You are on page 1of 65

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 118692

July 28, 2006

COASTAL PACIFIC TRADING, INC., petitioner,


vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated Steel
Corporation), FAR EAST BANK & TRUST COMPANY, PHILIPPINE
COMMERCIAL INDUSTRIAL1 BANK, EQUITABLE BANKING CORPORATION,
PRUDENTIAL BANK, BOARD OF TRUSTEES-CONSORTIUM OF BANKS-VISCO,
UNITED COCONUT PLANTERS BANK, CITYTRUST BANKING CORPORATION,
ASSOCIATED BANK, INSULAR BANK OF ASIA AND AMERICA,
INTERNATIONAL CORPORATE BANK, COMMER-CIAL BANK OF MANILA,
BANK OF THE PHILIPPINE ISLANDS, NATIONAL STEEL CORPORA-TION, THE
PROVINCIAL SHERIFF OF BOHOL, and DEPUTY SHERIFF JOVITO
DIGAL,2 respondents.
DECISION
PANGANIBAN, C.J.:
Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When
these directors sit on the board as representatives of shareholders who are also major creditors,
they cannot be allowed to use their offices to secure undue advantage for those shareholders,
in fraud of other creditors who do not have a similar representation in the board of directors.
The Case
Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing the
September 27, 1994 Decision4 and the January 5, 1995 Resolution5 of the Court of Appeals
(CA) in CA-GR CV No. 39385. The challenged Decision disposed as follows:
"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in toto."6
The challenged Resolution denied reconsideration.
The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of
engaging in a steel processing business. It was later renamed Visayan Integrated Steel
Corporation (VISCO).7
On December 11, 1961, VISCO obtained a loan from the Development Bank of the
Philippines (DBP) in the amount of P836,000. This loan was secured by a duly recorded Real

Estate Mortgage over VISCO's three (3) parcels of land, including all the machineries and
equipment found there.8
On August 15, 1963, VISCO entered into a Loan Agreement9 with respondent banks (later
referred to as "Consortium"10) for the amount of US$5,776,186.71 or P21,745,707.36 (at the
then prevailing exchange rate) to finance its importation of various raw materials. To secure
the full and faithful performance of its obligation, VISCO executed on August 3, 1965, a
second mortgage11 over the same land, machineries and equipment in favor of respondent
banks. This second mortgage remained unrecorded.12
VISCO eventually defaulted in the performance of its obligation to respondent banks. This
prompted the Consortium to file on January 26, 1966, Civil Case No. 1841, which was a
Petition for Foreclosure of Mortgage with Petition for Receivership. 13 This case was
eventually dismissed for failure to prosecute.14
Afterwards, negotiations were conducted between VISCO and respondent banks for the
conversion of the unpaid loan into equity in the corporation. 15 Vicente Garcia, vice-president
of VISCO and of Far East Bank and Trust Company (FEBTC), 16 testified that sometime in
1966, the creditor banks were given management of and control over VISCO. 17 In time,18 in
order to reorganize it, its principal creditors agreed to group themselves into a creditors'
consortium.19 As a result of the reorganized corporate structure of VISCO, respondent banks
acquired more than 90 percent of its equity. Notwithstanding this conversion, it remained
indebted to the Consortium in the amount of P16,123,918.02.20
Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement with
Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to that agreement, petitioner
delivered 3,000 metric tons of hot rolled steel coils to VISCO for processing into block iron
sheets. Contrary to their agreement, the latter was able to process and deliver to petitioner only
1,600 metric tons of those sheets. Hence, a total of 1,400 metric tons of hot rolled steel coils
remained unaccounted for.21 The fact that petitioner was among the major creditors of VISCO
was recognized by the latter's vice-president, Vicente Garcia.22 Indeed, on October 9, 1970, it
forwarded to petitioner a proposal for a Compromise Agreement. 23 Subsequent developments
indicate, however, that the parties did not arrive at a compromise.
Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, representative of
FEBTC24 and director of VISCO,25 a letter that reads as follows:
"In the light of recent development on IISMI and Elirol which were taken over by the
government, I suggest that we take certain precautionary measures to protect the interests of
the Consortium of Banks. One such step may be to insure the safety of the unexpended funds
of VISCO from any contingencies in the future. As of now VISCO's account with the Far East
Bank is in the name of BOARD OF TRUSTEES VISCO CONSORTIUM OF BANKS. It may
be better to eliminate the term VISCO and just call the account BOARD OF TRUSTEES
CONSORTIUM OF BANKS."26
According to a notation on this letter, an FEBTC assistant cashier named Silverio duly
complied with the above request.27 Indeed, events would later reveal that the bank held a
deposit account in the name of the "Board of Trustees-Consortium of Banks."28

On September 20, 1974, respondent banks held a luncheon meeting 29 in the FEBTC
Boardroom to discuss how they would address the insistent demands of the DBP for VISCO to
settle its obligations. Jose B. Fernandez, Jr., VISCO's then chairman and concurrent FEBTC
President,30 expressed his apprehension that either the DBP or the government would soon
pursue extra-judicial foreclosure against VISCO.
In this regard, Fernandez informed the members of the Consortium that he had received letteroffers from two corporations that were interested in purchasing VISCO's generator
sets.31 After deliberating on the matter, the members decided to approve the sale of these two
generator sets to Filmag (Phil.), Inc. It was also agreed that the proceeds of the sale would be
used to pay VISCO's indebtedness to DBP and to secure the release of the first
mortgage.32 The Consortium agreed with Filmag on the following payment procedure:
"The payment procedure will be as follows: Filmag pays to VISCO; VISCO pays the
Consortium; and then the Consortium pays the DBP with the arrangement that the Consortium
subrogates to the rights of the DBP as first mortgagee to the VISCO plant. The Consortium
further agreed to call a meeting of the VISCO board of directors for the purpose of considering
and formally approving the proposed sale of the 2 generators to Filmag."33
Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the FEBTC
Boardroom.34 The board was asked to decide how VISCO would settle its debt to DBP:
whether by asking the Consortium to put up the necessary amount or by accepting Filmag's
offer to purchase VISCO's generator sets.35 The latter option was unanimously chosen36 in a
Resolution worded as follows:
"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of December 14, 1973
and March 19, 1974 to purchase two (2) units of generator sets, including standard
accessories, of VISCO is hereby accepted under the following terms and conditions:
xxx

xxx

xxx

"2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE HUNDRED
FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY (P1,550,572) x x x and
shall be payable upon signing of a letter-agreement and which shall be later formalized into a
Deed of Sale. The amount, however, shall be held by the depositary bank of VISCO, Far East
Bank and Trust Company, in escrow and shall be at VISCO's disposal upon the signing of
Filmag of the receipt/s of delivery of the said two (2) generator sets.
xxx

xxx

xxx

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION FIVE
HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY (P1,550,572)
shall be utilized to pay the liability of VISCO with the Development Bank of the
Philippines."37
The sale of the generator sets to Filmag took place and, according to the testimony of Garcia,
the proceeds were deposited with FEBTC in a special account held in trust for the
Consortium.38

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court (RTC) a
Complaint39 for Recovery of Property and Damages with Preliminary Injunction and
Attachment.40 Petitioner's allegation was that VISCO had fraudulently misapplied or
converted the finished steel sheets entrusted to it.41 On June 3, 1975, Judge Pedro A. Revilla
issued a Writ of Preliminary Attachment over its properties that were not exempt from
execution.42
In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the account of
VISCO in FEBTC,43which denied holding that account. Instead, the bank admitted that what it
had was a deposit account in the name of the Board of Trustees-Consortium of Banks,
particularly Account No. 2479-1.44 FEBTC reported to Sheriff Bonifacio that it had instructed
its accounting department to hold the account, "subject to the prior liens or rights in favor of
[FEBTC] and other entities."45
While petitioner's case was pending, VISCO's vice-president (Garcia) and director (Arturo
Samonte) requested from FEBTC a cash advance of P1,342,656.88 for the full settlement of
VISCO's account with DBP.46 On June 29, 1976, FEBTC complied by issuing Check No.
FE239249 for P1,342,656.88, payable to "[DBP] for [the] account of VISCO."47 On even date,
DBP executed a Deed of Assignment of Mortgage Rights Interest and Participation 48 in favor
of Respondent Consortium of Banks. The deed stated that, in consideration of the payment
made, all of DBP's rights under the mortgage agreement with VISCO were being transferred
and conveyed to the Consortium.49 Thus did the latter obtain DBP's recorded primary lien over
the real and chattel properties of VISCO.
On September 23, 1980, the Consortium filed a Petition for Extra-Judicial Foreclosure with
the Office of the Provincial Sheriff of Bohol.50 The Notice of Extrajudicial Foreclosure of
Mortgage, published in the Bohol Newsweek on October 10, 1980, announced that the auction
sale was scheduled for November 11, 1980.51
On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment
creditor52 of VISCO, filed Civil Case No. 3383. It was a Complaint53 for Declaration of
Nullity of the Mortgage and Injunction to Restrain the Consortium from Proceeding with the
Auction Sale. SIP argued that DBP had actually been paid by VISCO with the proceeds from
the sale of the generator sets. Hence, the mortgage in favor of that bank had been extinguished
by the payment and could not have been assigned to the Consortium.54 A temporary
restraining order against the latter was thus successfully obtained; the provincial sheriff could
not proceed with the auction sale of the mortgaged assets.55 But SIP's victory was short-lived.
On March 2, 1984, Civil Case No. 3383 was decided in favor of the Consortium. 56 Judge
Andrew S. Namocatcat ruled thus:
"The evidence of the plaintiff is only anchored on the fact that the deed of assignment
executed by the DBP in favor of the defendant banks is an act which would defraud creditors.
It is the thinking of the court that the payment of defendant banks to DBP of VISCO's loan
and the execution of the DBP of the deed of assignment of credit and rights to the defendant
banks is in accordance with Article 1302 and 1303 of the New Civil Code, and said
transaction is not to defraud creditors because the defendant banks are also creditors of
VISCO."57

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in CA-GR
No. 03719. 58
The auction sale of VISCO's mortgaged properties took place on March 19, 1985 and the
Consortium emerged as the highest bidder.59 The Certificate of Sale60 in its favor was
registered on May 22, 1985.61
On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of Right
of Redemption62 in favor of the National Steel Corporation (NSC), in consideration
of P100,000. 63 On the same day, the Consortium sold the foreclosed real and personal
properties of VISCO to the NSC.64
On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which was a
Complaint for Annulment or Rescission of Sale, Damages with Preliminary
Injunction.65 Coastal alleged that, despite the Writ of Attachment issued in its favor in the still
pending Civil Case No. 21272, the Consortium had sold the properties to NSC. Further,
despite the attachment of the properties, the Consortium was allegedly able to sell and place
them beyond the reach of VISCO's other creditors.66 Thus imputing bad faith to respondent
banks' actions, petitioner said that the sale was intended to defraud VISCO's other creditors.

"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff and the corresponding
certificate of sale executed by the defendant sheriffs on March 15, 1985 relative to the real
properties of the defendant SRM/VISCO of Cortes, Bohol, Philippines, which were registered
in the Register of Deeds of Bohol, on May 22, 1985 and the Transfer of Assignment to the
defendant National Steel Corporation of any or part of the foreclosed properties arising from
the extrajudicial foreclosure sale as valid and legal;
"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant Consortium of
Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank & Trust Company, Philippine
Commercial Industrial Bank, Equitable Banking Corporation, Prudential Bank, Board of
Trustees-Consortium of Banks- [VISCO], United Coconut Planters Bank, City Trust Banking
Corporation, Associated Bank, Insular Bank of Asia and America, International Corporate
Bank, Commercial Bank of Manila, Bank of the Philippine Islands and the National Steel
Corporation in the instant case the amount of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing damages;
"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the defendants the
amount of FIFTEEN THOUSAND PESOS (P15,000.00) representing attorney's fees;
"4. Dismissing the Amended Complaint of the plaintiff;

Petitioner further contended that the assignment in favor of the Consortium was fraudulent,
because DBP had been paid with the proceeds from the sale of the generator sets owned by
VISCO, and not with the Consortium's own funds.67 Petitioner offered as proof the minutes of
the meeting68 in which the transaction was decided. Respondent Consortium countered that the
minutes would in fact readily disclose that the intention of its members was to apply the
proceeds to a partial payment to DBP.69 Respondent insisted that it used its own funds to pay
the bank.70
On August 20, 1985, a temporary restraining order (TRO)71 was issued by Judge Mercedes
Gozo-Dadole against VISCO, enjoining it from proceeding with the removal or disposal of its
properties; the execution and/or consummation of the foreclosure sale; and the sale of the
foreclosed properties to NSC. On September 6, 1985, the trial court issued an Order requiring
the Consortium to post a bond of P25 million in favor of Coastal for damages that petitioner
may suffer from the lifting of the TRO. The bond filed was then approved by the RTC in its
Order of September 13, 1985.72
On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas P.
Lapena, Jr., in favor of Coastal.73 VISCO was ordered to pay petitioner the sum
of P851,316.19 with interest at the legal rate, plus attorney's fees of P50,000.00 and
costs.74 Coastal filed a Motion for Execution,75 but the judgment has remained unsatisfied to
date.
On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered as follows:
"WHEREFORE, this Court hereby renders judgment in favor of the defendants and against the
plaintiff Coastal Pacific Trading, Inc. BY WAY OF THE MAIN COMPLAINT, to wit:

"5. Ordering the plaintiff to pay the cost; AND


"BY WAY OF CROSS CLAIM INTERPOSED
"BY THE DEFENDANT National Steel Corporation against the Consortium of Banks and
SRM/VISCO, the same is dismissed for lack of merit, without pronouncement as to cost."77
Insisting that the trial court erred in holding that it had failed to prove its case by
preponderance of evidence, Coastal filed an appeal with the CA. Allegedly, the purported
insufficiency of proof was based on the sole ground that petitioner did not file an objection
when the properties were sold on execution. It contended that the court a quo had arrived at
this erroneous conclusion by relying on inapplicable jurisprudence. 78
Additionally, Coastal argued that the trial court had erred in not annulling the foreclosure
proceedings and sale for being fictitious and done to defraud petitioner as VISCO's creditor.
Supposedly, the DBP mortgage had already been extinguished by payment; thus, the bank
could not have assigned the contract to the Consortium.79
Petitioner also prayed for the annulment of the sale in favor of NSC on the ground that the
latter was a party to the fraudulent foreclosure and, hence, not a buyer in good faith.80
Ruling of the Court of Appeals
At the outset, the CA stressed that the validity of the Consortium's mortgage, foreclosure, and
assignments had already been upheld in CA-GR CV No. 03719, entitled Southern Industrial
Projects v. United Coconut Planters Bank81 Citing Valencia v. RTC of Quezon City, Br.
9082 and Vda. de Cruzo v. Carriaga,83 the CA explained that the absolute identity of parties
was not necessary for the application of res judicata. All that was required was a shared

identity of interests, as shown by the identity of reliefs sought by one person in a prior case
and by another in a subsequent case.
While Coastal was not a party to Southern Industrial Projects, it should nevertheless be bound
by that Decision, because it had raised substantially the same claim and cause of action as SIP,
according to the appellate court. The CA held that the basic reliefs sought by Coastal and SIP
were substantially the same: the nullification of the Deed of Assignment in favor of the
Consortium, the foreclosure sale, and the subsequent sale to NSC. Because this identity of
reliefs sought showed an identity of interests, the CA concluded that it need not rule on those
issues.84

Petitioner raises the following issues for our consideration:


"I
"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of fraud and
collusion practised by [respondents] against [Petitioner] Coastal, erroneously sustained the
trial court's holding that the present case is barred by res judicata because of the previous
decision in the case of Southern Industrial Projects, Inc., vs. United Coconut Planters Bank,
CA-G.R. No. 03719, considering that the elements that call for the application of this rule are
not present in the case at bar, and the exceptions allowed by this Honorable Supreme Court are
not applicable here for variance or distinction in facts and issues, x x x:"91

As to the issue that the DBP mortgage had been extinguished by payment, the CA quoted its
earlier Decision inSouthern Industrial Projects:

"II

"The evidence shows that the proceeds of the sale of the two generating sets were applied by
defendants-appellees in the payment of the outstanding obligation of VISCO. It appears that
said proceeds were deposited in the bank account of the consortium of creditors to avoid it
being garnished by the creditors notwithstanding the set-off, VISCO was still indebted to the
defendants-appellees.

"Respondent Court of Appeals further erred in not annulling the Deed of Assignment of the
DBP mortgage x x x, the extrajudicial foreclosure proceedings of the two mortgages x x x, and
the separate sale of the land and machineries as real and personal properties by the foreclosing
banks to NSC, as well as the assignment or waiver of SRM/Visco's legal right of redemption
over the foreclosed properties, for being fraudulently executed through collusion among the
[respondents] and in fraud of SRM/Visco's creditor, [Petitioner] Coastal, x x x;" 92

"The evidence x x x shows that upon VISCO's request for [cash] advance, the Far East Banks
(sic) and Trust Co., the manager of the consortium of creditors, issued FEBTC check No.
239249 on June 29, 1976 in the amount of P1,342,656.68 payable to the DBP to pay off its
loan to the latter.
xxx

xxx

xxx

"x x x. A public document celebrated with all the legal formalities under the safeguard of
notarial certificate is evidence against a party, and a high degree [of] proof is necessary to
overcome the legal presumption that the recital is true. The biased and interested testimony of
one of the parties to such instrument who attempts to vary or repudiate what it purports to be,
cannot overcome the evidentiary force of what is recited in the document."85
The appellate court also rejected petitioner's contention that the Consortium's Petition for
Extrajudicial Foreclosure was already barred by the earlier resort to a judicial foreclosure. The
CA clarified that in filing a Petition for Judicial Foreclosure, the Consortium had pursued its
right as junior encumbrancer. On the other hand, the Consortium filed a Petition for
Extrajudicial Foreclosure as a first encumbrancer by virtue of DBP's assignment in its favor. 86
The CA also rejected petitioner's theory of extinguishment of obligation by merger. It
observed that the merger could not have possibly taken place, because respondent banks and
VISCO were not creditors and debtors in their own right.87
Petitioner's Motion for Reconsideration,88 which was received by the CA on November 15,
1994,89 was denied for lack of merit.
Hence, this Petition.90

Stripped of nonessentials, the two issues may be restated as follows:


1. Whether the present action is barred by res judicata
2. Whether respondents disposed of VISCO's assets in fraud of the creditors
The Court's Ruling
The Petition is meritorious.
First Issue:
Res judicata
The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP and Coastal
were substantially the same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cario, claimed Lot 4 based on an alleged
purchase of Valencia's "squatter's rights" over the property. The trial court dismissed the claim
and held that no such purchase ever took place.94 It also held that, on the assumption that a
sale had taken place, the sale was null and void for being contrary to the pertinent housing
law. It also found that all current occupants of Lot 4 were illegal squatters; thus, it ordered
their ejectment.
When this first case attained finality, Carino's daughter, Catbagan, filed another suit against
Valencia. Catbagan challenged the applicability of the ejectment Order issued to her; as an
occupant of the lot, she was allegedly not a party to the first case. Her Petition was denied for
lack of merit.95

Issues

The execution of the Decision in the first case was again forestalled when Llanes, Cario's
sister-in-law who was another occupant of Lot 4, filed another suit against the same
respondent. Like Cario, Llanes insisted on having purchased the subject lot from
Valencia.96 This Court ruled that the suit was barred by res judicata. There was a substantial
identity of parties, because the right claimed by both Cario and Llanes were based on each
one's alleged purchase of Valencia's "squatter's rights."97

VISCO; on the other hand, the latter was sued by SIP, based on an alleged breach of their
management contract. Very clearly, their rights were entirely distinct and separate from each
other. In no manner were these two creditors privies of each other.

In the first case, sales of "squatter's rights" were already categorically declared null and void
for being contrary to law. Thus, Llanes' admission that she had purchased Valencia's
"squatter's rights" placed her in the same category as Cario. The purchase could not be
treated differently, because the final and executory Decision held that all purchases of
"squatter's rights" (regardless of who the purchasers were) were null and void.98

The causes of action in the two Complaints were also different. Causes of action arise from
violations of rights. A single right may be violated by several acts or omissions, in which case
the plaintiff has only one cause of action. Likewise, a single act or omission may violate
several rights at the same time, as when the act constitutes a violation of separate and distinct
legal obligations.103 The violation of each of these separate rights is a separate cause of action
in itself.104 Hence, although these causes of action arise from the same state of facts, they are
distinct and independent and may be litigated separately; recovery on one is not a bar to
subsequent actions on the others.105

Further, the earlier ruling held that "the present occupants are illegal squatters." That ruling
included Llanes, who was admittedly one of the occupants.99 Simply put, she and Valencia
were considered identical parties for purposes of res judicata, because they were obviously
litigating under the same void title and capacity as vendees of "squatter's rights" and as
occupants of Lot 4.

In the present case, the right of SIP (arising from its management contract with VISCO) is
totally distinct and separate from the right of Coastal (arising from its processing contract with
VISCO). SIP and Coastal are asserting distinct rights arising from different legal obligations
of the debtor corporation. Thus, VISCO's violation of those separate rights has given rise to
separate causes of action.

Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to prevent or delay
the execution of the judgment in the first case, which had become final by reason of the three
affirmances by this Court. The pattern to obstruct the execution of the first judgment was
obvious: after Cario lost the first case, her daughter filed a second one. When the daughter
lost the second, the daughter-in-law filed a third case. It may be observed that the three
successive plaintiffs were all occupants of the same property and belonged to the same family;
this fact was also indicative of their privity.

The confusion in the resolution of the issue of identity of parties occurred, because the two
creditors were assailing the same transactions of VISCO on the same grounds. Since the two
cases they filed presented similar legal issues, the appellate court held that its ruling in AC-GR
CV No. 03719 was also applicable to the instant case.

Given this background, it becomes clear that the finding of a substantial identity of parties
in Valencia was based on its peculiar factual circumstances, which are different from those in
the present case.
Unlike Llanes, Coastal is not asserting a right that has been categorically declared null and
void in a prior case. In fact, its right based on the processing agreement was upheld in Civil
Case No. 21272. Clearly, Coastal cannot be treated in the same manner as Llanes.
The CA erred in applying Southern Industrial Projects v. United Coconut Planters Bank100 as
a bar by res judicatawith respect to the present case. For this principle to apply, the following
elements must concur: a) the former judgment was final; b) the court that rendered it had
jurisdiction over the subject matter and the parties; c) the judgment was based on the merits;
and, d) between the first and the second actions, there is an identity of parties, subject matters,
and causes of action.101
It is axiomatic that res judicata does not require an absolute, but only a substantial, identity of
parties. There is a substantial identity when there is privity between the two parties or they are
successors-in-interest by title subsequent to the commencement of the action, litigating for the
same thing, under the same title, and in the same capacity. 102 Petitioner was not acting in the
same capacity as SIP when it filed Civil Case No. 3383, which eventually became AC-GR CV
No. 03719. It brought this latter action as a creditor under a processing agreement with

Common but palpable is this misconception of the doctrine of res judicata. Persons do not
become privies by the mere fact that they are interested in the same question or in proving the
same set of facts, or that one person is interested in the result of a litigation involving the
other. Hence, several creditors of one debtor cannot be considered as identical parties for the
purpose of assailing the acts of the debtor. They have distinct credits, rights, and interests,
such that the failure of one to recover should not preclude the other creditors from also
pursuing their legal remedies.
Further, petitioner, which was not a party to Southern Industrial Projects (their causes of
action being separate and distinct), did not have the opportunity to be heard in that case, much
less to present its own evidence. Thus, to bind petitioner to the Decision in that case would
clearly violate its rights to due process. As a separate party, it has the right to have its
arguments and evidence evaluated on their own merits.
Second Issue:
Fraud of Creditors
We now come to the heart of the Petition. Coastal alleges that the assignment of mortgage, the
extrajudicial foreclosure proceedings, and the sale of the properties of VISCO should all be
rescinded on the ground that they were done to defraud the latter's creditors.
The CA found no merit in petitioner's arguments. It ruled that the assignment conformed to the
requirements of law; that the consideration for the assignment had allegedly been given by
FEBTC; and that, hence, the Consortium had a right to foreclose on the mortgaged properties.

By focusing on the innate validity of these Contracts, the CA totally overlooked the issue of
fraud as a ground for rescission. Elementary is the principle that the validity of a contract
does not preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code, contracts
that are otherwise valid between the contracting parties may nonetheless be subsequently
rescinded by reason of injury to third persons, like creditors. 106 In fact, rescission implies that
there is a contract that, while initially valid, produces a lesion or pecuniary damage to
someone.107Thus, when the CA confined itself to the issue of the validity of these contracts, it
did not at all address the heart of petitioner's cause of action: whether these transactions had
been undertaken by the Consortium to defraud VISCO's other creditors.
There is more than a preponderance of evidence showing the Consortium's deliberate plan to
defraud VISCO's other creditors.
Consortium Banks as Directors
It will be recalled that Respondent Consortium took over management and control of VISCO
by acquiring 90 percent of the latter's equity. Thus, 9 out of the 10 directors of the corporation
were all officials of the Consortium,108 which may thus be said to have effectively occupied
and/or controlled the board. Significantly, nowhere in the records can we find any denial by
respondent of this allegation by petitioner.109
As directors of VISCO, the officials of the Consortium were in a position of trust; thus, they
owed it a duty of loyalty. This trust relationship sprang from the fact that they had control and
guidance over its corporate affairs and property.110 Their duty was more stringent when it
became insolvent or without sufficient assets to meet its outstanding obligations that arose.
Because they were deemed trustees of the creditors in those instances, they should have
managed the corporation's assets with strict regard for the creditors' interests. When these
directors became corporate creditors in their own right, they should not have permitted
themselves to secure any undue advantage over other creditors.111 In the instant case, the
Consortium miserably failed to observe its duty of fidelity towards VISCO and its creditors.
Duty of the Consortium Banks
to VISCO's Creditors
Recall that as early as 1966, the Consortium, through its directors on the board of VISCO, had
already assumed management and control over the latter. Hence, when VISCO recognized its
outstanding liability to petitioner in 1970 and offered a Compromise Agreement, 112 respondent
banks were already at the helm of the debtor corporation. The members of the Consortium,
therefore, cannot deny that they were aware of those claims against the corporation.
Nonetheless, they did not adopt any measure to protect petitioner's credit.
Quite the opposite, they even took steps to hide VISCO's unexpended funds. Garcia's 1972
letter to Samonte unmistakably reveals that they kept those funds in an account named "Board
of Trustees VISCO Consortium of Banks." This fact alone shows an effort to hide, with the
evident intent to keep, those funds for themselves. The letter even says that, for the protection
of the Consortium, the name "VISCO" should be eliminated entirely, so that the account name
would read "Board of Trustees Consortium of Banks." Clearly, this particular move was found
to be necessary to avoid a takeover by the government, which was also a creditor of

VISCO.113 This express intent of the latter, under the direction and for the benefit of the
Consortium, corroborated petitioner's contention that respondent banks had defrauded
VISCO's creditors.
Assignment of Mortgage
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks of fraud.
Initially, respondent banks had agreed that VISCO should sell two of its generator sets, so that
the proceeds could be utilized to pay DBP. This plan was direct, simple, and would extinguish
the encumbrance in favor of the bank.
Then, quite surprisingly, the Consortium set down the following payment procedure: Filmag
would pay VISCO; the latter would pay the Consortium, which would pay DBP; and the
Consortium would then subrogate DBP to the latter's rights as first mortgagee. One is then led
to ask: if the intention was to pay DBP; from the sales proceeds of the generator sets, why did
the money have to pass through the Consortium?
The answer lies in the nature of respondent's mortgage. It will be recalled that this mortgage
remained unrecorded and not legally binding on the other creditors.114 Thus, if DBP had been
directly paid by VISCO, the latter could have freed up its properties to the satisfaction
of all its other creditors. This procedure would have been fair to all, but it was not followed by
the Consortium.
Instead, the proceeds from the sale of the generator sets were first paid to respondent banks,
which used the money to pay DBP. The last step in the payment procedure explains the reason
for this preferred though roundabout manner of payment. This final step entitled the
Consortium to obtain DBP's primary lien through an assignment by allowing it to pay
VISCO's loan to the bank, without incurring additional expenses.
In the end, by collecting the money from VISCO, respondent banks recovered what they had
ostensibly remitted to DBP. Moreover, the primary lien that respondent banks acquired
allowed them, as unsecured creditors of VISCO, to foreclose on the assets of the corporation
without regard to its inferior claims. It was a clever ruse that would have worked, were it not
done by creditors who were duty-bound, as directors, not to take clever advantage of other
creditors.
To be sure, there was undue advantage. The payment scheme devised by the Consortium
continued the efficacy of the primary lien, this time in its favor, to the detriment of the other
creditors. When one considers its knowledge that VISCO's assets might not be enough to meet
its obligations to several creditors,115 the intention to defraud the other creditors is even more
striking. Fraud is present when the debtor knows that its actions would cause injury.116
The assignment in favor of the Consortium was a rescissible contract for having been
undertaken in fraud of creditors.117 Article 1385 of the Civil Code provides for the effect of
rescission, as follows:

"Rescission creates the obligation to return the things which were the object of the contract,
together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the contract are
legally in the possession of third persons who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the person causing the loss."
Indeed, mutual restitution is required in all cases involving rescission. But when it is no longer
possible to return the object of the contract, an indemnity for damages operates as restitution.
The important consideration is that the indemnity for damages should restore to the injured
party what was lost.
In the case at bar, it is no longer possible to order the return of VISCO's properties. They have
already been sold to the NSC, which has not been shown to have acted in bad faith. The party
alleging bad faith must establish it by competent proof. Sans that proof, purchasers are deemed
to be in good faith, and their interest in the subject property must not be disturbed. Purchasers
in good faith are those who buy the property of another without notice that some other person
has a right to or interest in the property; and who pay the full and fair price for it at the time of
the purchase, or before they get notice of some other persons' claim of interest in the
property.118
In the present case, petitioner failed to discharge its burden of proving bad faith on the part of
NSC. There is insufficient evidence on record that the latter participated in the design to
defraud VISCO's creditors. To NSC, petitioner imputes fraud from the sole fact that the
former was allegedly aware that its vendor, the Consortium, had taken control over VISCO
including the corporation's assets.119 We cannot appreciate how knowledge of the takeover
would necessarily implicate anyone in the Consortium's fraudulent designs. Besides, NSC was
not shown to be privy to the information that VISCO had no other assets to satisfy other
creditors' respective claims.
The right of an innocent purchaser for value must be respected and protected, even if its
vendors obtained their title through fraud.120 Pursuant to this principle, the remedy of the
defrauded creditor is to sue for damages against those who caused or employed the fraud.
Hence, petitioner is entitled to damages from the Consortium.
Award of Damages
It is essential that for damages to be awarded, a claimant must satisfactorily prove during the
trial that they have a factual basis, and that the defendant's acts have a causal connection to
them.121 Thus, the question of damages should normally call for a remand of the case to the
lower court for further proceedings. Considering, however, the length of time that petitioner's
just claim has been thwarted, we find it in the best interest of substantial justice to decide the
issue of damages now on the basis of the available records. A remand for further proceedings
would only result in a needless delay.

