Principle of limited liability hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing
MIC, DBP, and PNB solidarily liable for the amount owing Hercon,
PHILIPPINE NATIONAL BANK, Petitioner,
vs.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
DECISION
LEONARDO-DE CASTRO, J.:
These petitions for review on certiorari1 assail the Decision2 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 Decision4 dated 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)6 and 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.8As 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 money was filed in the RTC of Makati, Branch 136 seeking to
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
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
1
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.
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 of P8,370,934.74 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.
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
2
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 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:
SECTION 2. TRANSFER OF BANKS LIABILITIES
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 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
3
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.)
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 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. 52 It 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
4
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 Commission70 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 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
5
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
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
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.
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
6
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.
The parties, thereafter, filed their respective Motion for Reconsideration regarding
the SCs decision.
Issue:
1) Whether or not operative fact doctrine is applicable in the said case.

As trustee of the. assets of NMIC, however, the APT should ensure compliance by 2) Whether or not Sec. 31 of R.A. 6657 unconstitutional.
NMIC of the judgment against it. The APT itself acknowledges this.84
3) Whether or not the 10-year period prohibition on the transfer of awarded lands under
WHEREFORE, the petitions are hereby GRANTED. RA 6657 lapsed on May 10, 1999, since Hacienda Luisita were placed under CARP
coverage through the SDOA scheme on May 11, 1989, and thus the qualified FWBs
should now be allowed to sell their land interests in Hacienda Luisita to third parties,
The complaint as against Development Bank of the Philippines, the Philippine
whether they have fully paid for the lands or not?
National Bank, and the Asset Privatization Trust, now the Privatization and
Management Office, is DISMISSED for lack of merit. The Asset Privatization Trust,
4) Whether or not qualified FWBs shall be entitled to the option of remaining as
now the Privatization and Management Office, as trustee of Nonoc Mining and
stockholder be reconsidered.
Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to
ensure compliance by the Nonoc Mining and Industrial Corporation, now the
Ruling:
Philnico Processing Corporation, with this Decision.
1) Operative Fact Doctrine is applicable to the instant case. The court ruled that the
SO ORDERED.
doctrine is not limited only to invalid or unconstitutional law but also to decisions
made by the president or the administrative agencies that have the force and effect
Piercing the veil of corporate fiction and interlocking directors of laws, especially if the said decisions produced acts and consequences that must be
respected. That the implementation of PARC resolution approving SDP of HLI
Hacienda Luisita Incorporated vs Presidential Agrarian Reform Council, et al.,
manifested such right and benefits favorable to the FWBs;
Facts: The SC en banc voted 11-0 dismissing the petition filed by HLI Affirm with
2) The SC said that the constitutionality of Sec. 31 of R.A. 6657 is not the lis mota of the
modifications the resolutions of the Presidential Agrarian Reform Council (PARC for
case and it was not raised at the earliest opportunity and did not rule on the
brevity) revoking Hacienda Luisita Inc. (HLI for brevity) Stock Distribution Plan (SDP)
constitutionality of the law;
and placing the subject land in HL under compulsory coverage of the CARP of the
government.
3) The SC ruled that it has not yet lapsed on May 10, 1999, and qualified FWBs are not
allowed to sell their land interest in HL to third parties; That the start of the counting
Thereafter, the SC voting 6-5 averred that there are operative facts that occurred in
of the prohibitive period shall be ten years from the issuance and registration of the
the premises. The SC thereat declared that the revocation of the SDP shall, by
Emancipation Patent (EP for brevity) or Certificate of Land Ownership Award (CLOA
application of the operative fact principle, give the 5296 qualified Farmworkers
for brevity), and considering that the EPs and CLOAs have not yet been issued, the
Beneficiaries (FWBs for brevity) to choose whether they want to remain as HLI
prohibitive period has not started yet.
stockholders or choose actual land distribution. Considering the premises, DAR
immediately scheduled a meeting regarding the effects of their choice and therefrom
4) The SC ruled in the affirmative, giving qualified FWBs the option to remain as
proceeded to secret voting of their choice.
stockholder

7
YES, the ruling in the July 5, 2011 Decision that the qualified FWBs be given an option
to remain as stockholders of HLI should be reconsidered.
[The Court reconsidered its earlier decision that the qualified FWBs should be given
an option to remain as stockholders of HLI, inasmuch as these qualified FWBs will
never gain control [over the subject lands] given the present proportion of
shareholdings in HLI. The Court noted that the share of the FWBs in the HLI capital
stock is [just] 33.296%. Thus, even if all the holders of this 33.296% unanimously vote
to remain as HLI stockholders, which is unlikely, control will never be in the hands of
the FWBs. Control means the majority of [sic] 50% plus at least one share of the
common shares and other voting shares. Applying the formula to the HLI
stockholdings, the number of shares that will constitute the majority is 295,112,101
shares (590,554,220 total HLI capital shares divided by 2 plus one [1] HLI share). The
118,391,976.85 shares subject to the SDP approved by PARC substantially fall short
of the 295,112,101 shares needed by the FWBs to acquire control over HLI.]
The SC PARTIALLY GRANTED the motions for reconsideration of respondents PARC,
et al., The 6,296 original FWBs shall forfeit and relinquish their rights over the HLI
shares of stock issued to them in favor of HLI. The HLI Corporate Secretary shall
cancel the shares issued to the said FWBs and transfer them to HLI in the stocks and
transfer book. The 4,206 non-qualified FWBs shall remain as stockholders of HLI.
Disregard of corporate personality
ALERT SECURITY AND INVESTIGATION AGENCY, INC. AND/OR MANUEL D. DASIG vs.
PASAWILAN, VERCELES AND BULUSAN G.R. No. 182397, 14 September 2011
FACTS:Respondents were all employed by Alert Security as security guards. They w
ere paid 165.00 pesos a day as regular employees, and assigned at the DOST pursua
nt to a security service contract between the DOST and Alert Security.Because they
were underpaid, they filed a complaint for money claims against petitioners before
the Labor Arbiter. As a result of this, they were relieved from their posts in the DOS
T and were not given new assignments despite the lapse of six months. They then fil
ed a joint complaint for illegal dismissal. Petitioners denied this and claimed that fro
m the DOST, respondents were merely detailed at the Metro Rail Transit, Inc. at the
Light Rail Transit Authority (LRTA) because the wages therein were already adjusted
to the latest minimum wage.
ISSUE:
1.) Whether or not failure to report for duty in new location constitutes abandonme
nt of work.
2.) Whether or not monetary awards to an illegally dismissed employee should be in
solidum by Alert Security and its President and General Manager.
RULING:
1.) No. The Labor Code, as amended, enumerates several just and authorized causes
for a valid termination of employment. An employee asserting his right and asking f
or minimum wage is not among those causes. Dismissing an employee on this groun
d amounts to retaliation by management for an employees legitimate grievance wit
hout due process.
Assuming that respondents were merely transferred to a new post wherein the wag
es are adjusted to the current minimum wage standards and they voluntarily aband
oned their jobs when they failed to report for duty in the new location, it still canno
t hold that the respondents abandoned their posts. For abandonment of work to fal
l under Article 282 (b) of the Labor Code, as amended, as gross and habitual neglect
of duties there must be the concurrence of two elements. First, there should be a fa
ilure of the employee to report for work without a valid or justifiable reason, and se
cond, there should be a showing that the employee intended to sever the employer
-
employee relationship, the second element being the more determinative factor as
manifested by overt acts. As to the first element, there is no showing that responde
nts were notified of their new assignments. For the second one, the fact that petitio
ners filed a complaint for illegal dismissal is indicative of their intention to remain e
mployed with private respondent considering that one of their prayers in the compl
aint is for re-instatement.
2.)No. Basic is the rule that a corporation has a separate and distinct personality apa
rt from its directors, officers, or owners. In exceptional cases, courts find it proper t
o breach this corporate personality in order to make directors, officers, or owners s
olidarily liable for the companies acts. This is when directors or trustees willfully an
d knowingly vote for or assent to patently unlawful acts of the corporation or who a
re guilty of gross negligence or bad faith in directing the affairs of the corporation. A
bsent any malice or bad faith on the part of the corporate officer, he cannot be liabl
e. Here, he was not using the veil of corporation.
PARK HOTEL, J's PLAYHOUSE BURGOS CORP., INC., and/or GREGG HARBUTT,
General Manager, ATTY. ROBERTO ENRIQUEZ, President, and BILL
8
PERCY, Petitioners,
vs.
MANOLO SORIANO, LESTER GONZALES, and YOLANDA BADILLA, Respondents.
Before this Court is a petition for review on certiorari under Rule 45 of the Rules of
Court seeking to set aside the Decision1 and the Resolution2 of the Court of Appeals
(CA) in CA-G.R. SP No. 67766.
The antecedents are as follows:
Petitioner Park Hotel3 is a corporation engaged in the hotel business. Petitioners
Gregg Harbutt4 (Harbutt) and Bill Percy5 (Percy) are the General Manager and
owner, respectively, of Park Hotel. Percy, Harbutt and Atty. Roberto Enriquez are
also the officers and stockholders of Burgos Corporation (Burgos), 6 a sister company
of Park Hotel.
Respondent Manolo Soriano (Soriano) was hired by Park Hotel in July 1990 as
Maintenance Electrician, and then transferred to Burgos in 1992. Respondent Lester
Gonzales (Gonzales) was employed by Burgos as Doorman, and later promoted as
Supervisor. Respondent Yolanda Badilla (Badilla) was a bartender of J's Playhouse
operated by Burgos.
In October of 1997, Soriano, Gonzales and Badilla7 were dismissed from work for
allegedly stealing company properties. As a result, respondents filed complaints for
illegal dismissal, unfair labor practice, and payment of moral and exemplary
damages and attorney's fees, before the Labor Arbiter (LA). In their complaints,
respondents alleged that the real reason for their dismissal was that they were
organizing a union for the company's employees.
On the other hand, petitioners alleged that aside from the charge of theft, Soriano
and Gonzales have violated various company rules and regulations8 contained in
several memoranda issued to them. After dismissing respondents, Burgos filed a
case for qualified theft against Soriano and Gonzales before the Makati City
Prosecutor's Office, but the case was dismissed for insufficiency of evidence.
In his Affidavit,9 Soriano claimed that on October 4, 1997, he was barred from
entering the company premises and that the following day, Harbutt shouted at him
for having participated in the formation of a union. He was later dismissed from
work. For his part, Gonzales averred that he was coerced to resign by Percy and
Harbutt in the presence of their goons. Badilla 10 claimed that she was also forced by
Percy and Harbutt to sign a resignation letter, but she refused to do so because she
was innocent of the charges against her. She was nevertheless dismissed from
service.
The three (3) respondents averred that they never received the memoranda
containing their alleged violation of company rules and they argued that these
memoranda were fabricated to give a semblance of cause to their termination.
Soriano and Gonzales further claimed that the complaint filed against them was
only an afterthought as the same was filed after petitioners learned that a
complaint for illegal dismissal was already instituted against them.
On September 27, 1998, the LA rendered a Decision 11 finding that respondents
were illegally dismissed because the alleged violations they were charged with were
not reduced in writing and were not made known to them, thus, denying them due
process. The LA found that respondents did not actually receive the memoranda
allegedly issued by petitioners, and that the same were mere afterthought to
conceal the illegal dismissal. The dispositive portion of the Decision reads:
WHEREFORE, premises all considered, respondents (petitioners herein) are hereby
ordered, jointly and severally:
a. To reinstate within ten (10) days herein complainants to their former positions
without loss of seniority rights with full backwages from actual dismissal to actual
reinstatement;
b. To declare the respondents (petitioners herein) guilty of unfair labor practice for
terminating complainants due to their union activities, which is union-busting, and
to pay a fine of Ten Thousand Pesos (P 10,000.00) pursuant to Article 288 of the
Labor Code, as amended, payable to the Commission;
c. To pay the amount of One Hundred Fifty Thousand [Pesos] (P 150,000.00) each to
complainants by way of moral and exemplary damages, plus ten percent (10%)
attorney's fees of the total award, chargeable to the respondents (petitioners
herein). SO ORDERED.12
Unsatisfied with the LA's decision, petitioners appealed to the National Labor
Relations Commission (NLRC). On August 31, 1999, the NLRC, First Division,
rendered a Decision13 remanding the case to the arbitration branch of origin for
further proceedings.14 On August 3, 2000, the LA rendered a new Decision, the
dispositive portion of which reads as follows:
9
WHEREFORE, premises all considered, respondents (petitioners herein) are hereby
ORDERED, jointly and severally:
a. to reinstate within ten (10) days herein three (3) complainants to their former
positions without loss of seniority rights with full backwages from actual dismissal
to actual reinstatement; to pay complainant Soriano his unpaid wages for seven (7)
days in the amount of P 1,680.00, his five (5) days incentive leave pay in the amount
of P 1,200,00 (P 240x5), unpaid proportionate 13th month pay in the amount
of P 4,992.00, plus other benefits;
b. to cease and desist from committing unfair labor practice against the
complainant and to pay a fine of Ten Thousand (P 10,000.00) Pesos pursuant to Art.
288 of the Labor Code, payable to the Commission; and
c. to pay the amount of P 150,000.0015 each to the complainants by way of moral
and exemplary damages, plus ten percent (10%) attorney's fees of the total award,
chargeable to the respondents (petitioners herein). SO ORDERED.16
Discontented with the LA's decision, petitioners again appealed to the NLRC. On
February 1, 2001, the NLRC affirmed the LA's decision and dismissed the appeal for
lack of merit.17 Petitioners filed a motion for reconsideration, but it was denied for
lack of merit.18
Undaunted, Park Hotel, Percy, and Harbutt filed a petition for certiorari with the CA
ascribing grave abuse of discretion amounting to lack or excess of jurisdiction on
the part of the NLRC in holding Park Hotel, Harbutt and Percy jointly and severally
liable to respondents.
On January 24, 2005, the CA rendered a Decision19 dismissing the petition and
affirming with modification the ruling of the NLRC, the dispositive portion of which
states:
WHEREFORE, the instant Petition is DISMISSED for lack of merit and the assailed
Decision dated 1 February 2001 of the 1st Division of the NLRC is hereby AFFIRMED
with MODIFICATION in that the award of damages is reduced to P 100,000.00 in
favor of each of the Private Respondents, including 10% of the total amount of
wages to be received as attorney's fees. SO ORDERED.20
The CA ruled that petitioners failed to observe the mandatory requirements
provided by law in the conduct of terminating respondents, i.e., lack of due process
and just cause. The CA also found that petitioners' primary objective in terminating
respondents' employment was to suppress their right to self-organization.
Petitioners filed a Motion for Reconsideration, but was denied in the
Resolution21 dated January 13, 2006.
Hence, the instant petition assigning the following errors:
I
THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION
AND ACTED WITHOUT AUTHORITY IN FINDING PARK HOTEL, BILL PERCY
AND [GREGORY] HARBUTT, TOGETHER WITH BURGOS CORPORATION AND
ITS PRESIDENT, AS ONE AND THE SAME ENTITY.
II
THE HONORABLE COURT OF APPEALS COMMITTED ERROR WHEN IT
OVERLOOKED MATERIAL CIRCUMSTANCES AND FACTS, WHICH IF TAKEN
INTO ACCOUNT, WOULD ALTER THE RESULTS OF ITS DECISION,
PARTICULARLY IN FINDING [THAT] THE SAID ENTITIES WERE FORMED IN
PURSUANCE TO THE COMMISSION OF FRAUD.
III
THE HONORABLE COURT OF APPEALS GRAVELY ABUSED ITS DISCRETION
AND ACTED WITHOUT AUTHORITY IN FINDING PARK HOTEL, BILL PERCY
AND GREGORY HARBUTT, TOGETHER WITH BURGOS CORPORATION AND
ITS PRESIDENT, GUILTY OF UNFAIR LABOR PRACTICE.22
For brevity and clarity, the issues in this case may be re-stated and simplified as
follows: (1) whether the respondents were validly dismissed; and (2) if petitioners
are liable, whether Park Hotel, Percy and Harbutt are jointly and severally liable
with Burgos for the dismissal of respondents.
Park Hotel argued that it is not liable on the ground that respondents were not its
employees. On the other hand, Percy and Harbutt argued that the CA committed
error in piercing the corporate veil between them and respondent corporations,
thereby making them all solidarily liable to the respondents.
10
To begin with, it is significant to note that the LA, the NLRC and the CA were
unanimous in their findings that respondents were dismissed without just cause
and due process. They were also in agreement that unfair labor practice was
committed against respondents. We reiterate the rule that findings of fact of the
Court of Appeals, particularly where it is in absolute agreement with that of the
NLRC and the LA, as in this case, are accorded not only respect but even finality and
are deemed binding upon this Court so long as they are supported by substantial
evidence.23 The function of this Court is limited to the review of the appellate
courts alleged errors of law. It is not required to weigh all over again the factual
evidence already considered in the proceedings below.24 In any event, we found no
compelling reason to disturb the unanimous findings and conclusions of the CA, the
NLRC and the LA with respect to the finding of illegal dismissal.
The requisites for a valid dismissal are: (a) the employee must be afforded due
process, i.e., he must be given an opportunity to be heard and defend himself; and
(b) the dismissal must be for a valid cause as provided in Article 282 of the Labor
Code, or for any of the authorized causes under Articles 283 and 284 of the same
Code.25 In the case before us, both elements are completely lacking. Respondents
were dismissed without any just or authorized cause and without being given the
opportunity to be heard and defend themselves. The law mandates that the burden
of proving the validity of the termination of employment rests with the employer.
Failure to discharge this evidentiary burden would necessarily mean that the
dismissal was not justified and, therefore, illegal. Unsubstantiated suspicions,
accusations, and conclusions of employers do not provide for legal justification for
dismissing employees. In case of doubt, such cases should be resolved in favor of
labor, pursuant to the social justice policy of labor laws and the Constitution.26
Anent the unfair labor practice, Article 248 (a) of the Labor Code27 considers it an
unfair labor practice when an employer interferes, restrains or coerces employees
in the exercise of their right to self-organization or the right to form an
association.28 In order to show that the employer committed unfair labor practice
under the Labor Code, substantial evidence is required to support the claim.
Substantial evidence has been defined as such relevant evidence as a reasonable
mind might accept as adequate to support a conclusion.29 In the case at bar,
respondents were indeed unceremoniously dismissed from work by reason of their
intent to form and organize a union. As found by the LA:
The immediate impulse of respondents (petitioners herein), as in the case at bar,
was to terminate the organizers. Respondents (petitioners herein) have to cripple
the union at sight, to frustrate attempts of employees from joining or supporting it,
preventing them, at all cost and to frustrate the employees bid to exercise their
right to self-organization. x x x30
Having settled that respondents were illegally dismissed and were victims of unfair
labor practice, the question that comes to fore is who are liable for the illegal
dismissal and unfair labor practice?
A perusal of the records would show that Burgos is the respondents' employer at
the time they were dismissed. Notwithstanding, the CA held that despite Soriano's
transfer to Burgos in 1992, he was still an employee of Park Hotel at the time of his
dismissal in 1997. The Court, however, rules that the CA's finding is clearly contrary
to the evidence presented. From the documents presented by Soriano, it appears
that Soriano's payroll passbook31contained withdrawals and deposits, made in
1991, and that Soriano's payslip32 issued by Park Hotel covered the period from
September to October 1990. Hence, these documents merely show that Soriano
was employed by Park Hotel before he was transferred to Burgos in 1992. Nowhere
in these documents does it state that Soriano continued to work for Park Hotel in
1992 and onwards. Clearly therefore, Park Hotel cannot be made liable for illegal
dismissal as it no longer had Soriano in its employ at the time he was dismissed
from work.
As to whether Park Hotel may be held solidarily liable with Burgos, the Court rules
that before a corporation can be held accountable for the corporate liabilities of
another, the veil of corporate fiction must first be pierced. 33 Thus, before Park Hotel
can be held answerable for the obligations of Burgos to its employees, it must be
sufficiently established that the two companies are actually a single corporate
entity, such that the liability of one is the liability of the other. 34
A corporation is an artificial being invested by law with a personality separate and
distinct from that of its stockholders and from that of other corporations to which it
may be connected.35 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. 36 To disregard the separate
11
juridical personality of a corporation, the wrongdoing must be established clearly
and convincingly. It cannot be presumed.37
In the case at bar, respondents utterly failed to prove by competent evidence that
Park Hotel was a mere instrumentality, agency, conduit or adjunct of Burgos, or that
its separate corporate veil had been used to cover any fraud or illegality committed
by Burgos against the respondents. Accordingly, Park Hotel and Burgos cannot be
considered as one and the same entity, and Park Hotel cannot be held solidary
liable with Burgos.
Nonetheless, although the corporate veil between Park Hotel and Burgos cannot be
pierced, it does not necessarily mean that Percy and Harbutt are exempt from
liability towards respondents. Verily, a corporation, being a juridical entity, may act
only through its directors, officers and employees. Obligations incurred by them,
while acting as corporate agents, are not their personal liability but the direct
accountability of the corporation they represent. 38However, corporate officers may
be deemed solidarily liable with the corporation for the termination of employees if
they acted with malice or bad faith.39 In the present case, the lower tribunals
unanimously found that Percy and Harbutt, in their capacity as corporate officers of
Burgos, acted maliciously in terminating the services of respondents without any
valid ground and in order to suppress their right to self-organization.
Section 3140 of the Corporation Code makes a director personally liable for
corporate debts if he willfully and knowingly votes for or assents to patently
unlawful acts of the corporation. It also makes a director personally liable if he is
guilty of gross negligence or bad faith in directing the affairs of the
corporation.1wphi1 Thus, Percy and Harbutt, having acted in bad faith in directing
the affairs of Burgos, are jointly and severally liable with the latter for respondents'
dismissal.
In cases when an employee is unjustly dismissed from work, he shall be entitled to
reinstatement without loss of seniority rights and other privileges, inclusive of
allowances, and other benefits or their monetary equivalent from the time the
compensation was withheld up to the time of actual reinstatement. 41
In the case at bar, the Court finds that it would be best to award separation pay
instead of reinstatement, in view of the passage of a long period of time since
respondents' dismissal. In St. Luke's Medical Center, Inc. v. Notario,42 the Court held
that if reinstatement proves impracticable, and hardly in the best interest of the
parties, due to the lapse of time since the employee's dismissal, the latter should be
awarded separation pay in lieu of reinstatement.
