaint reveals
that with regard to Uy, iBank did not demand that she be held liable for the obligations of Hammer because she
was a corporate officer who committed bad faith or gross negligence in the performance of her duties such that
the lifting of the corporate mask would be merited. What the complaint simply stated is that she, together with
her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety Agreement
which was later found by the RTC to have been forged. 29

Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a falsified
document, there was no sufficient justification for the RTC to have ruled that Uy should be held jointly and
severally liable to iBank for the unpaid loan of Hammer. Neither did the CA explain its affirmation of the RTC’s
ruling against Uy. The Court cannot give credence to the simplistic declaration of the RTC that liability would
attach directly to Uy for the sole reason that she was an officer and stockholder of Hammer.

At most, Uy could have been charged with negligence in the performance of her duties as treasurer of Hammer
by allowing the company to contract a loan despite its precarious financial position. Furthermore, if it was true,
as petitioners claim, that she no longer performed the functions of a treasurer, then she should have formally
resigned as treasurer to isolate herself from any liability that could result from her being an officer of the
corporation. Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing of the corporate
veil which requires that the negligence of the officer must be so gross that it could amount to bad faith and
must be established by clear and convincing evidence. Gross negligence is one that is characterized by the lack
of the slightest care, acting or failing to act in a situation where there is a duty to act, wilfully and intentionally
with a conscious indifference to the consequences insofar as other persons may be affected. 30

It behooves this Court to emphasize that the piercing of the veil of corporate fiction is frowned upon and can
only be done if it has been clearly established that the separate and distinct personality of the corporation is
used to justify a wrong, protect fraud, or perpetrate a deception. 31 As aptly explained in Philippine National
Bank v. Andrada Electric & Engineering Company:32
Hence, any 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. 33

Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the
aforementioned requisites for making a corporate officer, director or stockholder personally liable for the
obligations of a corporation, Uy, as a treasurer and stockholder of Hammer, cannot be made to answer for the
unpaid debts of the corporation.

Goldkey is a mere alter ego of Hammer

Goldkey contends that it cannot be held responsible for the obligations of its stockholder, Chua. 34 Moreover, it
theorizes that iBank is estopped from expanding Goldkey’s liability beyond the real estate mortgage. 35 It adds
that it did not authorize the execution of the said mortgage.36 Finally, it passes the blame on to iBank for failing
to exercise the requisite due diligence in properly evaluating Hammer’s creditworthiness before it was
extended an omnibus line.37

The Court disagrees with Goldkey.

There is no reason to discount the findings of the CA that iBank duly inspected the viability of Hammer and
satisfied itself that the latter was a good credit risk based on the Financial Statement submitted. In addition,
iBank required that the loan be secured by Goldkey’s Real Estate Mortgage and the Surety Agreement with
Chua and Uy. The records support the factual conclusions made by the RTC and the CA.

To the Court’s mind, Goldkey’s argument, that iBank is barred from pursuing Goldkey for the satisfaction of
the unpaid obligation of Hammer because it had already limited its liability to the real estate mortgage, is
completely absurd. Goldkey needs to be reminded that it is being sued not as a consequence of the real estate
mortgage, but rather, because it acted as an alter ego of Hammer. Accordingly, they must be treated as one and
the same entity, making Goldkey accountable for the debts of Hammer.

In fact, it is Goldkey who is now precluded from denying the validity of the Real Estate Mortgage. In its Answer
with Affirmative Defenses and Compulsory Counterclaim, dated January 5, 1998, it already admitted that it
acted as a third-party mortgagor to secure the obligation of Hammer to iBank. 38 Thus, it cannot, at this late
stage, question the due execution of the third-party mortgage.

Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to enforce an obligation of Chua.
The records clearly show that it was Hammer, of which Chua was the president and a stockholder, which
contracted a loan from iBank. What iBank sought was redress from Goldkey by demanding that the veil of
corporate fiction be lifted so that it could not raise the defense of having a separate juridical personality to
evade liability for the obligations of Hammer.

Under a variation of the doctrine of piercing the veil of corporate fiction, when two business enterprises are
owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the
rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as
identical or one and the same.39

While the conditions for the disregard of the juridical entity may vary, the following are some probative factors
of identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in Concept
Builders, Inc. v NLRC:40
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.41

These factors are unquestionably present in the case of Goldkey and

Hammer, as observed by the RTC, as follows:

1. Both corporations are family corporations of defendants Manuel Chua and his wife Fe Tan Uy. The other
incorporators and shareholders of the two corporations are the brother and sister of Manuel Chua (Benito Ng
Po Hing and Nenita Chua Tan) and the sister of Fe Tan Uy, Milagros Revilla. The other incorporator/share
holder is Manling Uy, the daughter of Manuel Chua Uy Po Tiong and Fe Tan Uy.
The stockholders of Hammer Garments as of March 23, 1987, aside from spouses Manuel and Fe Tan Uy are:
Benito Chua, brother Manuel Chua, Nenita Chua Tan, sister of Manuel Chua and Tessie See Chua Tan. On
March 8, 1988, the shares of Tessie See Chua Uy were assigned to Milagros T. Revilla, thereby consolidating
the shares in the family of Manuel Chua and Fe Tan Uy.

2. Hammer Garments and Goldkey share the same office and practically transact their business from the same
place.

3. Defendant Manuel Chua is the President and Chief Operating Officer of both corporations. All business
transactions of Goldkey and Hammer are done at the instance of defendant Manuel Chua who is authorized to
do so by the corporations.

The promissory notes subject of this complaint are signed by him as Hammer’s President and General
Manager. The third-party real estate mortgage of defendant Goldkey is signed by him for Goldkey to secure the
loan obligation of Hammer Garments withplaintiff "iBank''. The other third-party real estate mortgages which
Goldkey executed in favor of the other creditor banks of Hammer are also signed by Manuel Chua.

4. The assets of Goldkey and Hammer are co-mingled. The real properties of Goldkey are mortgaged to secure
Hammer's obligation with creditor hanks.

The proceeds of at least two loans which Hammer obtained from plaintiff "iBank", purportedly to finance its
export to WalMart are instead used to finance the purchase of a manager's check payable to Goldkey. The
defendants' claim that Goldkey is a creditor of Hammer to justify its receipt of the Manager's cheek is not
substantiated by evidence.  Despite subpoenas issued by this Court, Goldkey thru its treasurer, defendant Fe
Tan Uy and or its corporate secretary Manling Uy failed to produce the Financial Statement of Goldke.

5. When defendant Manuel Chua "disappeared", the defendant Goldkey ceased to operate despite the claim
that the other "officers" and stockholders like Benito Chua, Nenita Chua Tan, Fe Tan Uy, Manling Uy and
Milagros T. Revilla are still around and may be able to continue the business of Goldkey, if it were different or
distinct from Hammer which suffered financial set back. 42

Based on the foregoing findings of the RTC, it was apparent that Goldkey was merely an adjunct of Hammer
and, as such, the legal fiction that it has a separate personality from that of Hammer should be brushed aside as
they are, undeniably, one and the same.

WHEREFORE, the petitions are PARTLY GRANTED. The August 16, 2004 Decision and the December 2,
2004 Resolution of the Court of Appeals, in CA-G.R. CV No. 69817, are hereby MODIFIED. Fe Tan Uy is
released from any liability arising from the debts incurred by Hammer from iBank. Hammer Garments
Corporation, Manuel Chua Uy Po Tiong and Goldkey Development Corporation are jointly and severally liable
to pay International Exchange Bank the sum of P13,420,177.62 representing the unpaid loan obligation of
Hammer as of December 12, 1997 plus interest. No costs.

SO ORDERED.
G.R. No. 90580             April 8, 1991
RUBEN SAW, DIONISIO SAW, LINA S. CHUA, LUCILA S. RUSTE AND EVELYN
SAW, petitioners,
vs.
HON. COURT OF APPEALS, HON. BERNARDO P. PARDO, Presiding Judge of Branch 43,
(Regional Trial Court of Manila), FREEMAN MANAGEMENT AND DEVELOPMENT
CORPORATION, EQUITABLE BANKING CORPORATION, FREEMAN INCORPORATED, SAW
CHIAO LIAN, THE REGISTER OF DEEDS OF CALOOCAN CITY, and DEPUTY SHERIFF
ROSALIO G. SIGUA, respondents.
Benito O. Ching, Jr. for petitioners.
William R. Vetor for Equitable Banking Corp.
Pineda, Uy & Janolo for Freeman, Inc. and Saw Chiao.

CRUZ, J.:
A collection suit with preliminary attachment was filed by Equitable Banking Corporation against Freeman,
Inc. and Saw Chiao Lian, its President and General Manager. The petitioners moved to intervene, alleging that
(1) the loan transactions between Saw Chiao Lian and Equitable Banking Corp. were not approved by the
stockholders representing at least 2/3 of corporate capital; (2) Saw Chiao Lian had no authority to contract
such loans; and (3) there was collusion between the officials of Freeman, Inc. and Equitable Banking Corp. in
securing the loans. The motion to intervene was denied, and the petitioners appealed to the Court of Appeals.
Meanwhile, Equitable and Saw Chiao Lian entered into a compromise agreement which they submitted to and
was approved by the lower court. But because it was not complied with, Equitable secured a writ of execution,
and two lots owned by Freeman, Inc. were levied upon and sold at public auction to Freeman Management and
Development Corp.
The Court of Appeals1 sustained the denial of the petitioners' motion for intervention, holding that "the
compromise agreement between Freeman, Inc., through its President, and Equitable Banking Corp. will not
necessarily prejudice petitioners whose rights to corporate assets are at most inchoate, prior to the dissolution
of Freeman, Inc. . . . And intervention under Sec. 2, Rule 12 of the Revised Rules of Court is proper only when
one's right is actual, material, direct and immediate and not simply contingent or expectant."
It also ruled against the petitioners' argument that because they had already filed a notice of appeal, the trial
judge had lost jurisdiction over the case and could no longer issue the writ of execution.
The petitioners are now before this Court, contending that:
1. The Honorable Court of Appeals erred in holding that the petitioners cannot intervene in Civil Case No. 88-
44404 because their rights as stockholders of Freeman are merely inchoate and not actual, material, direct and
immediate prior to the dissolution of the corporation;
2. The Honorable Court of Appeals erred in holding that the appeal of the petitioners in said Civil Case No. 88-
44404 was confined only to the order denying their motion to intervene and did not divest the trial court of its
jurisdiction over the whole case.
The petitioners base their right to intervene for the protection of their interests as stockholders on Everett v.
Asia Banking Corp.2 where it was held:
The well-known rule that shareholders cannot ordinarily sue in equity to redress wrongs done to the
corporation, but that the action must be brought by the Board of Directors, . . . has its exceptions. (If the
corporation [were] under the complete control of the principal defendants, . . . it is obvious that a demand upon
the Board of Directors to institute action and prosecute the same effectively would have been useless, and the
law does not require litigants to perform useless acts.
Equitable demurs, contending that the collection suit against Freeman, Inc, and Saw Chiao Lian is
essentially in personam and, as an action against defendants in their personal capacities, will not prejudice the
petitioners as stockholders of the corporation. The Everett case is not applicable because it involved an action
filed by the minority stockholders where the board of directors refused to bring an action in behalf of the
corporation. In the case at bar, it was Freeman, Inc. that was being sued by the creditor bank.
Equitable also argues that the subject matter of the intervention falls properly within the original and exclusive
jurisdiction of the Securities and Exchange Commission under P.D. No. 902-A. In fact, at the time the motion
for intervention was filed, there was pending between Freeman, Inc. and the petitioners SEC Case No. 03577
entitled "Dissolution, Accounting, Cancellation of Certificate of Registration with Restraining Order or
Preliminary Injunction and Appointment of Receiver." It also avers in its Comment that the intervention of the
petitioners could have only caused delay and prejudice to the principal parties.
On the second assignment of error, Equitable maintains that the petitioners' appeal could only apply to the
denial of their motion for intervention and not to the main case because their personality as party litigants had
not been recognized by the trial court.
After examining the issues and arguments of the parties, the Court finds that the respondent court committed
no reversible error in sustaining the denial by the trial court of the petitioners' motion for intervention.
In the case of Magsaysay-Labrador v. Court of Appeals,3 we ruled as follows:
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's
holding that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to
intervene in the proceedings below. In the case of Batama Farmers' Cooperative Marketing Association, Inc. v.
Rosal, we held: "As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a
pending action, the party must have a legal interest in the matter in litigation, or in the success of either of the
parties or an interest against both, or he must be so situated as to be adversely affected by a distribution or
other disposition of the property in the custody of the court or an officer thereof."
To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or
otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights of the
original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the first is not more important than the second.
The interest which entitles a person to intervene in a suit between other parties must be in the matter in
litigation and of such direct and immediate character that the intervenor will either gain or lose by the direct
legal operation and effect of the judgment. Otherwise, if persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily complicated, expensive and interminable. And this is not the
policy of the law.
The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would
put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of
which plaintiff could not recover.
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural,
consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right
in the management of the corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does
not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate
property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate
property, which is owned by the corporation as a distinct legal person.
On the second assignment of error, the respondent court correctly noted that the notice of appeal was filed by
the petitioners on October 24, 1988, upon the denial of their motion to intervene, and the writ of execution was
issued by the lower court on January 30, 1989. The petitioners' appeal could not have concerned the "whole"
case (referring to the decision) because the petitioners "did not appeal the decision as indeed they cannot
because they are not parties to the case despite their being stockholders of respondent Freeman, Inc." They
could only appeal the denial of their motion for intervention as they were never recognized by the trial court as
party litigants in the main case.
Intervention is "an act or proceeding by which a third person is permitted to become a party to an action or
proceeding between other persons, and which results merely in the addition of a new party or parties to an
original action, for the purpose of hearing and determining at the same time all conflicting claims which may
be made to the subject matter in litigation.4
It is not an independent proceeding, but an ancillary and supplemental one which, in the nature of things,
unless otherwise provided for by the statute or Rules of Court, must be in subordination to the main
proceeding.5 It may be laid down as a general rule that an intervenor is limited to the field of litigation open to
the original parties.6
In the case at bar, there is no more principal action to be resolved as a writ of execution had already been
issued by the lower court and the claim of Equitable had already been satisfied. The decision of the lower court
had already become final and in fact had already been enforced. There is therefore no more principal
proceeding in which the petitioners may intervene.
As we held in the case of Barangay Matictic v. Elbinias:7
An intervention has been regarded, as merely "collateral or accessory or ancillary to the principal action and
not an independent proceedings; and interlocutory proceeding dependent on and subsidiary to, the case
between the original parties." (Fransisco, Rules of Court, Vol. 1, p. 721). With the final dismissal of the original
action, the complaint in intervention can no longer be acted upon. In the case of Clareza v. Resales, 2 SCRA
455, 457-458, it was stated that:
That right of the intervenor should merely be in aid of the right of the original party, like the plaintiffs in this
case. As this right of the plaintiffs had ceased to exist, there is nothing to aid or fight for. So the right of
intervention has ceased to exist.
Consequently, it will be illogical and of no useful purpose to grant or even consider further herein petitioner's
prayer for the issuance of a writ of mandamus to compel the lower court to allow and admit the petitioner's
complaint in intervention. The dismissal of the expropriation case has no less the inherent effect of also
dismissing the motion for intervention which is but the unavoidable consequence.
The Court observes that even with the denial of the petitioners' motion to intervene, nothing is really lost to
them.1âwphi1 The denial did not necessarily prejudice them as their rights are being litigated in the case now
before the Securities and Exchange Commission and may be fully asserted and protected in that separate
proceeding.
WHEREFORE, the petition is DENIED, with costs against the petitioners. It is so ordered.
Narvasa, Gancayco, Griño-Aquino and Medialdea, JJ., concur.
[G.R. No. 111890. May 7, 1997.]

CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI SAW, Petitioners, v. THE

COURT OF APPEALS, (FORMER 13TH DIVISION), THE REGISTER OF DEEDS OF METRO
MANILA — DISTRICT III (VALENZUELA), CENTURY-WELL PHIL. CORPORATION, LOURDES
CHONG, CHONG TAK KEI and UY CHI KIM, Respondents.

Dumlao, Farolan and Ignacio Law Offices, for Petitioners.

Arturo S. Santo for Private Respondents.

Estrella-Bautista & Associates for respondent Uy Chi Kim.

SYLLABUS

1. REMEDIAL LAW; EVIDENCE; PAROLE EVIDENCE RULE, CONSTRUED. — Section 9 of Rule 130 of the
Rules of Court states that "when the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no
evidence of such terms other than the contents of the written agreement." The so-called "parole evidence rule"
forbids any addition to or contradiction of the terms of a written instrument by testimony or other evidence
purporting to show that, at or before the execution of the parties’ written agreement, other or different terms
were agreed upon by the parties, varying the purport of the written contract. When an agreement has been
reduced to writing, the parties cannot be permitted to adduce evidence to prove alleged practices which to all
purposes would alter the terms of the written agreement. Whatever is not found in the writing is understood to
have been waived and abandoned.

2. ID.; ID.; ID.; EXCEPTIONS. — The rule is not without exceptions, however, as it is likewise provided that a
party to an action may present evidence to modify, explain, or add to the terms of the written agreement if he
puts in issue in his pleadings: (a) an intrinsic ambiguity, mistake or imperfection in the written agreement; (b)
The failure of the written agreement to express the true intent and agreement of the parties thereto; (c) The
validity of the written agreement; or (d) The existence of other terms agreed too by the parties or their
successors in interest after the execution of the written agreement.

3. CIVIL LAW; OBLIGATIONS AND CONTRACTS; EXTINGUISHMENT OF OBLIGATION; MODES. — Under

Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2) by the
loss of the thing due, (3) by the condonation or remission of the debt; (4) by the confusion or merger of the
rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of
obligations include annulment, rescission, fulfillment of a resolutory condition and prescription.

4. ID.; ID.; ID.; LEGAL COMPENSATION; REQUISITES. — Compensation may take place by operation of law
(legal compensation), when two persons, in their own right, are creditors and debtors of each other. Article
1279 of the Civil Code provides for the requisites of legal compensation: "Article 1279. In order that
compensation may be proper, it is necessary: (1) that each one of the obligors be bound principally, and that he
be at the same time a principal creditor of the other; (2) That both debts consist in a sum of money, or if the
things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due; (4) That they, be liquidated and demandable; (5) That over neither of them there
be any retention or controversy, commenced by third persons and communicated in due time to the
debtor."cralaw virtua1aw library

5. ID.; ID.; ID.; CONVENTIONAL COMPENSATION; REQUISITES. — Compensation may also be voluntary or
conventional, that is, when the parties, who are mutually creditors and debtors agree to compensate their
respective obligations, even though not all the requisites for legal compensation are present. Without the
confluence of the characters of mutual debtors and creditors, contracting parties cannot stipulate to the
compensation of their obligations, for then the legal tie that binds contracting parties to their obligations would
be absent. At least one party would be binding himself under an authority he does not possess. As observed by
a noted author, the requirements of conventional compensation are (1) that each of the parties can dispose of
the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their credits.

6. ID.; ID.; ID.; ID.; WILL NOT APPLY WHERE THE CONTRACTING PARTIES ARE NOT MUTUALLY
BOUND AS CREDITORS AND DEBTORS IN THEIR OWN NAME. — In the instant case, there can be no valid
compensation of the purchase price with the obligations of Cheng Kim Heng reflected in the promissory notes,
for the reason that CKH and Century-Well the principal contracting parties, are not mutually bound as
creditors and debtors in their own name. A close scrutiny of the promissory notes does not indicate the late
Cheng, as then president of CKH, acknowledging any indebtedness to Century-Well. In fact, there is no
indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as stockholders of
Century-Well, Choi and Kei, in turn are not parties to the Deed of Absolute Sale. They are merely stockholders
of Century-Well, and as such, are not bound principally, not even in a representative capacity, in the contract of
sale. Thus, their interest in the promissory, notes cannot be off-set against the obligations between CKH and
Century-Well arising out of the deed of absolute sale, absent any allegation, much less, even a scintilla of
substantiation, that Choi and Kei’s interest in Century-Well are so considerable as to merit a declaration of
unity of their civil personalities. Under present law, corporations, such as Century-Well, have personalities
separate and distinct from their stockholders, except only when the law sees it fit to pierce the veil of corporate
identity, particularly when the corporate fiction is shown to be used to defeat public convenience, justify wrong,
protect fraud or defend crime, or where a corporation the mere alter ego or business conduit of a person. The
court cannot, in this instance make such a ruling absent a demonstration of the merit of such a disposition.

DECISION

TORRES, JR., J.:

The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul the
sale of two parcels of land, from petitioner CKH Industrial and Development Corporation (CKH, for brevity) to
private respondent Century-Well Phil. Corporation (Century-Well, for brevity), for failure to pay the stipulated
price of P800,000.00.

Petitioners specifically assail the Decision 1 of the respondent Court of Appeals, which denied the annulment of
the sale. The appellate court found that there was payment of the consideration by way of compensation, and
ordered petitioners to pay moral damages and attorney’s fees to private respondents. The dispositive portion of
the questioned decision reads:chanrobles law library : red
"WHEREFORE, in view of all the foregoing, the appealed Decision is REVERSED. The complaint is
DISMISSED with costs against the plaintiffs. The plaintiffs jointly and severally are required to pay each of the
defendants Lourdes Chong, Chong Tak Kei, and Uy Chi Kim moral damages of P20,000.00; and further
requiring the plaintiffs, jointly and severally, to pay to each of the defendants Century-Well Phil. Corporation,
Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney’s fees of P20,000.00

With costs in this instance against the Plaintiffs-Appellees.

SO ORDERED." 2

The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil Case
No. 2845-V-88 entitled "CKH Industrial & Development Corporation v. Century-Well Philippine Corporation,
Lourdes Chong, Chong Tak Kei, Uy Chi Kim, and the Register of Deeds of Metro Manila, District III
(Valenzuela)." The trial court’s decision stated pertinently:jgc:chanrobles.com.ph

"WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff:chanrob1es virtual
1aw library

1. Ordering the rescission/annulment of the Deed of Absolute Sale of Realty.

2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in
the sum of P200,000.00;

3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney’s fees in the
amount of 15% of the agreed price of P800,000.00 plus appearance fees of P500.00 per appearance;

4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit;

5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby
ordered to cancel the certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of Realty
and to reissue a new title in the name of CKH.

The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is likewise dismissed
considering that by his mediation he took it upon himself to assume the damages he allegedly suffered.

SO ORDERED." 3

The records disclose that petitioner CKH is the owner of two parcels of land, consisting of 4,590 sq. m. and 300
sq. m. respectively, located in Karuhatan, Valenzuela, and covered by Transfer Certificates of Title Nos. 8710
and 8711, Register of Deeds of Caloocan City (now Register of Deeds District III [Valenzuela]). 4 CKH is a
corporation established under Philippine law by the late Cheng Kim Heng (Cheng), an immigrant of Chinese
descent. Upon Cheng’s demise, control over the petitioner corporation was transferred to Rubi Saw, also of
Chinese descent, and Cheng’s second wife.

It also appears that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah (Wah),
who lived in Hongkong together with their children, Chong Tak Kei (Kei), Chong Tak Choi (Choi), and Chong
Tak Yam (Yam). After Cheng immigrated to the Philippines in 1976, and married Rubi Saw in 1977, he brought
his first wife, Heng, and their children to this country, and established himself and his Chinese family as
naturalized Filipino citizens. Heng died in 1984.

On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng’s son, Kei, met at the 1266 Soler St., Sta.
Cruz, Manila, the residence of Cheng’s friend, Uy Chi Kim, and executed a Deed of Absolute Sale, 5 whereby
Rubi Saw, representing CKH, agreed to sell the subject properties to Century-Well, a corporation owned in part
by Lourdes Chong, Kei and Choi. 6

The pertinent portions of the Deed of Sale are hereby reproduced:jgc:chanrobles.com.ph

"KNOW ALL MEN BY THESE PRESENTS:chanrob1es virtual 1aw library

This Deed of Absolute Sale of Realty executed by and between:chanrob1es virtual 1aw library

CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing under and
by virtue of the laws of the Republic of the Philippines, with business address at 553 Bermuda St., Sta. Cruz,
Manila, represented in this act by its authorized representative, Ms. RUBI SAW, hereinafter referred to as
VENDOR,

- in favor of -

CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by virtue of the
laws of the Republic of the Philippines at least sixty (60%) percent of the subscribed capital stock of which is
owned by Filipino citizens, duly qualified to own and acquire lands in the Philippines, with office and business
address at 66 F. Bautista St., Valenzuela, Metro Manila and represented in this act by its Treasurer and
authorized representative, Ms. Lourdes Chong, hereinafter referred to as VENDEE,

WITNESSETH:chanrob1es virtual 1aw library

That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of Karuhatan,
Municipality of Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos. B-8710 and B-8711 of
the Registry of Deeds for Metro Manila District III, and more particularly described as follows:chanrob1es
virtual 1aw library
x       x       x

That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS,
Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to its
entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED, and CONVEYED by
way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land above described and
any and all improvements therein;

That the above-described parcels of land are free from liens and encumbrances of whatever kind and nature.

IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their hand on
_____ at _____."cralaw virtua1aw library

Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well. 7 The document was
notarized the day after the parties signed the same, i. e., March 9, 1988. 8

Claiming that the consideration for the sale of the subject properties was not paid by the private respondent-
vendee despite several demands to do so, Petitioners CKH and Rubi Saw filed the instant complaint 9 on May
23, 1988, with the Regional Trial Court of Valenzuela, Branch 172, against Century-Well, Lourdes Chong,
Chong Tak Kei and Uy Chi Kim. Petitioners prayed for the annulment/rescission of the Deed of Absolute Sale,
and in the meantime, for the issuance of a writ of preliminary injunction restraining the Register of Deeds of
Valenzuela from registering the Certificates of Title over the subject properties in the name of the private
respondent Century-Well.
The trial court synthesized the petitioners’ submissions as follows:jgc:chanrobles.com.ph

"The complaint alleges the following:chanrob1es virtual 1aw library

Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price shall be in the
form of a Manager’s Check, to be delivered to Rubi Saw upon the execution of the Deed of Sale, the preparation
of which, Lourdes Chong undertook. On May 8, 1988, the date agreed upon for the execution of the Deed of
Sale, plaintiff Rubi Saw, accompanied by her friend Aurora Chua Ng, went to 1266 Soler St., Sta. Cruz, Manila
which is the residence and place of business of defendant Uy Chi Kim, an elderly man of Chinese ancestry and
the place suggested by Lourdes Chong as their meeting place. During the meeting, Uy Chi Kim who was there
presented to Rubi Saw a Deed of Absolute Sale in favor of defendant Century Well for her signature. Before
Rubi Saw signed the Deed of Absolute Sale she inquired about the payment of the P800,000.00. Defendant Uy
Chi Kim presented to her a personal check but she refused the same because it was contrary to her
arrangement with Lourdes Chong that the payment would be in the form of Manager’s Check. Uy Chi Kim then
explained to Rubi Saw that since it was a Sunday that day, they were unable to obtain the Manager’s Check. He
assured her that he had sufficient cash money at the first floor of his residence which is a store owned by Uy
Chi Kim. Before Uy Chi Kim left on the pretext of getting the money, he persuaded plaintiff Rubi Saw to sign
the Deed of Absolute Sale and give the same to Lourdes Chong together with the two Certificates of Title. Since
Uy Chi Kim is an elderly Chinese whom Rubi Saw had no reason to mistrust, following Chinese custom,
plaintiff Rubi Saw acceded to the request of Uy Chi Kim, trusting that he had sufficient cash amounting to
P800,000.00 kept in the first floor of his residence. When Uy Chi Kim returned, he told Rubi Saw that he had
only P20,000 on hand. He assured plaintiff, however, that there was no cause for her to worry (as) he was
certain he would have the entire amount ready by the next day when the banks would be open. Again, trusting
the elderly defendant Uy Chi Kim, Rubi Saw did not object and did not insist on the return of the Deed of
Absolute Sale that she signed, together with the Certificate of Title which she delivered to Lourdes Chong. The
next day, May 9, 1988 Rubi Saw called Lourdes Chong and Uy Chi Kim over the telephone but was told they
were not around. She could not go to the residence of Uy Chi Kim because she could not leave her office due to
business concerns. On May 10, 1988 Rubi Saw repeatedly called the two but was informed they were not
around. On May 11, 1988 already anxious, she personally went to the residences and offices of the two
defendants but they were not around. On May 12, 1988 Rubi Saw wrote defendant Century Well advising
Lourdes Chong of the rescission and cancellation of the Deed of Absolute Sale because of lack of consideration.
Lourdes Chong refused to receive the letter. Thereafter, several demand letters were sent to the defendants but
they refused to pay plaintiffs. Worried that defendants might surreptitiously transfer the certificates of title to
their names, Rubi Saw wrote the public defendant Register of Deeds on May 16, 1988, giving information about
the circumstances of the sale and requesting not to allow registration of the Deed of Absolute Sale, together
with an Affidavit of Adverse Claim. On May 20, 1988, plaintiffs’ representative was informed by the Register of
Deeds that defendants have made representations with defendant to Register the Deed of Absolute Sale on May
23, 1988.chanrobles.com : virtual law library

Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and Uy Chi Kim maliciously misled her to
believe that they would pay the P800,000 as consideration when in fact they had no intention to pay plaintiffs,
and prayed that they should be awarded moral damages; that defendants be restrained from registering the
Deed of Absolute Sale, and be ordered to return to them the 2 titles of the properties together with the Deed of
Absolute Sale." 10

On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei alleged
that:jgc:chanrobles.com.ph

". . . the consideration for the two parcels of land was paid by means of off-setting or legal compensation in the
amount of P700,000 thru alleged promissory notes executed by Cheng Kim Heng in favor of his sons Chong
Tak Choi and Chong Tak Kei (Exh. 6, 7, & 8) and payment of P100,000.00 in cash.