Going over the records of the case, we find that petitioner has a final and executory judgment
in its favor in Civil Case No. 21272. The judgment in that case reads as follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering defendant
VISCO/SRM to pay the plaintiffs the sum of P851,316.19 with interest thereon at the legal
rate from the filing of this complaint, plus attorney's fees of P50,000.00 and to pay the
costs."122
The foregoing is the judgment credit that petitioner cannot enforce against VISCO because of
Respondent Consortium's fraudulent disposition of the corporation's assets. In other words, the
above amounts define the extent of the actual damage suffered by Coastal and the amount that
respondent has to restore pursuant to Article 1385.
On the basis of the finding of fraud, the award of exemplary damages is in order, to serve as a
warning to other creditors not to abuse their rights. Under Article 2229 of the Civil Code,
exemplary or corrective damages are imposed by way of example or correction for the public
good. By their nature, exemplary damages should be imposed in an amount sufficient and
effective to deter possible future similar acts by respondent banks. The court finds the amount
of P250,000 sufficient in the instant case.
As a rule, a corporation is not entitled to moral damages because, not being a natural person, it
cannot experience physical suffering or sentiments like wounded feelings, serious anxiety,
mental anguish and moral shock.123 The only exception to this rule is when the corporation has
a good reputation that is debased, resulting in its humiliation in the business realm. 124 In the
present case, the records do not show any evidence that the name or reputation of petitioner
has been sullied as a result of the Consortium's fraudulent acts. Accordingly, moral damages
are not warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of Appeals
dated September 27, 1994, and its Resolution dated January 5, 1995, are
hereby REVERSED and SET ASIDE. Respondent Consortium of Banks is ordered to PAY
Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the Regional Trial Court of
Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific Trading, Felix de la
Costa, and Aurora del Banco v. Visayan Integrated Corporation, to wit: "x x x the sum
of P851,316.19 with interest thereon at the legal rate from the filing of [the] [C]omplaint, plus
attorney's fees of P50,000 and x x x the costs." Respondent Consortium of Banks is further
ordered to pay petitioner exemplary damages in the amount of P250,000.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 172428

November 28, 2008

HERMAN C. CRYSTAL, LAMBERTO C. CRYSTAL, ANN GEORGIA C. SOLANTE,


and DORIS C. MAGLASANG, as Heirs of Deceased SPOUSES RAYMUNDO I.
CRYSTAL and DESAMPARADOS C. CRYSTAL, petitioners,
vs.
BANK OF THE PHILIPPINE ISLANDS, respondent.
DECISION
TINGA, J.:
Before us is a Petition for Review1 of the Decision2 and Resolution3 of the Court of Appeals
dated 24 October 2005 and 31 March 2006, respectively, in CA G.R. CV No. 72886, which
affirmed the 8 June 2001 decision of the Regional Trial Court, Branch 5, of Cebu City. 4
The facts, as culled from the records, follow.
On 28 March 1978, spouses Raymundo and Desamparados Crystal obtained a P300,000.00
loan in behalf of the Cebu Contractors Consortium Co. (CCCC) from the Bank of the
Philippine Islands-Butuan branch (BPI-Butuan). The loan was secured by a chattel mortgage
on heavy equipment and machinery of CCCC. On the same date, the spouses executed in favor
of BPI-Butuan a Continuing Suretyship5 where they bound themselves as surety of CCCC in
the aggregate principal sum of not exceeding P300,000.00. Thereafter, or on 29 March 1979,
Raymundo Crystal executed a promissory note6 for the amount of P300,000.00, also in favor
of BPI-Butuan.
Sometime in August 1979, CCCC renewed a previous loan, this time from BPI, Cebu City
branch (BPI-Cebu City). The renewal was evidenced by a promissory note7 dated 13 August
1979, signed by the spouses in their personal capacities and as managing partners of CCCC.
The promissory note states that the spouses are jointly and severally liable with CCCC. It
appears that before the original loan could be granted, BPI-Cebu City required CCCC to put
up a security.
However, CCCC had no real property to offer as security for the loan; hence, the spouses
executed a real estate mortgage8 over their own real property on 22 September 1977.9 On 3
October 1977, they executed another real estate mortgage over the same lot in favor of BPICebu City, to secure an additional loan of P20,000.00 of CCCC.10
CCCC failed to pay its loans to both BPI-Butuan and BPI-Cebu City when they became due.
CCCC, as well as the spouses, failed to pay their obligations despite demands. Thus, BPI
resorted to the foreclosure of the chattel mortgage and the real estate mortgage. The
foreclosure sale on the chattel mortgage was initially stalled with the issuance of a restraining

order against BPI.11 However, following BPIs compliance with the necessary requisites of
extrajudicial foreclosure, the foreclosure sale on the chattel mortgage was consummated on 28
February 1988, with the proceeds amounting to P240,000.00 applied to the loan from BPIButuan which had then reached P707,393.90.12Meanwhile, on 7 July 1981, Insular Bank of
Asia and America (IBAA), through its Vice-President for Legal and Corporate Affairs, offered
to buy the lot subject of the two (2) real
estate mortgages and to pay directly the spouses indebtedness in exchange for the release of
the mortgages. BPI rejected IBAAs offer to pay.13
BPI filed a complaint for sum of money against CCCC and the spouses before the Regional
Trial Court of Butuan City (RTC Butuan), seeking to recover the deficiency of the loan of
CCCC and the spouses with BPI-Butuan. The trial court ruled in favor of BPI. Pursuant to the
decision, BPI instituted extrajudicial foreclosure of the spouses mortgaged property. 14
On 10 April 1985, the spouses filed an action for Injunction With Damages, With A Prayer
For A Restraining Order and/ or Writ of Preliminary Injunction.15 The spouses claimed that
the foreclosure of the real estate mortgages is illegal because BPI should have exhausted
CCCCs properties first, stressing that they are mere guarantors of the renewed loans. They
also prayed that they be awarded moral and exemplary damages, attorneys fees, litigation
expenses and cost of suit. Subsequently, the spouses filed an amended
complaint,16 additionally alleging that CCCC had opened and maintained a foreign currency
savings account (FCSA-197) with bpi, Makati branch (BPI-Makati), and that said FCSA was
used as security for a P450,000.00 loan also extended by BPI-Makati. TheP450,000.00 loan
was allegedly paid, and thereafter the spouses demanded the return of the FCSA passbook.
BPI rejected the demand; thus, the spouses were unable to withdraw from the said account to
pay for their other obligations to BPI.
The trial court dismissed the spouses complaint and ordered them to pay moral and
exemplary damages and attorneys fees to BPI.17 It ruled that since the spouses agreed to bind
themselves jointly and severally, they are solidarily liable for the loans; hence, BPI can validly
foreclose the two real estate mortgages. Moreover, being guarantors-mortgagors, the spouses
are not entitled to the benefit of exhaustion. Anent the FCSA, the trial court found that CCCC
originally had FCDU SA No. 197 with BPI, Dewey Boulevard branch, which was transferred
to BPI-Makati as FCDU SA 76/0035, at the request of Desamparados Crystal. FCDU SA
76/0035 was thus closed, but Desamparados Crystal failed to surrender the passbook because
it was lost. The transferred FCSA in BPI-Makati was the one used as security for
CCCCs P450,000.00 loan from BPI-Makati. CCCC was no longer allowed to withdraw from
FCDU SA No. 197 because it was already closed.
The spouses appealed the decision of the trial court to the Court of Appeals, but their appeal
was dismissed.18 The spouses moved for the reconsideration of the decision, but the Court of
Appeals also denied their motion for reconsideration.19 Hence, the present petition.
Before the Court, petitioners who are the heirs of the spouses argue that the failure of the
spouses to pay the BPI-Cebu City loan of P120,000.00 was due to BPIs illegal refusal to
accept payment for the loan unless the P300,000.00 loan from BPI-Butuan would also be paid.

Consequently, in view of BPIs unjust refusal to accept payment of the BPI-Cebu City loan,
the loan obligation of the spouses was extinguished, petitioners contend.
The contention has no merit. Petitioners rely on IBAAs offer to purchase the mortgaged lot
from them and to directly pay BPI out of the proceeds thereof to settle the loan.20 BPIs refusal
to agree to such payment scheme cannot extinguish the spouses loan obligation. In the first
place, IBAA is not privy to the loan agreement or the promissory note between the spouses
and BPI. Contracts, after all, take effect only between the parties, their successors in interest,
heirs
and assigns.21 Besides, under Art. 1236 of the Civil Code, the creditor is not bound to accept
payment or performance by a third person who has no interest in the fulfillment of the
obligation, unless there is a stipulation to the contrary. We see no stipulation in the promissory
note which states that a third person may fulfill the spouses obligation. Thus, it is clear that
the spouses alone bear responsibility for the same.
In any event, the promissory note is the controlling repository of the obligation of the spouses.
Under the promissory note, the spouses defined the parameters of their obligation as follows:
On or before June 29, 1980 on demand, for value received, I/we promise to pay, jointly and
severally, to the BANK OF THE PHILIPPINE ISLANDS, at its office in the city of Cebu
Philippines, the sum of ONE HUNDRED TWENTY THOUSAND PESOS (P120,0000.00),
Philippine Currency, subject to periodic installments on the principal as follows: P30,000.00
quarterly amortization starting September 28, 1979. x x x 22
A solidary obligation is one in which each of the debtors is liable for the entire obligation, and
each of the creditors is entitled to demand the satisfaction of the whole obligation from any or
all of the debtors. 23 A liability is solidary "only when the obligation expressly so states, when
the law so provides or when the nature of the

Petitioners contend that the Court of Appeals erred in not granting their counterclaims,
considering that they suffered moral damages in view of the unjust refusal of BPI to accept the
payment scheme proposed by IBAA and the allegedly unjust and illegal foreclosure of the real
estate mortgages on their property.28 Conversely, they argue that the Court of Appeals erred in
awarding moral damages to BPI, which is a corporation, as well as exemplary damages,
attorneys fees and expenses of litigation.29
We do not agree. Moral damages are meant to compensate the claimant for any physical
suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings,
moral shock, social humiliation and similar injuries unjustly caused. 30 Such damages, to be
recoverable, must be the proximate result of a wrongful act or omission the factual basis for
which is satisfactorily established by the aggrieved party.31 There being no wrongful or unjust
act on the part of BPI in demanding payment from them and in seeking the foreclosure of the
chattel and real estate mortgages, there is no lawful basis for award of damages in favor of the
spouses.
Neither is BPI entitled to moral damages. A juridical person is generally not entitled to moral
damages because, unlike a natural person, it cannot experience physical suffering or such
sentiments as wounded feelings, serious anxiety, mental anguish or moral shock.32 The Court
of Appeals found BPI as "being famous and having gained its familiarity and respect not only
in the Philippines but also in the whole world because of its good will and good reputation
must protect and defend the same against any unwarranted suit such as the case at bench." 33 In
holding that BPI is entitled to moral damages, the Court of Appeals relied on the case
of People v. Manero,34 wherein the Court ruled that "[i]t is only when a juridical person has a
good reputation that is debased, resulting in social humiliation, that moral damages may be
awarded."35
We do not agree with the Court of Appeals. A statement similar to that made by the Court
in Manerocan be found in the case of Mambulao Lumber Co. v. PNB, et al.,36 thus:

obligation so requires."24 Thus, when the obligor undertakes to be "jointly and severally"
liable, it means that the obligation is solidary,25 such as in this case. By stating "I/we promise
to pay, jointly and severally, to the BANK OF THE PHILIPPINE ISLANDS," the spouses
agreed to be sought out and be demanded payment from, by BPI. BPI did demand payment
from them, but they failed to comply with their obligation, prompting BPIs valid resort to the
foreclosure of the chattel mortgage and the real estate mortgages.

x x x Obviously, an artificial person like herein appellant corporation cannot experience


physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or
social humiliation which are basis of moral damages. A corporation may have good
reputation which, if besmirched may also be a ground for the award of moral damages. x
x x (Emphasis supplied)

More importantly, the promissory note, wherein the spouses undertook to be solidarily liable
for the principal loan, partakes the nature of a suretyship and therefore is an additional security
for the loan. Thus we held in one case that if solidary liability was instituted to "guarantee" a
principal obligation, the law deems the contract to be one of suretyship. 26 And while a contract
of a surety is in essence secondary only to a valid principal obligation, the suretys liability to
the creditor or promisee of the principal is said to be direct, primary, and absolute; in other
words, the surety is directly and equally bound with the principal. The surety therefore
becomes liable for the debt or duty of another even if he possesses no direct or personal
interest over the obligations nor does he receive any benefit therefrom. 27

Nevertheless, in the more recent cases of ABS-CBN Corp. v. Court of Appeals, et


al.,37 and Filipinas Broadcasting Network, Inc. v. Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM),38 the Court held that the statements in Manero
and Mambulao were mere obiter dicta, implying that the award of moral damages to
corporations is not a hard and fast rule. Indeed, while the Court may allow the grant of moral
damages to corporations, it is not automatically granted; there must still be proof of the
existence of the factual basis of the damage and its causal relation to the defendants acts. This
is so because moral damages, though incapable of pecuniary estimation, are in the category of
an award designed to compensate the claimant for actual injurysuffered and not to impose a
penalty on the wrongdoer.39

The spouses complaint against BPI proved to be unfounded, but it does not automatically
entitle BPI to moral damages. Although the institution of a clearly unfounded civil suit can at
times be a legal
justification for an award of attorney's fees, such filing, however, has almost invariably been
held not to be a ground for an award of moral damages. The rationale for the rule is that the
law could not have meant to impose a penalty on the right to litigate. Otherwise, moral
damages must every time be awarded in favor of the prevailing defendant against an
unsuccessful plaintiff.40 BPI may have been inconvenienced by the suit, but we do not see how
it could have possibly suffered besmirched reputation on account of the single suit alone.
Hence, the award of moral damages should be deleted.
The awards of exemplary damages and attorneys fees, however, are proper. Exemplary
damages, on the other hand, are imposed by way of example or correction for the public good,
when the party to a contract acts in a wanton, fraudulent, oppressive or malevolent manner,
while attorneys fees are allowed when exemplary damages are awarded and when the party to
a suit is compelled to incur expenses to protect his interest.41 The spouses instituted their
complaint against BPI notwithstanding the fact that they were the ones who failed to pay their
obligations. Consequently, BPI was forced to litigate and defend its interest. For these reasons,
BPI is entitled to the awards of exemplary damages and attorneys fees.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court of Appeals
dated 24 October 2005 and 31 March 2006, respectively, are hereby AFFIRMED, with the
MODIFICATION that the award of moral damages to Bank of the Philippine Islands is
DELETED.
Costs against the petitioners.
SO ORDERED.

10

THIRD DIVISION

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO)


and PANTRANCO RETRENCHED EMPLOYEES
ASSOCIATION (PANREA),

G.R. No. 170689


Present:

Petitioners,
YNARES-SANTIAGO, J.,
Chairperson,

- versus -

CARPIO,*
NATIONAL LABOR RELATIONS COMMISSION (NLRC),
PANTRANCO NORTH EXPRESS, INC. (PNEI), PHILIPPINE
NATIONAL BANK (PNB), PHILIPPINE NATIONAL BANKMANAGEMENT AND DEVELOPMENT CORPORATION
(PNB-MADECOR), and MEGA PRIME REALTY AND
HOLDINGS CORPORATION (MEGA PRIME),

CHICO-NAZARIO,

Respondents.

Promulgated:

NACHURA, and
PERALTA, JJ.

x-----------------------------x
March 17, 2009

PHILIPPINE NATIONAL BANK,


x------------------------------------------------------------------------------------x

Petitioner,

- versus DECISION
PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEAPTGWO), PANTRANCO RETRENCHED EMPLOYEES
ASSOCIATION (PANREA) AND PANTRANCO ASSOCIATION
OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE
NATIONAL BANK-MANAGEMENT DEVELOPMENT
CORPORATION (PNB-MADECOR), and MEGA PRIME
REALTY HOLDINGS, INC.,

NACHURA, J.:

G.R. No. 170705


Respondents.
Before us are two consolidated petitions assailing the Court of Appeals (CA)
Decision[1] dated June 3, 2005 and its Resolution[2] dated December 7, 2005 in CA-G.R. SP
No. 80599.

11

In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco
Retrenched Employees Association (PANREA) pray that the CA decision be set aside and a
new one be entered, declaring the Philippine National Bank (PNB) and PNB Management and
Development Corporation (PNB-Madecor) jointly and solidarily liable for
the P722,727,150.22 National Labor Relations Commission (NLRC) judgment in favor of the
Pantranco North Express, Inc. (PNEI) employees;[3] while in G.R. No. 170705, PNB prays
that the auction sale of the Pantranco properties be declared null and void. [4]

The facts of the case, as found by the CA,[5] and established in Republic of the Phils. v.
NLRC,[6] Pantranco North Express, Inc. v. NLRC,[7] and PNB MADECOR v. Uy,[8] follow:

The Gonzales family owned two corporations, namely, the PNEI and Macris Realty
Corporation (Macris). PNEI provided transportation services to the public, and had its bus
terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood
on four valuable pieces of real estate (known as Pantranco properties) registered under the
name of Macris.[9] The Gonzales family later incurred huge financial losses despite attempts of
rehabilitation and loan infusion. In March 1975, their creditors took over the management of
PNEI and Macris. By 1978, full ownership was transferred to one of their creditors, the
National Investment Development Corporation (NIDC), a subsidiary of the PNB.

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution [10] commanding
the NLRC Sheriffs to levy on the assets of PNEI in order to satisfy the P722,727,150.22 due
its former employees, as full and final satisfaction of the judgment awards in the labor
cases. The sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and Mega
Prime.[11] In implementing the writ, the sheriffs levied upon the four valuable pieces of real
estate located at the corner of Quezon and Roosevelt Avenues, on which the former
Pantranco Bus Terminal stood. These properties were covered by Transfer Certificate of Title
(TCT) Nos. 87881-87884, registered under the name of PNB-Madecor.[12] Subsequently,
Notice of Sale of the foregoing real properties was published in the newspaper and the sale
was set on July 31, 2002. Having been notified of the auction sale, motions to quash the writ
were separately filed by PNB-Madecor and Mega Prime, and PNB. They likewise filed their
Third-Party Claims.[13] PNB-Madecor anchored its motion on its right as the registered owner
of the Pantranco properties, and Mega Prime as the successor-in-interest. For its part, PNB
sought the nullification of the writ on the ground that it was not a party to the labor case.[14] In
its Third-Party Claim, PNB alleged that PNBMadecor was indebted to the former and that the Pantranco properties

Macris was later renamed as the National Realty Development Corporation (Naredeco)
and eventually merged with the National Warehousing Corporation (Nawaco) to form the new
PNB subsidiary, the PNB-Madecor.

In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by
Gregorio Araneta III. In 1986, PNEI was among the several companies placed under
sequestration by the Presidential Commission on Good Government (PCGG) shortly after the
historic events in EDSA. In January 1988, PCGG lifted the sequestration order to pave the
way for the sale of PNEI back to the private sector through the Asset Privatization Trust
(APT). APT thus took over the management of PNEI.

In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of
payments. A management committee was thereafter created which recommended to the SEC
the sale of the company through privatization. As a cost-saving measure, the committee
likewise suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its
operation. Along with the cessation of business came the various labor claims commenced by
the former employees of PNEI where the latter obtained favorable decisions.

12

would answer for such debt. As such, the scheduled auction sale of the aforesaid properties
was not legally in order.[15]

On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties
were owned by PNB-Madecor. It being a corporation with a distinct and separate personality,
its assets could not answer for the liabilities of PNEI. Considering, however, that PNBMadecor executed a promissory note in favor of PNEI for P7,884,000.00, the writ of execution
to the extent of the said amount was concerned was considered valid. [16]

PNBs third-party claim to nullify the writ on the ground that it has an interest in the
Pantranco properties being a creditor of PNB-Madecor, on the other hand, was denied
because it only had an inchoate interest in the properties.[17]

The dispositive portion of the Labor Arbiters September 10, 2002 Resolution is quoted
hereunder:

WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings,
Inc. is hereby GRANTED and concomitantly the levies made by the sheriffs of the NLRC on
the properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment
by PNB Madecor to the complainants the amount of P7,884,000.00.

The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby
PARTIALLY GRANTED insofar as the amount of the writ exceeds P7,884,000.00.

The Motion for Recomputation and Examination of Judgment Awards is hereby


DENIED for want of merit.

13

The Motion to Expunge from the Records claimants/complainants Opposition dated


August 3, 2002 is hereby DENIED for lack of merit.

SO ORDERED.[18]

On appeal to the NLRC, the same was denied and the Labor Arbiters disposition was
affirmed.[19] Specifically, the NLRC concluded as follows:

(1)
PNB-Madecor and Mega Prime contended that it would be impossible for them to
comply with the requirement of the labor arbiter to pay to the PNEI employees the amount
of P7.8 million as a condition to the lifting of the levy on the properties, since the credit was
already garnished by Gerardo Uy and other creditors of PNEI. The NLRC found no evidence
that Uy had satisfied his judgment from the promissory note, and opined that even if the credit
was in custodia legis, the claim of the PNEI employees should enjoy preference under the
Labor Code.

(2)
The PNEI employees contested the finding that PNB-Madecor was indebted to the
PNEI for only P7.8 million without considering the accrual of interest. But the NLRC said
that there was no evidence that demand was made as a basis for reckoning interest.

(3)
The PNEI employees further argued that the labor arbiter may not properly
conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of Quezon City that
PNB-Madecor was the owner of the properties as his decision was reconsidered by the next
presiding judge, nor from a decision of the Supreme Court that PNEI was a mere lessee of the
properties, the fact being that the transfer of the properties to PNB-Madecor was done to avoid
satisfaction of the claims of the employees with the NLRC and that as a result of a civil case
filed by Mega Prime, the subsequent sale of the properties by PNB to Mega Prime was
rescinded. The NLRC pointed out that while the Macapagal decision was set aside by Judge
Bruselas and hence, his findings could not be invoked by the labor arbiter, the titles of PNBMadecor are conclusive and there is no evidence that PNEI had ever been an owner. The
Supreme Court had observed in its decision that PNEI owed back rentals of P8.7 million to
PNB-Madecor.

(4)
The PNEI employees faulted the labor arbiter for not finding that PNEI, PNB,
PNB-Madecor and Mega Prime were all jointly and severally liable for their claims. The

NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and had passed
through and were under the Asset Privatization Trust (APT) when the labor claims
accrued. The labor arbiter was correct in not granting PNBs third-party claim because at the
time the causes of action accrued, the PNEI was managed by a management committee
appointed by the PNB as the new owner of PNRI (sic) and Macris through a deed of
assignment or transfer of ownership. The NLRC says at length that the same is not true with
PNB-Madecor which is now the registered owner of the properties.[20]

The parties separate motions for reconsideration were likewise denied. [21] Thereafter, the
matter was elevated to the CA by PANREA, PEA-PTGWO and the Pantranco Association of
Concerned Employees. The latter group, however, later withdrew its petition. The former
employees petition was docketed as CA-G.R. SP No. 80599.

PNB-Madecor and Mega Prime likewise filed their separate petition before the CA
which was docketed as CA-G.R. SP No. 80737, but the same was dismissed.[22]

In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an


auction sale was conducted over the Pantranco properties to satisfy the claim of the PNEI
employees, wherein CPAR Realty was adjudged as the highest bidder.[23]

On June 3, 2005, the CA rendered the assailed decision affirming the NLRC
resolutions.

The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are
corporations with personalities separate and distinct from PNEI. As such, there being no
cogent reason to pierce the veil of corporate fiction, the separate personalities of the above
corporations should be maintained. The CA added that the Pantranco properties were never
owned by PNEI; rather, their titles were registered under the name of PNB-Madecor. If PNB
and PNB-Madecor could not answer for the liabilities of PNEI, with more reason should Mega
Prime not be held liable being a mere successor-in-interest of PNB-Madecor.

