Republic of the Philippines

SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 182729 September 29, 2010

KUKAN INTERNATIONAL CORPORATION, Petitioner,

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

DECISION

VELASCO, JR., J.:

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the
January 23, 2008 Decision1and the April 16, 2008 Resolution2 rendered by the Court of
Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 20073 and June 7, 20074 Orders of the
Regional Trial Court (RTC) of Manila, Branch 21, in Civil Case No. 99-93173,
entitled Romeo M. Morales, doing business under the name and style RM Morales
Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the
separate corporate identities of Kukan, Inc. and Kukan International Corporation and
declared them to be one and the same entity. Accordingly, the RTC held Kukan
International Corporation, albeit not impleaded in the underlying complaint of Romeo M.
Morales, liable for the judgment award decreed in a Decision dated November 28,
20025 in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and
installation of signages in a building being constructed in Makati City. Morales tendered
the winning bid and was awarded the PhP 5 million contract. Some of the items in the
project award were later excluded resulting in the corresponding reduction of the
contract price to PhP 3,388,502. Despite his compliance with his contractual
undertakings, Morales was only paid the amount of PhP 1,976,371.07, leaving a
balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands.
Shortchanged, Morales filed a Complaint6 with the RTC against Kukan, Inc. for a sum of
money, the case docketed as Civil Case No. 99-93173 and eventually raffled to Branch
17 of the court.
Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial
ensued. However, starting November 2000, Kukan, Inc. no longer appeared and
participated in the proceedings before the trial court, prompting the RTC to declare
Kukan, Inc. in default and paving the way for Morales to present his evidence ex parte.

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

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

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12%
per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral

damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable

attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and
SIX CENTAVOS (P7,960.06) as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.

IT IS SO ORDERED.7

After the above decision became final and executory, Morales moved for and secured a
writ of execution8 against Kukan, Inc. The sheriff then levied upon various personal
properties found at what was supposed to be Kukan, Inc.’s office at Unit 2205, 88
Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties
thus levied and that it was a different corporation from Kukan, Inc., Kukan International
Corporation (KIC) filed an Affidavit of Third-Party Claim. Notably, KIC was incorporated
in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case No.
99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April
30, 2003. In it, Morales prayed, applying the principle of piercing the veil of corporate
fiction, that an order be issued for the satisfaction of the judgment debt of Kukan, Inc.
with the properties under the name or in the possession of KIC, it being alleged that
both corporations are but one and the same entity. KIC opposed Morales’ motion. By
Order of May 29, 20039as reiterated in a subsequent order, the court denied the
omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true
relationship between the two, Morales filed a Motion for Examination of Judgment
Debtors dated May 4, 2005. In this motion Morales sought that subponae be issued
against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan
Kai Kit. This too was denied by the trial court in an Order dated May 24, 2005.10

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who
eventually granted the motion. The case was re-raffled to Branch 21, presided by public
respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of
Corporate Fiction to declare KIC as having no existence separate from Kukan, Inc. This
time around, the RTC, by Order dated March 12, 2007, granted the motion, the
dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court

hereby declares as follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one
and the same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable to
pay the amount awarded to plaintiff pursuant to the decision of November [28],
2002 which has long been final and executory.

SO ORDERED.

From the above order, KIC moved but was denied reconsideration in another Order
dated June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June
7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of
which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed
Orders dated March 12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED.
No costs.

SO ORDERED.11

The CA later denied KIC’s motion for reconsideration in the assailed resolution.
Hence, the instant petition for review, with the following issues KIC raises for the Court’s
consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioner’s
Constitutional Right to Due Process was not violated by the public respondent in
rendering the Orders dated March 12, 2007 and June 7, 2007 and in declaring
petitioner to be liable for the judgment obligations of the corporation "Kukan, Inc."
to private respondent – as petitioner is a stranger to the case and was never
made a party in the case before the trial court nor was it ever served a summons
and a copy of the complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders
dated March 12, 2007 and June 7, 2007 rendered by public respondent declaring
the petitioner liable to the judgment obligations of the corporation "Kukan, Inc." to
private respondent are valid as said orders of the public respondent modify
and/or amend the trial court’s final and executory decision rendered on
November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders
dated March 12, 2007 and June 7, 2007 rendered by public respondent declaring
the petitioner [KIC] and the corporation "Kukan, Inc." as one and the same, and,
therefore, the Veil of Corporate Fiction between them be pierced – as the
procedure undertaken by public respondent which the [CA] upheld is not
sanctioned by the Rules of Court and/or established jurisprudence enunciated by
this Honorable Supreme Court.12

In gist, the issues to be resolved boil down to the question of, first, whether the trial
court can, after the judgment against Kukan, Inc. has attained finality, execute it against
the property of KIC; second, whether the trial court acquired jurisdiction over KIC;
and third, whether the trial and appellate courts correctly applied, under the premises,
the principle of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and

Executory Judgment Be Executed

The preliminary question that must be answered is whether or not the trial court can,
after adjudging Kukan, Inc. liable for a sum of money in a final and executory judgment,
execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,13 the Court ruled that the deciding court has supervisory control
over the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all
proceedings on the execution are proceedings in the suit. There is no question that the
court which rendered the judgment has a general supervisory control over its process of
execution, and this power carries with it the right to determine every question of fact and
law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals14 in this wise: "The said
branch has a general supervisory control over its processes in the execution of its
judgment with a right to determine every question of fact and law which may be involved
in the execution."

The court’s supervisory control does not, however, extend as to authorize the alteration
or amendment of a final and executory decision, save for certain recognized exceptions,
among which is the correction of clerical errors. Else, the court violates the principle of
finality of judgment and its immutability, concepts which the Court, in Tan v.
Timbal,15 defined:

As we held in Industrial Management International Development Corporation vs. NLRC:

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

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

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired
finality becomes immutable and unalterable. As such, it may no longer be
modified in any respect even if the modification is meant to correct erroneous
conclusions of fact or law and whether it will be made by the court that rendered it or by
the highest court of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public

policy and sound practice that, at the risk of occasional error, the judgment of courts
and the award of quasi-judicial agencies must become final on some definite date fixed
by law. The only exceptions to the general rule are the correction of clerical errors, the
so-called nunc pro tunc entries which cause no prejudice to any party, void judgments,
and whenever circumstances transpire after the finality of the decision which render its
execution unjust and inequitable. None of the exceptions obtains here to merit the
review sought. (Emphasis added.)

So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment,
order the execution of its final decision in a manner as would amount to its prohibited
alteration or modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently,
it provides:

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

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12%
per annum from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral

damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable

attorney’s fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and
SIX CENTAVOS (P7,960.06) as litigation expenses.

x x x x (Emphasis supplied.)

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

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

Second Issue: Propriety of the RTC

Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against
KIC and its property, given that it was neither made a party nor impleaded in Civil Case
No. 99-93173, let alone served with summons. In other words, did the trial court acquire
jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted
itself to the jurisdiction of the trial court owing to its filing of four (4) pleadings adverted
to earlier, namely: (a) the Affidavit of Third-Party Claim;18(b) the Comment and
Opposition to Plaintiff’s Omnibus Motion;19 (c) the Motion for Reconsideration of the
RTC Order dated March 12, 2007;20 and (d) the Motion for Leave to Admit Reply.21 The
CA, citing Section 20, Rule 14 of the Rules of Court, stated that "the procedural rule on
service of summons can be waived by voluntary submission to the court’s jurisdiction
through any form of appearance by the party or its counsel." 22

We cannot give imprimatur to the appellate court’s appreciation of the thrust of Sec. 20,
Rule 14 of the Rules in concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.23 explains how courts acquire
jurisdiction over the parties in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the
other hand, jurisdiction over the defendants in a civil case is acquired either through the
service of summons upon them or through their voluntary appearance in court and their
submission to its authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,24 the Court reiterated its holding in Orion Security
Corporation, stating: "[I]n civil cases, the trial court acquires jurisdiction over the person
of the defendant either by the service of summons or by the latter’s voluntary
appearance and submission to the authority of the former."

The court’s jurisdiction over a party-defendant resulting from his voluntary submission to
its authority is provided under Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. – The defendant’s voluntary appearance in the

actions shall be equivalent to service of summons. The inclusion in a motion to dismiss
of other grounds aside from lack of jurisdiction over the person of the defendant shall
not be deemed a voluntary appearance.

To be sure, the CA’s ruling that any form of appearance by the party or its counsel is
deemed as voluntary appearance finds support in the kindred Republic v. Ker & Co.,
Ltd.25 and De Midgely v. Ferandos.26

Republic and De Midgely, however, have already been modified if not altogether
superseded27 by La Naval Drug Corporation v. Court of Appeals,28 wherein the Court
essentially ruled and elucidated on the current view in our jurisdiction, to wit: "[A] special
appearance before the court––challenging its jurisdiction over the person through a
motion to dismiss even if the movant invokes other grounds––is not tantamount to
estoppel or a waiver by the movant of his objection to jurisdiction over his person; and
such is not constitutive of a voluntary submission to the jurisdiction of the court."29

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173.
Even if it is conceded that it raised affirmative defenses through its aforementioned
pleadings, KIC never abandoned its challenge, however implicit, to the RTC’s
jurisdiction over its person. The challenge was subsumed in KIC’s primary assertion that
it was not the same entity as Kukan, Inc. Pertinently, in its Comment and Opposition to
Plaintiff’s Omnibus Motion dated May 20, 2003, KIC entered its "special but not
voluntary appearance" alleging therein that it was a different entity and has a separate
legal personality from Kukan, Inc. And KIC would consistently reiterate this assertion in
all its pleadings, thus effectively resisting all along the RTC’s jurisdiction of its person. It
cannot be overemphasized that KIC could not file before the RTC a motion to dismiss
and its attachments in Civil Case No. 99-93173, precisely because KIC was neither
impleaded nor served with summons. Consequently, KIC could only assert and claim
through its affidavits, comments, and motions filed by special appearance before the
RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,30 KIC cannot be deemed to have waived its
objection to the court’s lack of jurisdiction over its person. It would defy logic to say that
KIC unequivocally submitted itself to the jurisdiction of the RTC when it strongly
asserted that it and Kukan, Inc. are different entities. In the scheme of things obtaining,
KIC had no other option but to insist on its separate identity and plead for relief
consistent with that position.

Third Issue: Piercing the

Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts
correctly applied the principle of piercing the veil of corporate entity––called also as
disregarding the fiction of a separate juridical personality of a corporation––to support a
conclusion that Kukan, Inc. and KIC are but one and the same corporation with respect
to the contract award referred to at the outset. This principle finds its context on the
postulate that a corporation is an artificial being invested with a personality separate
and distinct from those of the stockholders and from other corporations to which it may
be connected or related.31

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

Commission,32 the Court revisited the subject principle of piercing the veil of corporate
fiction and wrote:

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group. Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as identical or as one
and the same.

Whether the separate personality of the corporation should be pierced hinges on

obtaining facts appropriately pleaded or proved. However, any piercing of the
corporate veil has to be done with caution, albeit the Court will not hesitate to disregard
the corporate veil when it is misused or when necessary in the interest of justice. x x x
(Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories,
Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an
association of persons or, in case of two corporations, merge them into one, when its
corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of
piercing the veil of corporate fiction. The doctrine applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, or when it is made as a shield to confuse the legitimate issues, or where a
corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be

established clearly and convincingly. It cannot be presumed.33 (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its
right to due process when, in the execution of its November 28, 2002 Decision, the
court authorized the issuance of the writ against KIC for Kukan, Inc.’s judgment debt,
albeit KIC has never been a party to the underlying suit. As a counterpoint, Morales
argues that KIC’s specific concern on due process and on the validity of the writ to
execute the RTC’s November 28, 2002 Decision would be mooted if it were established
that KIC and Kukan, Inc. are indeed one and the same corporation.