The defendant Century Well filed its Answer stating that during the operation of plaintiff CKH, the latter
borrowed from Chong Tak Choi and Chong Tak Kei the total sum of P700,000.00 paying interest on
P300,000.00 while the remaining P400,000.00 was interest free, and upon the death of Cheng Kim Heng, it
stopped making said payments. Defendant tried to prove that the source of this P700,000 was Hung Yuk Wah
while she was still residing in Hongkong, sent via bank draft from Hongkong to Chong Tak Choi and Chong Tak
Kei on a bank to bank transfer. Defendant likewise tried to prove that after the death of Cheng Kim Heng, Rubi
Saw unilaterally arrogated to herself the executive positions in plaintiff corporation such as President,
Secretary, Treasurer and General Manager; thus effectively shunting aside Hung Yuk Wah and her children in
the management of plaintiff corporation. Family differences (arose) between Rubi Saw on one hand, and Hung
Yuk Wah and her children on the other hand which turned to worst after the death of Cheng Kim Heng. This
brought about the entry of Chinese mediators between them, one of whom is defendant Uy Chi Kim, a reason
why the execution of the Deed of Absolute Sale was to be done at the residence and business address of Uy Chi
Kim." 11

Uy Chi Kim, on the other hand, answered on his behalf, that:jgc:chanrobles.com.ph

". . . his only participation in the transaction was as a mediator, he being one of the closest friends of Cheng
Kim Heng; that because the heirs of Cheng Kim Heng could not settle their problems he, together with Machao
Chan and Tomas Ching tried to mediate in accordance with Chinese traditions; that after long and tedious
meetings the parties finally agreed to meet at his residence at 1266 Soler St., Sta. Cruz, Manila for the purpose
of pushing thru the sale of the properties in question as part of the settlement of the estate. Defendant Uy Chi
Kim corroborated the defense of his co-defendants that the purchase price of the properties was P800,000.00
the payment of which consists in the form of P100,000.00 in cash Philippine Currency; and the balance of
P700,000.00 will be applied as a set-off to the amount borrowed by plaintiff CKH from Chong Tak Choi and
Chong Tak Kei. He advanced the amount of P100,000.00 by way of his personal check to Rubi Saw but because
Rubi Saw refused, he gave Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and Jacinto Say even
counted. After the P100,000.00 cash was given and the promissory notes, Rubi Saw signed the document of
sale. It was during the registration of the sale that a problem arose as to the payment of the capital gains (tax)
which Rubi Saw refused to pay. The buyer likewise refused to pay the same. The complaint against him is
baseless and which besmirched his reputation. Hence his counterclaim for damages." 12

The trial court denied the petitioners’ prayer for issuance of the writ of preliminary injunction in its Order
dated August 4, 1988. 13

After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the Deed of
Absolute Sale was merited, as there was no payment of the stipulated consideration for the sale of the real
properties involved to Rubi Saw.

In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement between the
parties, did not provide for payment by off-setting a portion of the purchase price with the outstanding
obligation of Cheng Kim Heng to his sons Chong Tak Choi and Chong Tak Kei. On the contrary, it provided for
payment in cash, in the amount of P800,000.00. The evidence presented, however, did not disclose that
payment of the said amount had ever been made by the private Respondent. Moreover, there cannot be any
valid off-setting or compensation in this case, as Article 1278 of the Civil Code 14 requires, as a prerequisite for
compensation, that the parties be mutually bound principally as creditors and debtors, which is not the case in
this instance. The rescission of the contract is, therefore, called for, ruled the court.

Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial court. In
its Decision 15 dated April 21, 1993, the appellate court expressed its own findings, that the execution of the
Deed of Absolute Sale was in settlement of a dispute between Rubi Saw and the first family of Cheng Kim Heng,
which arose upon Cheng’s death. The appellate court described the history of their dispute as
follows:jgc:chanrobles.com.ph

"In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his first wife
Wah, children Choi and Kei, and second wife Rubi as his co-incorporators/stockholders, along with other
individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13. respectively). On April 15 and July 17 the following year,
Heng, on behalf of CHK [sic], obtained loans of P400,000.00 and P100,000.00 from Choi, for which Heng
executed two promissory notes in Choi’s favor (Exhs. 6 and 7; ibid., p. 40 and p. 41, respectively). On
November 24, 1981, Heng obtained from his other son, Kei, another loan this time in the sum of P200,000.00
on behalf of CKH for which he issued another promissory note (Exh. 8, ibid., p. 42).

After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan (now
Metro Manila) covered by Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint; Record, p. 13) and B-
8711 (Annex B-Complaint; ibid., p. 14), which are now the subject of litigation in instant case.

On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico Hai Huat
(Lourdes). During their marriage, Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz, Manila, which
CKH was then utilizing as its office. At about this time, Heng and Rubi had moved residence from Valenzuela,
Metro Manila, to Bermuda St., Sta. Cruz, Manila.

Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between Heng’s first
wife Wah and their three children on the one hand, and his second wife Rubi, on the other, which came to a
head when, Rubi as president of CKH wrote a letter dated August 21, 1985 to the mayor of Valenzuela, Metro
Manila, to prevent issuance of a business permit to American Metals managed by Chong Tak Choi, stating that
CKH has not allowed it to make use of the property, and on November 7, 1985, when CKH, through counsel,
demanded that Wah, Choi and Yam vacate the residential and factory buildings and premises owned by CKH
and located on one of the subject lots on 76 F. Bautista St., Valenzuela, which the three and the corporation (of
which two of them were stockholders), had been allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp. 44-
45).

Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim, Ma
Chao, Tomas Cheng and Johnny Saw, were called in to mediate. The mediation efforts which resulted in the
withdrawal by Rubi Saw of her letter about the withholding of a license to American Metals. Inc. and much
later, had culminated in the transaction now under litigation.

The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to Century Well
for the amount of P800,000.00, P 100,000.00 of which will be paid in cash and the balance of P700,000.00 to
be set-off by the three (3) promissory notes executed in behalf of CKH in favor of Chong Tak Choi and Chong
Tak Kei (Exhs. 6, 7 and 8) the accumulated interests thereon to be waived as unstated consideration of the sale.

Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St., where the
corresponding deed of absolute sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid., pp. 46-49), with
mediator Cheng and CKH stockholder and Rubi’s secretary, Jacinto Say, signing as instrumental witnesses.
After having received the cash consideration of P100,000.00 and the promissory notes amounting to
P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes the document of sale and the
owner’s copies of the certificates of title for the two lots. The deed having been executed on a Sunday, the
parties agreed to have the same notarized the following day, May 9, 1988. The parties again met the next day,
May 9, 1988, when they acknowledged the deed before a notary public." 16

In sum, the appellate court found that there was indeed payment of the purchase price, partially in cash for P
100,000.00 and partially by compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei
for P500,000.00 and P200,000.00 respectively, against the remainder of the stipulated price. Such mode of
payment is recognized under Article 1249 17 of the Civil Code.

As observed by the appellate court:jgc:chanrobles.com.ph

"We are of the considered view that the appellees have not established what they claim to be the invalidity of
the subject deed of sale. The appellees are therefore neither entitled to the rescission or annulment of the
document nor to the award made in their favor in the decision under question and those other reliefs they are
seeking." 18

The question the Court is now tasked to answer is whether or not there was payment of the consideration for
the sale of real property subject of this case. More specifically, was there a valid compensation of the
obligations of Cheng Kim Heng to his sons with the purchase price of the sale?

To resolve this issue, it is first required that we establish the true agreement of the parties.

Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective claims.
Petitioners, while submitting that as worded, the Deed of Absolute Sale does not provide for payment by
compensation, thereby ruling out the intention of the parties to provide for such mode of payment, submit on
the other hand, that they had not received payment of the stipulated cash payment of P800,000.00. The
testimony of Rubi Saw during the hearings for preliminary injunction and during trial was submitted to
advance the submission that she was never paid the price of the subject lots, in cash or in promissory notes.

On the other side of the fence, private respondents, who, ironically, were the parties who drafted the subject
document, claim that the Deed of Sale does not express the true agreement of the parties, specifically with
regard to the mode of payment. Private respondents allege that the execution of the deed of absolute sale was
the culmination of mediation of the dispute of the first and second families of Cheng Kim Heng, over the
properties of the decedent; that the price of the real property subject of the contract of sale was partly in cash,
and the reminder to be compensated against Cheng’s indebtedness to his sons Choi and Kei, reflected in the
promissory notes submitted as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation, the
sale has been consummated and the private respondent Century-Well is entitled to the registration of the
certificates of title over the subject properties in its name.

These contrasting submissions of the circumstances surrounding the execution of the subject document have
led to this stalemate of sorts. Still, the best test to establish the true intent of the parties remains to be the Deed
of Absolute Sale, whose genuineness and due execution, are unchallenged. 19

Section 9 of Rule 130 of the Rules of Court states that "when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be, between the parties and their
successors-in-interest, no evidence of such terms other than the contents of the written agreement."cralaw
virtua1aw library

The so-called "parol evidence rule" forbids any addition to or contradiction of the terms of a written instrument
by testimony or other evidence purporting to show that, at or before the execution of the parties’ written
agreement, other or different terms were agreed upon by the parties, varying the purport of the written
contract. When an agreement has been reduced to writing, the parties cannot be permitted to adduce evidence
to prove alleged practices which to all purposes would alter the terms of the written agreement. Whatever is not
found in the writing is understood to have been waived and abandoned. 20

The rule is not without exceptions, however, as it is likewise provided that a party to an action may present
evidence to modify, explain, or add to the terms of the written agreement if he puts in issue in his pleadings: (a)
An intrinsic ambiguity, mistake or imperfection in the written agreement; (b) The failure of the written
agreement to express the true intent and agreement of the parties thereto; (c) The validity of the written
agreement; or (d) The existence of other terms agreed to by the parties or their successors in interest after the
execution of the written agreement. 21

We reiterate the pertinent provisions of the deed:jgc:chanrobles.com.ph

"That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS,
Philippine Currency, paid by VENDEE to VENDOR, receipt of which is hereby acknowledged by the latter to its
entire satisfaction, said VENDOR, by these presents, has SOLD, CEDED, TRANSFERRED, and CONVEYED by
way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land above described and
any and all improvements therein;" 22

The foregoing stipulation is clear enough in manifesting the vendor’s admission of receipt of the purchase
price, thereby lending sufficient, though reluctant, credence to the private respondents’ submission that
payment had been made by off-setting P700,000.00 of the purchase price with the obligation of Cheng Kim
Heng to his sons Choi and Kei. By signing the Deed of Absolute Sale, petitioner Rubi Saw has given her
imprimatur to the provisions of the deed, and she cannot now challenge its veracity.

However, the suitability of the said stipulations as benchmarks for the intention of the contracting parties, does
not come clothed with the cloak of validity. It must be remembered that agreements affecting the civil
relationship of the contracting parties must come under the scrutiny of the provisions of law existing and
effective at the time of the execution of the contract.

We refer particularly to the provisions of the law on compensation as a mode of extinguishment of obligations.
Under Article 1231 of the Civil Code, an obligation may be extinguished: (1) by payment or performance; (2) by
the loss of the thing due, (3) by the condonation or remission of the debt; (4) by the confusion or merger of the
rights of creditor and debtor, (5) by compensation; or (6) by novation. Other causes of extinguishment of
obligations include annulment, rescission, fulfillment of a resolutory condition and prescription.

Compensation may take place by operation of law (legal compensation), when two persons, in their own right,
are creditors and debtors of each other. 23 Article 1279 of the Civil Code provides for the requisites of legal
compensation:jgc:chanrobles.com.ph

"ARTICLE 1279. In order that compensation may be proper, it is necessary:chanrob1es virtual 1aw library

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of
the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind,
and also of the same quality if the latter has been stated;

(3) That the two debts be due:chanrob1es virtual 1aw library

(4) That they be liquidated and demandable:chanrob1es virtual 1aw library

(5) That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor."cralaw virtua1aw library

Compensation may also be voluntary or conventional, that is, when the parties, who are mutually creditors and
debtors agree to compensate their respective obligations, even though not all the requisites for legal
compensation are present. Without the confluence of the characters of mutual debtors and creditors,
contracting parties cannot stipulate to the compensation of their obligations, for then the legal tie that binds
contracting parties to their obligations would be absent. At least one party would be binding himself under an
authority he does not possess. As observed by a noted author, the requirements of conventional compensation
are (1) that each of the parties can dispose of the credit he seeks to compensate, and (2) that they agree to the
mutual extinguishment of their credits. 24

In the instant case, there can be no valid compensation of the purchase price with the obligations of Cheng Kim
Heng reflected in the promissory notes, for the reason that CKH and Century-Well the principal contracting
parties, are not mutually bound as creditors and debtors in their own name. A close scrutiny of the promissory
notes does not indicate the late Cheng, as then president of CKH, acknowledging any indebtedness to Century-
Well. As worded, the promissory notes reveal CKH’s indebtedness to Chong Tak Choi and Chong Tak Kei.

Exhibit 6

Metro Manila, Philippines

April 15, 1978

For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered
corporation with postal address at Rm. 330, MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic] to
pay on demand to Mr. CHONG TAK CHOI, the sum of FOUR HUNDRED THOUSAND PESOS, Philippine
currency (P400,000.00)

To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH
INDUSTRIAL & DEVELOPMENT CORPORATION, do hereby signed [sic] in behalf of the Corporation.

CKH INDUSTRIAL & DEVELOPMENT

CORPORATION

signed:chanrob1es virtual 1aw library

CHENG KIM HENG"

Exhibit 7

Manila,

July 17, 1978

For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered domestic
corporation in the City of Manila, represented by its president, CHENG KIM HENG with residence certificate
no. 118824650 issued at Manila, on 2-28-78 do promise to pay on demand the sum of ONE HUNDRED
THOUSAND PESOS ONLY (P100,000.00), Philippine currency with interest from the date hereof at the rate of
ten per cent (10%) per annum to Mr. CHONG TAK CHOI.

In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG, president
of CKH INDUSTRIAL & DEVELOPMENT CORPORATION do hereby affixed [sic] my signature
below.chanroblesvirtualawlibrary

signed:chanrob1es virtual 1aw library

CHENG KIM HENG

Exhibit 8

Manila, Philippines,

November 24, 1981

I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831 Tetuan St.
(2nd floor) Sta. Cruz, Manila, promises to pay to CHONG TAK KEI, with postal address at 76 F. Bautista St.,
Valenzuela, Metro Manila, the sum of PESOS: TWO HUNDRED THOUSAND ONLY (P200,000.00) Philippine
Currency, with interest at the rate of Ten per cent (10%) per annum from date stated above to a period of one
year and I hereby consent to any renewal, or extension of same amount to a same period which may be
requested by any one of us for the payment of this note.

I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI.

CKH IND. & DEV. CORP.

CHENG KIM HENG

President

In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as
stockholders of Century-Well. Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are
merely stockholders of Century-Well, 25 and as such, are not bound principally, not even in a representative
capacity, in the contract of sale. Thus, their interest in the promissory notes cannot be off-set against the
obligations between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation,
much less, even a scintilla of substantiation, that Choi and Kei’s interest in Century-Well are so considerable as
to merit a declaration of unity of their civil personalities. Under present law, corporations, such as Century-
Well, have personalities separate and distinct from their stockholders, 26 except only when the law sees it fit to
pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to defeat public
convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or
business conduit of a person. 27 The Court cannot, in this instance make such a ruling absent a demonstration
of the merit of such a disposition.

Considering the foregoing premises, the Court finds it proper to grant the prayer for rescission of the subject
deed of sale, for failure of consideration. 28

IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of the Court
of Appeals dated April 21, 1993, is hereby REVERSED and SET ASIDE. The decision of the Regional Trial
Court of Valenzuela, Branch 173 dated February 4, 1991, is hereby REINSTATED, with the MODIFICATION
that the award of moral damages and attorney’s fees to Rubi Saw, and the order for payment of costs are
DELETED.

The parties shall bear their respective costs.chanroblesvirtuallawlibrary:red

SO ORDERED.
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL
BANK of the PHILIPPINES, respondents.

TORRES, JR., J.:
Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated
January 29, 1990,1 affirming the nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI) No.
D891,2 with a face value of P500,000.00, from the Philippine Underwriters Finance Corporation (Philfinance)
to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement3 dated February 4, 1981, and a
Detached Assignment4 dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally
filed as a Petition for Mandamus5 under Rule 65 of the Rules of Court, to compel the Central Bank of the
Philippines to register the transfer of the subject CBCI to petitioner Traders Royal Bank (TRB).
In the said petition, TRB stated that:
3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached
Assignment" . . ., whereby Filriters, as registered owner, sold, transferred, assigned and delivered unto
Philippine Underwriters Finance Corporation (Philfinance) all its rights and title to Central Bank Certificates of
Indebtedness of PESOS: FIVE HUNDRED THOUSAND (P500,000) and having an aggregate value of PESOS:
THREE MILLION FIVE HUNDRED THOUSAND (P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by the
transferor intended to complete the assignment through the registration of the transfer in the name of
PhilFinance, which authorization is specifically phrased as follows: '(Filriters) hereby irrevocably authorized
the said issuer (Central Bank) to transfer the said bond/certificates on the books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and
in consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold,
transferred and delivered to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of
P500,000.00 . . ., which CBCI was among those previously acquired by PhilFinance from Filriters as averred in
paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase CBCI Serial
No. D891 (Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE
HUNDRED SIXTY-ONE & 11/100 (P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it
issued in favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable
the latter to have its title completed and registered in the books of the respondent. And by means of said
Detachment, Philfinance transferred and assigned all, its rights and title in the said CBCI (Annex "C") to
petitioner and, furthermore, it did thereby "irrevocably authorize the said issuer (respondent herein) to
transfer the said bond/certificate on the books of its fiscal agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached Assignments
(Annexes "B" and "D"), to the Securities Servicing Department of the respondent, and requested the latter to
effect the transfer of the CBCI on its books and to issue a new certificate in the name of petitioner as absolute
owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding
petitioner's valid and just title over the same and despite repeated demands in writing, the latest of which is
hereto attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's
request for registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered) by the
registered owner hereof, in person or by his attorney duly authorized in writing, and similarly noted hereon,
and upon payment of a nominal transfer fee which may be required, a new Certificate shall be issued to the
transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient authorizations in
writing executed by the registered owner, Filriters, and its transferee, PhilFinance, as required by the above-
quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a transfer of
ownership over the CBCI and issuing a new certificate to the transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the
Philippines' Motion for Admission of Amended Answer with Counter Claim for Interpleader 6 thereby calling to
fore the respondent Filriters Guaranty Assurance Corporation (Filriters), the registered owner of the subject
CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as an
insurance company under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund doctrine
and to the prejudice of policyholders and to all who have present or future claim against policies issued by
Filriters, Alfredo Banaria, then Senior Vice-President-Treasury of Filriters, without any board resolution,
knowledge or consent of the board of directors of Filriters, and without any clearance or authorization from the
Insurance Commissioner, executed a detached assignment purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-
Treasury of Filriters (both of whom were holding the same positions in Philfinance), without any consideration
or benefit redounding to Filriters and to the grave prejudice of Filriters, its policy holders and all who have
present or future claims against its policies, executed similar detached assignment forms transferring the CBCI
to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without the knowledge
and consent of directors of Filriters, and not duly authorized in writing by the Board, as requiring by Article V,
Section 3 of CB Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the corporate act of
Filriters and such null and void;
a) The assignment was executed without consideration and for that reason, the assignment is void from the
beginning (Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the
Insurance Code for its existence as an insurance company and the pursuit of its business operations. The
assignment of the CBCI is illegal act in the sense of malum in se or malum prohibitum, for anyone to make,
either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is immoral and
against public policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of Filriters
(and has in fact helped in placing Filriters under conservatorship), an inevitable result known to the officer
who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to bearer
but is a registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner as the
absolute owner and that the value of the registered certificates shall be payable only to the registered owner; a
sufficient notice to plaintiff that the assignments do not give them the registered owner's right as absolute
owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered
certificates are payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular
transaction made in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance
Code and its assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance
or authorization from the Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its
business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or
substantially all" of the assets of Filriters, which requires the affirmative action of the stockholders (Section 40,
Corporation [sic] Code.7
In its Decision8 dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment
of CBCI No. D891 in favor of Philfinance, and the subsequent assignment of the same CBCI by Philfinance in
favor of Traders Royal Bank null and void and of no force and effect. The dispositive portion of the decision
reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance
Corporation and against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of CBCI
by PhilFinance in favor of the plaintiff Traders Royal Bank as null and void and of no force and effect;
(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay the
value of the proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum of
P10,000 as attorney's fees; and
(d) to pay the costs.
SO ORDERED.9
The petitioner assailed the decision of the trial court in the Court of Appeals 10, but their appeals likewise failed.
The findings of the fact of the said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of
assignment dated November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance
Corporation (Philfinance). Subsequently, Philfinance transferred CBCI No. D891, which was still registered in
the name of Filriters, to appellant Traders Royal Bank (TRB). The transfer was made under a repurchase
agreement dated February 4, 1981, granting Philfinance the right to repurchase the instrument on or before
April 27, 1981. When Philfinance failed to buy back the note on maturity date, it executed a deed of assignment,
dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its
name before the Security and Servicing Department of the Central Bank (CB). Central Bank, however, refused
to effect the transfer and registration in view of an adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the
Regional Trial Court of Manila. The suit, however, was subsequently treated by the lower court as a case of
interpleader when CB prayed in its amended answer that Filriters be impleaded as a respondent and the court
adjudge which of them is entitled to the ownership of CBCI No. D891. Failing to get a favorable judgment. TRB
now comes to this Court on appeal. 11
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having
acquired the said certificate from Philfinance as a holder in due course, its possession of the same is thus free
fro any defect of title of prior parties and from any defense available to prior parties among themselves, and it
may thus, enforce payment of the instrument for the full amount thereof against all parties liable thereon. 12
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the
instrument clearly stated that it was payable to Filriters, the registered owner, whose name was inscribed
thereon, and that the certificate lacked the words of negotiability which serve as an expression of consent that
the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without
consideration, and did not conform to Central Bank Circular No. 769, series of 1980, better known as the
"Rules and Regulations Governing Central Bank Certificates of Indebtedness", which provided that any
"assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in
person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent,
having acquired the certificate through simulation. What happened was Philfinance merely borrowed CBCI No.
D891 from Filriters, a sister corporation, to guarantee its financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of
Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the
latter. For lack of such authority, the assignment did not therefore bind Filriters and violated as the same time
Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer
(People v. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA
778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED. 13
Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the
two corporations have identical corporate officers, thus demanding the application of the doctrine or piercing
the veil of corporate fiction, as to give validity to the transfer of the CBCI from registered owner to petitioner
TRB. 14 This renders the payment by TRB to Philfinance of CBCI, as actual payment to Filriters. Thus, there is
no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void
for lack of consideration.
Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the
meaning of the negotiable instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this
Certificate of indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the
registered owner hereof, the principal sum of FIVE HUNDRED THOUSAND PESOS.
x x x           x x x          x x x
Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a
permanent improvement revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it
is properly understood as acknowledgment of an obligation to pay a fixed sum of money. It is usually used for
the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered
owner hereof." Very clearly, the instrument is payable only to Filriters, the registered owner, whose name is
inscribed thereon. It lacks the words of negotiability which should have served as an expression of consent that
the instrument may be transferred by negotiation. 15
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE
CORPORATION, and to no one else, thus, discounting the petitioner's submission that the same is a negotiable
instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to
circulate as a substitute for money. Hence, freedom of negotiability is the touchtone relating to the protection
of holders in due course, and the freedom of negotiability is the foundation for the protection which the law
throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is totally absent in a
certificate indebtedness as it merely to pay a sum of money to a specified person or entity for a period of time.
As held in Caltex (Philippines), Inc. v. Court of Appeals, 16:
The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing,
that is, from the face of the instrument itself. In the construction of a bill or note, the intention of the parties is
to control, if it can be legally ascertained. While the writing may be read in the light of surrounding
circumstance in order to more perfectly understand the intent and meaning of the parties, yet as they have
constituted the writing to be the only outward and visible expression of their meaning, no other words are to be
added to it or substituted in its stead. The duty of the court in such case is to ascertain, not what the parties
may have secretly intended as contradistinguished from what their words express, but what is the meaning of
the words they have used. What the parties meant must be determined by what they said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed
by the negotiable instruments law. The pertinent question then is, was the transfer of the CBCI from Filriters to
Philfinance and subsequently from Philfinance to TRB, in accord with existing law, so as to entitle TRB to have
the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired
the instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for
"value received", there was really no consideration involved. What happened was Philfinance merely borrowed
CBCI No. D891 from Filriters, a sister corporation. Thus, for lack of any consideration, the assignment made is
a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank
Circular No. 769, series of 1980, otherwise known as the "Rules and Regulations Governing Central Bank
Certificates of Indebtedness", under which the note was issued. Published in the Official Gazette on November
19, 1980, Section 3 thereof provides that any assignment of registered certificates shall not be valid unless
made . . . by the registered owner thereof in person or by his representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of
Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the
latter. For lack of such authority, the assignment did not therefore bind Filriters and violated at the same time
Central Bank Circular No. 769 which has the force and effect of a law, resulting in the nullity of the transfer
(People vs. Que Po Lay, 94 Phil. 640; 3M Philippines, Inc. vs. Commissioner of Internal Revenue, 165 SCRA
778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to
Traders Royal Bank and which the latter can register with the Central Bank
Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and
Philfinance, though separate corporate entities on paper, have used their corporate fiction to defraud TRB into
purchasing the subject CBCI, which purchase now is refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the
principle of piercing the veil of corporate entity were to be applied in this case, then TRB's payment to
Philfinance for the CBCI purchased by it could just as well be considered a payment to Filriters, the registered
owner of the CBCI as to bar the latter from claiming, as it has, that it never received any payment for that CBCI
sold and that said CBCI was sold without its authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely borrowed
by Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financing operations, if it
were to be consistent therewith, on the issued raised by TRB that there was a piercing a veil of corporate entity,
the Court of Appeals should have ruled that such veil of corporate entity was, in fact, pierced, and the payment
by TRB to Philfinance should be construed as payment to Filriters. 17
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy,
and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime or where a corporation is a mere alter ego or business conduit of a
person. 18
Peiercing the veil of corporate entity requires the court to see through the protective shroud which exempts its
stockholders from liabilities that ordinarily, they could be subject to, or distinguished one corporation from a
seemingly separate one, were it not for the existing corporate fiction. But to do this, the court must be sure that
the corporate fiction was misused, to such an extent that injustice, fraud, or crime was committed upon
another, disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the
contrary. For one, other than the allegation that Filriters is 90% owned by Philfinance, and the identity of one
shall be maintained as to the other, there is nothing else which could lead the court under circumstance to
disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical
personality separate from its stockholders and from other corporations may be disregarded, 19 in the absence of
such grounds, the general rule must upheld. The fact that Filfinance owns majority shares in Filriters is not by
itself a ground to disregard the independent corporate status of Filriters. In Liddel & Co., Inc. vs. Collector of
Internal Revenue, 20 the mere ownership by a single stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate
corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the
subject certificate of indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should have put the
petitioner on notice, and prompted it to inquire from Filriters as to Philfinance's title over the same or its
authority to assign the certificate. As it is, there is no showing to the effect that petitioner had any dealings
whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any office of
the Bank or any agency duly authorized by the Bank, and such registration is noted hereon. After such
registration no transfer thereof shall be valid unless made at said office (where the Certificates has been
registered) by the registered owner hereof, in person, or by his attorney, duly authorized in writing and
similarly noted hereon and upon payment of a nominal transfer fee which may be required, a new Certificate
shall be issued to the transferee of the registered owner thereof. The bank or any agency duly authorized by the
Bank may deem and treat the bearer of this Certificate, or if this Certificate is registered as herein authorized,
the person in whose name the same is registered as the absolute owner of this Certificate, for the purpose of
receiving payment hereof, or on account hereof, and for all other purpose whether or not this Certificate shall
be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require
Philfinance to submit such an authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner was
disposing of the registered CBCI owned by another entity was a good reason for petitioner to verify of inquire
as to the title Philfinance to dispose to the CBCI.
Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 21, known as the Rules and
Regulations Governing Central Bank Certificates of Indebtedness, Section 3, Article V of which provides that:
Sec. 3. Assignment of Registered Certificates. — Assignment of registered certificates shall not be valid unless
made at the office where the same have been issued and registered or at the Securities Servicing Department,
Central Bank of the Philippines, and by the registered owner thereof, in person or by his representative, duly
authorized in writing. For this purpose, the transferee may be designated as the representative of the registered
owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its
requirements. An entity which deals with corporate agents within circumstances showing that the agents are
acting in excess of corporate authority, may not hold the corporation liable. 22 This is only fair, as everyone
must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due,
and observe honesty and good faith. 23
The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all
intents, is considered part of the law. As found by the courts a quo, Alfredo O. Banaria, who had signed the
deed of assignment from Filriters to Philfinance, purportedly for and in favor of Filriters, did not have the
necessary written authorization from the Board of Directors of Filriters to act for the latter. As it is, the sale
from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no consideration for
the same. This is fatal to the petitioner's cause, for then, Philfinance had no title over the subject certificate to
convey the Traders Royal Bank. Nemo potest nisi quod de jure potest — no man can do anything except what
he can do lawfully.
Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are
required by law 24 to be maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-
Charge of respondent Filriters, in his testimony given before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of
P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance Commission sometime in early
1981 and this CBCI No. 891 was among the CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891 before 1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of the
company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the
Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance Commission
requires this reserve to be invested preferably in government securities or government binds. This is how this
CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus, the
anauthorized use or distribution of the same by a corporate officer of Filriters cannot bind the said corporation,
not without the approval of its Board of Directors, and the maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed
interest of Traders Royal Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is hereby
AFFIRMED.
SO ORDERED.
[G.R. No. 100812. June 25, 1999.]