Unsatisfied, PEA-PTGWO and PANREA filed their motion for


reconsideration;[24] while PNB filed its Partial Motion for Reconsideration.[25] PNB pointed
out that PNB-Madecor was made to answer for P7,884,000.00 to the PNEI employees by
virtue of the promissory note it (PNB-Madecor) earlier executed in favor of PNEI. PNB,

14

however, questioned the June 23, 2004 auction sale as the P7.8 million debt had already been
satisfied pursuant to this Courts decision in PNB MADECOR v. Uy.[26]

MADECOR VS. UY CASE (363 SCRA 128 [2001]) AND GERARDO C. UY VS. PNEI
(CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38).[32]

Both motions were denied by the appellate court.[27]

In two separate petitions, PNB and the former PNEI employees come up to this Court
assailing the CA decision and resolution. The former PNEI employees raise the lone error,
thus:

The Honorable Court of Appeals palpably departed from the established rules and
jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI),
Philippine National Bank (PNB), Philippine National Bank Management and Development
Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not
jointly and severally answerable to theP722,727,150.22 Million NLRC money judgment
awards in favor of the 4,000 individual members of the Petitioners.[28]

They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI
and had complete control over the funds of PNEI. Hence, they are solidarily answerable with
PNEI for the unpaid money claims of the employees.[29] Citing A.C. Ransom Labor UnionCCLU v. NLRC,[30] the employees insist that where the employer corporation ceases to exist
and is no longer able to satisfy the judgment awards in favor of its employees, the owner of
the employer corporation should be made jointly and severally liable. [31] They added that
malice or bad faith need not be proven to make the owners liable.

On the other hand, PNB anchors its petition on this sole assignment of error, viz.:

THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED
TO PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE
AMOUNT OF P7,884,000.00 (THE AMOUNT OF PNB-MADECORS PROMISSORY
NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT
OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY
BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO THREE (3)
PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881,
87882 AND 87883, BEING LEVIED AND SOLD ON EXECUTION IN THE PNB-

PNB insists that the Pantranco properties could no longer be levied upon because the
promissory note for which the Labor Arbiter held PNB-Madecor liable to PNEI, and in turn to
the latters former employees, had already been satisfied in favor of Gerardo C. Uy. It added
that the properties were in fact awarded to the highest bidder. Besides, says PNB, the subject
properties were not owned by PNEI, hence, the execution sale thereof was not validly
effected.[33]

Both petitions must fail.

G.R. No. 170689

Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI
employees is whether they can attach the properties (specifically the Pantranco properties) of
PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI.

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere
in the records was it shown that PNEI owned the Pantranco properties. Petitioners, in fact,
never alleged in any of their pleadings the fact of such ownership. What was established,
instead, in PNB MADECOR v. Uy[34] and PNB v. Mega Prime Realty and Holdings
Corporation/Mega Prime Realty and Holdings Corporation v. PNB[35] was that the properties
were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot be pursued
against by the creditors of PNEI.

We would like to stress the settled rule that the power of the court in executing judgments
extends only to properties unquestionably belonging to the judgment debtor alone.[36] To be
sure, one mans goods shall not be sold for another mans debts.[37] A sheriff is not authorized
to attach or levy on property not belonging to the judgment debtor, and even incurs liability if
he wrongfully levies upon the property of a third person. [38]

15

Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities
separate and distinct from that of PNEI. PNB is sought to be held liable because it acquired
PNEI through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is
being made to answer for petitioners labor claims as the owner of the subject Pantranco
properties and as a subsidiary of PNB. Mega Prime is also included for having acquired
PNBs shares over PNB-Madecor.

The general rule is that a corporation has a personality separate and distinct from those of its
stockholders and other corporations to which it may be connected. [39] This is a fiction created
by law for convenience and to prevent injustice.[40] Obviously, PNB, PNB-Madecor, Mega
Prime, and PNEI are corporations with their own personalities. The separate personalities
of the first three corporations had been recognized by this Court in PNB v. Mega Prime Realty
and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB [41] where we
stated that PNB was only a stockholder of PNB-Madecor which later sold its shares to Mega
Prime; and that PNB-Madecor was the owner of the Pantranco properties. Moreover, these
corporations are registered as separate entities and, absent any valid reason, we maintain their
separate identities and we cannot treat them as one.

Neither can we merge the personality of PNEI with PNB simply because the latter acquired
the former. Settled is the rule that where one corporation sells or otherwise transfers all its
assets to another corporation for value, the latter is not, by that fact alone, liable for the debts
and liabilities of the transferor.[42]

Lastly, while we recognize that there are peculiar circumstances or valid grounds that may
exist to warrant the piercing of the corporate veil, [43] none applies in the present case whether
between PNB and PNEI; or PNB and PNB-Madecor.

Under the doctrine of piercing the veil of corporate fiction, the court looks at the corporation
as a mere collection of individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the corporation unifying the
group.[44] Another formulation of this doctrine is that 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 as one and the same. [45]

Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be

done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. After all, the concept of corporate entity
was not meant to promote unfair objectives.[46]

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and
insist that because the company, PNEI, has already ceased operations and there is no other
way by which the judgment in favor of the employees can be satisfied, corporate officers can
be held jointly and severally liable with the company. Petitioners rely on the pronouncement
of this Court inA.C. Ransom Labor Union-CCLU v. NLRC[47] and subsequent cases.[48]

This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant
case.

For one, in the said cases, the persons made liable after the companys cessation of operations
were the officers and agents of the corporation. The rationale is that, since the corporation is
an artificial person, it must have an officer who can be presumed to be the employer, being the
person acting in the interest of the employer. The corporation, only in the technical sense, is
the employer.[49] In the instant case, what is being made liable is another corporation (PNB)
which acquired the debtor corporation (PNEI).

Moreover, in the recent cases Carag v. National Labor Relations Commission[50] and McLeod
v. National Labor Relations Commission,[51] the Court explained the doctrine laid down in AC
Ransom relative to the personal liability of the officers and agents of the employer for the
debts of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation
on the strength of the definition of an employer in Article 212(c) (now Article 212[e]) of the
Labor Code. Under the said provision, employerincludes any person acting in the interest of
an employer, directly or indirectly, but does not include any labor organization or any of its
officers or agents except when acting as employer. It was clarified in Carag and McLeod that
Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable
for the debts of the corporation. It added that the governing law on personal liability of
directors or officers for debts of the corporation is still Section 31[52] of the Corporation
Code.

More importantly, as aptly observed by this Court in AC Ransom, it appears that


Ransom, foreseeing the possibility or probability of payment of backwages to its employees,
organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers
win their case. The execution could not be implemented against Ransom because of the
disposition posthaste of its leviable assets evidently in order to evade its just and due

16

obligations.[53] Hence, the Court sustained the piercing of the corporate veil and made the
officers of Ransom personally liable for the debts of the latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the
corporate veil applies only in three (3) basic areas, namely: 1) defeat of public convenience as
when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2)
fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a
crime; or 3) alter egocases, where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.[54] In the absence of malice, bad faith, or a specific provision of law
making a corporate officer liable, such corporate officer cannot be made personally liable for
corporate liabilities.[55]

Applying the foregoing doctrine to the instant case, we quote with approval the CA disposition
in this wise:

It would not be enough, then, for the petitioners in this case, the PNEI employees, to rest on
their laurels with evidence that PNB was the owner of PNEI. Apart from proving ownership,
it is necessary to show facts that will justify us to pierce the veil of corporate fiction and hold
PNB liable for the debts of PNEI. The burden undoubtedly falls on the petitioners to prove
their affirmative allegations. In line with the basic jurisprudential principles we have
explored, they must show that PNB was using PNEI as a mere adjunct or instrumentality or
has exploited or misused the corporate privilege of PNEI.

We do not see how the burden has been met. Lacking proof of a nexus apart from mere
ownership, the petitioners have not provided us with the legal basis to reach the assets of
corporations separate and distinct from PNEI.[56]

In PNB v. Ritratto Group, Inc.,[58] we outlined the circumstances which are useful in the
determination of whether a subsidiary is but a mere instrumentality of the parent-corporation,
to wit:

1.

The parent corporation owns all or most of the capital stock of the subsidiary;

2.

The parent and subsidiary corporations have common directors or officers;

3.

The parent corporation finances the subsidiary;

4.
The parent corporation subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation;

5.

The subsidiary has grossly inadequate capital;

6.
The parent corporation pays the salaries and other expenses or losses of the
subsidiary;

7.
The subsidiary has substantially no business except with the parent corporation or
no assets except those conveyed to or by the parent corporation;

8.
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 corporations own;
Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI,
petitioners still cannot proceed against the Pantranco properties, the same being owned by
PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The
general rule remains that PNB-Madecor has a personality separate and distinct from PNB. 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
subsidiarys separate existence shall be respected, and the liability of the parent corporation as
well as the subsidiary will be confined to those arising in their respective businesses. [57]

9.

The parent corporation uses the property of the subsidiary as its own;

10.
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;

17

11.

The formal legal requirements of the subsidiary are not observed.

None of the foregoing circumstances is present in the instant case. Thus, piercing of PNBMadecors corporate veil is not warranted. Being a mere successor-in-interest of PNBMadecor, with more reason should no liability attach to Mega Prime.

G.R. No. 170705

In its petition before this Court, PNB seeks the annulment of the June 23,
2004 execution sale of the Pantranco properties on the ground that the judgment debtor (PNEI)
never owned said lots. It likewise contends that the levy and the eventual sale on execution of
the subject properties was null and void as the promissory note on which PNB-Madecor was
made liable had already been satisfied.

It has been repeatedly stated that the Pantranco properties which were the subject of
execution sale were owned by Macris and later, the PNB-Madecor. They were never owned
by PNEI or PNB. Following our earlier discussion on the separate personalities of the
different corporations involved in the instant case, the only entity which has the right and
interest to question the execution sale and the eventual right to annul the same, if any, is PNBMadecor or its successor-in-interest. Settled is the rule that proceedings in court must be
instituted by the real party in interest.

A real party in interest is the party who stands to be benefited or injured by the judgment in
the suit, or the party entitled to the avails of the suit. [59] Interest within the meaning of the
rule means material interest, an interest in issue and to be affected by the decree, as
distinguished from mere interest in the question involved, or a mere incidental interest. [60] The
interest of the party must also be personal and not one based on a desire to vindicate the
constitutional right of some third and unrelated party.[61] Real interest, on the other hand,
means a present substantial interest, as distinguished from a mere expectancy or a future,
contingent, subordinate, or consequential interest.[62]

Specifically, in proceedings to set aside an execution sale, the real party in interest is the
person who has an interest either in the property sold or the proceeds thereof. Conversely, one
who is not interested or is not injured by the execution sale cannot question its validity. [63]

In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime,
the buyer of its entire stockholdings in PNB-Madecor was indebted to it (PNB). Considering
that said indebtedness remains unpaid, PNB insists that it has an interest over PNB-Madecor
and Mega Primes assets.

Again, the contention is bereft of merit. While PNB has an apparent interest in Mega
Primes assets being the creditor of the latter for a substantial amount, its interest remains
inchoate and has not yet ripened into a present substantial interest, which would give it the
standing to maintain an action involving the subject properties. As aptly observed by the
Labor Arbiter, PNB only has an inchoate right to the properties of Mega Prime in case the
latter would not be able to pay its indebtedness. This is especially true in the instant case, as
the debt being claimed by PNB is secured by the accessory contract of pledge of the entire
stockholdings of Mega Prime to PNB-Madecor.[64]

The Court further notes that the Pantranco properties (or a portion thereof ) were sold on
execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor was thus
made liable to the former PNEI employees as the judgment debtor of PNEI. It has long been
established in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an unpaid
obligation to PNEI amounting to more or less P7 million which could be validly pursued by
the creditors of the latter. Again, this strengthens the proper parties right to question the
validity of the execution sale, definitely not PNB
Besides, the issue of whether PNB has a substantial interest over the Pantranco properties
has already been laid to rest by the Labor Arbiter.[65] It is noteworthy that in its Resolution
dated September 10, 2002, the Labor Arbiter denied PNBs Third-Party Claim primarily
because PNB only has an inchoate right over the Pantranco properties.[66] Such conclusion
was later affirmed by the NLRC in its Resolution dated June 30, 2003.[67] Notwithstanding
said conclusion, PNB did not elevate the matter to the CA via a petition for review. Hence it
is presumed to be satisfied with the adjudication therein.[68] That decision of the NLRC has
become final as against PNB and can no longer be reviewed, much less reversed, by this
Court.[69] This is in accord with the doctrine that a party who has not appealed cannot obtain
from the appellate court any affirmative relief other than the ones granted in the appealed
decision.[70]

WHEREFORE, premises considered, the petitions are hereby DENIED for lack of
merit.

18

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION

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 Agreement 3 dated February 4, 1981, and a Detached
Assignment 4 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 Mandamus 5 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

19

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:

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.

11. Respondent is the registered owner of CBCI No. 891;

17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the
assignment.

12. The CBCI constitutes part of the reserve investment against liabilities required of
respondent as an insurance company under the Insurance Code;

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;

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-PresidentTreasury 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;

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;

xxx xxx xxx

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;

14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, VicePresident-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;

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).

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;

xxx xxx xxx

b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular
course of its business;

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;

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

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;

In its Decision 8 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:

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;

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;

20

(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance
Corp. The sum of P10,000 as attorney's fees; and

unless made . . . by the registered owner thereof in person or by his representative duly
authorized in writing."

(d) to pay the costs.

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.

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:

Said the Court:

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.

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).

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.

WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiffappellant.

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

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.

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

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.

SO ORDERED. 13

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.
xxx xxx xxx
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.

21

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.

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.

The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:

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.

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:

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.

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.

Says the petitioner;

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?

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

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.

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 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

22

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

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.

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.

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:

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.

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.

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.

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

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.

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?

23

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.

24

Republic of the Philippines

DECISION

Supreme Court
Manila

REYES, J.:

SECOND DIVISION

TIMOTEO H. SARONA,

G.R. No. 185280

Petitioner,
Present:

CARPIO, J.,
- versus -

Chairperson,
PEREZ,

This is a petition for review under Rule 45 of the Rules of Court from the May 29, 2008
Decision1 of the Twentieth Division of the Court of Appeals (CA) in CA-G.R. SP No. 02127
entitled Timoteo H. Sarona v. National Labor Relations Commission, Royale Security
Agency (formerly Sceptre Security Agency) and Cesar S. Tan (Assailed Decision), which
affirmed the National Labor Relations Commissions (NLRC) November 30, 2005 Decision
and January 31, 2006 Resolution, finding the petitioner illegally dismissed but limiting the
amount of his backwages to three (3) monthly salaries. The CA likewise affirmed the NLRCs
finding that the petitioners separation pay should be computed only on the basis of his length
of service with respondent Royale Security Agency (Royale). The CA held that absent any
showing that Royale is a mere alter ego of Sceptre Security Agency (Sceptre), Royale cannot
be compelled to recognize the petitioners tenure with Sceptre. The dispositive portion of the
CAs Assailed Decision states:

WHEREFORE, in view of the foregoing, the instant petition is PARTLY GRANTED,


though piercing of the corporate veil is hereby denied for lack of merit. Accordingly, the
assailed Decision and Resolution of the NLRC respectively dated November 30, 2005 and
January 31, 2006 are hereby AFFIRMED as to the monetary awards.

SERENO,
REYES, and
NATIONAL LABOR RELATIONS

SO ORDERED. 2

BERNABE, JJ.

COMMISSION, ROYALE SECURITY


Factual Antecedents

AGENCY (FORMERLY SCEPTRE


SECURITY AGENCY) and

Promulgated:

CESAR S. TAN,
Respondents.

January 18, 2012

On June 20, 2003, the petitioner, who was hired by Sceptre as a security guard sometime in
April 1976, was asked by Karen Therese Tan (Karen), Sceptres Operation Manager, to submit
a resignation letter as the same was supposedly required for applying for a position at Royale.
The petitioner was also asked to fill up Royales employment application form, which was
handed to him by Royales General Manager, respondent Cesar Antonio Tan II (Cesar). 3

x-----------------------------------------------------------------------------------------x
After several weeks of being in floating status, Royales Security Officer, Martin Gono
(Martin), assigned the petitioner at Highlight Metal Craft, Inc. (Highlight Metal) from July 29,

25

2003 to August 8, 2003. Thereafter, the petitioner was transferred and assigned to Wide Wide
World Express, Inc. (WWWE, Inc.). During his assignment at Highlight Metal, the petitioner
used the patches and agency cloths of Sceptre and it was only
when he was posted at WWWE, Inc. that he started using those of Royale. 4

On September 17, 2003, the petitioner was informed that his assignment at WWWE, Inc. had
been withdrawn because Royale had allegedly been replaced by another security agency. The
petitioner, however, shortly discovered thereafter that Royale was never replaced as WWWE,
Inc.s security agency. When he placed a call at WWWE, Inc., he learned that his fellow
security guard was not relieved from his post.5

On September 21, 2003, the petitioner was once again assigned at Highlight Metal, albeit for a
short period from September 22, 2003 to September 30, 2003. Subsequently, when the
petitioner reported at Royales office on October 1, 2003, Martin informed him that he would
no longer be given any assignment per the instructions of Aida Sabalones-Tan (Aida), general
manager of Sceptre. This prompted him to file a complaint for illegal dismissal on October 4,
2003.6

In his May 11, 2005 Decision, Labor Arbiter Jose Gutierrez (LA Gutierrez) ruled in the
petitioners favor and found him illegally dismissed. For being unsubstantiated, LA Gutierrez
denied credence to the respondents claim that the termination of the petitioners employment
relationship with Royale was on his accord following his alleged employment in another
company. That the petitioner was no longer interested in being an employee of Royale cannot
be presumed from his request for a certificate of employment, a claim which, to begin with, he
vehemently denies. Allegation of the petitioners abandonment is negated by his filing of a
complaint for illegal dismissal three (3) days after he was informed that he would no longer be
given any assignments. LA Gutierrez ruled:

In short, respondent wanted to impress before us that complainant abandoned his employment.
We are not however, convinced.

There is abandonment when there is a clear proof showing that one has no more interest to
return to work. In this instant case, the record has no proof to such effect. In a long line of
decisions, the Supreme Court ruled:

Abandonment of position is a matter of intention expressed in clearly certain and


unequivocal acts, however, an interim employment does not mean abandonment. (Jardine
Davis, Inc. vs. NLRC, 225 SCRA 757).

In abandonment, there must be a concurrence of the intention to abandon and some overt
acts from which an employee may be declared as having no more interest to work. (C.
Alcontin & Sons, Inc. vs. NLRC, 229 SCRA 109).

It is clear, deliberate and unjustified refusal to severe employment and not mere absence
that is required to constitute abandonment. x x x (De Ysasi III vs. NLRC, 231 SCRA 173).

Aside from lack of proof showing that complainant has abandoned his employment, the record
would show that immediate action was taken in order to protest his dismissal from
employment. He filed a complaint [for] illegal dismissal on October 4, 2004 or three (3) days
after he was dismissed. This act, as declared by the Supreme Court is inconsistent with
abandonment, as held in the case of Pampanga Sugar Development Co., Inc. vs. NLRC, 272
SCRA 737 where the Supreme Court ruled:

The immediate filing of a complaint for [i]llegal [d]ismissal by an employee is inconsistent


with abandonment.7

The respondents were ordered to pay the petitioner backwages, which LA Gutierrez computed
from the day he was dismissed, or on October 1, 2003, up to the promulgation of his Decision
on May 11, 2005. In lieu of reinstatement, the respondents were ordered to pay the petitioner
separation pay equivalent to his one (1) month salary in consideration of his tenure with
Royale, which lasted for only one (1) month and three (3) days. In this
regard, LA Gutierrez refused to pierce Royales corporate veil for purposes of factoring the
petitioners length of service with Sceptre in the computation of his separation pay. LA
Gutierrez ruled that Royales corporate personality, which is separate and distinct from that of
Sceptre, a sole proprietorship owned by the late Roso Sabalones (Roso) and later, Aida, cannot
be pierced absent clear and convincing evidence that Sceptre and Royale share the same
stockholders and incorporators and that Sceptre has complete control and dominion over the
finances and business affairs of Royale. Specifically:

26

To support its prayer of piercing the veil of corporate entity of respondent Royale,
complainant avers that respondent Royal (sic) was using the very same office of SCEPTRE in
C. Padilla St., Cebu City. In addition, all officers and staff of SCEPTRE are now the same
officers and staff of ROYALE, that all [the] properties of SCEPTRE are now being owned by
ROYALE and that ROYALE is now occupying the property of SCEPTRE. We are not
however, persuaded.

It should be pointed out at this juncture that SCEPTRE, is a single proprietorship. Being so, it
has no distinct and separate personality. It is owned by the late Roso T. Sabalones. After the
death of the owner, the property is supposed to be divided by the heirs and any claim against
the sole proprietorship is a claim against Roso T. Sabalones. After his death, the claims should
be instituted against the estate of Roso T. Sabalones. In short, the estate of the late Roso T.
Sabalones should have been impleaded as respondent of this case.

Complainant wanted to impress upon us that Sceptre was organized into another entity now
called Royale Security Agency. There is however, no proof to this assertion. Likewise, there is
no proof that Roso T. Sabalones, organized his single proprietorship business into a
corporation, Royale Security Agency. On the contrary, the name of Roso T. Sabalones does
not appear in the Articles of Incorporation. The names therein as incorporators are:

Bruno M. Kuizon [P]150,000.00


Wilfredo K. Tan 100,000.00
Karen Therese S. Tan 100,000.00
Cesar Antonio S. Tan 100,000.00
Gabeth Maria K. Tan 50,000.00

Complainant claims that two (2) of the incorporators are the granddaughters of Roso T.
Sabalones. This fact even give (sic) us further reason to conclude that respondent Royal (sic)
Security Agency is not an alter ego or conduit of SCEPTRE. It is obvious that respondent
Royal (sic) Security Agency is not owned by the owner of SCEPTRE.

It may be true that the place where respondent Royale hold (sic) office is the same office
formerly used by SCEPTRE. Likewise, it may be true that the same officers and staff now
employed by respondent Royale Security Agency were the same officers and staff employed
by SCEPTRE. We find, however, that these facts are not sufficient to justify to require

respondent Royale to answer for the liability of Sceptre, which was owned solely by the late
Roso T. Sabalones. As we have stated above, the remedy is to address the claim on the estate
of Roso T. Sabalones.8

The respondents appealed LA Gutierrezs May 11, 2005 Decision to the NLRC, claiming that
the finding of illegal dismissal was attended with grave abuse of discretion. This appeal was,
however, dismissed by the NLRC in its November 30, 2005 Decision, 9 the dispositive portion
of which states:

WHEREFORE, premises considered, the Decision of the Labor Arbiter declaring the illegal
dismissal of complainant is herebyAFFIRMED.

However[,] We modify the monetary award by limiting the grant of backwages to only three
(3) months in view of complainants very limited service which lasted only for one month and
three days.

1. Backwages - [P]15,600.00
2. Separation Pay - 5,200.00
3. 13th Month Pay - 583.34
[P]21,383.34 Attorneys Fees- 2,138.33
Total [P]23,521.67

The appeal of respondent Royal (sic) Security Agency is hereby DISMISSED for lack of
merit.

SO ORDERED.10

The NLRC partially affirmed LA Gutierrezs May 11, 2005 Decision. It concurred with the
latters finding that the petitioner was illegally dismissed and the manner by which his

27

separation pay was computed, but modified the monetary award in the petitioners favor by
reducing the amount of his backwages from P95,600.00 to P15,600.00. The NLRC determined
the petitioners backwages as limited to three (3) months of his last monthly salary,
considering that his employment with Royale was only for a period for one (1) month and
three (3) days, thus:11

On the other hand, while complainant is entitled to backwages, We are aware that his stint
with respondent Royal (sic) lasted only for one (1) month and three (3) days such that it is Our
considered view that his backwages should be limited to only three (3) months.

Backwages:

[P]5,200.00 x 3 months = [P]15,600.0012

The petitioner, on the other hand, did not appeal LA Gutierrezs May 11, 2005 Decision but
opted to raise the validity of LA Gutierrezs adverse findings with respect to piercing Royales
corporate personality and computation of his separation pay in his Reply to the respondents
Memorandum of Appeal. As the filing of an appeal is the prescribed remedy and no aspect of
the decision can be overturned by a mere reply, the NLRC dismissed the petitioners efforts to
reverse LA Gutierrezs disposition of these issues. Effectively, the petitioner had already
waived his right to question LA Gutierrezs Decision when he failed to file an appeal within
the reglementary period. The NLRC held:

On the other hand, in complainants Reply to Respondents Appeal Memorandum he prayed


that the doctrine of piercing the veil of corporate fiction of respondent be applied so that his
services with Sceptre since 1976 [will not] be deleted. If complainant assails this particular
finding in the Labor Arbiters Decision, complainant should have filed an appeal and not seek
a relief by merely filing a Reply to Respondents Appeal Memorandum.13

Consequently, the petitioner elevated the NLRCs November 30, 2005 Decision to the CA by
way of a Petition for Certiorari under Rule 65 of the Rules of Court. On the other hand, the
respondents filed no appeal from the NLRCs finding that the petitioner was illegally
dismissed.

The CA, in consideration of substantial justice and the jurisprudential dictum that an appealed
case is thrown open for the appellate courts review, disagreed with the NLRC and proceeded
to review the evidence on record to determine if Royale is Sceptres alter ego that would
warrant the piercing of its corporate veil.14 According to the CA, errors not assigned on appeal
may be reviewed as technicalities should not serve as bar to the full adjudication of cases.
Thus:

In Cuyco v. Cuyco, which We find application in the instant case, the Supreme Court held:

In their Reply, petitioners alleged that their petition only raised the sole issue of interest on
the interest due, thus, by not filing their own petition for review, respondents waived their
privilege to bring matters for the Courts review that [does] not deal with the sole issue raised.

Procedurally, the appellate court in deciding the case shall consider only the assigned errors,
however, it is equally settled that the Court is clothed with ample authority to review matters
not assigned as errors in an appeal, if it finds that their consideration is necessary to arrive at a
just disposition of the case.

Therefore, for full adjudication of the case, We have to primarily resolve the issue of whether
the doctrine of piercing the corporate veil be justly applied in order to determine petitioners
length of service with private respondents.15 (citations omitted)

Nonetheless, the CA ruled against the petitioner and found the evidence he submitted to
support his allegation that Royale and Sceptre are one and the same juridical entity to be
wanting. The CA refused to pierce Royales corporate mask as one of the probative factors
that would justify the application of the doctrine of piercing the corporate veil is stock
ownership by one or common ownership of both corporations and the petitioner failed to
present clear and convincing proof that Royale and Sceptre are commonly owned or
controlled. The relevant portions of the CAs Decision state:

In the instant case, We find no evidence to show that Royale Security Agency, Inc.
(hereinafter Royale), a corporation duly registered with the Securities and Exchange

28

Commission (SEC) and Sceptre Security Agency (hereinafter Sceptre), a single


proprietorship, are one and the same entity.

Petitioner, who has been with Sceptre since 1976 and, as ruled by both the Labor Arbiter and
the NLRC, was illegally dismissed by Royale on October 1, 2003, alleged that in order to
circumvent labor laws, especially to avoid payment of money claims and the consideration on
the length of service of its employees, Royale was established as an alter ego or business
conduit of Sceptre. To prove his claim, petitioner declared that Royale is conducting business
in the same office of Sceptre, the latter being owned by the late retired Gen. Roso Sabalones,
and was managed by the latters daughter, Dr. Aida Sabalones-Tan; that two of Royales
incorporators are grandchildren [of] the late Gen. Roso Sabalones; that all the properties of
Sceptre are now owned by Royale, and that the officers and staff of both business
establishments are the same; that the heirs of Gen. Sabalones should have applied for
dissolution of Sceptre before the SEC before forming a new corporation.

On the other hand, private respondents declared that Royale was incorporated only on March
10, 2003 as evidenced by the Certificate of Incorporation issued by the SEC on the same date;
that Royales incorporators are Bruino M. Kuizon, Wilfredo Gracia K. Tan, Karen Therese S.
Tan, Cesar Antonio S. Tan II and [Gabeth] Maria K. Tan.