Morales’ contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability;34 it is not available
to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be
subject to the court’s process of piercing the veil of its corporate fiction. In that situation,
the court has not acquired jurisdiction over the corporation and, hence, any proceedings
taken against that corporation and its property would infringe on its right to due process.
Aguedo Agbayani, a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the evidence
presented, it is imperative that the court must first have jurisdiction over the
corporation.35 x x x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations involved before its or their separate
personalities are disregarded; and (2) the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a cause of action duly commenced
involving parties duly brought under the authority of the court by way of service of
summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the
matter of the time and manner of raising the principle in question, it is undisputed that
no full-blown trial involving KIC was had when the RTC disregarded the corporate veil of
KIC. The reason for this actuality is simple and undisputed: KIC was not impleaded in
Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was
dragged to the case after it reacted to the improper execution of its properties and
veritably hauled to court, not thru the usual process of service of summons, but by mere
motion of a party with whom it has no privity of contract and after the decision in the
main case had already become final and executory. As to the propriety of a plea for the
application of the principle by mere motion, the following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings,

and is not available to settle important questions of law, or to dispose of the merits of
the case. A motion is usually a proceeding incidental to an action, but it may be a wholly
distinct or independent proceeding. A motion in this sense is not within this discussion
even though the relief demanded is denominated an "order."

A motion generally relates to procedure and is often resorted to in order to correct errors
which have crept in along the line of the principal action’s progress. Generally, where
there is a procedural defect in a proceeding and no method under statute or rule of
court by which it may be called to the attention of the court, a motion is an appropriate
remedy. In many jurisdictions, the motion has replaced the common-law pleas testing
the sufficiency of the pleadings, and various common-law writs, such as writ of error
coram nobis and audita querela. In some cases, a motion may be one of several
remedies available. For example, in some jurisdictions, a motion to vacate an order is a
remedy alternative to an appeal therefrom.

Statutes governing motions are given a liberal construction.36 (Emphasis supplied.)

The bottom line issue of whether Morales can proceed against KIC for the judgment
debt of Kukan, Inc.––assuming hypothetically that he can, applying the piercing the
corporate veil principle––resolves itself into the question of whether a mere motion is
the appropriate vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to
hold KIC liable on theory that Kukan, Inc. was out to defraud him through the use of the
separate and distinct personality of another corporation, KIC. In net effect, Morales’
adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a
new cause of action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by
KIC on the alleged identity of the two corporations. This new cause of action should be
properly ventilated in another complaint and subsequent trial where the doctrine of
piercing the corporate veil can, if appropriate, be applied, based on the evidence
adduced. Establishing the claim of Morales and the corresponding liability of KIC for
Kukan Inc.’s indebtedness could hardly be the subject, under the premises, of a mere
motion interposed after the principal action against Kukan, Inc. alone had peremptorily
been terminated. After all, a complaint is one where the plaintiff alleges causes of
action.

In any event, the principle of piercing the veil of corporate fiction finds no application to
the instant case.

As a general rule, courts should be wary of lifting the corporate veil between
corporations, however related. Philippine National Bank v. Andrada Electric Engineering
Company37 explains why:

A corporation is an artificial being created by operation of law. x x x It has a personality

separate and distinct from the persons composing it, as well as from any other legal
entity to which it may be related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the
corporate veil pierced when the corporation is just an alter ego of a person or of another
corporation. For reasons of public policy and in the interest of justice, the corporate veil
will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be
certain that the corporate fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of its rights. The wrongdoing must
be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice
that was never unintended may result from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid
inclusion of corporate assets as part of the estate of the decedent, to escape liability
arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to
promote or to shield unfair objectives or to cover up an otherwise blatant violation of the
prohibition against forum-shopping. Only in these and similar instances may the veil
be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear
and convincing proof that the separate and distinct personality of the corporation was
purposefully employed to evade a legitimate and binding commitment and perpetuate a
fraud or like wrongdoings. To be sure, the Court has, on numerous occasions, 38applied
the principle where a corporation is dissolved and its assets are transferred to another
to avoid a financial liability of the first corporation with the result that the second
corporation should be considered a continuation and successor of the first entity.

In those instances when the Court pierced the veil of corporate fiction of two
corporations, there was a confluence of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to

avoid a financial liability of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that
the second corporation should be considered as a continuation and successor of
the first corporation.

In the instant case, however, the second and third factors are conspicuously absent.
There is, therefore, no compelling justification for disregarding the fiction of corporate
entity separating Kukan, Inc. from KIC. In applying the principle, both the RTC and the
CA miserably failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC
based on the following premises and arguments:

While it is true that a corporation has a separate and distinct personality from its
stockholder, director and officers, the law expressly provides for an exception. When
Michael Chan, the Managing Director of defendant Kukan, Inc. (majority stockholder of
the newly formed corporation [KIC]) confirmed the award to plaintiff to supply and install
interior signages in the Enterprise Center he (Michael Chan, Managing Director of
defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and fraud in contracting the
obligation. Michael Chan neither returned the interior signages nor tendered payment to
the plaintiff. This circumstance may warrant the piercing of the veil of corporation fiction.
Having been guilty of bad faith in the management of corporate matters the corporate
trustee, director or officer may be held personally liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be
inferred from the circumstances of the case. x x x [A]nd the circumstances are: the
signature of Michael Chan, Managing Director of Kukan, Inc. appearing in the
confirmation of the award sent to the plaintiff; signature of Chan Kai Kit, a British
National appearing in the Articles of Incorporation and signature of Michael Chan also a
British National appearing in the Articles of Incorporation [of] Kukan International Corp.
give the impression that they are one and the same person, that Michael Chan and
Chan Kai Kit are both majority stockholders of Kukan International Corp. and Kukan,
Inc. holding 40% of the stocks; that Kukan International Corp. is practically doing the
same kind of business as that of Kukan, Inc.39 (Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate
existence of Kukan, Inc. and KIC on the main argument that Michael Chan owns 40% of
the common shares of both corporations, obviously oblivious that overlapping stock
ownership is a common business phenomenon. It must be remembered, however, that
KIC’s properties were the ones seized upon levy on execution and not that of Kukan,
Inc. or of Michael Chan for that matter. Mere ownership by a single stockholder or by
another corporation of a substantial block of shares of a corporation does not, standing
alone, provide sufficient justification for disregarding the separate corporate
personality.40 For this ground to hold sway in this case, there must be proof that Chan
had control or complete dominion of Kukan and KIC’s finances, policies, and business
practices; he used such control to commit fraud; and the control was the proximate
cause of the financial loss complained of by Morales. The absence of any of the
elements prevents the piercing of the corporate veil.41 And indeed, the records do not
show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual
obligation x x x worth more than three million pesos although it had only Php5,000.00
paid-up capital; [KIC] was incorporated shortly before Kukan, Inc. suddenly ceased to
appear and participate in the trial; [KIC’s] purpose is related and somewhat akin to that
of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty percent of the
outstanding stocks, while he formerly held the same amount of stocks in Kukan Inc.
These would lead to the inescapable conclusion that Kukan, Inc. committed fraudulent
representation by awarding to the private respondent the contract with full knowledge
that it was not in a position to comply with the obligation it had assumed because of
inadequate paid-up capital. It bears stressing that shareholders should in good faith put
at the risk of the business, unencumbered capital reasonably adequate for its
prospective liabilities. The capital should not be illusory or trifling compared with the
business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael
Chan, a.k.a. Chan Kai Kit has the largest block of shares in both business enterprises.
The emergence of the former was cleverly timed with the hasty withdrawal of the latter
during the trial to avoid the financial liability that was eventually suffered by the latter.
The two companies have a related business purpose. Considering these circumstances,
the obvious conclusion is that the creation of Kukan International Corporation served as
a device to evade the obligation incurred by Kukan, Inc. and yet profit from the goodwill
attained by the name "Kukan" by continuing to engage in the same line of business with
the same list of clients.42 (Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the
similarity of the business activities in which both corporations are engaged as a jumping
board to its conclusion that the creation of KIC "served as a device to evade the
obligation incurred by Kukan, Inc." The appellate court, however, left a gaping hole by
failing to demonstrate that Kukan, Inc. and its stockholders defrauded Morales. In fine,
there is no showing that the incorporation, and the separate and distinct personality, of
KIC was used to defeat Morales’ right to recover from Kukan, Inc. Judging from the
records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales
could not, thus, validly argue that Kukan, Inc. tried to avoid liability or had no property
against which to proceed.

Morales further contends that Kukan, Inc.’s closure is evidenced by its failure to file its
2001 General Information Sheet (GIS) with the Securities and Exchange Commission.
However, such fact does not necessarily mean that Kukan, Inc. had altogether ceased
operations, as Morales would have this Court believe, for it is stated on the face of the
GIS that it is only upon a failure to file the corporate GIS for five (5) consecutive years
that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-
up capital of PhP 5,000 is not an indication of the intent on the part of its management
to defraud creditors. Paid-up capital is merely seed money to start a corporation or a
business entity. As in this case, it merely represented the capitalization upon
incorporation in 1997 of Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and
should not be taken as a reflection of the firm’s capacity to meet its recurrent and long-
term obligations. It must be borne in mind that the equity portion cannot be equated to
the viability of a business concern, for the best test is the working capital which consists
of the liquid assets of a given business relating to the nature of the business concern. lawphil

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be
viewed as a badge of fraud, for it is in compliance with Sec. 13 of the Corporation
Code,43 which only requires a minimum paid-up capital of PhP 5,000. 1avv phi 1

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and
controlled as they are by the same stockholders, stands without factual basis. It is true
that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital stock of
both corporations. But such circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders for both
corporations in order to consider this factor to be constitutive of corporate identity.

It would not avail Morales any to rely44 on General Credit Corporation v. Alsons
Development and Investment Corporation.45 General Credit Corporation is factually not
on all fours with the instant case. There, the common stockholders of the corporations
represented 90% of the outstanding capital stock of the companies, unlike here where
Michael Chan merely represents 40% of the outstanding capital stock of both KIC and
Kukan, Inc., not even a majority of it. In that case, moreover, evidence was adduced to
support the finding that the funds of the second corporation came from the first. Finally,
there was proof in General Credit Corporation of complete control, such that one
corporation was a mere dummy or alter ego of the other, which is absent in the instant
case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application
of the principle of piercing the veil of corporate fiction to the instant case. As shown by
the records, the name Michael Chan, the similarity of business activities engaged in,
and incidentally the word "Kukan" appearing in the corporate names provide the nexus
between Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to
establish the identity of KIC as the alter ego or successor of Kukan, Inc.

It bears reiterating that piercing the veil of corporate fiction is frowned upon.
Accordingly, those who seek to pierce the veil must clearly establish that the separate
and distinct personalities of the corporations are set up to justify a wrong, protect fraud,
or perpetrate a deception. In the concrete and on the assumption that the RTC has
validly acquired jurisdiction over the party concerned, Morales ought to have proved by
convincing evidence that Kukan, Inc. was collapsed and thereafter KIC purposely
formed and operated to defraud him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CA’s January 23, 2008 Decision
and April 16, 2008 Resolution in CA-G.R. SP No. 100152 are hereby REVERSED and
SET ASIDE. The levy placed upon the personal properties of Kukan International
Corporation is hereby ordered lifted and the personal properties ordered returned to
Kukan International Corporation. The RTC of Manila, Branch 21 is hereby directed to
execute the RTC Decision dated November 28, 2002 against Kukan, Inc. with
reasonable dispatch.

No costs.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,

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

HERMOSISIMA, JR., J.:p

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

Thus, where a sister corporation is used as a shield to evade a corporation's subsidiary

liability for damages, the corporation may not be heard to say that it has a personality
separate and distinct from the other corporation. The piercing of the corporate veil
comes into play.

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

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

On November, 1981, private respondents were served individual written notices of

termination of employment by petitioner, effective on November 30, 1981. It was stated
in the individual notices that their contracts of employment had expired and the project
in which they were hired had been completed.
Public respondent found it to be, the fact, however, that at the time of the termination of
private respondent's employment, the project in which they were hired had not yet been
finished and completed. Petitioner had to engage the services of sub-contractors whose
workers performed the functions of private respondents.

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

On December 19, 1984, the Labor Arbiter rendered judgment1 ordering petitioner to
reinstate private respondents and to pay them back wages equivalent to one year or
three hundred working days.

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

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

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

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

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

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

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

1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela,
Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI)
and not by respondent;

2. Levy was made upon personal properties he found in the premises;

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

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

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

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

In support of their claim against HPPI, private respondents presented duly certified
copies of the General Informations Sheet, dated May 15, 1987, submitted by petitioner
to the Securities Exchange Commission (SEC) and the General Information Sheet,
dated May 25, 1987, submitted by HPPI to the Securities and Exchange Commission.