FRANCISCO MOTORS CORPORATION, Petitioner, v. COURT OF APPEALS and SPOUSES

GREGORIO and LIBRADA MANUEL, Respondents.

DECISION

QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision 1 of the
Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial
Court of Makati, Metro Manila. The procedural antecedents of this petition are as follows:chanrob1es virtual
1aw library

On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover three thousand four
hundred twelve and six centavos (P3,412.06), representing the balance of the jeep body purchased by the
Manuels from petitioner; an additional sum of twenty thousand four hundred fifty-four and eighty centavos
(P20,454.80) representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos
(P6,000.00) for cost of suit and attorney’s fees. 3 To the original balance on the price of jeep body were added
the costs of repair. 4 In their answer, private respondents interposed a counterclaim for unpaid legal services
by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators,
directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner
in regard to the petitioner’s claim for money, but also allowed the counter-claim of private respondents. Both
parties appealed. On April 15, 1991, the Court of Appeals sustained the trial court’s decision. 5 Hence, the
present petition.chanrobles virtual lawlibrary

For our review in particular is the propriety of the permissive counterclaim which private respondents filed
together with their answer to petitioner’s complaint for a sum of money. Private respondent Gregorio Manuel
alleged as an affirmative defense that, while he was petitioner’s Assistant Legal Officer, he represented
members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even
after the termination of the proceedings, his services were not paid. Said family members, he said, were also
incorporators, directors and officers of petitioner. Hence to counter petitioner’s collection suit, he filed a
permissive counterclaim for the unpaid attorney’s fees. 6

For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score,
and evidence ex-parte was presented on the counterclaim. The trial court ruled in favor of private respondents
and found that Gregorio Manuel indeed rendered legal services to the Francisco family in Special Proceedings
Number 7803- "In the Matter of Intestate Estate of Benita Trinidad." Said court also found that his legal
services were not compensated despite repeated demands, and thus ordered petitioner to pay him the amount
of fifty thousand (P50,000.00) pesos. 7

Dissatisfied with the trial court’s order, petitioner elevated the matter to the Court of Appeals, posing the
following issues:chanrobles virtual lawlibrary
"I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT
NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE DEFENDANT.
II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED PERMISSIVE
COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.
III.

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER THE

ALLEGED PERMISSIVE COUNTERCLAIM." 8

Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly
served on it together with the copy of the answer containing the permissive counterclaim. Further, petitioner
questions the propriety of its being made party to the case because it was not the real party in interest but the
individual members of the Francisco family concerned with the intestate case.

In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must be
answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the
Rules that a party still needed to be summoned anew if a counterclaim was set up against him. Failure to serve
summons, said respondent court, did not effectively negate trial court’s jurisdiction over petitioner in the
matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from
answering the counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the
copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover
when petitioner’s new counsel, Jose N. Aquino, entered his appearance, three (3) days still remained within the
period to file an answer to the counterclaim. Having failed to answer, petitioner was correctly considered in
default by the trial court. 9 Even assuming that the trial court acquired no jurisdiction over petitioner,
respondent court also said, but having filed a motion for reconsideration seeking relief from the said order of
default, petitioner was estopped from further questioning the trial court’s jurisdiction. 10

On the question of its liability for attorney’s fees owing to private respondent Gregorio Manuel, petitioner
argued that being a corporation, it should not be held liable therefor because these fees were owed by the
incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad.
Petitioner stressed that the personality of the corporation, vis-à-vis the individual persons who hired the
services of private respondent, is separate and distinct, 11 hence, the liability of said individuals did not become
an obligation chargeable against petitioner.chanroblesvirtual|awlibrary

Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:jgc:chanrobles.com.ph

"However, this distinct and separate personality is merely a fiction created by law for convenience and to
promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of
corporate fiction pierced, in cases where it is used as a cloak or cover for found (sic) illegality, or to work an
injustice, or where necessary to achieve equity or when necessary for the protection of creditors. (Sulo ng
Bayan, Inc. v. Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons and the legal fiction
of a separate corporate personality is not a shield for the commission of injustice and inequity. (Chemplex
Philippines, Inc. v. Pamatian, 57 SCRA 408)

"In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of
the heirs of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel
rendered legal services in the intestate estate case of their deceased mother. Considering the aforestated
principles and circumstances established in this case, equity and justice demands plaintiff-appellant’s veil of
corporate identity should be pierced and the defendant be compensated for legal services rendered to the heirs,
who are directors of the plaintiff-appellant corporation." 12

Now before us, petitioner assigns the following errors:chanrob1es virtual 1aw library
"I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE ENTITY.chanrobles virtual lawlibrary
II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER PETITIONER
WITH RESPECT TO THE COUNTERCLAIM." 13

Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction
because the transaction concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad.
According to petitioner, there was no cause of action by said respondent against petitioner; personal concerns
of the heirs should be distinguished from those involving corporate affairs. Petitioner further contends that the
present case does not fall among the instances wherein the courts may look beyond the distinct personality of a
corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees
from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal
capacity, and not involve the corporation. 14

With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the
answer containing the permissive counterclaim. It claims that the counterclaim is a separate case which can
only be properly served upon the opposing party through summons. Further petitioner states that by nature, a
permissive counterclaim is one which does not arise out of nor is necessarily connected with the subject of the
opposing party’s claim. Petitioner avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an
action independent from the answer, according to petitioner, then in effect there should be two simultaneous
actions between the same parties: each party is at the same time both plaintiff and defendant with respect to
the other, 15 requiring in each case separate summonses.

In their Comment, private respondents focus on the two questions raised by petitioner. They defend the
propriety of piercing the veil of corporate fiction, but deny the necessity of serving separate summonses on
petitioner in regard to their permissive counterclaim contained in the answer.

Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was
employed as assistant legal officer of petitioner corporation, and that his services were solicited by the
incorporators, directors and members to handle and represent them in Special Proceedings No. 7803,
concerning the Intestate Estate of the late Benita Trinidad. They assert that the members of petitioner
corporation took advantage of their positions by not compensating respondent Gregorio Manuel after the
termination of the estate proceedings despite his repeated demands for payment of his services. They cite
findings of the appellate court that support piercing the veil of corporate identity in this particular case. They
assert that the corporate veil may be disregarded when it is used to defeat public convenience, justify wrong,
protect fraud, and defend crime. It may also be pierced, according to them, 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. In these instances, they aver, the corporation should be treated merely as an association of
individual persons. 16chanrobles law library : red
Private respondents dispute petitioner’s claim that its right to due process was violated when respondents’
counterclaim was granted due course, although no summons was served upon it. They claim that no provision
in the Rules of Court requires service of summons upon a defendant in a counterclaim. Private respondents
argue that when the petitioner filed its complaint before the trial court it voluntarily submitted itself to the
jurisdiction of the court. As a consequence, the issuance of summons on it was no longer necessary. Private
respondents say they served a copy of their answer with affirmative defenses and counterclaim on petitioner’s
former counsel, Nicanor G. Alvarez. While petitioner would have the Court believe that respondents served said
copy upon Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents
assert that this contention is utterly baseless. Records disclose that the answer was received two (2) days before
the former counsel for petitioner withdrew his appearance, according to private respondents. They maintain
that the present petition is but a form of dilatory appeal, to set off petitioner’s obligations to the respondents by
running up more interest it could recover from them. Private respondents therefore claim damages against
petitioner. 17

To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction.

Basic in corporation law is the principle that a corporation has a separate personality distinct from its
stockholders and from other corporations to which it may be connected. 18 However, under the doctrine of
piercing the veil of corporate entity, the corporation’s separate juridical personality may be disregarded, for
example, when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Also, where the corporation 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, then its distinct personality may be
ignored. 19 In these circumstances, the courts will treat the corporation as a mere aggrupation of persons and
the liability will directly attach to them. The legal fiction of a separate corporate personality in those cited
instances, for reasons of public policy and in the interest of justice, will be justifiably set aside.

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.
The rationale behind piercing a corporation’s identity in a given case 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. However, 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.

Note also that he sought to collect legal fees not just from certain Francisco family members but also from
petitioner corporation on the claims that its management had requested his services and he acceded thereto as
an employee of petitioner from whom it could be deduced he was also receiving a salary. His move to recover
unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of
the purchase and repair of a jeep body could only result from an obvious misapprehension that petitioner’s
corporate assets could be used to answer for the liabilities of its individual directors, officers, and
incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly iniquitous to 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
therefor by piercing its corporate veil. While there are no hard and fast rules on disregarding separate
corporate identity, we must always be mindful of its function and purpose. A court should be careful in
assessing the milieu where the doctrine of piercing the corporate veil may be applied. Otherwise an injustice,
although unintended, may result from its erroneous application.chanroblesvirtualawlibrary

The personality of the corporation and those of its incorporators, directors and officers in their personal
capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual
incorporators, officers and directors could not be properly directed against the corporation without violating
basic principles governing corporations. Moreover, every action — including a counterclaim — must be
prosecuted or defended in the name of the real party in interest. 20 It is plainly an error to lay the claim for
legal fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual
members of the Francisco family.

However, with regard to the procedural issue raised by petitioner’s allegation, that it needed to be summoned
anew in order for the court to acquire jurisdiction over it, we agree with respondent court’s view to the
contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered
within ten (10) days from service. Nothing in the Rules of Court says that summons should first be served on
the defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the
court to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the plaintiff in the original
complaint, has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules
of Civil Procedure, 21 if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion of
plaintiff, the defendant may be declared in default. This is what happened to petitioner in this case, and this
Court finds no procedural error in the disposition of the appellate court on this particular issue. Moreover, as
noted by the respondent court, when petitioner filed its motion seeking to set aside the order of default, in
effect it submitted itself to the jurisdiction of the court. As well said by respondent court:jgc:chanrobles.com.ph

"Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request,
plaintiff-appellant was granted time to file a motion for reconsideration of the disputed decision. Plaintiff-
appellant did file its motion for reconsideration to set aside the order of default and the judgment rendered on
the counterclaim.

"Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously
insists, plaintiff-appellant is considered to have submitted to the court’s jurisdiction when it filed the motion
for reconsideration seeking relief from the court. (Soriano v. Palacio, 12 SCRA 447). A party is estopped from
assailing the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones v. Gironella,
159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais v. Balais, 159 SCRA 37)."
22chanrobles virtual lawlibrary

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only
as it held Francisco Motors Corporation liable for the legal obligation owing to private respondent Gregorio
Manuel; but this decision is without prejudice to his filing the proper suit against the concerned members of
the Francisco family in their personal capacity. No pronouncement as to costs.

SO ORDERED.
G.R. No. 142616            July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner,
vs.
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL
MERCHANDISE, respondents.
KAPUNAN, J.:
In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and
set aside the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the
Order issuing a writ of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated June 30,
1999, and its Order dated October 4, 1999, which denied petitioner's motion to dismiss.
The antecedents of this case are as follows:
Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law.
Meanwhile, respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are
domestic corporations, likewise, organized and existing under Philippine law.
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and
doing business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of
US$300,000.00 secured by real estate mortgages constituted over four (4) parcels of land in Makati City. This
credit facility was later increased successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in
November 1996; to US$1,425,000.00 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 Hong Kong.
However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms
of the real estate mortgages, 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 on May 27, 1999 at the Makati City Hall.
On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of
preliminary injunction and/or temporary restraining order before the Regional Trial Court of Makati. The
Executive Judge of the Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May
28, 1999, the case was raffled to Branch 147 of the Regional Trial Court of Makati. The trial judge then set a
hearing on June 8, 1999. At the hearing of the application for preliminary injunction, petitioner was given a
period of seven days to file its written opposition to the application. On June 15, 1999, petitioner filed an
opposition to the application for a writ of preliminary injunction to which the respondents filed a reply. On
June 25, 1999, 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. On June 30, 1999, the trial court judge issued
an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly issued on July 14,
1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.
Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of
preliminary injunction before the Court of Appeals. In the impugned decision, 1 the appellate court dismissed
the petition. Petitioner thus seeks recourse to this Court and raises the following errors:
1.
THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO,
CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS
AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-IN-
FACT AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.
2.
THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN EXCESS
OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT WAS
PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101
SCRA 827.2
Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's
Orders dated June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the instant
case.3
In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two
separate entities, petitioner is still the party-in-interest in the application for preliminary injunction because it
is tasked to commit acts of foreclosing respondents' properties. 4 Respondents maintain that the entire credit
facility is void as it contains stipulations in violation of the principle of mutuality of contracts. 5 In addition,
respondents justified the act of the court a quo in applying the doctrine of "Piercing the Veil of Corporate
Identity" by stating that petitioner is merely an alter ego or a business conduit of PNB-IFL.6
The petition is impressed with merit.
Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the
contract:
GROUNDS
I
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE
DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.
II
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST AGREED
UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT THE
RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT THE APPLICABLE MAXIMUM RATE OF
INTEREST IS REDUCED BY LAW OR BY THE MONETARY BOARD. 7
Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure
and eventual sale of the property in order to protect their rights to said property by reason of void credit
facilities as bases for the real estate mortgage over the said property. 8
The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint,
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. In other
words, herein 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 issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the
party to the loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent,
the respondents in their complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling
of the interest to be paid by them in accordance with the terms and conditions in the documents evidencing the
credit facilities, and crediting the amount previously paid to PNB by herein respondents. 9
Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the
contract. Respondents, therefore, do not have any cause of action against petitioner.
The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned
subsidiary of defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-
IFL.10 In justifying its ruling, the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11 reasoned that the
corporate entity may be disregarded 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. 12
We disagree.
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.13 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.
We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court
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 the case at bar, respondents fail to show any
cogent reason why the separate entities of the PNB and PNB-IFL should be disregarded.
While there exists no definite test of general application in determining when a subsidiary may be treated as a
mere instrumentality of the parent corporation, some factors have been identified that will justify the
application of the treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs.
Southern Railway Co.14 is enlightening. The case involved a suit against the Southern Railway Company.
Plaintiff was employed by Lenoir Car Works and alleged that he sustained injuries while working for Lenoir.
He, however, filed a suit against Southern Railway Company on the ground that Southern had acquired the
entire capital stock of Lenoir Car Works, hence, the latter corporation was but a mere instrumentality of the
former. The Tennessee Supreme Court stated that as a general rule the stock ownership alone by one
corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the
subsidiary unless 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. Said Court then
outlined the circumstances which may be useful in the determination of whether the subsidiary is but a mere
instrumentality of the parent-corporation:
The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the
infinite variations of fact that can arise but there are certain common circumstances which are important and
which, if present in the proper combination, are controlling.
These are as follows:
(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.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock
of Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The complaint must be
dismissed.
Similarly, 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. 15
In Concept Builders, Inc. v. NLRC,16 we have laid the test in determining the applicability of the doctrine of
piercing the veil of corporate fiction, to wit:
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 plaintiffs legal rights;
and,
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the
"instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the
corporation operated and the individual defendant's relationship to the operation. 17
Aside from the fact that 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 are present. Neither is
there a demonstration that any of the evils sought to be prevented by the doctrine of piercing the corporate veil
exists. Inescapably, therefore, the doctrine of piercing the corporate veil based on the alter ego or
instrumentality doctrine finds no application in the case at bar.
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, the petitioner was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the
foreclosure proceedings. A suit against an agent cannot without compelling reasons be considered a suit
against the principal. Under the Rules of Court, every action must be prosecuted or defended in the name of the
real party-in-interest, unless otherwise authorized by law or these Rules. 18 In mandatory terms, the Rules
require that "parties-in-interest without whom no final determination can be had, an action shall be joined
either as plaintiffs or defendants."19 In the case at bar, the injunction suit is directed only against the agent, not
the principal.
Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but
adjunct to the main suit.20 A writ of preliminary injunction is an ancillary or preventive remedy that may only
be resorted to by a litigant to protect or preserve his rights or interests and for no other purpose during the
pendency of the principal action. The dismissal of the principal action thus results in the denial of the prayer
for the issuance of the writ. Further, there is no showing that respondents are entitled to the issuance of the
writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure provides:
SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when
it is established:
(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in
restraining the commission or continuance of the act or acts complained of, or in requiring the performance of
an act or acts, either for a limited period or perpetually,
(b) That the commission, continuance or non-performance of the acts or acts complained of during the
litigation would probably work injustice to the applicant; or
(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or
suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject
of the action or proceeding, and tending to render the judgment ineffectual.
Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious
consequences which cannot be remedied under any standard compensation. 21 Respondents do not deny their
indebtedness. Their properties are by their own choice encumbered by real estate mortgages. Upon the non-
payment of the loans, which were secured by the mortgages sought to be foreclosed, the mortgaged properties
are properly subject to a foreclosure sale. Moreover, respondents questioned the alleged void stipulations in the
contract only when petitioner initiated the foreclosure proceedings. Clearly, respondents have failed to prove
that they have a right protected and that the acts against which the writ is to be directed are violative of said
right.22 The Court is not unmindful of the findings of both the trial court and the appellate court that there may
be serious grounds to nullify the provisions of the loan agreement. However, as earlier discussed, respondents
committed the mistake of filing the case against the wrong party, thus, they must suffer the consequences of
their error.
All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract
the provisions of which respondents seek to declare void. Accordingly, the case before the Regional Trial Court
must be dismissed and the preliminary injunction issued in connection therewith, must be lifted.
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.
SO ORDERED.
G.R. No. 100866 July 14, 1992
REBECCA BOYER-ROXAS and GUILLERMO ROXAS, petitioners,
vs.
HON. COURT OF APPEALS and HEIRS OF EUGENIA V. ROXAS, INC., respondents.
 