Settled is the tenet that allegations in the complaint must be duly proven by competent
evidence and the burden of proof is on the party making the allegation. Further, Section 1 of
Rule 131 of the Revised Rules of Court provides:

SECTION 1. Burden of proof. Burden of proof is the duty of a party to present evidence on
the facts in issue necessary to establish his claim or defense by the amount of evidence
required by law.

We believe that petitioner did not discharge the required burden of proof to establish his
allegations. As We see it, petitioners claim that Royale is an alter ego or business conduit of
Sceptre is without basis because aside from the fact that there is no common ownership of
both Royale and Sceptre, no evidence on record would prove that Sceptre, much less the late
retired Gen. Roso Sabalones or his heirs, has control or complete domination of Royales
finances and business transactions. Absence of this first element, coupled by petitioners
failure to present clear and convincing evidence to substantiate his allegations, would prevent
piercing of the corporate veil. Allegations must be proven by sufficient evidence. Simply
stated, he who alleges a fact has the burden of proving it; mere allegation is not
evidence.16 (citations omitted)

By way of this Petition, the petitioner would like this Court to revisit the computation of his
backwages, claiming that the same should be computed from the time he was illegally
dismissed until the finality of this decision.17 The petitioner would likewise have this Court
review and examine anew the factual allegations and the supporting evidence to determine if
the CA erred in its refusal to pierce Royales corporate mask and rule that it is but a mere
continuation or successor of Sceptre. According to the petitioner, the erroneous computation
of his separation pay was due to the CAs failure, as well as the NLRC and LA Gutierrez, to
consider evidence conclusively demonstrating that Royale and Sceptre are one and the same
juridical entity. The petitioner claims that since Royale is no more than Sceptres alter ego, it
should recognize and credit his length of service with Sceptre.18

The petitioner claimed that Royale and Sceptre are not separate legal persons for purposes of
computing the amount of his separation pay and other benefits under the Labor Code. The
piercing of Royales corporate personality is justified by several indicators that Royale was
incorporated for the sole purpose of defeating his right to security of tenure and circumvent
payment of his benefits to which he is entitled under the law: (i) Royale was holding office in
the same property used by Sceptre as its principal place of business; 19(ii) Sceptre and Royal
have the same officers and employees;20 (iii) on October 14, 1994, Roso, the sole proprietor of
Sceptre, sold to Aida, and her husband, Wilfredo Gracia K. Tan (Wilfredo),21 the property
used by Sceptre as its principal place of business;22 (iv) Wilfredo is one of the incorporators of
Royale;23 (v) on May 3, 1999, Roso ceded the license to operate Sceptre issued by the
Philippine National Police to Aida;24 (vi) on July 28, 1999, the business name Sceptre
Security & Detective Agency was registered with the Department of Trade and Industry
(DTI) under the name of Aida;25 (vii) Aida exercised control over the affairs of Sceptre and
Royale, as she was, in fact, the one who dismissed the petitioner from employment; 26 (viii)
Karen, the daughter of Aida, was Sceptres Operation Manager and is one of the incorporators
of Royale;27 and (ix) Cesar Tan II, the son of Aida was one of Sceptres officers and is one of
the incorporators of Royale.28

In their Comment, the respondents claim that the petitioner is barred from questioning the
manner by which his backwages and separation pay were computed. Earlier, the petitioner
moved for the execution of the NLRCs November 30, 2005 Decision 29 and the respondents
paid him the full amount of the monetary award thereunder shortly after the writ of execution
was issued.30 The respondents likewise maintain that Royales separate and distinct corporate
personality should be respected considering that the evidence presented by the petitioner fell
short of establishing that Royale is a mere alter ego of Sceptre.

29

The petitioner does not deny that he has received the full amount of backwages and separation
pay as provided under the NLRCs November 30, 2005 Decision. 31 However, he claims that
this does not preclude this Court from modifying a decision that is tainted with grave abuse of
discretion or issued without jurisdiction.32

The petitioners receipt of the monetary award adjudicated by the NLRC is not absolute,
unconditional and unqualified. The petitioners May 3, 2007 Motion for Release contains a
reservation, stating in his prayer that: it is respectfully prayed that the respondents and/or
Great Domestic Insurance Co. be ordered to RELEASE/GIVE the amount of P23,521.67 in
favor of the complainant TIMOTEO H. SARONA without prejudice to the outcome of the
petition with the CA.33

ISSUES

Considering the conflicting submissions of the parties, a judicious determination of their


respective rights and obligations requires this Court to resolve the following substantive
issues:

a. Whether Royales corporate fiction should be pierced for the purpose of compelling it to
recognize the petitioners length of service with Sceptre and for holding it liable for the
benefits that have accrued to him arising from his employment with Sceptre; and

b. Whether the petitioners backwages should be limited to his salary for three (3) months.

OUR RULING

Because his receipt of the proceeds of the award under the NLRCs November 30, 2005
Decision is qualified and without prejudice to the CAs resolution of his petition
forcertiorari, the petitioner is not barred from exercising his right to elevate the decision
of the CA to this Court.

Before this Court proceeds to decide this Petition on its merits, it is imperative to resolve the
respondents contention that the full satisfaction of the award under the NLRCs November
30, 2005 Decision bars the petitioner from questioning the validity thereof. The respondents
submit that they had paid the petitioner the amount of P21,521.67 as directed by the NLRC
and this constitutes a waiver of his right to file an appeal to this Court.

The respondents fail to convince.

In Leonis Navigation Co., Inc., et al. v. Villamater, et al.,34 this Court ruled that the prevailing
partys receipt of the full amount of the judgment award pursuant to a writ of execution issued
by the labor arbiter does not
close or terminate the case if such receipt is qualified as without prejudice to the outcome of
the petition for certiorari pending with the CA.

Simply put, the execution of the final and executory decision or resolution of the NLRC shall
proceed despite the pendency of a petition for certiorari, unless it is restrained by the proper
court. In the present case, petitioners already paid Villamaters widow, Sonia, the amount
of P3,649,800.00, representing the total and permanent disability award plus attorneys fees,
pursuant to the Writ of Execution issued by the Labor Arbiter. Thereafter, an Order was issued
declaring the case as "closed and terminated". However, although there was no motion for
reconsideration of this last Order, Sonia was, nonetheless, estopped from claiming that the
controversy had already reached its end with the issuance of the Order closing and terminating
the case. This is because the Acknowledgment Receipt she signed when she received
petitioners payment was without prejudice to the final outcome of the petition
for certiorari pending before the CA.35

The finality of the NLRCs decision does not preclude the filing of a petition
for certiorari under Rule 65 of the Rules of Court. That the NLRC issues an entry of judgment
after the lapse of ten (10) days from the parties receipt of its decision 36 will only give rise to
the prevailing partys right to move for the execution thereof but will not prevent the CA from
taking cognizance of a petition forcertiorari on jurisdictional and due process
considerations.37 In turn, the decision rendered by the CA on a petition for certiorari may be
appealed to this Court by way of a petition for review on certiorari under Rule 45 of the Rules
of Court. Under Section 5, Article VIII of the Constitution, this Court has the power to
review, revise, reverse, modify, or affirm on appeal or certiorari as the law or the Rules of
Court may provide, final judgments and orders of lower courts in x x x all cases in which only
an error or question of law is involved. Consistent with this constitutional mandate, Rule 45
of the Rules of Court provides the remedy of an appeal by certiorari from decisions, final
orders or resolutions of the CA in any case, i.e., regardless of the nature of the action or
proceedings
involved, which would be but a continuation of the appellate process over the original

30

case.38 Since an appeal to this Court is not an original and independent action but a
continuation of the proceedings before the CA, the filing of a petition for review under Rule
45 cannot be barred by the finality of the NLRCs decision in the same way that a petition
for certiorari under Rule 65 with the CA cannot.

Furthermore, if the NLRCs decision or resolution was reversed and set aside for being issued
with grave abuse of discretion by way of a petition for certiorari to the CA or to this Court by
way of an appeal from the decision of the CA, it is considered void ab initio and, thus, had
never become final and executory.39

A Rule 45 Petition should be confined to questions of law. Nevertheless, this Court has
the power to resolve a question of fact, such as whether a corporation is a mere alter ego
of another entity or whether the corporate fiction was invoked for fraudulent or
malevolent ends, if the findings in assailed decision is not supported by the evidence on
record or based on a misapprehension of facts.

The question of whether one corporation is merely an alter ego of another is purely one of fact.
So is the question of whether a corporation is a paper company, a sham or subterfuge or
whether the petitioner adduced the requisite quantum of evidence warranting the piercing of
the veil of the respondents corporate personality.40

As a general rule, this Court is not a trier of facts and a petition for review on certiorari under
Rule 45 of the Rules of Court must exclusively raise questions of law. Moreover, if factual
findings of the NLRC and the LA have been affirmed by the CA, this Court accords them the
respect and finality they deserve. It is well-settled and oft-repeated that findings of fact of
administrative agencies and quasi-judicial bodies, which have acquired expertise because their
jurisdiction is confined to specific matters, are generally accorded not only respect, but finality
when affirmed by the CA. 41

Nevertheless, this Court will not hesitate to deviate from what are clearly procedural
guidelines and disturb and strike down the findings of the CA and those of the labor tribunals
if there is a showing that they are unsupported by the evidence on record or there was a patent
misappreciation of facts. Indeed, that the impugned decision of the CA is consistent with the
findings of the labor tribunals does notper se conclusively demonstrate the correctness thereof.
By way of exception to the general rule, this Court will scrutinize the facts if only to rectify
the prejudice and injustice resulting from an incorrect assessment of the evidence presented.

A resolution of an issue that has supposedly become final and executory as the petitioner
only raised it in his reply to the respondents appeal may be revisited by the appellate
court if such is necessary for a just disposition of the case.

As above-stated, the NLRC refused to disturb LA Gutierrezs denial of the petitioners plea to
pierce Royales corporate veil as the petitioner did not appeal any portion of LA Gutierrezs
May 11, 2005 Decision.

In this respect, the NLRC cannot be accused of grave abuse of discretion. Under Section 4(c),
Rule VI of the NLRC Rules,42 the NLRC shall limit itself to reviewing and deciding only the
issues that were elevated on appeal. The NLRC, while not totally bound by technical rules of
procedure, is not licensed to disregard and violate the implementing rules it implemented. 43

Nonetheless, technicalities should not be allowed to stand in the way of equitably and
completely resolving the rights and obligations of the parties. Technical rules are not binding
in labor cases and are not to be applied strictly if the result would be detrimental to the
working man.44 This Court may choose not to encumber itself with technicalities and
limitations consequent to procedural rules if such will only serve as a hindrance to its duty to
decide cases judiciously and in a manner that would put an end with finality to all existing
conflicts between the parties.

Royale is a continuation or successor of Sceptre.

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


succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence. It has a personality separate and distinct from the persons composing it, as
well as from any other legal entity to which it may be related. This is basic. 45

Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be

31

impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.46

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 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.47

Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be
done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
misused or when necessary in the interest of justice. After all, the concept of corporate entity
was not meant to promote unfair objectives.48

The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of another corporation.49

In this regard, this Court finds cogent reason to reverse the CAs findings. Evidence abound
showing that Royale is a mere continuation or successor of Sceptre and fraudulent objectives
are behind Royales incorporation and the petitioners subsequent employment therein. These
are plainly suggested by events that the respondents do not dispute and which the CA, the
NLRC and LA Gutierrez accept as fully substantiated but misappreciated as insufficient to
warrant the use of the equitable weapon of piercing.

As correctly pointed out by the petitioner, it was Aida who exercised control and supervision
over the affairs of both Sceptre and Royale. Contrary to the submissions of the respondents
that Roso had been the only one in sole control of Sceptres finances and business affairs,
Aida took over as early as 1999 when Roso assigned his license to operate Sceptre on May 3,
1999.50 As further proof of Aidas acquisition of the rights as Sceptres sole proprietor, she
caused the registration of the business name Sceptre Security & Detective Agency under her
name with the DTI a few months after Roso abdicated his rights to Sceptre in her favor. 51 As

far as Royale is concerned, the respondents do not deny that she has a hand in its management
and operation and possesses control and supervision of its employees, including the petitioner.
As the petitioner correctly pointed out, that Aida was the one who decided to stop giving any
assignments to the petitioner and summarily dismiss him is an eloquent testament of the power
she wields insofar as Royales affairs are concerned. The presence of actual common control
coupled with the misuse of the corporate form to perpetrate oppressive or manipulative
conduct or evade performance of legal obligations is patent; Royale cannot hide behind its
corporate fiction.

Aidas control over Sceptre and Royale does not, by itself, call for a disregard of the corporate
fiction. There must be a showing that a fraudulent intent or illegal purpose is behind the
exercise of such control to warrant the piercing of the corporate veil. 52 However, the manner
by which the petitioner was made to resign from Sceptre and how he became an employee of
Royale suggest the perverted use of the legal fiction of the separate corporate personality. It is
undisputed that the petitioner tendered his resignation and that he applied at Royale at the
instance of Karen and Cesar and on the impression they created that these were necessary for
his continued employment. They orchestrated the petitioners resignation from Sceptre and
subsequent employment at Royale, taking advantage of their ascendancy over the petitioner
and the latters lack of knowledge of his rights and the consequences of his actions.
Furthermore, that the petitioner was made to resign from Sceptre and apply with Royale only
to be unceremoniously terminated shortly thereafter leads to the ineluctable conclusion that
there was intent to violate the petitioners rights as an employee, particularly his right to
security of tenure. The respondents scheme reeks of bad faith and fraud and compassionate
justice dictates that Royale and Sceptre be merged as a single entity, compelling Royale to
credit and recognize the petitioners length of service with Sceptre. The respondents cannot
use the legal fiction of a separate corporate personality for ends subversive of the policy and
purpose behind its creation53 or which could not have been intended by law to which it owed
its being.54

For the piercing doctrine to apply, it is of no consequence if Sceptre is a sole proprietorship.


As ruled in Prince Transport, Inc., et al. v. Garcia, et al.,55 it is the act of hiding behind the
separate and distinct personalities of juridical entities to perpetuate fraud, commit illegal acts,
evade ones obligations that the equitable piercing doctrine was formulated to address and
prevent:

A settled formulation of the doctrine of piercing the corporate veil is that 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 these two
entities are distinct and treat them as identical or as one and the same. In the present case, it
may be true that Lubas is a single proprietorship and not a corporation. However, petitioners
attempt to isolate themselves from and hide behind the supposed separate and distinct

32

personality of Lubas so as to evade their liabilities is precisely what the classical doctrine of
piercing the veil of corporate entity seeks to prevent and remedy.56

Also, Sceptre and Royale have the same principal place of business. As early as October 14,
1994, Aida and Wilfredo became the owners of the property used by Sceptre as its principal
place of business by virtue of a Deed of Absolute Sale they executed with Roso. 57 Royale,
shortly after its incorporation, started to hold office in the same property. These, the
respondents failed to dispute.

The respondents do not likewise deny that Royale and Sceptre share the same officers and
employees. Karen assumed the dual role of Sceptres Operation Manager and incorporator of
Royale. With respect to the petitioner, even if he has already resigned from Sceptre and has
been employed by Royale, he was still using the patches and agency cloths of Sceptre during
his assignment at Highlight Metal.

Royale also claimed a right to the cash bond which the petitioner posted when he was still
with Sceptre. If Sceptre and Royale are indeed separate entities, Sceptre should have released
the petitioners cash bond when he resigned and Royale would have required the petitioner to
post a new cash bond in its favor.

from the commencement of employment up to the time of termination, including the imputed
service for which the employee is entitled to backwages, with the salary rate prevailing at the
end of the period of putative service being the basis for computation. 59

It is well-settled, even axiomatic, that if reinstatement is not possible, the period covered
in the computation of backwages is from the time the employee was unlawfully
terminated until the finality of the decision finding illegal dismissal.

With respect to the petitioners backwages, this Court cannot subscribe to the view that it
should be limited to an amount equivalent to three (3) months of his salary. Backwages is a
remedy affording the employee a way to recover what he has lost by reason of the unlawful
dismissal.60 In awarding backwages, the primordial consideration is the income that should
have accrued to the employee from the time that he was dismissed up to his
reinstatement61 and the length of service prior to his dismissal is definitely inconsequential.

As early as 1996, this Court, in Bustamante, et al. v. NLRC, et al.,62 clarified in no uncertain
terms that if reinstatement is no longer possible, backwages should be computed from the time
the employee was terminated until the finality of the decision, finding the dismissal unlawful.

Taking the foregoing in conjunction with Aidas control over Sceptres and Royales business
affairs, it is patent that Royale was a mere subterfuge for Aida. Since a sole proprietorship
does not have a separate and distinct personality from that of the owner of the enterprise, the
latter is personally liable. This is what she sought to avoid but cannot prosper.

Therefore, in accordance with R.A. No. 6715, petitioners are entitled on their full backwages,
inclusive of allowances and other benefits or their monetary equivalent, from the time their
actual compensation was withheld on them up to the time of their actual reinstatement.

Effectively, the petitioner cannot be deemed to have changed employers as Royale and Sceptre
are one and the same. His separation pay should, thus, be computed from the date he was hired
by Sceptre in April 1976 until the finality of this decision. Based on this Courts ruling
in Masagana Concrete Products, et al. v. NLRC, et al.,58 the intervening period between the
day an employee was illegally dismissed and the day the decision finding him illegally
dismissed becomes final and executory shall be considered in the computation of his
separation pay as a period of imputed or putative service:

As to reinstatement of petitioners, this Court has already ruled that reinstatement is no longer
feasible, because the company would be adjustly prejudiced by the continued employment of
petitioners who at present are overage, a separation pay equal to one-month salary granted to
them in the Labor Arbiter's decision was in order and, therefore, affirmed on the Court's
decision of 15 March 1996.Furthermore, since reinstatement on this case is no longer
feasible, the amount of backwages shall be computed from the time of their illegal
termination on 25 June 1990 up to the time of finality of this decision. 63 (emphasis
supplied)

Separation pay, equivalent to one month's salary for every year of service, is awarded as an
alternative to reinstatement when the latter is no longer an option. Separation pay is computed

33

A further clarification was made in Javellana, Jr. v. Belen:64

Article 279 of the Labor Code, as amended by Section 34 of Republic Act 6715 instructs:

Art. 279. Security of Tenure. - In cases of regular employment, the employer shall not
terminate the services of an employee except for a just cause or when authorized by this Title.
An employee who is unjustly dismissed from work shall be entitled to reinstatement without
loss of seniority rights and other privileges and to his full backwages, inclusive of allowances,
and to his other benefits or their monetary equivalent computed from the time his
compensation was withheld from him up to the time of his actual reinstatement.

Clearly, the law intends the award of backwages and similar benefits to accumulate past the
date of the Labor Arbiter's decision until the dismissed employee is actually reinstated. But if,
as in this case, reinstatement is no longer possible, this Court has consistently ruled that
backwages shall be computed from the time of illegal dismissal until the date the decision
becomes final.65 (citation omitted)

Finally, moral damages and exemplary damages at P25,000.00 each as indemnity for the
petitioners dismissal, which was tainted by bad faith and fraud, are in order. Moral damages
may be recovered where the dismissal of the employee was tainted by bad faith or fraud, or
where it constituted an act oppressive to labor, and done in a manner contrary to morals, good
customs or public policy while exemplary damages are recoverable only if the dismissal was
done in a wanton, oppressive, or malevolent manner.69

WHEREFORE, premises considered, the Petition is hereby GRANTED.


We REVERSE and SET ASIDE the CAs May 29, 2008 Decision in C.A.-G.R. SP No.
02127 and order the respondents to pay the petitioner the following minus the amount of
(P23,521.67) paid to the petitioner in satisfaction of the NLRCs November 30, 2005 Decision
in NLRC Case No. V-000355-05:

a) full backwages and other benefits computed from October 1, 2003 (the date Royale illegally
dismissed the petitioner) until the finality of this decision;

b) separation pay computed from April 1976 until the finality of this decision at the rate of one
month pay per year of service;

In case separation pay is awarded and reinstatement is no longer feasible, backwages shall be
computed from the time of illegal dismissal up to the finality of the decision should separation
pay not be paid in the meantime. It is the employees actual receipt of the full amount of his
separation pay that will effectively terminate the employment of an illegally dismissed
employee.66 Otherwise, the employer-employee relationship subsists and the illegally
dismissed employee is entitled to backwages, taking into account the increases and other
benefits, including the 13th month pay, that were received by his co-employees who are not
dismissed.67 It is the obligation of the employer to pay an illegally dismissed employee or
worker the whole amount of the salaries or wages, plus all other benefits and
bonuses and general increases, to which he would have been normally entitled had he not been
dismissed and had not stopped working.68

c) ten percent (10%) attorneys fees based on the total amount of the awards under (a) and (b)
above;

d) moral damages of Twenty-Five Thousand Pesos (P25,000.00); and

5.

exemplary damages of Twenty-Five Thousand Pesos (P25,000.00).

This case is REMANDED to the labor arbiter for computation of the separation pay,
backwages, and other monetary awards due the petitioner.
In fine, this Court holds Royale liable to pay the petitioner backwages to be computed from
his dismissal on October 1, 2003 until the finality of this decision. Nonetheless, the amount
received by the petitioner from the respondents in satisfaction of the November 30, 2005
Decision shall be deducted accordingly.

SO ORDERED.

34

CHINA BANKING CORPORATION, petitioner,


vs.
DYNE-SEM ELECTRONICS CORPORATION, respondent.
CORONA, J.:

5.3 [t]he various facilities, machineries and equipment being used by [respondent] in its
business operations were legitimately and validly acquired, under arms-length transactions,
from various corporations which had become absolute owners thereof at the time of said
transactions; these were not just "taken over" nor "acquired from Dynetics" by [respondent],
contrary to what plaintiff falsely and maliciously alleges;

On June 19 and 26, 1985, Dynetics, Inc. (Dynetics) and Elpidio O. Lim borrowed a total
of P8,939,000 from petitioner China Banking Corporation. The loan was evidenced by six
promissory notes.1

5.4 [respondent] acquired most of its present machineries and equipment as second-hand items
to keep costs down;

The borrowers failed to pay when the obligations became due. Petitioner consequently
instituted a complaint for sum of money2 on June 25, 1987 against them. The complaint
sought payment of the unpaid promissory notes plus interest and penalties.

5.5 [t]he present plant site is under lease from Food Terminal, Inc., a government-controlled
corporation, and is located inside the FTI Complex in Taguig, Metro Manila, where a number
of other firms organized in 1986 and also engaged in the same or similar business have
likewise established their factories; practical convenience, and nothing else, was behind
[respondents] choice of plant site;

Summons was not served on Dynetics, however, because it had already closed down. Lim, on
the other hand, filed his answer on December 15, 1987 denying that "he promised to pay [the
obligations] jointly and severally to [petitioner]."3
On January 7, 1988, the case was scheduled for pre-trial with respect to Lim. The case against
Dynetics was archived.

5.6 [respondent] operates its own bonded warehouse under authority from the Bureau of
Customs which has the sole and absolute prerogative to authorize and assign customs bonded
warehouses; again, practical convenience played its role here since the warehouse in question
was virtually lying idle and unused when said Bureau decided to assign it to [respondent] in
June 1986.6

On September 23, 1988, an amended complaint4 was filed by petitioner impleading respondent
Dyne-Sem Electronics Corporation (Dyne-Sem) and its stockholders Vicente Chuidian,
Antonio Garcia and Jacob Ratinoff. According to petitioner, respondent was formed and
organized to be Dynetics alter ego as established by the following circumstances:

On February 28, 1989, the trial court issued an order archiving the case as to Chuidian, Garcia
and Ratinoff since summons had remained unserved.

Dynetics, Inc. and respondent are both engaged in the same line of business of
manufacturing, producing, assembling, processing, importing, exporting, buying, distributing,
marketing and testing integrated circuits and semiconductor devices;

xxx [T]he Court rules that Dyne-Sem Electronics Corporation is not an alter ego of Dynetics,
Inc. Thus, Dyne-Sem Electronics Corporation is not liable under the promissory notes.

After hearing, the court a quo rendered a decision on December 27, 1991 which read:

xxx
[t]he principal office and factory site of Dynetics, Inc. located at Avocado Road, FTI
Complex, Taguig, Metro Manila, were used by respondent as its principal office and factory
site;
[r]espondent acquired some of the machineries and equipment of Dynetics, Inc. from banks
which acquired the same through foreclosure;

xxx

xxx

WHEREFORE, judgment is hereby rendered ordering Dynetics, Inc. and Elpidio O. Lim,
jointly and severally, to pay plaintiff.
xxx

xxx

xxx

[r]espondent retained some of the officers of Dynetics, Inc.5

Anent the complaint against Dyne-Sem and the latters counterclaim, both are hereby
dismissed, without costs.

xxx

SO ORDERED.7

xxx

xxx

On December 28, 1988, respondent filed its answer, alleging that:


5.1 [t]he incorporators as well as present stockholders of [respondent] are totally different
from those of Dynetics, Inc., and not one of them has ever been a stockholder or officer of the
latter;
5.2 [n]ot one of the directors of [respondent] is, or has ever been, a director, officer, or
stockholder of Dynetics, Inc.;

From this adverse decision, petitioner appealed to the Court of Appeals 8 but the appellate
court dismissed the appeal and affirmed the trial courts decision. 9 It found that respondent
was indeed not an alter ego of Dynetics. The two corporations had different articles of
incorporation. Contrary to petitioners claim, no merger or absorption took place between the
two. What transpired was a mere sale of the assets of Dynetics to respondent. The appellate
court denied petitioners motion for reconsideration.10
Hence, this petition for review11 with the following assigned errors:

35

VI.
Issues
What is the quantum of evidence needed for the trial court to determine if the veil of
corporat[e] fiction should be pierced?
[W]hether or not the Regional Trial Court of Manila Branch 15 in its Decision dated
December 27, 1991 and the Court of Appeals in its Decision dated February 28, 2001 and
Resolution dated July 27, 2001, which affirmed en toto [Branch 15, Manila Regional Trial
Courts decision,] have ruled in accordance with law and/or applicable [jurisprudence] to the
extent that the Doctrine of Piercing the Veil of Corporat[e] Fiction is not applicable in the case
at bar?12
We find no merit in the petition.
The question of whether one corporation is merely an alter ego of another is purely one of fact.
So is the question of whether a corporation is a paper company, a sham or subterfuge or
whether petitioner adduced the requisite quantum of evidence warranting the piercing of the
veil of respondents corporate entity. This Court is not a trier of facts. Findings of fact of the
Court of Appeals, affirming those of the trial court, are final and conclusive. The jurisdiction
of this Court in a petition for review on certiorari is limited to reviewing only errors of law,
not of fact, unless it is shown, inter alia, that: (a) the conclusion is grounded entirely on
speculations, surmises and conjectures; (b) the inference is manifestly mistaken, absurd and
impossible; (c) there is grave abuse of discretion; (d) the judgment is based on a
misapplication of facts; (e) the findings of fact of the trial court and the appellate court are
contradicted by the evidence on record and (f) the Court of Appeals went beyond the issues of
the case and its findings are contrary to the admissions of both parties. 13
We have reviewed the records and found that the factual findings of the trial and appellate
courts and consequently their conclusions were supported by the evidence on record.
The general rule is that a corporation has a personality separate and distinct from that of its
stockholders and other corporations to which it may be connected.14 This is a fiction created
by law for convenience and to prevent injustice.15
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may exist to
warrant the disregard of its independent being and the piercing of the corporate
veil.16 In Martinez v. Court of Appeals,17 we held:
The veil of separate corporate personality may be lifted when such personality is used to
defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to
confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit
or an alter ego of another corporation or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation; or when the corporation is used as a cloak or cover for fraud or
illegality, or to work injustice, or where necessary to achieve equity or for the protection of the

creditors. In such cases, the corporation will be considered as a mere association of persons.
The liability will directly attach to the stockholders or to the other corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
proven clearly and convincingly.18
In this case, petitioner failed to prove that Dyne-Sem was organized and controlled, and its
affairs conducted, in a manner that made it merely an instrumentality, agency, conduit or
adjunct of Dynetics, or that it was established to defraud Dynetics creditors, including
petitioner.
The similarity of business of the two corporations did not warrant a conclusion that respondent
was but a conduit of Dynetics. As we held in Umali v. Court of Appeals,19 "the mere fact that
the businesses of two or more corporations are interrelated is not a justification for
disregarding their separate personalities, absent sufficient showing that the corporate entity
was purposely used as a shield to defraud creditors and third persons of their rights."
Likewise, respondents acquisition of some of the machineries and equipment of Dynetics was
not proof that respondent was formed to defraud petitioner. As the Court of Appeals found, no
merger20 took place between Dynetics and respondent Dyne-Sem. What took place was a sale
of the assets21 of the former to the latter. Merger is legally distinct from a sale of
assets.22 Thus, where one corporation sells or otherwise transfers all its assets to another
corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of
the transferor.
Petitioner itself admits that respondent acquired the machineries and equipment not directly
from Dynetics but from the various corporations which successfully bidded for them in an
auction sale. The contracts of sale executed between the winning bidders and respondent
showed that the assets were sold for considerable amounts.23 The Court of Appeals thus
correctly ruled that the assets were not "diverted" to respondent as an alter ego of
Dynetics.24 The machineries and equipment were transferred and disposed of by the winning
bidders in their capacity as owners. The sales were therefore valid and the transfers of the
properties to respondent legal and not in any way in contravention of petitioners rights as
Dynetics creditor.
Finally, it may be true that respondent later hired Dynetics former Vice-President Luvinia
Maglaya and Assistant Corporate Counsel Virgilio Gesmundo. From this, however, we cannot
conclude that respondent was an alter ego of Dynetics. In fact, even the overlapping of
incorporators and stockholders of two or more corporations will not necessarily lead to such
inference and justify the piercing of the veil of corporate fiction.25 Much more has to be
proven.Premises considered, no factual and legal basis exists to hold respondent Dyne-Sem
liable for the obligations of Dynetics to petitioner.
WHEREFORE, the petition is hereby DENIED.The assailed Court of Appeals decision and
resolution in CA-G.R. CV No. 40672 are hereby AFFIRMED.
Costs against petitioner.