The General Information Sheet submitted by the petitioner revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

HPPI P 6,999,500.00

Antonio W. Lim 2,900,000.00

Dennis S. Cuyegkeng 300.00

Elisa C. Lim 100,000.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Dennis S. Cuyegkeng Member

 Elisa C. Lim Member

Teodulo R. Dino Member

Virgilio O. Casino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa O. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road

Valenzuela, Metro Manila.5

On the other hand, the General Information Sheet of HPPI revealed the following:

1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed

Antonio W. Lim P 400,000.00

Elisa C. Lim 57,700.00

AWL Trading 455,000.00

Dennis S. Cuyegkeng 40,100.00

Teodulo R. Dino 100.00

Virgilio O. Casino 100.00

2. Board of Directors

Antonio W. Lim Chairman

Elisa C. Lim Member

 Dennis S. Cuyegkeng Member

Virgilio O. Casino Member

Teodulo R. Dino Member

3. Corporate Officers

Antonio W. Lim President

Dennis S. Cuyegkeng Assistant to the President

Elisa C. Lim Treasurer

Virgilio O. Casino Corporate Secretary

4. Principal Office

355 Maysan Road, Valenzuela, Metro Manila.6

On February 1, 1990, HPPI filed an Opposition to private respondents' motion for

issuance of a break-open order, contending that HPPI is a corporation which is separate
and distinct from petitioner. HPPI also alleged that the two corporations are engaged in
two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was
then engaged in construction.

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

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

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

Hence, the resort to the present petition.

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

We find petitioner's contention to be unmeritorious.

It is a fundamental principle of corporation law that a corporation is an entity separate

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

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

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

2. Identity of directors and officers.

3. The manner of keeping corporate books and records.

4. Methods of conducting the business.13

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

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 plaintiff's legal rights; and

3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.

The absence of any one of these elements prevents "piercing the

corporate veil." In applying the "instrumentality" or "alter ego" doctrine, the
courts are concerned with reality and not form, with how the corporation
operated and the individual defendant's relationship to that operation. 14

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

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

Furthermore, the NLRC stated that:

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

From the foregoing, it appears that, among other things, the respondent
(herein petitioner) and the third-party claimant shared the same address
and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents. 16

Clearly, petitioner ceased its business operations in order to evade the payment to
private respondents of back wages and to bar their reinstatement to their former
positions. HPPI is obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial liability that already attached
to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial
Relations, 17 where we had the occasion to rule:

Respondent court's findings that indeed the Claparols Steel and Nail
Plant, which ceased operation of June 30, 1957, was SUCCEEDED by the
Claparols Steel Corporation effective the next day, July 1, 1957, up to
December 7, 1962, when the latter finally ceased to operate, were not
disputed by petitioner. It is very clear that the latter corporation was a
continuation and successor of the first entity . . . . Both predecessors and
successor were owned and controlled by petitioner Eduardo Claparols and
there was no break in the succession and continuity of the same business.
This "avoiding-the-liability" scheme is very patent, considering that 90% of
the subscribed shares of stock of the Claparols Steel Corporation (the
second corporation) was owned by respondent . . . Claparols himself, and
all the assets of the dissolved Claparols Steel and Nail plant were turned
over to the emerging Claparols Steel Corporation.

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

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

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

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

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

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

WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC,
dated April 23, 1992 and December 3, 1992, are AFFIRMED.SO ORDERED.
G.R. No. 142435 April 30, 2003

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners,

vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO
SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks the reversal of the Decision1 dated October
21, 1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein
petitioners' appeal from the Decision2 dated February 10, 1993 of the Regional Trial
Court (RTC) of Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court
had dismissed petitioners' complaint for annulment of real estate mortgage and the
extra-judicial foreclosure thereof. Likewise brought for our review is the
Resolution3 dated February 23, 2000 of the Court of Appeals which denied petitioners'
motion for reconsideration.

The facts, as culled from records, are as follows:

Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export
Trading" (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard,
Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic
and foreign consumption. The Lipats also owned the "Mystical Fashions" in the United
States, which sells goods imported from the Philippines through BET. Mrs. Lipat
designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she
was managing "Mystical Fashions" in the United States.

In order to facilitate the convenient operation of BET, Estelita Lipat executed on

December 14, 1978, a special power of attorney appointing Teresita Lipat as her
attorney-in-fact to obtain loans and other credit accommodations from respondent
Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to execute
mortgage contracts on properties owned or co-owned by her as security for the
obligations to be extended by Pacific Bank including any extension or renewal thereof.

Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to
"Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as
represented by Teresita, executed a Real Estate Mortgage over their property located at
No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure
"other additional or new loans, discounting lines, overdrafts and credit accommodations,
of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from
the Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of
the whole or part of said original, additional or new loans, discounting lines, overdrafts
and other credit accommodations, including interest and expenses or other obligations
of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly,
principal or secondary, as appears in the accounts, books and records of the
Mortgagee."4

On September 5, 1979, BET was incorporated into a family corporation named Bela's
Export Corporation (BEC) in order to facilitate the management of the business. BEC
was engaged in the business of manufacturing and exportation of all kinds of garments
of whatever kind and description5 and utilized the same machineries and equipment
previously used by BET. Its incorporators and directors included the Lipat spouses who
owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who
owned 20 shares, and other close relatives and friends of the Lipats. 6 Estelita Lipat was
named president of BEC, while Teresita became the vice-president and general
manager.

Eventually, the loan was later restructured in the name of BEC and subsequent loans
were obtained by BEC with the corresponding promissory notes duly executed by
Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank
in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC
executed the corresponding trust receipt therefor. Export bills were also executed in
favor of Pacific Bank for additional finances. These transactions were all secured by the
real estate mortgage over the Lipats' property.

The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific
Bank's demand letters, Estelita Lipat went to the office of the bank's liquidator and
asked for additional time to enable her to personally settle BEC's obligations. The bank
acceded to her request but Estelita failed to fulfill her promise.

Consequently, the real estate mortgage was foreclosed and after compliance with the
requirements of the law the mortgaged property was sold at public auction. On January
31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the
highest bidder.

On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a
complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the
certificate of sale issued over the property against Pacific Bank and Eugenio D.
Trinidad. The complaint, which was docketed as Civil Case No. Q-89-4152, alleged,
among others, that the promissory notes, trust receipt, and export bills were all ultra
vires acts of Teresita as they were executed without the requisite board resolution of the
Board of Directors of BEC. The Lipats also averred that assuming said acts were valid
and binding on BEC, the same were the corporation's sole obligation, it having a
personality distinct and separate from spouses Lipat. It was likewise pointed out that
Teresita's authority to secure a loan from Pacific Bank was specifically limited to Mrs.
Lipat's sole use and benefit and that the real estate mortgage was executed to secure
the Lipats' and BET's P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that
petitioners Lipat cannot evade payments of the value of the promissory notes, trust
receipt, and export bills with their property because they and the BEC are one and the
same, the latter being a family corporation. Respondent Trinidad further claimed that he
was a buyer in good faith and for value and that petitioners are estopped from denying
BEC's existence after holding themselves out as a corporation.

After trial on the merits, the RTC dismissed the complaint, thus:

WHEREFORE, this Court holds that in view of the facts contained in the record,
the complaint filed in this case must be, as is hereby, dismissed. Plaintiffs
however has five (5) months and seventeen (17) days reckoned from the finality
of this decision within which to exercise their right of redemption. The writ of
injunction issued is automatically dissolved if no redemption is effected within
that period.

The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.

No costs.

IT IS SO ORDERED.7

The trial court ruled that there was convincing and conclusive evidence proving that
BEC was a family corporation of the Lipats. As such, it was a mere extension of
petitioners' personality and business and a mere alter ego or business conduit of the
Lipats established for their own benefit. Hence, to allow petitioners to invoke the theory
of separate corporate personality would sanction its use as a shield to further an end
subversive of justice.8 Thus, the trial court pierced the veil of corporate fiction and held
that Bela's Export Corporation and petitioners (Lipats) are one and the same. Pacific
Bank had transacted business with both BET and BEC on the supposition that both are
one and the same. Hence, the Lipats were estopped from disclaiming any obligations
on the theory of separate personality of corporations, which is contrary to principles of
reason and good faith.

The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV
No. 41536. Said appeal, however, was dismissed by the appellate court for lack of
merit. The Court of Appeals found that there was ample evidence on record to support
the application of the doctrine of piercing the veil of corporate fiction. In affirming the
findings of the RTC, the appellate court noted that Mrs. Lipat had full control over the
activities of the corporation and used the same to further her business interests. 9 In fact,
she had benefited from the loans obtained by the corporation to finance her business. It
also found unnecessary a board resolution authorizing Teresita Lipat to secure loans
from Pacific Bank on behalf of BEC because the corporation's by-laws allowed such
conduct even without a board resolution. Finally, the Court of Appeals ruled that the
mortgage property was not only liable for the original loan of P583,854.00 but likewise
for the value of the promissory notes, trust receipt, and export bills as the mortgage
contract equally applies to additional or new loans, discounting lines, overdrafts, and
credit accommodations which petitioners subsequently obtained from Pacific Bank.

The Lipats then moved for reconsideration, but this was denied by the appellate court in
its Resolution of February 23, 2000.10

Hence, this petition, with petitioners submitting that the court a quo erred —

1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF

CORPORATE FICTION APPLIES IN THIS CASE.

2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE

UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF
P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES,
TRUST RECEIPTS AND EXPORT BILLS OF BELA'S EXPORT
CORPORATION.

3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN

THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURT'S
JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS
APPEAL."

4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE

DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND
TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT
SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING
TO HIM.

5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND

IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS "AN
UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN
NEITHER BIND NOR BE OF ANY CONSEQUENCE TO APPELLANTS."11

In sum, the following are the relevant issues for our resolution:

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

2. Whether or not petitioners' property under the real estate mortgage is liable not only
for the amount of P583,854.00 but also for the value of the promissory notes, trust
receipt, and export bills subsequently incurred by BEC; and

3. Whether or not petitioners are liable to pay the 15% attorney's fees stipulated in the
deed of real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts erred in
holding them liable for the obligations incurred by BEC through the application of the
doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on
their part.

Respondents counter that there is clear and convincing evidence to show fraud on part
of petitioners given the findings of the trial court, as affirmed by the Court of Appeals,
that BEC was organized as a business conduit for the benefit of petitioners.

Petitioners' contentions fail to persuade this Court. A careful reading of the judgment of
the RTC and the resolution of the appellate court show that in finding petitioners'
mortgaged property liable for the obligations of BEC, both courts below relied upon
the alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of
corporate fiction. When the corporation is the mere alter ego or business conduit of a
person, the separate personality of the corporation may be disregarded. 12 This is
commonly referred to as the "instrumentality rule" or the alter ego doctrine, which the
courts have applied in disregarding the separate juridical personality of corporations. As
held in one case,

Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the
fiction of the corporate entity of the 'instrumentality' may be disregarded. The
control necessary to invoke the rule is not majority or even complete stock
control but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and
is but a conduit for its principal. x x x .13

We find that the evidence on record demolishes, rather than buttresses, petitioners'
contention that BET and BEC are separate business entities. Note that Estelita Lipat
admitted that she and her husband, Alfredo, were the owners of BET 14 and were two of
the incorporators and majority stockholders of BEC.15 It is also undisputed that Estelita
Lipat executed a special power of attorney in favor of her daughter, Teresita, to obtain
loans and credit lines from Pacific Bank on her behalf.16 Incidentally, Teresita was
designated as executive-vice president and general manager of both BET and BEC,
respectively.17 We note further that: (1) Estelita and Alfredo Lipat are the owners and
majority shareholders of BET and BEC, respectively;18 (2) both firms were managed by
their daughter, Teresita;19 (3) both firms were engaged in the garment business,
supplying products to "Mystical Fashion," a U.S. firm established by Estelita Lipat; (4)
both firms held office in the same building owned by the Lipats; 20 (5) BEC is a family
corporation with the Lipats as its majority stockholders; (6) the business operations of
the BEC were so merged with those of Mrs. Lipat such that they were practically
indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation
itself had no visible assets; (8) the board of directors of BEC was composed of the
Burgos and Lipat family members;21 (9) Estelita had full control over the activities of and
decided business matters of the corporation;22 and that (10) Estelita Lipat had benefited
from the loans secured from Pacific Bank to finance her business abroad 23 and from the
export bills secured by BEC for the account of "Mystical Fashion." 24 It could not have
been coincidental that BET and BEC are so intertwined with each other in terms of
ownership, business purpose, and management. Apparently, BET and BEC are one
and the same and the latter is a conduit of and merely succeeded the former.
Petitioners' attempt to isolate themselves from and hide behind the corporate
personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the
classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In
our view, BEC is a mere continuation and successor of BET, and petitioners cannot
evade their obligations in the mortgage contract secured under the name of BEC on the
pretext that it was signed for the benefit and under the name of BET. We are thus
constrained to rule that the Court of Appeals did not err when it applied the
instrumentality doctrine in piercing the corporate veil of BEC.