GUTIERREZ, JR., J.:
This is a petition to review the decision and resolution of the Court of Appeals in CA-G.R. No. 14530 affirming
the earlier decision of the Regional Trial Court of Laguna, Branch 37, at Calamba, in the consolidated RTC Civil
Case Nos. 802-84-C and 803-84-C entitled "Heirs of Eugenia V. Roxas, Inc. v. Rebecca Boyer-Roxas" and Heirs
of Eugenia V. Roxas, Inc. v. Guillermo Roxas," the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered in favor of the plaintiff and against the
defendants, by ordering as it is hereby ordered that:
1) In RTC Civil Case No. 802-84-C: Rebecca Boyer-Roxas and all persons claiming under her to:
a) Immediately vacate the residential house near the Balugbugan pool located inside the premises of the
Hidden Valley Springs Resort at Limao, Calauan, Laguna;
b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983, for her occupancy of the
residential house until the same is vacated;
c) Remove the unfinished building erected on the land of the plaintiff within ninety (90) days from receipt of
this decision;
d) Pay the plaintiff the amount of P100.00 per month from September 10, 1983, until the said unfinished
building is removed from the land of the plaintiff; and
e) Pay the costs.
2) In RTC Civil Case No. 803-84-C: Guillermo Roxas and all persons claiming under him to:
a) Immediately vacate the residential house near the tennis court located within the premises of the Hidden
Valley Springs Resort at Limao, Calauan, Laguna;
b) Pay the plaintiff the amount of P300.00 per month from September 10, 1983, for his occupancy of the said
residential house until the same is vacated; and
c) Pay the costs. (Rollo, p. 36)
In two (2) separate complaints for recovery of possession filed with the Regional Trial Court of Laguna against
petitioners Rebecca Boyer-Roxas and Guillermo Roxas respectively, respondent corporation, Heirs of Eugenia
V. Roxas, Inc., prayed for the ejectment of the petitioners from buildings inside the Hidden Valley Springs
Resort located at Limao, Calauan, Laguna allegedly owned by the respondent corporation.
In the case of petitioner Rebecca Boyer-Roxas (Civil Case No-802-84-C), the respondent corporation alleged
that Rebecca is in possession of two (2) houses, one of which is still under construction, built at the expense of
the respondent corporation; and that her occupancy on the two (2) houses was only upon the tolerance of the
respondent corporation.
In the case of petitioner Guillermo Roxas (Civil Case No. 803-84-C), the respondent corporation alleged that
Guillermo occupies a house which was built at the expense of the former during the time when Guillermo's
father, Eriberto Roxas, was still living and was the general manager of the respondent corporation; that the
house was originally intended as a recreation hall but was converted for the residential use of Guillermo; and
that Guillermo's possession over the house and lot was only upon the tolerance of the respondent corporation.
In both cases, the respondent corporation alleged that the petitioners never paid rentals for the use of the
buildings and the lots and that they ignored the demand letters for them to vacate the buildings.
In their separate answers, the petitioners traversed the allegations in the complaint by stating that they are
heirs of Eugenia V. Roxas and therefore, co-owners of the Hidden Valley Springs Resort; and as co-owners of
the property, they have the right to stay within its premises.
The cases were consolidated and tried jointly.
At the pre-trial, the parties limited the issues as follows:
1) whether plaintiff is entitled to recover the questioned premises;
2) whether plaintiff is entitled to reasonable rental for occupancy of the premises in question;
3) whether the defendant is legally authorized to pierce the veil of corporate fiction and interpose the same as a
defense in an accion publiciana;
4) whether the defendants are truly builders in good faith, entitled to occupy the questioned premises;
5) whether plaintiff is entitled to damages and reasonable compensation for the use of the questioned
premises;
6) whether the defendants are entitled to their counterclaim to recover moral and exemplary damages as well
as attorney's fees in the two cases;
7) whether the presence and occupancy by the defendants on the premises in questioned (sic) hampers, deters
or impairs plaintiff's operation of Hidden Valley Springs Resort; and
8) whether or not a unilateral and sudden withdrawal of plaintiffs tolerance allowing defendants' occupancy of
the premises in questioned (sic) is unjust enrichment. (Original Records, 486)
Upon motion of the plaintiff respondent corporation, Presiding Judge Francisco Ma. Guerrero of Branch 34
issued an Order dated April 25, 1986 inhibiting himself from further trying the case. The cases were re-raffled
to Branch 37 presided by Judge Odilon Bautista. Judge Bautista continued the hearing of the cases.
For failure of the petitioners (defendants below) and their counsel to attend the October 22, 1986 hearing
despite notice, and upon motion of the respondent corporation, the court issued on the same day, October 22,
1986, an Order considering the cases submitted for decision. At this stage of the proceedings, the petitioners
had not yet presented their evidence while the respondent corporation had completed the presentation of its
evidence.
The evidence of the respondent corporation upon which the lower court based its decision is as follows:
To support the complaints, the plaintiff offered the testimonies of Maria Milagros Roxas and that of Victoria
Roxas Villarta as well as Exhibits "A" to "M-3".
The evidence of the plaintiff established the following: that the plaintiff, Heirs of Eugenia V Roxas,
Incorporated, was incorporated on December 4, 1962 (Exh. "C") with the primary purpose of engaging in
agriculture to develop the properties inherited from Eugenia V. Roxas and that of y Eufrocino Roxas; that the
Articles of Incorporation of the plaintiff, in 1971, was amended to allow it to engage in the resort business (Exh.
"C-1"); that the incorporators as original members of the board of directors of the plaintiff were all members of
the same family, with Eufrocino Roxas having the biggest share; that accordingly, the plaintiff put up a resort
known as Hidden Valley Springs Resort on a portion of its land located at Bo. Limao, Calauan, Laguna, and
covered by TCT No. 32639 (Exhs. "A" and "A-l"); that improvements were introduced in the resort by the
plaintiff and among them were cottages, houses or buildings, swimming pools, tennis court, restaurant and
open pavilions; that the house near the Balugbugan Pool (Exh. "B-l") being occupied by Rebecca B. Roxas was
originally intended as staff house but later used as the residence of Eriberto Roxas, deceased husband of the
defendant Rebecca Boyer-Roxas and father of Guillermo Roxas; that this house presently being occupied by
Rebecca B. Roxas was built from corporate funds; that the construction of the unfinished house (Exh. "B-2")
was started by the defendant Rebecca Boyer-Roxas and her husband Eriberto Roxas; that the third building
(Exh. "B-3") presently being occupied by Guillermo Roxas was originally intended as a recreation hall but later
converted as a residential house; that this house was built also from corporate funds; that the said house
occupied by Guillermo Roxas when it was being built had nipa roofing but was later changed to galvanized iron
sheets; that at the beginning, it had no partition downstairs and the second floor was an open space; that the
conversion from a recreation hall to a residential house was with the knowledge of Eufrocino Roxas and was
not objected to by any of the Board of Directors of the plaintiff; that most of the materials used in converting
the building into a residential house came from the materials left by Coppola, a film producer, who filmed the
movie "Apocalypse Now"; that Coppola left the materials as part of his payment for rents of the rooms that he
occupied in the resort; that after the said recreation hall was converted into a residential house, defendant
Guillermo Roxas moved in and occupied the same together with his family sometime in 1977 or 1978; that
during the time Eufrocino Roxas was still alive, Eriberto Roxas was the general manager of the corporation and
there was seldom any board meeting; that Eufrocino Roxas together with Eriberto Roxas were (sic) the ones
who were running the corporation; that during this time, Eriberto Roxas was the restaurant and wine
concessionaire of the resort; that after the death of Eufrocino Roxas, Eriberto Roxas continued as the general
manager until his death in 1980; that after the death of Eriberto Roxas in 1980, the defendants Rebecca B.
Roxas and Guillermo Roxas, committed acts that impeded the plaintiff's expansion and normal operation of
the resort; that the plaintiff could not even use its own pavilions, kitchen and other facilities because of the acts
of the defendants which led to the filing of criminal cases in court; that cases were even filed before the
Ministry of Tourism, Bureau of Domestic Trade and the Office of the President by the parties herein; that the
defendants violated the resolution and orders of the Ministry of Tourism dated July 28, 1983, August 3, 1983
and November 26, 1984 (Exhs. "G", "H" and "H-l") which ordered them or the corporation they represent to
desist from and to turn over immediately to the plaintiff the management and operation of the restaurant and
wine outlets of the said resort (Exh. "G-l"); that the defendants also violated the decision of the Bureau of
Domestic Trade dated October 23, 1983 (Exh. "C"); that on August 27, 1983, because of the acts of the
defendants, the Board of Directors of the plaintiff adopted Resolution No. 83-12 series of 1983 (Exh. "F")
authorizing the ejectment of the defendants from the premises occupied by them; that on September 1, 1983,
demand letters were sent to Rebecca Boyer-Roxas and Guillermo Roxas (Exhs. "D" and "D-1") demanding that
they vacate the respective premises they occupy; and that the dispute between the plaintiff and the defendants
was brought before the barangay level and the same was not settled (Exhs. "E" and "E-l"). (Original Records,
pp. 454-456)
The petitioners appealed the decision to the Court of Appeals. However, as stated earlier, the appellate court
affirmed the lower court's decision. The Petitioners' motion for reconsideration was likewise denied.
Hence, this petition.
In a resolution dated February 5, 1992, we gave due course to the petition.
The petitioners now contend:
I Respondent Court erred when it refused to pierce the veil of corporate fiction over private respondent and
maintain the petitioners in their possession and/or occupancy of the subject premises considering that
petitioners are owners of aliquot part of the properties of private respondent. Besides, private respondent itself
discarded the mantle of corporate fiction by acts and/or omissions of its board of directors and/or
stockholders.
II The respondent Court erred in not holding that petitioners were in fact denied due process or their day in
court brought about by the gross negligence of their former counsel.
III The respondent Court misapplied the law when it ordered petitioner Rebecca Boyer-Roxas to remove the
unfinished building in RTC Case No. 802-84-C, when the trial court opined that she spent her own funds for
the construction thereof. (CA Rollo, pp. 17-18)
Were the petitioners denied due process of law in the lower court?
After the cases were re-raffled to the sala of Presiding Judge Odilon Bautista of Branch 37 the following events
transpired:
On July 3, 1986, the lower court issued an Order setting the hearing of the cases on July 21, 1986. Petitioner
Rebecca V. Roxas received a copy of the Order on July 15, 1986, while petitioner Guillermo Roxas received his
copy on July 18, 1986. Atty. Conrado Manicad, the petitioners' counsel received another copy of the Order on
July 11, 1986. (Original Records, p. 260)
On motion of the respondent corporation's counsel, the lower court issued an Order dated July 15, 1986
cancelling the July 21, 1986 hearing and resetting the hearing to August 11, 1986. (Original records, 262-263)
Three separate copies of the order were sent and received by the petitioners and their counsel. (Original
Records, pp. 268, 269, 271)
A motion to cancel and re-schedule the August 11, 1986 hearing filed by the respondent corporation's counsel
was denied in an Order dated August 8, 1986. Again separate copies of the Order were sent and received by the
petitioners and their counsel. (Original Records, pp. 276-279)
At the hearing held on August 11, 1986, only Atty. Benito P. Fabie, counsel for the respondent corporation
appeared. Neither the petitioners nor their counsel appeared despite notice of hearing. The lower court then
issued an Order on the same date, to wit:
ORDER
When these cases were called for continuation of trial, Atty. Benito P. Fabie appeared before this Court,
however, the defendants and their lawyer despite receipt of the Order setting the case for hearing today failed
to appear. On Motion of Atty. Fabie, further cross examination of witness Victoria Vallarta is hereby considered
as having been waived.
The plaintiff is hereby given twenty (20) days from today within which to submit formal offer of evidence and
defendants are also given ten (10) days from receipt of such formal offer of evidence to file their objection
thereto.
In the meantime, hearing in these cases is set to September 29, 1986 at 10:00 o'clock in the morning. (Original
Records, p. 286)
Copies of the Order were sent and received by the petitioners and their counsel on the following dates —
Rebecca Boyer-Roxas on August 20, 1986, Guillermo Roxas on August 26, 1986, and Atty. Conrado Manicad on
September 19, 1986. (Original Records, pp. 288-290)
On September 1, 1986, the respondent corporation filed its "Formal Offer of Evidence." In an Order dated
September 29, 1986, the lower court issued an Order admitting exhibits "A" to "M-3" submitted by the
respondent corporation in its "Formal Offer of Evidence . . . there being no objection . . ." (Original Records, p.
418) Copies of this Order were sent and received by the petitioners and their counsel on the following dates:
Rebecca Boyer-Roxas on October 9, 1986; Guillermo Roxas on October 9, 1986 and Atty. Conrado Manicad on
October 4, 1986 (Original Records, pp. 420, 421, 428).
The scheduled hearing on September 29, 1986 did not push through as the petitioners and their counsel were
not present prompting Atty. Benito Fabie, the respondent corporation's counsel to move that the cases be
submitted for decision. The lower court denied the motion and set the cases for hearing on October 22, 1986.
However, in its Order dated September 29, 1986, the court warned that in the event the petitioners and their
counsel failed to appear on the next scheduled hearing, the court shall consider the cases submitted for
decision based on the evidence on record. (Original Records, p. 429, 430 and 431)
Separate copies of this Order were sent and received by the petitioners and their counsel on the following
dates: Rebecca Boyer-Roxas on October 9, 1986, Guillermo Roxas on October 9, 1986; and Atty. Conrado
Manicad on October 1, 1986. (Original Records, pp. 429-430)
Despite notice, the petitioners and their counsel again failed to attend the scheduled October 22, 1986 hearing.
Atty. Fabie representing the respondent corporation was present. Hence, in its Order dated October 22, 1986,
on motion of Atty. Fabie and pursuant to the order dated September 29, 1986, the Court considered the cases
submitted for decision. (Original Records, p. 436)
On November 14, 1986, the respondent corporation, filed a "Manifestation", stating that ". . . it is submitting
without further argument its "Opposition to the Motion for Reconsideration" for the consideration of the
Honorable Court in resolving subject incident." (Original Records, p. 442)
On December 16, 1986, the lower court issued an Order, to wit:
ORDER
Considering that the Court up to this date has not received any Motion for Reconsideration filed by the
defendants in the above-entitled cases, the Court cannot act on the Opposition to Motion for Reconsideration
filed by the plaintiff and received by the Court on November 14, 1986. (Original Records, p. 446)
On January 15, 1987, the lower court rendered the questioned decision in the two (2) cases. (Original Records,
pp. 453-459)
On January 20, 1987, Atty. Conrado Manicad, the petitioners' counsel filed an Ex-Parte Manifestation and
attached thereto, a motion for reconsideration of the October 22, 1986 Order submitting the cases for decision.
He prayed that the Order be set aside and the cases be re-opened for reception of evidence for the petitioners.
He averred that: 1) within the reglementary period he prepared the motion for reconsideration and among
other documents, the draft was sent to his law office thru his messenger; after signing the final copies, he
caused the service of a copy to the respondent corporation's counsel with the instruction that the copy of the
Court be filed; however, there was a miscommunication between his secretary and messenger in that the
secretary mailed the copy for the respondent corporation's counsel and placed the rest in an envelope for the
messenger to file the same in court but the messenger thought that it was the secretary who would file it; it was
only later on when it was discovered that the copy for the Court has not yet been filed and that such failure to
file the motion for reconsideration was due to excusable neglect and/or accident. The motion for
reconsideration contained the following allegations: that on the date set for hearing (October 22, 1986), he was
on his way to Calamba to attend the hearing but his car suffered transmission breakdown; and that despite
efforts to repair said transmission, the car remained inoperative resulting in his absence at the said hearing.
(Original Records, pp. 460-469)
On February 3, 1987, Atty. Manicad filed a motion for reconsideration of the January 15, 1987 decision. He
explained that he had to file the motion because the receiving clerk refused to admit the motion for
reconsideration attached to the ex-parte manifestation because there was no proof of service to the other party.
Included in the motion for reconsideration was a notice of hearing of the motion on February 3, 1987. (Original
Records, p. 476-A)
On February 4, 1987, the respondent corporation through its counsel filed a Manifestation and Motion
manifesting that they received the copy of the motion for reconsideration only today (February 4, 1987), hence
they prayed for the postponement of the hearing. (Original Records, pp. 478-479)
On the same day, February 4, 1987, the lower court issued an Order setting the hearing on February 13, 1987 on
the ground that it received the motion for reconsideration late. Copies of this Order were sent separately to the
petitioners and their counsel. The records show that Atty. Manicad received his copy on February 11, 1987. As
regards the petitioners, the records reveal that Rebecca Boyer-Roxas did not receive her copy while as regards
Guillermo Roxas, somebody signed for him but did not indicate when the copy was received. (Original Records,
pp. 481-483)
At the scheduled February 13, 1987 hearing, the counsels for the parties were present. However, the hearing
was reset for March 6, 1987 in order to allow the respondent corporation to file its opposition to the motion for
reconsideration. (Order dated February 13, 1987, Original Records, p. 486) Copies of the Order were sent and
received by the petitioners and their counsel on the following dates: Rebecca Boyer-Roxas on February 23,
1987; Guillermo Roxas on February 23, 1987 and Atty. Manicad on February 19, 1987. (Original Records, pp.
487, 489-490)
The records are not clear as to whether or not the scheduled hearing on March 6, 1987 was held. Nevertheless,
the records reveal that on March 13, 1987, the lower court issued an Order denying the motion for
reconsideration.
The well-settled doctrine is that the client is bound by the mistakes of his lawyer. (Aguila v. Court of First
Instance of Batangas, Branch I, 160 SCRA 352 [1988]; See also Vivero v. Santos, et al., 98 Phil. 500 [1956];
Isaac v. Mendoza, 89 Phil. 279 [1951]; Montes v. Court of First Instance of Tayabas, 48 Phil. 640 [1926]; People
v. Manzanilla, 43 Phil. 167 [1922]; United States v. Dungca, 27 Phil. 274 [1914]; and United States v. Umali, 15
Phil. 33 [1910]) This rule, however, has its exceptions. Thus, in several cases, we ruled that the party is not
bound by the actions of his counsel in case the gross negligence of the counsel resulted in the client's
deprivation of his property without due process of law. In the case of Legarda v. Court of Appeals (195 SCRA
418 [1991]), we said:
In People's Homesite & Housing Corp. v. Tiongco and Escasa (12 SCRA 471 [1964]), this Court ruled as follows:
Procedural technicality should not be made a bar to the vindication of a legitimate grievance. When such
technicality deserts from being an aid to Justice, the courts are justified in excepting from its operation a
particular case. Where there was something fishy and suspicious about the actuations of the former counsel of
petitioners in the case at bar, in that he did not give any significance at all to the processes of the court, which
has proven prejudicial to the rights of said clients, under a lame and flimsy explanation that the court's
processes just escaped his attention, it is held that said lawyer deprived his clients of their day in court, thus
entitling said clients to petition for relief from judgment despite the lapse of the reglementary period for filing
said period for filing said petition.
In Escudero v. Judge Dulay (158 SCRA 69 [1988]), this Court, in holding that the counsel's blunder in
procedure is an exception to the rule that the client is bound by the mistakes of counsel, made the following
disquisition:
Petitioners contend, through their new counsel, that the judgment rendered against them by the respondent
court was null and void, because they were therein deprived of their day in court and divested of their property
without due process of law, through the gross ignorance, mistake and negligence of their previous counsel.
They acknowledge that, while as a rule, clients are bound by the mistake of their counsel, the rule should not be
applied automatically to their case, as their trial counsel's blunder in procedure and gross ignorance of existing
jurisprudence changed their cause of action and violated their substantial rights.
We are impressed with petitioner's contentions.
x x x           x x x          x x x
While this Court is cognizant of the rule that, generally, a client will suffer consequences of the negligence,
mistake or lack of competence of his counsel, in the interest of Justice and equity, exceptions may be made to
such rule, in accordance with the facts and circumstances of each case. Adherence to the general rule would, in
the instant case, result in the outright deprivation of their property through a technicality.
In its questioned decision dated November 19, 1989 the Court of Appeals found, in no uncertain terms, the
negligence of the then counsel for petitioners when he failed to file the proper motion to dismiss or to draw a
compromise agreement if it was true that they agreed on a settlement of the case; or in simply filing an answer;
and that after having been furnished a copy of the decision by the court he failed to appeal therefrom or to file a
petition for relief from the order declaring petitioners in default. In all these instances the appellate court
found said counsel negligent but his acts were held to bind his client, petitioners herein, nevertheless.
The Court disagrees and finds that the negligence of counsel in this case appears to be so gross and inexcusable.
This was compounded by the fact, that after petitioner gave said counsel another chance to make up for his
omissions by asking him to file a petition for annulment of the judgment in the appellate court, again counsel
abandoned the case of petitioner in that after he received a copy of the adverse judgment of the appellate court,
he did not do anything to save the situation or inform his client of the judgment. He allowed the judgment to
lapse and become final. Such reckless and gross negligence should not be allowed to bind the petitioner.
Petitioner was thereby effectively deprived of her day in court. (at pp. 426-427)
The herein petitioners, however, are not similarly situated as the parties mentioned in the abovecited cases. We
cannot rule that they, too, were victims of the gross negligence of their counsel.
The petitioners are to be blamed for the October 22, 1986 order issued by the lower court submitting the cases
for decision. They received notices of the scheduled hearings and yet they did not do anything. More
specifically, the parties received notice of the Order dated September 29, 1986 with the warning that if they fail
to attend the October 22, 1986 hearing, the cases would be submitted for decision based on the evidence on
record. Earlier, at the scheduled hearing on September 29, 1986, the counsel for the respondent corporation
moved that the cases be submitted for decision for failure of the petitioners and their counsel to attend despite
notice. The lower court denied the motion and gave the petitioners and their counsel another chance by
rescheduling the October 22, 1986 hearing.
Indeed, the petitioners knew all along that their counsel was not attending the scheduled hearings. They did
not take steps to change their counsel or make him attend to their cases until it was too late. On the contrary,
they continued to retain the services of Atty. Manicad knowing fully well his lapses vis-a-vis their cases. They,
therefore, cannot raise the alleged gross negligence of their counsel resulting in their denial of due process to
warrant the reversal of the lower court's decision. In a similar case, Aguila v. Court of First Instance of
Batangas, Branch 1 (supra), we ruled:
In the instant case, the petitioner should have noticed the succession of errors committed by his counsel and
taken appropriate steps for his replacement before it was altogether too late. He did not. On the contrary, he
continued to retain his counsel through the series of proceedings that all resulted in the rejection of his cause,
obviously through such counsel's "ineptitude" and, let it be added, the clients' forbearance. The petitioner's
reverses should have cautioned him that his lawyer was mishandling his case and moved him to seek the help
of other counsel, which he did in the end but rather tardily.
Now petitioner wants us to nullify all of the antecedent proceedings and recognize his earlier claims to the
disputed property on the justification that his counsel was grossly inept. Such a reason is hardly plausible as
the petitioner's new counsel should know. Otherwise, all a defeated party would have to do to salvage his case is
claim neglect or mistake on the part of his counsel as a ground for reversing the adverse judgment. There
would be no end to litigation if these were allowed as every shortcoming of counsel could be the subject of
challenge by his client through another counsel who, if he is also found wanting, would likewise be disowned by
the same client through another counsel, and so on ad infinitum. This would render court proceedings
indefinite, tentative and subject to reopening at any time by the mere subterfuge of replacing counsel. (at pp.
357-358)
We now discuss the merits of the cases.
In the first assignment of error, the petitioners maintain that their possession of the questioned properties
must be respected in view of their ownership of an aliquot portion of all the properties of the respondent
corporation being stockholders thereof. They propose that the veil of corporate fiction be pierced, considering
the circumstances under which the respondent corporation was formed.
Originally, the questioned properties belonged to Eugenia V. Roxas. After her death, the heirs of Eugenia V.
Roxas, among them the petitioners herein, decided to form a corporation — Heirs of Eugenia V. Roxas,
Incorporated (private respondent herein) with the inherited properties as capital of the corporation. The
corporation was incorporated on December 4, 1962 with the primary purpose of engaging in agriculture to
develop the inherited properties. The Articles of Incorporation of the respondent corporation were amended in
1971 to allow it to engage in the resort business. Accordingly, the corporation put up a resort known as Hidden
Valley Springs Resort where the questioned properties are located.
These facts, however, do not justify the position taken by the petitioners.
The respondent is a bona fide corporation. As such, it has a juridical personality of its own separate from the
members composing it. (Western Agro Industrial Corporation v. Court of Appeals, 188 SCRA 709 [1990]; Tan
Boon Bee & Co., Inc. v. Jarencio, 163 SCRA 205 [1988]; Yutivo Sons Hardware Company v. Court of Tax
Appeals, 1 SCRA 160 [1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290
[1965]) There is no dispute that title over the questioned land where the Hidden Valley Springs Resort is
located is registered in the name of the corporation. The records also show that the staff house being occupied
by petitioner Rebecca Boyer-Roxas and the recreation hall which was later on converted into a residential
house occupied by petitioner Guillermo Roxas are owned by the respondent corporation. Regarding properties
owned by a corporation, we stated in the case of Stockholders of F. Guanzon and Sons, Inc. v. Register of
Deeds of Manila, (6 SCRA 373 [1962]):
xxx xxx xxx
. . . Properties registered in the name of the corporation are owned by it as an entity separate and distinct from
its members. While shares of stock constitute personal property, they do not represent property of the
corporation. The corporation has property of its own which consists chiefly of real estate (Nelson v. Owen, 113
Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies an aliquot part
of the corporation's property, or the right to share in its proceeds to that extent when distributed according to
law and equity (Hall & Faley v. Alabama Terminal, 173 Ala., 398, 56 So. 235), but its holder is not the owner of
any part of the capital of the corporation (Bradley v. Bauder, 36 Ohio St., 28). Nor is he entitled to the
possession of any definite portion of its property or assets (Gottfried V. Miller, 104 U.S., 521; Jones v. Davis, 35
Ohio St., 474). The stockholder is not a co-owner or tenant in common of the corporate property (Harton v.
Johnston, 166 Ala., 317, 51 So. 992). (at pp. 375-376)
The petitioners point out that their occupancy of the staff house which was later used as the residence of
Eriberto Roxas, husband of petitioner Rebecca Boyer-Roxas and the recreation hall which was converted into a
residential house were with the blessings of Eufrocino Roxas, the deceased husband of Eugenia V. Roxas, who
was the majority and controlling stockholder of the corporation. In his lifetime, Eufrocino Roxas together with
Eriberto Roxas, the husband of petitioner Rebecca Boyer-Roxas, and the father of petitioner Guillermo Roxas
managed the corporation. The Board of Directors did not object to such an arrangement. The petitioners argue
that . . . the authority thus given by Eufrocino Roxas for the conversion of the recreation hall into a residential
house can no longer be questioned by the stockholders of the private respondent and/or its board of directors
for they impliedly but no leas explicitly delegated such authority to said Eufrocino Roxas. (Rollo, p. 12)
Again, we must emphasize that the respondent corporation has a distinct personality separate from its
members. The corporation transacts its business only through its officers or agents. (Western Agro Industrial
Corporation v. Court of Appeals, supra). Whatever authority these officers or agents may have is derived from
the board of directors or other governing body unless conferred by the charter of the corporation. An officer's
power as an agent of the corporation must be sought from the statute, charter, the by-laws or in a delegation of
authority to such officer, from the acts of the board of directors, formally expressed or implied from a habit or
custom of doing business. (Vicente v. Geraldez, 52 SCRA 210 [1973])
In the present case, the record shows that Eufrocino V. Roxas who then controlled the management of the
corporation, being the majority stockholder, consented to the petitioners' stay within the questioned
properties. Specifically, Eufrocino Roxas gave his consent to the conversion of the recreation hall to a
residential house, now occupied by petitioner Guillermo Roxas. The Board of Directors did not object to the
actions of Eufrocino Roxas. The petitioners were allowed to stay within the questioned properties until August
27, 1983, when the Board of Directors approved a Resolution ejecting the petitioners, to wit:
R E S O L U T I O N No. 83-12
RESOLVED, That Rebecca B. Roxas and Guillermo Roxas, and all persons claiming under them, be ejected
from their occupancy of the Hidden Valley Springs compound on which their houses have been constructed
and/or are being constructed only on tolerance of the Corporation and without any contract therefor, in order
to give way to the Corporation's expansion and improvement program and obviate prejudice to the operation of
the Hidden Valley Springs Resort by their continued interference.
RESOLVED, Further that the services of Atty. Benito P. Fabie be engaged and that he be authorized as he is
hereby authorized to effect the ejectment, including the filing of the corresponding suits, if necessary to do so.
(Original Records, p. 327)
We find nothing irregular in the adoption of the Resolution by the Board of Directors. The petitioners' stay
within the questioned properties was merely by tolerance of the respondent corporation in deference to the
wishes of Eufrocino Roxas, who during his lifetime, controlled and managed the corporation. Eufrocino Roxas'
actions could not have bound the corporation forever. The petitioners have not cited any provision of the
corporation by-laws or any resolution or act of the Board of Directors which authorized Eufrocino Roxas to
allow them to stay within the company premises forever. We rule that in the absence of any existing contract
between the petitioners and the respondent corporation, the corporation may elect to eject the petitioners at
any time it wishes for the benefit and interest of the respondent corporation.
The petitioners' suggestion that the veil of the corporate fiction should be pierced is untenable. The separate
personality of the corporation may be disregarded only 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 when necessary for the
protection of the creditors." (Sulong Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 [1976] cited in Tan Boon Bee &
Co., Inc., v. Jarencio, supra and Western Agro Industrial Corporation v. Court of Appeals, supra) The
circumstances in the present cases do not fall under any of the enumerated categories.
In the third assignment of error, the petitioners insist that as regards the unfinished building, Rebecca Boyer-
Roxas is a builder in good faith.
The construction of the unfinished building started when Eriberto Roxas, husband of Rebecca Boyer-Roxas,
was still alive and was the general manager of the respondent corporation. The couple used their own funds to
finance the construction of the building. The Board of Directors of the corporation, however, did not object to
the construction. They allowed the construction to continue despite the fact that it was within the property of
the corporation. Under these circumstances, we agree with the petitioners that the provision of Article 453 of
the Civil Code should have been applied by the lower courts.
Article 453 of the Civil Code provides:
If there was bad faith, not only on the part of the person who built, planted or sown on the land of another but
also on the part of the owner of such land, the rights of one and the other shall be the same as though both had
acted in good faith.
In such a case, the provisions of Article 448 of the Civil Code govern the relationship between petitioner
Rebecca-Boyer-Roxas and the respondent corporation, to wit:
Art. 448 — The owner of the land on which anything has been built, sown or planted in good faith, shall have
the right to appropriate as his own the works, sowing or planting after payment of the indemnity provided for
in articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who
sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of
the land does not choose to appropriate the buildings or trees after proper indemnity. The parties shall agree
upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.
WHEREFORE, the present petition is partly GRANTED. The questioned decision of the Court of Appeals
affirming the decision of the Regional Trial Court of Laguna, Branch 37, in RTC Civil Case No. 802-84-C is
MODIFIED in that subparagraphs (c) and (d) of Paragraph 1 of the dispositive portion of the decision are
deleted. In their stead, the petitioner Rebecca Boyer-Roxas and the respondent corporation are ordered to
follow the provisions of Article 448 of the Civil Code as regards the questioned unfinished building in RTC Civil
Case No. 802-84-C. The questioned decision is affirmed in all other respects.
SO ORDERED.

[G.R. NO. 170782 : June 22, 2009]

SIAIN ENTERPRISES, INC., Petitioner, v. CUPERTINO REALTY CORP. and EDWIN R.
CATACUTAN, Respondents.
DECISION
NACHURA, J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the decision of the
Court of Appeals in CA-G.R. CV No. 714241 which affirmed the decision of the Regional Trial Court, Branch 29,
Iloilo City in Civil Case No. 23244.2
On April 10, 1995, petitioner 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 promissory note authorizes Cupertino,
as the creditor, to place in escrow the loan proceeds of P37,000,000.00 with Metropolitan Bank & Trust
Company to pay off petitioner's loan obligation with Development Bank of the Philippines (DBP). To secure the
loan, petitioner, on the same date, executed a real estate mortgage over two (2) parcels of land and other
immovables, such as equipment and machineries.
Two (2) days thereafter, or on April 12, 1995, the parties executed an amendment to promissory note which
provided for a seventeen percent (17%) interest per annum on the P37,000,000.00 loan.3 The amendment to
promissory note was likewise signed by Cua Le Leng and Wilfredo Lua on behalf of petitioner and Cupertino,
respectively.
On August 16, 1995, Cua Le Leng signed a second promissory note 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. This second promissory note provides:
PROMISSORY NOTE

AMOUNT DATE: AUGUST 16, 1995

ONE HUNDRED SIXTY MILLION PESOS
(PHP 160,000,000.00)
FOR VALUE RECEIVED, after one (1) year from this date on or August 16, 1996, WE, SIAIN ENTERPRISES
INC. with Metro Manila office address at 306 J.P. Rizal St., Mandaluyong City, represented herein by its duly
authorized President, Ms. LELENG CUA, (a copy of her authority is hereto attached as Annex "A") and Ms.
LELENG CUA in her personal capacity, a resident of ILOILO CITY, jointly and severally, unconditionally
promise to pay CUPERTINO REALTY CORPORATION, or order, an existing corporation duly organized under
Philippine laws, the amount/sum of ONE HUNDRED SIXTY MILLION PESOS (PHP 160,000,000.00),
Philippine Currency, without further need of any demand, at the office of CUPERTINO REALTY
CORPORATION;
The amount/sum of ONE HUNDRED SIXTY MILLION PESOS (PHP 160,000,000.00) shall earn a
compounding interest of 30% per annum which interest shall be payable to CUPERTINO REALTY
CORPORATION at its above given address ON THE FIRST DAY OF EVERY MONTH WITHOUT THE NEED
OF DEMAND.
In case We fail to pay the principal amount of this note at maturity or in the event of bankruptcy or insolvency,
receivership, levy of execution, garnishment or attachment or in case of conviction for a criminal offense
carrying with it the penalty of civil interdiction or in any of the cases covered by Article 1198 of the Civil Code of
the Philippines, then the entire principal of this note and other interests and penalties due thereon shall, at the
option of CUPERTINO REALTY CORPORATION, immediately become due and payable and We jointly and
severally agree to pay additionally a penalty at the rate of THREE PERCENT (3%) per month on the total
amount/sum due until fully paid. Furthermore, We jointly and severally agree to pay an additional sum
equivalent to 20% of the total amount due but in no case less than PHP 100,000.00 as and for attorney's fees in
addition to expenses and costs of suit.
We hereby authorize and empower CUPERTINO REALTY CORPORATION at its option at any time, without
notice, to apply to the payment of this note and or any other particular obligation or obligations of all or any
one of us to CUPERTINO REALTY CORPORATION, as it may select, irrespective of the dates of maturity,
whether or not said obligations are then due, any and all moneys, checks, securities and things of value which
are now or which may hereafter be in its hand on deposit or otherwise to the credit of, or belonging to, both or
any one of us, and CUPERTINO REALTY CORPORATION is hereby authorized to sell at public or private sale
such checks, securities, or things of value for the purpose of applying the proceeds thereof to such payments of
this note.
We hereby expressly consent to any extension and/or renewals hereof in whole or in part and/or partial
payment on account which may be requested by and granted to us or any one of us for the payment of this note
as long as the remaining unpaid balance shall earn an interest of THREE percent (3%) a month until fully paid.
Such renewals or extensions shall, in no case, be understood as a novation of this note or any provision thereof
and We will thereby continue to be liable for the payment of this note.
We submit to the jurisdiction of the Courts of the City of Manila or of the place of execution of this note, at the
option of CUPERTINO REALTY CORPORATION without divesting any other court of the its jurisdiction, for
any legal action which may arise out of this note. In case of judical execution of this obligation, or any part of it,
we hereby waive all our rights under the provisions of Rule 39, section 12 of the Rules of Court.
We, who are justly indebted to CUPERTINO REALTY CORPORATION, agree to execute respectively a real
estate mortgage and a pledge or a chattel mortgage covering securities to serve as collaterals for this loan and
to execute likewise an irrevocable proxy to allow representatives of the creditor to be able to monitor acts of
management so as to prevent any premature call of this loan. We further undertake to execute any other kind
of document which CUPERTINO REALTY CORPORATION may solely believe is necessary in order to effect
any security over any collateral.
For this purpose, Ms. LELENG CUA, upon the foregoing promissory note, has this 16th day of Aug 1995,
pledged her shares of stocks in SIAIN ENTERPRISES, INC., worth PHP 1,800,000.00 which she hereby
confesses as representing 80% of the total outstanding shares of the said company.
In default of payment of said note or any part thereof at maturity, Ms. LELENG CUA hereby authorizes
CUPERTINO REALTY CORPORATION or its assigns, to dispose of said security or any part thereof at public
sale. The proceeds of such sale or sales shall, after payment of all expenses and commissions attending said sale
or sales, be applied to this promissory note and the balance, if any, after payment of this promissory note and
interest thereon, shall be returned to the undersigned, her heirs, successors and administrators; it shall be
optional for the owner of the promissory note to bid for and purchase the securities or any part thereof.