36

G.R. No. 167530

March 13, 2013

PHILIPPINE NATIONAL BANK, Petitioner,


vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.

money was filed in the RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP,
and PNB solidarily liable for the amount owing Hercon, Inc.11 The case was docketed as Civil
Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger.
This prompted the amendment of the complaint to substitute HRCC for Hercon, Inc. 12

G.R. No. 167561


ASSET PRIVATIZATION TRUST, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
G.R. No. 167603
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision 2 dated November 30, 2004 and
the Resolution3 dated March 22, 2005 of the Court of Appeals in CA-G.R. CV No. 57553. The
said Decision affirmed the Decision4dated November 6, 1995 of the Regional Trial Court
(RTC) of Makati City, Branch 62, granting a judgment award of P8,370,934.74, plus legal
interest, in favor of respondent Hydro Resources Contractors Corporation (HRCC) with the
modification that the Privatization and Management Office (PMO), successor of petitioner
Asset Privatization Trust (APT),5 has been held solidarily liable with Nonoc Mining and
Industrial Corporation (NMIC)6and petitioners Philippine National Bank (PNB) and
Development Bank of the Philippines (DBP), while the Resolution denied reconsideration
separately prayed for by PNB, DBP, and APT.
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the
properties of Marinduque Mining and Industrial Corporation (MMIC). As a result of the
foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the
business operations of the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57%
and 43% of the shares of NMIC, respectively, except for five qualifying shares. 8 As of
September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP
or PNB.9
Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and
Road Construction Program in 1985 for a total contract price of P35,770,120. After computing
the payments already made by NMIC under the program and crediting the NMICs receivables
from
Hercon, Inc., the latter found that NMIC still has an unpaid balance
of P8,370,934.74.10 Hercon, Inc. made several demands on NMIC, including a letter of final
demand dated August 12, 1986, and when these were not heeded, a complaint for sum of

Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No.
50 creating the APT for the expeditious disposition and privatization of certain government
corporations and/or the assets thereof. Pursuant to the said Proclamation, on February 27,
1987, DBP and PNB executed their respective deeds of transfer in favor of the National
Government assigning, transferring and conveying certain assets and liabilities, including their
respective stakes in NMIC.13 In turn and on even date, the National Government transferred
the said assets and liabilities to the APT as trustee under a Trust Agreement. 14 Thus, the
complaint was amended for the second time to implead and include the APT as a defendant.
In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its
contract with HRCC was entered into by its then President without any authority. Moreover,
the said contract allegedly failed to comply with laws, rules and regulations concerning
government contracts. NMIC further claimed that the contract amount was manifestly
excessive and grossly disadvantageous to the government. NMIC made counterclaims for the
amounts already paid to Hercon, Inc. and attorneys fees, as well as payment for equipment
rental for four trucks, replacement of parts and other services, and damage to some of NMICs
properties.16
For its part, DBPs answer17 raised the defense that HRCC had no cause of action against it
because DBP was not privy to HRCCs contract with NMIC. Moreover, NMICs juridical
personality is separate from that of DBP. DBP further interposed a counterclaim for attorneys
fees.18
PNBs answer19 also invoked lack of cause of action against it. It also raised estoppel on
HRCCs part and laches as defenses, claiming that the inclusion of PNB in the complaint was
the first time a demand for payment was made on it by HRCC. PNB also invoked the separate
juridical personality of NMIC and made counterclaims for moral damages and attorneys
fees.20
APT set up the following defenses in its answer21: lack of cause of action against it, lack of
privity between Hercon, Inc. and APT, and the National Governments preferred lien over the
assets of NMIC.22
After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of
HRCC. It pierced the corporate veil of NMIC and held DBP and PNB solidarily liable with
NMIC:
On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction,
this Court likewise finds for the plaintiff.

37

From the documentary evidence adduced by the plaintiff, some of which were even adopted
by defendants and DBP and PNB as their own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4",
"I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established
that except for five (5) qualifying shares, NMIC is owned by defendants DBP and PNB, with
the former owning 57% thereof, and the latter 43%. As of September 24, 1984, all the
members of NMICs Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa,
Ruben Ancheta, Geraldo Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits
"I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB.
In fact, it was Rolando M. Zosa, then Governor of DBP, who was signing and entering into
contracts with third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears that the 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 legal fiction that two (2) corporations
are distinct entities, and treat them as identical." (Phil. Veterans Investment Development
Corp. vs. CA, 181 SCRA 669).
From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of
both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for
the latters unpaid obligations to plaintiff.23
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the
Decision of the trial court reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff
HYDRO RESOURCES CONTRACTORS CORPORATION and against the defendants
NONOC
MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE
PHILIPPINES and PHILIPPINE NATIONAL BANK, ordering the aforenamed defendants, to
pay the plaintiff jointly and severally, the sum ofP8,370,934.74 plus legal interest thereon
from date of demand, and attorneys fees equivalent to 25% of the judgment award.
The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC
MINING AND INDUSTRIAL CORPORATION is directed to ensure compliance with this
Decision.24
DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was
wrong for the RTC to pierce the veil of NMICs corporate personality and hold DBP and PNB
solidarily liable with NMIC.25
The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing
of the veil of the corporate personality of NMIC and held DBP, PNB, and APT solidarily
liable with NMIC. In particular, the Court of Appeals made the following findings:

In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to
the extent of 57% and 43% respectively; that said two (2) appellants are the only stockholders,
with the qualifying stockholders of five (5) consisting of its own officers and included in its
charter merely to comply with the requirement of the law as to number of incorporators; and
that the directorates of DBP, PNB and [NMIC] are interlocked.
xxxx
We find it therefore correct for the lower court to have ruled that:
"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of
both DBP and PNB. Thus, the DBP and PNB are jointly and severally liable with NMIC for
the latters unpaid obligation to plaintiff."26(Citation omitted.)
The Court of Appeals then concluded that, "in keeping with the concept of justice and fair
play," the corporate veil of NMIC should be pierced, ratiocinating:
For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing
beneficial contracts, and then using such separate entity to evade the payment of a just debt,
would be the height of injustice and iniquity. Surely that could not have been the intendment
of the law with respect to corporations. x x x.27
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The
judgment in favor of appellee Hydro Resources Contractors Corporation in the amount
of P8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the
dismissal of the case as against Assets Privatization Trust is REVERSED, and its successor
the Privatization and Management Office is INCLUDED as one of those jointly and severally
liable for such indebtedness. The award of attorneys fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28
The respective motions for reconsideration of DBP, PNB, and APT were denied. 29
Hence, these consolidated petitions.30
All three petitioners assert that NMIC is a corporate entity with a juridical personality separate
and distinct from both PNB and DBP. They insist that the majority ownership by DBP and
PNB of NMIC is not a sufficient ground for disregarding the separate corporate personality of
NMIC because NMIC was not a mere adjunct, business conduit or alter ego of DBP and PNB.
According to them, the application of the doctrine of piercing the corporate veil is
unwarranted as nothing in the records would show that the ownership and control of the
shareholdings of NMIC by DBP and PNB were used to commit fraud, illegality or injustice. In
the absence of evidence that the stock control by DBP and PNB over NMIC was used to
commit some fraud or a wrong and that said control was the proximate cause of the injury

38

sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is
misplaced.31
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to
pay NMICs exclusive and separate corporate indebtedness to HRCC, such liability of the two
banks was transferred to and assumed by the National Government through the APT, now the
PMO, under the respective deeds of transfer both dated February 27, 1997 executed by DBP
and PNB pursuant to Proclamation No. 50 dated December 8, 1986 and Administrative Order
No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an unqualified assumption by the
National Government of all liabilities incurred by NMIC, the National Government through
the APT could not be held liable for NMICs contractual liability. The APT asserts that HRCC
had not sufficiently shown that the APT is the successor-in-interest of all the liabilities of
NMIC, or of DBP and PNB as transferors, and that the adjudged liability is included among
the liabilities assigned and transferred by DBP and PNB in favor of the National
Government.33
HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the
veil of corporate fiction." It claims that NMIC was the alter ego of DBP and PNB which
owned, conducted and controlled the business of NMIC as shown by the following
circumstances: NMIC was owned by DBP and PNB, the officers of DBP and PNB were also
the officers of NMIC, and DBP and PNB financed the operations of NMIC. HRCC further
argues that a parent corporation may be held liable for the contracts or obligations of its
subsidiary corporation where the latter is a mere agency, instrumentality or adjunct of the
parent corporation.34
Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and
NMIC because the APT assumed the obligations of DBP and PNB as the successor-in-interest
of the said banks with respect to the assets and liabilities of NMIC.35 As trustee of the
Republic of the Philippines, the APT also assumed the responsibility of the Republic pursuant
to the following provision of Section 2.02 of the respective deeds of transfer executed by DBP
and PNB in favor of the Republic:

as a distinct legal entity and as a result of a conscious policy decision to promote capital
formation,39 a corporation incurs its own liabilities and is legally responsible for payment of
its obligations.40 In other words, by virtue of the separate juridical personality of a corporation,
the corporate debt or credit is not the debt or credit of the stockholder. 41 This protection from
liability for shareholders is the principle of limited liability. 42
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.43
However, the rule is that a court should be careful in assessing the milieu where the doctrine
of the corporate veil may be applied. Otherwise an injustice, although unintended, may result
from its erroneous application.44 Thus, cutting through the corporate cover requires an
approach characterized by due care and caution:
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. x x x. 45 (Emphases supplied; citations
omitted.)
Sarona v. National Labor Relations Commission46 has defined the scope of application of the
doctrine of piercing the corporate veil:
The doctrine of piercing the corporate veil applies only in three (3) basic areas, namely: 1)
defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion
of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. (Citation omitted.)

SECTION 2. TRANSFER OF BANKS LIABILITIES


xxxx
2.02 With respect to the Banks liabilities which are contingent and those liabilities where the
Banks creditors consent to the transfer thereof is not obtained, said liabilities shall remain in
the books of the BANK with the GOVERNMENT funding the payment thereof. 36
After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly authorized by law or incident
to its existence.37 It has a personality separate and distinct from that of its stockholders and
from that of other corporations to which it may be connected.38 As a consequence of its status

Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as
assignee of DBP and PNB) should be held solidarily liable for using NMIC as alter ego. 47 The
RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant to the
alter ego theory when it concluded that NMIC "is a mere adjunct, business conduit or alter ego
of both DBP and PNB."48 The Court of Appeals upheld such conclusion of the trial court. 49 In
other words, both the trial and appellate courts relied on the alter ego theory when they
disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the
alter ego theory, which is also known as the instrumentality theory, namely:
(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

39

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 right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of.50 (Emphases omitted.)
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary
be completely under the control and domination of the parent.51 It examines the parent
corporations relationship with the subsidiary.52It inquires whether a subsidiary corporation is
so organized and controlled and its affairs are so conducted as to make it a mere
instrumentality or agent of the parent corporation such that its separate existence as a distinct
corporate entity will be ignored.53 It seeks to establish whether the subsidiary corporation has
no autonomy and the parent corporation, though acting through the subsidiary in form and
appearance, "is operating the business directly for itself."54
The second prong is the "fraud" test. This test requires that the parent corporations conduct in
using the subsidiary corporation be unjust, fraudulent or wrongful. 55 It examines the
relationship of the plaintiff to the corporation.56 It recognizes that piercing is appropriate only
if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor. 57 As
such, it requires a showing of "an element of injustice or fundamental unfairness." 58
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants
control, exerted in a fraudulent, illegal or otherwise unfair manner toward it, caused the harm
suffered.59 A causal connection between the fraudulent conduct committed through the
instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff
should be established. The plaintiff must prove that, unless the corporate veil is pierced, it will
have been treated unjustly by the defendants exercise of control and improper use of the
corporate form and, thereby, suffer damages.60
To summarize, piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements: control of the corporation by the stockholder or parent
corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of
these elements prevents piercing the corporate veil.61
This Court finds that none of the tests has been satisfactorily met in this case.
In applying the alter ego doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendants relationship to that
operation.62 With respect to the control element, it refers not to paper or formal control by
majority or even complete stock control but actual control which amounts to "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."63 In addition, the
control must be shown to have been exercised at the time the acts complained of took place. 64

Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the
corporate cover of NMIC based on two factors: (1) the ownership by DBP and PNB of
effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB
and NMIC.65 Unfortunately, the conclusion of the trial and appellate courts that the DBP and
PNB fit the alter ego theory with respect to NMICs transaction with HRCC on the premise of
complete stock ownership and interlocking directorates involved a quantum leap in logic and
law exposing a gap in reason and fact.
While ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and without
more, however, these circumstances are insufficient to establish an alter ego relationship or
connection between DBP and PNB on the one hand and NMIC on the other hand, that will
justify the puncturing of the latters corporate cover. This Court has declared that "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."66 This Court has likewise ruled that 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."67
True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on
appeal to this Court, provided they are borne out of the record or are based on substantial
evidence.68 It is equally true that the question of whether one corporation is merely an alter
ego of another is purely one of fact. So is the question of whether a corporation is a paper
company, a sham or subterfuge or whether the requisite quantum of evidence has been
adduced warranting the piercing of the veil of corporate personality. 69 Nevertheless, it has
been held in Sarona v. National Labor Relations Commission 70 that this Court has the power
to resolve a question of fact, such as whether a corporation is a mere alter ego of another entity
or whether the corporate fiction was invoked for fraudulent or malevolent ends, if the findings
in the assailed decision are either not supported by the evidence on record or based on a
misapprehension of facts.
In this case, nothing in the records shows that the corporate finances, policies and practices of
NMIC were dominated by DBP and PNB in such a way that NMIC could be considered to
have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On
the contrary, the evidence establishes that HRCC knew and acted on the knowledge that it was
dealing with NMIC, not with NMICs stockholders. The letter proposal of Hercon, Inc.,
HRCCs predecessor-in-interest, regarding the contract for NMICs mine stripping and road
construction program was addressed to and accepted by NMIC.71 The various billing reports,
progress reports, statements of accounts and communications of Hercon, Inc./HRCC regarding
NMICs mine stripping and road construction program in 1985 concerned NMIC and NMICs
officers, without any indication of or reference to the control exercised by DBP and/or PNB
over NMICs affairs, policies and practices.72
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of,
the alleged undue disregard by NMIC of the demands of HRCC to satisfy the unpaid claims
for services rendered by HRCC in connection with NMICs mine stripping and road
construction program in 1985. On the contrary, the overall picture painted by the evidence

40

offered by HRCC is one where HRCC was dealing with NMIC as a distinct juridical person
acting through its own corporate officers.73
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were
interlocking has no basis. HRCCs Exhibit "I-5,"74 the initial General Information Sheet
submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial court
and the Court of Appeals may have proven that DBP and PNB owned the stocks of NMIC to
the extent of 57% and 43%, respectively. However, nothing in it supports a finding that
NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the five members
of NMICs board of directors, four were nominees of either DBP or PNB and only one was a
nominee of both DBP and PNB.75 Only two members of the board of directors of NMIC, Jose
Tengco, Jr. and Rolando Zosa, were established to be members of the board of governors of
DBP and none was proved to be a member of the board of directors of PNB. 76 No director of
NMIC was shown to be also sitting simultaneously in the board of governors/directors of both
DBP and PNB.
In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand
and NMIC on the other hand, the Court of Appeals invoked Sibagat Timber Corporation v.
Garcia,77 which it described as "a case under a similar factual milieu."78 However, in Sibagat
Timber Corporation, this Court took care to enumerate the circumstances which led to the
piercing of the corporate veil of Sibagat Timber Corporation for being the alter ego of Del
Rosario & Sons Logging Enterprises, Inc. Those circumstances were as follows: holding
office in the same building, practical identity of the officers and directors of the two
corporations and assumption of management and control of Sibagat Timber Corporation by
the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.
Here, DBP and PNB maintain an address different from that of NMIC. 79 As already discussed,
there was insufficient proof of interlocking directorates. There was not even an allegation of
similarity of corporate officers. Instead of evidence that DBP and PNB assumed and
controlled the management of NMIC, HRCCs evidence shows that NMIC operated as a
distinct entity endowed with its own legal personality. Thus, what obtains in this case is a
factual backdrop different from, not similar to, Sibagat Timber Corporation.
In relation to the second element, to disregard the separate juridical personality of a
corporation, the wrongdoing or unjust act in contravention of a plaintiffs legal rights must be
clearly and convincingly established; it cannot be presumed. Without a demonstration that any
of the evils sought to be prevented by the doctrine is present, it does not apply. 80

There being a total absence of evidence pointing to a fraudulent, illegal or unfair act
committed against HRCC by DBP and PNB under the guise of NMIC, there is no basis to hold
that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of
Appeals82:
As a general rule, a corporation will be looked upon as a legal entity, unless and until
sufficient reason to the contrary appears. When the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons. Also, the corporate entity may be disregarded in the
interest of justice in such cases as fraud that may work inequities among members of the
corporation internally, involving no rights of the public or third persons. In both instances,
there must have been fraud, and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It
cannot be presumed.
As regards the third element, in the absence of both control by DBP and PNB of NMIC and
fraud or fundamental unfairness perpetuated by DBP and PNB through the corporate cover of
NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC
for which HRCC could hold DBP and PNB solidarily liable with NMIC.1wphi1
Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the
APT as transferee of the rights, titles and interests of DBP and PNB in NMIC will attach only
if DBP and PNB are held liable, the APT incurs no liability for the judgment indebtedness of
NMIC. Even HRCC recognizes that "as assignee of DBP and PNB 's loan receivables," the
APT simply "stepped into the shoes of DBP and PNB with respect to the latter's rights and
obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect
to NMIC other than whatever liabilities may be imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which
HRCC invokes, the APT cannot be held liable. The contingent liability for which the National
Government, through the APT, may be held liable under the said provision refers to contingent
liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily liable with NMIC,
no contingent liability may be imputed to the APT as well. Only NMIC as a distinct and
separate legal entity is liable to pay its corporate obligation to HRCC in the amount
of P8,370,934.74, with legal interest thereon from date of demand.
As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of
the judgment against it. The APT itself acknowledges this. 84

In this case, the Court of Appeals declared:We are not saying that PNB and DBP are guilty of
fraud in forming NMIC, nor are we implying that NMIC was used to conceal fraud. x x x. 81

WHEREFORE, the petitions are hereby GRANTED.

Such a declaration clearly negates the possibility that DBP and PNB exercised control over
NMIC which DBP and PNB used "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." It is a recognition that, even assuming that DBP and PNB exercised control over
NMIC, there is no evidence that the juridical personality of NMIC was used by DBP and PNB
to commit a fraud or to do a wrong against HRCC.

The complaint as against Development Bank of the Philippines, the Philippine National Bank,
and the Asset Privatization Trust, now the Privatization and Management Office, is
DISMISSED for lack of merit. The Asset Privatization Trust, now the Privatization and
Management Office, as trustee of Nonoc Mining and Industrial Corporation, now the Philnico
Processing Corporation, is DIRECTED to ensure compliance by the Nonoc Mining and
Industrial Corporation, now the Philnico Processing Corporation, with this Decision.

41

Republic of the Philippines

Promulgated:

SUPREME COURT

BF CORPORATION,

Manila

Respondent.

June 27, 2008

x-----------------------------------------------------------------------------------------x

SECOND DIVISION

DECISION

EDSA SHANGRI-LA HOTEL AND

G.R. No. 145842

VELASCO, JR., J.:

RESORT, INC., RUFO B. COLAYCO,


RUFINO L. SAMANIEGO, KUOK
Before us are these two (2) consolidated petitions for review under Rule 45 to nullify
certain issuances of the Court of Appeals (CA).

KHOON CHEN, and KUOK


KHOON TSEN,

Present:
Petitioners,
CARPIO MORALES, J.,

- versus -

Acting Chairperson,
TINGA,
VELASCO, JR.,

BF CORPORATION,
Respondent.

REYES,* and

In the first petition, docketed as G.R. No. 145842, petitioners Edsa Shangri-la Hotel and
Resort, Inc. (ESHRI), Rufo B. Colayco, Rufino L. Samaniego, Kuok Khoon Chen, and Kuok
Khoon Tsen assail the Decision[1] dated November 12, 1999 of the CA in CA-G.R. CV No.
57399, affirming the Decision[2] dated September 23, 1996 of the Regional Trial Court (RTC),
Branch 162 in Pasig City in Civil Case No. 63435 that ordered them to pay jointly and
severally respondent BF Corporation (BF) a sum of money with interests and damages. They
also assail the CA Resolution dated October 25, 2000 which, apart from setting aside an
earlier Resolution[3] of August 13, 1999 granting ESHRIs application for restitution and
damages against bond, affirmed the aforesaid September 23, 1996 RTC Decision.

BRION, JJ.

x ------------------------------------------- x

In the second petition, docketed as G.R. No. 145873, petitioner Cynthia Roxas-del Castillo
also assails the aforementioned CA Decision of November 12, 1999 insofar at it adjudged her
jointly and severally liable with ESHRI, et al. to pay the monetary award decreed in the RTC
Decision.

CYNTHIA ROXAS-DEL CASTILLO, G.R. No. 145873


Petitioner,

- versus -

Both petitions stemmed from a construction contract denominated as Agreement for the
Execution of Builders Work for the EDSA Shangri-la Hotel Project[4] that ESHRI and BF
executed for the construction of the EDSA Shangri-la Hotel starting May 1, 1991. Among
other things, the contract stipulated for the payment of the contract price on the basis of the

42

work accomplished as described in the monthly progress billings. Under this arrangement, BF
shall submit a monthly progress billing to ESHRI which would then re-measure the work
accomplished and prepare a Progress Payment Certificate for that months progress billing. [5]

In a memorandum-letter dated August 16, 1991 to BF, ESHRI laid out the collection
procedure BF was to follow, to wit: (1) submission of the progress billing to ESHRIs
Engineering Department; (2) following-up of the preparation of the Progress Payment
Certificate with the Head of the Quantity Surveying Department; and (3) following-up of the
release of the payment with one Evelyn San Pascual. BF adhered to the procedures agreed
upon in all its billings for the period from May 1, 1991 to June 30, 1992, submitting for the
purpose the required Builders Work Summary, the monthly progress billings, including an
evaluation of the work in accordance with the Project Managers Instructions (PMIs) and the
detailed valuations contained in the Work Variation Orders (WVOs) for final re-measurement
under the PMIs. BF said that the values of the WVOs were contained in the progress billings
under the section Change Orders.[6]

On September 23, 1996, the RTC, on the main finding that BF, as plaintiff a quo, is entitled to
the payment of its claim covered by Progress Billing Nos. 14 to 19 and to the retention money
corresponding to Progress Billing Nos. 1 to 11, with interest in both instances, rendered
judgment for BF. The fallo of the RTC Decision reads:

WHEREFORE, defendants [EHSRI], Ru[f]o B. Colayco, Rufino L. Samaniego, Cynthia del


Castillo, Kuok Khoon Chen, and Kuok Khoon Tsen, are jointly and severally hereby ordered
to:

1. Pay plaintiff the sum of P24,780,490.00 representing unpaid construction work


accomplishments under plaintiffs Progress Billings Nos. 14-19;

2.
From May 1, 1991 to June 30, 1992, BF submitted a total of 19 progress billings following the
procedure agreed upon. Based on Progress Billing Nos. 1 to 13, ESHRI paid BF PhP
86,501,834.05.[7]

According to BF, however, ESHRI, for Progress Billing Nos. 14 to 19, did not re-measure the
work done, did not prepare the Progress Payment Certificates, let alone remit payment for the
inclusive periods covered. In this regard, BF claimed having been misled into working
continuously on the project by ESHRI which gave the assurance about the Progress Payment
Certificates already being processed.

After several futile attempts to collect the unpaid billings, BF filed, on July 26, 1993, before
the RTC a suit for a sum of money and damages.

In its defense, ESHRI claimed having overpaid BF for Progress Billing Nos. 1 to 13 and, by
way of counterclaim with damages, asked that BF be ordered to refund the excess payments.
ESHRI also charged BF with incurring delay and turning up with inferior work
accomplishment.

Return to plaintiff the retention sum of P5,810,000.00;

3. Pay legal interest on the amount of P24,780,490.80 representing the construction work
accomplishments under Progress Billings Nos. 14-19 and on the amount of P5,810,000.00
representing the retention sum from date of demand until their full Payment;

4.
Pay plaintiff P1,000,000.00 as moral damages, P1,000,000.00 as exemplary damages,
P1,000,000.00 as attorneys fees, and cost of the suit.[8]

According to the RTC, ESHRIs refusal to pay BFs valid claims constituted evident
bad faith entitling BF to moral damages and attorneys fees.

ESHRI subsequently moved for reconsideration, but the motion was denied by the RTC,
prompting ESHRI to appeal to the CA in CA-G.R. CV No. 57399.

Pending the resolution of CA-G.R. CV No. 57399, the following events and/or
incidents transpired:
The RTC found for BF

(1) The trial court, by Order dated January 21, 1997, granted BFs motion for execution
pending appeal. ESHRI assailed this order before the CA via a petition for certiorari, docketed

43

as CA-G.R. SP No. 43187.[9] Meanwhile, the branch sheriff garnished from ESHRIs bank
account in the Philippine National Bank (PNB) the amount of PhP 35 million.

(2) On March 7, 1997, the CA issued in CA-G.R. SP No. 43187 a writ of preliminary
injunction enjoining the trial court from carrying out its January 21, 1997 Order upon
ESHRIs posting of a PhP 1 million bond. In a supplemental resolution issued on the same
day, the CA issued a writ of preliminary mandatory injunction directing the trial court judge
and/or his branch sheriff acting under him (a) to lift all the garnishments and levy made under
the enjoined order of execution pending appeal; (b) to immediately return the garnished
deposits to PNB instead of delivering the same to ESHRI; and (c) if the garnished deposits
have been delivered to BF, the latter shall return the same to ESHRIs deposit account.