In view of the foregoing, respondents are entitled to the payment of full backwages,
inclusive of allowances, and other benefits or their monetary equivalent, and
separation pay in lieu of reinstatement equivalent to one month salary for every
year of service.43 The awards of separation pay and backwages are not mutually
exclusive, and both may be given to respondents.44
The awards of moral and exemplary damages45 in favor of respondents are also 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.46 The grant of attorney's fees is likewise proper.
Attorney's fees may likewise be awarded to respondents who were illegally
dismissed in bad faith and were compelled to litigate or incur expenses to protect
their rights by reason of the oppressive acts47 of petitioners. The unjustified act of
petitioners had obviously compelled respondents to institute an action primarily to
protect their rights and interests which warrants the granting of the award.
WHEREFORE, the Decision and Resolution of the Court of Appeals in CA-G.R. SP No.
67766, dated January 24, 2005 and January 13, 2006, respectively,
are AFFIRMED with the following MODIFICATIONS: (a) Petitioner Park Hotel is
exonerated from any liability to respondents; and (b) The award of reinstatement is
deleted, and in lieu thereof, respondents are awarded separation pay.
The case is REMANDED to the Labor Arbiter for the purpose of computing
respondents' full backwages, inclusive of allowances, and other benefits or their
monetary equivalent, computed from the date of their dismissal up to the finality of
the decision, and separation pay in lieu of reinstatement equivalent to one month
salary for every year of service, computed from the time of their engagement up to
the finality of this Decision. SO ORDERED
Separate personality of a subsidiary
PEA-PTGWO vs NLRC
FACTS: Gonzales family owned two (2) corporations, namely, the PNEI and Macris
Realty Corporation (Macris). PNEI provided transportation services to the public.
They incurred huge financial losses and creditors took over the management of
PNEI and Maricris. Full ownership was transferred to one of their creditors, the
National Investment Development Corporation (NIDC), a subsidiary of the PNB
12
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.
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.
Labor Arbiter issued the Sixth Alias Writ of Execution commanding the NLRC Sheriffs
to levy on the assets of PNEI due to its former employees. The sheriffs were
likewise instructed to proceed against PNB, PNB-Madecor and Mega Prime. In
implementing the writ, the sheriffs levied upon the four valuable pieces of real
estate owned by PNB-Madecor. PNB, PNB-Madecor and Mega Prime filed motion
to quash the writ and third-party claims.
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 PNB-
Madecor 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.
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.
On appeal to the NLRC, the same was denied and the Labor Arbiters disposition
was affirmed. MR denied.
In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, 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
On appeal, CA rule in favor of Respondents upholding the separate and distinct
personalities of Rs from PNEI. As such, there being no cogent reason to pierce the
veil of corporate fiction. MR denied.
ISSUE: Whether former PNEI employees can attach the properties of PNB, PNB-
Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI.
DECISION: No. First, the subject property is not owned by the judgment debtor, that
is, PNEI. Second, PNB, PNB-Madecor and Mega Prime are corporations with
personalities separate and distinct from that of PNEI.
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. This
is a fiction created by law for convenience and to prevent injustice.
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 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. 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.
Assuming arguendo, 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.
In PNB v. Ritratto Group, Inc., 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;
13
 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;
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;
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
PNB-Madecors corporate veil is not warranted.
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]
RUBEN MARTINEZ,* substituted by his heirs, MENA CONSTANTINO MARTINEZ,
WILFRIDO C. MARTINEZ, EMMA M. NAVA, and EDNA M.
SAKHRANI, petitioners, vs. COURT OF APPEALS and BPI INTERNATIONAL
FINANCE, respondents.
Before us is a petition for review on certiorari of the Decision[1] of the Court of
Appeals, in CA-G.R. CV No. 43985, modifying the Decision[2] of the Regional
Trial Court of Kalookan City, Branch 122, in Civil Case No. C-10811.
The antecedents are as follows:
Respondent BPI International Finance[3] is a foreign corporation not doing business in
the Philippines, with office address at the Bank of America Tower, 12 Harcourt Road,
Central Hongkong. It was a deposit-taking company organized and existing under and
by virtue of the laws of Hongkong, and was also engaged in investment banking
operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in
Hongkong, with a paid-up capital of HK$10,000. The registered shareholders of the
CLL in Hongkong were the Overseas Nominee, Ltd. and Shares Nominee, Ltd., which
were mainly nominee shareholders. In Hongkong, the nominee shareholder of CLL
was Baker & McKenzie Nominees, Ltd., a leading solicitor firm. However, beneficially,
the company was equally owned by Messrs. Ramon Siy, Ricardo Lopa, Wilfrido C.
Martinez, and Miguel J. Lacson.[4] The registered office address of CLL in Hongkong
was 22/F, Princes Building, also the office address of Price Waterhouse & Co., a large
accounting firm in Hongkong.
The bulk of the business of the CLL was the importation of molasses from the
Philippines, principally from the Mar Tierra Corporation, and the resale thereof in the
international market.[5] However, Mar Tierra Corporation also sold molasses to its
customers.[6] Wilfrido C. Martinez was the president of Mar Tierra Corporation, while
its executive vice-president was Blamar Gonzales. The business operations of both
the CLL and Mar Tierra Corporation were run by Wilfrido Martinez and Gonzales.
About 42% of the capital stock of Mar Tierra Corporation was owned by RJL
Martinez Fishing Corporation (RJL), the leading tuna fishing outfit in the Philippines.
Petitioner Ruben Martinez was the president of RJL and a member of the board of
directors thereof. The majority stockholders of RJL were Ruben Martinez and his
brothers, Jose and Luis Martinez. Sixty-eight (68) percent of the total assets of Ruben
Martinez were in the RJL.
In 1979, respondent BPI International Finance (then AIFL) granted CLL a letter
of credit in the amount of US$3,000,000. Wilfrido Martinez signed the letter
14
agreement with the respondent for the CLL. The respondent and the CLL had made
the following arrangements:
Cintas Largas, Ltd. will purchase molasses from the Philippines, mainly from Mar
Tierra Corporation, and then sell the molasses to foreign countries. Both the
purchase of the molasses from the Philippines and the subsequent sale thereof to
foreign customers were effected by means of Letters of Credit. A Letter of Credit
would be opened by Cintas Largas, Ltd. in favour of Mar Tierra Corporation or any
other seller in the Philippines. Upon the sale of the molasses to foreign buyers, a
Letter of Credit would then be opened by such buyers, in favour of Cintas Largas,
Ltd. The Letters of Credit were effected through the Letter of Credit Facility of
Cintas Largas, Ltd. in plaintiff. The profits of Cintas Largas, Ltd. from these
transactions were then deposited in either the deposit account of Cintas Largas, Ltd.
with plaintiff or the Money Market Placement Account Nos. 063 and 084,
depending upon the instructions of Wilfrido C. Martinez and Blamar C. Gonzales,
principally.[7]
On January 24, 1979, the CLL opened a money market placement with the
respondent bearing MMP No. 063, with an initial placement of US$390,000. [8] The
CLL also opened and maintained a foreign currency account and a deposit account
with the respondent. The authorized signatory in both accounts of CLL was Wilfrido
C. Martinez. Some instructions also came from Gonzales, to be confirmed by Wilfrido
Martinez.[9] On March 21, 1980, petitioner Ruben Martinez and/or his son Wilfrido C.
Martinez and/or Miguel J. Lacson affixed their signatures on the two signature cards
furnished by the respondent which became MMP No. 063 and MMP No. 084. On the
face of the cards, the signatories became joint account holders of the said money
market placements.[10]
On March 25, 1980, the CLL opened a money market placement account with
the respondent bearing MMP No. 084 with an initial placement of US$68,768.60,
transferred from MMP No. 063.[11] At times, funds in MMP Nos. 063 and 084 were
transferred to the CLLs deposit account, and vice versa.
On May 19, 1980, the CLL, through Wilfrido Martinez, and the respondent,
through Senen L. Matoto and Michael Sung, Senior Manager of the Money
Management Division of the respondent, executed a letter-agreement in which the
existing back-to-back credit facility granted to the CLL way back in 1979 was extended
up to July 1980, and increased to US$5,000,000. The credit facility was to be secured
as follows:
DOCUMENTATION: Standard AFHK L/C documentation.[12]
The facility was designed to finance the purchases of molasses made by the CLL
from the Philippines for re-export.[13]
In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel J. Lacson,
Ricardo Lopa, and Ramon Siy executed a continuing suretyship agreement in which
they bound and obliged themselves, jointly and severally, with the CLL to pay the
latters obligation under the said credit facility.[14]
As of September 26, 1980, the balance of the deposit account of the CLL with
the respondent was US$1,025,052.06.[15] On the other hand, the balance of the
money placement in MMP No. 063, as of September 25, 1980 was
US$312,708.43,[16] while the balance of the money market placement in MMP No.
084 as of September 8, 1980 stood at US$768,258.24.[17]
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra Corporation, sent
to the respondent a telex confirming his telephone conversation with Michael
Sung/Bing Matoto requesting the respondent to transfer US$340,000 to Account No.
FCD SA 18402-7, registered in the name of Mar Tierra Corporation, Philippine Banking
Corporation, Union Cement Building, Port Area, Manila, as payee, with the following
specific instructions: (a) there should be no mention of Wilfrido Martinez or Mar
Tierra Corporation; (b) the telex instruction should be signed only by Wilfrido
Martinez and sent only through the telex machine of Mar Tierra Corporation; and, (c)
the final confirmation of the transfer should be made by telephone call. [18] Gonzales
requested the respondent, in the same telex, to confirm its total available account so
that instructions on the transfer of the funds to FCD SA 18402-7 could be
formalized.[19]
On October 13, 1980, Sung sent a telex to Gonzales informing the latter of the
balances of the MMP Nos. 063 and 084 and in the CLL account deposit, with the
corresponding maturity dates thereof, thus:
Sung informed Gonzales that the account available was approximately
US$340,000, considering the CLL deposit account and the money market
placements.[21] On October 14, 1980, the respondent received a telex from Wilfrido
C. Martinez requesting that the transfer of US$340,000 from the deposit account of
the CLL or any deposit available be effected by telegraphic transfer as soon as
possible to their account, payee FCD SA 18402-7, Philippine Banking Corporation,
Port Area, Manila.[22] On October 21, 1980, Wilfrido Martinez wrote the respondent
confirming his request for the transfer of US$340,000 to their account, FCD SA 18402-
7, with the Philippine Banking Corporation, through Wells Fargo Bank of New York,
Philippine Banking Corporation Account No. FCDU SA No. 003-019205.[23]
The respondent complied with the request of the CLL, through Wilfrido
Martinez and Gonzales, and remitted US$340,000 as instructed.[24] However, instead
15
of deducting the amount from the funds in the CLL foreign currency or deposit
accounts and/or MMP Nos. 063 and 084, the respondent merely posted the
US$340,000 as an account receivable of the CLL since, at that time, the money market
placements had not yet matured.[25] When the money market placements matured,
however, the respondent did not collect the US$340,000 therefrom. Instead, the
respondent allowed the CLL and/or Wilfrido C. Martinez to withdraw, up to July 3,
1981, the bulk of the CLL deposit account and MMP Nos. 084 and 063; [26] hence, it
failed to secure reimbursement for the US$340,000 from the said deposit account
and/or money market placements.
In the meantime, problems ensued in the reconciliation of the transactions
involving the funds of the CLL, including the MMP Nos. 063 and 084 with the
respondent, as well as the receivables of Mar Tierra Corporation. There was also a
need to audit the said funds. Sometime in July 1982, conferences were held between
the executive committee of Mar Tierra Corporation and some of its officers, including
Miguel J. Lacson, where the means to reduce the administrative expenses and
accountants fees, and the possibility of placing the CLL on an inactive status were
discussed.[27] The respondent pressured the CLL, Wilfrido Martinez, and Gonzales to
pay the US$340,000 it remitted to Account No. FCD SA 18402-7.[28] Eventually,
Wilfrido C. Martinez and Blamar Gonzales engaged the services of the auditing firm,
the Jacinto, Belano, Castro & Co., to review the flow of the CLLs funds and the
receivables of Mar Tierra Corporation.
On August 16, 1982, the CLL, through its certified public accountant, wrote the
respondent requesting the latter to furnish its accountant with a copy of the financial
report prepared by its auditors.[29] An audit was, thereafter, conducted by the Jacinto,
Belano, Castro & Co., certified public accountants of the CLL and Mar Tierra
Corporation. Based on their report, the auditors found that the CLL owed the
respondent US$340,000.[30]
In the meantime, the respondent demanded from the CLL, Wilfrido Martinez,
Lacson, Gonzales, and petitioner Ruben Martinez, the payment of the US$340,000
remitted by it to FCD SA 18402-7, per instructions of Gonzales and Wilfrido Martinez.
No remittance was made to the respondent. Petitioner Ruben Martinez denied
knowledge of any such remittance, as well as any liability for the amount thereof.
On June 17, 1983, the respondent filed a complaint against the CLL, Wilfrido
Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, with the RTC of Kaloocan
City for the collection of the principal amount of US$340,000, with a plea for a writ
of preliminary attachment. Two alternative causes of action against the defendants
were alleged therein, viz:
FIRST ALTERNATIVE CAUSE OF ACTION
2.1 The allegations contained in the foregoing paragraphs are repleaded herein by
reference.
2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained
in the foregoing paragraphs was made upon the express instructions of defendants
GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf of the defendant
CINTAS, defendants GONZALES and WILFRIDO C. MARTINEZ being the duly
authorized representatives of defendant CINTAS to transact any and all of its
business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to
advance the said amount and for defendants GONZALES, WILFRIDO C. MARTINEZ
and CINTAS to repay plaintiff all such monies so advanced to said defendants or to
their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing
defendants in meeting the latters liability to the recipient/s of the amount so
remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just,
binding and lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ
and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee
shareholders in Hongkong. The real and beneficial shareholders of the foregoing
defendants are the defendants LACSON and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or
business conduit for their sole benefit and/or to defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing
defendants, has no corporate personality distinct and separate from that of its
beneficial shareholders and, likewise, has no substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made
upon the instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and
CINTAS, was in fact a remittance made for the benefit of the beneficial shareholders
of defendant CINTAS.
16
2.10 Any and all obligations of defendant CINTAS are the obligations of its beneficial
shareholders since the former is being used by the latter as an alter ego or business
conduit for their sole benefit and/or to defeat public convenience.
SECOND ALTERNATIVE CAUSE OF ACTION
3.1 The allegations contained in the foregoing paragraphs are incorporated herein
by reference.
3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and LACSON are joint
account holders of Money Market Placement Account Nos. 063 and 084
(hereinafter referred to as MMP 063 and 084 for brevity) opened and maintained
by said defendants with the plaintiff.
3.3 Said money market placement accounts, although nominally opened and
maintained by said defendants, were in reality for the account and benefit of all the
defendants.
3.4 Defendant CINTAS likewise opened and maintained a deposit account with
plaintiff.
3.5 Defendants W.C. Martinez and Gonzales upon giving instructions to plaintiff to
remit the amount of US$340,000.00 as previously discussed also instructed plaintiff
to reimburse itself from available funds in MMP Account Nos. 063 and 084 and the
defendant CINTAS deposit account.
3.6 Due to excusable mistake, plaintiff was unable to obtain reimbursement for the
remittance it made from MMP Account Nos. 063, 084 and from the deposit account
of defendant CINTAS.
3.7 As a consequence of said mistake, plaintiff delivered to the foregoing
defendants and/or to third parties upon orders of the defendants substantially all
the funds in MMP Account Nos. 063, 084 and the deposit account of defendant
CINTAS.
3.8 The amount of US$340,000.00 delivered by plaintiff to the foregoing defendants
constituted an overpayment and/or erroneous payment as defendants had no right
to demand the same; further, said amount having been unduly delivered by
mistake, the foregoing defendants were obliged to return it.
3.9 Since the foregoing defendants had no legal right to the overpayment or
erroneous payment of US$340,000.00 they, therefore, hold said money in trust for
the plaintiff.
3.10 Despite numerous demands to the defendants WILFRIDO C. MARTINEZ, RUBEN
MARTINEZ, LACSON and CINTAS for restitution of the funds erroneously paid or
overpaid to said defendants, they have failed and continue to fail to make any
restitution.[31]
The respondent prayed therein that, after due proceedings, judgment be
rendered in its favor, viz:
ON THE
FIRST ALTERNATIVE CAUSE OF ACTION
4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, jointly
and severally, liable to pay plaintiff the amount of US$340,000.00 with interests
thereon from February 20, 1982 until fully paid.
4.2 Declaring that defendant CINTAS is a mere alter ego or business conduit of
defendants LACSON and WILFRIDO C. MARTINEZ; hence, the foregoing defendants
are, jointly and severally, liable to pay plaintiff the amount of US$340,000.00 with
interests thereon.
4.3 Ordering the foregoing defendants to be, jointly and severally, liable for the
amount of P100,000.00 as and for attorneys fees; and
4.4 Ordering the foregoing defendants to be, jointly and severally, liable to plaintiff
for actual damages in an amount to be proved at the trial. Or -
ON THE
SECOND ALTERNATIVE CAUSE OF ACTION
5.1 Declaring that plaintiff made an erroneous payment in the amount of
US$340,000.00 to defendants LACSON, WILFRIDO C. MARTINEZ, RUBEN MARTINEZ
and CINTAS.
5.2 Declaring the foregoing defendants to be, jointly and severally, liable to
reimburse plaintiff the amount of US$340,000.00 with interest thereon from
February 20, 1982 until fully paid.
17
5.3 Ordering defendants to be, jointly and severally, liable for the amount
of P100,000.00 as and for attorneys fees; and
5.4 Ordering defendants to be, jointly and severally, liable to plaintiff for actual
damages in an amount to be proved at the trial.
5.5 A writ of preliminary attachment be issued against the properties of the
defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS as a
security for the satisfaction of any judgment that may be recovered.
Plaintiff further prays for such other relief as may be deemed just and equitable in
the premises.[32]
In his answer to the complaint, petitioner Ruben Martinez interposed the
following special and affirmative defenses:
BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering defendant
respectfully states:
2. Defendant is not the holder, owner, depositor, trustee and has no interest
whatsoever in the account in Philippine Banking Corporation (FCD SA 18402-7)
where the plaintiff remitted the amount sought to be recovered. Hence, he did not
benefit directly or indirectly from the said remittance;
3. Defendant did not participate in any manner whatsoever in the remittance of
funds from the plaintiff to the alleged FCD Account in the Philippine Banking
Corporation;
4. Defendant has not received nor benefited from the alleged remittance, payment,
overpayment or erroneous payment allegedly made by plaintiff; hence, insofar as
he is concerned, there is nothing to return to or to hold in trust for the plaintiff;
5. Plaintiffs alleged remittance of the amount by mere telex or telephone
instruction was highly irregular and questionable considering that the undertaking
was that no remittance or transfer could be done without the prior signature of the
authorized signatories;
6. The alleged telex instructions to the plaintiff was for it to confirm the amounts
that are free and available which it did;
7. Plaintiff is guilty of estoppel or laches by making it appear that the funds so
remitted are free and available and by not acting within reasonable time to correct
the alleged mistake;
8. The alleged remittance, overpayment and erroneous payment was manipulated
by plaintiffs own employees, officers or representatives without connivance or
collusion on the part of the answering defendant; hence, plaintiff has only itself to
blame for the same; likewise, its recourse is not against answering defendant;
9. Plaintiffs Complaint is defective in that it has failed to state the facts constituting
the mistake regarding its failure to obtain reimbursement from MMP 063 and 084;
10. Plaintiff is guilty of gross negligence and it only has itself to blame for its alleged
loss;
11. Sometime on or about 1980, defendant was made to sign blank forms
concerning opening of money market placements and perhaps, this is how he
became a joint account holder of MMP 063 and 084; defendant at that time did not
realize the import or significance of his act; afterwards, defendant did not do any
act or omission by which he could be implicated in this case;
12. Assuming that defendant is a joint account holder of said MMP 063 and 084,
plaintiff has failed to plead defendants obligations, if any, by being said joint
account holder; likewise, the Complaint fails to attach the corresponding
documents showing defendants being a joint account holder. [33]
The CLL was declared in default for its failure to file an answer to the complaint.
After trial, the RTC rendered its decision, the dispositive portion of which reads
as follows:
PREMISES CONSIDERED, judgment is hereby rendered as follows:
1. Ordering all the defendants, jointly and severally, to pay plaintiff the amount of
US$340,000.00 or its equivalent in Philippine currency measured at the Central
Bank prevailing rate of exchange in October 1980 and with legal interest thereon
computed from the filing of plaintiffs complaint on June 17, 1983 until fully paid;
2. Declaring that defendant Cintas Largas Ltd. is a mere business conduit and alter
ego of the individual defendants, thereby holding the individual defendants, jointly
and severally, liable to pay plaintiff the aforesaid amount of US$340,000.00 or its
18
equivalent in Philippine Currency measured at the Central Bank prevailing rate of
exchange in October 1980, with interest thereon as above-stated;
3. Ordering all defendants to, jointly and severally, pay unto plaintiff the amount
of P50,000.00 as and for attorneys fees, plus costs.
All counterclaims and cross-claims are dismissed for lack of merit.
SO ORDERED.[34]
The trial court ruled that the CLL was a mere paper company with nominee
shareholders in Hongkong. It ruled that the principle of piercing the veil of corporate
entity was applicable in this case, and held the defendants liable, jointly and severally,
for the claim of the respondent, on its finding that the defendants merely used the
CLL as their business conduit. The trial court declared that the majority shareholder
of Mar Tierra Corporation was the RJL, controlled by petitioner Ruben Martinez and
his brothers, Jose and Luis Martinez, as majority shareholders thereof. Moreover,
petitioner Ruben Martinez was a joint account holder of MMP Nos. 063 and 084. The
trial court, likewise, found that the auditors of Mar Tierra Corporation and the CLL
confirmed that the defendants owed US$340,000. The trial court concluded that the
respondent had established its causes of action against Wilfrido Martinez, Lacson,
Gonzales, and petitioner Ruben Martinez; hence, held all of them liable for the claim
of the respondent.