(signed)
LELENG CUA
SIAIN ENTERPRISES, INC.
In her personal capacity
CO-MAKER
By:
(signed)
LELENG CUA
MAKER
WITNESSES:
(signed)
EDGARDO LUA
(signed)
ROSE MARIE RAGODON4
Parenthetically, on even date, the parties executed an amendment of real estate mortgage, providing in
pertinent part:
WHEREAS, on 10 April 1995, the [petitioner] executed, signed and delivered a Real Estate Mortgage to and in
favor of [Cupertino] on certain real estate properties to secure the payment to [Cupertino] of a loan in the
amount of THIRTY SEVEN MILLION PESOS (P37,000,000.00) Philippine Currency, granted by [Cupertino]
was ratified (sic) on 10 April 1995 before Constancio Mangoba, Jr., Notary Public in Makati City, as Doc. No.
242; in Page No. 50; Book No., XVI; Series of 1995, and duly recorded in the Office of the Register of Deeds for
the said City of Iloilo;
WHEREAS, the [petitioner] has increased its loan payable to [Cupertino] which now amounts to ONE
HUNDRED NINETY SEVEN MILLION PESOS (197,000,000.00); andcralawlibrary
WHEREAS, the [petitioner] and [Cupertino] intend to amend the said Real Estate Mortgage in order to reflect
the current total loan secured by the said Real Estate Mortgage;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereto have agreed and by
these presents do hereby agree to amend said Real Estate Mortgage dated 10 April 1995 mentioned above by
substituting the total amount of the loan secured by said Real Estate Mortgage from P37,000,000.00
to P197,000,000.00.
It is hereby expressly understood that with the foregoing amendment, all other terms and conditions of said
Real Estate Mortgage dated 10 April 1995 are hereby confirmed, ratified and continued to be in full force and
effect, and that this agreement be made an integral part of said Real Estate Mortgage. 5
Curiously however, and contrary to the tenor of the foregoing loan documents, petitioner, on March 11, 1996,
through counsel, wrote Cupertino and demanded the release of the P160,000,000.00 loan increase covered by
the amendment of real estate mortgage.6 In the demand letter, petitioner's counsel stated that despite repeated
verbal demands, Cupertino had yet to release the P160,000,000.00 loan. On May 17, 1996, petitioner
demanded anew from Cupertino the release of the P160,000,000.00 loan.7
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. Cupertino declared petitioner's demand as made to "abscond from a just and valid obligation," a
mere afterthought, following Cupertino's letter demanding payment of the P37,000,000.00 loan covered by
the first promissory note which became overdue on March 5, 1996.
Not surprisingly, Cupertino instituted extrajudicial foreclosure proceedings over the properties subject of the
amended real estate mortgage. The auction sale was scheduled on October 11, 1996 with respondent Notary
Public Edwin R. Catacutan commissioned to conduct the same. This prompted petitioner to file a complaint
with a prayer for a restraining order to enjoin Notary Public Catacutan from proceeding with the public
auction.
The following are the parties' conflicting claims, summarized by the RTC, and quoted verbatim by the CA in its
decision:
"The verified complaint alleges that [petitioner] is engaged in the manufacturing and retailing/wholesaling
business. On the other hand, Cupertino is engaged in the realty business. That on April 10, 1995, [petitioner]
executed a Real Estate Mortgage over its real properties covered by Transfer Certificates of title Nos. T-75109
and T-73481 ("the mortgage properties") of the Register of Deeds of Iloilo in favor of Cupertino to secure the
former's loan obligation to the latter in the amount of Php37,000,000.00. That it has been the agreement
between [petitioner] and Cupertino that the aforesaid loan will be non-interest bearing. Accordingly, the
parties saw to it that the promissory note (evidencing their loan agreement) did not provide any stipulation
with respect to interest. On several occasions thereafter, [petitioner] made partial payments to Cupertino in
respect of the aforesaid loan obligation by the former to the latter in the total amount of Php7,985,039.08,
thereby leaving a balance of Php29,014,960.92. On August 16, 1995, [petitioner] and Cupertino executed an
amendment of Real Estate Mortgage (Annex "C") increasing the total loan covered by the aforesaid REM from
Php37,000,000.00 to P197,000,000.00. This amendment to REM was executed preparatory to the promised
release by Cupertino of additional loan proceeds to [petitioner] in the total amount of Php160,000,000.00.
However, despite the execution of the said amendment to REM and its subsequent registration with the
Register of Deeds of Iloilo City and notwithstanding the clear agreement between [petitioner] and Cupertino
and the latter will release and deliver to the former the aforesaid additional loan proceeds of P160,000,000.00
after the signing of pertinent documents and the registration of the amendment of REM, Cupertino failed and
refused to release the said additional amount for no apparent reason at all, contrary to its repeated promises
which [petitioner] continuously relied on. On account of Cupertino's unfulfilled promises, [petitioner]
repeatedly demanded from Cupertino the release and/or delivery of the said Php160,000,000.00 to the
former. However, Cupertino still failed and refused and continuously fails and refuses to release and/or deliver
the Php160,000,000.00 to [petitioner]. When [petitioner] tendered payment of the amount of
Php29,014,960.92 which is the remaining balance of the Php37,000,000.00 loan subject of the REM, in order
to discharge the same, Cupertino unreasonably and unjustifiably refused acceptance thereof on the ground that
the previous payment amounting to Php7,985,039.08, was applied by Cupertino to alleged interests and not to
principal amount, despite the fact that, as earlier stated, the aforesaid loan by agreement of the parties, is non-
interest bearing. Worst, unknown to [petitioner], Cupertino was already making arrangements with
[respondent] Notary Public for the extrajudicial sale of the mortgage properties even as [petitioner] is more
than willing to pay the Php29,014,960.92 which is the remaining balance of the Php37,000,000.00 loan and
notwithstanding Cupertino's unjustified refusal and failure to deliver to [petitioner] the amount of
Php160,000,000.00. In fact, a notarial sale of the mortgaged properties is already scheduled on 04 October
1996 by [respondent] Notary Public at his office located at Rm. 100, Iloilo Casa Plaza, Gen Luna St., Iloilo City.
In view of the foregoing, Cupertino has no legal right to foreclose the mortgaged properties. In any event,
Cupertino cannot extrajudicially cause the foreclosure by notarial sale of the mortgage properties by
[respondent] Notary Public as there is nothing in the REM (dated 10 April 1995) or in the amendment thereto
that grants Cupertino the said right.
xxx
"[Respondents] finally filed an answer to the complaint, alleging that the loan have (sic) an interest of 17% per
annum: that no payment was ever made by [petitioner], that [petitioner] has already received the amount of
the loan prior to the execution of the promissory note and amendment of Real Estate Mortgage, xxx. crvll
"[Petitioner] filed a supplemental complaint alleging subsequent acts made by defendants causing the
subsequent auction sale and registering the Certificates of Auction Sale praying that said auction sale be
declared null and void and ordering the Register of Deeds to cancel the registration and annotation of the
Certificate of Notarial Sale."
Thereafter, the Pre-Trial conference was set. Both parties submitted their respective Brief and the following
facts were admitted, viz:
1. Execution of the mortgage dated April 10, 1995;
2. Amendment of Real Estate Mortgage dated August 16, 1995;
3. Execution of an Extra-Judicial Foreclosure by the [Cupertino];
4. Existence of two (2) promissory notes;
5. Existence but not the contents of the demand letter March 11, 1996 addressed to Mr. Wilfredo Lua and
receipt of the same by [Cupertino]; andcralawlibrary
6. Notice of Extra-Judicial Foreclosure Sale."
For failing to arrive at an amicable settlement, trial on the merits ensued. The parties presented oral and
documentary evidence to support their claims and contentions. [Petitioner] insisted that she never received the
proceeds of Php160,000,000.00, thus, the foreclosure of the subject properties is null and void. [Cupertino] on
the other hand claimed otherwise.8
After trial, the 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 dismissing petitioner's complaint and finding for Cupertino, both the lower courts upheld the validity of the
amended real estate mortgage. The RTC found, as did the CA, that although the amended real estate mortgage
fell within the exceptions to the parol evidence rule under Section 9, Rule 130 of the Rules of Court, petitioner
still failed to overcome and debunk Cupertino's evidence that the amended real estate mortgage had a
consideration, and petitioner did receive the amount of P160,000,000.00 representing its incurred obligation
to Cupertino. Both courts ruled that as between petitioner's bare denial and negative evidence of non-receipt of
the P160,000,000.00, and Cupertino's affirmative evidence on the existence of the consideration, the latter
must be given more weight and value. In all, the lower courts gave credence to Cupertino's evidence that
the P160,000,000.00 proceeds were the total amount received by petitioner and its affiliate companies over
the years from Wilfredo Lua, Cupertino's president. 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.
Undaunted, petitioner filed this appeal insisting on the nullity of the amended real estate mortgage. Petitioner
is adamant that the amended real estate mortgage is void as it did not receive the agreed consideration therefor
i.e. P160,000,000.00. Petitioner avers that the amended real estate mortgage does not accurately reflect the
agreement between the parties as, at the time it signed the document, it actually had yet to receive the amount
of P160,000,000.00. Lastly, 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.
We are in complete accord with the lower courts' rulings.
Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by
the appellate court, are accorded the highest degree of respect and are considered conclusive between the
parties.9 A review of such findings by this Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are grounded entirely on speculation, surmises or
conjectures; (2) when a lower court's inference from its factual findings is manifestly mistaken, absurd or
impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the findings of the
appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly
considered, will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the
findings of fact are conclusions without mention of the specific evidence on which they are based, are premised
on the absence of evidence, or are contradicted by evidence on record. 10 None of these exceptions necessitating
a reversal of the assailed decision obtains in this instance.
Conversely, we cannot subscribe to petitioner's faulty reasoning.
First. All the loan documents, on their face, unequivocally declare petitioner's indebtedness to Cupertino:
1. Promissory Note dated April 10, 1995, prefaced with a "[f]or value received," and the escrow arrangement for
the release of the P37,000,000.00 obligation in favor of DBP, another creditor of petitioner.
2. Mortgage likewise dated April 10, 1995 executed by petitioner to secure its P37,000,000.00 loan obligation
with Cupertino.
3. Amendment to Promissory Note for P37,000,000.00 dated April 12, 1995 which tentatively sets the interest
rate at seventeen percent (17%) per annum.
4. Promissory Note dated August 16, 1995, likewise prefaced with "[f]or value received," and unconditionally
promising to pay Cupertino P160,000,000.00 with a stipulation on compounding interest at thirty percent
(30%) per annum. The Promissory Note requires, among others, the execution of a real estate mortgage to
serve as collateral therefor. In case of default in payment, petitioner, specifically, through its president, Cua Le
Leng, authorizes Cupertino to "dispose of said security or any part thereof at [a] public sale."
5. Amendment of Real Estate Mortgage also dated August 16, 1995 with a recital that the mortgagor, herein
petitioner, has increased its loan payable to the mortgagee, Cupertino, from P37,000,000.00
to P197,000,000.00. In connection with the increase in loan obligation, the parties confirmed and ratified the
Real Estate Mortgage dated April 10, 1995.
Unmistakably, from the foregoing chain of transactions, a presumption has arisen that the loan documents
were supported by a consideration.
Rule 131, Section 3 of the Rules of Court specifies that a disputable presumption is satisfactory if
uncontradicted and not overcome by other evidence. Corollary thereto, paragraphs (r) and (s) thereof and
Section 24 of the Negotiable Instruments Law read:
SEC. 3. Disputable presumptions.' The following presumptions are satisfactory if uncontradicted, but may be
contradicted and overcome by other evidence:
xxx
(r) That there was sufficient consideration for a contract;
(s) That a negotiable instrument was given or indorsed for a sufficient consideration;
xxx
SEC. 24. Presumption of consideration.' Every negotiable instrument is deemed prima facie to have been
issued for a valuable consideration; and every person whose signature appears thereon to have become a party
thereto for value.
Second. The foregoing notwithstanding, petitioner insists that the Amended Real Estate Mortgage was not
supported by a consideration, asserting non-receipt of the P160,000,000.00 loan increase reflected in the
Amended Real Estate Mortgage. However, petitioner's bare-faced assertion does not even dent, much less,
overcome the aforesaid presumptions on consideration for a contract. As deftly pointed out by the trial court:
x x x In this case, this Court finds that the [petitioner] has not been able to establish its claim of non-receipt by
a preponderance of evidence. Rather, the Court is inclined to give more weight and credence to the affirmative
and straightforward testimony of [Cupertino] explaining in plain and categorical words that the
Php197,000,000.00 loan represented by the amended REM was the total sum of the debit memo, the checks,
the real estate mortgage and the amended real estate mortgage, the pledges of jewelries, the trucks and the
condominiums plus the interests that will be incurred which all in all amounted to Php197,000,000.00. It is a
basic axiom in this jurisdiction that as between the plaintiff's negative evidence of denial and the defendant's
affirmative evidence on the existence of the consideration, the latter must be given more weight and value.
Moreover, [Cupertino's] foregoing testimony on the existence of the consideration of the Php160,000,000.00
promissory note has never been refuted nor denied by the [petitioner], who while initially having manifested
that it will present rebuttal evidence eventually failed to do so, despite all available opportunities accorded to it.
By such failure to present rebutting evidence, [Cupertino's] testimony on the existence of the consideration of
the amended real estate mortgage does not only become impliedly admitted by the [petitioner], more
significantly, to the mind of this Court, it is a clear indication that [petitioner] has no counter evidence to
overcome and defeat the [Cupertino's] evidence on the matter. Otherwise, there is no logic for [petitioner] to
withhold it if available. Assuming that indeed it exists, it may be safely assumed that such evidence having been
willfully suppressed is adverse if produced.
The presentation by [petitioner] of its cash Journal Receipt Book as proof that it did not receive the proceeds of
the Php160,000,000.00 promissory note does not likewise persuade the Court. In the first place, the subject
cash receipt journal only contained cash receipts for the year 1995. But as appearing from the various checks
and debit memos issued by Wilfredo Lua and his wife, Vicky Lua and from the former's unrebutted testimony
in Court, the issuance of the checks, debit memos, pledges of jewelries, condominium units, trucks and the
other components of the Php197,000,000.00 amended real estate mortgage had all taken place prior to the
year 1995, hence, they could not have been recorded therein. What is more, the said cash receipt journal
appears to be prepared solely at the behest of the [petitioner], hence, can be considered as emanating from a
"poisonous tree" therefore self-serving and cannot be given any serious credibility. 11
Significantly, petitioner asseverates that the parol evidence rule, which excludes other evidence, apart from the
written agreement, to prove the terms agreed upon by the parties contained therein, 12 is not applicable to the
Amended Real Estate Mortgage. Both the trial and appellate courts agreed with petitioner and did not apply
the parol evidence rule. Yet, despite the allowance to present evidence and prove the invalidity of the Amended
Real Estate Mortgage, petitioner still failed to substantiate its claim of non-receipt of the proceeds of
the P160,000,000.00 loan increase.
Moreover, petitioner was the plaintiff in the trial court, the party that brought suit against respondent.
Accordingly, it had the burden of proof, the duty to present a preponderance of evidence to establish its
claim.13 However, petitioner's evidence consisted only of a barefaced denial of receipt and a vaguely drawn
theory that in their previous loan transaction with respondent covered by the first promissory note, it did not
receive the proceeds of the P37,000,000.00. Petitioner conveniently ignores that this particular promissory
note secured by the real estate mortgage was under an escrow arrangement and taken out to pay its obligation
to DBP. Thus, petitioner, quite obviously, would not be in possession of the proceeds of the loan. Contrary to
petitioner's contention, there is no precedent to explain its stance that respondent undertook to release
the P160,000,000.00 loan only after it had first signed the Amended Real Estate
Mortgage.ςηαñrοblεš νιr†υαl lαω lιbrαrÿ
Third. Petitioner bewails the lower courts' application of the doctrine of "piercing the veil of corporate fiction."
As a general rule, a corporation will be deemed a separate legal entity until sufficient reason to the contrary
appears.14 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.15
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. We quote with favor the RTC's and the CA's disquisitions on this matter:
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. For the facts established in the case at bar
has convinced the Court of the propriety to apply the principle known as "piercing the veil of the corporate
entity" 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. x x x
xxx
The conjunction of the identity of the [petitioner] corporation in relation to Siain Transport, Inc. (Siain
Transport), Yuyek Manufacturing Corp. (Yuyek), as well as the individual personalities of Cua Leleng and
Alberto Lim has been indubitably shown in the instant case by the following established considerations, to wit:
1. Siain and Yuyek have [a] common set of [incorporators], stockholders and board of directors;
2. They have the same internal bookkeeper and accountant in the person of Rosemarie Ragodon;
3. They have the same office address at 306 Jose Rizal St., Mandaluyong City;
4. They have the same majority stockholder and president in the person of Cua Le Leng; andcralawlibrary
5. 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.
Thus, it is crystal clear that [petitioner] corporation, Yuyek and Siain Transport are characterized by oneness of
operations vested in the person of their common president, Cua Le Leng, and unity in the keeping and
maintenance of their corporate books and records through their common accountant and bookkeeper,
Rosemarie Ragodon. Consequently, these corporations are proven to be the mere alter-ego of their president
Cua Leleng, and considering that Cua Leleng and Alberto Lim have been living together as common law
spouses with three children, this Court believes that while Alberto Lim does not appear to be an officer of Siain
and Yuyek, nonetheless, his receipt of certain checks and debit memos from Willie Lua and Victoria Lua was
actually for the account of his common-law wife, Cua Leleng and her alter ego corporations. While this Court
agrees with Siain that a corporation has a personality separate and distinct from its individual stockholders or
members, this legal fiction cannot, however, be applied to its benefit in this case where to do so would result to
injustice and evasion of a valid obligation, for well settled is the rule in this jurisdiction that the veil of
corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for
purposes that could not have been intended by the law that created it; or to justify wrong, or for evasion of an
existing obligation. Resultantly, the obligation incurred and/or the transactions entered into either by Yuyek,
or by Siain Trucking, or by Cua Leleng, or by Alberto Lim with Cupertino are deemed to be that of the
[petitioner] itself.
The same principle equally applies to Cupertino. Thus, while it appears that the issuance of the checks and the
debit memos as well as the pledges of the condominium units, the jewelries, and the trucks had occurred prior
to March 2, 1995, the date when Cupertino was incorporated, the same does not affect the validity of the
subject transactions because applying again the principle of piercing the corporate veil, the transactions
entered into by Cupertino Realty Corporation, it being merely the alter ego of Wilfredo Lua, are deemed to be
the latter's personal transactions and vice-versa.16
xxx
x x x Firstly. As can be viewed from the extant record of the instant case, Cua Leleng is the majority stockholder
of the three (3) corporations namely, Yuyek Manufacturing Corporation, Siain Transport, Inc., and Siain
Enterprises Inc., at the same time the President thereof. Second. Being the majority stockholder and the
president, Cua Le leng has the unlimited power, control and authority without the approval from the board of
directors to obtain for and in behalf of the [petitioner] corporation from [Cupertino] thereby mortgaging her
jewelries, the condominiums of her common law husband, Alberto Lim, the trucks registered in the name of
[petitioner] corporation's sister company, Siain Transport Inc., the subject lots registered in the name of
[petitioner] corporation and her oil mill property at Iloilo City. And, to apply the proceeds thereof in whatever
way she wants, to the prejudice of the public.
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.17
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 71424 is AFFIRMED. Costs against the petitioner.
G.R. No. 157479               November 24, 2010
PHILIP TURNER and ELNORA TURNER, Petitioners,
vs.
LORENZO SHIPPING CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
This case concerns the right of dissenting stockholders to demand payment of the value of their shareholdings.
In the stockholders’ suit to recover the value of their shareholdings from the corporation, the Regional Trial
Court (RTC) upheld the dissenting stockholders, herein petitioners, and ordered the corporation, herein
respondent, to pay. Execution was partially carried out against the respondent. On the respondent’s petition for
certiorari, however, the Court of Appeals (CA) corrected the RTC and dismissed the petitioners’ suit on the
ground that their cause of action for collection had not yet accrued due to the lack of unrestricted retained
earnings in the books of the respondent.
Thus, the petitioners are now before the Court to challenge the CA’s decision promulgated on March 4, 2003 in
C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping Corporation v. Hon. Artemio S. Tipon, in his capacity as
Presiding Judge of Branch 46 of the Regional Trial Court of Manila, et al. 1
Antecedents
The petitioners held 1,010,000 shares of stock of the respondent, a domestic corporation engaged primarily in
cargo shipping activities. In June 1999, the respondent decided to amend its articles of incorporation to remove
the stockholders’ pre-emptive rights to newly issued shares of stock. Feeling that the corporate move would be
prejudicial to their interest as stockholders, the petitioners voted against the amendment and demanded
payment of their shares at the rate of ₱2.276/share based on the book value of the shares, or a total of
₱2,298,760.00.
The respondent found the fair value of the shares demanded by the petitioners unacceptable. It insisted that
the market value on the date before the action to remove the pre-emptive right was taken should be the value,
or ₱0.41/share (or a total of ₱414,100.00), considering that its shares were listed in the Philippine Stock
Exchange, and that the payment could be made only if the respondent had unrestricted retained earnings in its
books to cover the value of the shares, which was not the case.
The disagreement on the valuation of the shares led the parties to constitute an appraisal committee pursuant
to Section 82 of the Corporation Code, each of them nominating a representative, who together then
nominated the third member who would be chairman of the appraisal committee. Thus, the appraisal
committee came to be made up of Reynaldo Yatco, the petitioners’ nominee; Atty. Antonio Acyatan, the
respondent’s nominee; and Leo Anoche of the Asian Appraisal Company, Inc., the third member/chairman.
On October 27, 2000, the appraisal committee reported its valuation of ₱2.54/share, for an aggregate value of
₱2,565,400.00 for the petitioners.2
Subsequently, the petitioners demanded payment based on the valuation of the appraisal committee, plus
2%/month penalty from the date of their original demand for payment, as well as the reimbursement of the
amounts advanced as professional fees to the appraisers. 3
In its letter to the petitioners dated January 2, 2001,4 the respondent refused the petitioners’ demand,
explaining that pursuant to the Corporation Code, the dissenting stockholders exercising their appraisal rights
could be paid only when the corporation had unrestricted retained earnings to cover the fair value of the
shares, but that it had no retained earnings at the time of the petitioners’ demand, as borne out by its Financial
Statements for Fiscal Year 1999 showing a deficit of ₱72,973,114.00 as of December 31, 1999.
Upon the respondent’s refusal to pay, the petitioners sued the respondent for collection and damages in the
RTC in Makati City on January 22, 2001. The case, docketed as Civil Case No. 01-086, was initially assigned to
Branch 132.5
On June 26, 2002, the petitioners filed their motion for partial summary judgment, claiming that:
7) xxx the defendant has an accumulated unrestricted retained earnings of ELEVEN MILLION NINE
HUNDRED SEVENTY FIVE THOUSAND FOUR HUNDRED NINETY (P11,975,490.00) PESOS, Philippine
Currency, evidenced by its Financial Statement as of the Quarter Ending March 31, 2002; xxx
8) xxx the fair value of the shares of the petitioners as fixed by the Appraisal Committee is final, that the same
cannot be disputed xxx
9) xxx there is no genuine issue to material fact and therefore, the plaintiffs are entitled, as a matter of right, to
a summary judgment. xxx 6
The respondent opposed the motion for partial summary judgment, stating that the determination of the
unrestricted retained earnings should be made at the end of the fiscal year of the respondent, and that the
petitioners did not have a cause of action against the respondent.
During the pendency of the motion for partial summary judgment, however, the Presiding Judge of Branch 133
transmitted the records to the Clerk of Court for re-raffling to any of the RTC’s special commercial courts in
Makati City due to the case being an intra-corporate dispute. Hence, Civil Case No. 01-086 was re-raffled to
Branch 142.
Nevertheless, because the principal office of the respondent was in Manila, Civil Case No. 01-086 was
ultimately transferred to Branch 46 of the RTC in Manila, presided by Judge Artemio Tipon, 7 pursuant to the
Interim Rules of Procedure on Intra-Corporate Controversies (Interim Rules) requiring intra-corporate cases
to be brought in the RTC exercising jurisdiction over the place where the principal office of the corporation was
found.
After the conference in Civil Case No. 01-086 set on October 23, 2002, which the petitioners’ counsel did not
attend, Judge Tipon issued an order,8 granting the petitioners’ motion for partial summary judgment, stating:
As to the motion for partial summary judgment, there is no question that the 3-man committee mandated to
appraise the shareholdings of plaintiff submitted its recommendation on October 27, 2000 fixing the fair value
of the shares of stocks of the plaintiff at P2.54 per share. Under Section 82 of the Corporation Code:
"The findings of the majority of the appraisers shall be final, and the award shall be paid by the corporation
within thirty (30) days after the award is made."
"The only restriction imposed by the Corporation Code is–"
"That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained
earning in its books to cover such payment."
The evidence submitted by plaintiffs shows that in its quarterly financial statement it submitted to the
Securities and Exchange Commission, the defendant has retained earnings of P11,975,490 as of March 21,
2002. This is not disputed by the defendant. Its only argument against paying is that there must be
unrestricted retained earning at the time the demand for payment is made.
This certainly is a very narrow concept of the appraisal right of a stockholder. The law does not say that the
unrestricted retained earnings must exist at the time of the demand. Even if there are no retained earnings at
the time the demand is made if there are retained earnings later, the fair value of such stocks must be paid. The
only restriction is that there must be sufficient funds to cover the creditors after the dissenting stockholder is
paid. No such allegations have been made by the defendant. 9
On November 12, 2002, the respondent filed a motion for reconsideration.
On the scheduled hearing of the motion for reconsideration on November 22, 2002, the petitioners filed a
motion for immediate execution and a motion to strike out motion for reconsideration. In the latter motion,
they pointed out that the motion for reconsideration was prohibited by Section 8 of the Interim Rules. Thus,
also on November 22, 2002, Judge Tipon denied the motion for reconsideration and granted the petitioners’
motion for immediate execution.10
Subsequently, on November 28, 2002, the RTC issued a writ of execution. 11
Aggrieved, the respondent commenced a special civil action for certiorari in the CA to challenge the two
aforecited orders of Judge Tipon, claiming that:
A.
JUDGE TIPON GRAVELY ABUSED HIS DISCRETION IN GRANTING SUMMARY JUDGMENT TO THE
SPOUSES TURNER, BECAUSE AT THE TIME THE "COMPLAINT" WAS FILED, LSC HAD NO RETAINED
EARNINGS, AND THUS WAS COMPLYING WITH THE LAW, AND NOT VIOLATING ANY RIGHTS OF THE
SPOUSES TURNER, WHEN IT REFUSED TO PAY THEM THE VALUE OF THEIR LSC SHARES. ANY
RETAINED EARNINGS MADE A YEAR AFTER THE "COMPLAINT" WAS FILED ARE IRRELEVANT TO
THE SPOUSES TURNER’S RIGHT TO RECOVER UNDER THE "COMPLAINT", BECAUSE THE WELL-
SETTLED RULE, REPEATEDLY BROUGHT TO JUDGE TIPON’S ATTENTION, IS "IF NO RIGHT EXISTED
AT THE TIME (T)HE ACTION WAS COMMENCED THE SUIT CANNOT BE MAINTAINED, ALTHOUGH
SUCH RIGHT OF ACTION MAY HAVE ACCRUED THEREAFTER.
B.
JUDGE TIPON IGNORED CONTROLLING CASE LAW, AND THUS GRAVELY ABUSED HIS DISCRETION,
WHEN HE GRANTED AND ISSUED THE QUESTIONED "WRIT OF EXECUTION" DIRECTING THE
EXECUTION OF HIS PARTIAL SUMMARY JUDGMENT IN FAVOR OF THE SPOUSES TURNER, BECAUSE
THAT JUDGMENT IS NOT A FINAL JUDGMENT UNDER SECTION 1 OF RULE 39 OF THE RULES OF
COURT AND THEREFORE CANNOT BE SUBJECT OF EXECUTION UNDER THE SUPREME COURT’S
CATEGORICAL HOLDING IN PROVINCE OF PANGASINAN VS. COURT OF APPEALS.
Upon the respondent’s application, the CA issued a temporary restraining order (TRO), enjoining the
petitioners, and their agents and representatives from enforcing the writ of execution. By then, however, the
writ of execution had been partially enforced.
The TRO lapsed without the CA issuing a writ of preliminary injunction to prevent the execution. Thereupon,
the sheriff resumed the enforcement of the writ of execution.
The CA promulgated its assailed decision on March 4, 2003,12 pertinently holding:
However, it is clear from the foregoing that the Turners’ appraisal right is subject to the legal condition that no
payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings
in its books to cover such payment. Thus, the Supreme Court held that:
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which
means that the capital stock, property and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors. The reason is that creditors of a corporation are preferred over the
stockholders in the distribution of corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to the
prejudice of creditors is null and void. Creditors of a corporation have the right to assume that so long as there
are outstanding debts and liabilities, the board of directors will not use the assets of the corporation to
purchase its own stock.
In the instant case, it was established that there were no unrestricted retained earnings when the Turners filed
their Complaint. In a letter dated 20 August 2000, petitioner informed the Turners that payment of their
shares could only be made if it had unrestricted earnings in its books to cover the same. Petitioner reiterated
this in a letter dated 2 January 2001 which further informed the Turners that its Financial Statement for fiscal
year 1999 shows that its retained earnings ending December 31, 1999 was at a deficit in the amount of
₱72,973,114.00, a matter which has not been disputed by private respondents. Hence, in accordance with the
second paragraph of sec. 82, BP 68 supra, the Turners’ right to payment had not yet accrued when they filed
their Complaint on January 22, 2001, albeit their appraisal right already existed.
In Philippine American General Insurance Co. Inc. vs. Sweet Lines, Inc., the Supreme Court declared that:
Now, before an action can properly be commenced all the essential elements of the cause of action must be in
existence, that is, the cause of action must be complete. All valid conditions precedent to the institution of the
particular action, whether prescribed by statute, fixed by agreement of the parties or implied by law must be
performed or complied with before commencing the action, unless the conduct of the adverse party has been
such as to prevent or waive performance or excuse non-performance of the condition.
It bears restating that a right of action is the right to presently enforce a cause of action, while a cause of action
consists of the operative facts which give rise to such right of action. The right of action does not arise until the
performance of all conditions precedent to the action and may be taken away by the running of the statute of
limitations, through estoppel, or by other circumstances which do not affect the cause of action. Performance
or fulfillment of all conditions precedent upon which a right of action depends must be sufficiently alleged,
considering that the burden of proof to show that a party has a right of action is upon the person initiating the
suit.
The Turners’ right of action arose only when petitioner had already retained earnings in the amount of
₱11,975,490.00 on March 21, 2002; such right of action was inexistent on January 22, 2001 when they filed the
Complaint.
In the doctrinal case of Surigao Mine Exploration Co. Inc., vs. Harris, the Supreme Court ruled:
Subject to certain qualifications, and except as otherwise provided by law, an action commenced before the
cause of action has accrued is prematurely brought and should be dismissed. The fact that the cause of action
accrues after the action is commenced and while it is pending is of no moment. It is a rule of law to which there
is, perhaps, no exception, either at law or in equity, that to recover at all there must be some cause of action at
the commencement of the suit. There are reasons of public policy why there should be no needless haste in
bringing up litigation, and why people who are in no default and against whom there is as yet no cause of action
should not be summoned before the public tribunals to answer complaints which are groundless. An action
prematurely brought is a groundless suit. Unless the plaintiff has a valid and subsisting cause of action at the
time his action is commenced, the defect cannot be cured or remedied by the acquisition or accrual of one while
the action is pending, and a supplemental complaint or an amendment setting up such after-accrued cause of
action is not permissible.
The afore-quoted ruling was reiterated in Young vs Court of Appeals and Lao vs. Court of Appeals.
The Turners’ apprehension that their claim for payment may prescribe if they wait for the petitioner to have
unrestricted retained earnings is misplaced. It is the legal possibility of bringing the action that determines the
starting point for the computation of the period of prescription. Stated otherwise, the prescriptive period is to
be reckoned from the accrual of their right of action.
Accordingly, We hold that public respondent exceeded its jurisdiction when it entertained the herein
Complaint and issued the assailed Orders. Excess of jurisdiction is the state of being beyond or outside the
limits of jurisdiction, and as distinguished from the entire absence of jurisdiction, means that the act although
within the general power of the judge, is not authorized and therefore void, with respect to the particular case,
because the conditions which authorize the exercise of his general power in that particular case are wanting,
and hence, the judicial power is not in fact lawfully invoked.
We find no necessity to discuss the second ground raised in this petition.
WHEREFORE, upon the premises, the petition is GRANTED. The assailed Orders and the corresponding Writs
of Garnishment are NULLIFIED. Civil Case No. 02-104692 is hereby ordered DISMISSED without prejudice to
refiling by the private respondents of the action for enforcement of their right to payment as withdrawing
stockholders.
SO ORDERED.
The petitioners now come to the Court for a review on certiorari of the CA’s decision, submitting that:
I.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT GRANTED THE PETITION
FOR CERTIORARI WHEN THE REGIONAL TRIAL COURT OF MANILA DID NOT ACT BEYOND ITS
JURISDICTION AMOUNTING TO LACK OF JURISDICTION IN GRANTING THE MOTION FOR PARTIAL
SUMMARY JUDGMENT AND IN GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF
JUDGMENT;
II.
THE COURT OF APPEALS COMMITTED SERIOUS ERRORS OF LAW WHEN IT ORDERED THE
DISMISSAL OF THE CASE, WHEN THE PETITION FOR CERTIORARI MERELY SOUGHT THE
ANNULMENT OF THE ORDER GRANTING THE MOTION FOR PARTIAL SUMMARY JUDGMENT AND OF
THE ORDER GRANTING THE MOTION FOR IMMEDIATE EXECUTION OF THE JUDGMENT;
III.
THE HONORABLE COURT OF APPEALS HAS DECIDED QUESTIONS OF SUBSTANCE NOT THEREFORE
DETERMINED BY THIS HONORABLE COURT AND/OR DECIDED IT IN A WAY NOT IN ACCORD WITH
LAW OR WITH JURISPRUDENCE.
Ruling
The petition fails.
The CA correctly concluded that the RTC had exceeded its jurisdiction in entertaining the petitioners’
complaint in Civil Case No. 01-086, and in rendering the summary judgment and issuing writ of execution.
A.
Stockholder’s Right of Appraisal, In General
A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of
his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the
Corporation Code, to wit:
Section 81. Instances of appraisal right. - Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of changing or restricting the rights of
any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of
incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable
corporate action is taken.13 It serves the purpose of enabling the dissenting stockholder to have his interests
purchased and to retire from the corporation. 141avvphil
Under the common law, there were originally conflicting views on whether a corporation had the power to
acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its issued
stocks because such purchase was an indirect method of reducing capital (which was statutorily restricted),
aside from being inconsistent with the privilege of limited liability to creditors. 15 Only a few American
jurisdictions adopted by decision or statute the strict English rule forbidding a corporation from purchasing its
own shares. In some American states where the English rule used to be adopted, statutes granting authority to
purchase out of surplus funds were enacted, while in others, shares might be purchased even out of capital
provided the rights of creditors were not prejudiced. 16 The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a corporation of its assets and
against the impairment of its capital needed for the protection of creditors. 17
Now, however, a corporation can purchase its own shares, provided payment is made out of surplus profits and
the acquisition is for a legitimate corporate purpose.18 In the Philippines, this new rule is embodied in Section
41 of the Corporation Code, to wit:
Section 41. Power to acquire own shares. - A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases:
Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of
this Code. (n)
The Corporation Code defines how the right of appraisal is exercised, as well as the implications of the right of
appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has voted against the proposed corporate action by
making a written demand on the corporation within 30 days after the date on which the vote was taken for the
payment of the fair value of his shares. The failure to make the demand within the period is deemed a waiver of
the appraisal right.19
2. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a
period of 60 days from the date the stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom shall be named by the stockholder,
another by the corporation, and the third by the two thus chosen. The findings and award of the majority of the
appraisers shall be final, and the corporation shall pay their award within 30 days after the award is made.
Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his
or her shares to the corporation.20
3. All rights accruing to the withdrawing stockholder’s shares, including voting and dividend rights, shall be
suspended from the time of demand for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the shares by the corporation, except the right
of such stockholder to receive payment of the fair value of the shares. 21
4. Within 10 days after demanding payment for his or her shares, a dissenting stockholder shall submit to the
corporation the certificates of stock representing his shares for notation thereon that such shares are dissenting
shares. A failure to do so shall, at the option of the corporation, terminate his rights under this Title X of the