SO ORDERED.[12]

The CA predicated its ruling on the interplay of two main reasons. First, the issues the
parties raised in their respective briefs were, for the most part, factual and evidentiary. Thus,
there is no reason to disturb the case disposition of the RTC, inclusive of its award of damages
and attorneys fees and the reasons underpinning the award. Second, BF had sufficiently
established its case by preponderance of evidence. Part of what it had sufficiently proven
relates to ESHRI being remiss in its obligation to re-measure BFs later work
accomplishments and pay the same. On the other hand, ESHRI had failed to prove the basis of
its disclaimer from liability, such as its allegation on the defective work accomplished by BF.

(3) By a Decision dated June 30, 1997 in CA-G.R. SP No. 43187, the CA set aside the trial
courts January 21, 1997 Order. The CA would later deny BFs motion for reconsideration.

(4) Aggrieved, BF filed before this Court a petition for review of the CA Decision, docketed
as G.R. No. 132655.[10] OnAugust 11, 1998, the Court affirmed the assailed decision of the
CA with the modification that the recovery of ESHRIs garnished deposits shall be against
BFs bond.[11]

We denied the motions for reconsideration of ESHRI and BF.

(5) Forthwith, ESHRI filed, and the CA by Resolution of August 13, 1999 granted, an
application for restitution or damages against BFs bond. Consequently, BF and Stronghold
Insurance Co., Inc., the bonding company, filed separate motions for reconsideration.

On November 12, 1999, in CA-G.R. CV No. 57399, the CA rendered a Decision resolving (1)
the aforesaid motions of BF and its surety and (2) herein petitioners appeal from the trial
courts Decision dated September 23, 1996. This November 12, 1999Decision, finding for BF
and now assailed in these separate recourses, dispositively reads:

Apropos ESHRIs entitlement to the remedy of restitution or reparation arising from the
execution of the RTC Decision pending appeal, the CA held that such remedy may
peremptorily be allowed only if the executed judgment is reversed, a situation not obtaining in
this case.

Following the denial by the CA, per its Resolution[13] dated October 25, 2000, of their motion
for reconsideration, petitioners are now before the Court, petitioner del Castillo opting,
however, to file a separate recourse.

G.R. No. 145842

In G.R. No. 145842, petitioners ESHRI, et al. raise the following issues for our
consideration:

I.
Whether or not the [CA] committed grave abuse of discretion in disregarding issues of
law raised by petitioners in their appeal [particularly in admitting in evidence photocopies of
Progress Billing Nos. 14 to 19, PMIs and WVOs].
WHEREFORE, premises considered, the decision appealed from is AFFIRMED in toto. This
Courts Resolution dated 13 August 1999 is reconsidered and set aside, and defendantsappellants application for restitution is denied for lack of merit.

44

II.
Whether or not the [CA] committed grave abuse of discretion in not holding
respondent guilty of delay in the performance of its obligations and, hence, liable for
liquidated damages [in view that respondent is guilty of delay and that its works were
defective].

III.
Whether or not the [CA] committed grave abuse of discretion in finding petitioners
guilty of malice and evidence bad faith, and in awarding moral and exemplary damages and
attorneys fees to respondent.

IV.

Whether or not the [CA] erred in setting aside its Resolution dated August 13, 2000.[14]

The petition has no merit.

Prefatorily, it should be stressed that the second and third issues tendered relate to the
correctness of the CAs factual determinations, specifically on whether or not BF was in delay
and had come up with defective works, and whether or not petitioners were guilty of malice
and bad faith. It is basic that in an appeal by certiorari under Rule 45, only questions of law
may be presented by the parties and reviewed by the Court.[15] Just as basic is the rule that
factual findings of the CA, affirmatory of that of the trial court, are final and conclusive on
the Court and may not be reviewed on appeal, except for the most compelling of reasons, such
as when: (1) the conclusion is grounded on speculations, surmises, or conjectures; (2) the
inference is manifestly mistaken, absurd, or impossible; (3) there is grave abuse of discretion;
(4) the judgment is based on a misapprehension of facts; (5) the findings of fact are
conflicting; (6) such findings are contrary to the admissions of both parties; and (7) the CA
manifestly overlooked certain relevant evidence and undisputed facts, that, if properly
considered, would justify a different conclusion.[16]

In our review of this case, we find that none of the above exceptions obtains. Accordingly, the
factual findings of the trial court, as affirmed by the CA, that there was delay on the part of
ESHRI, that there was no proof that BFs work was defective, and that petitioners were guilty
of malice and bad faith, ought to be affirmed.

Admissibility of Photocopies of Progress Billing Nos. 14 to 19,


PMIs and WVOs

Petitioners fault the CA, and necessarily the trial court, on the matter of the admission in
evidence of the photocopies of Progress Billing Nos. 14 to 19 and the complementing PMIs
and the WVOs. According to petitioners, BF, before being allowed to adduce in evidence the
photocopies adverted to, ought to have laid the basis for the presentation of the photocopies as
secondary evidence, conformably to the best evidence rule.
Respondent BF, on the other hand, avers having complied with the laying-the-basis
requirement. Defending the action of the courts below in admitting into evidence the
photocopies of the documents aforementioned, BF explained that it could not present the
original of the documents since they were in the possession of ESHRI which refused to hand
them over to BF despite requests.

We agree with BF. The only actual rule that the term best evidence denotes is the rule
requiring that the original of a writing must, as a general proposition, be produced[17] and
secondary evidence of its contents is not admissible except where the original cannot be had.
Rule 130, Section 3 of the Rules of Court enunciates the best evidence rule:

SEC. 3. Original document must be produced; exceptions. When the subject of inquiry
is the contents of a document, no evidence shall be admissible other than the original
document itself, except in the following cases:

(a) When the original has been lost or destroyed, or cannot be produced in court, without bad
faith on the part of the offeror;

(b) When the original is in the custody or under the control of the party against whom
the evidence is offered, and the latter fails to produce it after reasonable
notice; (Emphasis added.)

Complementing the above provision is Sec. 6 of Rule 130, which reads:

SEC. 6. When original document is in adverse partys custody or control. If the


document is in the custody or under control of the adverse party, he must have reasonable
notice to produce it. If after such notice and after satisfactory proof of its existence, he fails to
produce the document, secondary evidence may be presented as in the case of loss.

45

Secondary evidence of the contents of a written instrument or document refers to evidence


other than the original instrument or document itself.[18] A party may present secondary
evidence of the contents of a writing not only when the original is lost or destroyed, but also
when it is in the custody or under the control of the adverse party. In either instance, however,
certain explanations must be given before a party can resort to secondary evidence.

In our view, the trial court correctly allowed the presentation of the photocopied documents
in question as secondary evidence. Any suggestion that BF failed to lay the required basis for
presenting the photocopies of Progress Billing Nos. 14 to 19 instead of their originals has to be
dismissed. The stenographic notes of the following exchanges between Atty. Andres and Atty.
Autea, counsel for BF and ESHRI, respectively, reveal that BF had complied with the
requirements:

ATTY. ANDRES:

During the previous hearing of this case, your Honor, likewise, the witness
testified that certain exhibits namely, the Progress Payment Certificates and the Progress
Billings the originals of these documents were transmitted to ESHRI, all the originals are in
the possession of ESHRI since these are internal documents and I am referring specifically to
the Progress Payment Certificates. We requested your Honor, that in order that plaintiff
[BF] be allowed to present secondary original, that opposing counsel first be given
opportunity to present the originals which are in their possession. May we know if they
have brought the originals and whether they will present the originals in court, Your Honor.
(Emphasis added.)

ATTY. AUTEA:

Four factual premises are readily deducible from the above exchanges, to wit: (1) the
existence of the original documents which ESHRI had possession of; (2) a request was made
on ESHRI to produce the documents; (3) ESHRI was afforded sufficient time to produce
them; and (4) ESHRI was not inclined to produce them.

Clearly, the circumstances obtaining in this case fall under the exception under Sec. 3(b) of
Rule 130. In other words, the conditions sine qua non for the presentation and reception of the
photocopies of the original document as secondary evidence have been met. These are: (1)
there is proof of the original documents execution or existence; (2) there is proof of the cause
of the original documents unavailability; and (3) the offeror is in good faith.[19] While perhaps
not on all fours because it involved a check, what the Court said in Magdayao v. People, is
very much apt, thus:

x x x To warrant the admissibility of secondary evidence when the original of a writing is in


the custody or control of the adverse party, Section 6 of Rule 130 provides that the adverse
party must be given reasonable notice, that he fails or refuses to produce the same in court and
that the offeror offers satisfactory proof of its existence.

xxxx

The mere fact that the original of the writing is in the custody or control of the party against
whom it is offered does not warrant the admission of secondary evidence. The offeror must
prove that he has done all in his power to secure the best evidence by giving notice to the said
party to produce the document. The notice may be in the form of a motion for the production
of the original or made in open court in the presence of the adverse party or via a subpoena
duces tecum, provided that the party in custody of the original has sufficient time to produce
the same. When such party has the original of the writing and does not voluntarily offer
to produce it or refuses to produce it, secondary evidence may be admitted.[20] (Emphasis
supplied.)

We have already informed our client about the situation, your Honor, that it has
been claimed by plaintiff that some of the originals are in their possession and our client
assured that, they will try to check. Unfortunately, we have not heard from our client, Your
Honor.
On the Restitution of the Garnished Funds

46

We now come to the propriety of the restitution of the garnished funds. As petitioners
maintain, the CA effectively, but erroneously, prevented restitution of ESHRIs improperly
garnished funds when it nullified its own August 13, 1999 Resolution in CA-G.R. SP No.
43187. In this regard, petitioners invite attention to the fact that the restitution of the funds was
in accordance with this Courts final and already executory decision in G.R. No. 132655,
implying that ESHRI should be restored to its own funds without awaiting the final outcome
of the main case. For ease of reference, we reproduce what the appellate court pertinently
wrote in its Resolution of August 13, 1999:

It is true that the Courts Decision of August 11, 1998 in G.R. No. 132655 recognized the
validity of the issuance of the desired restitution order. It bears to emphasize, however, that the
CA had since then decided CA-G.R. CV No. 57399, the main case, on the merits when it
affirmed the underlying RTC Decision in Civil Case No. 63435. This CA Decision on the
original and main case effectively rendered our decision on the incidental procedural matter on
restitution moot and academic. Allowing restitution at this point would not serve any purpose,
but only prolong an already protracted litigation.

G.R. No. 145873


BASED ON THE FOREGOING, the Application (for Restitution/Damages against Bond for
Execution Pending Appeal) datedMay 12, 1999 filed by [ESHRI] is GRANTED.
Accordingly, the surety of [BF], STRONGHOLD Insurance Co., Inc.,
is ORDERED toPAY the sum of [PhP 35 million] to [ESHRI] under its SICI Bond. x x x In
the event that the bond shall turn out to be insufficient or the surety (STRONGHOLD) cannot
be made liable under its bond, [BF], being jointly and severally liable under the bond
is ORDERED toRETURN the amount of [PhP 35 million] representing the garnished
deposits of the bank account maintained by [ESHRI] with the [PNB] Shangri-la Plaza Branch,
Mandaluyong City. Otherwise, this Court shall cause the implementation of the Writ of
Execution dated April 24, 1998 issued in Civil Case No. 63435 against both [BF], and/or its
surety, STRONGHOLD, in case they should fail to comply with these directives.

Petitioner Roxas-del Castillo, in her separate petition, excepts from the CA Decision
affirming, in its entirety, the RTC Decision holding her, with the other individual petitioners in
G.R. No. 145842, who were members of the Board of Directors of ESHRI, jointly and
severally liable with ESHRI for the judgment award. She presently contends:

I.
THE [CA] ERRED IN NOT DECLARING THAT THE DECISION OF THE
TRIAL COURT ADJUDGING PETITIONER PERSONALLY LIABLE TO RESPONDENT
VOID FOR NOT STATING THE FACTUAL AND LEGAL BASIS FOR SUCH AWARD.

SO ORDERED.[21]

Petitioners contention on the restitution angle has no merit, for, as may be recalled, the
CA, simultaneously with the nullification and setting aside of its August 13, 1999 Resolution,
affirmed, via its assailed November 12, 1999 Decision, the RTC Decision of September 23,
1996, the execution pending appeal of which spawned another dispute between the parties.
And as may be recalled further, the appellate court nullified its August 13, 1999 Resolution on
the basis of Sec. 5, Rule 39, which provides:
Sec. 5. Effect of reversal of executed judgment. Where the executed judgment is
reversed totally or partially, or annulled, on appeal or otherwise, the trial court may, on
motion, issue such orders of restitution or reparation of damages as equity and justice may
warrant under the circumstances.

On the strength of the aforequoted provision, the appellate court correctly dismissed
ESHRIs claim for restitution of its garnished deposits, the executed appealed RTC Decision
in Civil Case No. 63435 having in fact been upheld in toto.

II.
THE [CA] ERRED IN NOT RULING THAT AS FORMER DIRECTOR,
PETITIONER CANNOT BE HELD PERSONALLY LIABLE FOR ANY ALLEGED
BREACH OF A CONTRACT ENTERED INTO BY THE CORPORATION.

III.
THE [CA] ERRED IN NOT RULING THAT RESPONDENT IS NOT
ENTITLED TO AN AWARD OF MORAL DAMAGES.

IV.
THE [CA] ERRED IN HOLDING PETITIONER PERSONALLY LIABLE TO
RESPONDENT FOR EXEMPLARY DAMAGES.

V.
THE [CA] ERRED IN NOT RULING THAT RESPONDENT IS NOT
ENTITLED TO ANY AWARD OF ATTORNEYS FEES.[22]

47

First off, Roxas-del Castillo submits that the RTC decision in question violated the
requirements of due process and of Sec. 14, Article VII of the Constitution that states, No
decision shall be rendered by any court without expressing therein clearly and distinctly the
facts and the law on which it is based.

Roxas-del Castillos threshold posture is correct. Indeed, the RTC decision in question, as
couched, does not provide the factual or legal basis for holding her personally liable under the
premises. In fact, only in the dispositive portion of the decision did her solidary liability crop
up. And save for her inclusion as party defendant in the underlying complaint, no reference is
made in other pleadings thus filed as to her liability.

The Court notes that the appellate court, by its affirmatory ruling, effectively recognized the
applicability of the doctrine on piercing the veil of the separate corporate identity. Under the
circumstances of this case, we cannot allow such application. A corporation, upon coming to
existence, is invested by law with a personality separate and distinct from those of the persons
composing it. Ownership by a single or a small group of stockholders of nearly all of the
capital stock of the corporation is not, without more, sufficient to disregard the fiction of
separate corporate personality.[23] Thus, obligations incurred by corporate officers, acting as
corporate agents, are not theirs but direct accountabilities of the corporation they represent.
Solidary liability on the part of corporate officers may at times attach, but only under
exceptional circumstances, such as when they act with malice or in bad faith. [24] Also, in
appropriate cases, the veil of corporate fiction shall be disregarded when the separate juridical
personality of a corporation is abused or used to commit fraud and perpetrate a social injustice,
or used as a vehicle to evade obligations.[25] In this case, no act of malice or like dishonest
purpose is ascribed on petitioner Roxas-del Castillo as to warrant the lifting of the corporate
veil.

The above conclusion would still hold even if petitioner Roxas-del Castillo, at the time
ESHRI defaulted in paying BFs monthly progress bill, was still a director, for, before she
could be held personally liable as corporate director, it must be shown that she acted in a
manner and under the circumstances contemplated in Sec. 31 of the Corporation Code, which
reads:

Section 31. Directors or trustees who willfully or knowingly vote for or assent to patently
unlawful acts of the corporation or acquire any 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.
(Emphasis ours.)

We do not find anything in the testimony of one Crispin Balingit to indicate that Roxas-del
Castillo made any misrepresentation respecting the payment of the bills in question. Balingit,
in fact, testified that the submitted but unpaid billings were still being evaluated. Further, in
the said testimony, in no instance was bad faith imputed on Roxas-del Castillo.

Not lost on the Court are some material dates. As it were, the controversy between the
principal parties started in July 1992 when Roxas-del Castillo no longer sat in the ESHRI
Board, a reality BF does not appear to dispute. In fine, she no longer had any participation in
ESHRIs corporate affairs when what basically is the ESHRI-BF dispute erupted. Familiar and
fundamental is the rule that contracts are binding only among parties to an agreement. Art.
1311 of the Civil Code is clear on this point:

Article 1311. Contracts take effect only between the parties, their assigns and heirs, except in
cases where the rights and obligations are not transmissible by their nature, or by stipulation or
by provision of law.
In the instant case, Roxas-del Castillo could not plausibly be held liable for breaches of
contract committed by ESHRI nor for the alleged wrongdoings of its governing board or
corporate officers occurring after she severed official ties with the hotel management.

Given the foregoing perspective, the other issues raised by Roxas-del Castillo as to her
liability for moral and exemplary damages and attorneys fees are now moot and academic.

And her other arguments insofar they indirectly impact on the liability of ESHRI need not
detain us any longer for we have sufficiently passed upon those concerns in our review of G.R.
No. 145842.
WHEREFORE, the petition in G.R. No. 145842 is DISMISSED, while the petition in G.R.
No. 145873 is GRANTED. Accordingly, the appealed Decision dated November 12, 1999 of
the CA in CA-G.R. CV No. 57399 is AFFIRMED withMODIFICATION that the petitioner
in G.R. No. 145873, Cynthia Roxas-del Castillo, is absolved from any liability decreed in the
RTC Decision dated September 23, 1996 in Civil Case No. 63435, as affirmed by the CA.

48

THIRD DIVISION
[G.R. No. 141617. August 14, 2001]
ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT
CORPORATION, petitioners, vs. RITA C. MEJIA, as Executrix of Testate Estate of
ANDREA CORDOVA VDA. DE GUTIERREZ, respondent.
DECISION
GONZAGA-REYES, J.:
In this petition for review by certiorari, petitioners pray for the setting aside of the Decision of
the Court of Appeals promulgated on 13 April 1999 and its 15 December 1999 Resolution in
CA-G.R. CV No. 19281.
As culled from the decisions of the lower courts and the pleadings of the parties, the factual
background of this case is as set out herein:
Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of land in
Camarin, Caloocan City known as Lot 861 of the Tala Estate. The land had an aggregate area
of twenty-five (25) hectares and was covered by Transfer Certificate of Title (TCT) No. 5779
of the Registry of Deeds of Caloocan City. The property was later subdivided into five lots
with an area of five hectares each and pursuant thereto, TCT No. 5779 was cancelled and five
new transfer certificates of title were issued in the name of Gutierrez, namely TCT No. 7123
covering Lot 861-A, TCT No. 7124 covering Lot 861-B, TCT No. 7125 covering Lot 861-C,
TCT No. 7126 covering Lot 861-D and TCT No. 7127 covering Lot 861-E.
On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation (Cardale)
executed a Deed of Sale with Mortgage relating to the lots covered by TCT Nos. 7124, 7125,
7126 and 7127, for the consideration of P800,000.00. Upon the execution of the deed, Cardale
paid Gutierrez P171,000.00. It was agreed that the balance of P629,000.00 would be paid in
several installments within five years from the date of the deed, at an interest of nine percent
per annum based on the successive unpaid principal balances. Thereafter, the titles of
Gutierrez were cancelled and in lieu thereof TCT Nos. 7531 to 7534 were issued in favor of
Cardale.
To secure payment of the balance of the purchase price, Cardale constituted a mortgage on
three of the four parcels of land covered by TCT Nos. 7531, 7532 and 7533, encompassing
fifteen hectares of land.[1] The encumbrance was annotated upon the certificates of title and the
owners duplicate certificates. The owners duplicates were retained by Gutierrez.
On 26 August 1968, owing to Cardales failure to settle its mortgage obligation, Gutierrez
filed a complaint for rescission of the contract with the Quezon City Regional Trial Court
(RTC), which was docketed as Civil Case No. Q-12366.[2] On 20 October 1969, during the
pendency of the rescission case, Gutierrez died and was substituted by her executrix,
respondent Rita C. Mejia (Mejia). In 1971, plaintiffs presentation of evidence was
terminated. However, Cardale, which was represented by petitioner Adalia B. Francisco

(Francisco) in her capacity as Vice-President and Treasurer of Cardale, lost interest in


proceeding with the presentation of its evidence and the case lapsed into inactive status for a
period of about fourteen years.
In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533 became
delinquent in the payment of real estate taxes in the amount of P102,300.00, while the other
mortgaged property covered by TCT No. 7531 became delinquent in the amount of
P89,231.37, which culminated in their levy and auction sale on 1 and 12 September 1983, in
satisfaction of the tax arrears. The highest bidder for the three parcels of land was petitioner
Merryland Development Corporation (Merryland), whose President and majority stockholder
is Francisco. A memorandum based upon the certificate of sale was then made upon the
original copies of TCT Nos. 7531 to 7533.
On 13 August 1984, before the expiration of the one year redemption period, Mejia filed a
Motion for Decision with the trial court. The hearing of said motion was deferred, however,
due to a Motion for Postponement filed by Cardale through Francisco, who signed the motion
in her capacity as officer-in-charge, claiming that Cardale needed time to hire new
counsel. However, Francisco did not mention the tax delinquencies and sale in favor of
Merryland. Subsequently, the redemption period expired and Merryland, acting through
Francisco, filed petitions for consolidation of title,[3] which culminated in the issuance of
certain orders[4] decreeing the cancellation of Cardales TCT Nos. 7531 to 7533 and the
issuance of new transfer certificates of title free from any encumbrance or third-party claim
whatsoever in favor of Merryland. Pursuant to such orders, the Register of Deeds of
Caloocan City issued new transfer certificates of title in the name of Merryland which did not
bear a memorandum of the mortgage liens in favor of Gutierrez.
Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an undated
Manifestation to the effect that the properties subject of the mortgage and covered by TCT
Nos. 7531 to 7533 had been levied upon by the local government of Caloocan City and sold at
a tax delinquency sale. Francisco further claimed that the delinquency sale had rendered the
issues in Civil Case No. Q-12366 moot and academic. Agreeing with Francisco, the trial court
dismissed the case, explaining that since the properties mortgaged to Cardale had been
transferred to Merryland which was not a party to the case for rescission, it would be more
appropriate for the parties to resolve their controversy in another action.
On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed with
the RTC of Quezon City a complaint for damages with prayer for preliminary attachment
against Francisco, Merryland and the Register of Deeds of Caloocan City. The case was
docketed as Civil Case No. Q-49766. On 15 April 1988, the trial court rendered a
decision[5] in favor of the defendants, dismissing the complaint for damages filed by Mejia. It
was held that plaintiff Mejia, as executrix of Gutierrezs estate, failed to establish by clear and
convincing evidence her allegations that Francisco controlled Cardale and Merryland and that
she had employed fraud by intentionally causing Cardale to default in its payment of real
property taxes on the mortgaged properties so that Merryland could purchase the same by
means of a tax delinquency sale. Moreover, according to the trial court, the failure to recover
the property subject of the Deed of Sale with Mortgage was due to Mejias failure to actively

49

pursue the action for rescission (Civil Case No. 12366), allowing the case to drag on for
eighteen years. Thus, it ruled that xxx

xxx

xxx

The act of not paying or failing to pay taxes due the government by the defendant Adalia B.
Francisco, as treasurer of Cardale Financing and Realty Corporation do not, per se, constitute
perpetration of fraud or an illegal act. It do [sic] not also constitute an act of evasion of an
existing obligation (to plaintiff) if there is no clear showing that such an act of non-payment of
taxes was deliberately made despite its (Cardales) solvency and capability to pay. There is no
evidence showing that Cardale Financing and Realty Corporation was financially capable of
paying said taxes at the time.
There are times when the corporate fiction will be disregarded: (1) where all the members or
stockholders commit illegal act; (2) where the corporation is used as dummy to commit fraud
or wrong; (3) where the corporation is an agency for a parent corporation; and (4) where the
stock of a corporation is owned by one person. (I, Fletcher, 58, 59, 61 and 63). None of the
foregoing reasons can be applied to the incidents in this case: (1) there appears no illegal act
committed by the stockholders of defendant Merryland Development Corporation and Cardale
Financing and Realty Corporation; (2) the incidents proven by evidence of the plaintiff as well
as that of the defendants do not show that either or both corporations were used as dummies
by defendant Adalia B. Francisco to commit fraud or wrong. To be used as [a] dummy, there
has to be a showing that the dummy corporation is controlled by the person using it. The
evidence of plaintiff failed to prove that defendant Adalia B. Francisco has controlling interest
in either or both corporations. On the other hand, the evidence of defendants clearly show that
defendant Francisco has no control over either of the two corporations; (3) none of the two
corporations appears to be an agency for a parent (the other) corporation; and (4) the stock of
either of the two corporation [sic] is not owned by one person (defendant Adalia B.
Francisco). Except for defendant Adalia B. Francisco, the incorporators and stockholders of
one corporation are different from the other.
xxx

xxx

xxx

The said case (Civil Case No. 12366) remained pending for almost 18 years before the then
Court of First Instance, now the Regional Trial Court. Even if the trial of the said case became
protracted on account of the retirement and/or promotion of the presiding judge, as well as the
transfer of the case from one sala to another, and as claimed by the plaintiff that the
defendant lost interest, (which allegation is unusual, so to speak), the court believe [sic] that
it would not have taken that long to dispose [of] said case had plaintiff not slept on her rights,
and her duty and obligation to see to it that the case is always set for hearing so that it may be
adjudicated [at] the earliest possible time. This duty pertains to both parties, but plaintiff
should have been more assertive, as it was her obligation, similar to the obligation of plaintiff
relative to the service of summons in other cases. The fact that Cardale Financing and Realty
Corporation did not perform its obligation as provided in the said Deed of Sale with
Mortgage (Exhibit A) is very clear. Likewise, the fact that Andrea Cordova, the
contracting party, represented by the plaintiff in this case did not also perform her duties
and/or obligation provided in the said contract is also clear. This could have been the reason

why the plaintiff in said case (Exhibit E) slept on her rights and allowed the same to remain
pending for almost 18 years. However, and irrespective of any other reason behind the same,
the court believes that plaintiff, indeed, is the one to blame for the failure of the testate estate
of the late Andrea Cordova Vda. de Gutierrez to recover the money or property due it on the
basis of Exhibit A.
xxx

xxx

xxx

xxx Had the plaintiff not slept on her rights and had it not been for her failure to perform her
commensurate duty to pursue vigorously her case against Cardale Financing and Realty
Corporation in said Civil Case No. 12366, she could have easily known said non-payment of
realty taxes on the said properties by said Cardale Financing and Realty Corporation, or, at
least the auction sales that followed, and from which she could have redeemed said properties
within the one year period provided by law, or, have availed of remedies at the time to protect
the interest of the testate estate of the late Andrea Cordova Vda. de Gutierrez.
xxx

xxx

xxx

The dispositive portion of the trial courts decision states WHEREFORE, in view of all the foregoing consideration, the court hereby renders judgment
in favor of the defendants Register of Deeds of Caloocan City, Merryland Development
Corporation and Adalia B. Francisco, and against plaintiff Rita C. Mejia, as Executrix of the
Testate Estate of Andrea Cordova Vda. De Gutierrez, and hereby orders:
1. That this case for damages be dismissed, at the same time, plaintiffs motion for
reconsideration dated September 23, 1987 is denied;
2. Plaintiff pay the defendants Merryland Development Corporation and the Register of Deeds
the sum of P20,000.00, and another sum of P20,000.00 to the defendant Adalia B. Francisco,
as and for attorneys fees and litigation expenses, and pay the costs of the proceedings.
SO ORDERED.
The Court of Appeals,[6] in its decision[7] promulgated on 13 April 1999, reversed the trial
court, holding that the corporate veil of Cardale and Merryland must be pierced in order to
hold Francisco and Merryland solidarily liable since these two corporations were used as
dummies by Francisco, who employed fraud in allowing Cardale to default on the realty taxes
for the properties mortgaged to Gutierrez so that Merryland could acquire the same free from
all liens and encumbrances in the tax delinquency sale and, as a consequence thereof,
frustrating Gutierrezs rights as a mortgagee over the subject properties. Thus, the Court of
Appeals premised its findings of fraud on the following circumstances
xxx

xxx

xxx

xxx Appellee Francisco knew that Cardale of which she was vice-president and treasurer had
an outstanding obligation to Gutierrez for the unpaid balance of the real properties covered by
TCT Nos. 7531 to 7533, which Cardale purchased from Gutierrez which account, as of
December 1988, already amounted to P4,414,271.43 (Exh. K, pp. 39-44, record); she also