The decision was appealed to the CA. On June 27, 1997, the CA rendered its
decision, the dispositive portion of which reads:
WHEREFORE, the decision of the Court a quo dated December [19], 1991 is
hereby MODIFIED, by exonerating appellant Blamar Gonzales from any liability to
appellee and the complaint against him is DISMISSED. The decision appealed from
is AFFIRMED in all other respect. SO ORDERED.[35]
The appellate court exonerated Gonzales of any liability, reasoning that he was
not a stockholder of the CLL nor of Mar Tierra Corporation, but was a mere employee
of the latter corporation.[36] Petitioner Ruben Martinez sought a reconsideration of
the decision of the CA, to no avail.[37]
Dissatisfied with the decision and resolution of the appellate court, the
petitioner, filed the petition at bar, on the following grounds:
I that the said defendants Wilfrido and Miguel J. Lacson who are the sole directors
RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONER
RUBEN MARTINEZ IS LIABLE TO RESPONDENT BPI INTERNATIONAL FINANCE FOR
REIMBURSEMENT OF THE US$340,000.00 REMITTED BY SAID RESPONDENT BPI
INTERNATIONAL FINANCE TO FCD SA ACCOUNT NO. 18402-7 AT THE PHILIPPINE
BANKING CORPORATION, PORT AREA BRANCH.
II
RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING THE COUNTER-CLAIM
OF PETITIONER RUBEN MARTINEZ CONSIDERING THE EVIDENCE ON RECORD THAT
PROVES THE SAME.[38]
The paramount issue posed for resolution is whether or not the petitioner is
obliged to reimburse to the respondent the principal amount of US$340,000.
The petitioner asserts that the trial and appellate courts erred when they held
him liable for the reimbursement of US$340,000 to the respondent. He contends that
he is not in actuality a stockholder of Mar Tierra Corporation, nor a stockholder of
the CLL. He was not involved in any way in the operations of the said corporations.
He added that while he may have signed the signature cards of MMP Nos. 063 and
084 in blank, he never had any involvement in the management and disposition of
the said accounts, nor of any deposits in or withdrawals from either or both accounts.
He was not aware of any transactions between the respondent, Wilfrido Martinez,
and Gonzales, with reference to the remittance of the US$340,000 to FCD SA 18402-
7; nor did he oblige himself to pay the said amount to the respondent. According to
the petitioner, there is no evidence that he had benefited from any of the following:
(a) the remittance by the respondent of the US$340,000 to Account No. FCD SA
18402-7 owned by Mar Tierra Corporation; (b) the money market placements in
MMP Nos. 063 and 084, or, (c) from any deposits in or withdrawals from the said
account and money market placements.
On the other hand, the appellate court found the petitioner and his co-
defendants, jointly and severally, liable to the respondent for the payment of the
US$340,000 based on the following findings of the trial court:
The Court finds that defendant Cintas Largas (Ltd.) with capitalization of $10,000.00
divided into 1,000 shares at HK$10 per share, is a mere paper company with
nominee shareholders in Hongkong, namely: Overseas Nominees Ltd. and Shares
Nominees Ltd., with defendants Wilfrido and Miguel J. Lacson as the sole directors
(Exh. A). Since the said shareholders are mere nominee companies, it would appear
are the real and beneficial shareholders (t.s.n., 9-1-87, p. 5). Further, defendant
19
Cintas Largas Ltd. has no real office in Hongkong as it is merely being
accommodated by Price Waterhouse, a large accounting office in Hongkong (t.s.n.,
9-1-87, pp. 7-8).
Defendant Cintas Largas Ltd., being a mere alter ego or business conduit for the
individual defendants with no corporate personality distinct and separate from that
of its beneficial shareholders and with no substantial assets in its own name, it is
safe to conclude that the remittance of US$340,000.00 was, in fact, a remittance
made for the benefit of the individual defendants. Plaintiff was supposed to deduct
the US$340,000.00 remitted to the foreign currency deposit account from Cintas
Largas (Ltd.) funds or from money market placement account Nos. 063 and 084 as
well as Cintas Largas Ltd. deposit account (Exh. FF-24).
Defendant Cintas Largas Ltd. was established only for financing (t.s.n., 12-19-88, pp.
25-26) and the active owners of Cintas are defendants Miguel Lacson and Wilfrido
C. Martinez (t.s.n., 12-19-88, p. 22). Mar Tierra Corporation of which defendant
Wilfrido Martinez is the President and one of its owners and defendant Blamar
Gonzales as the Vice President, sells molasses to defendant Cintas Largas Ltd.
Defendant Miguel J. Lacson is a business partner in purchasing molasses for Mar
Tierra Corporation. Mar Tierra Corporation was selling molasses to Cintas Largas
Ltd. which were purchased by Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-
88, pp. 23-24). The majority owner of Mar Tierra Corporation is RJL Martinez Fishing
Corporation which is owned by brothers Ruben Martinez, Jose Martinez and Luis
Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-88, pp. 11-12). The FCD SA-18402-7
account at Philippine Banking Corporation, Port Area Branch, where the
US$340,000.00 was remitted by the plaintiff is the account of Mar Tierra
Corporation, and with the interlapping connection of the defendants to each other,
these could be the reason why the funds of Cintas Largas Ltd. were being co-
mingled and controlled by defendants more particularly defendants Blamar
Gonzales and Wilfrido C. Martinez (Exhs. D, E, F, G, H, I, J, L, M, N, O, P, R, S, and T).
On the basis of the evidence, the Court finds and so holds that the cause of action
of the plaintiff against the defendants has been established. [39]
We do not agree with the trial court and appellate court.
We note that the question of whether or not a corporation is merely an alter
ego is purely one of fact.[40] So is the question of whether or not a corporation is a
paper company or a sham or subterfuge or whether the respondent adduced the
requisite quantum of evidence warranting the piercing of the veil of corporate entity
of the CLL.[41] The Court is not a trier of facts. Hence, the factual findings of the trial
court, as affirmed by the appellate court, are generally conclusive upon this
Court.[42] However, the rule is subject to the following exceptions: (a) where the
conclusion is a finding grounded entirely on speculation, surmise and conjectures; (b)
where the information made is manifestly mistaken; (c) where there is grave abuse
of discretion; (d) where the judgment is based on a misapplication of facts, and the
findings of facts of the trial court and the appellate court are contradicted by the
evidence on record; and (e) when certain material facts and circumstances had been
overlooked by the trial court which, if taken into account, would alter the result of
the case.
We have reviewed the records and find that some substantial factual findings
of the trial court and the appellate court and, consequently, their conclusions based
on the said findings, are not supported by the evidence on record.
The general rule is that a corporation is clothed with a personality separate and
distinct from the persons composing it. Such corporation may not be held liable for
the obligation of the persons composing it; and neither can its stockholders be held
liable for such obligation.[43] A corporation has a separate personality distinct from its
stockholders and from other corporation to which it may be connected. [44] This
separate and distinct personality of a corporation is a fiction created by law for
convenience and to prevent injustice.[45]
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds
can exist to warrant, albeit sparingly, the disregard of its independent being and the
piercing of the corporate veil.[46] Thus, 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;[47] 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.[48] In such cases where valid grounds exist for
piercing the veil of corporate entity, the corporation will be considered as a mere
association of persons.[49] The liability will directly attach to them.[50]
However, mere ownership by a single stockholder or by another corporation of
all or nearly all of the capital stocks of a corporation is not by itself a sufficient ground
to disregard the separate corporate personality. The substantial identity of the
incorporators of two or more corporations does not warrantly imply that there was
fraud so as to justify the piercing of the writ of corporate fiction. [51] To disregard the
said separate juridical personality of a corporation, the wrongdoing must be proven
clearly and convincingly.[52]
20
 The test in determining the application of the instrumentality or alter ego
doctrine is as follows:
1. Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate veil. In
applying the instrumentality or alter ego doctrine, the courts are concerned with
reality and not form, with how the corporation operated and the individual
defendants relationship to that operation.[53]
In this case, the respondent failed to adduce the quantum of evidence necessary
to prove any valid ground for the piercing of the veil of corporate entity of Mar Tierra
Corporation, or of RJL for that matter, and render the petitioner liable for the
respondents claim, jointly and severally, with Wilfrido Martinez and Lacson. The mere
fact that the majority stockholder of Mar Tierra Corporation is the RJL, and that the
petitioner, along with Jose and Luis Martinez, owned about 42% of the capital stock
of RJL, do not constitute sufficient evidence that the latter corporation, and/or the
petitioner and his brothers, had complete domination of Mar Tierra Corporation. It
does not automatically follow that the said corporation was used by the petitioner
for the purpose of committing fraud or wrong, or to perpetrate an injustice on the
respondent. There is no evidence on record that the petitioner had any involvement
in the purchases of molasses by Wilfrido Martinez, Gonzales and Lacson, and the
subsequent sale thereof to the CLL, through Mar Tierra Corporation. On the contrary,
the evidence on record shows that the CLL purchased molasses from Mar Tierra
Corporation and paid for the same through the credit facility granted by the
respondent to the CLL. The CLL, thereafter, made remittances to Mar Tierra
Corporation from its deposit account and MMP Nos. 063 and 084 with the
respondent. The close business relationship of the two corporations does not warrant
a finding that Mar Tierra Corporation was but a conduit of the CLL.
Likewise, the respondent failed to adduce preponderant evidence to prove that
the Mar Tierra Corporation and the RJL were so organized and controlled, its affairs
so conducted as to make the latter corporation merely an instrumentality, agency,
conduit or adjunct of the former or of Wilfrido Martinez, Gonzales, and Lacson for
that matter, or that such corporations were organized to defraud their creditors,
including the respondent. The mere fact, therefore, 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.[54]
Also, the mere fact that part of the proceeds of the sale of molasses made by
Mar Tierra Corporation to the CLL may have been used by the latter as deposits in its
deposit account with the respondent or in the money market placements in MMP
Nos. 063 and 084, or that the funds of Mar Tierra Corporation and the CLL with the
respondent were mingled, and their disposition controlled by Wilfrido Martinez, does
not constitute preponderant evidence that the petitioner, Wilfrido Martinez and
Lacson used the Mar Tierra Corporation and the RJL to defraud the respondent. The
respondent treated the CLL and Mar Tierra Corporation as separate entities and
considered them as one and the same entity only when Wilfrido C. Martinez and/or
Blamar Gonzales failed to pay the US$340,000 remitted by the respondent to FCD SA
18402-7. This being the case, there is no factual and legal basis to hold the petitioner
liable to the respondent for the said amount.
Contrary to the ruling of the trial court and the appellate court, the auditors of
the CLL and the Mar Tierra Corporation, in their report, did not find the petitioner
liable for the respondents claim in their report. The auditors, in fact, found the CLL
alone liable for the said amount.[55] Even a cursory reading of the report will show
that the name of the petitioner was not mentioned therein.
The respondent failed to adduce evidence that the petitioner had any
involvement in the transactions between the CLL, through Wilfrido Martinez and
Gonzales, and the respondent, with reference to the remittance of the US$340,000
to FCD SA 18402-7. In fact, the said transaction was so confidential that Gonzales
even suggested to the respondent that the name of Wilfrido Martinez or Mar Tierra
Corporation be not made of record, and to authorize only Wilfrido Martinez to sign
the telex instruction:
OCT. 10, 1980
TO: AYALA FINANCE
ATTN: MICHAEL SUNG/BING MATOTO
FR: B. GONZALES
RE: TRANSFER OF FUNDS
21
THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT WE WLD LIKE TO
SUGGEST THE FF PROCEDURES FOR FUND TRANSFER.
1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO OUR FCD ACCT BY
TELEGRAPHIC TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF
PHILBANKING CORPORATION, PORT AREA BRANCH, UNION CEMENT
BLDG, BONIFACIO DRIVE, PORT AREA, METRO MANILA, PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF W.C. MARTINEZ
OR MAR TIERRA CORP. TLX INSTRUCTION SHLD BE SIGNED BY W.C.
MARTINEZ AND WILL BE SENT ONLY THRU TLX MACHINE OF MAR TIERRA
CORP.
4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE CALL.
PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND AVAILABLE SO WE CAN
FORMALIZE INSTRUCTION OF TRANSFER IF THE ABOVE PROCEDURE IS APPROVED
BY YOU. PLS CONFRM ALSO LIST OF CORRESPONDENT BANK IN HK.
IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE FF PROCEDURE:
1. WELLS FARGO HK WIL SEND A TLX TO MANILA INSTRUCTING PHIL BANKING CORP
TO CREDIT FCD SA 18402-7.
2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME WELLS FARGO HK WIL
REQUEST WELLS FARGO NEW YORK TO CREDIT FCDU NO. 003-019205 FOR THE
ACCT OF PHIL BANKING CORP.[56]
Even the respondent admitted, in its complaint, that the CLL, Gonzales, and
Wilfrido Martinez, bound and obliged themselves to repay the US$340,000, viz:
2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained
in the foregoing paragraphs was made upon the express instructions of defendants
GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf of the defendant
CINTAS, defendants GONZALES and WILFRIDO C. MARTINEZ being the duly
authorized representatives of defendant CINTAS to transact any and all of its
business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to
advance the said amount and for defendants GONZALES, WILFRIDO C. MARTINEZ
and CINTAS to repay plaintiff all such monies so advanced to said defendants or to
their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing
defendants in meeting the latters liability to the recipient/s of the amount so
remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just,
binding and lawful obligation of the defendants GONZALES, WILFRIDO C. MARTINEZ
and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee
shareholders in Hongkong. The real and beneficial shareholders of the foregoing
defendants are the defendants LACSON, and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or
business conduit for their sole benefit and/or to defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing
defendants, has no corporate personality distinct and separate from that of its
beneficial shareholders and likewise has no substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made
upon the instructions of defendants GONZALES, WILFRIDO C. MARTINEZ and
CINTAS, was in fact a remittance made for the benefit of the beneficial shareholders
of defendant CINTAS.[57]
The admissions made by the respondent in its complaint are judicial admissions
which cannot be contradicted unless there is a showing that it was made through
palpable mistake or that no such admission was made.[58]
The respondent impleaded the petitioner only in its second alternative cause of
action, on its allegation that the latter was a joint account holder of MMP Nos. 063
and 084, simply because he signed the signature cards with Wilfrido Martinez and/or
Lacson in blank. The trial court found the submission of the respondent duly
established, based on Wilfrido Martinezs answer to the complaint, and held the
petitioner liable for the said amount based on the signature cards in this language:
Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel Lacson are joint
account holders of the money market placement account Nos. 063 and 084 (par. 17
22
page 4 Answer of defendant Wilfrido C. Martinez; par. 2, page 5, Amended Answer
of defendant Lacson; t.s.n., 4-18-88, p. 7).[59]
The appellate court affirmed the ruling of the trial court without making any
specific reference to the aforequoted ruling of the trial court. [60]
We do not agree. The judicial admissions made by Wilfrido Martinez in his
answer to the complaint are not binding on the petitioner.[61] The evidence on record
shows that the petitioner affixed his signatures on the signature cards merely upon
the request of his son, Wilfrido Martinez. The signature cards were printed forms of
the respondent with the names of the signatories and the supposed account holders
typewritten thereon and, except for the account number, were similarly worded, viz
The respondent failed to adduce any evidence, testimonial or documentary,
including the relevant laws[63] of Hongkong where the placements were made to hold
the petitioner liable for the respondents claims. Other than the signature cards, the
respondent failed to adduce a shred of evidence to prove (a) the terms and conditions
of the money market placements of the CLL in MMP Nos. 063 and 084; and, (b) the
rights and obligations of the petitioner, Wilfrido Martinez and Lacson, over the
money market placements. In light of the evidence on record, the CLL and/or Wilfrido
Martinez never surrendered their ownership over the funds in favor of the petitioner
when the latter co-signed the signature cards. The CLL and/or Wilfrido Martinez
retained complete control and dominion over the funds.
By merely affixing his signatures on the signature cards, the petitioner did not
necessarily become a joint and solidary creditor of the respondent over the said
placements. Neither did the petitioner bind himself to pay to the respondent the
US$340,000 which was borrowed by the CLL and/or Wilfrido Martinez, and later
remitted to FCD SA 18402-7.
The respondent has no one but itself to blame for its failure to deduct the
US$340,000 from the foreign currency and deposit accounts and money market
placements of the CLL. The evidence on record shows that the respondent was
supposed to deduct the said amount from the money market placements of the CLL
in MMP Nos. 063 and 084, but failed to do so. The respondent remitted the amount
from its own funds and, by its negligence, merely posted the amount in the account
of the CLL. Worse, the respondent allowed the CLL and Wilfrido Martinez to withdraw
the entirety of the deposits in the said accounts, without first deducting the
US$340,000. By the time the respondent realized its mistakes, the funds in the said
accounts had already been withdrawn solely by the CLL and/or Wilfrido Martinez.
This was the testimony of Michael Sung, the witness for the respondent.
Q: Do you know whether this US$340,000 was really transferred to
Foreign Currency Deposit Account No. 18402-7 of the Philippine
Banking Corporation in Manila?
A: Yes.
Q: Pursuant to the procedure for fund transfer as contained in Exhs. B, C,
D and E, after having made such remittance of US$340,000.00, what
was plaintiff supposed to do, if any, in order to get reimbursement
for such transfer?
A: Plaintiff was supposed to deduct the US$340,000.00 remitted to the
foreign currency deposit account from the Cintas Largas funds or
from Money Market Placement Account Nos. 063 and 084 as well as
the Cintas Largas, Ltd. deposit account.
Q: Do you know if plaintiff was able to obtain reimbursement of the
US$340,000 remitted to the Philippine Banking Corporation in
Manila?
A: No, because instead of deducting the remittance of US$340,000 from
the funds in the money market placement accounts and/or the
Cintas Largas Deposit Account, we posted the US$340,000
remittance as an account receivable of Cintas Largas, Ltd. since at
that time the money market placement deposits have not yet
matured. Subsequently, we failed to charge the deposit and MMP
accounts when they matured and Cintas Largas, Ltd. and/or Wilfrido
C. Martinez had already withdrawn the bulk of the funds contained
in Money Market Placement Account No. 063 and the Cintas Largas,
Ltd. Deposit Account thus, we were unable to obtain
reimbursement therefrom.[64]
It cannot even be argued that if the petitioner would not be adjudged liable for
the respondents claim, he would thereby be enriching himself at the expense of the
respondent. There is no evidence on record that the petitioner withdrew a single
centavo from or was personally benefited by the funds in MMP Nos. 063 and 084.
The testimonial and documentary evidence of the respondent clearly shows that the
CLL and/or Wilfrido Martinez used and disposed of the said funds without the
knowledge, involvement, and consent of the petitioner. Furthermore, the
documentary evidence of the respondent shows the following:
Clearly from the foregoing, the withdrawals from the deposit and foreign
currency accounts and MMP Nos. 063 and 084 of the CLL, after the respondent
23
remitted the US$340,000, were for the account of the CLL and/or Wilfrido Martinez,
and not of the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court
of Appeals is REVERSED AND SET ASIDE. The complaint of the respondent against the
petitioner in Civil Case No. C-10811 is DISMISSED. No costs. SO ORDERED.
The instrumentality rule of the alter ego rule
Concept Builders vs NLRC
Facts: Petitioner Concept Builders, Inc., a domestic corporation engaged in the
construction business. Private respondents were employed by said company as
laborers, carpenters and riggers. However, they were illegally dismissed.
Aggrieved, private respondents filed a complaint for illegal dismissal. The Labor
Arbiter rendered judgment ordering petitioner to reinstate private respondents and
to pay them back wages. It became final and executory.
The alias Writ of Execution cannot be enforced by the sheriff because all the
employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI)
and not by petitioner. Thus, NLRC issued a break-open order against Concept
Builders and HPPI.
Issue: Whether the piercing the veil of corporate entity is proper.
Held: Yes.
It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it
may be connected. But, this separate and distinct personality of a corporation is
merely a fiction created by law for convenience and to promote justice. So, when
the notion of separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to defeat the
labor laws, this separate personality of the corporation may be disregarded or the
veil of corporate fiction pierced. This is true likewise when the corporation is merely
an adjunct, a business conduit or an alter ego of another corporation.
The conditions under which the juridical entity may be disregarded vary according
to the peculiar facts and circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly, there are some probative factors of identity that
will justify the application of the doctrine of piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
The SEC en banc explained the instrumentality rule which the courts have applied
in disregarding the separate juridical personality of corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted
so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the instrumentality may be disregarded. The control necessary
to invoke the rule is not majority or even complete stock control but such
domination of instances, policies and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of its own, and is but a conduit for
its principal. It must be kept in mind that the control must be shown to have been
exercised at the time the acts complained of took place. Moreover, the control and
breach of duty must proximately cause the injury or unjust loss for which the
complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty or
dishonest and unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents piercing the corporate veil. In
applying the instrumentality or alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the individual
defendants relationship to that operation.
Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already
attached to petitioner corporation.
Test in piercing corporate existence based on the alter ego rule
Corporation; piercing the corporate veil; alter ego theory. 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
24
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the
injury or unjust loss complained of.
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. It
examines the parent corporations relationship with the subsidiary. It 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. 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.
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. It examines the relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the parent corporation uses the
subsidiary in a way that harms the plaintiff creditor. As such, it requires a showing
of an element of injustice or fundamental unfairness.
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. 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.
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.
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. 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. In addition, the control must be
shown to have been exercised at the time the acts complained of took place. Phil.
National Bank vs. Hydro Resources Contractors Corp., .G.R. Nos. 167530, 167561,
16760311. March 13, 2013
These petitions for review on certiorari1 assail the Decision2 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 Decision4 dated 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)6 and 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.8As 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
25
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 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
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
Franchise of a corporation
MANILA JOCKEY CLUB, INC. AND PHILIPPINE RACING CLUB , INC., petitioners, vs. THE
COURT OF APPEALS AND PHILIPPINE RACING COMMISSION, respondents.
This is a Petition for Review on Certiorari seeking the reversal of the decision[1] of the
Court of Appeals in CA-G.R. SP No. 25251 dated September 17, 1991 and the
resolution[2] dated January 8, 1992, which denied the motion for reconsideration. At
issue here is the control and disposition of breakages[3] in connection with the
conduct of horse-racing.
The pertinent facts on record are as follows:
On June 18, 1948, Congress approved Republic Act No. 309, entitled An Act to
Regulate Horse-Racing in the Philippines. This Act consolidated all existing laws and
amended inconsistent provisions relative to horse racing. It provided for the
distribution of gross receipts from the sale of betting tickets, but is silent on the
allocation of so-called breakages. Thus the practice, according to the petitioners, was
to use the breakages for the anti-bookies drive and other sales promotions activities
of the horse racing clubs.
On October 23, 1992, petitioners, Manila Jockey Club, Inc. (MJCI) and Philippine
Racing Club, Inc. (PRCI), were granted franchises to operate and maintain race tracks
for horse racing in the City of Manila and the Province of Rizal by virtue of Republic
Act Nos. 6631 and 6632, respectively, and allowed to hold horse races, with bets, on
the following dates:
x x x Saturdays, Sundays and official holidays of the year, excluding Thursdays and
Fridays of the Holy Week, June twelfth, commonly known as Independence Day,
Election Day and December thirtieth, commonly known as Rizal Day.