On the second issue, petitioners contend that their mortgaged property should not be
made liable for the subsequent credit lines and loans incurred by BEC because, first, it
was not covered by the mortgage contract of BET which only covered the loan of
P583,854.00 and which allegedly had already been paid; and, second, it was secured
by Teresita Lipat without any authorization or board resolution of BEC.

We find petitioners' contention untenable. As found by the Court of Appeals, the

mortgaged property is not limited to answer for the loan of P583,854.00. Thus:

Finally, the extent to which the Lipats' property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the value
of the promissory notes, trust receipt and export bills as well. For the mortgage
was executed not only for the purpose of securing the Bela's Export Trading's
original loan of P583,854.00, but also for "other additional or new loans,
discounting lines, overdrafts and credit accommodations, of whatever amount,
which the Mortgagor and/or Debtor may subsequently obtain from the mortgagee
as well as any renewal or extension by the Mortgagor and/or Debtor of the whole
or part of said original, additional or new loans, discounting lines, overdrafts and
other credit accommodations, including interest and expenses or other
obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether
directly, or indirectly principal or secondary, as appears in the accounts, books
and records of the mortgagee.25

As a general rule, findings of fact of the Court of Appeals are final and conclusive, and
cannot be reviewed on appeal by the Supreme Court, provided they are borne out by
the record or based on substantial evidence.26 As noted earlier, BEC merely succeeded
BET as petitioners' alter ego; hence, petitioners' mortgaged property must be held liable
for the subsequent loans and credit lines of BEC.

Further, petitioners' contention that the original loan had already been paid, hence, the
mortgaged property should not be made liable to the loans of BEC, is unsupported by
any substantial evidence other than Estelita Lipat's self-serving testimony. Two
disputable presumptions under the rules on evidence weigh against petitioners, namely:
(a) that a person takes ordinary care of his concerns;27 and (b) that things have
happened according to the ordinary course of nature and the ordinary habits of
life.28 Here, if the original loan had indeed been paid, then logically, petitioners would
have asked from Pacific Bank for the required documents evidencing receipt and
payment of the loans and, as owners of the mortgaged property, would have
immediately asked for the cancellation of the mortgage in the ordinary course of things.
However, the records are bereft of any evidence contradicting or overcoming said
disputable presumptions.

Petitioners contend further that the mortgaged property should not bind the loans and
credit lines obtained by BEC as they were secured without any proper authorization or
board resolution. They also blame the bank for its laxity and complacency in not
requiring a board resolution as a requisite for approving the loans.

Such contentions deserve scant consideration.

Firstly, it could not have been possible for BEC to release a board resolution since per
admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners' rebuttal
witness, no business or stockholder's meetings were conducted nor were there election
of officers held since its incorporation. In fact, not a single board resolution was passed
by the corporate board29 and it was Estelita Lipat and/or Teresita Lipat who decided
business matters.30

Secondly, the principle of estoppel precludes petitioners from denying the validity of the
transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of petitioner Estelita Lipat and
both BET and BEC. While the power and responsibility to decide whether the
corporation should enter into a contract that will bind the corporation is lodged in its
board of directors, subject to the articles of incorporation, by-laws, or relevant provisions
of law, yet, just as a natural person may authorize another to do certain acts for and on
his behalf, the board of directors may validly delegate some of its functions and powers
to officers, committees, or agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate by-laws, or authorization from the
board, either expressly or impliedly by habit, custom, or acquiescence in the general
course of business.31 Apparent authority, is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.32

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by
virtue of a special power of attorney executed by Estelita Lipat. Recall that Teresita
Lipat acted as the manager of both BEC and BET and had been deciding business
matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were
for the benefit of "Mystical Fashion" owned by Estelita Lipat.33 Hence, Pacific Bank
cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita
Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act within the scope of an
apparent authority, it holds him out to the public as possessing the power to do those
acts; thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agent's authority.34

We find no necessity to extensively deal with the liability of Alfredo Lipat for the
subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the
validity of the real estate mortgage of the original loan; hence, he cannot now dispute
the subsequent loans obtained using the same mortgage contract since it is, by its very
terms, a continuing mortgage contract.

On the third and final issue, petitioners assail the decision of the Court of Appeals for
not taking cognizance of the issue on attorney's fees on the ground that it was raised for
the first time on appeal. We find the conclusion of the Court of Appeals to be in accord
with settled jurisprudence. Basic is the rule that matters not raised in the complaint
cannot be raised for the first time on appeal.35 A close perusal of the complaint yields no
allegations disputing the attorney's fees imposed under the real estate mortgage and
petitioners cannot now allege that they have impliedly disputed the same when they
sought the annulment of the contract.

In sum, we find no reversible error of law committed by the Court of Appeals in

rendering the decision and resolution herein assailed by petitioners.

WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the
Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536
are AFFIRMED. Costs against petitioners.

SO ORDERED.
G.R. No. 170689 March 17, 2009

PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO

RETRENCHED EMPLOYEES ASSOCIATION (PANREA), Petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO NORTH
EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB), PHILIPPINE
NATIONAL BANK-MANAGEMENT AND DEVELOPMENT CORPORATION (PNB-
MADECOR), and MEGA PRIME REALTY AND HOLDINGS CORPORATION (MEGA
PRIME), Respondents.

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

G.R. No. 170705 March 17, 2009

PHILIPPINE NATIONAL BANK, Petitioner,

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

DECISION

NACHURA, J.:

Before us are two consolidated petitions assailing the Court of Appeals (CA)
Decision1 dated June 3, 2005 and its Resolution2 dated December 7, 2005 in CA-G.R.
SP No. 80599.

In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco
Retrenched Employees Association (PANREA) pray that the CA decision be set aside
and a new one be entered, declaring the Philippine National Bank (PNB) and PNB
Management and Development Corporation (PNB-Madecor) jointly and solidarily liable
for the ₱722,727,150.22 National Labor Relations Commission (NLRC) judgment in
favor of the Pantranco North Express, Inc. (PNEI) employees;3 while in G.R. No.
170705, PNB prays that the auction sale of the Pantranco properties be declared null
and void.4

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

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

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

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

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

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of
Execution10 commanding the NLRC Sheriffs to levy on the assets of PNEI in order to
satisfy the ₱722,727,150.22 due its former employees, as full and final satisfaction of
the judgment awards in the labor cases. The sheriffs were likewise instructed to
proceed against PNB, PNB-Madecor and Mega Prime.11 In implementing the writ, the
sheriffs levied upon the four valuable pieces of real estate located at the corner of
Quezon and Roosevelt Avenues, on which the former Pantranco Bus Terminal stood.
These properties were covered by Transfer Certificate of Title (TCT) Nos. 87881-87884,
registered under the name of PNB-Madecor.12 Subsequently, Notice of Sale of the
foregoing real properties was published in the newspaper and the sale was set on July
31, 2002. Having been notified of the auction sale, motions to quash the writ were
separately filed by PNB-Madecor and Mega Prime, and PNB. They likewise filed their
Third-Party Claims.13 PNB-Madecor anchored its motion on its right as the registered
owner of the Pantranco properties, and Mega Prime as the successor-in-interest. For its
part, PNB sought the nullification of the writ on the ground that it was not a party to the
labor case.14 In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to
the former and that the Pantranco properties

would answer for such debt. As such, the scheduled auction sale of the aforesaid
properties was not legally in order.15
On September 10, 2002, the Labor Arbiter declared that the subject Pantranco
properties were owned by PNB-Madecor. It being a corporation with a distinct and
separate personality, its assets could not answer for the liabilities of PNEI. Considering,
however, that PNB-Madecor executed a promissory note in favor of PNEI for
₱7,884,000.00, the writ of execution to the extent of the said amount was concerned
was considered valid.16

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

The dispositive portion of the Labor Arbiter’s September 10, 2002 Resolution is quoted
hereunder:

WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings,
Inc. is hereby GRANTED and concomitantly the levies made by the sheriffs of the
NLRC on the properties of PNB Madecor should be as it (sic) is hereby LIFTED subject
to the payment by PNB Madecor to the complainants the amount of ₱7,884,000.00.

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

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby
PARTIALLY GRANTED insofar as the amount of the writ exceeds ₱7,884,000.00.

The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED
for want of merit.

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

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

SO ORDERED.18

On appeal to the NLRC, the same was denied and the Labor Arbiter’s disposition was
affirmed.19 Specifically, the NLRC concluded as follows:

(1) PNB-Madecor and Mega Prime contended that it would be impossible for
them to comply with the requirement of the labor arbiter to pay to the PNEI
employees the amount of ₱7.8 million as a condition to the lifting of the levy on
the properties, since the credit was already garnished by Gerardo Uy and other
creditors of PNEI. The NLRC found no evidence that Uy had satisfied his
judgment from the promissory note, and opined that even if the credit was in
custodia legis, the claim of the PNEI employees should enjoy preference under
the Labor Code.

(2) The PNEI employees contested the finding that PNB-Madecor was indebted
to the PNEI for only ₱7.8 million without considering the accrual of interest. But
 the NLRC said that there was no evidence that demand was made as a basis for
reckoning interest.

(3) The PNEI employees further argued that the labor arbiter may not properly
conclude from a decision of Judge Demetrio Macapagal Jr. of the RTC of
Quezon City that PNB-Madecor was the owner of the properties as his decision
was reconsidered by the next presiding judge, nor from a decision of the
Supreme Court that PNEI was a mere lessee of the properties, the fact being that
the transfer of the properties to PNB-Madecor was done to avoid satisfaction of
the claims of the employees with the NLRC and that as a result of a civil case
filed by Mega Prime, the subsequent sale of the properties by PNB to Mega
Prime was rescinded. The NLRC pointed out that while the Macapagal decision
was set aside by Judge Bruselas and hence, his findings could not be invoked by
the labor arbiter, the titles of PNB-Madecor are conclusive and there is no
evidence that PNEI had ever been an owner. The Supreme Court had observed
in its decision that PNEI owed back rentals of ₱8.7 million to PNB-Madecor.

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

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

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

In view of the ₱7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an

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

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

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

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration;24 while
PNB filed its Partial Motion for Reconsideration.25 PNB pointed out that PNB-Madecor
was made to answer for ₱7,884,000.00 to the PNEI employees by virtue of the
promissory note it (PNB-Madecor) earlier executed in favor of PNEI. PNB, however,
questioned the June 23, 2004 auction sale as the ₱7.8 million debt had already been
satisfied pursuant to this Court’s decision in PNB MADECOR v. Uy. 26

Both motions were denied by the appellate court.27

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

The Honorable Court of Appeals palpably departed from the established rules and
jurisprudence in ruling that private respondents Pantranco North Express, Inc. (PNEI),
Philippine National Bank (PNB), Philippine National Bank Management and
Development Corporation (PNB-MADECOR), Mega Prime Realty and Holdings, Inc.
(Mega Prime) are not jointly and severally answerable to the ₱722,727,150.22 Million
NLRC money judgment awards in favor of the 4,000 individual members of the
Petitioners.28

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

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

THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED
TO PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF PNEI IN THE
AMOUNT OF ₱7,884,000.00 (THE AMOUNT OF PNB-MADECOR’S PROMISSORY
NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT
OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY
BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO THREE (3)
PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881,
87882 AND 87883, BEING LEVIED AND SOLD ON EXECUTION IN THE "PNB-
MADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND "GERARDO C. UY VS. PNEI"
(CIVIL CASE NO. 95-72685, RTC MANILA, BRANCH 38).32

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

Both petitions must fail.

G.R. No. 170689

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

We answer in the negative.

First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere
in the records was it shown that PNEI owned the Pantranco properties. Petitioners, in
fact, never alleged in any of their pleadings the fact of such ownership. What was
established, instead, in PNB MADECOR v. Uy34 and PNB v. Mega Prime Realty and
Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB35 was that
the properties were owned by Macris, the predecessor of PNB-Madecor. Hence, they
cannot be pursued against by the creditors of PNEI.