50

knew that Gutierrez had a mortgage lien on the said properties to secure payment of the
aforesaid obligation; she likewise knew that the said mortgaged properties were under
litigation in Civil Case No. Q-12366 which was an action filed by Gutierrez against Cardale
for rescission of the sale and/or recovery of said properties (Exh. E). Despite such knowledge,
appellee Francisco did not inform Gutierrezs Estate or the Executrix (herein appellant) as
well as the trial court that the mortgaged properties had incurred tax delinquencies, and that
Final Notices dated July 9, 1982 had been sent by the City Treasurer of Caloocan demanding
payment of such tax arrears within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 3738, record). Both notices which were addressed to
Cardale Financing & Realty Corporation c/o Merryland Development Corporation
and sent to appellee Franciscos address at 83 Katipunan Road, White Plains, Quezon City,
gave warning that if the taxes were not paid within the aforesaid period, the properties would
be sold at public auction to satisfy the tax delinquencies.
To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not
inform the Estate of Gutierrez or her executrix about the tax delinquencies and of the
impending auction sale of the said properties. Even a modicum of good faith and fair play
should have encouraged appellee Francisco to at least advise Gutierrezs Estate through her
executrix (herein appellant) and the trial court which was hearing the complaint for rescission
and recovery of said properties of such fact, so that the Estate of Gutierrez, which had a real
interest on the properties as mortgagee and as plaintiff in the rescission and recovery suit,
could at least take steps to forestall the auction sale and thereby preserve the properties and
protect its interests thereon. And not only did appellee Francisco allow the auction sale to take
place, but she used her other corporation (Merryland) in participating in the auction sale and in
acquiring the very properties which her first corporation (Cardale) had mortgaged to
Gutierrez. Again, appellee Francisco did not thereafter inform the Estate of Gutierrez or its
executrix (herein appellant) about the auction sale, thus precluding the Estate from exercising
its right of redemption. And it was only after the expiration of the redemption period that
appellee Francisco filed a Manifestation in Civil Case No. Q-12366 (Exh. I, p. 36, record), in
which she disclosed for the first time to the trial court and appellant that the properties subject
of the case and on which Gutierrez or her Estate had a mortgage lien, had been sold in a tax
delinquency sale. And in order to further conceal her deceptive maneuver, appellee Francisco
did not divulge in her aforesaid Manifestation that it was her other corporation (Merryland)
that acquired the properties in the auction sale.
We are not impressed by appellees submission that no evidence was adduced to prove that
Cardale had the capacity to pay the tax arrears and therefore she or Cardale may not be faulted
for the tax delinquency sale of the properties in question. Appellee Franciscos bad faith or
deception did not necessarily lie in Cardales or her failure to settle the tax deliquencies in
question, but in not disclosing to Gutierrezs estate or its executrix (herein appellant) which
had a mortgage lien on said properties the tax delinquencies and the impending auction sale of
the encumbered properties.
Appellee Franciscos deception is further shown by her concealment of the tax delinquency
sale of the properties from the estate or its executrix, thus preventing the latter from availing

of the right of redemption of said properties. That appellee Francisco divulged the auction
sale of the properties only after such redemption period had lapsed clearly betrays her
intention to keep Gutierrezs Estate or its Executrix from availing of such right. And as the
evidence would further show, appellee Francisco had a hand in securing for Merryland
consolidation of its ownership of the properties and in seeing to it that Merrylands torrens
certificates for the properties were free from liens and encumbrances. All these appellee
Francisco did even as she was fully aware that Gutierrez or her estate had a valid and
subsisting mortgage lien on the said properties.
It is likewise worthy of note that early on appellee Francisco had testified in the action for
rescission of sale and recovery of possession and ownership of the properties which Gutierrez
filed against Cardale (Civil Case No. Q-12366) in her capacity as defendant Cardales vicepresident and treasurer. But then, for no plausible reason whatsoever, she lost interest in
continuing with the presentation of evidence for defendant Cardale. And then, when appellant
Mejia as executrix of Gutierrezs Estate filed on August 13, 1984 a Motion for Decision in the
aforesaid case, appellee Francisco moved to defer consideration of appellants Motion on the
pretext that defendant Cardale needed time to employ another counsel. Significantly, in her
aforesaid Motion for Postponement dated August 16, 1984 which appellee Francisco
personally signed as Officer-in-Charge of Cardale, she also did not disclose the fact that the
properties subject matter of the case had long been sold at a tax delinquency sale and acquired
by her other corporation Merryland.
And as if what she had already accomplished were not enough fraudulence, appellee
Francisco, acting in behalf of Merryland, caused the issuance of new transfer certificates of
title in the name of Merryland, which did not anymore bear the mortgage lien in favor of
Gutierrez. In the meantime, to further avoid payment of the mortgage indebtedness owing to
Gutierrezs estate, Cardale corporation was dissolved. Finally, to put the properties beyond
the reach of the mortgagee, Gutierrezs estate, Merryland caused the subdivision of such
properties, which were subsequently sold on installment basis.
In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor to
inform the mortgagee of the tax delinquencies, if any, of the mortgaged properties. Moreover,
petitioners claim that Cardales failure to pay the realty taxes, per se, does not constitute fraud
since it was not proven that Cardale was capable of paying the taxes. Petitioners also contend
that if Mejia, as executrix of Gutierrezs estate, was not remiss in her duty to pursue Civil
Case No. 12366, she could have easily learned of the non-payment of realty taxes on the
subject properties and of the auction sale that followed and thus, have redeemed the properties
or availed of some other remedy to conserve the estate of Gutierrez. In addition, Mejia could
have annotated a notice oflis pendens on the titles of the mortgaged properties, but she failed
to do so. It is the stand of petitioners that respondent has not adduced any proof that Francisco
controlled both Cardale and Merryland and that she used these two corporations to perpetuate
a fraud upon Gutierrez or her estate. Petitioners maintain that the evidence shows that, apart
form the meager share of petitioner Francisco, the stockholdings of both corporations
comprise other shareholders, and the stockholders of either of them, aside from petitioner
Francisco, are composed of different persons. As to Civil Case No. 12366, petitioners insist
that the decision of the trial court in that case constitutes res judicata to the instant case.[8]

51

It is dicta in corporation law that a corporation is a juridical person with a separate and distinct
personality from that of the stockholders or members who compose it.[9] However, when the
legal fiction of the separate corporate personality is abused, such as when the same is used for
fraudulent or wrongful ends, the courts have not hesitated to pierce the corporate veil. One of
the earliest formulations of this doctrine of piercing the corporate veil was made in the
American case of United States v. Milwaukee Refrigerator Transit Co.[10] If any general rule can be laid down, in the present state of authority, it is that a corporation
will be looked upon as a legal entity as a general rule, and until sufficient reason to the
contrary appears; but, 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.
Since then a good number of cases have firmly implanted this doctrine in Philippine
jurisprudence.[11] One such case is Umali v. Court of Appeals[12]wherein the Court declared
that
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.
With specific regard to corporate officers, the general rule is that the officer cannot be held
personally liable with the corporation, whether civilly or otherwise, for the consequences of
his acts, if he acted for and in behalf of the corporation, within the scope of his authority and
in good faith. In such cases, the officers acts are properly attributed to the
corporation.[13] However, if it is proven that the officer has used the corporate fiction to
defraud a third party,[14] or that he has acted negligently, maliciously or in bad faith,[15] then
the corporate veil shall be lifted and he shall be held personally liable for the particular
corporate obligation involved.
The Court, after an assiduous study of this case, is convinced that the totality of the
circumstances appertaining conduce to the inevitable conclusion that petitioner Francisco
acted in bad faith. The events leading up to the loss by the Gutierrez estate of its mortgage
security attest to this. It has been established that Cardale failed to comply with its obligation
to pay the balance of the purchase price for the four parcels of land it bought from Gutierrez
covered by TCT Nos. 7531 to 7534, which obligation was secured by a mortgage upon the
lands covered by TCT Nos. 7531, 7532 and 7533. This prompted Gutierrez to file an action
for rescission of the Deed of Sale with Mortgage (Civil Case No. Q-12366), but the case
dragged on for about fourteen years when Cardale, as represented by Francisco, who was

Vice-President and Treasurer of the same,[16] lost interest in completing its presentation of
evidence.
Even before 1984 when Mejia, in her capacity as executrix of Gutierrezs estate, filed a
Motion for Decision with the trial court, there is no question that Francisco knew that the
properties subject of the mortgage had become tax delinquent. In fact, as treasurer of Cardale,
Francisco herself was the officer charged with the responsibility of paying the realty taxes on
the corporations properties. This was admitted by the trial court in its decision. [17] In addition,
notices dated 9 July 1982 from the City Treasurer of Caloocan demanding payment of the tax
arrears on the subject properties and giving warning that if the realty taxes were not paid
within the given period then such properties would be sold at public auction to satisfy the tax
delinquencies were sent directly to Franciscos address in White Plains, Quezon City. [18] Thus,
as early as 1982, Francisco could have informed the Gutierrez estate or the trial court in Civil
Case No. Q-12366 of the tax arrears and of the notice from the City Treasurer so that the
estate could have taken the necessary steps to prevent the auction sale and to protect its
interests in the mortgaged properties, but she did no such thing. Finally, in 1983, the
properties were levied upon and sold at public auction wherein Merryland - a corporation
where Francisco is a stockholder[19] and concurrently acts as President and director[20] - was
the highest bidder.
When Mejia filed the Motion for Decision in Civil Case No. Q-12366,[21] the period for
redeeming the properties subject of the tax sale had not yet expired. [22] Under the Realty
Property Tax Code,[23] pursuant to which the tax levy and sale were prosecuted,[24] both the
delinquent taxpayer and in his absence, any person holding a lien or claim over the property
shall have the right to redeem the property within one year from the date of registration of the
sale.[25] However, if these persons fail to redeem the property within the time provided, then
the purchaser acquires the property free from any encumbrance or third party claim
whatsoever.[26] Cardale made no attempts to redeem the mortgaged property during this
time. Moreover, instead of informing Mejia or the trial court in Q-12366 about the tax sale,
the records show that Francisco filed a Motion for Postponement [27] in behalf of Cardale even signing the motion in her capacity as officer-in-charge - which worked to defer the
hearing of Mejias Motion for Decision. No mention was made by Francisco of the tax sale in
the motion for postponement. Only after the redemption period had expired did Francisco
decide to reveal what had transpired by filing a Manifestation stating that the properties
subject of the mortgage in favor of Gutierrez had been sold at a tax delinquency sale; however,
Francisco failed to mention that it was Merryland that acquired the properties since she was
probably afraid that if she did so the court would see behind her fraudulent scheme. In this
regard, it is also significant to note that it was Francisco herself who filed the petitions for
consolidation of title and who helped secure for Merryland titles over the subject properties
free from any encumbrance or third-party claim whatsoever.
It is exceedingly apparent to the Court that the totality of Francisos actions clearly betray an
intention to conceal the tax delinquencies, levy and public auction of the subject properties
from the estate of Gutierrez and the trial court in Civil Case No. Q-12366 until after the
expiration of the redemption period when the remotest possibility for the recovery of the
properties would be extinguished.[28] Consequently, Francisco had effectively deprived the

52

estate of Gutierrez of its rights as mortgagee over the three parcels of land which were sold to
Cardale. If Francisco was acting in good faith, then she should have disclosed the status of the
mortgaged properties to the trial court in Civil Case No. Q-12366 - especially after Mejia had
filed a Motion for Decision, in response to which she filed a motion for postponement wherein
she could easily have mentioned the tax sale - since this action directly affected such
properties which were the subject of both the sale and mortgage.

the amount of P629,000.00) at the rate of nine percent (9%) per annum computed from
January, 1989 until fully satisfied. MERRYLAND is hereby absolved from all liability.
SO ORDERED.

That Merryland acquired the property at the public auction only serves to shed more light
upon Franciscos fraudulent purposes. Based on the findings of the Court of Appeals,
Francisco is the controlling stockholder and President of Merryland.[29] Thus, aside from the
instrumental role she played as an officer of Cardale, in evading that corporations legitimate
obligations to Gutierrez, it appears that Franciscos actions were also oriented towards
securing advantages for another corporation in which she had a substantial interest. We
cannot agree, however, with the Court of Appeals decision to hold Merryland solidarily liable
with Francisco. The only act imputable to Merryland in relation to the mortgaged properties is
that it purchased the same and this by itself is not a fraudulent or wrongful act. No evidence
has been adduced to establish that Merryland was a mere alter ego or business conduit of
Francisco. Time and again it has been reiterated that 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.[30] Neither has it been
alleged or proven that Merryland is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
Cardale.[31]Even assuming that the businesses of Cardale and Merryland are interrelated, this
alone is not justification for disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third persons of their
rights.[32] Thus, Merrylands separate juridical personality must be upheld.
Based on a statement of account submitted by Mejia, the Court of Appeals awarded
P4,314,271.43 in favor of the estate of Gutierrez which represents the unpaid balance of the
purchase price in the amount of P629,000.00 with an interest rate of nine percent (9%) per
annum, in accordance with the agreement of the parties under the Deed of Sale with
Mortgage,[33] as of December 1988.[34] Therefore, in addition to the amount awarded by the
appellate court, Francisco should pay the estate of Gutierrez interest on the unpaid balance of
the purchase price (in the amount of P629,000.00) at the rate of nine percent (9%) per annum
computed from January, 1989 until fully satisfied.
Finally, contrary to petitioners assertions, we agree with the Court of Appeals that the
decision of the trial court in Civil Case No. Q-12366 does not constitute res judicata insofar as
the present case is concerned because the decision in the first case was not a judgment on the
merits. Rather, it was merely based upon the premise that since Cardale had been dissolved
and the property acquired by another corporation, the action for rescission would not
prosper. As a matter of fact, it was even expressly stated by the trial court that the parties
should ventilate their issues in another action.
WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly
MODIFIED so as to hold ADALIA FRANCISCO solely liable to the estate of Gutierrez for
the amount of P4,314,271.43 and for interest on the unpaid balance of the purchase price (in

53

FIRST DIVISION
[G.R. Nos. 116124-25. November 22, 2000]
BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and
GENERAL CREDIT CORPORATION,respondents.
DECISION

On August 15, 1980, a complaint for sum of money with preliminary attachment, [1] docketed
as Civil Case No. Q-30583, was instituted in the then Court of First Instance of Rizal by CCCQC against petitioner, who had in the meantime been dismissed from his employment by
CCC-Equity. The complaint was subsequently amended in order to include Hidelita Nuval,
petitioners wife, as a party defendant.[2] The complaint alleged that petitioner embezzled the
funds of CCC-QC amounting to P1,300,593.11. Out of this amount, at least P630,000.00 was
used for the purchase of a house and lot located at No. 12 Macopa Street, Valle Verde I, Pasig
City. The property was mortgaged to CCC, and was later foreclosed.

YNARES-SANTIAGO, J.:
Assailed in this petition for review is the consolidated decision of the Court of Appeals dated
July 7, 1994, which reversed the separate decisions of the Regional Trial Court of Pasig City
and the Regional Trial Court of Quezon City in two cases between petitioner Reynoso and
respondent General Credit Corporation (GCC).
Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, CCC), a
financing and investment firm, decided to organize franchise companies in different parts of
the country, wherein it shall hold thirty percent (30%) equity. Employees of the CCC were
designated as resident managers of the franchise companies. Petitioner Bibiano O. Reynoso,
IV was designated as the resident manager of the franchise company in Quezon City, known
as the Commercial Credit Corporation of Quezon City (hereinafter, CCC-QC).
CCC-QC entered into an exclusive management contract with CCC whereby the latter was
granted the management and full control of the business activities of the former. Under the
contract, CCC-QC shall sell, discount and/or assign its receivables to CCC. Subsequently,
however, this discounting arrangement was discontinued pursuant to the so-called DOSRI
Rule, prohibiting the lending of funds by corporations to its directors, officers, stockholders
and other persons with related interests therein.
On account of the new restrictions imposed by the Central Bank policy by virtue of the
DOSRI Rule, CCC decided to form CCC Equity Corporation, (hereinafter, CCC-Equity), a
wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent equity in CCCQC, together with two seats in the latters Board of Directors.
Under the new set-up, several officials of Commercial Credit Corporation, including petitioner
Reynoso, became employees of CCC-Equity. While petitioner continued to be the Resident
Manager of CCC-QC, he drew his salaries and allowances from CCC-Equity. Furthermore,
although an employee of CCC-Equity, petitioner, as well as all employees of CCC-QC,
became qualified members of the Commercial Credit Corporation Employees Pension Plan.
As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and
supervised its employees. The business activities of CCC-QC pertain to the acceptance of
funds from depositors who are issued interest-bearing promissory notes. The amounts
deposited are then loaned out to various borrowers. Petitioner, in order to boost the business
activities of CCC-QC, deposited his personal funds in the company. In return, CCC-QC
issued to him its interest-bearing promissory notes.

In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and
asserted that the sum of P1,300,593.11 represented his money placements in CCC-QC, as
shown by twenty-three (23) checks which he issued to the said company.[3]
The case was subsequently transferred to the Regional Trial Court of Quezon City, Branch 86,
pursuant to the Judiciary Reorganization Act of 1980.
On January 14, 1985, the trial court rendered its decision, the decretal portion of which states:
Premises considered, the Court finds the complaint without merit. Accordingly, said
complaint is hereby DISMISSED.
By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation, humiliation
and mental anguish.
On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is hereby
ordered:
a)
to pay defendant the sum of P185,000.00 plus 14% interest per annum from October 2,
1980 until fully paid;
b)
to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per annum from
June 24, 1981, the date of filing of Amended Answer, until fully paid; from this amount may
be deducted the remaining obligation of defendant under the promissory note of October 24,
1977, in the sum of P9,738.00 plus penalty at the rate of 1% per month from December 24,
1977 until fully paid;
c)

to pay defendants P200,000.00 as moral damages;

d)

to pay defendants P100,000.00 as exemplary damages;

e)

to pay defendants P25,000.00 as and for attorney's fees; plus costs of the suit.

SO ORDERED.
Both parties appealed to the then Intermediate Appellate Court. The appeal of Commercial
Credit Corporation of Quezon City was dismissed for failure to pay docket fees. Petitioner, on
the other hand, withdrew his appeal.

54

Hence, the decision became final and, accordingly, a Writ of Execution was issued on July 24,
1989.[4] However, the judgment remained unsatisfied,[5] prompting petitioner to file a Motion
for Alias Writ of Execution, Examination of Judgment Debtor, and to Bring Financial Records
for Examination to Court. CCC-QC filed an Opposition to petitioners motion,[6] alleging that
the possession of its premises and records had been taken over by CCC.
Meanwhile, in 1983, CCC became known as the General Credit Corporation.
On November 22, 1991, the Regional Trial Court of Quezon City issued an Order directing
General Credit Corporation to file its comment on petitioners motion for alias writ of
execution.[7] General Credit Corporation filed a Special Appearance and Opposition on
December 2, 1991,[8] alleging that it was not a party to the case, and therefore petitioner
should direct his claim against CCC-QC and not General Credit Corporation. Petitioner filed
his reply,[9] stating that the CCC-QC is an adjunct instrumentality, conduit and agency of
CCC. Furthermore, petitioner invoked the decision of the Securities and Exchange
Commission in SEC Case No. 2581, entitled, Avelina G. Ramoso, et al., Petitioner versus
General Credit Corp., et al., Respondents, where it was declared that General Credit
Corporation, CCC-Equity and other franchised companies including CCC-QC were declared
as one corporation.
On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of an
alias writ of execution.[10] On December 20, 1991, General Credit Corporation filed an
Omnibus Motion,[11] alleging that SEC Case No. 2581 was still pending appeal, and
maintaining that the levy on properties of the General Credit Corporation by the deputy sheriff
of the court was erroneous.
In his Opposition to the Omnibus Motion, petitioner insisted that General Credit Corporation
is just the new name of Commercial Credit Corporation; hence, General Credit Corporation
and Commercial Credit Corporation should be treated as one and the same entity.
On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus
Motion.[12] On March 5, 1992, it issued an Order directing the issuance of an alias writ of
execution.[13]
Previously, on February 21, 1992, General Credit Corporation instituted a complaint before
the Regional Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C. Tanangco, in
his capacity as Deputy Sheriff of Quezon City,[14] docketed as Civil Case No. 61777, praying
that the levy on its parcel of land located in Pasig, Metro Manila and covered by Transfer
Certificate of Title No. 29940 be declared null and void, and that defendant sheriff be enjoined
from consolidating ownership over the land and from further levying on other properties of
General Credit Corporation to answer for any liability under the decision in Civil Case No. Q30583.
The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining
order. Thus, General Credit Corporation instituted two (2) petitions for certiorari with the
Court of Appeals, docketed as CA-G.R. SP No. 27518[15] and CA-G.R. SP No. 27683. These
cases were later consolidated.

On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated cases, the
dispositive portion of which reads:
WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal to issue
a restraining order as having been rendered moot by our Resolution of 7 April 1992 which, by
way of injunctive relief, provided that "the respondents and their representatives are hereby
enjoined from conducting an auction sale (on execution) of petitioner's properties as well as
initiating similar acts of levying (upon) and selling on execution other properties of said
petitioner". The injunction thus granted, as modified by the words in parenthesis, shall remain
in force until Civil Case No. 61777 shall have been finally terminated.
In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET
ASIDE, for having been issued in excess of jurisdiction, the Order of 13 February 1992 in
Civil Case No. Q-30583 as well as any other order or process through which the petitioner is
made liable under the judgment in said Civil Case No. Q-30583.
No damages and no costs.
SO ORDERED.[16]
Hence, this petition for review anchored on the following arguments:
1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683 WHEN
IT NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND OTHER
ORDERS OR PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL COURT OF
QUEZON CITY THROUGH WHICH GENERAL CREDIT CORPORATION IS MADE
LIABLE UNDER THE JUDGMENT THAT WAS RENDERED IN CIVIL CASE NO. Q30583.
2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518 WHEN
IT ENJOINED THE AUCTION SALE ON EXECUTION OF THE PROPERTIES OF
GENERAL CREDIT CORPORATION AS WELL AS INITIATING SIMILAR ACTS OF
LEVYING UPON AND SELLING ON EXECUTION OF OTHER PROPERTIES OF
GENERAL CREDIT CORPORATION.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL
CREDIT CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-30583, INSTEAD
OF, DECLARING THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY
IS THE ALTER EGO, INSTRUMENTALITY, CONDUIT OR ADJUNCT OF
COMMERCIAL CREDIT CORPORATION AND ITS SUCCESSOR GENERAL CREDIT
CORPORATION.
At the outset, it must be stressed that there is no longer any controversy over petitioners
claims against his former employer, CCC-QC, inasmuch as the decision in Civil Case No. Q30583 of the Regional Trial Court of Quezon City has long become final and executory. The
only issue, therefore, to be resolved in the instant petition is whether or not the judgment in
favor of petitioner may be executed against respondent General Credit Corporation. The latter
contends that it is a corporation separate and distinct from CCC-QC and, therefore, its

55

properties may not be levied upon to satisfy the monetary judgment in favor of petitioner. In
short, respondent raises corporate fiction as its defense. Hence, we are necessarily called upon
to apply the doctrine of piercing the veil of corporate entity in order to determine if General
Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-QC.
The petition is impressed with merit.
A corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes, and properties expressly authorized by law or incident to its
existence.[17] It is an artificial being 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.[18] It was evolved to make possible the aggregation and assembling of huge
amounts of capital upon which big business depends. It also has the advantage of nondependence on the lives of those who compose it even as it enjoys certain rights and conducts
activities of natural persons.
Precisely because the corporation is such a prevalent and dominating factor in the business life
of the country, the law has to look carefully into the exercise of powers by these artificial
persons it has created.
Any piercing of the corporate veil has to be done with caution. However, the Court will not
hesitate to use its supervisory and adjudicative powers where the corporate fiction is used as
an unfair device to achieve an inequitable result, defraud creditors, evade contracts and
obligations, or to shield it from the effects of a court decision. The corporate fiction has to be
disregarded when necessary in the interest of justice.
In First Philippine International Bank v. Court of Appeals, et al., [19] we held:
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, the achievement or
perfection of a monopoly or generally the perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals.
Also in the above-cited case, we stated that this Court has pierced the veil of corporate fiction
in numerous cases where it was used, among others, to avoid a judgment credit; [20] to avoid
inclusion of corporate assets as part of the estate of a decedent;[21] to avoid liability arising
from debt;[22] when made use of as a shield to perpetrate fraud and/or confuse legitimate
issues;[23] or to promote unfair objectives or otherwise to shield them.[24]
In the appealed judgment, the Court of Appeals sustained respondents arguments of
separateness and its character as a different corporation which is a non-party or stranger to this
case.
The defense of separateness will be disregarded where the business affairs of a subsidiary
corporation are so controlled by the mother corporation to the extent that it becomes an
instrument or agent of its parent. But even when there is dominance over the affairs of the

subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction
is used to defeat public convenience, justify wrong, protect fraud or defend crime. [25]
We stated in Tomas Lao Construction v. National Labor Relations Commission,[26] that the
legal fiction of a corporation being a judicial entity with a distinct and separate personality
was envisaged for convenience and to serve justice. Therefore, it should not be used as a
subterfuge to commit injustice and circumvent the law.
Precisely for the above reasons, we grant the instant petition.
It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation
was intended to publicly identify it as a component of the CCC group of companies engaged
in one and the same business, i.e., investment and financing. Aside from CCC-Quezon City,
other franchise companies were organized such as CCC-North Manila and CCC-Cagayan
Valley. The organization of subsidiary corporations as what was done here is usually resorted
to for the aggrupation of capital, the ability to cover more territory and population, the
decentralization of activities best decentralized, and the securing of other legitimate
advantages. But when the mother corporation and its subsidiary cease to act in good faith and
honest business judgment, when the corporate device is used by the parent to avoid its liability
for legitimate obligations of the subsidiary, and when the corporate fiction is used to
perpetrate fraud or promote injustice, the law steps in to remedy the problem. When that
happens, the corporate character is not necessarily abrogated. It continues for legitimate
objectives. However, it is pierced in order to remedy injustice, such as that inflicted in this
case.
Factually and legally, the CCC had dominant control of the business operations of CCCQC. The exclusive management contract insured that CCC-QC would be managed and
controlled by CCC and would not deviate from the commands of the mother corporation. In
addition to the exclusive management contract, CCC appointed its own employee, petitioner,
as the resident manager of CCC-QC.
Petitioners designation as resident manager implies that he was placed in CCC-QC by a
superior authority. In fact, even after his assignment to the subsidiary corporation, petitioner
continued to receive his salaries, allowances, and benefits from CCC, which later became
respondent General Credit Corporation. Not only that. Petitioner and the other permanent
employees of CCC-QC were qualified members and participants of the Employees Pension
Plan of CCC.
There are other indications in the record which attest to the applicability of the identity rule in
this case, namely: the unity of interests, management, and control; the transfer of funds to suit
their individual corporate conveniences; and the dominance of policy and practice by the
mother corporation insure that CCC-QC was an instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line of
business involving a single transaction process. Under their discounting arrangements, CCC
financed the operations of CCC-QC. The subsidiary sold, discounted, or assigned its accounts
receivables to CCC.