(Sec. 5 of R.A. 6631)
x x x Saturdays, Sundays, and official holidays of the year, except on those official
holidays where the law expressly provides that no horse races are to be held. The
26
grantee may also conduct races on the eve of any public holiday to start not earlier
than five-thirty (5:30) oclock in the afternoon but not to exceed five days a year.
(Sec. 7 of R.A. 6632)
Said laws carried provisions on the allocation of breakages to beneficiaries as
follows:
Franchise Laws
R. A. 6631[4] R. A. 6632[5]
(for MJCI) (for PRCI)
Provincial or city hospitals 25%
Rehabilitation of drug addicts 25% 50%
For the benefit of Philippine
Amateur Athletes Federation 50% 25%
Charitable institutions 25%
On March 20, 1974, Presidential Decree No. 420 was issued creating the
Philippine Racing Commission (PHILRACOM), giving it exclusive jurisdiction and
control over every aspect of the conduct of horse racing, including the framing and
scheduling of races.[6] By virtue of this power, the PHILRACOM authorized the holding
of races on Wednesdays starting on December 22, 1976.[7]
In connection with the new schedule of races, petitioners made a joint query
regarding the ownership of breakages accumulated during Wednesday races. In
response to the query, PHILRACOM rendered its opinion in a letter dated September
20, 1978. It declared that the breakages belonged to the racing clubs concerned, to
wit:
We find no further need to dissect the provisions of P.D. 420 to come to a legal
conclusion. As can be clearly seen from the foregoing discussion and based on the
established precedents, there can be no doubt that the breakage of Wednesday
races shall belong to the racing club concerned.[8]
Consequently, the petitioners allocated the proceeds of breakages for their own
business purpose.
Thereafter, PHILRACOM authorized the holding of races on Thursdays from
November 15, 1984 to December 31, 1984, and on Tuesdays since January 15, 1985
up to the present. These mid-week races are in addition to those days specifically
mentioned in R.A. 6631 and R.A. 6632. Likewise, petitioners allocated the breakages
from these races for their own uses.
On December 16, 1986 President Corazon Aquino amended certain provisions
Sec. 4 of R.A. 6631 and Sec. 6 of R.A. 6632 through Executive Orders No. 88 and
89. Under these Executive Orders, breakages were allocated to beneficiaries, as
follows:
Franchise Laws
E. O. 89[9] E.O. 88[10]
(for MJCI) (for PRCI)
Provincial or city hospitals 25%
Rehabilitation of drug addicts 25% 50%
For the benefit of Philippine
Racing Commission 50% 25%
Charitable institutions 25%
On April 23, 1987, PHILRACOM itself addressed a query to the Office of the
President asking which agency is entitled to dispose of the proceeds of the breakages
derived from the Tuesday and Wednesday races.
In a letter dated May 21, 1987, the Office of the President, through then Deputy
Executive Secretary Catalino Macaraig, Jr., replied that the disposition of the
breakages rightfully belongs to PHILRACOM, not only those derived from the
Saturday, Sunday and holiday races, but also from the Tuesday and Wednesday races
in accordance with the distribution scheme prescribed in said Executive Orders.[11]
Controversy arose when herein respondent PHILRACOM, sent a series of
demand letters to petitioners MJCI and PRCI, requesting its share in the breakages
27
of mid-week-races and proof of remittances to other legal beneficiaries as provided
under the franchise laws. On June 8, 1987, PHILRACOM sent a letter of demand to
petitioners MJCI and PRCI asking them to remit PHILRACOMs share in the breakages
derived from the Tuesday, Wednesday and Thursday races in this wise:
Pursuant to Board Resolution dated December 21, 1986, and Executive Order Nos.
88 and 89 series of 1986, and the authority given by the Office of the President
dated May 21, 1987, please remit to the Commission the following:
1) PHILRACOMs share in the breakages derived from Wednesday racing for the
period starting December 22, 1976 up to the December 31, 1986.
2) PHILRACOMs share in the breakages derived from Thursday racing for the period
starting November 15, 1984 up to December 31, 1984; and
3) PHILRACOMS share in the breakages derived from Tuesday racing for the period
starting January 15, 1985 up to December, 1986.
4) Kindly furnish the Commission with the breakdown of all breakages derived from
Tuesdays, Thursdays and Wednesdays racing that you have remitted to the legal
beneficiaries.[12]
On June 16, 1987, petitioners MJCI and PRCI sought reconsideration [13] of the
May 21, 1987 opinion of then Deputy Executive Secretary Macaraig, but the same
was denied by the Office of the President in its letter dated April 11, 1988. [14]
On April 25, 1988, PHILRACOM wrote another letter[15] to the petitioners MJCI
and RCI seeking the remittance of its share in the breakages. Again, on June 13, 1990,
PHILRACOM reiterated its previous demand embodied in its letter of April 25,
1988.[16]
Petitioners ignored said demand. Instead, they filed a Petition for Declaratory
Relief before the Regional Trial Court, Branch 150 of Makati, on the ground that there
is a conflict between the previous opinion of PHILRACOM dated September 20, 1978
and the present position of PHILRACOM, as declared and affirmed by the Office of
the President in its letters dated May 21, 1987 and April 11, 1988. Petitioners averred
that there was an actual controversy between the parties, which should be resolved.
On March 11, 1991, the trial court rendered judgment, disposing as follows:
WHEREFORE, and in view of all the foregoing considerations, the Court hereby
declares and decides as follows:
a) Executive Orders Nos. 88 and 89 do not and cannot cover the disposition and
allocation of mid-week races, particularly those authorized to be held during
Tuesdays, Wednesdays and those which are not authorized under Republic Acts
6631 and 6632; and
b) The ownership by the Manila Jockey Club, Inc. and the Philippine Racing Club, Inc.
of the breakages they derive from mid-week races shall not be disturbed, with the
reminder that the breakages should be strictly and wholly utilized for the purpose
for which ownership thereof has been vested upon said racing entities.
SO ORDERED.[17]
Dissatisfied, respondent PHILRACOM filed a Petition for Certiorari with prayer
for the issuance of a writ of preliminary injunction before this Court, raising the lone
question of whether or not E. O. Nos. 88 and 89 cover breakages derived from the
mid-week races. However, we referred the case to the Court of Appeals, which
eventually reversed the decision of the trial court, and ruled as follows:
The decision on the part of PHILRACOM to authorize additional racing days had the
effect of widening the scope of Section 5 of RA 6631 and Section 7 of RA
6632. Consequently, private respondents derive their privilege to hold races on the
designated days not only from their franchise acts but also from the order issued by
the PHILRACOM. No provision of law became inconsistent with the passage of the
Order granting additional racing days. Neither was there a special provision set to
govern those mid-week races. The reason is simple. There was no need for any new
provisions because there are enough general provisions to cover them. The
provisions on the disposition and allocation of breakages being general in character
apply to breakages derived on any racing day.[18]
WHEREFORE, based on the foregoing analysis and interpretation of the laws in
question, the judgment of the trial court is hereby SET ASIDE. Decision is hereby
rendered:
1. declaring Section 4 of RA 6631 as amended by E.O. 89 and Section 6 of RA 6632
as amended by E.O. 88 to cover the disposition and allocation of breakages derived
on all races conducted by private respondents on any racing day, whether as
provided for under Section 4 of RA 6631 or Section 6 of RA 6632 or as ordered by
PHILRACOM in the exercise of its powers under P.D. 420;
28
2. ordering private respondents to remit to PHILRACOM its share under E.O. 88 and
E.O. 89 derived from races held on Tuesdays, Wednesdays, Thursdays as authorized
by PHILRACOM.
SO ORDERED.[19]
Petitioners filed a motion for reconsideration, but it was denied for lack of merit,
with respondent Court of Appeals further declaring that:
In so far as the prospective application of Executive Orders Nos. 88 and 89 is
concerned, We have no disagreement with the respondents. Since PHILRACOM
became the beneficiary of the breakages only upon effectivity of Executive Order
Nos. 88 and 89, it is therefore entitled to such breakages from December 16, 1986
when said Executive Orders were issued. However, we do not concede that
respondents are entitled to breakages prior to December 16, 1986 because it is
clear that the applicable laws from 1976 to December 16, 1986 were R.A. 6631 and
R.A. 6632, which specifically apportion the breakages to specified beneficiaries
among which was the PAAF, a government agency.Since respondents admit that
PHILRACOM (Petitioner) was merely placed in lieu of PAAF as beneficiary/recipient
of breakages, then whatever breakages was due to PAAF as one of the beneficiaries
under R.A. Nos. 6631 and 6632 accrued to or should belong to PHILRACOM as
successor to the defunct PAAF.
Finding the Motion for Reconsideration without merit, and for reasons indicated,
the Motion is denied. SO ORDERED.[20]
Consequent to the aforequoted adverse decision, petitioners MJCI and PRCI
filed this petition for review under Rule 45.
The main issue brought by the parties for the Courts resolution is: Who are the
rightful beneficiaries of the breakages derived from mid-week races? This issue also
carries an ancillary question: assuming PHILRACOM is entitled to the mid-week
breakages under the law, should the petitioners remit the money from the time the
mid-week races started, or only upon the promulgation of E.O. Nos. 88 and 89?
Petitioners assert that franchise laws should be construed to apply the
distribution scheme specifically and exclusively to the racing days enumerated in Sec.
5 of R.A. 6631, and Sec. 7 of R.A. 6632. They claim that disposition of breakages under
these laws should be limited to races conducted on all Saturdays, Sundays, and
official holidays of the year, except, on those official holidays where the law expressly
provides that no horse races are to be held, hence, there is no doubt that the
breakages of Wednesday races shall belong to the racing clubs concerned. [21] They
even advance the view that where a statute by its terms is expressly limited to certain
matters, it may not by interpretation or construction be extended to other
matters.[22]
However, respondent PHILRACOM contends that R.A. Nos. 6631 and 6632 are
laws intended primarily to grant petitioners their respective franchises to construct,
operate, and maintain a race track for horse racing.[23] When PHILRACOM added mid-
week races, the franchises given to the petitioners remained the same. Logically,
what applies to races authorized under Republic Act Nos. 6631 and 6632 should also
apply to races additionally authorized by PHILRACOM, namely mid-week races,
because these are general provisions which apply general rules and procedures
governing the operation of the races. Consequently, if the authorized racing days are
extended, these races must therefore be governed by the same rules and provisions
generally provided therein.
We find petitioners position on the main issue lacking in merit and far from
persuasive.
Franchise laws are privileges[24] conferred by the government on corporations
to do that which does not belong to the citizens of the country generally by common
right.[25] As a rule, a franchise springs from contracts between the sovereign power
and the private corporation for purposes of individual advantage as well as public
benefit.[26] Thus, a franchise partakes of a double nature and character.[27] In so far as
it affects or concerns the public, it is public juris and subject to governmental
control.[28] The legislature may prescribe the conditions and terms upon which it may
be held, and the duty of grantee to the public exercising it. [29]
As grantees of a franchise, petitioners derive their existence from the
same. Petitioners operations are governed by all existing rules relative to horse racing
provided they are not inconsistent with each other and could be reasonably
harmonized. Therefore, the applicable laws are R.A. 309, as amended, R.A. 6631 and
6632, as amended by E.O. 88 and 89, P.D. 420 and the orders issued by PHILRACOM.
Consequently, every statute should be construed in such a way that will harmonize it
with existing laws. This principle is expressed in the legal maxim interpretare et
concordare leges legibus est optimus interpretandi, that is, to interpret and to do it
in such a way as to harmonize laws with laws is the best method of interpretation. [30]
A reasonable reading of the horse racing laws favors the determination that the
entities enumerated in the distribution scheme provided under R.A. Nos. 6631 and
6632, as amended by Executive Orders 88 and 89, are the rightful beneficiaries of
breakages from mid-week races. Petitioners should therefore remit the proceeds of
breakages to those benefactors designated by the aforesaid laws.
29
 The holding of horse races on Wednesdays is in addition to the existing schedule
of races authorized by law. Since this new schedule became part of R.A. 6631 and
6632 the set of procedures in the franchise laws applicable to the conduct of horse
racing business must likewise be applicable to Wednesday or other mid-week
races. A fortiori, the granting of the mid-week races does not require another
legislative act to reiterate the manner of allocating the proceeds of betting tickets.
Neither does the allocation of breakages under the same provision need to be
isolated to construe another distribution scheme. No law can be viewed in a
condition of isolation or as the beginning of a new legal system. [31] A supplemental
law becomes an addition to the existing statutes, or a section thereof; and its effect
is not to change in any way the provisions of the latter but merely to extend the
operation thereof, or give additional power to enforce its provisions, as the case may
be. In enacting a particular statute, legislators are presumed to have full knowledge
and to have taken full cognizance of the existing laws on the same subject or those
relating thereto.
Proceeding to the subsidiary issue, the period for the remittance of breakages
to the beneficiaries should have commenced from the time PHILRACOM authorized
the holding of mid-week races because R.A. Nos. 6631 and 6632 were already in
effect then. The petitioners contend that they cannot be held retroactively liable to
respondent PHILRACOM for breakages prior to the effectivity of E.O. Nos. 88 and
89. They assert that the real intent behind E.O. Nos. 88 and 89 was to favor the
respondent PHILRACOM anew with the benefits which formerly had accrued in favor
of Philippine Amateur Athletic Federation (PAAF). They opine that since laws operate
prospectively unless the legislator intends to give them retroactive effect, the accrual
of these breakages should start on December 16, 1986, the date of effectivity of E.O.
Nos. 88 and 89.[32] Now, even if one of the benefactors of breakages, the PAAF, as
provided by R.A. 6631 and 6632 had ceased operation, it is still not proper for the
petitioners to presume that they were entitled to PAAFs share. When the petitioners
mistakenly appropriated the breakages for themselves, they became the implied
trustees for those legally entitled to the proceeds. This is in consonance with Article
1456 of the Civil Code, which provides that:
Art. 1456If property is acquired through mistake or fraud, the person obtaining it is,
by force of law, considered a trustee of an implied trust for the benefit of the
person from whom the property comes.
The petitioners should have properly set aside the amount for the defunct PAAF,
until an alternative beneficiary was designated, which as subsequently provided for
by Executive Order Nos. 88 and 89, is PHILRACOM:
Secs. 2 - All the cash balances and accumulated amounts corresponding to the share
of the Philippine Amateur Athletic Federation/Ministry of Youth and Sports
Development, pursuant to Section 6 of Republic Act No. 6632, not remitted by the
Philippine Racing Club, Inc./Manila Jockey Club Inc., are hereby transferred to the
Philippine Racing Commission to be constituted into a TRUST FUND to be used
exclusively for the payment of additional prizes for races sponsored by the
Commission and for necessary capital outlays and other expenses relative to horse-
breeding activities of the National Stud Farm. x x x x x x [E.O. No. 88]
Sec. 2. Any provision of law to the contrary notwithstanding, all cash balances and
accumulated amounts corresponding to the share of the Philippine Amateur
Athletic Federation/Ministry of Youth and Sports Development, pursuant to
Republic Act No. 6631, not remitted by the Manila Jockey Club, Inc., are hereby
constituted into a TRUST FUND to be used exclusively for the payment of additional
prizes for races sponsored by the Philippine Racing Commission and for the
necessary capital outlays and other expenses relative to horse-breeding activities of
the National Stud Farm. x x x x x x. [E.O. No. 89]
While herein petitioners might have relied on a prior opinion issued by an
administrative body, the well-entrenched principle is that the State could not
be estopped by a mistake committed by its officials or agents.[33] Well-settled also is
the rule that the erroneous application of the law by public officers does not prevent
a subsequent correct application of the law.[34] Although there was an initial
interpretation of the law by PHILRACOM, a court of law could not be precluded from
setting that interpretation aside if later on it is shown to be inappropriate.
Moreover, the detrimental consequences of depriving the city hospitals and
other institutions of the funds needed for rehabilitation of drug dependents and
other patients are all too obvious. It goes without saying that the allocation of
breakages in favor of said institutions is a policy decision in pursuance of social
development goals worthy of judicial approbation.
Nor could we be oblivious to the reality that horse racing although authorized
by law is still a form of gambling. Gambling is essentially antagonistic to the aims of
enhancing national productivity and self-reliance.[35] For this reason, legislative
franchises impose limitations on horse racing and betting. Petitioners contention that
a gambling franchise is a public contract protected by the Constitutional provision on
non-impairment of contract could not be left unqualified. For as well said in Lim vs.
Pacquing:[36]
x x x it should be remembered that a franchise is not in the strict sense a simple
contract but rather it is, more importantly, a mere privilege specially in matters
30
which are within the governments power to regulate and even prohibit through the
exercise of the police power. Thus, a gambling franchise is always subject to the
exercise of police power for the public welfare.[37]
That is why we need to stress anew that a statute which authorizes a gambling
activity or business should be strictly construed, and every reasonable doubt be
resolved so as to limit rather than expand the powers and rights claimed by franchise
holders under its authority.[38]
WHEREFORE, there being no reversible error, the appealed decision and the
resolution of the respondent Court of Appeals in CA-G.R. SP No. 25251, are hereby
AFFIRMED, and the instant petition is hereby DENIED for lack of merit. Costs against
petitioners. SO ORDERED.
Classes of corporation
Public corporation
Philippine Society for the Prevention of Cruelty to Animals vs Commission on Audit
Facts: PSPCA was incorporated as a juridical entity by virtue of Act No. 1285 by the
Philippine Commission in order to enforce laws relating to the cruelty inflicted upon
animals and for the protection of and to perform all things which may tend to
alleviate the suffering of animals and promote their welfare.
In order to enhance its powers, PSPCA was initially imbued with (1) power to
apprehend violators of animal welfare laws and (2) share 50% of the fines imposed
and collected through its efforts pursuant to the violations of related laws.
However, Commonwealth Act No. 148 recalled the said powers. President Quezon
then issued Executive Order No. 63 directing the Commission of Public Safety,
Provost Marshal General as head of the Constabulary Division of the Philippine
Army, Mayors of chartered cities and every municipal president to detail and
organize special officers to watch, capture, and prosecute offenders of criminal-
cruelty laws.
On December 1, 2003, an audit team from the Commission on Audit visited
petitioners office to conduct a survey. PSPCA demurred on the ground that it was a
private entity and not under the CoAs jurisdiction, citing Sec .2(1), Art. IX of the
Constitution.
Issues: WON the PSPCA is subject to CoAs Audit Authority.
Held: No. The charter test cannot be applied. It is predicated on the legal regime
established by the 1935 Constitution, Sec.7, Art. XIII. Since the underpinnings of the
charter test had been introduced by the 1935 Constitution and not earlier, the test
cannot be applied to PSPCA which was incorporated on January 19, 1905. Laws,
generally, have no retroactive effect unless the contrary is provided. There are a few
exceptions: (1) when expressly provided; (2) remedial statutes; (3) curative statutes;
and (4) laws interpreting others.
None of the exceptions apply in the instant case.
The mere fact that a corporation has been created by a special law doesnt
necessarily qualify it as a public corporation. At the time PSPCA was formed, the
Philippine Bill of 1902 was the applicable law and no proscription similar to the
charter test can be found therein. There was no restriction on the legislature to
create private corporations in 1903. The amendments introduced by CA 148 made it
clear that PSPCA was a private corporation, not a government agency.
PSPCAs charter shows that it is not subject to control or supervision by any agency
of the State. Like all private corporations, the successors of its members are
determined voluntarily and solely by the petitioner, and may exercise powers
generally accorded to private corporations.
PSPCAs employees are registered and covered by the SSS at the latters initiative
and not through the GSIS.
The fact that a private corporation is impressed with public interest does not make
the entity a public corporation. They may be considered quasi-public
corporations which are private corporations that render public service, supply
public wants and pursue other exemplary objectives. The true criterion to determine
whether a corporation is public or private is found in the totality of the relation of
the corporate to the State. It is public if it is created by the latters own agency or
instrumentality, otherwise, it is private.
Boy Scout vs. COA
The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the
Philippines (BSP) is the subject matter of this controversy that reached
us via petition for prohibition[1] filed by the BSP under Rule 65 of the 1997 Rules of
Court. In this petition, the BSP seeks that the COA be prohibited from implementing
its June 18, 2002 Decision,[2] its February 21, 2007 Resolution,[3] as well as all other
31
issuances arising therefrom, and that all of the foregoing be rendered null and
void. [4]
Antecedent Facts and Background
of the Case
This case arose when the COA issued Resolution No. 99-011[5] on August 19, 1999
(the COA Resolution), with the subject Defining the Commissions policy with respect
to the audit of the Boy Scouts of the Philippines. In its whereas clauses, the COA
Resolution stated that the BSP was created as a public corporation under
Commonwealth Act No. 111, as amended by Presidential Decree No. 460 and
Republic Act No. 7278; that in Boy Scouts of the Philippines v. National Labor
Relations Commission,[6] the Supreme Court ruled that the BSP, as constituted under
its charter, was a government-controlled corporation within the meaning of Article
IX(B)(2)(1) of the Constitution; and that the BSP is appropriately regarded as a
government instrumentality under the 1987 Administrative Code. [7] The COA
Resolution also cited its constitutional mandate under Section 2(1), Article IX
(D). Finally, the COA Resolution reads:
NOW THEREFORE, in consideration of the foregoing premises, the
COMMISSION PROPER HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to
conduct an annual financial audit of the Boy Scouts of the Philippines in
accordance with generally accepted auditing standards, and express an
opinion on whether the financial statements which include the Balance
Sheet, the Income Statement and the Statement of Cash Flows present fairly
its financial position and results of operations.
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the
Boy Scouts of the Philippines shall be classified among the government
corporations belonging to the Educational, Social, Scientific, Civic and
Research Sector under the Corporate Audit Office I, to be audited, similar to
the subsidiary corporations, by employing the team audit
approach.[8] (Emphases supplied.)
The BSP sought reconsideration of the COA Resolution in a letter[9] dated November
26, 1999 signed by the BSP National President Jejomar C. Binay, who is now the Vice
President of the Republic, wherein he wrote:
It is the position of the BSP, with all due respect, that it is not subject to the
Commissions jurisdiction on the following grounds:
1. We reckon that the ruling in the case of Boy Scouts of the
Philippines vs. National Labor Relations Commission, et al. (G.R.
No. 80767) classifying the BSP as a government-controlled
corporation is anchored on the substantial Government
participation in the National Executive Board of the BSP. It is to be
noted that the case was decided when the BSP Charter is defined
by Commonwealth Act No. 111 as amended by Presidential
Decree 460.