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

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

The general rule is that a corporation has a personality separate and distinct from those
of its stockholders and other corporations to which it may be connected. 39 This is a
fiction created by law for convenience and to prevent injustice.40 Obviously, PNB, PNB-
Madecor, Mega Prime, and PNEI are corporations with their own personalities. The
"separate personalities" of the first three corporations had been recognized by this
Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and
Holdings Corporation v. PNB41 where we stated that PNB was only a stockholder of
PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was
the owner of the Pantranco properties. Moreover, these corporations are registered as
separate entities and, absent any valid reason, we maintain their separate identities and
we cannot treat them as one.

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

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

Under the doctrine of "piercing the veil of corporate fiction," the court looks at the
corporation as a mere collection of individuals or an aggregation of persons undertaking
business as a group, disregarding the separate juridical personality of the corporation
unifying the group.44 Another formulation of this doctrine is that when two business
enterprises are owned, conducted and controlled by the same parties, both law and
equity will, when necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as identical or as one
and the same.45

Whether the separate personality of the corporation should be pierced hinges on

obtaining facts appropriately pleaded or proved. However, any piercing of the corporate
veil has to be done with caution, albeit the Court will not hesitate to disregard the
corporate veil when it is misused or when necessary in the interest of justice. After all,
the concept of corporate entity was not meant to promote unfair objectives.46

As between PNB and PNEI, petitioners want us to disregard their separate

personalities, and insist that because the company, PNEI, has already ceased
operations and there is no other way by which the judgment in favor of the employees
can be satisfied, corporate officers can be held jointly and severally liable with the
company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor
Union-CCLU v. NLRC47 and subsequent cases.48

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

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

Moreover, in the recent cases Carag v. National Labor Relations Commission 50 and
McLeod v. National Labor Relations Commission,51 the Court explained the doctrine laid
down in AC Ransom relative to the personal liability of the officers and agents of the
employer for the debts of the latter. In AC Ransom, the Court imputed liability to the
officers of the corporation on the strength of the definition of an employer in Article
212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer
includes any person acting in the interest of an employer, directly or indirectly, but does
not include any labor organization or any of its officers or agents except when acting as
employer. It was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by
itself, does not make a corporate officer personally liable for the debts of the
corporation. It added that the governing law on personal liability of directors or officers
for debts of the corporation is still Section 3152 of the Corporation Code.

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

Ransom, foreseeing the possibility or probability of payment of backwages to its
employees, organized Rosario to replace Ransom, with the latter to be eventually
phased out if the strikers win their case. The execution could not be implemented
against Ransom because of the disposition posthaste of its leviable assets evidently in
order to evade its just and due obligations.53Hence, the Court sustained the piercing of
the corporate veil and made the officers of Ransom personally liable for the debts of the
latter.

Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the
corporate veil applies only in three (3) basic areas, namely: 1) defeat of public
convenience as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter 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.54 In the
absence of malice, bad faith, or a specific provision of law making a corporate officer
liable, such corporate officer cannot be made personally liable for corporate liabilities.55

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

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

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

Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI,
petitioners still cannot proceed against the Pantranco properties, the same being owned
by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB.
The general rule remains that PNB-Madecor has a personality separate and distinct
from PNB. The mere fact that a corporation owns all of the stocks of another
corporation, taken alone, is not sufficient to justify their being treated as one entity. If
used to perform legitimate functions, a subsidiary’s separate existence shall be
respected, and the liability of the parent corporation as well as the subsidiary will be
confined to those arising in their respective businesses.57

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

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

2. The parent and subsidiary corporations have common directors or officers;

3. The parent corporation finances the subsidiary;

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

5. The subsidiary has grossly inadequate capital;

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

7. The subsidiary has substantially no business except with the parent

corporation or no assets except those conveyed to or by the parent corporation;

8. In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or
its business or financial responsibility is referred to as the parent corporation’s
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-Madecor’s corporate veil is not warranted. Being a mere successor-in-interest of
PNB-Madecor, with more reason should no liability attach to Mega Prime.

G.R. No. 170705

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

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

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

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

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

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

The Court further notes that the Pantranco properties (or a portion thereof ) were sold
on execution to satisfy the unpaid obligation of PNB-Madecor to PNEI. PNB-Madecor
was thus made liable to the former PNEI employees as the judgment debtor of PNEI. It
has long been established in PNB-Madecor v. Uy and other similar cases that PNB-
Madecor had an unpaid obligation to PNEI amounting to more or less ₱7 million which
could be validly pursued by the creditors of the latter. Again, this strengthens the proper
parties’ right to question the validity of the execution sale, definitely not PNB.

Besides, the issue of whether PNB has a substantial interest over the Pantranco
properties has already been laid to rest by the Labor Arbiter.65 It is noteworthy that in its
Resolution dated September 10, 2002, the Labor Arbiter denied PNB’s Third-Party
Claim primarily because PNB only has an inchoate right over the Pantranco
properties.66Such conclusion was later affirmed by the NLRC in its Resolution dated
June 30, 2003.67 Notwithstanding said conclusion, PNB did not elevate the matter to the
CA via a petition for review. Hence it is presumed to be satisfied with the adjudication
therein.68 That decision of the NLRC has become final as against PNB and can no
longer be reviewed, much less reversed, by this Court.69 This is in accord with the
doctrine that a party who has not appealed cannot obtain from the appellate court any
affirmative relief other than the ones granted in the appealed decision.70

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

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

MEL V. VELARDE, petitioner,

vs.
LOPEZ, INC., respondent.

DECISION

CARPIO-MORALES, J.:

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

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

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

Section 6

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

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

b) the BORROWER fails to mortgage in favor of the LENDER real

property sufficient to cover the amount of the LOAN.4

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

Petitioner protested the computation indicated in the July 15, 1998 letter, he asserting
that the imputed unliquidated advances from Sky Vision had already been properly
liquidated.6
On August 18, 1998, respondent filed a complaint for collection of sum of money with
damages at the Regional Trial Court (RTC) of Pasig City against petitioner, alleging that
petitioner violated the above-quoted Section 6 of the loan agreement as he failed to put
up the needed collateral for the loan and pay the installments as they became due, and
that despite his receipt of letters of demand dated December 1, 1997 7 and January 13,
1998,8 he refused to pay.

In his answer, petitioner alleged that the loan agreement did not reflect his true
agreement with respondent, it being merely a "cover document" to evidence the reward
to him of ten million pesos (P10,000,000.00) for his loyalty and excellent performance
as General Manager of Sky Vision and that the payment, if any was expected, was in
the form of continued service; and that it was when he was compelled by respondent to
retire that the form of payment agreed upon was rendered impossible, prompting the
late Eugenio Lopez, Jr. to agree that his retirement benefits from Sky Vision would
instead be applied to the loan.9

By way of compulsory counterclaim, petitioner claimed that he was entitled to retirement

benefits from Sky Vision in the amount of P98,280,000.00, unpaid salaries in the
amount of P2,740,000.00, unpaid incentives in the amount of
P500,000, unpaid share from the "net income of Plaintiff corporation," equity in his
service vehicle in the amount of P1,500,000, reasonable return on the stock ownership
plan for services rendered as General Manager, and moral damages and attorney’s
fees.10

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

1. P103,020,000.00, PLUS the value of Defendant’s stock options and unpaid

share from the net income with Plaintiff corporation (to be computed) as actual
damages;

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

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

Respondent filed a manifestation and a motion to dismiss the

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

By Order of January 3, 2000, Branch 155 of the RTC of Pasig denied respondent’s
motion to dismiss the counterclaim on the following premises: A counterclaim being
essentially a complaint, the principle that a motion to dismiss hypothetically admits the
allegations of the complaint is applicable; the counterclaim is compulsory, hence, within
its jurisdiction; and there is identity of interest between respondent and Sky Vision to
merit the piercing of the veil of corporate fiction.12
Respondent’s motion for reconsideration of the trial court’s Order of January 3, 2000
having been denied, it filed a Petition for Certiorari at the Court of Appeals which held
that respondent is not the real party-in-interest on the counterclaim and that there was
failure to show the presence of any of the circumstances to justify the application of the
principle of "piercing the veil of corporate fiction." The Orders of the trial court were thus
set aside and the counterclaims of petitioner were accordingly dismissed.13

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

I.

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

II.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT RESPONDENT

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

III.

THE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE

COUNTERCLAIMS OF PETITIONER VELARDE ARE NOT COMPULSORY.14

While petitioner correctly invokes the ruling in Atienza v. Court of Appeals15 to postulate
that not every denial of a motion to dismiss can be corrected by certiorari under Rule 65
and that, as a general rule, the remedy from such denial is to appeal in due course after
a decision has been rendered on the merits, there are exceptions thereto, as when the
court in denying the motion to dismiss acted without or in excess of jurisdiction or with
patent grave abuse of discretion,16 or when the assailed interlocutory order is patently
erroneous and the remedy of appeal would not afford adequate and expeditious
relief,17 or when the ground for the motion to dismiss is improper venue, 18 res
judicata,19 or lack of jurisdiction20 as in the case at bar.
Early on, it bears noting, when the case was still with the trial court, respondent filed a
motion to dismiss the counterclaims to assail its jurisdiction, respondent asserting that
the counterclaims, being money claims arising from a labor relationship, are within the
exclusive competence of the National Labor Relations Commission.21 On the other
hand, petitioner alleged that due to the tortuous manner he was coerced into retirement,
it is the Regional Trial Courts (RTCs) and not the National Labor Relations Commission
which has exclusive jurisdiction over his counterclaims.

In determining which has jurisdiction over a case, the averments of the

complaint/counterclaim, taken as a whole, are considered.22 In his counterclaim,
petitioner alleged that:

xxx

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

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

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

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

29.4 These circumstances hardly reflect a simple retirement. The Defendant,

who is known in the local and international media community, is hardly
considered a rank and file employee. Defendant was a stockholder of the
 Corporation and a duly-elected member of the Board of Directors. Certain
government officials can attest to the sensitivity of issues and matters the
Defendant had represented for the Lopezes that are hardly issues handled by a
simple rank and file employee. Respectable individuals in government and
industry are willing to testify to this regard.x x x23 (Underscoring and italics
supplied).

At the heart of petitioner’s counterclaim is his alleged forced retirement which is also the
basis of his claim for, among other things, unpaid salaries, unpaid incentives,
reasonable return on the stock ownership plan, and other benefits from a subsidiary
company of the respondent.

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

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

While petitioner’s counterclaims were filed on December 1, 1998, the second

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

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

It cannot be gainsaid that a subsidiary has an independent and separate juridical

personality, distinct from that of its parent company, hence, any claim or suit against the
latter does not bind the former and vice versa.

Petitioner argues nevertheless that jurisdiction over the subsidiary is justified by piercing
the veil of corporate fiction. Piercing the veil of corporate fiction is warranted, however,
only in cases when the separate legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, such that in the case of two corporations, the law
will regard the corporations as merged into one.27 The rationale behind piercing a
corporation’s identity is to remove the barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes of those who use the
corporate personality as a shield for undertaking certain proscribed activities. 28

In applying the doctrine of piercing the veil of corporate fiction, the following requisites
must be established: (1) control, not merely majority or complete stock control; (2) such
control must have been used by the defendant to commit fraud or wrong, to perpetuate
the violation of a statutory or other positive legal duty, or dishonest acts in contravention
of plaintiff’s legal rights; and (3) the aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained of.29

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

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

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

It bears emphasis that Sky Vision’s involvement in the transaction subject of the case
sprang only after a proposal was apparently proffered by petitioner that his retirement
benefits from Sky Vision be used in partial payment of his loan from respondent as
gathered from the July 15, 1998 letter30 of Rommel Duran, Vice-President and General
Manager of respondent, to petitioner reading:

Dear Mr. Velarde:

As requested, we have made computations on the outstanding amount of your

loan with Lopez, Inc. should your retirement benefits from Sky Vision
Corporation/Central CATV, Inc. ""Sky/Central") be applied to the partial payment
of your loan. Please note that in order to effect the application of your retirement
benefits to the partial payment of your loan, you will need to give
Sky/Central written instructions on the same in the soonest possible time.
 As you will see in the attached computation, the amount of P4,077,077.13 will be
applied to the payment of your loan to retroact on January 1, 1998. The amount
of P422,922.87, representing unliquidated advances made by Sky/Central to you
(see attached listing), has been deducted from your retirement pay of P4.5
million. Should you be able to liquidate the advances as
requested by Sky/Central, the said amount will be applied to the partial payment
of your loan and we shall adjust the amount of principal and interest due from
you accordingly. After the application of the amount of P4,077,077.13 to the
partial payment of your loan, the amount of P7,585,912.86 will be immediately
due and demandable. The amount of P7,585,912.86 represents the outstanding
principal and interest due as of July 15, 1998.