Corporation Code. If shares represented by the certificates bearing such notation are transferred, and the
certificates are consequently canceled, the rights of the transferor as a dissenting stockholder under this Title
shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions
that would have accrued on such shares shall be paid to the transferee. 22
5. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder,
upon the surrender of the certificates of stock representing his shares, the fair value thereof as of the day prior
to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of such
corporate action.23
Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation
has unrestricted retained earnings in its books to cover the payment. In case the corporation has no available
unrestricted retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend rights
shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the
shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other
assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred
in the distribution of corporate assets.24 The creditors of a corporation have the right to assume that the board
of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation
has outstanding debts and liabilities.25 There can be no distribution of assets among the stockholders without
first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is
null and void.26
B.
Petitioners’ cause of action was premature
That the respondent had indisputably no unrestricted retained earnings in its books at the time the petitioners
commenced Civil Case No. 01-086 on January 22, 2001 proved that the respondent’s legal obligation to pay the
value of the petitioners’ shares did not yet arise. Thus, the CA did not err in holding that the petitioners had no
cause of action, and in ruling that the RTC did not validly render the partial summary judgment.
A cause of action is the act or omission by which a party violates a right of another. 27 The essential elements of a
cause of action are: (a) the existence of a legal right in favor of the plaintiff; (b) a correlative legal duty of the
defendant to respect such right; and (c) an act or omission by such defendant in violation of the right of the
plaintiff with a resulting injury or damage to the plaintiff for which the latter may maintain an action for the
recovery of relief from the defendant.28 Although the first two elements may exist, a cause of action arises only
upon the occurrence of the last element, giving the plaintiff the right to maintain an action in court for recovery
of damages or other appropriate relief.29
Section 1, Rule 2, of the Rules of Court requires that every ordinary civil action must be based on a cause of
action. Accordingly, Civil Case No. 01-086 was dismissible from the beginning for being without any cause of
action.
The RTC concluded that the respondent’s obligation to pay had accrued by its having the unrestricted retained
earnings after the making of the demand by the petitioners. It based its conclusion on the fact that the
Corporation Code did not provide that the unrestricted retained earnings must already exist at the time of the
demand.
The RTC’s construal of the Corporation Code was unsustainable, because it did not take into account the
petitioners’ lack of a cause of action against the respondent. In order to give rise to any obligation to pay on the
part of the respondent, the petitioners should first make a valid demand that the respondent refused to pay
despite having unrestricted retained earnings. Otherwise, the respondent could not be said to be guilty of any
actionable omission that could sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after the filing of the complaint cure the
lack of cause of action in Civil Case No. 01-086. The petitioners’ right of action could only spring from an
existing cause of action. Thus, a complaint whose cause of action has not yet accrued cannot be cured by an
amended or supplemental pleading alleging the existence or accrual of a cause of action during the pendency of
the action.30 For, only when there is an invasion of primary rights, not before, does the adjective or remedial
law become operative.31 Verily, a premature invocation of the court’s intervention renders the complaint
without a cause of action and dismissible on such ground. 32 In short, Civil Case No. 01-086, being a groundless
suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings more than sufficient to cover the
petitioners’ claims on June 26, 2002 (when they filed their motion for partial summary judgment) did not
rectify the absence of the cause of action at the time of the commencement of Civil Case No. 01-086. The
motion for partial summary judgment, being a mere application for relief other than by a pleading, 33 was not
the same as the complaint in Civil Case No. 01-086. Thereby, the petitioners did not meet the requirement of
the Rules of Court that a cause of action must exist at the commencement of an action, which is "commenced
by the filing of the original complaint in court."34
The petitioners claim that the respondent’s petition for certiorari sought only the annulment of the assailed
orders of the RTC (i.e., granting the motion for partial summary judgment and the motion for immediate
execution); hence, the CA had no right to direct the dismissal of Civil Case No. 01-086.
The claim of the petitioners cannot stand.
Although the respondent’s petition for certiorari targeted only the RTC’s orders granting the motion for partial
summary judgment and the motion for immediate execution, the CA’s directive for the dismissal of Civil Case
No. 01-086 was not an abuse of discretion, least of all grave, because such dismissal was the only proper thing
to be done under the circumstances. According to Surigao Mine Exploration Co., Inc. v. Harris:35
Subject to certain qualification, and except as otherwise provided by law, an action commenced before the
cause of action has accrued is prematurely brought and should be dismissed. The fact that the
cause of action accrues after the action is commenced and while the case is pending is of no moment. It is a rule
of law to which there is, perhaps no exception, either in law or in equity, that to recover at all there must be
some cause of action at the commencement of the suit. There are reasons of public policy why there should be
no needless haste in bringing up litigation, and why people who are in no default and against whom there is as
yet no cause of action should not be summoned before the public tribunals to answer complaints which are
groundless. An action prematurely brought is a groundless suit. Unless the plaintiff has a valid and
subsisting cause of action at the time his action is commenced, the defect cannot be cured or
remedied by the acquisition or accrual of one while the action is pending, and a supplemental
complaint or an amendment setting up such after-accrued cause of action is not permissible.
Lastly, the petitioners argue that the respondent’s recourse of a special action for certiorari was the wrong
remedy, in view of the fact that the granting of the motion for partial summary judgment constituted only an
error of law correctible by appeal, not of jurisdiction.
The argument of the petitioners is baseless. The RTC was guilty of an error of jurisdiction, for it exceeded its
jurisdiction by taking cognizance of the complaint that was not based on an existing cause of action.
WHEREFORE, the petition for review on certiorari is denied for lack of merit.
We affirm the decision promulgated on March 4, 2003 in C.A.-G.R. SP No. 74156 entitled Lorenzo Shipping
Corporation v. Hon. Artemio S. Tipon, in his capacity as Presiding Judge of Branch 46 of the Regional Trial
Court of Manila, et al.
Costs of suit to be paid by the petitioners.
SO ORDERED.
G.R. No. 144476            April 8, 2003
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE
T. ONG, and JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., MASAGANA TELAMART,
INC., REGISTER OF DEEDS OF PASAY CITY, and the SECURITIES AND EXCHANGE
COMMISSION, respondents.
x-----------------------------x
G.R. No. 144629            April 8, 2003
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU, JOHN YU,
LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT CORP., petitioners,
vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. ONG, WILLIE
T. ONG, and JULIA ONG ALONZO, respondents.
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong,
Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2)
motion for partial reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a reversal of
this Court's Decision,1 dated February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the
decision2 of the Court of Appeals, dated October 5, 1999, which in turn upheld, likewise with modification, the
decision of the SEC en banc, dated September 11, 1998; and (3) motion for issuance of writ of execution of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C.
Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and
incompletion when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by
the Tius, encountered dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB)
for P190 million. To stave off foreclosure of the mortgage on the two lots where the mall was being built, the
Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo
(the Ongs), to invest in FLADC. Under the Pre-Subscription Agreement they entered into, the Ongs and the
Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to subscribe to 1,000,000 shares at a
par value of P100.00 each while the Tius were to subscribe to an additional 549,800 shares at P100.00 each in
addition to their already existing subscription of 450,200 shares. Furthermore, they agreed that the Tius were
entitled to nominate the Vice-President and the Treasurer plus five directors while the Ongs were entitled to
nominate the President, the Secretary and six directors (including the chairman) to the board of directors of
FLADC. Moreover, the Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the
Tius committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at
P20 million (for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to
cover their additional 549,800 stock subscription therein. The Ongs paid in another P70 million 3 to FLADC
and P20 million to the Tius over and above their P100 million investment, the total sum of which (P190
million) was used to settle the P190 million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on
February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to
credit to them the FLADC shares covering their real property contributions; (2) preventing David S. Tiu and
Cely Y. Tiu from assuming the positions of and performing their duties as Vice-President and Treasurer,
respectively, and (3) refusing to give them the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and perform
the duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from doing so.
Furthermore, the Ongs refused to provide them the space for their executive offices as Vice-President and
Treasurer. Finally, and most serious of all, the Ongs refused to give them the shares corresponding to their
property contributions of a four-story building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence,
they felt they were justified in setting aside their Pre-Subscription Agreement with the Ongs who allegedly
refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-
President and Treasurer of FLADC but that it was they who refused to comply with the corporate duties
assigned to them. It was the contention of the Ongs that they wanted the Tius to sign the checks of the
corporation and undertake their management duties but that the Tius shied away from helping them manage
the corporation. On the issue of office space, the Ongs pointed out that the Tius did in fact already have existing
executive offices in the mall since they owned it 100% before the Ongs came in. What the Tius really wanted
were new offices which were anyway subsequently provided to them. On the most important issue of their
alleged failure to credit the Tius with the FLADC shares commensurate to the Tius' property contributions, the
Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30 square-meter lot in favor
of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp tax. Without
the payment thereof, the SEC would not approve the valuation of the Tius' property contribution (as opposed to
cash contribution). This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT)
over the property in FLADC's name. In any event, it was easy for the Tius to simply pay the said transfer taxes
and, after the new TCT was issued in FLADC's name, they could then be given the corresponding shares of
stocks. On the 151 square-meter property, the Tius never executed a deed of assignment in favor of FLADC. The
Tius initially claimed that they could not as yet surrender the TCT because it was "still being reconstituted" by
the Lichaucos from whom the Tius bought it. The Ongs later on discovered that FLADC had in reality owned
the property all along, even before their Pre-Subscription Agreement was executed in 1994. This meant that the
151 square-meter property was at that time already the corporate property of FLADC for which the Tius were
not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced 4 by the Tius on February 27, 1996 at the
Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-Subscription
Agreement. After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on
May 19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and
consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC;
(c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of
incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325
and 134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation
of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and representatives, to desist from
exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any
manner intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of
P8,866,669.00 and all interest payments as well as any payments on principal received from the
P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from
said defendants plus legal interest from the date of receipt of such amount.
SO ORDERED.5
On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs' P70
million was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that
the imposition of interest on it was correct. 6
Both parties appealed7 to the SEC en banc which rendered a decision on September 11, 1998, affirming the May
19, 1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the Pre-Subscription
Agreement but reverted to classifying the P70 million paid by the Ongs as premium on capital and not as a loan
or advance to FLADC, hence, not entitled to earn interest. 8
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:
WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission En
Banc in SEC AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated
August 15, 1994 is hereby AFFIRMED, subject to the following MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in
accordance with the following cash and property contributions of the parties therein.
(a) Ong Group – P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
2) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of Intraland
Resources and Development Corporation valued at P20,000,000.00 for 200,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No. 15587 in the name of
Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the management
thereof is (sic) hereby ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70,000,000.00 that
was advanced to it by the Ong Group upon the finality of this decision. Should the former incur in delay in the
payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New Civil Code.
4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon the
finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal interest
thereon pursuant to Article 2209 of the New Civil Code.
SO ORDERED.9
An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the "height
of ingratitude" and as "pulling a fast one" on the Ongs. The CA moreover found the Tius guilty of withholding
FLADC funds from the Ongs and diverting corporate income to their own MATTERCO account. 10 These were
findings later on affirmed in our own February 1, 2002 Decision which is the subject of the instant motion for
reconsideration.11
But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the Tius were
in pari delicto (which would not have legally entitled them to rescission) but, "for practical considerations,"
that is, their inability to work together, it was best to separate the two groups by rescinding the Pre-
Subscription Agreement, returning the original investment of the Ongs and awarding practically everything
else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate petitions for review before
this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may not
properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-Subscription
Agreement did not provide for reciprocity of obligations; that the rights over the subject matter of the
rescission (capital assets and properties) had been acquired by a third party (FLADC); that they did not commit
a substantial and fundamental breach of their agreement since they did not prevent the Tius from assuming the
positions of Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000 shares
corresponding to the 1,902.30 square-meter property covered by TCT No. 134066 (formerly 15587) was due to
the refusal of the Tius to pay the required transfer taxes to secure the approval of the SEC for the property
contribution and, thereafter, the issuance of title in FLADC's name. They also argued that the liquidation of
FLADC may not legally be ordered by the appellate court even for so called "practical considerations" or even to
prevent "further squabbles and numerous litigations," since the same are not valid grounds under the
Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70 million and
P20 million advances to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand, contended
that the rescission should have been limited to the restitution of the parties' respective investments and not the
liquidation of FLADC based on the erroneous perception by the court that: the Masagana Citimall was
threatened with incompletion since FLADC was in financial distress; that the Tius invited the Ongs to invest in
FLADC to settle its P190 million loan from PNB; that they violated the Pre-Subscription Agreement when it
was the Lichaucos and not the Tius who executed the deed of assignment over the 151 square-meter property
commensurate to 49,800 shares in FLADC thereby failing to pay the price for the said shares; that they did not
turn over to the Ongs the entire amount of FLADC funds; that they were diverting rentals from lease contracts
due to FLADC to their own MATTERCO account; that the P70 million paid by the Ongs was an advance and
not a premium on capital; and that, by rescinding the Pre-Subscription Agreement, they wanted to wrestle
away the management of the mall and prevent the Ongs from enjoying the profits of their P190 million
investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming the
assailed decision of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum
to be computed from the time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be
computed from the date of the FLADC Board Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically, the 151
sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the Pre-
Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-President and
Treasurer of the corporation. On the other hand, the Decision established that the Tius failed to turn over
FLADC funds to the Ongs and that the Tius diverted rentals due to FLADC to their MATTERCO account.
Consequently, it held that rescission was not possible since both parties were in pari delicto. However, this
Court agreed with the Court of Appeals that the remedy of specific performance, as espoused by the Ongs, was
not practical and sound either and would only lead to further "squabbles and numerous litigations" between
the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the
grounds that: (a) the SEC order had become executory as early as September 11, 1998 pursuant to Sections 1
and 12, Rule 43 of the Rules of Court; (b) any further delay would be injurious to the rights of the Tius since the
case had been pending for more than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under
RA 8799 (Securities Regulation Code). The Ongs filed their opposition, contending that the Decision dated
February 1, 2002 was not yet final and executory; that no good reason existed to issue a warrant of execution;
and that, pursuant to Section 5.2 of RA 8799, the SEC retained jurisdiction over pending cases involving intra-
corporate disputes already submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution, the Ongs filed their own
"Motion for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision)" on
March 15, 2002, raising two main points: (a) that specific performance and not rescission was the proper
remedy under the premises; and (b) that, assuming rescission to be proper, the subject decision of this Court
should be modified to entitle movants to their proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy), movants Ong argue that
their alleged breach of the Pre-Subscription Agreement was, at most, casual which did not justify the rescission
of the contract. They stress that providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President
and Treasurer, respectively, had no bearing on their obligations under the Pre-Subscription Agreement since
the said obligation (to provide executive offices) pertained to FLADC itself. Such obligation arose from the
relations between the said officers and the corporation and not any of the individual parties such as the Ongs.
Likewise, the alleged failure of the Ongs to credit shares of stock in favor of the Tius for their property
contributions also pertained to the corporation and not to the Ongs. Just the same, it could not be done in view
of the Tius' refusal to pay the necessary transfer taxes which in turn resulted in the inability to secure SEC
approval for the property contributions and the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-Subscription
Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADC's loan to PNB.
Hence, in this light, the alleged failure to provide office space for the two corporate officers was no more than
an inconsequential infringement. For rescission to be justified, the law requires that the breach of contract
should be so "substantial or fundamental" as to defeat the primary objective of the parties in making the
agreement. At any rate, the Ongs claim that it was the Tius who were guilty of fundamental violations in failing
to remit funds due to FLADC and diverting the same to their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating the Pre-
Subscription Agreement, neither of them could resort to rescission under the principle of pari delicto. In
addition, since the cash and other contributions now sought to be returned already belong to FLADC, an
innocent third party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given their proportionate share of
the mall), movants Ong vehemently take exception to the second item in the dispositive portion of the
questioned Decision insofar as it decreed that whatever remains of the assets of FLADC and the management
thereof (after liquidation) shall be transferred to the Tius. They point out that the mall itself, which would have
been foreclosed by PNB if not for their timely investment of P190 million in 1994 and which is now worth about
P1 billion mainly because of their efforts, should be included in any partition and distribution. They (the Ongs)
should not merely be given interest on their capital investments. The said portion of our Decision, according to
them, amounted to the unjust enrichment of the Tius and ran contrary to our own pronouncement that the act
of the Tius in unilaterally rescinding the agreement was "the height of ingratitude" and an attempt "to pull a
fast one" as it would prevent the Ongs from enjoying the fruits of their P190 million investment in FLADC. It
also contravenes this Court's assurance in the questioned Decision that the Ongs and Tius "will have a
bountiful return of their respective investments derived from the profits of the corporation."
Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8, 2002, pointing out that there
was no violation of the Pre-Subscription Agreement on the part of the Ongs; that, after more than seven years
since the mall began its operations, rescission had become not only impractical but would also adversely affect
the rights of innocent parties; and that it would be highly inequitable and unfair to simply return the P100
million investment of the Ongs and give the remaining assets now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration, counter that the arguments therein are a
mere re-hash of the contentions in the Ongs' petition for review and previous motion for reconsideration of the
Court of Appeals' decision. The Tius compare the arguments in said pleadings to prove that the Ongs do not
raise new issues, and, based on well-settled jurisprudence,12 the Ongs' present motion is therefore pro-
forma and did not prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective positions
of the parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their respective
memoranda. On February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine
Consumers Foundation, Inc. vs. National Telecommunications Commission,13 this Court, through then Chief
Justice Felix V. Makasiar, said that its members may and do change their minds, after a re-study of the facts
and the law, illuminated by a mutual exchange of views.14 After a thorough re-examination of the case, we find
that our Decision of February 1, 2002 overlooked certain aspects which, if not corrected, will cause extreme
and irreparable damage and prejudice to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious
motions for reconsideration. As long as the same adequately raises a valid ground 15 (i.e., the decision or final
order is contrary to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision
from attaining finality. In Security Bank and Trust Company vs. Cuenca,16 we ruled that a motion for
reconsideration is not pro-forma for the reason alone that it reiterates the arguments earlier passed upon and
rejected by the appellate court. We explained there that a movant may raise the same arguments, if only to
convince this Court that its ruling was erroneous. Moreover, the rule (that a motion is pro-forma if it only
repeats the arguments in the previous pleadings) will not apply if said arguments were not squarely passed
upon and answered in the decision sought to be reconsidered. In the case at bar, no ruling was made on some
of the petitioner Ongs' arguments. For instance, no clear ruling was made on why an order distributing
corporate assets and property to the stockholders would not violate the statutory preconditions for corporate
dissolution or decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain the
subject motion for reconsideration since some important issues therein, although mere repetitions, were not
considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription Agreement.
We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning
450,200 shares representing the paid-up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became necessary to give each group equal (50-50)
shareholdings as agreed upon in the Pre-Subscription Agreement. The authorized capital stock was thus
increased from 500,000 shares to 2,000,000 shares with a par value of P100 each, with the Ongs subscribing
to 1,000,000 shares and the Tius to 549,800 more shares in addition to their 450,200 shares to complete
1,000,000 shares. Thus, the subject matter of the contract was the 1,000,000 unissued shares of FLADC stock
allocated to the Ongs. Since these were unissued shares, the parties' Pre-Subscription Agreement was in fact a
subscription contract as defined under Section 60, Title VII of the Corporation Code:
Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed
shall be deemed a subscription within the meaning of this Title, notwithstanding the fact that the parties refer
to it as a purchase or some other contract (Italics supplied).
A subscription contract necessarily involves the corporation as one of the contracting parties since the subject
matter of the transaction is property owned by the corporation – its shares of stock. Thus, the subscription
contract (denominated by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100
million for 1,000,000 shares of stock was, from the viewpoint of the law, one between the Ongs and FLADC,
not between the Ongs and the Tius. Otherwise stated, the Tius did not contract in their personal capacities with
the Ongs since they were not selling any of their own shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement were FLADC and the
Ongs alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their personal
capacities will not prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had
the legal personality to file suit rescinding the subscription agreement with the Ongs inasmuch as it was the
real party in interest therein. Article 1311 of the Civil Code provides that "contracts take effect only between the
parties, their assigns and heirs…" Therefore, a party who has not taken part in the transaction cannot sue or be
sued for performance or for cancellation thereof, unless he shows that he has a real interest affected thereby. 17
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the Pre-
Subscription Agreement: a shareholder's agreement between the Tius and the Ongs defining and governing
their relationship and a subscription contract between the Tius, the Ongs and FLADC regarding the
subscription of the parties to the corporation. They point out that these two component parts form one whole
agreement and that their terms and conditions are intrinsically related and dependent on each other. Thus, the
breach of the shareholders' agreement, which was allegedly the consideration for the subscription contract, was
also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after
the oral arguments on January 29, 2003, we find this argument too strained for comfort. It is obviously
intended to remedy and cover up the Tius' lack of legal personality to rescind an agreement in which they were
personally not parties-in-interest. Assuming arguendo that there were two "sub-agreements" embodied in the
Pre-Subscription Agreement, this Court fails to see how the shareholders agreement between the Ongs and
Tius can, within the bounds of reason, be interpreted as the consideration of the subscription contract between
FLADC and the Ongs. There was nothing in the Pre-Subscription Agreement even remotely suggesting such
alleged interdependence. Be that as it may, however, the Tius are nevertheless not the proper parties to raise
this point because they were not parties to the subscription contract between FLADC and the Ongs. Thus, they
are not in a position to claim that the shareholders agreement between them and the Ongs was what induced
FLADC and the Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though
FLADC was represented by the Tius in the subscription contract, FLADC had a separate juridical personality
from the Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof
that the corporation is being used "as a cloak or cover for fraud or illegality, or to work injustice." 18
The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is breach by
FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of the corporation. There is
evidence that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her function as
such. The records show that the President, Wilson Ong, supervised the collection and receipt of rentals in the
Masagana Citimall;19 that he ordered the same to be deposited in the bank;20 and that he held on to the cash
and properties of the corporation. 21 Section 25 of the Corporation Code prohibits the President from acting
concurrently as Treasurer of the corporation. The rationale behind the provision is to ensure the effective
monitoring of each officer's separate functions.
However, although the Tius were adversely affected by the Ongs' unwillingness to let them assume their
positions, rescission due to breach of contract is definitely the wrong remedy for their personal grievances. The
Corporation Code, SEC rules and even the Rules of Court provide for appropriate and
adequate intra-corporate remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no legal personality to do so and the
requirements of the law therefor have not been met. A contrary doctrine will tread on extremely dangerous
ground because it will allow just any stockholder, for just about any real or imagined offense, to demand
rescission of his subscription and call for the distribution of some part of the corporate assets to him without
complying with the requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission
of the subject agreement based on a less than substantial breach of subscription contract. Not only are they not
parties to the subscription contract between the Ongs and FLADC; they also have other available and effective
remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not prosper since rescission will violate
the Trust Fund Doctrine and the procedures for the valid distribution of assets and property under the
Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs.
Rivera,22 provides that subscriptions to the capital stock of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction of their claims. 23 This doctrine is the underlying principle in
the procedure for the distribution of capital assets, embodied in the Corporation Code, which allows the
distribution of corporate capital only in three instances: (1) amendment of the Articles of Incorporation to
reduce the authorized capital stock,24 (2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings,25 and (3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power of a corporation to acquire its own
shares26 and in Section 122 on the prohibition against the distribution of corporate assets and property unless
the stringent requirements therefor are complied with.27
The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the
stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the
court a quo "to prevent further squabbles and future litigations" unless the indispensable conditions and
procedures for the protection of corporate creditors are followed. Otherwise, the "corporate peace" laudably
hoped for by the court will remain nothing but a dream because this time, it will be the creditors' turn to engage
in "squabbles and litigations" should the court order an unlawful distribution in blatant disregard of the Trust
Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and
the Corporation Code, since rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in the premature liquidation of the
corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the
Corporation Code.28 The Tius maintain that rescinding the subscription contract is not synonymous to
corporate liquidation because all rescission will entail would be the simple restoration of the status quo
ante and a return to the two groups of their cash and property contributions. We wish it were that simple. Very
noticeable is the fact that the Tius do not explain why rescission in the instant case will not effectively result in
liquidation. The Tius merely refer in cavalier fashion to the end-result of rescission (which incidentally is 100%
favorable to them) but turn a blind eye to its unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not result
in an unauthorized liquidation of the corporation because their case is actually a petition to decrease capital
stock pursuant to Section 38 of the Corporation Code. Section 122 of the law provides that "(e)xcept by
decrease of capital stock…, no corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities." The Tius claim that their case for rescission, being
a petition to decrease capital stock, does not violate the liquidation procedures under our laws. All that needs to
be done, according to them, is for this Court to order (1) FLADC to file with the SEC a petition to issue a
certificate of decrease of capital stock and (2) the SEC to approve said decrease. This new argument has no
merit.
The Tius' case for rescission cannot validly be deemed a petition to decrease capital stock because such action
never complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation
Code. No majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at
which the approval of stockholders owning at least two-thirds of the outstanding capital stock was secured.
There was no revised treasurer's affidavit and no proof that said decrease will not prejudice the creditors'
rights. On the contrary, all their pleadings contained were alleged acts of violations by the Ongs to justify an
order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC
to file at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporation's
authorized capital stock is an amendment of the Articles of Incorporation. It is a decision that only the
stockholders and the directors can make, considering that they are the contracting parties thereto. In this case,
the Tius are actually not just asking for a review of the legality and fairness of a corporate decision. They
want this Court to make a corporate decision for FLADC. We decline to intervene and order corporate
structural changes not voluntarily agreed upon by its stockholders and directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADC's directors and stockholders
is a violation of the "business judgment rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and
courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton
destruction to the rights of the minority, as when plaintiffs aver that the defendants (members of the board),
have concluded a transaction among themselves as will result in serious injury to the plaintiffs stockholders. 29
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in corporate
law, thus:
Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are
not in the business of business, and the laissez faire rule or the free enterprise system prevailing in our social
and economic set-up dictates that it is better for the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business decisions. More importantly, the social contract in
the corporate family to decide the course of the corporate business has been vested in the board and not with
courts.30
Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the corporation
to the exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock. Ordering the return
and distribution of the Ongs' capital contribution without dissolving the corporation or decreasing its
authorized capital stock is not only against the law but is also prejudicial to corporate creditors who enjoy
absolute priority of payment over and above any individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If rescission is
denied, will injustice be inflicted on any of the parties? The answer is no because the financial interests of both
the Tius and the Ongs will remain intact and safe within FLADC. On the other hand, if rescission is granted,
will any of the parties suffer an injustice? Definitely yes because the Ongs will find themselves out in the streets
with nothing but the money they had in 1994 while the Tius will not only enjoy a windfall estimated to be
anywhere from P450 million to P900 million31 but will also take over an extremely profitable business without
much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1, 2002,
stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed breaches of
the Pre-Subscription Agreement. This may be true to a certain extent but, judging from the comparative gravity
of the acts separately committed by each group, we find that the Ongs' acts were relatively tame vis-à-vis those
committed by the Tius in not surrendering FLADC funds to the corporation and diverting corporate income to
their own MATTERCO account. The Ongs were right in not issuing to the Tius the shares corresponding to the
four-story building and the 1,902.30 square-meter lot because no title for it could be issued in FLADC's name,
owing to the Tius' refusal to pay the transfer taxes. And as far as the 151 square-meter lot was concerned, why
should FLADC issue additional shares to the Tius for property already owned by the corporation and which, in
the final analysis, was already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to "pull a fast one" on the
Ongs because that was where the problem precisely started. It is clear that, when the finances of FLADC
improved considerably after the equity infusion of the Ongs, the Tius started planning to take over the
corporation again and exclude the Ongs from it. It appears that the Tius' refusal to pay transfer taxes might not
have really been at all unintentional because, by failing to pay that relatively small amount which they could
easily afford, the Tius should have expected that they were not going to be given the corresponding shares. It
was, from every angle, the perfect excuse for blackballing the Ongs. In other words, the Tius created a problem
then used that same problem as their pretext for showing their partners the door. In the process, they stood to
be rewarded with a bonanza of anywhere between P450 million to P900 million in assets (from an investment
of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable damage of the Ongs,
FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it
has become today were it not for the timely infusion of P190 million by the Ongs in 1994. There are no ifs or
buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this and
the fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments —
assuming good faith and honest intentions — we cannot allow the rescission of the subject subscription
agreement. The Ongs' shortcomings were far from serious and certainly less than substantial; they were in fact
remediable and correctable under the law. It would be totally against all rules of justice, fairness and equity to
deprive the Ongs of their interests on petty and tenuous grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan
Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for partial
reconsideration, dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for
Confirmation of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is
hereby DISMISSED for lack of merit. The unilateral rescission by the Tius of the subject Pre-Subscription
Agreement, dated August 15, 1994, is hereby declared as null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely Y.
Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being
moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision of the
Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby
REVERSED.
Costs against the petitioner Tius.
SO ORDERED.
[G.R. No. 108734. May 29, 1996.]