However, may we humbly refer you to Republic Act No. 7278
which amended the BSPs charter after the cited case was decided.
The most salient of all amendments in RA No. 7278 is the
alteration of the composition of the National Executive Board of
the BSP.
The said RA virtually eliminated the substantial government
participation in the National Executive Board by removing: (i) the
President of the Philippines and executive secretaries, with the
exception of the Secretary of Education, as members thereof; and
(ii) the appointment and confirmation power of the President of
the Philippines, as Chief Scout, over the members of the said
Board.
The BSP believes that the cited case has been superseded by RA
7278. Thereby weakening the cases conclusion that the BSP is a
government-controlled corporation (sic). The 1987
Administrative Code itself, of which the BSP vs. NLRC relied on for
some terms, defines government-owned and controlled
corporations as agencies organized as stock or non-stock
corporations which the BSP, under its present charter, is not.
Also, the Government, like in other GOCCs, does not have funds
invested in the BSP. What RA 7278 only provides is that the
32
 Government or any of its subdivisions, branches, offices, agencies
and instrumentalities can from time to time donate and
contribute funds to the BSP.
Also the BSP respectfully believes that the BSP is not appropriately
regarded as a government instrumentality under the 1987
Administrative Code as stated in the COA resolution. As defined
by Section 2(10) of the said code, instrumentality refers to any
agency of the National Government, not integrated within the
department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate
powers, administering special funds, and enjoying operational
autonomy, usually through a charter.
The BSP is not an entity administering special funds. It is not even
included in the DECS National Budget. x x x
It may be argued also that the BSP is not an agency of the
Government. The 1987 Administrative Code, merely referred the
BSP as an attached agency of the DECS as distinguished from an
actual line agency of departments that are included in the
National Budget. The BSP believes that an attached agency is
different from an agency. Agency, as defined in Section 2(4) of the
Administrative Code, is defined as any of the various units of the
Government including a department, bureau, office,
instrumentality, government-owned or controlled corporation or
local government or distinct unit therein.
Under the above definition, the BSP is neither a unit of the
Government; a department which refers to an executive
department as created by law (Section 2[7] of the Administrative
Code); nor a bureau which refers to any principal subdivision or
unit of any department (Section 2[8], Administrative Code). [10]
Subsequently, requests for reconsideration of the COA Resolution were also made
separately by Robert P. Valdellon, Regional Scout Director, Western Visayas Region,
Iloilo City and Eugenio F. Capreso, Council Scout Executive of Calbayog City. [11]
In a letter[12] dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit
Officer (CAO) I of the COA, furnished the BSP with a copy
the Memorandum[13] dated June 20, 2000 of Atty. Santos M. Alquizalas, the COA
General Counsel. In said Memorandum, the COA General Counsel opined that
Republic Act No. 7278 did not supersede the Courts ruling in Boy Scouts of the
Philippines v. National Labor Relations Commission, even though said law eliminated
the substantial government participation in the selection of members of the National
Executive Board of the BSP.The Memorandum further provides:
Analysis of the said case disclosed that the substantial government
participation is only one (1) of the three (3) grounds relied upon by the Court
in the resolution of the case. Other considerations include the character of
the BSPs purposes and functions which has a public aspect and the statutory
designation of the BSP as a public corporation. These grounds have not been
deleted by R.A. No. 7278. On the contrary, these were strengthened as
evidenced by the amendment made relative to BSPs purposes stated in
Section 3 of R.A. No. 7278.
On the argument that BSP is not appropriately regarded as a government
instrumentality and agency of the government, such has already been
answered and clarified. The Supreme Court has elucidated this matter in the
BSP case when it declared that BSP is regarded as, both a government-
controlled corporation with an original charter and as an instrumentality of
the Government. Likewise, it is not disputed that the Administrative Code of
1987 designated the BSP as one of the attached agencies of DECS. Being an
attached agency, however, it does not change its nature as a government-
controlled corporation with original charter and, necessarily, subject to COA
audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution
provides that COA shall have the power, authority, and duty to examine,
audit and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or
pertaining to, the Government, or any of its subdivisions, agencies or
instrumentalities, including government-owned or controlled corporations
with original charters.[14]
Based on the Memorandum of the COA General Counsel, Director Sunico
wrote:
In view of the points clarified by said Memorandum upholding COA
Resolution No. 99-011, we have to comply with the provisions of the latter, among
of
which is to conduct an annual financial audit of the Boy Scouts of the Philippines. [15]
33

In a letter dated November 20, 2000 signed by Director
Amorsonia B. Escarda, CAO I, the COA informed the BSP that a
preliminary survey of its organizational structure, operations and
accounting system/records shall be conducted on November 21 to
22, 2000.[16]
Upon the BSPs request, the audit was deferred for thirty (30) days. The BSP
then filed a Petition for Review with Prayer for Preliminary Injunction and/or
Temporary Restraining Order before the COA. This was denied by the COA in its
questioned Decision, which held that the BSP is under its audit jurisdiction. The BSP
moved for reconsideration but this was likewise denied under its questioned
Resolution.[17]
This led to the filing by the BSP of this petition for prohibition with
preliminary injunction and temporary restraining order against the COA.
The Issue
As stated earlier, the sole issue to be resolved in this case is whether the BSP
falls under the COAs audit jurisdiction.
The Parties Respective Arguments
The BSP contends that Boy Scouts of the Philippines v. National Labor
Relations Commission is inapplicable for purposes of determining the audit
jurisdiction of the COA as the issue therein was the jurisdiction of the National Labor
Relations Commission over a case for illegal dismissal and unfair labor practice filed
by certain BSP employees.[18]
While the BSP concedes that its functions do relate to those that the
government might otherwise completely assume on its own, it avers that this alone
was not determinative of the COAs audit jurisdiction over it. The BSP further avers
that the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission simply stated x x x that in respect of functions, the BSP is akin to a public
corporation but this was not synonymous to holding that the BSP is a government
corporation or entity subject to audit by the COA. [19]
The BSP contends that Republic Act No. 7278 introduced crucial
amendments to its charter; hence, the findings of the Court in Boy Scouts of the
Philippines v. National Labor Relations Commission are no longer valid as the
government has ceased to play a controlling influence in it. The BSP claims that the
pronouncements of the Court therein must be taken only within the context of that
case; that the Court had categorically found that its assets were acquired from the
Boy Scouts of America and not from the Philippine government, and that its
operations are financed chiefly from membership dues of the Boy Scouts themselves
as well as from property rentals; and that the BSP may correctly be characterized as
non-governmental, and hence, beyond the audit jurisdiction of the COA. It further
claims that the designation by the Court of the BSP as a government agency or
instrumentality is mere obiter dictum.[20]
The BSP maintains that the provisions of Republic Act No. 7278 suggest that
governance of BSP has come to be overwhelmingly a private affair or nature, with
government participation restricted to the seat of the Secretary of Education, Culture
and Sports.[21] It cites Philippine Airlines Inc. v. Commission on Audit [22] wherein the
Court declared that, PAL, having ceased to be a government-owned or controlled
corporation is no longer under the audit jurisdiction of the COA. [23] Claiming that the
amendments introduced by Republic Act No. 7278 constituted a supervening event
that changed the BSPs corporate identity in the same way that the governments
privatization program changed PALs, the BSP makes the case that the government no
longer has control over it; thus, the COA cannot use the Boy Scouts of the Philippines
v. National Labor Relations Commission as its basis for the exercise of its jurisdiction
and the issuance of COA Resolution No. 99-011.[24]The BSP further claims as follows:
It is not far-fetched, in fact, to concede that BSPs funds and
assets are private in character. Unlike ordinary public corporations,
such as provinces, cities, and municipalities, or government-owned and
controlled corporations, such as Land Bank of the Philippines and the
Development Bank of the Philippines, the assets and funds of BSP are
not derived from any government grant. For its operations, BSP is not
34
dependent in any way on any government appropriation; as a matter
of fact, it has not even been included in any appropriations for the
government. To be sure, COA has not alleged, in its Resolution No. 99-
011 or in the Memorandum of its General Counsel, that BSP received,
receives or continues to receive assets and funds from any agency of
the government. The foregoing simply point to the private nature of
the funds and assets of petitioner BSP.
As stated in petitioners third argument, BSPs assets and funds
were never acquired from the government. Its operations are not in
any way financed by the government, as BSP has never been included
in any appropriations act for the government. Neither has the
government invested funds with BSP. BSP, has not been, at any time, a
user of government property or funds; nor have properties of the
government been held in trust by BSP. This is precisely the reason why,
until this time, the COA has not attempted to subject BSP to its audit
jurisdiction. x x x.[25]
To summarize its other arguments, the BSP contends that it is
not a government-owned or controlled corporation; neither is it an
instrumentality, agency, or subdivision of the government.
[26]
In its Comment, the COA argues as follows:
1. The BSP is a public corporation created under Commonwealth
Act No. 111 dated October 31, 1936, and whose functions relate
to the fostering of public virtues of citizenship and patriotism
and the general improvement of the moral spirit and fiber of the
youth. The manner of creation and the purpose for which the
BSP was created indubitably prove that it is a government
agency.
2. Being a government agency, the funds and property owned
or held in trust by the BSP are subject to the audit authority of
respondent Commission on Audit pursuant to Section 2 (1),
Article IX-D of the 1987 Constitution.
3. Republic Act No. 7278 did not change the character of the BSP
as a government-owned or controlled corporation and
government instrumentality.[27]
The COA maintains that the functions of the BSP that include, among others,
the teaching to the youth of patriotism, courage, self-reliance, and kindred virtues,
are undeniably sovereign functions enshrined under the Constitution and discussed
by the Court in Boy Scouts of the Philippines v. National Labor Relations
Commission. The COA contends that any attempt to classify the BSP as a private
corporation would be incomprehensible since no less than the law which created it
had designated it as a public corporation and its statutory mandate embraces
performance of sovereign functions.[28]
The COA claims that the only reason why the BSP employees fell within the
scope of the Civil Service Commission even before the 1987 Constitution was the fact
that it was a government-owned or controlled corporation; that as an attached
agency of the Department of Education, Culture and Sports (DECS), the BSP is an
agency of the government; and that the BSP is a chartered institution under Section
1(12) of the Revised Administrative Code of 1987, embraced under the term
government instrumentality.[29]
The COA concludes that being a government agency, the funds and property
owned or held by the BSP are subject to the audit authority of the COA pursuant to
Section 2(1), Article IX (D) of the 1987 Constitution.
In support of its arguments, the COA cites The Veterans Federation of the
Philippines (VFP) v. Reyes,[30] wherein the Court held that among the reasons why the
VFP is a public corporation is that its charter, Republic Act No. 2640, designates it as
one. Furthermore, the COA quotes the Court as saying in that case:
In several cases, we have dealt with the issue of whether certain
specific activities can be classified as sovereign functions. These cases,
which deal with activities not immediately apparent to be sovereign
functions, upheld the public sovereign nature of operations needed
either to promote social justice or to stimulate patriotic sentiments and
love of country.
35
 Petitioner claims that its funds are not public funds because no
budgetary appropriations or government funds have been released to
the VFP directly or indirectly from the DBM, and because VFP funds
come from membership dues and lease rentals earned from
administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released
to the VFP does not prove that it is a private corporation. The DBM
indeed did not see it fit to propose budgetary appropriations to the
VFP, having itself believed that the VFP is a private corporation. If the
DBM, however, is mistaken as to its conclusion regarding the nature of
VFP's incorporation, its previous assertions will not prevent future
budgetary appropriations to the VFP. The erroneous application of the
law by public officers does not bar a subsequent correct application of
the law.[31] (Citations omitted.)
The COA points out that the government is not precluded by law from
extending financial support to the BSP and adding to its funds, and that as a
government instrumentality which continues to perform a vital function imbued with
public interest and reflective of the governments policy to stimulate patriotic
sentiments and love of country, the BSPs funds from whatever source are public
funds, and can be used solely for public purpose in pursuance of the provisions of
[32]
Republic Act No. [7278].
The COA claims that the fact that it has not yet audited the BSPs funds may
not bar the subsequent exercise of its audit jurisdiction.
[33]
The BSP filed its Reply on August 29, 2007 maintaining that its statutory
designation as a public corporation and the public character of its purpose and
functions are not determinative of the COAs audit jurisdiction; reiterating its stand
that Boy Scouts of the Philippines v. National Labor Relations Commission is not
applicable anymore because the aspect of government ownership and control has
been removed by Republic Act No. 7278; and concluding that the funds and property
that it either owned or held in trust are not public funds and are not subject to the
COAs audit jurisdiction.
Thereafter, considering the BSPs claim that it is a private corporation, this
Court, in a Resolution[34] dated July 20, 2010, required the parties to file, within a
period of twenty (20) days from receipt of said Resolution, their respective comments
on the issue of whether Commonwealth Act No. 111, as amended by Republic Act
No. 7278, is constitutional.
In compliance with the Courts resolution, the parties filed their respective
Comments.
In its Comment[35] dated October 22, 2010, the COA argues that the constitutionality
of Commonwealth Act No. 111, as amended, is not determinative of the resolution
of the present controversy on the COAs audit jurisdiction over petitioner, and in fact,
the controversy may be resolved on other grounds; thus, the requisites before a
judicial inquiry may be made, as set forth in Commissioner of Internal Revenue v.
Court of Tax Appeals,[36] have not been fully met.[37] Moreover, the COA maintains
that behind every law lies the presumption of constitutionality. [38] The COA likewise
argues that contrary to the BSPs position, repeal of a law by implication is not
favored.[39] Lastly, the COA claims that there was no violation of Section 16, Article XII
of the 1987 Constitution with the creation or declaration of the BSP as a government
corporation. Citing Philippine Society for the Prevention of Cruelty to Animals v.
Commission on Audit,[40] the COA further alleges:
The true criterion, therefore, to determine whether a corporation is public
or private is found in the totality of the relation of the corporation to the State. If the
corporation is created by the State as the latters own agency or instrumentality to
help it in carrying out its governmental functions, then that corporation is considered
public; otherwise, it is private. x x x.[41]
For its part, in its Comment[42] filed on December 3, 2010, the BSP submits
that its charter, Commonwealth Act No. 111, as amended by Republic Act No. 7278,
is constitutional as it does not violate Section 16, Article XII of the Constitution. The
36
BSP alleges that while [it] is not a public corporation within the purview of COAs audit
jurisdiction, neither is it a private corporation created by special law falling within the
[43]
ambit of the constitutional prohibition x x x. The BSP further alleges:
Petitioners purpose is embodied in Section 3 of C.A. No. 111, as
amended by Section 1 of R.A. No. 7278, thus:
A reading of the foregoing provision shows that petitioner was created to
advance the interest of the youth, specifically of young boys, and to mold
them into becoming good citizens. Ultimately, the creation of petitioner
redounds to the benefit, not only of those boys, but of the public good or
welfare. Hence, it can be said that petitioners purpose and functions are more
of a public rather than a private character. Petitioner caters to all boys who
wish to join the organization without any distinction. It does not limit its
membership to a particular class of boys. Petitioners members are trained in
scoutcraft and taught patriotism, civic consciousness and responsibility,
courage, self-reliance, discipline and kindred virtues, and moral values,
preparing them to become model citizens and outstanding leaders of the
country.[44]
The BSP reiterates its stand that the public character of its purpose and
functions do not place it within the ambit of the audit jurisdiction of the COA as it
lacks the government ownership or control that the Constitution requires before an
entity may be subject of said jurisdiction.[45] It avers that it merely stated in its Reply
that the withdrawal of government control is akin to privatization, but it does not
necessarily mean that petitioner is a private corporation.[46] The BSP claims that it has
a unique characteristic which neither classifies it as a purely public nor a purely
private corporation;[47] that it is not a quasi-public corporation; and that it may belong
to a different class altogether.[48]
The BSP claims that assuming arguendo that it is a private corporation, its
creation is not contrary to the purpose of Section 16, Article XII of the Constitution;
and that the evil sought to be avoided by said provision is inexistent in the enactment
of the BSPs charter,[49] as, (i) it was not created for any pecuniary purpose; (ii) those
who will primarily benefit from its creation are not its officers but its entire
membership consisting of boys being trained in scoutcraft all over the country; (iii) it
caters to all boys who wish to join the organization without any distinction; and (iv)
it does not limit its membership to a particular class or group of boys. Thus, the
enactment of its charter confers no special privilege to particular individuals, families,
or groups; nor does it bring about the danger of granting undue favors to certain
groups to the prejudice of others or of the interest of the country, which are the evils
sought to be prevented by the constitutional provision involved. [50]
Finally, the BSP states that the presumption of constitutionality of a
legislative enactment prevails absent any clear showing of its repugnancy to the
Constitution.[51]
The Ruling of the Court
After looking at the legislative history of its amended charter and carefully studying
the applicable laws and the arguments of both parties, we find that the BSP is a public
corporation and its funds are subject to the COAs audit jurisdiction.
The BSP Charter (Commonwealth Act No. 111, approved on October 31,
1936), entitled An Act to Create a Public Corporation to be Known as the Boy Scouts
of the Philippines, and to Define its Powers and Purposes created the BSP as a public
corporation to serve the following public interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote
through organization and cooperation with other agencies, the
ability of boys to do useful things for themselves and others, to
train them in scoutcraft, and to inculcate in them patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline
and kindred virtues, and moral values, using the method which are
in common use by boy scouts.
37
 Presidential Decree No. 460, approved on May 17, 1974, amended
Commonwealth Act No. 111 by strengthening the volunteer and democratic
Commonwealth Act No. 111 and provided substantial changes in the BSP
character of the BSP and reducing government representation in its governing body,
organizational structure. Pertinent provisions are quoted below:
as follows:
Section II. Section 5 of the said Act is also amended to read
as follows:
The governing body of the said corporation shall consist of
a National Executive Board composed of (a) the President of the
Philippines or his representative; (b) the charter and life members
of the Boy Scouts of the Philippines; (c) the Chairman of the Board
of Trustees of the Philippine Scouting Foundation; (d) the Regional
Chairman of the Scout Regions of the Philippines; (e) the Secretary
of Education and Culture, the Secretary of Social Welfare, the
Secretary of National Defense, the Secretary of Labor, the Secretary
of Finance, the Secretary of Youth and Sports, and the Secretary of
Local Government and Community Development; (f) an equal
number of individuals from the private sector; (g) the National
President of the Girl Scouts of the Philippines; (h) one Scout of
Senior age from each Scout Region to represent the boy
membership; and (i) three representatives of the cultural
minorities. Except for the Regional Chairman who shall be elected
by the Regional Scout Councils during their annual meetings, and
the Scouts of their respective regions, all members of the National
Executive Board shall be either by appointment or cooption,
subject to ratification and confirmation by the Chief Scout, who
shall be the Head of State. Vacancies in the Executive Board shall
be filled by a majority vote of the remaining members, subject to
ratification and confirmation by the Chief Scout. The by-laws may
prescribe the number of members of the National Executive Board
necessary to constitute a quorum of the board, which number may
be less than a majority of the whole number of the board. The
National Executive Board shall have power to make and to amend
the by-laws, and, by a two-thirds vote of the whole board at a
meeting called for this purpose, may authorize and cause to be
executed mortgages and liens upon the property of the
corporation.
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended
Section 1. Sections 2 and 3 of Commonwealth Act. No.
111, as amended, is hereby amended to read as follows:
"Sec. 2. The said corporation shall have the powers of
perpetual succession, to sue and be sued; to enter into contracts;
to acquire, own, lease, convey and dispose of such real and
personal estate, land grants, rights and choses in action as shall be
necessary for corporate purposes, and to accept and receive funds,
real and personal property by gift, devise, bequest or other means,
to conduct fund-raising activities; to adopt and use a seal, and the
same to alter and destroy; to have offices and conduct its business
and affairs in Metropolitan Manila and in the regions, provinces,
cities, municipalities, and barangays of the Philippines, to make and
adopt by-laws, rules and regulations not inconsistent with this Act
and the laws of the Philippines, and generally to do all such acts and
things, including the establishment of regulations for the election
of associates and successors, as may be necessary to carry into
effect the provisions of this Act and promote the purposes of said
corporation: Provided, That said corporation shall have no power
to issue certificates of stock or to declare or pay dividends, its
objectives and purposes being solely of benevolent character and
not for pecuniary profit of its members.
"Sec. 3. The purpose of this corporation shall be to
promote through organization and cooperation with other
agencies, the ability of boys to do useful things for themselves and
others, to train them in scoutcraft, and to inculcate in them
patriotism, civic consciousness and responsibility, courage, self-
reliance, discipline and kindred virtues, and moral values, using
the method which are in common use by boy scouts."
Sec. 2. Section 4 of Commonwealth Act No. 111, as
amended, is hereby repealed and in lieu thereof, Section 4 shall
read as follows:
38

"Sec. 4. The President of the Philippines shall be the Chief
Scout of the Boy Scouts of the Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No.
111, as amended, are hereby amended to read as follows:
"Sec. 5. The governing body of the said corporation shall
consist of a National Executive Board, the members of which shall
be Filipino citizens of good moral character. The Board shall be
composed of the following:
"(a) One (1) charter member of the Boy Scouts of the
Philippines who shall be elected by the members of the National
Council at its meeting called for this purpose;
"(b) The regional chairmen of the scout regions who shall
be elected by the representatives of all the local scout councils of
the region during its meeting called for this purpose: Provided, That
a candidate for regional chairman need not be the chairman of a
local scout council;
"(c) The Secretary of Education, Culture and Sports;
"(d) The National President of the Girl Scouts of the
Philippines;
"(e) One (1) senior scout, each from Luzon, Visayas and
Mindanao areas, to be elected by the senior scout delegates of the
local scout councils to the scout youth forums in their respective
areas, in its meeting called for this purpose, to represent the boy
scout membership;
"(f) Twelve (12) regular members to be elected by the
members of the National Council in its meeting called for this
purpose;
"(g) At least ten (10) but not more than fifteen (15)
additional members from the private sector who shall be elected
by the members of the National Executive Board referred to in the
immediately preceding paragraphs (a), (b), (c), (d), (e) and (f) at the
organizational meeting of the newly reconstituted National
Executive Board which shall be held immediately after the meeting
of the National Council wherein the twelve (12) regular members
and the one (1) charter member were elected.
"Sec. 8. Any donation or contribution which from time to
time may be made to the Boy Scouts of the Philippines by the
Government or any of its subdivisions, branches, offices, agencies
or instrumentalities or by a foreign government or by private,
entities and individuals shall be expended by the National Executive
Board in pursuance of this Act.