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

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

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

SO ORDERED.
G.R. No. L-18216 October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.

BAUTISTA ANGELO, J.:

On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc.
executed a certificate of liquidation of the assets of the corporation reciting, among
other things, that by virtue of a resolution of the stockholders adopted on September 17,
1960, dissolving the corporation, they have distributed among themselves in proportion
to their shareholdings, as liquidating dividends, the assets of said corporation, including
real properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was
denied registration on seven grounds, of which the following were disputed by the
stockholders:

3. The number of parcels not certified to in the acknowledgment;

5. P430.50 Reg. fees need be paid;

6. P940.45 documentary stamps need be attached to the document;

7. The judgment of the Court approving the dissolution and directing the
disposition of the assets of the corporation need be presented (Rules of Court,
Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land

Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6.

The stockholders interposed the present appeal.

As correctly stated by the Commissioner of Land Registration, the propriety or

impropriety of the three grounds on which the denial of the registration of the certificate
of liquidation was predicated hinges on whether or not that certificate merely involves a
distribution of the corporation's assets or should be considered a transfer or
conveyance.

Appellants contend that the certificate of liquidation is not a conveyance or transfer but
merely a distribution of the assets of the corporation which has ceased to exist for
having been dissolved. This is apparent in the minutes for dissolution attached to the
document. Not being a conveyance the certificate need not contain a statement of the
number of parcel of land involved in the distribution in the acknowledgment appearing
therein. Hence the amount of documentary stamps to be affixed thereon should only be
P0.30 and not P940.45, as required by the register of deeds. Neither is it correct to
require appellants to pay the amount of P430.50 as registration fee.

The Commissioner of Land Registration, however, entertained a different opinion. He

concurred in the view expressed by the register of deed to the effect that the certificate
of liquidation in question, though it involves a distribution of the corporation's assets, in
the last analysis represents a transfer of said assets from the corporation to the
stockholders. Hence, in substance it is a transfer or conveyance.

We agree with the opinion of these two officials. A corporation is a juridical person
distinct from the members composing it. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property they do not represent property of the
corporation. The corporation has property of its own which consists chiefly of real estate
(Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W.
743). A share of stock only typifies an aliquot part of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and equity
(Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the
owner of any part of the capital of the corporation (Bradley v. Bauder 36 Ohio St., 28).
Nor is he entitled to the possession of any definite portion of its property or assets
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder is
not a co-owner or tenant in common of the corporate property (Halton v. Hohnston, 166
Ala 317, 51 So 992).

On the basis of the foregoing authorities, it is clear that the act of liquidation made by
the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and
cannot be considered a partition of community property, but rather a transfer or
conveyance of the title of its assets to the individual stockholders. Indeed, since the
purpose of the liquidation, as well as the distribution of the assets of the corporation, is
to transfer their title from the corporation to the stockholders in proportion to their
shareholdings, — and this is in effect the purpose which they seek to obtain from the
Register of Deeds of Manila, — that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders. It is,
therefore, fair and logical to consider the certificate of liquidation as one in the nature of
a transfer or conveyance.

WHEREFORE, we affirm the resolution appealed from, with costs against appellants.
G.R. No. L-17295 July 30, 1962

ANG PUE & COMPANY, ET AL., plaintiffs-appellants,

vs.
SECRETARY OF COMMERCE AND INDUSTRY, defendant-appellee.

Felicisimo E. Escaran for plaintiffs-appellants.

Office of the Solicitor General for defendant-appellee.

DIZON, J.:

Action for declaratory relief filed in the Court of First Instance of Iloilo by Ang Pue &
Company, Ang Pue and Tan Siong against the Secretary of Commerce and Industry to
secure judgment "declaring that plaintiffs could extend for five years the term of the
partnership pursuant to the provisions of plaintiffs' Amendment to the Article of Co-
partnership."

The answer filed by the defendant alleged, in substance, that the extension for another
five years of the term of the plaintiffs' partnership would be in violation of the provisions
of Republic Act No. 1180.

It appears that on May 1, 1953, Ang Pue and Tan Siong, both Chinese citizens,
organized the partnership Ang Pue & Company for a term of five years from May 1,
1953, extendible by their mutual consent. The purpose of the partnership was "to
maintain the business of general merchandising, buying and selling at wholesale and
retail, particularly of lumber, hardware and other construction materials for commerce,
either native or foreign." The corresponding articles of partnership (Exhibit B) were
registered in the Office of the Securities & Exchange Commission on June 16, 1953.

On June 19, 1954 Republic Act No. 1180 was enacted to regulate the retail business. It
provided, among other things, that, after its enactment, a partnership not wholly formed
by Filipinos could continue to engage in the retail business until the expiration of its
term.

On April 15, 1958 — prior to the expiration of the five-year term of the partnership Ang
Pue & Company, but after the enactment of the Republic Act 1180, the partners already
mentioned amended the original articles of part ownership (Exhibit B) so as to extend
the term of life of the partnership to another five years. When the amended articles were
presented for registration in the Office of the Securities & Exchange Commission on
April 16, 1958, registration was refused upon the ground that the extension was in
violation of the aforesaid Act.

From the decision of the lower court dismissing the action, with costs, the plaintiffs
interposed this appeal.
The question before us is too clear to require an extended discussion. To organize a
corporation or a partnership that could claim a juridical personality of its own and
transact business as such, is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem necessary to impose. That the
State, through Congress, and in the manner provided by law, had the right to enact
Republic Act No. 1180 and to provide therein that only Filipinos and concerns wholly
owned by Filipinos may engage in the retail business can not be seriously disputed.
That this provision was clearly intended to apply to partnership already existing at the
time of the enactment of the law is clearly showing by its provision giving them the right
to continue engaging in their retail business until the expiration of their term or life.

To argue that because the original articles of partnership provided that the partners
could extend the term of the partnership, the provisions of Republic Act 1180 cannot be
adversely affect appellants herein, is to erroneously assume that the aforesaid provision
constitute a property right of which the partners can not be deprived without due
process or without their consent. The agreement contain therein must be deemed
subject to the law existing at the time when the partners came to agree regarding the
extension. In the present case, as already stated, when the partners amended the
articles of partnership, the provisions of Republic Act 1180 were already in force, and
there can be not the slightest doubt that the right claimed by appellants to extend the
original term of their partnership to another five years would be in violation of the clear
intent and purpose of the law aforesaid.

WHEREFORE, the judgment appealed from is affirmed, with costs.

G.R. No. 119002 October 19, 2000

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,

vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.

DECISION

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,
through its managing director, wrote a letter to the Philippine Football Federation
(Federation), through its president private respondent Henri Kahn, wherein the former
offered its services as a travel agency to the latter.1 The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the
Federation to the South East Asian Games in Kuala Lumpur as well as various other
trips to the People's Republic of China and Brisbane. The total cost of the tickets
amounted to P449,654.83. For the tickets received, the Federation made two partial
payments, both in September of 1989, in the total amount of P176,467.50. 2

On 4 October 1989, petitioner wrote the Federation, through the private respondent a
demand letter requesting for the amount of P265,894.33.3 On 30 October 1989, the
Federation, through the Project Gintong Alay, paid the amount of P31,603.00. 4

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000
as partial payment for the outstanding balance of the Federation.5 Thereafter, no further
payments were made despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila.
Petitioner sued Henri Kahn in his personal capacity and as President of the Federation
and impleaded the Federation as an alternative defendant. Petitioner sought to hold
Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on
the ground that Henri Kahn allegedly guaranteed the said obligation.6

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the
Federation owed the amount P207,524.20, representing the unpaid balance for the
plane tickets, he averred that the petitioner has no cause of action against him either in
his personal capacity or in his official capacity as president of the Federation. He
maintained that he did not guarantee payment but merely acted as an agent of the
Federation which has a separate and distinct juridical personality.7

On the other hand, the Federation failed to file its answer, hence, was declared in
default by the trial court.8
In due course, the trial court rendered judgment and ruled in favor of the petitioner and
declared Henri Kahn personally liable for the unpaid obligation of the Federation. In
arriving at the said ruling, the trial court rationalized:

Defendant Henri Kahn would have been correct in his contentions had it been duly
established that defendant Federation is a corporation. The trouble, however, is that
neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the
corporate existence of the defendant Federation. In paragraph 2 of its complaint,
plaintiff asserted that "Defendant Philippine Football Federation is a sports association
xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the
President of defendant Federation, its corporate existence is within the personal
knowledge of defendant Henri Kahn. He could have easily denied specifically the
assertion of the plaintiff that it is a mere sports association, if it were a domestic
corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to

enter into, or to ratify, a contract. The contract entered into by its officers or agents on
behalf of such association is not binding on, or enforceable against it. The officers or
agents are themselves personally liable.

x x x9

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff
the principal sum of P207,524.20, plus the interest thereon at the legal rate computed
from July 5, 1990, the date the complaint was filed, until the principal obligation is fully
liquidated; and another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the
counterclaims of the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December
1994, the respondent court rendered a decision reversing the trial court, the decretal
portion of said decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby

REVERSED and SET ASIDE and another one is rendered dismissing the complaint
against defendant Henri S. Kahn.11

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the
Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the same
as said entity has a separate and distinct personality from its officers.

Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that
the Federation be held liable for the unpaid obligation. The same was denied by the
appellate court in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in
the dispositive portion thereof the Philippine Football Federation (PFF) as liable for the
unpaid obligation, it should be remembered that the trial court dismissed the complaint
against the Philippine Football Federation, and the plaintiff did not appeal from this
decision. Hence, the Philippine Football Federation is not a party to this appeal and
consequently, no judgment may be pronounced by this Court against the PFF without
violating the due process clause, let alone the fact that the judgment dismissing the
complaint against it, had already become final by virtue of the plaintiff's failure to appeal
therefrom. The alternative prayer is therefore similarly DENIED.12

Petitioner now seeks recourse to this Court and alleges that the respondent court
committed the following assigned errors:13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT

PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION
(PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF
AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING

PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE
OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED
WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF
THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF
FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT

PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN
NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the
Philippine Football Federation as a juridical person. In the assailed decision, the
appellate court recognized the existence of the Federation. In support of this, the CA
cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine
Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which
said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
recognized the juridical existence of national sports associations. This may be gleaned
from the powers and functions granted to these associations. Section 14 of R.A. 3135
provides:

SEC. 14. Functions, powers and duties of Associations. - The National Sports'
Association shall have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and

government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and

personal, for the accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due

consultation with the executive committee;

xxx

13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National
sports associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and

government which shall be submitted to the Department and any amendment
thereto shall take effect upon approval by the Department: Provided, however,
That no team, school, club, organization, or entity shall be admitted as a voting
member of an association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject
to the approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal,
for the accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic
and Asian Games, for the promotion of their sport;
 5. Affiliate with international or regional sports associations after due consultation
with the Department;

xxx

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate
that these entities may acquire a juridical personality. The power to purchase, sell, lease
and encumber property are acts which may only be done by persons, whether natural or
artificial, with juridical capacity. However, while we agree with the appellate court that
national sports associations may be accorded corporate status, such does not
automatically take place by the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling act.
We cannot agree with the view of the appellate court and the private respondent that
the Philippine Football Federation came into existence upon the passage of these laws.
Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine
Football Federation. These laws merely recognized the existence of national sports
associations and provided the manner by which these entities may acquire juridical
personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National

Association shall be organized for each individual sports in the Philippines in the
manner hereinafter provided to constitute the Philippine Amateur Athletic Federation.
Applications for recognition as a National Sports' Association shall be filed with the
executive committee together with, among others, a copy of the constitution and by-
laws and a list of the members of the proposed association, and a filing fee of ten
pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said
association will promote the purposes of this Act and particularly section three thereof.
No application shall be held pending for more than three months after the filing thereof
without any action having been taken thereon by the executive committee. Should the
application be rejected, the reasons for such rejection shall be clearly stated in a written
communication to the applicant. Failure to specify the reasons for the rejection shall not
affect the application which shall be considered as unacted upon: Provided, however,
That until the executive committee herein provided shall have been formed, applications
for recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said executive
committee shall be dissolved upon the organization of the executive committee herein
provided: Provided, further, That the functioning executive committee is charged with
the responsibility of seeing to it that the National Sports' Associations are formed and
organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a

national sports association for each individual sport in the Philippines shall be filed with
the Department together with, among others, a copy of the Constitution and By-Laws
and a list of the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national
sports association to be organized will promote the objectives of this Decree and has
substantially complied with the rules and regulations of the Department: Provided, That
the Department may withdraw accreditation or recognition for violation of this Decree
and such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the
latter shall have exclusive technical control over the development and promotion of the
particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a
national sports association, such entity must be recognized by the accrediting
organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D. 604. This fact of recognition,
however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence
of the Federation, Henri Kahn attached to his motion for reconsideration before the trial
court a copy of the constitution and by-laws of the Philippine Football Federation.
Unfortunately, the same does not prove that said Federation has indeed been
recognized and accredited by either the Philippine Amateur Athletic Federation or the
Department of Youth and Sports Development. Accordingly, we rule that the Philippine
Football Federation is not a national sports association within the purview of the
aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for
the unpaid obligations of the unincorporated Philippine Football Federation. It is a
settled principal in corporation law that 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. 14 As
president of the Federation, Henri Kahn is presumed to have known about the corporate
existence or non-existence of the Federation. We cannot subscribe to the position taken
by the appellate court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the Federation
because it had contracted and dealt with the Federation in such a manner as to
recognize and in effect admit its existence.15 The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The application of the
doctrine 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. 16 In the case
at bar, the petitioner is not trying to escape liability from the contract but rather is the
one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The
decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is
hereby REINSTATED.