CONCEPT BUILDERS, INC., Petitioner, v. THE NATIONAL LABOR RELATIONS,

COMMISSION,(First Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel
Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut, Emilio
Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut, Domingo Guarino,
Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand
Torres, Felipe Basilan, and Ruben Robalos, Respondents.

The Law Firm of Araullo and Raymundo for Petitioner.

Ciriaco S. Cruz for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION LAW; DOCTRINE OF PIERCING THE VEIL OF CORPORATE

ENTITY; WHEN APPLICABLE. — 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 the 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.

2. ID.; ID.; ID.; PROBATIVE FACTORS OF IDENTITY THAT WILL JUSTIFY THE APPLICATION THEREOF.
— The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some
probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit:
"1. Stock ownership by one or common ownership of both corporations. 2. Identity of directors and officers. 3.
The manner of keeping corporate books and records. 4. Methods of conducting the business."cralaw virtua1aw
library

3. ID.; ID.; ID.; TEST IN DETERMINING THE APPLICABILITY THEREOF. — The test in determining the
applicability of the doctrine of piercing the veil of corporation fiction is as follows: "1. Control, not mere
majority or complete stock control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time
no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of 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 prevent ‘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."cralaw virtua1aw library

4. ID.; ID.; ID.; APPLICABLE IN CASE AT BAR. — In this case, the NLRC noted that, while petitioner claimed
that it ceased its business operations on April 29, 1986, it filed an Information Sheet with the Securities and
Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela,
Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that: "Both information sheets were filed by the same Virgilio 0. Casiño as the
corporate Secretary of both corporations. It would also not be amiss to note that both corporations had the
same president, the same board of directors, the same corporate officers, and substantially the same
subscribers. From the foregoing, it appears that, among other things, the respondent (herein petitioner-) and
the third-party claimant shared the same address an/or premises. Under this circumstances, (sic) it cannot be
said that the property levied upon by the sheriff were not of respondents." Clearly, petitioner ceased its
business operations in order to evade the payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner
corporation

5. ID.; NATIONAL LABOR RELATIONS COMMISSION MANUAL OF EXECUTION OF JUDGMENT;

SECTION 3, RULE VII THEREOF; PROPERLY OBSERVED IN CASE AT BAR. — In view of the failure of the
sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private respondents had no
other recourse but to apply for a break-open order after the third-party claim of HPPI was dismissed for lack of
merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of
Judgment which provides that: "Should the losing party, his grant or representative, refuse or prohibit the
Sheriff or his representative entry to the place where the property subject of execution is located or kept, the
judgment creditor may apply to the Commissioner or Labor Arbiter concerned for a break-open order."

DECISION

HERMOSISIMA, JR., J.:

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter
ego of a person or of another corporation. Where badges of fraud exist; where public convenience is defeated;
where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come
to naught. The law in these instances will regard the corporation as a mere association of persons and, in case
of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporation’s subsidiary liability for damages, the
corporation may not be heard to say that it has a personality separate and distinct from the other corporation.
The piercing of the corporate veil comes into play.

This special civil action ostensibly raises the question of whether the National Labor Relations Commission
committed grave abuse of discretion when it issued a "break-open order" to the sheriff to be enforced against
personal property found in the premises of petitioner’s sister company.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road,
Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said
company as laborers, carpenters and riggers.

On November, 1981, private respondents were served individual written notices of termination of employment
by petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of
employment had expired and the project in which they were hired had been completed.

Public respondent found it to be, the fact, however, that at the time of the termination of private respondent’s
employment, the project in which they were hired had not yet been finished and completed. Petitioner had to
engage the services of sub-contractors whose workers performed the functions of private respondents.

Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of
their legal holiday pay, overtime pay and thirteenth-month pay against petitioner.

On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private
respondents and to pay them back wages equivalent to one year or three hundred working days.

On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by petitioner on the ground that the said decision had already become final and
executory. 2

On October 16, 1986, the NLRC Research and Information Department made the finding that private
respondents’ back wages amounted to P199,800.00. 3

On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision,
dated December 19, 1984. The writ was partially satisfied through garnishment of sums from petitioner’s
debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was
turned over to the cashier of the NLRC.

On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect
from herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to
reinstate private respondents to their former positions.

On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on
petitioner through the security guard on duty but the service was refused on the ground that petitioner no
longer occupied the premises.

On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of
execution.

The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated
November 2, 1989:chanrob1es virtual 1aw library

1. All the employees inside petitioner’s premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that
they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;

3. Security guards with high-powered guns prevented him from removing the properties he had levied upon. 4

The said special sheriff recommended that a, "break-open order" be issued to enable him to enter petitioner’s
premises so that he could proceed with the public auction sale of the aforesaid personal properties on
November 7, 1989.

On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that
the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is
the Vice-President.

On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that
HPPI and petitioner corporation were owned by the same incorporator/stockholders. They also alleged that
petitioner temporarily suspended its business operations in order to evade its legal obligations to them and
that private respondents were willing to post an indemnity bond to answer for any damages which petitioner
and HPPI may suffer because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the General
Informations Sheet, dated May 15, 1987, submitted by petition or to the Securities Exchange Commission
(SEC) and the General Information Sheet, dated May 15, 1987, submitted by HPPI to the Securities and
Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:jgc:chanrobles.com.ph

"1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila." 5

On the other hand, the General Information Sheet of HPPI revealed the following:jgc:chanrobles.com.ph

"1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100 00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila." 6

On February 1, 1990, HPPI filed an Opposition to private respondents’ motion for issuance of a break-open
order, contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged
that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm
while petitioner was then engaged in constitution.

On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents’ motion for break-open
order.

Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor
Arbiter, issued a break-open order and directed private respondents to file a bond. Thereafter, it directed the
sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim
for lack of merit.

Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated December
3, 1992.

Hence, the resort to the present petition.

Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its
decision despite a third-party claim on the levied property. Petitioner further contends, that the doctrine of
piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it
created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the
manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from
petitioner’s construction business. Hence, it is of no consequence that petitioner and HPPI shared the same
premises, the same President and the same set of officers and subscribers. 7

We find petitioner’s contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its
stockholders and from other corporations to which it may be connected. 8 But, this separate and distinct
personality of a corporation is merely a fiction created by law for convenience and to promote justice. 9 So,
when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or is used as a device to defeat the labor laws, 10 this separate personality of the
corporation may be disregarded or the veil of corporate fiction pierced. 11 This is true likewise when the
corporation is merely an adjunct, a business conduit or an alter ego of another corporation. 12

The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and
circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some
probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to
wit:jgc:chanrobles.com.ph

"1. Stock ownership by one or common ownership of both corporations.

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business." 13

The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the
separate juridical personality of corporations as follows:jgc:chanrobles.com.ph

"Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the ‘instrumentality’ may be
disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has, so to speak, no separate
mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control
must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss for which the complaint is made."cralaw
virtua1aw library

The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as
follows:jgc:chanrobles.com.ph

"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:chanrob1es virtual 1aw library

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." 14

Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a
subterfuge is purely one of fact. 15

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29,
1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that
its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its office address is at 355
Maysan Road, Valenzuela, Metro Manila.

Furthermore, the NLRC stated that:jgc:chanrobles.com.ph

"Both information sheets were filed by the same Virgilio O. Casiño as the corporate secretary of both
corporations. It would also not be amiss to note that both corporations had the same president, the same board
of directors, the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party
claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back
wages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of
petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.

The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the occasion
to rule:jgc:chanrobles.com.ph

"Respondent court’s findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June
30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July l, 1957, up to
December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioner. It is very clear that
the latter corporation was a continuation and successor of the first entity . . . Both predecessors and successor
were owned and controlled by petitioner Eduardo Claparols and there was no break in the succession and
continuity of the same business. This ‘avoiding-the-liability’ scheme is very patent, considering that 90% of the
subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was owned
by Respondent. . . Claparols himself, and an the assets of the dissolved Claparols Steel and Nail Plant were
turned over to the emerging Claparols Steel Corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the
present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial
obligation to its employees."cralaw virtua1aw library

In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution,
private respondents had no other recourse but to apply for a break-open order after the third-party claim of
HPPI was dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC
Manual of Execution of Judgment which provides that:jgc:chanrobles.com.ph

"Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative entry to
the place where the property subject of execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order."cralaw virtua1aw library

Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were
complied with. Petitioner and the third-party claimant were given the opportunity to submit evidence in
support of their claim.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued
by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported
by substantial evidence are binding on this Court and are entitled to great respect, in the absence of showing of
grave abuse of a discretion. 18

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and
December 3. 1992. are AFFIRMED.

SO ORDERED.
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 Decision 1 dated October 21, 1999 of the Court of
Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners' appeal from the Decision 2 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 Resolution 3 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 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 description 5 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. 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
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.
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
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. 12 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. 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 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 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
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.

G.R. No. L-28694 May 13, 1981

TELEPHONE ENGINEERING & SERVICE COMPANY, INC., petitioner,
vs.
WORKMEN'S COMPENSATION COMMISSION, PROVINCIAL SHERIFF OF RIZAL and
LEONILA SANTOS GATUS, for herself and in behalf of her minor children, Teresita, Antonina
and Reynaldo, all surnamed GATUS, respondents.

MELENCIO-HERRERA, J.:1äwphï1.ñët
These certiorari proceedings stem from the award rendered against petitioner Telephone Engineering and
Services, Co., Inc. (TESCO) on October 6, 1967 by the Acting Referee of Regional Office No. 4, Quezon City
Sub-Regional Office, Workmen's Compensation Section, in favor of respondent Leonila S. Gatus and her
children, dependents of the deceased employee Pacifico L. Gatus. The principal contention is that the award
was rendered without jurisdiction as there was no employer-employee relationship between petitioner and the
deceased.
Petitioner is a domestic corporation engaged in the business of manufacturing telephone equipment with
offices at Sheridan Street, Mandaluyong, Rizal. Its Executive Vice-President and General Manager is Jose Luis
Santiago. It has a sister company, the Utilities Management Corporation (UMACOR), with offices in the same
location. UMACOR is also under the management of Jose Luis Santiago.
On September 8, 1964, UMACOR employed the late Pacifica L. Gatus as Purchasing Agent. On May 16, 1965,
Pacifico L. Gatus was detailed with petitioner company. He reported back to UMACOR on August 1, 1965. On
January 13, 1967, he contracted illness and although he retained to work on May 10, 1967, he died nevertheless
on July 14, 1967 of "liver cirrhosis with malignant degeneration."
On August 7, 1967, his widow, respondent Leonila S. Gatus, filed a "Notice and Claim for Compensation" with
Regional Office No. 4, Quezon City Sub-Regional Office, Workmen's Compensation Section, alleging therein
that her deceased husband was an employee of TESCO, and that he died of liver cirrhosis. 1 On August 9, 1967,
and Office wrote petitioner transmitting the Notice and for Compensation, and requiring it to submit an
Employer's Report of Accident or Sickness pursuant to Section 37 of the Workmen's Compensation Act (Act
No. 3428). 2 An "Employer's Report of Accident or Sickness" was thus submitted with UMACOR indicated as
the employer of the deceased. The Report was signed by Jose Luis Santiago. In answer to questions Nos. 8 and
17, the employer stated that it would not controvert the claim for compensation, and admitted that the
deceased employee contracted illness "in regular occupation." 3 On the basis of this Report, the Acting Referee
awarded death benefits in the amount of P5,759.52 plus burial expenses of P200.00 in favor of the heirs of
Gatus in a letter-award dated October 6, 1967 4 against TESCO.
Replying on October 27, 1967, TESCO, through Jose Luis Santiago, informed the Acting Referee that it would
avail of the 15-days-notice given to it to state its non-conformity to the award and contended that the cause of
the illness contracted by Gatus was in no way aggravated by the nature of his work. 5
On November 6, 1967, TESCO requested for an extension of ten days within which to file a Motion for
Reconsideration, 6 and on November 15, 1967, asked for an additional extension of five days. 7 TESCO filed its
"Motion for Reconsideration and/or Petition to Set Aside Award" on November 18, 1967, alleging as grounds
therefor, that the admission made in the "Employer's Report of Accident or Sickness" was due to honest
mistake and/or excusable negligence on its part, and that the illness for which compensation is sought is not an
occupational disease, hence, not compensable under the law. 8 The extension requested was denied. The
Motion for Reconsideration was likewise denied in an Order issued by the Chief of Section of the Regional
Office dated December 28, 1967 9 predicated on two grounds: that the alleged mistake or negligence was not
excusable, and that the basis of the award was not the theory of direct causation alone but also on that of
aggravation. On January 28, 1968, an Order of execution was issued by the same Office.
On February 3, 1968, petitioner filed an "Urgent Motion to Compel Referee to Elevate the Records to the
Workmen's Compensation Commission for Review." 10 Meanwhile, the Provincial Sheriff of Rizal levied on and
attached the properties of TESCO on February 17, 1968, and scheduled the sale of the same at public auction on
February 26, 1968. On February 28, 1968, the Commission issued an Order requiring petitioner to submit
verified or true copies of the Motion for Reconsideration and/or Petition to Set Aside Award and Order of
December 28, 1967, and to show proof that said Motion for Reconsideration was filed within the reglementary
period, with the warning that failure to comply would result in the dismissal of the Motion. However, before
this Order could be released, TESCO filed with this Court, on February 22, 1968, The present petition for
"Certiorari with Preliminary Injunction" seeking to annul the award and to enjoin the Sheriff from levying and
selling its properties at public auction.
On February 29, 1968, this Court required respondents to answer the Petition but denied
Injunction. 11 TESCO'S Urgent Motion dated April 2, 1968, for the issuance of a temporary restraining order to
enjoin the Sheriff from proceeding with the auction sale of its properties was denied in our Resolution dated
May 8, 1968.
TESCO asserts: 1äwphï1.ñët
I. That the respondent Workmen's Compensation Commission has no jurisdiction nor authority to render the
award (Annex 'D', Petition) against your petitioner there being no employer-employee relationship between it
and the deceased Gatus;
II. That petitioner can never be estopped from questioning the jurisdiction of respondent commission
especially considering that jurisdiction is never conferred by the acts or omission of the parties;
III. That this Honorable Court has jurisdiction to nullify the award of respondent commission.
TESCO takes the position that the Commission has no jurisdiction to render a valid award in this suit as there
was no employer-employee relationship between them, the deceased having been an employee of UMACOR
and not of TESCO. In support of this contention, petitioner submitted photostat copies of the payroll of
UMACOR for the periods May 16-31, 1967 and June 1-15, 1967 12 showing the name of the deceased as one of
the three employees listed under the Purchasing Department of UMACOR. It also presented a photostat copy of
a check of UMACOR payable to the deceased representing his salary for the period June 14 to July 13, 1967. 13
Both public and private respondents contend, on the other hand, that TESCO is estopped from claiming lack of
employer – employee relationship.
To start with, a few basic principles should be re-stated the existence of employer-employee relationship is the
jurisdictional foundation for recovery of compensation under the Workmen's Compensation Law. 14 The lack of
employer-employee relationship, however, is a matter of defense that the employer should properly raise in the
proceedings below. The determination of this relationship involves a finding of fact, which is conclusive and
binding and not subject to review by this Court. 15
Viewed in the light of these criteria, we note that it is only in this Petition before us that petitioner denied, for
the first time, the employer-employee relationship. In fact, in its letter dated October 27, 1967 to the Acting
Referee, in its request for extension of time to file Motion for Reconsideration, in its "Motion for
Reconsideration and/or Petition to Set Aside Award," and in its "Urgent Motion to Compel the Referee to
Elevate Records to the Commission for Review," petitioner represented and defended itself as the employer of
the deceased. Nowhere in said documents did it allege that it was not the employer. Petitioner even admitted
that TESCO and UMACOR are sister companies operating under one single management and housed in the
same building. Although respect for the corporate personality as such, is the general rule, there are exceptions.
In appropriate cases, the veil of corporate fiction may be pierced as when the same is made as a shield to
confuse the legitimate issues. 16
While, indeed, jurisdiction cannot be conferred by acts or omission of the parties, TESCO'S denial at this stage
that it is the employer of the deceased is obviously an afterthought, a devise to defeat the law and evade its
obligations. 17 This denial also constitutes a change of theory on appeal which is not allowed in this
jurisdiction. 18 Moreover, issues not raised before the Workmen's Compensation Commission cannot be raised
for the first time on appeal. 19 For that matter, a factual question may not be raised for the first time on appeal
to the Supreme Court. 20
This certiorari proceeding must also be held to have been prematurely brought. Before a petition for certiorari
can be instituted, all remedies available in the trial Court must be exhausted first. 21 certiorari cannot be
resorted to when the remedy of appeal is present. 22 What is sought to be annulled is the award made by the
Referee. However, TESCO did not pursue the remedies available to it under Rules 23, 24 and 25 of the Rules of
the Workmen's Compensation Commission, namely, an appeal from the award of the Referee, within fifteen
days from notice, to the Commission; a petition for reconsideration of the latter's resolution, if adverse, to the
Commission en banc; and within ten days from receipt of an unfavorable decision by the latter, an appeal to
this Court. As petitioner had not utilized these remedies available to it, certiorari win not he, it being
prematurely filed. As this Court ruled in the case of Manila Jockey Club, Inc. vs. Del Rosario, 2 SCRA 462
(1961). 1äwphï1.ñët
An aggrieved party by the decision of a Commissioner should seek a reconsideration of the decision by the
Commission en banc. If the decision is adverse to him, he may appeal to the Supreme Court. An appeal brought
to the Supreme Court without first resorting to the remedy referred to is premature and may be dismissed.
Although this rule admits of exceptions, as where public welfare and the advancement of public policy so
dictate, the broader interests of justice so require, or where the Orders complained of were found to be
completely null and void or that the appeal was not considered the appropriate remedy, 23 the case at bar does
not fan within any of these exceptions. WHEREFORE, this Petition is hereby dismissed.
SO ORDERED.

G.R. No. 96490 February 3, 1992

INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, petitioner,
vs.
VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL TEXTILE MILLS,
INC., respondents.
Romeo C. Lagman for petitioner.
Borreta, Gutierrez & Leogardo for respondent Indophil Textile Mills, Inc.

MEDIALDEA, J.:
This is a petition for certiorari seeking the nullification of the award issued by the respondent Voluntary
Arbitrator Teodorico P. Calica dated December 8, 1990 finding that Section 1 (c), Article I of the Collective
Bargaining Agreement between Indophil Textile Mills, Inc. and Indophil Textile Mill Workers Union-PTGWO
does not extend to the employees of Indophil Acrylic Manufacturing Corporation as an extension or expansion
of Indophil Textile Mills, Incorporated.
The antecedent facts are as follows:
Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor organization duly registered with
the Department of Labor and Employment and the exclusive bargaining agent of all the rank-and-file
employees of Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is impleaded in his official
capacity as the Voluntary Arbitrator of the National Conciliation and Mediation Board of the Department of
Labor and Employment, while private respondent Indophil Textile Mills, Inc. is a corporation engaged in the
manufacture, sale and export of yarns of various counts and kinds and of materials of kindred character and
has its plants at Barrio Lambakin. Marilao, Bulacan.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and private respondent Indophil
Textile Mills, Inc. executed a collective bargaining agreement effective from April 1, 1987 to March 31, 1990.
On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed and registered with the
Securities and Exchange Commission. Subsequently, Acrylic applied for registration with the Board of
Investments for incentives under the 1987 Omnibus Investments Code. The application was approved on a
preferred non-pioneer status.
In 1988, Acrylic became operational and hired workers according to its own criteria and standards. Sometime
in July, 1989, the workers of Acrylic unionized and a duly certified collective bargaining agreement was
executed.
In 1990 or a year after the workers of Acrylic have been unionized and a CBA executed, the petitioner union
claimed that the plant facilities built and set up by Acrylic should be considered as an extension or expansion of
the facilities of private respondent Company pursuant to Section 1(c), Article I of the CBA, to wit,.
c) This Agreement shall apply to the Company's plant facilities and installations and to any extension and
expansion thereat. (Rollo, p.4)
In other words, it is the petitioner's contention that Acrylic is part of the Indophil bargaining unit.
The petitioner's contention was opposed by private respondent which submits that it is a juridical entity
separate and distinct from Acrylic.
The existing impasse led the petitioner and private respondent to enter into a submission agreement on
September 6, 1990. The parties jointly requested the public respondent to act as voluntary arbitrator in the
resolution of the pending labor dispute pertaining to the proper interpretation of the CBA provision.
After the parties submitted their respective position papers and replies, the public respondent Voluntary
Arbitrator rendered its award on December 8, 1990, the dispositive portion of which provides as follows:
PREMISES CONSIDERED, it would be a strained interpretation and application of the questioned CBA
provision if we would extend to the employees of Acrylic the coverage clause of Indophil Textile Mills CBA.
Wherefore, an award is made to the effect that the proper interpretation and application of Sec. l, (c), Art. I, of
the 1987 CBA do (sic) not extend to the employees of Acrylic as an extension or expansion of Indophil Textile
Mills, Inc. (Rollo, p.21)
Hence, this petition raising four (4) issues, to wit:
1. WHETHER OR NOT THE RESPONDENT ARBITRATOR ERRED IN INTERPRETING SECTION 1(c), ART I
OF THE CBA BETWEEN PETITIONER UNION AND RESPONDENT COMPANY.
2. WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND DISTINCT ENTITY FROM
RESPONDENT COMPANY FOR PURPOSES OF UNION REPRESENTATION.
3. WHETHER OR NOT THE RESPONDENT ARBITRATOR GRAVELY ABUSED HIS DISCRETION
AMOUNTING TO LACK OR IN EXCESS OF HIS JURISDICTION.
4. WHETHER OR NOT THE RESPONDENT ARBITRATOR VIOLATED PETITIONER UNION'S CARDINAL
PRIMARY RIGHT TO DUE PROCESS. (Rollo, pp. 6-7)
The central issue submitted for arbitration is whether or not the operations in Indophil Acrylic Corporation are
an extension or expansion of private respondent Company. Corollary to the aforementioned issue is the
question of whether or not the rank-and-file employees working at Indophil Acrylic should be recognized as
part of, and/or within the scope of the bargaining unit.
Petitioner maintains that public respondent Arbitrator gravely erred in interpreting Section l(c), Article I of the
CBA in its literal meaning without taking cognizance of the facts adduced that the creation of the aforesaid
Indophil Acrylic is but a devise of respondent Company to evade the application of the CBA between petitioner
Union and respondent Company.
Petitioner stresses that the articles of incorporation of the two corporations establish that the two entities are
engaged in the same kind of business, which is the manufacture and sale of yarns of various counts and kinds
and of other materials of kindred character or nature.
Contrary to petitioner's assertion, the public respondent through the Solicitor General argues that the Indophil
Acrylic Manufacturing Corporation is not an alter ego or an adjunct or business conduit of private respondent
because it has a separate legitimate business purpose. In addition, the Solicitor General alleges that the
primary purpose of private respondent is to engage in the business of manufacturing yarns of various counts
and kinds and textiles. On the other hand, the primary purpose of Indophil Acrylic is to manufacture, buy, sell
at wholesale basis, barter, import, export and otherwise deal in yarns of various counts and kinds. Hence,
unlike private respondent, Indophil Acrylic cannot manufacture textiles while private respondent cannot buy
or import yarns.
Furthermore, petitioner emphasizes that the two corporations have practically the same incorporators,
directors and officers. In fact, of the total stock subscription of Indophil Acrylic, P1,749,970.00 which
represents seventy percent (70%) of the total subscription of P2,500,000.00 was subscribed to by respondent
Company.
On this point, private respondent cited the case of Diatagon Labor Federation v. Ople, G.R. No. L-44493-94,
December 3, 1980, 10l SCRA 534, which ruled that two corporations cannot be treated as a single bargaining
unit even if their businesses are related. It submits that the fact that there are as many bargaining units as there
are companies in a conglomeration of companies is a positive proof that a corporation is endowed with a legal
personality distinctly its own, independent and separate from other corporations (see Rollo, pp. 160-161).
Petitioner notes that the foregoing evidence sufficiently establish that Acrylic is but an extension or expansion
of private respondent, to wit:
(a) the two corporations have their physical plants, offices and facilities situated in the same compound, at
Barrio Lambakin, Marilao, Bulacan;
(b) many of private respondent's own machineries, such as dyeing machines, reeling, boiler, Kamitsus among
others, were transferred to and are now installed and being used in the Acrylic plant;
(c) the services of a number of units, departments or sections of private respondent are provided to Acrylic; and
(d) the employees of private respondent are the same persons manning and servicing the units of Acrylic.
(see Rollo, pp. 12-13)
Private respondent insists that the existence of a bonafide business relationship between Acrylic and private
respondent is not a proof of being a single corporate entity because the services which are supposedly provided
by it to Acrylic are auxiliary services or activities which are not really essential in the actual production of
Acrylic. It also pointed out that the essential services are discharged exclusively by Acrylic personnel under the
control and supervision of Acrylic managers and supervisors.
In sum, petitioner insists that the public respondent committed grave abuse of discretion amounting to lack or
in excess of jurisdiction in erroneously interpreting the CBA provision and in failing to disregard the corporate
entity of Acrylic.
We find the petition devoid of merit.
Time and again, We stress that the decisions of voluntary arbitrators are to be given the highest respect and a
certain measure of finality, but this is not a hard and fast rule, it does not preclude judicial review thereof
where want of jurisdiction, grave abuse of discretion, violation of due process, denial of substantial justice, or
erroneous interpretation of the law were brought to our attention. (see Ocampo, et al. v. National Labor
Relations Commission, G.R. No. 81677, 25 July 1990, First Division Minute Resolution citing Oceanic Bic
Division (FFW) v. Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA 392)
It should be emphasized that in rendering the subject arbitral award, the voluntary arbitrator Teodorico Calica,
a professor of the U.P. Asian Labor Education Center, now the Institute for Industrial Relations, found that the
existing law and jurisprudence on the matter, supported the private respondent's contentions. Contrary to
petitioner's assertion, public respondent cited facts and the law upon which he based the award. Hence, public
respondent did not abuse his discretion.
Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction
that a corporation is an entity with a juridical personality separate and distinct from its members or
stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of
persons. The members or stockholders of the corporation will be considered as the corporation, that is liability
will attach directly to the officers and stockholders. 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. (Umali et al. v. Court of Appeals, G.R. No.
89561, September 13, 1990, 189 SCRA 529, 542)
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of
the corporation is a devise to evade the application of the CBA between petitioner Union and private
respondent Company. While we do not discount the possibility of the similarities of the businesses of private
respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the
relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the
employees of the private respondent are the same persons manning and providing for auxilliary services to the
units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our
considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
In the same case of Umali, et al. v. Court of Appeals (supra), We already emphasized that "the legal corporate
entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt
or obligation." In the instant case, petitioner does not seek to impose a claim against the members of the
Acrylic.
Furthermore, We already ruled in the case of Diatagon Labor Federation Local 110 of the ULGWP
v. Ople (supra) that it is grave abuse of discretion to treat two companies as a single bargaining unit when
these companies are indubitably distinct entities with separate juridical personalities.
Hence, the Acrylic not being an extension or expansion of private respondent, the rank-and-file employees
working at Acrylic should not be recognized as part of, and/or within the scope of the petitioner, as the
bargaining representative of private respondent.
All premises considered, the Court is convinced that the public respondent Voluntary Arbitrator did not
commit grave abuse of discretion in its interpretation of Section l(c), Article I of the CBA that the Acrylic is not
an extension or expansion of private respondent.
ACCORDINGLY, the petition is DENIED and the award of the respondent Voluntary Arbitrator are hereby
AFFIRMED.
SO ORDERE

G.R. No. L-41337 June 30, 1988

TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH XVIII of the
Court of First Instance of Manila, GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN
CAN DRUG COMPANY, respondents.
De Santos, Balgos & Perez Law Office for petitioner.
Araneta Mendoza & Papa Law Office for respondent Phil. American Drug Company.