The BSP as a Public Corporation under
Par. 2, Art. 2 of the Civil Code
There are three classes of juridical persons under Article 44 of the Civil Code
and the BSP, as presently constituted under Republic Act No. 7278, falls under the
second classification. Article 44 reads:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for
public interest or purpose created by law; their personality begins
as soon as they have been constituted according to law;
(3) Corporations, partnerships and associations
for private interest or purpose to which the law grants a juridical
personality, separate and distinct from that of each shareholder,
partner or member. (Emphases supplied.)
The BSP, which is a corporation created for a public interest or purpose, is
subject to the law creating it under Article 45 of the Civil Code, which provides:
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of
the preceding article are governed by the laws creating or
recognizing them.
39
 Private corporations are regulated by laws of general
application on the subject.
Partnerships and associations for private interest or
purpose are governed by the provisions of this Code concerning
partnerships. (Emphasis and underscoring supplied.)
The purpose of the BSP as stated in its amended charter shows that it was
created in order to implement a State policy declared in Article II, Section 13 of the
Constitution, which reads:
ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
Section 13. The State recognizes the vital role of the
youth in nation-building and shall promote and protect their
physical, moral, spiritual, intellectual, and social well-being. It
shall inculcate in the youth patriotism and nationalism, and
encourage their involvement in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public
purpose in pursuit of a constitutional mandate, comes within the class of public
corporations defined by paragraph 2, Article 44 of the Civil Code and governed by the
law which creates it, pursuant to Article 45 of the same Code.
The BSP is a Public Corporation Not
Subject to the Test of Government
Ownership or Control and Economic
Viability
The BSP is a public corporation or a government agency or instrumentality
with juridical personality, which does not fall within the constitutional prohibition in
Article XII, Section 16, notwithstanding the amendments to its charter. Not all
corporations, which are not government owned or controlled, are ipso facto to be
considered private corporations as there exists another distinct class of corporations
or chartered institutions which are otherwise known as public corporations. These
corporations are treated by law as agencies or instrumentalities of the government
which are not subject to the tests of ownership or control and economic viability but
to different criteria relating to their public purposes/interests or constitutional
policies and objectives and their administrative relationship to the government or
any of its Departments or Offices.
Historically, therefore, the BSP had been subjected to government audit in
so far as public funds had been infused thereto. However, this practice should not
preclude the exercise of the audit jurisdiction of COA, clearly set forth under the
Constitution, which pertinently provides:
Section 2. (1) The Commission on Audit shall have the
power, authority, and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy
under this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled
corporations with original charters and their subsidiaries; and (d)
such non-governmental entities receiving subsidy or equity,
directly or indirectly, from or through the Government, which are
required by law of the granting institution to submit to such audit
as a condition of subsidy or equity. x x x. [64]
Since the BSP, under its amended charter, continues to be a public
corporation or a government instrumentality, we come to the inevitable
conclusion that it is subject to the exercise by the COA of its audit jurisdiction
in the manner consistent with the provisions of the BSP Charter.
40
WHEREFORE, premises considered, the instant petition for prohibition
is DISMISSED. SO ORDERED.
PNCC IS A PRIVATE CORPORATION
HERMANO OIL v TOLL REGULATORY BOARD
FACTS: Hermano Oil Manufacturing & Sugar Corporation owned a parcel of land at
NLEX. The petitioner requested that respondent Toll Regulatory Board (TRB) grant
an easement of right of way, for it had been deprived of its enjoyment and
possession by the fence that barred its entry. TRB denied based on the Limited
Access Highway Act.
Hence, petitioner sued TRB and Engr. Dumlao demanding specific performance, the
grant of the easement of right of way and damages being deprived of its property
without due process, just compensation and equal protection of the law.
ISSUE: Whether or not petitioner can claim just compensation.
RULING: No. The limited access imposed on the petitioner's property did not
partake of a compensable taking due to the exercise of the power of eminent
domain.
The putting up of the access fence on the petitioner's property was in the valid
exercise of police power. Toll way is not an ordinary road. As a facility designed to
promote the fastest access to certain destinations, its use, operation, and
maintenance require close regulation. Public interest and safety require the
imposition of certain restrictions on toll ways that do not apply to ordinary roads.
As a special kind of road, it is but reasonable that not all forms of transport could
use it
There is no question that the property was not taken and devoted for public use.
Instead, the property was subjected to a certain restraint, i.e. the access fence, in
order to secure the general safety and welfare of the motorists using the NLEX.
There being a clear and valid exercise of police power, the petitioner was certainly
not entitled to any just compensation
ANTONIO P. SALENGA andNATIONAL LABOR RELATIONS COMMISSION vs COURT
OF APPEALS and CLARK DEVELOPMENT CORPORATION
FACTS;President/Chief Executive Officer (CEO) Rufo Colayco issued an Order informi
ng Salenga that, pursuant to the decision of the board of directors of respondent CD
C, the position of head executive assistant the position held by petitioner was de
clared redundant. His employment was then terminated. He then filed illegal dismis
sal case against CDC and Colayco. The Labor Arbiter ruled in favor of Salenga. When
the Decision was rendered, CDC was already under the leadership of Sergio T. Nagui
at. He instructed Atty. Monina C. Pineda, manager of the Corporate and Legal Servic
es Department and concurrent corporate board secretary, not to appeal the Decisio
n and to so inform the OGCC. However, two separate appeals were filed before LA
Darlucio. One from the OGCC on behalf of respondent CDC and Rufo Colayco and th
e second from Rufo Colayco.
Petitioner opposed the two appeals on the grounds that both appellants had failed t
o observe Rule VI, Sections 4 to 6 of the NLRC Rules of Procedure; and that appellan
ts had not been authorized by respondents board of directors to represent the corp
oration and, thus, they were not the employer whom the Rules referred to.
ISSUE:Whether or not NLRC can entertain an appeal absent a board resolution allow
ing it.
HELD: No. The NLRC had no jurisdiction to entertain the appeal filed by Timbol-
Roman and former CDC CEO Colayco.
A corporation can only exercise its powers and transact its business through its boar
d of directors and through its officers and agents when authorized by a board resolu
tion or its bylaws. The power of a corporation to sue and be sued is exercised by the
board of directors. The physical acts of the corporation, like the signing of documen
ts, can be performed only by natural persons duly authorized for the purpose by cor
porate bylaws or by a specific act of the board. The purpose of verification is to secu
re an assurance that the allegations in the pleading are true and correct and have b
een filed in good faith.
Thus, absent the requisite board resolution, neither Timbol-
Roman nor Atty. Mallari, who signed the Memorandum of Appeal and Joint Affidavi
t of Declaration allegedly on behalf of respondent corporation, may be considered a
s the appellant and employer referred to by Rule VI, Sections 4 to 6 of the NLRC
Rules of Procedure, which provides that appeal shall be verified by appellant himsel
f in accordance with Section 4, Rule 7 of the Rules of Court. The OGCC failed to prod
uce any valid authorization from the board of directors despite petitioner Salengas
repeated demands. And the so-
41
called appeal was done against the instructions of then President/CEO Naguiat not t
o file an appeal.
De facto Corporation
Seventh Day Adventist Conference Church of Southern Philippines vs. North
Eastern Mindanao Mission of Seventh Day Adventist, Inc.
FACTS:
Spouses Felix Cosio and Felisa Cuysona donate a parcel of land to South Philippine
[Union] Mission of Seventh Day Adventist Church, and was received by Liberato
Rayos, an elder of the Seventh Day Adventist Church, on behalf of the donee.
However, twenty years later, the spouses sold the same land to the Seventh Day
Adventist Church of Northeastern Mindanao Mission.
Claiming to be the alleged donees successors-in-interest, petitioners asserted
ownership over the property. This was opposed by respondents who argued that at
the time of the donation, SPUM-SDA Bayugan could not legally be a donee because,
not having been incorporated yet, it had no juridical personality. Neither were
petitioners members of the local church then, hence, the donation could not have
been made particularly to them.
ISSUE:
Should the Seventh Day Adventist Church of Northeastern Mindanao Mission's
ownership of the lot be upheld?
HELD:
We answer in the affirmative.
Donation is undeniably one of the modes of acquiring ownership of real property.
Likewise, ownership of a property may be transferred by tradition as a consequence
of a sale.
Donation is an act of liberality whereby a person disposes gratuitously of a thing or
right in favor of another person who accepts it. The donation could not have been
made in favor of an entity yet inexistent at the time it was made. Nor could it have
been accepted as there was yet no one to accept it.
The deed of donation was not in favor of any informal group of SDA members but a
supposed SPUM-SDA Bayugan (the local church) which, at the time, had neither
juridical personality nor capacity to accept such gift.
The filing of articles of incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de facto corporation.[12] We have
held that an organization not registered with the Securities and Exchange
Commission (SEC) cannot be considered a corporation in any concept, not even as a
corporation de facto.[13] Petitioners themselves admitted that at the time of the
donation, they were not registered with the SEC, nor did they even attempt to
organize[14] to comply with legal requirements.
Corporate existence begins only from the moment a certificate of
incorporation is issued. No such certificate was ever issued to petitioners or their
supposed predecessor-in-interest at the time of the donation. Petitioners obviously
could not have claimed succession to an entity that never came to exist. Neither could
the principle of separate juridical personality apply since there was never any
corporation[15] to speak of. And, as already stated, some of the representatives of
petitioner Seventh Day Adventist Conference Church of Southern Philippines, Inc.
were not even members of the local church then, thus, they could not even claim
that the donation was particularly for them.[16]
The de facto doctrine thus effects a compromise between two
conflicting public interest[s]the one opposed to an unauthorized
assumption of corporate privileges; the other in favor of doing
42
 justice to the parties and of establishing a general assurance of
security in business dealing with corporations.[17]
Generally, the doctrine exists to protect the public dealing
with supposed corporate entities, not to favor the defective or non-
existent corporation.[18]
In view of the foregoing, petitioners arguments anchored on their
supposed de facto status hold no water. We are convinced that there was no
donation to petitioners or their supposed predecessor-in-interest.
On the other hand, there is sufficient basis to affirm the title of SDA-NEMM.
The factual findings of the trial court in this regard were not convincingly disputed.
This Court is not a trier of facts. Only questions of law are the proper subject of a
petition for review on certiorari
Corporation by estoppel
PRISCILO B. PAZ,* Petitioner, vs. NEW INTERNATIONAL ENVIRONMENTAL
UNIVERSALITY, INC., Respondent.
Assailed in this petition for review on certiorari1 are the Decision2 dated January 31,
2012 and the Resolution3 dated October 2, 2012 of the Court of Appeals (CA) in CA-
G.R. CV No. 00903-MIN, which affirmed the Decision4 dated May 19, 2006 of the
Regional Trial Court of Davao City, Branch 33 (RTC) in Civil Case No. 29,292-2002,
declaring petitioner Captain Priscilo B. Paz (petitioner) liable for breach of contract.
The Facts
On March 1, 2000, petitioner, as the officer-in-charge of the Aircraft Hangar at the
Davao International Airport, Davao City, entered into a Memorandum of
Agreement5 (MOA) with Captain Allan J. Clarke (Capt. Clarke), President of
International Environmental University, whereby for a period of four (4) years,
unless pre-terminated by both parties with six (6) months advance notice, the
former shall allow the latter to use the aircraft hangar space at the said Airport
"exclusively for company aircraft/helicopter."6 Said hangar space was previously
leased to Liberty Aviation Corporation, which assigned the same to petitioner.7
On August 19, 2000, petitioner complained in a letter8 addressed to "MR. ALLAN J.
CLARKE, International Environmental Universality, Inc. x x x" that the hangar space
was being used "for trucks and equipment, vehicles maintenance and fabrication,"
instead of for "company helicopter/aircraft" only, and thereby threatened to cancel
the MOA if the "welding, grinding, and fabrication jobs" were not stopped
immediately.9
On January 16, 2001, petitioner sent another letter10 to "MR. ALLAN J. CLARKE,
International Environmental Universality, Inc. x x x," reiterating that the hangar
space "must be for aircraft use only," and that he will terminate the MOA due to
the safety of the aircrafts parked nearby. He further offered a vacant space along
the airport road that was available and suitable for Capt. Clarkes operations. 11
On July 19, 2002, petitioner sent a third letter,12 this time, addressed to "MR. ALLAN
JOSEPH CLARKE, CEO, New International Environmental University, Inc. x x x,"
demanding that the latter vacate the premises due to the damage caused by an
Isuzu van driven by its employee to the left wing of an aircraft parked inside the
hangar space, which Capt. Clarke had supposedly promised to buy, but did not. 13
On July 23, 2002, petitioner sent a final letter14 addressed to "MR. ALLAN J. CLARKE,
Chairman, CEO, New International Environmental University, Inc. x x x," strongly
demanding the latter to immediately vacate the hangar space. He further informed
Capt. Clarke that the company will "apply for immediate electrical disconnection
with the Davao Light and Power Company (DLPC)[,] so as to compel [the latter] to
desist from continuing with [the] works" thereon.15
On September 4, 2002, respondent New International Environmental Universality,
Inc.16 (respondent) filed a complaint17 against petitioner for breach of contract
before the RTC, docketed as Civil Case No. 29,292-2002,18claiming that: (a)
petitioner had disconnected its electric and telephone lines; (b) upon petitioners
instruction, security guards prevented its employees from entering the leased
premises by blocking the hangar space with barbed wire; and (c) petitioner violated
the terms of the MOA when he took over the hangar space without giving
respondent the requisite six (6)-month advance notice of termination.19
In his defense, petitioner alleged, among others, that: (a) respondent had no cause
of action against him as the MOA was executed between him and Capt. Clarke in
the latters personal capacity; (b) there was no need to wait for the expiration of
43
the MOA because Capt. Clarke performed highly risky works in the leased premises
that endangered other aircrafts within the vicinity; and (c) the six (6)-month
advance notice of termination was already given in the letters he sent to Capt.
Clarke.20
On March 25, 2003, the RTC issued a Writ of Preliminary Injunction 21 ordering
petitioner to: (a) immediately remove all his aircrafts parked within the leased
premises; (b) allow entry of respondent by removing the steel gate installed
thereat; and (c) desist and refrain from committing further acts of dispossession
and/or interference in respondents occupation of the hangar space.
For failure of petitioner to comply with the foregoing writ, respondent filed on
October 24, 2003 a petition for indirect contempt22 before the RTC, docketed as
Civil Case No. 30,030-2003, which was tried jointly with Civil Case No. 29,292-
2002.23
The RTC Ruling
After due trial, the RTC rendered a Decision24 dated May 19, 2006 finding
petitioner: (a) guilty of indirect contempt for contumaciously disregarding its
Order25 dated March 6, 2003, by not allowing respondent to possess and occupy the
leased premises pending final decision in the main case; and (b) liable for breach of
contract for illegally terminating the MOA even before the expiration of the term
thereof.26 He was, thus, ordered to pay a fine of P5,000.00, and to pay respondent
nominal damages of P100,000.00 and attorneys fees of P50,000.00 with legal
interest, and costs of suit.27
On the challenge to respondents juridical personality, the RTC quoted the
Order28 dated April 11, 2005 of the SEC explaining that respondent was issued a
Certificate of Incorporation on September 3, 2001 as New International
Environmental Universality, Inc. but that, subsequently, when it amended its
Articles of Incorporation on November 14, 2001 and July 11, 2002, the SEC
Extension Office in Davao City erroneously used the name New International
Environmental University, Inc.29 The latter name was used by respondent when it
filed its amended complaint on September 11, 2002 and the petition for indirect
contempt against petitioner on October 24, 2003 believing that it was allowed to do
so, as it was only on April 11, 2005 when the SEC directed it to revert to its correct
name.30
The RTC further declared that the MOA, which was "made and executed by and
between CAPT. [PRISCILO] B. PAZ, Officer-In-Charge of Aircraft Hangar at Davao
International Airport, Davao City, Philippines, hereinafter called as FIRST PARTY
[a]nd CAPT. ALLAN J. CLARKE[,] President of INTERNATIONAL ENVIRONMENTAL
UNIVERSITY with office address at LIBERTY AVIATION HANGAR, Davao International
Airport, Davao City, Philippines, hereinafter called as SECOND PARTY," 31 was
executed by the parties not only in their personal capacities but also in
representation of their respective corporations or entities. 32
On the issue of the violation of the terms of the MOA, the RTC found respondent to
have been effectively evicted from the leased premises between July and August
of2002, or long before the expiration of the term thereof in 2004, when petitioner:
(a) placed a gate/fence that prevented ingress to and egress from the leased
premises; (b) parked a plane inside and outside the leased premises; (c)
disconnected the electrical and telephone connections of respondent; and (d)
locked respondents employees out.33 Despite the service of the injunctive writ
upon petitioner, respondent was not allowed to possess and occupy the leased
premises, as in fact, the trial court even had to order on March 8, 2004 the
inventory of the items locked inside the bodega of said premises that was kept off-
limits to respondent. Hence, petitioner was declared guilty of indirect contempt. 34
Aggrieved, petitioner elevated his case on appeal before the CA, arguing that the
trial court should have dismissed outright the cases against him for failure of
respondent to satisfy the essential requisites of being a party to an action, i.e., legal
personality, legal capacity to sue or be sued, and real interest in the subject matter
of the action.35
The CA Ruling
Finding that the errors ascribed by petitioner to the trial court only touched the civil
action for breach of contract, the appellate court resolved the appeal against him in
a Decision36 dated January 31, 2012, and affirmed the RTCs finding of petitioners
liability for breach of contract.37
The CA ruled that, while there was no corporate entity at the time of the execution
of the MOA on March 1,2000 when Capt. Clarke signed as "President of
International Environmental University," petitioner is nonetheless estopped from
denying that he had contracted with respondent as a corporation, having
recognized the latter as the "Second Party" in the MOA that "will use the hangar
space exclusively for company aircraft/helicopter."38 Petitioner was likewise found
to have issued checks to respondent from May 3, 2000 to October 13, 2000, which
belied his claim of contracting with Capt. Clarke in the latters personal
capacity.[[39]
44
Petitioner moved for the reconsideration40 of the foregoing Decision, raising as an
additional issue the death41 of Capt. Clarke which allegedly warranted the dismissal
of the case.42 However, the motion was denied in a Resolution43 dated October 2,
2012 where the CA held that Capt. Clarke was merely an agent of respondent, who
is the real party in the case. Thus, Capt. Clarkes death extinguished only the agency
between him and respondent, not the appeal against petitioner. 44
Undaunted, petitioner is now before the Court via the instant petition,45 claiming
that: (a) the CA erred in not settling his appeal for both the breach of contract and
indirect contempt cases in a single proceeding and, consequently, the review of said
cases before the Court should be consolidated,46 and (b) the CA should have
dismissed the cases against him for (1) lack of jurisdiction of the trial court in view
of the failure to implead Capt. Clarke as an indispensable party;47 (2) lack of legal
capacity and personality on the part of respondent;48 and (3) lack of factual and
legal bases for the assailed RTC Decision.49
The Courts Ruling
The petition lacks merit.
First, on the matter of the consolidation50 of the instant case with G.R. No. 202826
entitled "Priscilo B. Paz v. New International Environmental University," the petition
for review of the portion of the RTC Decision finding petitioner guilty of indirect
contempt,51 the Court had earlier denied said motion in a Resolution52 dated July
24, 2013 on the ground that G.R. No. 202826 had already been denied53 with
finality.54 Thus, any further elucidation on the issue would be a mere superfluity.
Second, whether or not Capt. Clarke should have been impleaded as an
indispensable party was correctly resolved by the CA which held that the former
was merely an agent of respondent.55 While Capt. Clarkes name and signature
appeared on the MOA, his participation was, nonetheless, limited to being a
representative of respondent. As a mere representative, Capt. Clarke acquired no
rights whatsoever, nor did he incur any liabilities, arising from the contract between
petitioner and respondent. Therefore, he was not an indispensable party to the
case at bar.56
It should be emphasized, as it has been time and again, that this Court is not a trier
of facts, and is thus not duty-bound to analyze again and weigh the evidence
introduced in and considered by the tribunals.57 When supported by substantial
evidence, the findings of fact by the CA are conclusive and binding on the parties
and are not reviewable by this Court, unless the case falls under any of the
exceptions,58 none of which was established herein.
The CA had correctly pointed out that, from the very language itself of the MOA
entered into by petitioner whereby he obligated himself to allow the use of the
hangar space "for company aircraft/helicopter," petitioner cannot deny that he
contracted with respondent.59 Petitioner further acknowledged this fact in his final
letter dated July 23, 2002, where he reiterated and strongly demanded the former
to immediately vacate the hangar space his "company is occupying/utilizing."60
Section 2161 of the Corporation Code62 explicitly provides that one who assumes an
obligation to an ostensible corporation, as such, cannot resist performance thereof
on the ground that there was in fact no corporation. Clearly, petitioner is bound by
his obligation under the MOA not only on estoppel but by express provision of law.
As aptly raised by respondent in its Comment63 to the instant petition, it is futile to
insist that petitioner issued the receipts for rental payments in respondents name
and not with Capt. Clarkes, whom petitioner allegedly contracted in the latters
personal capacity, only because it was upon the instruction of an
employee.64 Indeed, it is disputably presumed that a person takes ordinary care of
his concerns,65 and that all private transactions have been fair and regular. 66 Hence,
it is assumed that petitioner, who is a pilot, knew what he was doing with respect to
his business with respondent.
Petitioners pleadings, however, abound with clear indications of a business
relationship gone sour. In his third letter dated July 19, 2002, petitioner lamented
the fact that Capt. Clarkes alleged promise to buy an aircraft had not
materialized.67 He likewise insinuated that Capt. Clarke's real motive in staying in
the leased premises was the acquisition of petitioner's right to possess and use the
hangar space.68
Be that as it may, it is settled that courts have no power to relieve parties from
obligations they voluntarily assumed, simply because their contracts turn out to be
disastrous deals or unwise investments.69
The lower courts, therefore, did not err in finding petitioner liable for breach of
contract for effectively evicting respondent from the leased premises even before
the expiration of the term of the lease.1wphi1 The Court reiterates with approval
the ratiocination of the RTC that, if it were true that respondent was violating the
terms and conditions of the lease, "[petitioner] should have gone to court to make
the [former] refrain from its 'illegal' activities or seek rescission of the [MOA], rather
than taking the law into his own hands."70
45
WHEREFORE, the petition is DENIED. The Decision dated January 31, 2012 and the
Resolution dated October 2, 2012 of the Court of Appeals in CA-G.R. CV No. 00903-
MIN are hereby AFFIRMED. SO ORDERED.