56

The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971, shows the
pervasive and intensive auditing function of CCC over CCC-QC.[27] The two corporations also
shared the same office space. CCC-QC had no office of its own.

Under the foregoing circumstances, the contention of respondent General Credit Corporation,
the new name of CCC, that the corporate fiction should be appreciated in its favor is without
merit.

The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by the
director-representative of CCC. The lawyers who filed the complaint and amended complaint
were all in-house lawyers of CCC.

Paraphrasing the ruling in Claparols v. Court of Industrial Relations,[28] reiterated in Concept


Builders Inc. v. National Labor Relations,[29] it is very obvious that respondent seeks the
protective shield of a corporate fiction whose veil the present case could, and should, be
pierced as it was deliberately and maliciously designed to evade its financial obligation of its
employees.

The challenged decision of the Court of Appeals states that CCC, now General Credit
Corporation, is not a formal party in the case. The reason for this is that the complaint was
filed by CCC-QC against petitioner. The choice of parties was with CCC-QC. The judgment
award in this case arose from the counterclaim which petitioner set up against CCC-QC.
The circumstances which led to the filing of the aforesaid complaint are quite revealing. As
narrated above, the discounting agreements through which CCC controlled the finances of its
subordinates became unlawful when Central Bank adopted the DOSRI prohibitions. Under
this rule the directors, officers, and stockholders are prohibited from borrowing from their
company. Instead of adhering to the letter and spirit of the regulations by avoiding DOSRI
loans altogether, CCC used the corporate device to continue the prohibited practice. CCC
organized still another corporation, the CCC-Equity Corporation. However, as a wholly
owned subsidiary, CCC-Equity was in fact only another name for CCC. Key officials of CCC,
including the resident managers of subsidiary corporations, were appointed to positions in
CCC-Equity.
In order to circumvent the Central Banks disapproval of CCC-QCs mode of reducing its
DOSRI lender accounts and its directive to follow Central Bank requirements, resident
managers, including petitioner, were told to observe a pseudo-compliance with the phasing out
orders. For his unwillingness to satisfactorily conform to these directives and his reluctance to
resort to illegal practices, petitioner earned the ire of his employers. Eventually, his services
were terminated, and criminal and civil cases were filed against him.

If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment debt
and work an injustice. The decision raised to us for review is an invitation to multiplicity of
litigation. As we stated in Islamic Directorate vs. Court of Appeals,[30] the ends of justice are
not served if further litigation is encouraged when the issue is determinable based on the
records.
A court judgment becomes useless and ineffective if the employer, in this case CCC as a
mother corporation, is placed beyond the legal reach of the judgment creditor who, after
protracted litigation, has been found entitled to positive relief. Courts have been organized to
put an end to controversy. This purpose should not be negated by an inapplicable and wrong
use of the fiction of the corporate veil.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and
ASIDE. The injunction against the holding of an auction sale for the execution of the decision
in Civil Case No. Q-30583 of properties of General Credit Corporation, and the levying upon
and selling on execution of other properties of General Credit Corporation, is LIFTED.
SO ORDERED.

Petitioner issued twenty-three checks as money placements with CCC-QC because of


difficulties faced by the firm in implementing the required phase-out program. Funds from his
current account in the Far East Bank and Trust Company were transferred to CCC-QC. These
monies were alleged in the criminal complaints against him as having been
stolen. Complaints for qualified theft and estafa were brought by CCC-QC against
petitioner. These criminal cases were later dismissed. Similarly, the civil complaint which
was filed with the Court of First Instance of Pasig and later transferred to the Regional Trial
Court of Quezon City was dismissed, but his counterclaims were granted.
Faced with the financial obligations which CCC-QC had to satisfy, the mother firm closed
CCC-QC, in obvious fraud of its creditors. CCC-QC, instead of opposing its closure,
cooperated in its own demise. Conveniently, CCC-QC stated in its opposition to the motion
for alias writ of execution that all its properties and assets had been transferred and taken over
by CCC.

57

Republic of the Philippines


SUPREME COURT
Manila

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and
by preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:

FIRST DIVISION
G.R. No. 182729

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan,
Inc., disposing as follows:

September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,


vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the Regional Trial Court of
Manila, Branch 21, and ROMEO M. MORALES, doing business under the name and
style "RM Morales Trophies and Plaques," Respondents.
DECISION
VELASCO, JR., J.:
The Case

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys
fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
For lack of factual foundation, the counterclaim is DISMISSED.

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January
23, 2008 Decision1and the April 16, 2008 Resolution2 rendered by the Court of Appeals (CA)
in CA-G.R. SP No. 100152.
The assailed CA decision affirmed the March 12, 2007 3 and June 7, 20074 Orders of the
Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173,
entitled Romeo M. Morales, doing business under the name and style RM Morales Trophies
and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the separate corporate
identities of Kukan, Inc. and Kukan International Corporation and declared them to be one and
the same entity. Accordingly, the RTC held Kukan International Corporation, albeit not
impleaded in the underlying complaint of Romeo M. Morales, liable for the judgment award
decreed in a Decision dated November 28, 20025 in favor of Morales and against Kukan, Inc.
The Facts
Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of
signages in a building being constructed in Makati City. Morales tendered the winning bid and
was awarded the PhP 5 million contract. Some of the items in the project award were later
excluded resulting in the corresponding reduction of the contract price to PhP 3,388,502.
Despite his compliance with his contractual undertakings, Morales was only paid the amount
of PhP 1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay
despite demands. Shortchanged, Morales filed a Complaint6 with the RTC against Kukan, Inc.
for a sum of money, the case docketed as Civil Case No. 99-93173 and eventually raffled to
Branch 17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
ensued. However, starting November 2000, Kukan, Inc. no longer appeared and participated in
the proceedings before the trial court, prompting the RTC to declare Kukan, Inc. in default and
paving the way for Morales to present his evidence ex parte.

IT IS SO ORDERED.7
After the above decision became final and executory, Morales moved for and secured a writ of
execution8 against Kukan, Inc. The sheriff then levied upon various personal properties found
at what was supposed to be Kukan, Inc.s office at Unit 2205, 88 Corporate Center, Salcedo
Village, Makati City. Alleging that it owned the properties thus levied and that it was a
different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an
Affidavit of Third-Party Claim. Notably, KIC was incorporated in August 2000, or shortly
after Kukan, Inc. had stopped participating in Civil Case No. 99-93173.
In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30,
2003. In it, Morales prayed, applying the principle of piercing the veil of corporate fiction, that
an order be issued for the satisfaction of the judgment debt of Kukan, Inc. with the properties
under the name or in the possession of KIC, it being alleged that both corporations are but one
and the same entity. KIC opposed Morales motion. By Order of May 29, 2003 9as reiterated in
a subsequent order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment Debtors
dated May 4, 2005. In this motion Morales sought that subponae be issued against the primary
stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This too was
denied by the trial court in an Order dated May 24, 2005. 10
Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by public
respondent Judge Amor Reyes.

58

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate
Fiction to declare KIC as having no existence separate from Kukan, Inc. This time around, the
RTC, by Order dated March 12, 2007, granted the motion, the dispositive portion of which
reads:
WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby
declares as follows:
1. defendant Kukan, Inc. and newly created Kukan International Corp. as one and the same
corporation;
2. the levy made on the properties of Kukan International Corp. is hereby valid;
3. Kukan International Corp. and Michael Chan are jointly and severally liable to pay the
amount awarded to plaintiff pursuant to the decision of November [28], 2002 which has long
been final and executory.
SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another Order dated June
7, 2007.
KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7,
2007 RTC Orders.
On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which
states:
WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders
dated March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.
SO ORDERED.11
The CA later denied KICs motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the Courts
consideration:
1. There is no legal basis for the [CA] to resolve and declare that petitioners Constitutional
Right to Due Process was not violated by the public respondent in rendering the Orders dated
March 12, 2007 and June 7, 2007 and in declaring petitioner to be liable for the judgment
obligations of the corporation "Kukan, Inc." to private respondent as petitioner is a stranger
to the case and was never made a party in the case before the trial court nor was it ever served
a summons and a copy of the complaint.
2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12,
2007 and June 7, 2007 rendered by public respondent declaring the petitioner liable to the
judgment obligations of the corporation "Kukan, Inc." to private respondent are valid as said

orders of the public respondent modify and/or amend the trial courts final and executory
decision rendered on November 28, 2002.
3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12,
2007 and June 7, 2007 rendered by public respondent declaring the petitioner [KIC] and the
corporation "Kukan, Inc." as one and the same, and, therefore, the Veil of Corporate Fiction
between them be pierced as the procedure undertaken by public respondent which the [CA]
upheld is not sanctioned by the Rules of Court and/or established jurisprudence enunciated by
this Honorable Supreme Court.12
In gist, the issues to be resolved boil down to the question of, first, whether the trial court can,
after the judgment against Kukan, Inc. has attained finality, execute it against the property of
KIC; second, whether the trial court acquired jurisdiction over KIC; and third, whether the
trial and appellate courts correctly applied, under the premises, the principle of piercing the
veil of corporate fiction.
The Ruling of the Court
The petition is meritorious.
First Issue: Against Whom Can a Final and
Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial court can, after
adjudging Kukan, Inc. liable for a sum of money in a final and executory judgment, execute
such judgment debt against the property of KIC.
The poser must be answered in the negative.
In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control over the
execution of its judgment:
A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that the court
which rendered the judgment has a general supervisory control over its process of execution,
and this power carries with it the right to determine every question of fact and law which may
be involved in the execution.
We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said branch
has a general supervisory control over its processes in the execution of its judgment with a
right to determine every question of fact and law which may be involved in the execution."
The courts supervisory control does not, however, extend as to authorize the alteration or
amendment of a final and executory decision, save for certain recognized exceptions, among
which is the correction of clerical errors. Else, the court violates the principle of finality of
judgment and its immutability, concepts which the Court, in Tan v. Timbal, 15 defined:
As we held in Industrial Management International Development Corporation vs. NLRC:

59

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement
of rights of the parties. Once a decision or order becomes final and executory, it is removed
from the power or jurisdiction of the court which rendered it to further alter or amend it. It
thereby becomes immutable and unalterable and any amendment or alteration which
substantially affects a final and executory judgment is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. An order of execution which varies the
tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the
aforementioned awards to Morales. Thus, making KIC, thru the medium of a writ of
execution, answerable for the above judgment liability is a clear case of altering a decision, an
instance of granting relief not contemplated in the decision sought to be executed. And the
change does not fall under any of the recognized exceptions to the doctrine of finality and
immutability of judgment. It is a settled rule that a writ of execution must conform to
the fallo of the judgment; as an inevitable corollary, a writ beyond the terms of the judgment is
a nullity.17

Republic v. Tango16 expounded on the same principle and its exceptions:

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an
examination of the other issues raised by KIC would be proper.

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired
finality becomes immutable and unalterable. As such, it may no longer be modified in any
respect even if the modification is meant to correct erroneous conclusions of fact or law and
whether it will be made by the court that rendered it or by the highest court of the land. x x x
The doctrine of finality of judgment is grounded on the fundamental principle of public policy
and sound practice that, at the risk of occasional error, the judgment of courts and the award of
quasi-judicial agencies must become final on some definite date fixed by law. The only
exceptions to the general rule are the correction of clerical errors, the so-called nunc pro tunc
entries which cause no prejudice to any party, void judgments, and whenever circumstances
transpire after the finality of the decision which render its execution unjust and inequitable.
None of the exceptions obtains here to merit the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment,
order the execution of its final decision in a manner as would amount to its prohibited
alteration or modification?
We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it
provides:
WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and
by preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering
Kukan, Inc.:
1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;
2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;
3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys
fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)

Second Issue: Propriety of the RTC


Assuming Jurisdiction over KIC
The next issue turns on the validity of the execution the trial court authorized against KIC and
its property, given that it was neither made a party nor impleaded in Civil Case No. 99-93173,
let alone served with summons. In other words, did the trial court acquire jurisdiction over
KIC?
In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to
the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted to earlier,
namely: (a) the Affidavit of Third-Party Claim;18 (b) the Comment and Opposition to
Plaintiffs Omnibus Motion;19 (c) the Motion for Reconsideration of the RTC Order dated
March 12, 2007;20 and (d) the Motion for Leave to Admit Reply.21 The CA, citing Section 20,
Rule 14 of the Rules of Court, stated that "the procedural rule on service of summons can be
waived by voluntary submission to the courts jurisdiction through any form of appearance by
the party or its counsel."22
We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20, Rule
14 of the Rules in concluding that the trial court acquired jurisdiction over KIC.
Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire
jurisdiction over the parties in a civil case:
Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other
hand, jurisdiction over the defendants in a civil case is acquired either through the service of
summons upon them or through their voluntary appearance in court and their submission to its
authority. (Emphasis supplied.)
In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person of
the defendant either by the service of summons or by the latters voluntary appearance and
submission to the authority of the former."
The courts jurisdiction over a party-defendant resulting from his voluntary submission to its
authority is provided under Sec. 20, Rule 14 of the Rules, which states:

60

Section 20. Voluntary appearance. The defendants voluntary appearance in the actions shall
be equivalent to service of summons. The inclusion in a motion to dismiss of other grounds
aside from lack of jurisdiction over the person of the defendant shall not be deemed a
voluntary appearance.
To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed
as voluntary appearance finds support in the kindred Republic v. Ker & Co., Ltd. 25 and De
Midgely v. Ferandos.26
Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals,28 wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special
appearance before the courtchallenging its jurisdiction over the person through a motion to
dismiss even if the movant invokes other groundsis not tantamount to estoppel or a waiver
by the movant of his objection to jurisdiction over his person; and such is not constitutive of a
voluntary submission to the jurisdiction of the court."29
In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it
is conceded that it raised affirmative defenses through its aforementioned pleadings, KIC
never abandoned its challenge, however implicit, to the RTCs jurisdiction over its person.
The challenge was subsumed in KICs primary assertion that it was not the same entity as
Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiffs Omnibus Motion dated
May 20, 2003, KIC entered its "special but not voluntary appearance" alleging therein that
it was a different entity and has a separate legal personality from Kukan, Inc. And KIC would
consistently reiterate this assertion in all its pleadings, thus effectively resisting all along the
RTCs jurisdiction of its person. It cannot be overemphasized that KIC could not file before
the RTC a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely
because KIC was neither impleaded nor served with summons. Consequently, KIC could only
assert and claim through its affidavits, comments, and motions filed by special appearance
before the RTC that it is separate and distinct from Kukan, Inc.
Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its objection
to the courts lack of jurisdiction over its person. It would defy logic to say that KIC
unequivocally submitted itself to the jurisdiction of the RTC when it strongly asserted that it
and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had no other
option but to insist on its separate identity and plead for relief consistent with that position.
Third Issue: Piercing the
Veil of Corporate Fiction
The third and main issue in this case is whether or not the trial and appellate courts correctly
applied the principle of piercing the veil of corporate entitycalled also as disregarding the
fiction of a separate juridical personality of a corporationto support a conclusion that
Kukan, Inc. and KIC are but one and the same corporation with respect to the contract award
referred to at the outset. This principle finds its context on the postulate that a corporation is an
artificial being invested with a personality separate and distinct from those of the stockholders
and from other corporations to which it may be connected or related. 31

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations


Commission,32 the Court revisited the subject principle of piercing the veil of corporate fiction
and wrote:
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation
as a mere collection of individuals or an aggregation of persons undertaking business as a
group, disregarding the separate juridical personality of the corporation unifying the group.
Another formulation of this doctrine is that when two 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 as one and the same.
Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate
veil when it is misused or when necessary in the interest of justice. x x x (Emphasis supplied.)
The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:
While a corporation may exist for any lawful purpose, the law will regard it as an association
of persons or, in case of two corporations, merge them into one, when its corporate legal entity
is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate
fiction. The doctrine applies only when such 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.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
established clearly and convincingly. It cannot be presumed. 33 (Emphasis supplied.)
Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to
due process when, in the execution of its November 28, 2002 Decision, the court authorized
the issuance of the writ against KIC for Kukan, Inc.s judgment debt, albeit KIC has never
been a party to the underlying suit. As a counterpoint, Morales argues that KICs specific
concern on due process and on the validity of the writ to execute the RTCs November 28,
2002 Decision would be mooted if it were established that KIC and Kukan, Inc. are indeed one
and the same corporation.
Morales contention is untenable.
The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given transaction, is
basically applied only to determine established liability;34 it is not available to confer on the
court a jurisdiction it has not acquired, in the first place, over a party not impleaded in a case.
Elsewise put, a corporation not impleaded in a suit cannot be subject to the courts process of
piercing the veil of its corporate fiction. In that situation, the court has not acquired

61

jurisdiction over the corporation and, hence, any proceedings taken against that corporation
and its property would infringe on its right to due process. Aguedo Agbayani, a recognized
authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction.
xxx
This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the evidence presented, it is
imperative that the court must first have jurisdiction over the corporation.35 x x x (Emphasis
supplied.)
The implication of the above comment is twofold: (1) the court must first acquire jurisdiction
over the corporation or corporations involved before its or their separate personalities are
disregarded; and (2) the doctrine of piercing the veil of corporate entity can only be raised
during a full-blown trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons or what passes as such
service.
The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the
matter of the time and manner of raising the principle in question, it is undisputed that no fullblown trial involving KIC was had when the RTC disregarded the corporate veil of KIC. The
reason for this actuality is simple and undisputed: KIC was not impleaded in Civil Case No.
99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the case after
it reacted to the improper execution of its properties and veritably hauled to court, not thru the
usual process of service of summons, but by mere motion of a party with whom it has no
privity of contract and after the decision in the main case had already become final and
executory. As to the propriety of a plea for the application of the principle by mere motion, the
following excerpts are instructive:
Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and is
not available to settle important questions of law, or to dispose of the merits of the case. A
motion is usually a proceeding incidental to an action, but it may be a wholly distinct or
independent proceeding. A motion in this sense is not within this discussion even though the
relief demanded is denominated an "order."
A motion generally relates to procedure and is often resorted to in order to correct errors
which have crept in along the line of the principal actions progress. Generally, where there is
a procedural defect in a proceeding and no method under statute or rule of court by which it
may be called to the attention of the court, a motion is an appropriate remedy. In many
jurisdictions, the motion has replaced the common-law pleas testing the sufficiency of the
pleadings, and various common-law writs, such as writ of error coram nobis and audita
querela. In some cases, a motion may be one of several remedies available. For example, in
some jurisdictions, a motion to vacate an order is a remedy alternative to an appeal therefrom.
Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment debt of
Kukan, Inc.assuming hypothetically that he can, applying the piercing the corporate veil
principleresolves itself into the question of whether a mere motion is the appropriate vehicle
for such purpose.
Verily, Morales espouses the application of the principle of piercing the corporate veil to hold
KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the separate
and distinct personality of another corporation, KIC. In net effect, Morales adverted motion to
pierce the veil of corporate fiction dated January 3, 2007 stated a new cause of action, i.e., for
the liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged identity of the
two corporations. This new cause of action should be properly ventilated in another complaint
and subsequent trial where the doctrine of piercing the corporate veil can, if appropriate, be
applied, based on the evidence adduced. Establishing the claim of Morales and the
corresponding liability of KIC for Kukan Inc.s indebtedness could hardly be the subject,
under the premises, of a mere motion interposed after the principal action against Kukan, Inc.
alone had peremptorily been terminated. After all, a complaint is one where the plaintiff
alleges causes of action.
In any event, the principle of piercing the veil of corporate fiction finds no application to the
instant case.
As a general rule, courts should be wary of lifting the corporate veil between corporations,
however related. Philippine National Bank v. Andrada Electric Engineering
Company37 explains why:
A corporation is an artificial being created by operation of law. x x x It has a personality
separate and distinct from the persons composing it, as well as from any other legal entity to
which it may be related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate
veil pierced when the corporation is just an alter ego of a person or of another corporation. For
reasons of public policy and in the interest of justice, the corporate veil will justifiably be
impaled only when it becomes a shield for fraud, illegality or inequity committed against third
persons.
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.
This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or
to perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair
objectives or to cover up an otherwise blatant violation of the prohibition against forumshopping. Only in these and similar instances may the veil be pierced and disregarded.
(Emphasis supplied.)

62

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and
convincing proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings. To be sure, the Court has, on numerous occasions, 38 applied the principle where
a corporation is dissolved and its assets are transferred to another to avoid a financial liability
of the first corporation with the result that the second corporation should be considered a
continuation and successor of the first entity.
In those instances when the Court pierced the veil of corporate fiction of two corporations,
there was a confluence of the following factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second corporation to avoid a financial
liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the second
corporation should be considered as a continuation and successor of the first corporation.
In the instant case, however, the second and third factors are conspicuously absent. There is,
therefore, no compelling justification for disregarding the fiction of corporate entity separating
Kukan, Inc. from KIC. In applying the principle, both the RTC and the CA miserably failed to
identify the presence of the abovementioned factors. Consider:
The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the
following premises and arguments:
While it is true that a corporation has a separate and distinct personality from its stockholder,
director and officers, the law expressly provides for an exception. When Michael Chan, the
Managing Director of defendant Kukan, Inc. (majority stockholder of the newly formed
corporation [KIC]) confirmed the award to plaintiff to supply and install interior signages in
the Enterprise Center he (Michael Chan, Managing Director of defendant Kukan, Inc.) knew
that there was no sufficient corporate funds to pay its obligation/account, thus implying bad
faith on his part and fraud in contracting the obligation. Michael Chan neither returned the
interior signages nor tendered payment to the plaintiff. This circumstance may warrant the
piercing of the veil of corporation fiction. Having been guilty of bad faith in the management
of corporate matters the corporate trustee, director or officer may be held personally liable. x x
x
Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred
from the circumstances of the case. x x x [A]nd the circumstances are: the signature of
Michael Chan, Managing Director of Kukan, Inc. appearing in the confirmation of the award
sent to the plaintiff; signature of Chan Kai Kit, a British National appearing in the Articles of
Incorporation and signature of Michael Chan also a British National appearing in the Articles
of Incorporation [of] Kukan International Corp. give the impression that they are one and the
same person, that Michael Chan and Chan Kai Kit are both majority stockholders of Kukan
International Corp. and Kukan, Inc. holding 40% of the stocks; that Kukan International Corp.
is practically doing the same kind of business as that of Kukan, Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of
Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of the common
shares of both corporations, obviously oblivious that overlapping stock ownership is a
common business phenomenon. It must be remembered, however, that KICs properties were
the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for that
matter. Mere ownership by a single stockholder or by another corporation of a substantial
block of shares of a corporation does not, standing alone, provide sufficient justification for
disregarding the separate corporate personality.40 For this ground to hold sway in this case,
there must be proof that Chan had control or complete dominion of Kukan and KICs finances,
policies, and business practices; he used such control to commit fraud; and the control was the
proximate cause of the financial loss complained of by Morales. The absence of any of the
elements prevents the piercing of the corporate veil.41 And indeed, the records do not show the
presence of these elements.
On the other hand, the CA held:
In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x
x worth more than three million pesos although it had only Php5,000.00 paid-up capital; [KIC]
was incorporated shortly before Kukan, Inc. suddenly ceased to appear and participate in the
trial; [KICs] purpose is related and somewhat akin to that of Kukan, Inc.; and in [KIC]
Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the outstanding stocks, while he
formerly held the same amount of stocks in Kukan Inc. These would lead to the inescapable
conclusion that Kukan, Inc. committed fraudulent representation by awarding to the private
respondent the contract with full knowledge that it was not in a position to comply with the
obligation it had assumed because of inadequate paid-up capital. It bears stressing that
shareholders should in good faith put at the risk of the business, unencumbered capital
reasonably adequate for its prospective liabilities. The capital should not be illusory or trifling
compared with the business to be done and the risk of loss.
Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan,
a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises. The emergence
of the former was cleverly timed with the hasty withdrawal of the latter during the trial to
avoid the financial liability that was eventually suffered by the latter. The two companies have
a related business purpose. Considering these circumstances, the obvious conclusion is that the
creation of Kukan International Corporation served as a device to evade the obligation
incurred by Kukan, Inc. and yet profit from the goodwill attained by the name "Kukan" by
continuing to engage in the same line of business with the same list of clients. 42 (Emphasis
supplied.)
Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of
the business activities in which both corporations are engaged as a jumping board to its
conclusion that the creation of KIC "served as a device to evade the obligation incurred by
Kukan, Inc." The appellate court, however, left a gaping hole by failing to demonstrate that
Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the
incorporation, and the separate and distinct personality, of KIC was used to defeat Morales
right to recover from Kukan, Inc. Judging from the records, no serious attempt was made to

63

levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that Kukan, Inc.
tried to avoid liability or had no property against which to proceed.
Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001
General Information Sheet (GIS) with the Securities and Exchange Commission. However,
such fact does not necessarily mean that Kukan, Inc. had altogether ceased operations, as
Morales would have this Court believe, for it is stated on the face of the GIS that it is only
upon a failure to file the corporate GIS for five (5) consecutive years that non-operation shall
be presumed.
The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up
capital of PhP 5,000 is not an indication of the intent on the part of its management to defraud
creditors. Paid-up capital is merely seed money to start a corporation or a business entity. As
in this case, it merely represented the capitalization upon incorporation in 1997 of Kukan, Inc.
Paid-up capitalization of PhP 5,000 is not and should not be taken as a reflection of the firms
capacity to meet its recurrent and long-term obligations. It must be borne in mind that the
equity portion cannot be equated to the viability of a business concern, for the best test is the
working capital which consists of the liquid assets of a given business relating to the nature of
the business concern.lawphil

It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly,
those who seek to pierce the veil must clearly establish that the separate and distinct
personalities of the corporations are set up to justify a wrong, protect fraud, or perpetrate a
deception. In the concrete and on the assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales ought to have proved by convincing evidence
that Kukan, Inc. was collapsed and thereafter KIC purposely formed and operated to defraud
him. Morales has not to us discharged his burden.
WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and
April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and SET
ASIDE. The levy placed upon the personal properties of Kukan International Corporation is
hereby ordered lifted and the personal properties ordered returned to Kukan International
Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision
dated November 28, 2002 against Kukan, Inc. with reasonable dispatch.
No costs.
SO ORDERED.

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as
a badge of fraud, for it is in compliance with Sec. 13 of the Corporation Code, 43 which only
requires a minimum paid-up capital of PhP 5,000.1avvphi1
The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true that
Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of both
corporations. But such circumstance, standing alone, is insufficient to establish identity. There
must be at least a substantial identity of stockholders for both corporations in order to consider
this factor to be constitutive of corporate identity.
It would not avail Morales any to rely44 on General Credit Corporation v. Alsons Development
and Investment Corporation.45 General Credit Corporation is factually not on all fours with the
instant case. There, the common stockholders of the corporations represented 90% of the
outstanding capital stock of the companies, unlike here where Michael Chan merely represents
40% of the outstanding capital stock of both KIC and Kukan, Inc., not even a majority of it. In
that case, moreover, evidence was adduced to support the finding that the funds of the second
corporation came from the first. Finally, there was proof in General Credit Corporation of
complete control, such that one corporation was a mere dummy or alter ego of the other,
which is absent in the instant case.
Evidently, the aforementioned case relied upon by Morales cannot justify the application of
the principle of piercing the veil of corporate fiction to the instant case. As shown by the
records, the name Michael Chan, the similarity of business activities engaged in, and
incidentally the word "Kukan" appearing in the corporate names provide the nexus between
Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the
identity of KIC as the alter ego or successor of Kukan, Inc.

64

65