SO ORDERED.
G.R. No. 125469 October 27, 1997

PHILIPPINE STOCK EXCHANGE, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and PUERTO AZUL LAND, INC., respondents.

TORRES, JR., J.:

The Securities and Exchange Commission is the government agency, under the direct
general supervision of the Office of the President, 1 with the immense task of enforcing
the Revised Securities Act, and all other duties assigned to it by pertinent laws. Among
its inumerable functions, and one of the most important, is the supervision of all
corporations, partnerships or associations, who are grantees of primary franchise and/or
a license or permit issued by the government to operate in the Philippines. 2 Just how far
this regulatory authority extends, particularly, with regard to the Petitioner Philippine
Stock Exchange, Inc. is the issue in the case at bar.

In this Petition for Review on Certiorari, petitioner assails the resolution of the
respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the
Securities and Exchange Commission ordering the petitioner Philippine Stock
Exchange, Inc. to allow the private respondent Puerto Azul Land, Inc. to be listed in its
stock market, thus paving the way for the public offering of PALI's shares.

The facts of the case are undisputed, and are hereby restated in sum.

The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to
offer its shares to the public in order to raise funds allegedly to develop its properties
and pay its loans with several banking institutions. In January, 1995, PALI was issued a
Permit to Sell its shares to the public by the Securities and Exchange Commission
(SEC). To facilitate the trading of its shares among investors, PALI sought to course the
trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which
purpose it filed with the said stock exchange an application to list its shares, with
supporting documents attached.

On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's
application, recommended to the PSE's Board of Governors the approval of PALI's
listing application.

On February 14, 1996, before it could act upon PALI's application, the Board of
Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming
that the late President Marcos was the legal and beneficial owner of certain properties
forming part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to
be among its assets and that the Ternate Development Corporation, which is among the
stockholders of PALI, likewise appears to have been held and continue to be held in
trust by one Rebecco Panlilio for then President Marcos and now, effectively for his
estate, and requested PALI's application to be deferred. PALI was requested to
comment upon the said letter.

PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel
and Resort Complex were not claimed by PALI as its assets. On the contrary, the resort
is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club,
entities distinct from PALI. Furthermore, the Ternate Development Corporation owns
only 1.20% of PALI. The Marcoses responded that their claim is not confined to the
facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying
that they are also asserting legal and beneficial ownership of other properties titled
under the name of PALI.

On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
Presidential Commission on Good Government (PCGG) requesting for comments on
the letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that
the Marcoses received a Temporary Restraining Order on the same date, enjoining the
Marcoses from, among others, "further impeding, obstructing, delaying or interfering in
any manner by or any means with the consideration, processing and approval by the
PSE of the initial public offering of PALI." The TRO was issued by Judge Martin S.
Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in
Branch 69 thereof.

In its regular meeting held on March 27, 1996, the Board of Governors of the PSE
reached its decision to reject PALI's application, citing the existence of serious claims,
issues and circumstances surrounding PALI's ownership over its assets that adversely
affect the suitability of listing PALI's shares in the stock exchange.

On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting
Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the
PSE in the application of PALI for the listing of its shares with the PSE, and requesting
that the SEC, in the exercise of its supervisory and regulatory powers over stock
exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on PALI's
listing application and institute such measures as are just and proper under the
circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the
letter of PALI and directing the PSE to file its comments thereto within five days from its
receipt and for its authorized representative to appear for an "inquiry" on the matter. On
April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the
April 11, 1996 letter of PALI.

On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The
dispositive portion of the said order reads:
 WHEREFORE, premises considered, and invoking the Commissioner's
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-
A, the decision of the Board of Governors of the Philippine Stock
Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby
set aside, and the PSE is hereby ordered to immediately cause the listing
of the PALI shares in the Exchange, without prejudice to its authority to
require PALI to disclose such other material information it deems
necessary for the protection of the investigating public.

This Order shall take effect immediately.

SO ORDERED.

PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,
however denied by the Commission in its May 9, 1996 Order which states:

WHEREFORE, premises considered, the Commission finds no compelling

reason to reconsider its order dated April 24, 1996, and in the light of
recent developments on the adverse claim against the PALI properties,
PSE should require PALI to submit full disclosure of material facts and
information to protect the investing public. In this regard, PALI is hereby
ordered to amend its registration statements filed with the Commission to
incorporate the full disclosure of these material facts and information.

Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a
Petition for Review (with Application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of the SEC, submitting the
following as errors of the SEC:

I. SEC COMMITTED SERIOUS ERROR AND GRAVE

ABUSE OF DISCRETION IN ISSUING THE ASSAILED
ORDERS WITHOUT POWER, JURISDICTION, OR
AUTHORITY; SEC HAS NO POWER TO ORDER THE
LISTING AND SALE OF SHARES OF PALI WHOSE
ASSETS ARE SEQUESTERED AND TO REVIEW AND
SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;

II. SEC COMMITTED SERIOUS ERROR AND GRAVE

ABUSE OF DISCRETION IN FINDING THAT PSE ACTED
IN AN ARBITRARY AND ABUSIVE MANNER IN
DISAPPROVING PALI'S LISTING APPLICATION;

III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND

VOID FOR ALLOWING FURTHER DISPOSITION OF
 PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM
PART OF NAVAL/MILITARY RESERVATION; AND

IV. THE FULL DISCLOSURE OF THE SEC WAS NOT

PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
PROCESS CLAUSE OF THE CONSTITUTION.

On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a
Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment
and Opposition to Motion to Dismiss.

On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the
PSE's Petition for Review. Hence, this Petition by the PSE.

The appellate court had ruled that the SEC had both jurisdiction and authority to look
into the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities
Act in relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b)5 of the
Revised Securities Act, and for the purpose of ensuring fair administration of the
exchange. Both as a corporation and as a stock exchange, the petitioner is subject to
public respondent's jurisdiction, regulation and control. Accepting the argument that the
public respondent has the authority merely to supervise or regulate, would amount to
serious consequences, considering that the petitioner is a stock exchange whose
business is impressed with public interest. Abuse is not remote if the public respondent
is left without any system of control. If the securities act vested the public respondent
with jurisdiction and control over all corporations; the power to authorize the
establishment of stock exchanges; the right to supervise and regulate the same; and the
power to alter and supplement rules of the exchange in the listing or delisting of
securities, then the law certainly granted to the public respondent the plenary authority
over the petitioner; and the power of review necessarily comes within its authority.

All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:

. . . the Philippine Stock Exchange has acted in an arbitrary and abusive

manner in disapproving the application of PALI for listing of its shares in
the face of the following considerations:

1. PALI has clearly and admittedly complied with the Listing Rules and full
disclosure requirements of the Exchange;

2. In applying its clear and reasonable standards on the suitability for

listing of shares, PSE has failed to justify why it acted differently on the
application of PALI, as compared to the IPOs of other companies similarly
situated that were allowed listing in the Exchange;
 3. It appears that the claims and issues on the title to PALI's properties
were even less serious than the claims against the assets of the other
companies in that, the assertions of the Marcoses that they are owners of
the disputed properties were not substantiated enough to overcome the
strength of a title to properties issued under the Torrens System as
evidence of ownership thereof;

4. No action has been filed in any court of competent jurisdiction seeking

to nullify PALI's ownership over the disputed properties, neither has the
government instituted recovery proceedings against these properties. Yet
the import of PSE's decision in denying PALI's application is that it would
be PALI, not the Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.

In addition, the argument that the PALI properties belong to the Military/Naval
Reservation does not inspire belief. The point is, the PALI properties are now titled. A
property losses its public character the moment it is covered by a title. As a matter of
fact, the titles have long been settled by a final judgment; and the final decree having
been registered, they can no longer be re-opened considering that the one year period
has already passed. Lastly, the determination of what standard to apply in allowing
PALI's application for listing, whether the discretion method or the system of public
disclosure adhered to by the SEC, should be addressed to the Securities Commission,
it being the government agency that exercises both supervisory and regulatory authority
over all corporations.

On August 15, 19961 the PSE, after it was granted an extension, filed the instant
Petition for Review on Certiorari, taking exception to the rulings of the SEC and the
Court of Appeals. Respondent PALI filed its Comment to the petition on October 17,
1996. On the same date, the PCGG filed a Motion for Leave to file a Petition for
Intervention. This was followed up by the PCGG's Petition for Intervention on October
21, 1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office
of the Solicitor General, representing the SEC and the Court of Appeals, likewise filed
its Comment on December 26, 1996. In answer to the PCGG's motion for leave to file
petition for intervention, PALI filed its Comment thereto on January 17, 1997, whereas
the PSE filed its own Comment on January 20, 1997.

On February 25, 1996, the PSE filed its Consolidated Reply to the comments of
respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996).
On May 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.

PSE submits that the Court of Appeals erred in ruling that the SEC had authority to
order the PSE to list the shares of PALI in the stock exchange. Under presidential
decree No. 902-A, the powers of the SEC over stock exchanges are more limited as
compared to its authority over ordinary corporations. In connection with this, the powers
of the SEC over stock exchanges under the Revised Securities Act are specifically
enumerated, and these do not include the power to reverse the decisions of the stock
exchange. Authorities are in abundance even in the United States, from which the
country's security policies are patterned, to the effect of giving the Securities
Commission less control over stock exchanges, which in turn are given more lee-way in
making the decision whether or not to allow corporations to offer their stock to the public
through the stock exchange. This is in accord with the "business judgment rule"
whereby the SEC and the courts are barred from intruding into business judgments of
corporations, when the same are made in good faith. the said rule precludes the
reversal of the decision of the PSE to deny PALI's listing application, absent a showing
of bad faith on the part of the PSE. Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the discretion to accept or reject
applications for listing. Thus, even if an issuer has complied with the PSE listing rules
and requirements, PSE retains the discretion to accept or reject the issuer's listing
application if the PSE determines that the listing shall not serve the interests of the
investing public.

Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations,
nor with corporations whose properties are under sequestration. A reading of Republic
of the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal
that the properties of PALI, which were derived from the Ternate Development
Corporation (TDC) and the Monte del Sol Development Corporation (MSDC). are under
sequestration by the PCGG, and subject of forfeiture proceedings in the
Sandiganbayan. This ruling of the Court is the "law of the case" between the Republic
and TDC and MSDC. It categorically declares that the assets of these corporations
were sequestered by the PCGG on March 10, 1986 and April 4, 1988.

It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over
its properties can no longer be questioned, since certificates of title have been issued to
PALI and more than one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under the Torrens System is
a conclusive evidence of ownership is not an absolute rule and admits certain
exceptions. It is fundamental that forest lands or military reservations are non-alienable.
Thus, when a title covers a forest reserve or a government reservation, such title is void.

PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy
of "full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of
a clear mandate for the effectivity of such policy. As it is, the case records reveal the
truth that PALI did not comply with the listing rules and disclosure requirements. In fact,
PALI's documents supporting its application contained misrepresentations and
misleading statements, and concealed material information. The matter of sequestration
of PALI's properties and the fact that the same form part of military/naval/forest
reservations were not reflected in PALI's application.