Lim vs. Philippine Fishing Gear Industries Inc. [GR 136448, 3 November 1999]
It was established that Lim Tong Lim requested Peter Yao to engage in commercial
fishing with him and one Antonio Chua. The three agreed to purchase two fishing
boats but since they do not have the money they borrowed from one Jesus Lim
(brother of Lim Tong Lim). They again borrowed money and they agreed to purchase
fishing nets and other fishing equipments. Now, Yao and Chua represented
themselves as acting in behalf of Ocean Quest Fishing Corporation (OQFC) they
contracted with Philippine Fishing Gear Industries (PFGI) for the purchase of fishing
nets amounting to more than P500k.
They were however unable to pay PFGI and so they were sued in their own names
because apparently OQFC is a non-existent corporation. Chua admitted liability and
asked for some time to pay. Yao waived his rights. Lim Tong Lim however argued that
hes not liable because he was not aware that Chua and Yao represented themselves
as a corporation; that the two acted without his knowledge and consent.
ISSUE: Whether or not Lim Tong Lim is liable.
HELD: Yes. From the factual findings of both lower courts, it is clear that Chua, Yao
and Lim had decided to engage in a fishing business, which they started by buying
boats worth P3.35 million, financed by a loan secured from Jesus Lim. In their
Compromise Agreement, they subsequently revealed their intention to pay the loan
with the proceeds of the sale of the boats, and to divide equally among them the
excess or loss. These boats, the purchase and the repair of which were financed with
borrowed money, fell under the term common fund under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible
like credit or industry. That the parties agreed that any loss or profit from the sale
and operation of the boats would be divided equally among them also shows that
they had indeed formed a partnership.
Lim Tong Lim cannot argue that the principle of corporation by estoppels can only be
imputed to Yao and Chua. Unquestionably, Lim Tong Lim benefited from the use of
the nets found in his boats, the boat which has earlier been proven to be an asset of
the partnership. Lim, Chua and Yao decided to form a corporation. Although it was
never legally formed for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.
International express vs. CA
In 1989, International Express Travel & Tour Services, Inc. (IETTI), offered to the
Philippine Football Federation (PFF) its travel services for the South East Asian
Games. PFF, through Henri Kahn, its president, agreed. IETTI then delivered the plane
tickets to PFF, PFF in turn made a down payment. However, PFF was not able to
complete the full payment in subsequent installments despite repeated demands
from IETTI. IETTI then sued PFF and Kahn was impleaded as a co-defendant.
Kahn averred that he should not be impleaded because he merely acted as an agent
of PFF which he averred is a corporation with separate and distinct personality from
him. The trial court ruled against Kahn and held him personally liable for the said
obligation (PFF was declared in default for failing to file an answer). The trial court
ruled that Kahn failed to prove that PFF is a corporation. The Court of Appeals
however reversed the decision of the trial court. The Court of Appeals took judicial
notice of the existence of PFF as a national sports association; that as such, PFF is
empowered to enter into contracts through its agents; that PFF is therefore liable for
the contract entered into by its agent Kahn. The CA further ruled that IETTI is in
estoppel; that it cannot now deny the corporate existence of PFF because it had
contracted and dealt with PFF in such a manner as to recognize and in effect admit
its existence.
ISSUE: Whether or not the Court of Appeals is correct.
HELD: No. PFF, upon its creation, is not automatically considered a national sports
association. It must first be recognized and accredited by the Philippine Amateur
Athletic Federation and the Department of Youth and Sports Development. This fact
was never substantiated by Kahn. As such, PFF is considered as an unincorporated
sports association. And under the law, any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and
becomes personally liable for contract entered into or for other acts performed as
such agent. Kahn is therefore personally liable for the contract entered into by
PFF with IETTI.
There is also no merit on the finding of the CA that IETTI is in estoppel. The application
of the doctrine of corporation by estoppel applies to a third party only when he tries
to escape liability on a contract from which he has benefited on the irrelevant ground
of defective incorporation. In the case at bar, IETTI is not trying to escape liability
from the contract but rather is the one claiming from the contract.
Lozano vs. De los Santos
46
Reynaldo Lozano was the president of KAMAJDA (Kapatirang Mabalacat-Angeles
Jeepney Drivers Association, Inc.). Antonio Anda was the president of SAMAJODA
(Samahang Angeles-Mabalacat Jeepney Operators and Drivers Association, Inc.). In
1995, the two agreed to consolidate the two corporations, thus, UMAJODA (Unified
Mabalacat-Angeles Jeepney Operators and Drivers Association, Inc.). In the same
year, elections for the officers of UMAJODA were held. Lozano and Anda both ran for
president. Lozano won but Anda alleged fraud and the elections and thereafter he
refused to participate with UMAJODA. Anda continued to collect fees from members
of SAMAJODA and refused to recognize Lozano as president of UMAJODA. Lozano
then filed a complaint for damages against Anda with the MCTC of Mabalacat (and
Magalang), Pampanga. Anda moved for the dismissal of the case for lack of
jurisdiction. The MCTC judge denied Andas motion. On certiorari, Judge Eliezer De
Los Santos of RTC Angeles City reversed and ordered the dismissal of the case on the
ground that what is involved is an intra-corporate dispute which should be under the
jurisdiction of the Securities and Exchange Commission (SEC).
ISSUE: Whether or not the RTC Judge is correct.
HELD: No. The regular courts have jurisdiction over the case. The case between
Lozano and Anda is not an intra-corporate dispute. UMAJODA is not yet incorporated.
It is yet to submit its articles of incorporation to the SEC. It is not even a dispute
between KAMAJDA or SAMAJODA. The controversy between Lozano and Anda does
not arise from intra-corporate relations but rather from a mere conflict from their
plan to merge the two associations.
NOTE: Regular courts can now hear intra-corporate disputes (expanded jurisdiction).
Corporate name
PHILIPS EXPORT VS. COURT OF APPEALS- Corporate Trade Name
A corporations right to use its corporate and trade name is a property right, a right
in rem, which it may assert and protect against the whole world.
FACTS:
Philips Export B.V. (PEBV) filed with the SEC for the cancellation of the word
Philips the corporate name of Standard Philips Corporation in view of its prior
registration with the Bureau of Patents and the SEC. However, Standard Philips
refused to amend its Articles of Incorporation so PEBV filed with the SEC a petition
for the issuance of a Writ of Preliminary Injunction, however this was denied ruling
that it can only be done when the corporate names are identical and they have at
least 2 words different. This was affirmed by the SEC en banc and the Court of
Appeals thus the case at bar.
ISSUE:
Whether or not Standard Philips can be enjoined from using Philips in its corporate
name
RULING: YES
A corporations right to use its corporate and trade name is a property right, a right
in rem, which it may assert and protect against the whole world. According to Sec.
18 of the Corporation Code, no corporate name may be allowed if the proposed
name is identical or deceptively confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing law.
For the prohibition to apply, 2 requisites must be present:
(1) the complainant corporation must have acquired a prior right over the use of
such corporate name and
(2) the proposed name is either identical or deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law or
patently deceptive, confusing or contrary to existing law.
With regard to the 1st requisite, PEBV adopted the name Philips part of its name
26 years before Standard Philips. As regards the 2nd, the test for the existence of
confusing similarity is whether the similarity is such as to mislead a person using
ordinary care and discrimination. Standard Philips only contains one word,
Standard, different from that of PEBV. The 2 companies products are also the
same, or cover the same line of products. Although PEBV primarily deals with
electrical products, it has also shipped to its subsidiaries machines and parts which
fall under the classification of chains, rollers, belts, bearings and cutting saw, the
goods which Standard Philips also produce. Also, among Standard Philips primary
purposes are to buy, sell trade x x x electrical wiring devices, electrical component,
electrical supplies. Given these, there is nothing to prevent Standard Philips from
dealing in the same line of business of electrical devices. The use of Philips by
Standard Philips tends to show its intention to ride on the popularity and
established goodwill of PEBV.
47
 GSIS FAMILY BANK - THRIFT BANK [FORMERLY COMSAVINGS BANK,
INC.], Petitioner, v. BPI FAMILY BANK, Respondent.
This is a Petition for Review on Certiorari filed by GSIS Family Bank Thrift
Bank1 assailing the Court of Appeals Decision 2 dated March 29, 2006 (Decision) and
Resolution3 dated October 23, 2006 which denied petitioner's petition for review of
the Securities and Exchange Commission Decision dated February 22, 2005 (SEC En
Banc Decision). The SEC En Banc Decision4 prohibited petitioner from using the
word "Family" as part of its corporate name and ordered petitioner to delete the
word from its name.5
Facts
Petitioner was originally organized as Royal Savings Bank and started operations in
1971. Beginning 1983 and 1984, petitioner encountered liquidity problems. On July
9, 1984, it was placed under receivership and later temporarily closed by the
Central Bank of the Philippines. Two (2) months after its closure, petitioner
reopened and was renamed Comsavings Bank, Inc. under the management of the
Commercial Bank of Manila.6
In 1987, the Government Service Insurance System (GSIS) acquired petitioner from
the Commercial Bank of Manila. Petitioner's management and control was thus
transferred to GSIS.7 To improve its marketability to the public, especially to the
members of the GSIS, petitioner sought Securities and Exchange Commission (SEC)
approval to change its corporate name to "GSIS Family Bank, a Thrift
Bank."8 Petitioner likewise applied with the Department of Trade and Industry (DTI)
and Bangko Sentral ng Pilpinas (BSP) for authority to use "GSIS Family Bank, a Thrift
Bank" as its business name. The DTI and the BSP approved the applications.9 Thus,
petitioner operates under the corporate name "GSIS Family Bank - a Thrift Bank,"
pursuant to the DTI Certificate of Registration No. 741375 and the Monetary Board
Circular approval.10
Respondent BPI Family Bank was a product of the merger between the Family Bank
and Trust Company (FBTC) and the Bank of the Philippine Islands (BPI). 11 On June
27, 1969, the Gotianum family registered with the SEC the corporate name "Family
First Savings Bank," which was amended to "Family Savings Bank," and then later to
"Family Bank and Trust Company."12 Since its incorporation, the bank has been
commonly known as "Family Bank." In 1985, Family Bank merged with BPI, and the
latter acquired all the rights, privileges, properties, and interests of Family Bank,
including the right to use names, such as "Family First Savings Bank," "Family Bank,"
and "Family Bank and Trust Company." BPI Family Savings Bank was registered with
the SEC as a wholly-owned subsidiary of BPI. BPI Family Savings Bank then
registered with the Bureau of Domestic Trade the trade or business name "BPI
Family Bank," and acquired a reputation and goodwill under the
name.13chanroblesvirtuallawlibrary
Proceedings before the SEC
Eventually, it reached respondent's attention that petitioner is using or attempting
to use the name "Family Bank." Thus, on March 8, 2002, respondent petitioned the
SEC Company Registration and Monitoring Department (SEC CRMD) to disallow or
prevent the registration of the name "GSIS Family Bank" or any other corporate
name with the words "Family Bank" in it. Respondent claimed exclusive ownership
to the name "Family Bank," having acquired the name since its purchase and
merger with Family Bank and Tmst Company way back 1985.14 Respondent also
alleged that through the years, it has been known as "BPI Family Bank" or simply
"Family Bank" both locally and internationally. As such, it has acquired a reputation
and goodwill under the name, not only with clients here and abroad, but also with
correspondent and competitor banks, and the public in general.15
Respondent prayed the SEC CRMD to disallow or prevent the registration of the
name "GSIS Family Bank" or any other corporate name with the words "Family
Bank" should the same be presented for registration. Respondent likewise prayed
the SEC CRMD to issue an order directing petitioner or any other corporation to
change its corporate name if the names have already been registered with the
SEC.16
The SEC CRMD was thus confronted with the issue of whether the names BPI Family
Bank and GSIS Family Bank are confusingly similar as to require the amendment of
the name of the latter corporation.
The SEC CRMD declared that upon the merger of FBTC with the BPI in 1985, the
latter acquired the right to the use of the name of the absorbed corporation. Thus,
BPI Family Bank has a prior right to the use of the name Family Bank in the banking
industry, arising from its long and extensive nationwide use, coupled with its
registration with the Intellectual Property Office (IPO) of the name "Family Bank" as
its trade name. Applying the rule of "priority in registration" based on the legal
maxim first in time, first in right, the SEC CRMD concluded that BPI has the
preferential right to the use of the name "Family Bank." More, GSIS and Comsavings
Bank were then fully aware of the existence and use of the name "Family Bank" by
FBTC prior to the latter's merger with BPI. 17
48
The SEC CRMD also held that there exists a confusing similarity between the
corporate names BPI Family Bank and GSIS Family Bank. It explained that although
not identical, the corporate names are indisputably similar, as to cause confusion in
the public mind, even with the exercise of reasonable care and observation,
especially so since both corporations are engaged in the banking business.18
In a decision19 dated May 19, 2003, the SEC CRMD said, cralawlawlibrary
PREMISES CONSIDERED respondent GSIS FAMILY BANK is hereby directed to refrain
from using the word "Family" as part of its name and make good its commitment to
change its name by deleting or dropping the subject word from its corporate name
within [thirty (30) days] from the date of actual receipt hereof.20chanrobleslaw
Petitioner appealed21 the decision to the SEC En Banc, which denied the appeal, and
upheld the SEC CRMD in the SEC En Banc Decision.22 Petitioner elevated the SEC En
Banc Decision to the Court of Appeals, raising the following
issues:chanRoblesvirtualLawlibrary
1. Whether the use by GSIS Family Bank of the words "Family Bank" is
deceptively and confusingly similar to the name BPI Family Bank;
2. Whether the use by Comsavings Bank of "GSIS Family Bank" as its business
constitutes unfair competition;
3. Whether BPI Family Bank is guilty of forum shopping;
4. Whether the approval of the DTI and the BSP of petitioner's application
to use the name GSIS Family Bank constitutes its authority to the lawful
and valid use of such trade name or trade mark;
5. Whether the application of respondent BPI Family Bank for the exclusive
use of the name "Family Bank," a generic name, though not yet approved
by IPO of the Bureau of Patents, has barred the GSIS Family Bank from
using such trade mark or name.23
Court of Appeals Ruling
The Court of Appeals ruled that the approvals by the BSP and by the DTI of
petitioner's application to use the name "GSIS Family Bank" do not constitute
authority for its lawful and valid use. It said that the SEC has absolute jurisdiction,
supervision and control over all corporations.24 The Court of Appeals held that
respondent was entitled to the exclusive use of the corporate name because of its
prior adoption of the name "Family Bank" since 1969.25 There is confusing similarity
in the corporate names because "[c]onfusion as to the possible association with
GSIS might arise if we were to allow Comsavings Bank to add its parent company's
acronym, 'GSIS' to 'Family Bank.' This is true especially considering both companies
belong to the banking industry. Proof of actual confusion need not be shown. It
suffices that confusion is probably or likely to occur."26 The Court of Appeals also
ruled out forum shopping because not all the requirements of litis pendentia are
present.27
The dispositive portion of the decision read,cralawlawlibrary
WHEREFORE, the instant petition for review is hereby DISMISSED for lack of
merit.28chanrobleslaw
After its Motion for Reconsideration was denied,29 petitioner brought the decision
to this Court via a Petition for Review on Certiorari.30
Issues in the Petition
Petitioner raised the following issues in its petition:chanRoblesvirtualLawlibrary
I. The Court of Appeals gravely erred in affirming the SEC Resolution finding
the word "Family" not generic despite its unregistered status with the IPO
of the Bureau of Patents and the use by GSIS-Family Bank in its corporate
name of the words "[F]amily [B]ank" as deceptive and [confusingly similar]
to the name BPI Family Bank;31
II. The Court of Appeals gravely erred when it ruled that the respondent is not
guilty of forum shopping despite the filing of three (3) similar complaints
before the DTI and BSP and with
the SEC without the requisite certification of non-forum shopping
attached thereto;32
III. The Court of Appeals gravely erred when it completely disregarded the
opinion of the Banko Sentral ng Pilipinas that the use by the herein
petitioner of the trade name GSIS Family Bank - Thrift Bank is not similar or
does not deceive or likely cause any deception to the public. 33
Court's Ruling
49

We uphold the decision of the Court of Appeals.
Section 18 of the Corporation Code provides,
Section 18. Corporate name. - No corporate name may be allowed by the Securities
and Exchange Commission if the proposed name is identical or deceptively or
confusingly similar to that of any existing corporation or to any other name already
protected by law or is patently deceptive, confusing or contrary to existing laws.
When a change in the corporate name is approved, the Commission shall issue an
amended certificate of incorporation under the amended name.chanrobleslaw
In Philips Export B.V. v. Court of Appeals,34 this Court ruled that to fall within the
prohibition of the law on the right to the exclusive use of a corporate name, two
requisites must be proven, namely:chanRoblesvirtualLawlibrary
(1) that the complainant corporation acquired a prior right over the use of
such corporate name; and
(2) the proposed name is either
(a) identical or
(b) deceptive or confusingly similar to that of any existing corporation or
to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.35
These two requisites are present in this case. On the first requisite of a prior
right, Industrial Refractories Corporation of the Philippines v. Court of Appeals (IRCP
case)36 is instructive. In that case, Refractories Corporation of the Philippines (RCP)
filed before the SEC a petition to compel Industrial Refractories Corporation of the
Philippines (IRCP) to change its corporate name on the ground that its corporate
name is confusingly similar with that of RCP's such that the public may be confused
into believing that they are one and the same corporation. The SEC and the Court of
Appeals found for petitioner, and ordered IRCP to delete or drop from its corporate
name the word "Refractories." Upon appeal of IRCP, this Court upheld the decision
of the CA.
Applying the priority of adoption rule to determine prior right, this Court said that
RCP has acquired the right to use the word "Refractories" as part of its corporate
name, being its prior registrant. In arriving at this conclusion, the Court considered
that RCP was incorporated on October 13, 1976 and since then continuously used
the corporate name "Refractories Corp. of the Philippines." Meanwhile, IRCP only
started using its corporate name "Industrial Refractories Corp. of the Philippines"
when it amended its Articles of Incorporation on August 23, 1985. 37
In this case, respondent was incorporated in 1969 as Family Savings Bank and in
1985 as BPI Family Bank. Petitioner, on the other hand, was incorporated as GSIS
Family - Thrift Bank only in 2002,38 or at least seventeen (17) years after respondent
started using its name. Following the precedent in the IRCP case, we rule that
respondent has the prior right over use of the corporate name.
The second requisite in the Philips Export case likewise obtains on two points: the
proposed name is (a) identical or (b) deceptive or confusingly similar to that of any
existing corporation or to any other name already protected by law.
On the first point (a), the words "Family Bank" present in both petitioner and
respondent's corporate name satisfy the requirement that there be identical names
in the existing corporate name and the proposed one. Respondent cannot justify its
claim under Section 3 of the Revised Guidelines in the Approval of Corporate and
Partnership Names,39 to wit:cralawlawlibrary
3. The name shall not be identical, misleading or confusingly similar to one already
registered by another corporation or partnership with the Commission or a sole
proprietorship registered with the Department of Trade and Industry.
If the proposed name is similar to the name of a registered firm, the proposed
name must contain at least one distinctive word different from the name of the
company already registered.chanrobleslaw
Section 3 states that if there be identical, misleading or confusingly similar name to
one already registered by another corporation or partnership with the SEC, the
proposed name must contain at least one distinctive word different from the name
of the company already registered. To show contrast with respondent's corporate
name, petitioner used the words "GSIS" and "thrift." But these are not sufficiently
distinct words that differentiate petitioner's corporate name from respondent's.
While "GSIS" is merely an acronym of the proper name by which petitioner is
identified, the word "thrift" is simply a classification of the type of bank that
petitioner is. Even if the classification of the bank as "thrift" is appended to
petitioner's proposed corporate name, it will not make the said corporate name
distinct from respondent's because the latter is likewise engaged in the banking
business.
This Court used the same analysis in Ang mga Kaanib sa Iglesia ng Dios Kay Kristo
Hesus, H.S.K. sa Bans ang Pilipinas, Inc. v. Iglesia ng Dios Kay Cristo Jesus, Haligi at
50
Suhay ng Katotohanan40 In that case, Iglesia ng Dios Kay Cristo Jesus filed a case
before the SEC to compel Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus to
change its corporate name, and to prevent it from using the same or similar name
on the ground that the same causes confusion among their members as well as the
public. Ang mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus claimed that it complied
with SEC Memorandum Circular No. 14-2000 by adding not only two, but eight
words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang
Pilipinas, Inc.," which effectively distinguished it from Iglesia ng Dios Kay Cristo
Jesus.This Court rejected the argument, thus:cralawlawlibrary
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in
petitioner's name are, as correctly observed by the SEC, merely descriptive of and
also referring to the members, or kaanib, of respondent who are likewise residing in
the Philippines. These words can hardly serve as an effective differentiating
medium necessary to avoid confusion or difficulty in distinguishing petitioner from
respondent. This is especially so, since both petitioner and respondent corporations
are using the same acronym - H.S.K.; not to mention the fact that both are
espousing religious beliefs and operating in the same place. xxx41chanrobleslaw
On the second point (b), there is a deceptive and confusing similarity between
petitioner's proposed name and respondent's corporate name, as found by the
SEC.42 In determining the existence of confusing similarity in corporate names, the
test is whether the similarity is such as to mislead a person using ordinary care and
discrimination.43 And even without such proof of actual confusion between the two
corporate names, it suffices that confusion is probable or likely to occur. 44
Petitioner's corporate name is "GSIS Family BankA Thrift Bank" and respondent's
corporate name is "BPI Family Bank." The only words that distinguish the two are
"BPI," "GSIS," and "Thrift." The first two words are merely the acronyms of the
proper names by which the two corporations identify themselves; and the third
word simply describes the classification of the bank. The overriding consideration in
determining whether a person, using ordinary care and discrimination, might be
misled is the circumstance that both petitioner and respondent are engaged in the
same business of banking. "The likelihood of confusion is accentuated in cases
where the goods or business of one corporation are the same or substantially the
same to that of another corporation."45
Respondent alleged that upon seeing a Comsavings Bank branch with the signage
"GSIS Family Bank" displayed at its premises, some of the respondent's officers and
their clients began asking questions. These include whether GSIS has acquired
Family Bank; whether there is a joint arrangement between GSIS and Family Bank;
whether there is a joint arrangement between BPI and GSIS regarding Family Bank;
whether Comsavings Bank has acquired Family Bank; and whether there is there an
arrangement among Comsavings Bank, GSIS, BPI, and Family Bank regarding BPI
Family Bank and GSIS Family Bank.46 The SEC made a finding that "[i]t is not a
remote possibility that the public may entertain the idea that a relationship or
arrangement indeed exists between BPI and GSIS due to the use of the term 'Family
Bank' in their corporate names."47
Findings of fact of quasi-judicial agencies, like the SEC, are generally accorded
respect and even finality by this Court, if supported by substantial evidence, in
recognition of their expertise on the specific matters under their consideration,
more so if the same has been upheld by the appellate court, as in this case. 48
Petitioner cannot argue that the word "family" is a generic or descriptive name,
which cannot be appropriated exclusively by respondent. "Family," as used in
respondent's corporate name, is not generic. Generic marks are commonly used as
the name or description of a kind of goods, such as "Lite" for beer or "Chocolate
Fudge" for chocolate soda drink. Descriptive marks, on the other hand, convey the
characteristics, function, qualities or ingredients of a product to one who has never
seen it or does not know it exists, such as "Arthriticare" for arthritis medication.49
Under the facts of this case, the word "family" cannot be separated from the word
"bank."50 In asserting their claims before the SEC up to the Court of Appeals, both
petitioner and respondent refer to the phrase "Family Bank" in their submissions.