PARAS, J.:
This is a petition for certiorari, with prayer for preliminary injunction, to annul and set aside the March 26,
1975 Order of the then Court of First Instance of Manila, Branch XXIII, setting aside the sale of "Heidelberg"
cylinder press executed by the sheriff in favor of the herein petitioner, as well as the levy on the said property,
and ordering the sheriff to return the said machinery to its owner, herein private respondent Philippine
American Drug Company.
Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein
private respondent Graphic Publishing, Inc. (GRAPHIC for short) paper products amounting to P55,214.73. On
December 20, 1972, GRAPHIC made partial payment by check to petitioner in the total amount of P24,848.74;
and on December 21, 1972, a promissory note was executed to cover the balance of P30,365.99. In the said
promissory note, it was stipulated that the amount will be paid on monthly installments and that failure to pay
any installment would make the amount immediately demandable with an interest of 12% per annum. On
September 6, 1973, for failure of GRAPHIC to pay any installment, petitioner filed with the then Court of First
Instance of Manila, Branch XXIII, presided over by herein respondent judge, Civil Case No. 91857 for a Sum of
Money (Rollo, pp. 36-38). Respondent judge declared GRAPHIC in default for failure to file its answer within
the reglementary period and plaintiff (petitioner herein) was allowed to present its evidence ex parte. In a
Decision dated January 18, 1974 (Ibid., pp. 39-40), the trial court ordered GRAPHIC to pay the petitioner the
sum of P30,365.99 with 12% interest from March 30, 1973 until fully paid, plus the costs of suit. On motion of
petitioner, a writ of execution was issued by respondent judge; but the aforestated writ having expired without
the sheriff finding any property of GRAPHIC, an alias writ of execution was issued on July 2, 1974.
Pursuant to the said issued alias writ of execution, the executing sheriff levied upon one (1) unit printing
machine Identified as "Original Heidelberg Cylinder Press" Type H 222, NR 78048, found in the premises of
GRAPHIC. In a Notice of Sale of Execution of Personal Property dated July 29, 1974, said printing machine was
scheduled for auction sale on July 26, 1974 at 10:00 o'clock at 14th St., Cor. Atlanta St., Port Area, Manila
(lbid., p. 45); but in a letter dated July 19, 1974, herein private respondent, Philippine American Drug Company
(PADCO for short) had informed the sheriff that the printing machine is its property and not that of GRAPHIC,
and accordingly, advised the sheriff to cease and desist from carrying out the scheduled auction sale on July 26,
1974. Notwithstanding the said letter, the sheriff proceeded with the scheduled auction sale, sold the property
to the petitioner, it being the highest bidder, and issued a Certificate of Sale in favor of petitioner (Rollo, p. 48).
More than five (5) hours after the auction sale and the issuance of the certificate of sale, PADCO filed an
"Affidavit of Third Party Claim" with the Office of the City Sheriff (Ibid., p. 47). Thereafter, on July 30,1974,
PADCO filed with the Court of First Instance of Manila, Branch XXIII, a Motion to Nullify Sale on Execution
(With Injunction) (Ibid., pp, 49-55), which was opposed by the petitioner (Ibid., pp. 5668). Respondent judge,
in an Order dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The decretal portion of the said
order, reads:
WHEREFORE, the sale of the 'Heidelberg cylinder press executed by the Sheriff in favor of the plaintiff as well
as the levy on the said property is hereby set aside and declared to be without any force and effect. The Sheriff
is ordered to return the said machinery to its owner, the Philippine American Drug Co.
Petitioner filed a Motion For Reconsideration (Ibid., pp. 7093) and an Addendum to Motion for
Reconsideration (Ibid., pp. 94-08), but in an Order dated August 13, 1975, the same was denied for lack of
merit (Ibid., p. 109). Hence, the instant petition.
In a Resolution dated September 12, 1975, the Second Division of this Court resolved to require the
respondents to comment, and to issue a temporary restraining order (Rollo, p. 111 ). After submission of the
parties' Memoranda, the case was submitted for decision in the Resolution of November 28, 1975 (Ibid., p.
275).
Petitioner, to support its stand, raised two (2) issues, to wit:
I
THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT ACTED WITHOUT JURISDICTION WHEN HE
ACTED UPON THE MOTION OF PADCO, NOT ONLY BECAUSE SECTION 17, RULE 39 OF THE RULES OF
COURT WAS NOT COMPLIED WITH, BUT ALSO BECAUSE THE CLAIMS OF PADCO WHICH WAS NOT A
PARTY TO THE CASE COULD NOT BE VENTILATED IN THE CASE BEFORE HIM BUT IN INDEPENDENT
PROCEEDING.
II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION WHEN HE REFUSED TO PIERCE THE
PADCO'S (IDENTITY) AND DESPITE THE ABUNDANCE OF EVIDENCE CLEARLY SHOWING THAT
PADCO WAS CONVENIENTLY SHIELDING UNDER THE THEORY OF CORPORATE PETITION.
Petitioner contends that respondent judge gravely exceeded, if not, acted without jurisdiction, in nullifying the
sheriffs sale not only because Section 17, Rule 39 of the Rules of Court was not complied with, but more
importantly because PADCO could not have litigated its claim in the same case, but in an independent civil
proceeding.
This contention is well-taken.
In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA 355, 366-367 [1975]), this Court categorically ruled
as follows:
In other words, constitution, Section 17 of Rule 39 of the Revised Rules of Court, the rights of third-party
claimants over certain properties levied upon by the sheriff to satisfy the judgment should not be decided inthe
action where the third-party claims have been presented, but in the separate action instituted by the claimants.
... Otherwise stated, the court issuing a writ of execution is supposed to enforce the authority only over
properties of the judgment debtor, and should a third party appeal- to claim the property levied upon by the
sheriff, the procedure laid down by the Rules is that such claim should be the subject of a separate and
independent action.
xxx xxx xxx
... This rule is dictated by reasons of convenience, as "intervention is more likely to inject confusion into the
issues between the parties in the case . . . with which the third-party claimant has nothing to do and thereby
retard instead of facilitate the prompt dispatch of the controversy which is the underlying objective of the rules
of pleading and practice." Besides, intervention may not be permitted after trial has been concluded and a final
judgment rendered in the case.
However, the fact that petitioner questioned the jurisdiction of the court during the initial hearing of the case
but nevertheless actively participated in the trial, bars it from questioning now the court's jurisdiction. A party
who voluntarily participated in the trial, like the herein petitioner, cannot later on raise the issue of the court's
lack of jurisdiction (Philippine National Bank vs. Intermediate Appellate Court, 143 SCRA [1986]).
As to the second issue (the non-piercing of PADCO's corporate Identity) the decision of respondent judge is as
follows:
The plaintiff, however, contends that the controlling stockholders of the Philippine American Drug Co. are also
the same controlling stockholders of the Graphic Publishing, Inc. and, therefore, the levy upon the said
machinery which was found in the premises occupied by the Graphic Publishing, Inc. should be upheld. This
contention cannot be sustained because the two corporations were duly incorporated under the Corporation
Law and each of them has a juridical personality distinct and separate from the other and the properties of one
cannot be levied upon to satisfy the obligation of the other. This legal preposition is elementary and
fundamental.
It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct
from that of the persons composing it as well as from any other legal entity to which it may be related (Yutivo &
Sons Hardware Company vs. Court of Tax Appeals, 1 SCRA 160 [1961]; and Emilio Cano Enterprises, Inc. vs.
CIR, 13 SCRA 290 [1965]). As a matter of fact, 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 (Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968]). However, this separate and
distinct personality is merely a fiction created by law for convenience and to promote justice (Laguna
Transportation Company vs. SSS, 107 Phil. 833 [1960]). Accordingly, this separate personality of the
corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or
cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for
the protection of creditors (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347 [1976]). Corporations are
composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the
commission of injustice and inequity (Chenplex Philippines, Inc., et al. vs. Hon. Pamatian et al., 57 SCRA 408
(19741). Likewise, this is true when the corporation is merely an adjunct, business conduit or alter ego of
another corporation. In such case, the fiction of separate and distinct corporation entities should be
disregarded (Commissioner of Internal Revenue vs. Norton & Harrison, 11 SCRA 714 [1964]).
In the instant case, petitioner's evidence established that PADCO was never engaged in the printing business;
that the board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO holds
50% share of stock of GRAPHIC. Petitioner likewise stressed that PADCO's own evidence shows that the
printing machine in question had been in the premises of GRAPHIC since May, 1965, long before PADCO even
acquired its alleged title on July 11, 1966 from Capitol Publishing. That the said machine was allegedly leased
by PADCO to GRAPHIC on January 24, 1966, even before PADCO purchased it from Capital Publishing on July
11, 1966, only serves to show that PADCO's claim of ownership over the printing machine is not only farce and
sham but also unbelievable.
Considering the aforestated principles and the circumstances established in this case, respondent judge should
have pierced PADCO's veil of corporate Identity.
Respondent PADCO argues that if respondent judge erred in not piercing the veil of its corporate fiction, the
error is merely an error of judgment and not an error of jurisdiction correctable by appeal and not by certiorari.
To this argument of respondent, suffice it to say that the same is a mere technicality. In the case of Rubio vs.
Mariano (52 SCRA 338, 343 [1973]), this Court ruled:
While We recognize the fact that these movants — the MBTC, the Phillips spouses, the Phillips corporation and
the Hacienda Benito, Inc.— did raise in their respective answers the issue as to the propriety of the instant
petition for certiorari on the ground that the remedy should have been appeal within the reglementary period,
We considered such issue as a mere technicality which would have accomplished nothing substantial except to
deny to the petitioner the right to litigate the matters he raised ...
Litigations should, as much as possible, be decided on their merits and not on technicality (De las Alas vs.
Court of Appeals, 83 SCRA 200, 216 [1978]). Every party-litigant must be afforded the amplest opportunity for
the proper and just determination of his cause, free from the unacceptable plea of technicalities (Heirs of
Ceferino Morales vs. Court of Appeals, 67 SCRA 304, 310 [1975]).
PREMISES CONSIDERED, the March 26,1975 Order of the then Court of First Instance of Manila, is
ANNULLED and SET ASIDE, and the Temporary Restraining Order issued is hereby made permanent.
SO ORDERED.
G.R. No. 85266               January 30, 1990
PHILIPPINE VETERANS INVESTMENT DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and VIOLETA MONTELIBANO BORRES, respondents.
The Government Corporate Counsel for petitioner.
Ricardo P.C. Castro, Jr. for private respondent.

CRUZ, J.:
The concept of piercing the veil of corporate fiction is a mystique to many people, especially the layman. But it
is not as esoteric as all that as this case will demonstrate.
This case arose when Violeta M. Borres, private respondent herein, was injured in an accident that was later
held by the trial and respondent courts to be due to the negligence of Phividec Railways, Inc. (PRI). 1 The
accident occurred on March 29, 1979. On May 25, 1979, petitioner Philippine Veterans Investment
Development Corporation (PHIVIDEC) sold all its rights and interests in the PRI to the Philippine Sugar
Commission (PHILSUCOM). Two days later, PHILSUCOM caused the creation of a wholly-owned subsidiary,
the Panay Railways, Inc., to operate the railway assets acquired from PHIVIDEC. On January 21, 1980, Borres
filed a complaint for damages against PRI and Panay Railways Inc. (Panay ), 2 whereupon the latter filed with
leave of court a third-party complaint against the herein petitioner. 3
It alleged that upon the sale to PHILSUCOM of PRI, the corporate name of PRI was changed to Panay
Railways, Inc. It disclaimed liability on the ground that in the Agreement concluded between PHIVIDEC and
PHILSUCOM, it was provided that:
D. With the exception of the Liabilities and Contracts specified in Annexes 4 and 5 of the preceding paragraph,
PHIVIDEC hereby holds PHILSUCOM harmless from and against any action, claim or liability that may arise
out of or result from acts or omissions, contracts or transactions prior to the turn-over.
After trial, Judge Ricardo M. Ilarde of the Regional Trial Court of Iloilo held Phividec Railways, Inc. negligent
and so liable to the plaintiff for damages. It also held that as PRI was a wholly-owned subsidiary of PHIVIDEC,
the latter should answer for PRI's liability. The decision was affirmed on appeal by the respondent
court, 4 which is now faulted for grave abuse of discretion in this petition.
The sole issue raised in this petition is the ruling of the Court of Appeals that:
Thus, the piercing of the veil of corporate fiction is called for in the case at bar. When PRI was sold by
PHIVIDEC to PHILSUCOM on May 25, 1979, the legal fiction of PRI as a separate corporate entity from
PHIVIDEC disappeared pursuant to and in view of the representations and warranties contained in the
agreement of sale between PHIVIDEC and PHILSUCOM, particularly the stipulation already quoted above, by
virtue of which PHIVIDEC held PHILSUCOM harmless from any claim or liability arising out of any act or
transaction "prior to the turn-over." By virtue of this provision, PHIVIDEC had expressly assumed liability for
any claim arising before the turn-over of PRI to PHILSUCOM. And since the accident in question took place
before said turn-over and since after said turn-over PRI ceased to exist (in the sense that its railways operations
were taken over by PHILSUCOM thru the Panay RW) the only logical conclusion is that PHIVIDEC should be
solely liable for the damages to the plaintiff in the case at bar. Indeed, applying the Koppel precedent just cited,
PHIVIDEC cannot hide behind the veil of corporate fiction in order to evade this liability, nor could the veil of
corporate fiction be made a shield to confuse claimants such as plaintiff-appellee.
It is the position of the petitioner that PHIVIDEC and PRI are entirely distinct and separate corporations
although the latter is its subsidiary. The transfer of the shares of stock of PRI to PHILSUCOM did not divest
PRI of its juridical personality or of its capacity to direct its own affairs and conduct its own business under the
control of its own board of directors. By the same token, it is answerable for its own obligations, which cannot
be passed on to the petitioner as its own liability. To support this stand, the petitioner invokes the case of E.J.
Nell v. Pacific Farms, 5 which, however, it has not accurately quoted.
We must sustain the respondents.
In Koppel v. Yatco, 6 the Court, citing Fletcher, declared that the veil of corporate fiction may be pierced when
it is used to defeat public convenience, justify wrong, protect fraud, or defend crime. 7 It added that when the
corporation is the mere alter ego or business conduit of a person it may be disregarded, "to prevent injustice, or
the distortion or hiding of the truth, or to let in a just defense."8
The rule is that:
Where it appears that two business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third persons, disregard the legal fiction that two
corporations are distinct entities, and treat them as identical. 9
In Yutivo Sons Hardware Co. v. Court of Tax Appeals, 10 this Court held:
It is an elementary and 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. However, "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 as an association of persons, or in the case of two corporations merge them into
one. ... Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it may
be disregarded."
In Commissioner of Internal Revenue v. Norton and Harrison Co., 11 this Court likewise ruled that where a
corporation is merely an adjunct, business conduit or alter ego of another corporation the fiction of separate
and distinct corporate entities should be disregarded.
In fact, contrary to the suggestion in the petition, what the Court said in the Nell Case was:
Generally where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is
not liable for the debts and liabilities of the transferor, except: (1) where the purchaser expressly or impliedly
agrees to assume such 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 entered into fraudulently in order to escape liability for such debts.
Moreover, as correctly pointed out by the respondent court:
Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that PHVIDEC had complete control of PRI's
business. This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v. Manila
Electric, 24 F 2nd 383) that if a parent- holding company (PHIVIDEC in the present case) assumes complete
control of the operations of its subsidiary's business, the separate corporate existence of the subsidiary must be
disregarded, such that the holding company will be responsible for the negligence of the employees of the
subsidiary as if it were the holding company's own employees.
It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and PHILSUCOM,
particularly the stipulation exempting the latter from any "claim or liability arising out of any act or
transaction" prior to the turn-over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since
the accident happened before that agreement and PRI ceased to exist after the turn-over, it should follow that
PHIVIDEC cannot evade its liability for the injuries sustained by the private respondent.
A contrary conclusion would leave the private respondent without any recourse for her legitimate
claim.1âwphi1 In the interest of justice and equity, and to prevent the veil of corporate fiction from denying her
the reparation to which she is entitled, that veil must be pierced and PHIVIDEC and PRI regarded as one and
the same entity.
WHEREFORE, the challenged decision is AFFIRMED and the petition is DENIED, with costs against the
petitioner. It is so ordered.
G.R. No. 80043             June 6, 1991
ROBERTO A. JACINTO, petitioner,
vs.
HONORABLE COURT OF APPEALS and METROPOLITAN BANK AND TRUST
COMPANY, respondents.
Romeo G. Carlos for petitioner.
Jorge, Perez & Associates for private respondents.

DAVIDE, JR., J.:
This is an appeal by certiorari to partially set aside the Decision of the Court of Appeals in C.A-G.R. CV No.
081531.promulgated on 19 August 1987, which affirmed in toto the decision of the Regional Trial Court of
Manila, Branch 11, in Civil Case No. 133164 entitled "Metropolitan Bank and Trust Co. vs. Inland Industries
Inc. and Roberto Jacinto," the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered ordering defendants to pay, jointly and severally, the plaintiff, the
principal obligation of P382,015.80 (Annex J-1 to J-3 of Stipulation), with interest/charges thereon at the rate
of 16 % per annum from January 1, 1979 up to the time the said amount is fully paid, plus the sum of
P20,000.00 as attorney's fees. Said defendants are further ordered to pay in solidum the costs of this suit.
SO ORDERED.2
Petitioner's co-defendant in the courts below, Inland Industries Inc., just as in the case of petitioner's motion to
reconsider the questioned decision,3 chose not to join him in this appeal.
In Our resolution of 28 August 1988 We required the respondent to comment on the petition. Respondent
Metropolitan Bank and Trust Co. filed its comment4 on 12 October 1988. We required the petitioner to file a
reply thereto,5 which he comment plied with on 20 December 1988.6
We gave due course to the petition on 8 May 19897 and required the parties to submit their respective
memoranda.
Private respondent filed its memorandum on 29 June 1989 8 while petitioner asked leave to adopt his petition
and reply as his memorandum,9 which We granted on 14 June 1989.10
Petitioner submits the following issues:
1. Whether or not the respondent Court of Appeals can validly pierce the fiction of corporate identity of the
defendant corporation Inland Industries, Inc. even if there is no allegation in the complaint regarding the
same, nor is there anything in the prayer demanding the piercing of the corporate veil of the corporation Inland
Industries, Inc.;
2. Whether or not the Court of Appeals can validly pierce the fiction of corporate identity of the defendant
Inland Industries, Inc. even if absolutely no proof was presented in court to serve as legal justification for the
same.
We find this petition to be bereft of merit. The issues are basically factual and a careful scrutiny of the decisions
of both courts below reveals that their findings and conclusions on the matter of piercing the veil of corporate
fiction and on the liability of herein petitioner are overwhelmingly supported by the evidence.
Insofar as material and relevant to the issues raised, the trial court found and held: 11
As to [the] liability of [the] defendant Roberto A. Jacinto, it would appear that he is in factetum (sic), or, in fact,
the corporation itself known as Inland Industries, Inc. Aside from the fact that he is admittedly the President
and General Manager of the corporation and a substantial stockholders (sic) thereof, it was defendant Roberto
A. Jacinto who dealt entirely with the plaintiff in those transactions. In the Trust Receipts that he signed
supposedly in behalf of Inland Industries, Inc., it is not even mentioned that he did so in this official capacity.
x x x           x x x          x x x
In this case, the Court is satisfied that Roberto A. Jacinto was practically the corporation itself, the Inland
industries, Inc.
In a detailed fashion, the respondent Court of Appeals brushed aside the posturing of petitioner as follows:
Defendant Roberto Jacinto, tried to escape liability and shift the entire blame under the trust receipts solely
and exclusively on defendant-appellant corporation. He asserted that he cannot be held solidarily liable with
the latter (defendant corporation) because he just signed said instruments in his official capacity as president
of Inland Industries, Inc. and the latter (defendant corporation) has a juridical personality distinct and
separate from its officers and stockholders. It is likewise asserted, citing an American case, that the principle of
piercing the fiction of corporate entity should be applied with great caution and not precipitately, because a
dual personality by a corporation and its stockholders would defeat the principal purpose for which a
corporation is formed. Upon the other hand, plaintiff-appellee reiterated its allegation in the complaint that
defendant corporation is just a mere alter ego of defendant Roberto Jacinto who is its President and General
Manager, while the wife of the latter owns a majority of its shares of stock.
Defendants-appellants' assertion is plainly without legal basis. This is shown by the undisputed fact that
Roberto Jacinto even admitted that he and his wife own 52% of the stocks of defendant corporation (TSN, April
22, 1985, p. 6). We cannot accept as true the assertion of defendant Jacinto that he only acted in his official
capacity as President and General Manager of Inland Industries, Inc. when he signed the aforesaid trust
receipts. To Our mind the same is just a clever ruse and a convenient ploy to thwart his personal liability
therefor by taking refuge under the protective mantle of the separate corporate personality of defendant
corporation.
As could be expected, Roberto Jacinto in his direct testimony presented a different corporate scenario
regarding Inland Industries, Inc. and vehemently declared that it is Bienvenida Catabas who is its President,
while Aurora Heresa is its Chairman of the Board. His assertion on this point, however, is not convincing in
view of his admission in the same breath, that his wife, Hedy U. Jacinto, own (sic) with him 52% of the shares
of stock of said corporation. Indeed, this circumstance –– even if standing alone –– cannot but engender in the
most unprejudiced mind doubt and misgiving why Catabas and Heresa would be defendant corporation's
President and Chairman of the Board, respectively. Pertinent portion of his testimony on this point is quoted
hereunder:
Atty. Carlos Do you know the defendant Inland Industries, Inc.?
A Yes, sir. Because I am the General Manager of this corporation.
Q Aside from being the General Manager of the defendant corporation are you in any other way connected with
the same?
A I am also a stockholder.
Q Does your corporation have a Board of Directors?
A Yes, sir.
Q By the way, who are the stockholders of this corporation?
A Bienvenida Catabas, Aurora Heresa, Paz Yulo, Hedy Y. Jacinto and myself.
Q Who is the President of the defendant corporation?
A Bienvenida Catabas.
Q Who is the Chairman of the Board?
A Aurora Heresa.
Q Do you have any relation with Hedy Y. Jacinto?
A She is my wife.
Q If you combine the stockholdings of your wife together with yours and percentage wise, how much is your
equity?
Atty. Dizon raised some objections. However, the Court allowed the same.
A About 52 % (Ibid., pp. 3-6)
Furthermore, a cursory perusal of the Stipulation of facts clearly shows that defendant Roberto Jacinto acted in
his capacity as President and General Manager of Inland Industries, Inc. when he signed said trust receipts.
Pertinent portion of his testimony are quoted below:
(d) All the goods covered by the three (3) Letters of Credit (Annexes "A", "B" & "C") and paid for under the Bills
of Exchange (Annexes "D", "E" & "F") were delivered to and received by defendant Inland Industries, Inc.
through its co-defendant Roberto A. Jacinto, its President and General Manager, who signed for and in behalf
of defendant Inland and agreed to the terms and conditions of three (3) separate trust receipts covering the
same and herein identified as follows: . . . (p. 3 of Stipulations of Facts and Formulation of Issues [p. 95,
Records]).
The conflicting statements by defendant Jacinto place in extreme doubt his credibility anent his alleged
participation in said transactions and We are thus persuaded to agree with the findings of the lower court that
the latter (Roberto Jacinto) was practically the corporation itself. Indeed, a painstaking examination of the
records show that there is no clear-cut delimitation between the personality of Roberto Jacinto as an individual
and the personality of Inland Industries, Inc. as a corporation.
The circumstances aforestated lead Us to conclude that the corporate veil that en-shrouds defendant Inland
Industries, Inc. could be validly pierced, and a host of cases decided by our High Court is supportive of this
view. Thus it held that "when the veil of corporate fiction is made as a shield to perpetuate fraud and/or
confuse legitimate issues, the same should be pierced." (Republic vs. Razon, 20 SCRA 234; A.D. Santos, Inc. vs.
Vasquez, 22 SCRA 1156; Emilio Cano Enterprises, Inc. vs. Court of Appeals, 13 SCRA 290). Almost in the same
vein is the dictum enunciated by the same court in the case of Commissioner of Internal Revenue vs. Norton &
Harrison Co., (11 SCRA 714), that "Where a corporation is merely an adjunct, business conduit or alter ego, the
fiction of separate and distinct corporate entity should be disregarded."
In its resolution of 29 September 1987, the respondent Court of Appeals, on the contention again of petitioner
that the finding that defendant corporation is his mere alter ego is not supported by the evidence and has no
legal justification, ruled that:
The contention . . . is nothing but an empty assertion. A cursory perusal of the decision would at once readily
show on pages 11-13 of the same that said factual findings of the court is well grounded as the same in fact even
include a portion of the very testimony of said defendant-appellant admitting that he and his wife own 52% of
the stocks of defendant corporation. The stipulation of facts also show (sic) that appellant Roberto Jacinto
acted in his capacity as President/General Manager of defendant corporation and that "all the goods covered by
the three (3) Letters of Credit (Annexes "A", "B" & "C") and paid for under the Bills of Exchange (Annexes "D",
"E" & "F") were delivered to and received by defendant Inland Industries, Inc. through its co-defendant
Roberto A. Jacinto, its President and General Manager, who signed for and in behalf of defendant Inland and
agreed to the terms and conditions of three (3) separate trust receipts covering the same.
Petitioner, however, faults the courts below for piercing the veil of corporate fiction despite the absence of any
allegation in the complaint questioning the separate identity and existence of Inland Industries, Inc. This is not
accurate.1âwphi1 While on the face of the complaint there is no specific allegation that the corporation is a
mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the presentation of
evidence and the examination of witnesses, unequivocally show that respondent Metropolitan Bank and Trust
Company sought to prove that petitioner and the corporation are one or that he is the corporation. No serious
objection was heard from petitioner. Section 5 of Rule 10 of the Rules of Court provides:
Sec. 5. Amendment to conform to or authorize presentation of evidence. –– When issues not raised by the
pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they
had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to
conform to the evidence and to raise these issues may be made upon motion of any party at any time, even after
judgment; but failure so to amend does not affect the trial of these issues. If the evidence is objected to at the
time of trial on the ground that it is not within the issues made by the pleadings, the court may allow the
pleadings to be amended and shall do so freely when the presentation of the merits of the action will be
subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would
prejudice him in maintaining his action or defense upon the merits. The court may grant continuance to enable
the objecting party to meet such evidence.
Pursuant thereto, "when evidence is presented by one party, with the express or implied consent of the adverse
party, as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues,
which shall be considered as if they have been raised in the pleadings. There is implied consent to the evidence
thus presented when the adverse party fails to object thereto. 12
WHEREFORE, for lack of merit, the Petition is DISMISSED with costs against petitioner.
SO ORDERED.
Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.