This coined phrase, neither being generic nor descriptive, is merely suggestive and
may properly be regarded as arbitrary. Arbitrary marks are "words or phrases used
as a mark that appear to be random in the context of its use. They are generally
considered to be easily remembered because of their arbitrariness. They are
original and unexpected in relation to the products they endorse, thus, becoming
themselves distinctive."51 Suggestive marks, on the other hand, "are marks which
merely suggest some quality or ingredient of goods, xxx The strength of the
suggestive marks lies on how the public perceives the word in relation to the
product or service."52
In Ang v. Teodoro,53 this Court ruled that the words "Ang Tibay" is not al descriptive
term within the meaning of the Trademark Law but rather a fanciful or coined
phrase.54 In so ruling, this Court considered the etymology and meaning of the
Tagalog words, "Ang Tibay" to determine whether they relate to the quality or
description of the merchandise to which respondent therein applied them as
trademark, thus:cralawlawlibrary
51
We find it necessary to go into the etymology and meaning of the Tagalog words
"Ang Tibay" to determine whether they are a descriptive term, i.e., whether they
relate to the quality or description of the merchandise to which respondent has
applied them as a trade-mark. The word "ang" is a definite article meaning "the" in
English. It is also used as an adverb, a contraction of the word "anong" (what or
how). For instance, instead of saying, "Anong ganda!" ("How beautiful!"), we
ordinarily say, "Ang ganda!" Tibay is a root word from which are derived the
verb magpatibay (to strengthen); the nouns pagkamatibay (strength,
durability), katibayan (proof, support, strength), katibaytibayan (superior strength);
and the adjectives matibay (strong, durable, lasting), napakatibay (very
strong), kasintibay or magkasintibay (as strong as, or of equal strength). The phrase
"Ang Tibay" is an exclamation denoting admiration of strength or durability. For
instance, one who tries hard but fails to break an object exclaims, "Ang tibay!"
("How strong!") It may also be used in a sentence thus, "Ang tibay ng sapatos mo!"
("How durable your shoes are!") The phrase "ana tibay" is never used adjectively to
define or describe an object. One does not say, "ang tibay sapatos" or "sapatos ang
tibay" to mean "durable shoes," but "matibay na sapatos" or "sapatos na matibay."
From all of this we deduce that "Ang Tibay" is not a descriptive term within the
meaning of the Trade-Mark Law but rather a fanciful or coined phrase which may
properly and legally be appropriated as a trade-mark or trade-name,
xxx55 (Underscoring supplied).chanrobleslaw
The word "family" is defined as "a group consisting of parents and children living
together in a household" or "a group of people related to one another by blood or
marriage."56Bank, on the other hand, is defined as "a financial establishment that
invests money deposited by customers, pays it out when requested, makes loans at
interest, and exchanges currency."57 By definition, there can be no expected
relation between the word "family" and the banking business of respondent.
Rather, the words suggest that respondent's bank is where family savings should be
deposited. More, as in the Ang case, the phrase "family bank" cannot be used to
define an object.
Petitioner's argument that the opinion of the BSP and the certificate of registration
granted to it by the DTI constitute authority for it to use "GSIS Family Bank" as
corporate name is also untenable.
The enforcement of the protection accorded by Section 18 of the Corporation Code
to corporate names is lodged exclusively in the SEC. The jurisdiction of the SEC is
not merely confined to the adjudicative functions provided in Section 5 of the SEC
Reorganization Act,58 as amended.59 By express mandate, the SEC has absolute
jurisdiction, supervision and control over all corporations.60 It is the SEC's duty to
prevent confusion in the use of corporate names not only for the protection of the
corporations involved, but more so for the protection of the public. It has authority
to de-register at all times, and under all circumstances corporate names which in its
estimation are likely to generate confusion.61
The SEC62 correctly applied Section 18 of the Corporation Code, and Section 15 of
SEC Memorandum Circular No. 14-2000, pertinent portions of which
provide:cralawlawlibrary
In implementing Section 18 of the Corporation Code of the Philippines (BP 69), the
following revised guidelines in the approval of corporate and partnership names are
hereby adopted for the information and guidance of all
concerned:chanRoblesvirtualLawlibrary
xxx
15. Registrant corporations or partnership shall submit a letter undertaking to
change their corporate or partnership name in case another person or firm has
acquired a prior right to the use of the said firm name or the same is deceptively or
confusingly similar to one already registered unless this undertaking is already
included as one of the provisions of the articles of incorporation or partnership of
the registrant.
chanrobleslaw
The SEC, after finding merit in respondent's claims, can compel petitioner to abide
by its commitment "to change its corporate name in the event that another person,
firm or entity has acquired a prior right to use of said name or one similar to it." 63
Clearly, the only determination relevant to this case is that one made by the SEC in
the exercise of its express mandate under the law. The BSP opinion invoked by
petitioner even acknowledges that "the issue on whether a proposed name is
identical or deceptively similar to that of any of existing corporation is matter within
the official jurisdiction and competence of the SEC."64
Judicial notice65 may also be taken of the action of the IPO in approving
respondent's registration of the trademark "BPI Family Bank" and its logo on
October 17, 2008. The certificate of registration of a mark shall be prima
facie evidence of the validity of the registration, the registrant's ownership of the
mark, and of the registrant's exclusive right to use the same in connection with the
goods or services and those that are related thereto specified in the certificate. 66
52

Finally, we uphold the Court of Appeals' finding that the issue of forum shopping
was belatedly raised by petitioner and, thus, cannot anymore be considered at the
appellate stage of the proceedings. Petitioner raised the issue of forum shopping
for the first time only on appeal.67 Petitioner argued that the complaints filed by
respondent did not contain certifications against non-forum shopping, in violation
of Section 5, Rule 7 of the Rules of Court.68
In S.C. Megaworld Construction and Development Corporation vs. Parada, 69 this
Court said that objections relating to non-compliance with the verification and
certification of non-forum shopping should be raised in the proceedings below, and
not for the first time on appeal. In that case, S.C. Megaworld argued that the
complaint for collection of sum of money should have been dismissed outright by
the trial court on account of an invalid non-forum shopping certification. It alleged
that the Special Power of Attorney granted to Parada did not specifically include an
authority for the latter to sign the verification and certification of non-forum
shopping, thus rendering the complaint defective for violation of Sections 4 and 5 of
Rule 7 of the Rules of Court. On motion for reconsideration of the decision of the
Court of Appeals, petitioner raised for the first time, the issue of forum shopping.
The Court ruled against S.C. Megaworld, thus:cralawlawlibrary
It is well-settled that no question will be entertained on appeal unless it has been
raised in the proceedings below. Points of law, theories, issues and arguments not
brought to the attention of the lower court, administrative agency or quasi-judicial
body, need not be considered by a reviewing court, as they cannot be raised for the
first time at that late stage. Basic considerations of fairness and due process impel
this rule. Any issue raised for the first time on appeal is barred by
estoppel.70chanrobleslaw
In this case, the fact that respondent filed a case before the DTI was made known to
petitioner71 long before the SEC rendered its decision. Yet, despite its knowledge,
petitioner failed to question the alleged forum shopping before the SEC. The
exceptions to the general rule that forum shopping should be raised in the earliest
opportunity, as explained in the cited case of Young v. Keng Seng,72 do not obtain in
this case.
WHEREFORE, the petition is DENIED. The decision of the Court of Appeals dated
March 29, 2006 is hereby AFFIRMED. SO ORDERED.
Ang Mga Kaanib vs. Iglesia
FACTS: Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan
(Church of God in Christ Jesus, the Pillar and Ground of Truth), is a non-stock religious
society or corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and
several other members of respondent corporation disassociated themselves from the
latter and succeeded in registering on March 30, 1977 a new non-stock religious
society or corporation, named Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng
Katotohanan. Respondent corporation filed with the SEC a petition to compel the
Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name to another name that is not similar or identical to any name already
used by a corporation, partnership or association registered with the Commission.
Petitioner is compelled to change its corporate name and be barred from using the
same or similar name on the ground that the same causes confusion among their
members as well as the public. SEC rendered a decision ordering petitioner to change
its corporate name. The Court of Appeals rendered the assailed decision affirming
the decision of the SEC En Banc.
ISSUE: Whether the court of appeals failed to properly appreciate the scope of the
constitutional guarantee on religious freedom
RULING: The additional words "Ang Mga Kaanib " and "Sa Bansang Pilipinas, Inc." in
petitioner's name are, as correctly observed by the SEC, merely descriptive of and
also referring to the members, or kaanib, of respondent who are likewise residing in
the Philippines. These words can hardly serve as an effective differentiating medium
necessary to avoid confusion or difficulty in distinguishing petitioner from
respondent. This is especially so, since both petitioner and respondent corporations
are using the same acronym H.S.K.; not to mention the fact that both are espousing
religious beliefs and operating in the same place. The fact that there are other non-
stock religious societies or corporations using the names Church of the Living God,
Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ &
By the Holy Spirit, and other similar names, is of no consequence. It does not
authorize the use by petitioner of the essential and distinguishing feature of
respondent's registered and protected corporate name. Ordering petitioner to
change its corporate name is not a violation of its constitutionally guaranteed right
to religious freedom. In so doing, the SEC merely compelled petitioner to abide by
one of the SEC guidelines in the approval of partnership and corporate names,
namely its undertaking to manifest its willingness to change its corporate name in the
event another person, firm, or entity has acquired a prior right to the use of the said
firm name or one deceptively or confusingly similar to it. The instant petition for
review is DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.
53
 LYCEUM OF THE PHILS. V. CA
FACTS:
1. Petitioner had sometime commenced before in the SEC a complaint against
Lyceum of Baguio, to require it to change its corporate name and to adopt another
name not similar or identical with that of petitioner. SEC decided in favor of
petitioner. Lyceum of Baguio filed petition for certiorari but was denied for
lack of merit.
2. Armed with the resolution of the Court, petitioner instituted before the SEC to
compel private respondents, which are also educational institutions, to delete word
Lyceum from their corporate names and permanently to enjoin them from using
such as part of their respective names.
3. Hearing officer sustained the claim of petitioner and held that the word Lyceum
was capable of appropriation and that petitioner had acquired an enforceable right
to the use of that word.
4. In an appeal, the decision was reversed by the SEC En Banc. They held that the
word Lyceum to have become identified with petitioner as to render use thereof
of other institutions as productive of consfusion about the identity of the schools
concerned in the mind of the general public.
5. Petitioner went to appeal with the CA but the latter just affirmed the decision of
the SEC En Banc.
HELD:
Under the corporation code, no corporate name may be allowed by the SEC if the
proposed name is identical or deceptively or confusingly similar to that of any
existing corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. The policy behind this provision is
to avoid fraud upon the public, which would have the occasion to deal with the
entity concerned, the evasion of legal obligations and duties, and the reduction of
difficulties of administration and supervision over corporations.
The corporate names of private respondents are not identical or deceptively or
confusingly similar to that of petitioners. Confusion and deception has been
precluded by the appending of geographic names to the word Lyceum.
Furthermore, the word Lyceum has become associated in time with schools and
other institutions providing public lectures, concerts, and public discussions. Thus, it
generally refers to a school or an institution of learning.
Petitioner claims that the word has acquired a secondary meaning in relation to
petitioner with the result that the word, although originally generic, has become
appropriable by petitioner to the exclusion of other institutions.
The doctrine of secondary meaning is a principle used in trademark law but has
been extended to corporate names since the right to use a corporate name to the
exclusion of others is based upon the same principle, which underlies the right to
use a particular trademark or tradename. Under this doctrine, a word or phrase
originally incapable of exclusive appropriation with reference to an article in the
market, because geographical or otherwise descriptive might nevertheless have
been used for so long and so exclusively by one producer with reference to this
article that, in that trade and to that group of purchasing public, the word or phrase
has come to mean that the article was his produce. The doctrine cannot be made to
apply where the evidence didn't prove that the business has continued for so long a
time that it has become of consequence and acquired good will of considerable
value such that its articles and produce have acquired a well known reputation, and
confusion will result by the use of the disputed name.
Petitioner didn't present evidence, which provided that the word Lyceum
acquired secondary meaning. The petitioner failed to adduce evidence that it had
exclusive use of the word. Even if petitioner used the word for a long period of
time, it hadnt acquired any secondary meaning in its favor because the appellant
failed to prove that it had been using the same word all by itself to the exclusion of
others.
Doctrine of Secondary Meaning
PHILIPPINE NUT INDUSTRY, INC. vs. STANDARD BRANDS INCORPORATED and
TIBURCIO S. EVALLE as Director of Patents
Facts: Philippine Nut Industry Inc., a domestic corporation, obtained from the
Patent Office on August 10, 1961, a certificate covering the trademark "PHILIPPINE
PLANTERS CORDIAL PEANUTS," the label used on its product of salted peanuts.
On May 14, 1962, Standard Brands, a foreign corporation, filed a case with the
Director of Patent, asking for the cancellation of Philippine Nut's certificate of
registration on the ground that "the registrant was not entitled to register the mark
at the time of its application for registration thereof" for the reason that it
(Standard Brands) is the owner of the trademark "PLANTERS COCKTAIL PEANUTS"
covered by Certificate of Registration No. SR-172, issued by the Patent Office on
July 28, 1958.
54
Thereafter, the Philippine Nut filed its answer invoking the special defense that its
registered label is not confusingly similar to that of Standard Brands as the latter
alleges.
Respondent Director of Patents gave due course to Standard Brand's petition,
ordering the cancellation of Philippine Nut's Certificate of Registration.
Upon denial of the motion for reconsideration, the Philippine Nut petitioned for a
review, seeking the reversal of the Director of Patents decision.
Issue: Whether or not the trademark "PHILIPPINE PLANTERS CORDIAL PEANUTS"
used by Philippine Nut on its label for salted peanuts with the same coloring
scheme and the same lay-out of words, confusingly similar to the trademark
"PLANTERS COCKTAIL PEANUTS" used by Standard Brands on its product.
Ruling: Yes. As to appearance and general impression of the two trademarks, the
Supreme Court said it found a very confusing similarity.
The word PLANTERS printed across the upper portion of the label in bold letters
easily attracts and catches the eye of the ordinary consumer and it is that word and
none other that sticks in his mind when he thinks of salted peanuts.
The Supreme Court also held that although it is true that no producer or
manufacturer may have a monopoly of any color scheme or form of words in a
label, but when a competitor adopts a distinctive or dominant mark or feature of
another's trademark and with it makes use of the same color ensemble, employs
similar words written in a style, type and size of lettering almost identical with those
found in the other trademark, the intent to pass to the public his product as that of
the other is quite obvious. It deceives the public. Hence, the decision of respondent
Director of Patents was affirmed.
Effect of change of corporate name
Republic Planters vs Court of Appeals
216 SCRA 738 Mercantile Law Business Organization Corporation Law Liability
of Officers Exception Change of Corporate Name
In 1979, World Garment Manufacturing (WGM), through its board authorized Shozo
Yamaguchi (president) and Fermin Canlas (treasurer) to obtain credit facilities from
Republic Planters Bank (RPB). For this, 9 promissory notes were executed. Each
promissory note was uniformly written in the following manner:
___________, after date, for value received, I/we, jointly and severally promise to pay
to the ORDER of the REPUBLIC PLANTERS BANK, at its office in Manila, Philippines, the
sum of ___________ PESOS(.) Philippine Currency
Please credit proceeds of this note to:
________ Savings Account ______XX Current Account
No. 1372-00257-6 of WORLDWIDE GARMENT MFG. CORP.
Sgd. Shozo Yamaguchi
Sgd. Fermin Canlas
However, no payment was made to RPB and the latter sued (WGM) in February 1982.
In December 1982, WGM changed its name to Pinch Manufacturing Corporation
(PMC). The trial court ruled that Canlas as well as the other signatory of the
promissory note as solidarily liable for the amount stated therein. Only Canlas
appealed. He averred that he cannot be held liable solidarily because in signing the
promissory note, he did so within the scope and authority granted to him by the
corporate board hence he should not be liable. The Court of Appeals agreed with him.
The CA also ruled that the change of name of WGM to PMC extinguished the
personality of WGM and hence so is its liability.
ISSUE: Whether or not the Court of Appeals is correct.
HELD: No. The change of name did not create a new corporation. Nor did it render
PMC the successor of WGM. There is still only one corporation to speak of here. It is
the same corporation with a different name, and its character is in no respect
changed. A change in the corporate name does not make a new corporation, and
whether effected by special act or under a general law, has no affect on the identity
of the corporation, or on its property, rights, or liabilities. The corporation continues,
as before, responsible in its new name for all debts or other liabilities which it had
previously contracted or incurred.
Anent the issue of the liability of Canlas as treasurer of WGM, it is true that as a
general rule, officers or directors under the old corporate name bear no personal
liability for acts done or contracts entered into by officers of the corporation, if duly
authorized. However, under the Negotiable Instruments Law, agents who sign a
promissory note without indicating their capacity as such and without disclosing their
principal shall be held personally liable to the promissory note. No parol evidence
shall be admitted to prove the agency. In this case, Canlas signed the promissorny
note without indicating that he did so as agent or treasurer of WGM, hence, he is
personally liable pursuant to the Negotiable Instruments Law.
STRADEC vs. Radstock
Facts: Construction Development Corporation of the Philippines (CDCP) was
incorporated in 1966. It was granted a franchise to construct, operate and maintain
toll facilities in the North and South Luzon Tollways and Metro Manila Expressway.
55
CDCP Mining Corporation (CDCP Mining), an affiliate of CDCP, obtained loans from
Marubeni Corporation of Japan (Marubeni). A CDCP official issued letters of
guarantee for the loans although there was no CDCP Board Resolution authorizing
the issuance of such letters of guarantee. CDCP Mining secured the Marubeni loans
when CDCP and CDCP Mining were still privately owned and managed.
In 1983, CDCPs name was changed to Philippine National Construction Corporation
(PNCC) in order to reflect that the Government already owned 90.3% of PNCC and
only 9.70% is under private ownership. Meanwhile, the Marubeni loans to CDCP
Mining remained unpaid.
On 20 October 2000 and 22 November 2000, the PNCC Board of Directors (PNCC
Board) passed Board Resolutions admitting PNCCs liability to Marubeni. Previously,
for two decades the PNCC Board consistently refused to admit any liability for the
Marubeni loans.
In January 2001, Marubeni assigned its entire credit to Radstock Securities Limited
(Radstock), a foreign corporation. Radstock immediately sent a notice and demand
letter to PNCC.
PNCC and Radstock entered into a Compromise Agreement. Under this agreement,
PNCC shall pay Radstock the reduced amount of P6,185,000,000.00 in full settlement
of PNCCs guarantee of CDCP Minings debt allegedly totaling P17,040,843,968.00
(judgment debt as of 31 July 2006). To satisfy its reduced obligation, PNCC undertakes
to (1) "assign to a third party assignee to be designated by Radstock all its rights and
interests" to the listed real properties of PNCC; (2) issue to Radstock or its assignee
common shares of the capital stock of PNCC issued at par value which shall comprise
20% of the outstanding capital stock of PNCC; and (3) assign to Radstock or its
assignee 50% of PNCCs 6% share, for the next 27 years, in the gross toll revenues of
the Manila North Tollways Corporation.
Strategic Alliance Development Corporation (STRADEC) moved for reconsideration.
STRADEC alleged that it has a claim against PNCC as a bidder of the National
Governments shares, receivables, securities and interests in PNCC.
Issue
Whether or not the Compromise Agreement between PNCC and Radstock is valid in
relation to the Constitution, existing laws, and public policy
Held
The Compromise Agreement is contrary to the Constitution, existing laws and public
policy.
PNCCs toll fees are public funds. PNCC cannot use public funds like toll fees that
indisputably form part of the General Fund, to pay a private debt of CDCP Mining to
Radstock. Such payment cannot qualify as expenditure for a public purpose. The toll
fees are merely held in trust by PNCC for the National Government, which is the
owner of the toll fees. Considering that there is no appropriation law passed by
Congress for the compromise amount, the Compromise Agreement is void for being
contrary to law, specifically Section 29(1), Article VI of the Constitution. And since the
payment pertains to CDCP Minings private debt to Radstock, the Compromise
Agreement is also void for being contrary to the fundamental public policy that
government funds or property shall be spent or used solely for public purposes.
Radstock is not qualified to own land in the Philippines. Consequently, Radstock is
also disqualified to own the rights to ownership of lands in the Philippines. Radstock
cannot own the rights to ownership of any land in the Philippines because Radstock
cannot lawfully own the land itself. Otherwise, there will be a blatant circumvention
of the Constitution, which prohibits a foreign private corporation from owning land
in the Philippines. In addition, Radstock cannot transfer the rights to ownership of
land in the Philippines if it cannot own the land itself. It is basic that an assignor or
seller cannot assign or sell something he does not own at the time the ownership, or
the rights to the ownership, are to be transferred to the assignee or buyer. The third
party assignee under the Compromise Agreement who will be designated by
Radstock can only acquire rights duplicating those which its assignor is entitled by
law to exercise. Thus, the assignee can acquire ownership of the land only if its
assignor owns the land. Clearly, the assignment by PNCC of the real properties to a
nominee to be designated by Radstock is a circumvention of the Constitutional
prohibition against a private foreign corporation owning lands in the Philippines. The
said circumvention renders the Compromise Agreement void.
56