It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it
is clothed with the markings of a corporate entity, it functions as the primary channel
through which the vessels of capital trade ply. The PSE's relevance to the continued
operation and filtration of the securities transactions in the country gives it a distinct
color of importance such that government intervention in its affairs becomes justified, if
not necessarily. Indeed, as the only operational stock exchange in the country today,
the PSE enjoys a monopoly of securities transactions, and as such, it yields an
immense influence upon the country's economy.

Due to this special nature of stock exchanges, the country's lawmakers has seen it wise
to give special treatment to the administration and regulation of stock exchanges. 6

These provisions, read together with the general grant of jurisdiction, and right of
supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC
the special mandate to be vigilant in the supervision of the affairs of stock exchanges so
that the interests of the investing public may be fully safeguard.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold

the SEC's challenged control authority over the petitioner PSE even as it provides that
"the Commission shall have absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are the grantees of primary franchises
and/or a license or permit issued by the government to operate in the Philippines. . ."
The SEC's regulatory authority over private corporations encompasses a wide margin of
areas, touching nearly all of a corporation's concerns. This authority springs from the
fact that a corporation owes its existence to the concession of its corporate franchise
from the state.

The SEC's power to look into the subject ruling of the PSE, therefore, may be implied
from or be considered as necessary or incidental to the carrying out of the SEC's
express power to insure fair dealing in securities traded upon a stock exchange or to
ensure the fair administration of such exchange. 7 It is, likewise, observed that the
principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities may
be encouraged and protected, and their activities for the promotion of economic
development. 8

Thus, it was in the alleged exercise of this authority that the SEC reversed the decision
of the PSE to deny the application for listing in the stock exchange of the private
respondent PALI. The SEC's action was affirmed by the Court of Appeals.

We affirm that the SEC is the entity with the primary say as to whether or not securities,
including shares of stock of a corporation, may be traded or not in the stock exchange.
This is in line with the SEC's mission to ensure proper compliance with the laws, such
as the Revised Securities Act and to regulate the sale and disposition of securities in
the country. 9 As the appellate court explains:

Paramount policy also supports the authority of the public respondent to

review petitioner's denial of the listing. Being a stock exchange, the
petitioner performs a function that is vital to the national economy, as the
business is affected with public interest. As a matter of fact, it has often
 been said that the economy moves on the basis of the rise and fall of
stocks being traded. By its economic power, the petitioner certainly can
dictate which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own rules liberally
as it may please. Petitioner can either allow or deny the entry to the
market of securities. To repeat, the monopoly, unless accompanied by
control, becomes subject to abuse; hence, considering public interest,
then it should be subject to government regulation.

The role of the SEC in our national economy cannot be minimized. The legislature,
through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent
laws, has entrusted to it the serious responsibility of enforcing all laws affecting
corporations and other forms of associations not otherwise vested in some other
government office. 10

This is not to say, however, that the PSE's management prerogatives are under the
absolute control of the SEC. The PSE is, alter all, a corporation authorized by its
corporate franchise to engage in its proposed and duly approved business. One of the
PSE's main concerns, as such, is still the generation of profit for its stockholders.
Moreover, the PSE has all the rights pertaining to corporations, including the right to sue
and be sued, to hold property in its own name, to enter (or not to enter) into contracts
with third persons, and to perform all other legal acts within its allocated express or
implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed

corporate name, and with a distinct legal personality. In organizing itself as a collective
body, it waives no constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore, the state will generally
not interfere with the same. Questions of policy and of management are left to the
honest decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the board of directors. The
board is the business manager of the corporation, and so long as it acts in good faith, its
orders are not reviewable by the courts. 12

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant
authority to reverse the PSE's decision in matters of application for listing in the market,
the SEC may exercise such power only if the PSE's judgment is attended by bad faith.
In Board of Liquidators vs. Kalaw,13 it was held that bad faith does not simply connote
bad judgment or negligence. It imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a known duty through some motive or
interest of ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the
qualification of PALI to sell its shares to the public through the stock exchange. During
the time for receiving objections to the application, the PSE heard from the
representative of the late President Ferdinand E. Marcos and his family who claim the
properties of the private respondent to be part of the Marcos estate. In time, the PCGG
confirmed this claim. In fact, an order of sequestration has been issued covering the
properties of PALI, and suit for reconveyance to the state has been filed in the
Sandiganbayan Court. How the properties were effectively transferred, despite the
sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private
respondent PALI, in only a short span of time, are not yet explained to the Court, but it
is clear that such circumstances give rise to serious doubt as to the integrity of PALI as
a stock issuer. The petitioner was in the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the general public. The purpose of the
Revised Securities Act, after all, is to give adequate and effective protection to the
investing public against fraudulent representations, or false promises, and the
imposition of worthless ventures. 14

It is to be observed that the U.S. Securities Act emphasized its avowed protection to
acts detrimental to legitimate business, thus:

The Securities Act, often referred to as the "truth in securities" Act, was
designed not only to provide investors with adequate information upon
which to base their decisions to buy and sell securities, but also to protect
legitimate business seeking to obtain capital through honest presentation
against competition from crooked promoters and to prevent fraud in the
sale of securities. (Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).

As has been pointed out, the effects of such an act are chiefly (1)
prevention of excesses and fraudulent transactions, merely by
requirement of that their details be revealed; (2) placing the market during
the early stages of the offering of a security a body of information, which
operating indirectly through investment services and expert investors, will
tend to produce a more accurate appraisal of a security, . . . Thus, the
Commission may refuse to permit a registration statement to become
effective if it appears on its face to be incomplete or inaccurate in any
material respect, and empower the Commission to issue a stop order
suspending the effectiveness of any registration statement which is found
to include any untrue statement of a material fact or to omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. (Idem).

Also, as the primary market for securities, the PSE has established its name and
goodwill, and it has the right to protect such goodwill by maintaining a reasonable
standard of propriety in the entities who choose to transact through its facilities. It was
reasonable for the PSE, therefore, to exercise its judgment in the manner it deems
appropriate for its business identity, as long as no rights are trampled upon, and public
welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a
thing of the past, and should remain so.

The observation that the title of PALI over its properties is absolute and can no longer
be assailed is of no moment. At this juncture, there is the claim that the properties were
owned by TDC and MSDC and were transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such
properties belong to the Marcos estate, and were held only in trust by Rebecco Panlilio.
It is also alleged by the petitioner that these properties belong to naval and forest
reserves, and therefore beyond private dominion. If any of these claims is established to
be true, the certificates of title over the subject properties now held by PALI map be
disregarded, as it is an established rule that a registration of a certificate of title does not
confer ownership over the properties described therein to the person named as owner.
The inscription in the registry, to be effective, must be made in good faith. The defense
of indefeasibility of a Torrens Title does not extend to a transferee who takes the
certificate of title with notice of a flaw.

In any case, for the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not be
determined as an absolute fact. What is material is that the uncertainty of the properties'
ownership and alienability exists, and this puts to question the qualification of PALI's
public offering. In sum, the Court finds that the SEC had acted arbitrarily in arrogating
unto itself the discretion of approving the application for listing in the PSE of the private
respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a
corporation entity, whose business judgments are respected in the absence of bad faith.

The question as to what policy is, or should be relied upon in approving the registration
and sale of securities in the SEC is not for the Court to determine, but is left to the
sound discretion of the Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other functions under
pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the
power to promulgate such rules and regulations as it may consider appropriate in the
public interest for the enforcement of the said laws. The second paragraph of Section 4
of the said law, on the other hand, provides that no security, unless exempt by law, shall
be issued, endorsed, sold, transferred or in any other manner conveyed to the public,
unless registered in accordance with the rules and regulations that shall be promulgated
in the public interest and for the protection of investors by the Commission. Presidential
Decree No. 902-A, on the other hand, provides that the SEC, as regulatory agency, has
supervision and control over all corporations and over the securities market as a whole,
and as such, is given ample authority in determining appropriate policies. Pursuant to
this regulatory authority, the SEC has manifested that it has adopted the policy of "full
material disclosure" where all companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information about themselves and the
securities they sell, for the protection of the investing public, and under pain of
administrative, criminal and civil sanctions. In connection with this, a fact is deemed
material if it tends to induce or otherwise effect the sale or purchase of its
securities. 15 While the employment of this policy is recognized and sanctioned by the
laws, nonetheless, the Revised Securities Act sets substantial and procedural standards
which a proposed issuer of securities must satisfy. 16 Pertinently, Section 9 of the
Revised Securities Act sets forth the possible Grounds for the Rejection of the
registration of a security:

— The Commission may reject a registration statement and refuse to

issue a permit to sell the securities included in such registration statement
if it finds that —

(1) The registration statement is on its face incomplete or inaccurate in

any material respect or includes any untrue statement of a material fact or
omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading; or

(2) The issuer or registrant —

(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of

this Act, or the rules promulgated pursuant thereto, or any
order of the Commission;

(iii) has failed to comply with any of the applicable

requirements and conditions that the Commission may, in
the public interest and for the protection of investors, impose
before the security can be registered;

(iv) has been engaged or is engaged or is about to engage

in fraudulent transaction;

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or

is engaged in a business that is illegal or contrary to
government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound
or to be based on sound business principles;

(4) An officer, member of the board of directors, or principal stockholder of

the issuer is disqualified to be such officer, director or principal
stockholder; or

(5) The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the prejudice of
 the public interest or as a fraud upon the purchasers or investors.
(Emphasis Ours)

A reading of the foregoing grounds reveals the intention of the lawmakers to make the
registration and issuance of securities dependent, to a certain extent, on the merits of
the securities themselves, and of the issuer, to be determined by the Securities and
Exchange Commission. This measure was meant to protect the interests of the
investing public against fraudulent and worthless securities, and the SEC is mandated
by law to safeguard these interests, following the policies and rules therefore provided.
The absolute reliance on the full disclosure method in the registration of securities is,
therefore, untenable. As it is, the Court finds that the private respondent PALI, on at
least two points (nos. 1 and 5) has failed to support the propriety of the issue of its
shares with unfailing clarity, thereby lending support to the conclusion that the PSE
acted correctly in refusing the listing of PALI in its stock exchange. This does not
discount the effectivity of whatever method the SEC, in the exercise of its vested
authority, chooses in setting the standard for public offerings of corporations wishing to
do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.

In resume, the Court finds that the PSE has acted with justified circumspection,
discounting, therefore, any imputation of arbitrariness and whimsical animation on its
part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by
the law and by the circumstances attendant to this case.

ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS

the Petition for Review on Certiorari. The Decisions of the Court of Appeals and the
Securities and Exchange Commission dated July 27, 1996 and April 24, 1996
respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby
ENTERED, affirming the decision of the Philippine Stock Exchange to deny the
application for listing of the private respondent Puerto Azul Land, Inc.

SO ORDERED.

Regalado and Puno, JJ., concur.

G.R. Nos. 116124-25 November 22, 2000

BIBIANO O. REYNOSO, IV, petitioner,

vs.
HON. COURT OF APPEALS and GENERAL CREDIT CORPORATION, respondents.

DECISION

YNARES-SANTIAGO, J.:

Assailed in this petition for review is the consolidated decision of the Court of Appeals
dated July 7, 1994, which reversed the separate decisions of the Regional Trial Court of
Pasig City and the Regional Trial Court of Quezon City in two cases between petitioner
Reynoso and respondent General Credit Corporation (GCC).

Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, "CCC"), a
financing and investment firm, decided to organize franchise companies in different
parts of the country, wherein it shall hold thirty percent (30%) equity. Employees of the
CCC were designated as resident managers of the franchise companies. Petitioner
Bibiano O. Reynoso, IV was designated as the resident manager of the franchise
company in Quezon City, known as the Commercial Credit Corporation of Quezon City
(hereinafter, "CCC-QC").

CCC-QC entered into an exclusive management contract with CCC whereby the latter
was granted the management and full control of the business activities of the former.
Under the contract, CCC-QC shall sell, discount and/or assign its receivables to CCC.
Subsequently, however, this discounting arrangement was discontinued pursuant to the
so-called "DOSRI Rule", prohibiting the lending of funds by corporations to its directors,
officers, stockholders and other persons with related interests therein.

On account of the new restrictions imposed by the Central Bank policy by virtue of the
DOSRI Rule, CCC decided to form CCC Equity Corporation, (hereinafter, "CCC-
Equity"), a wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent
equity in CCC-QC, together with two seats in the latter’s Board of Directors.

Under the new set-up, several officials of Commercial Credit Corporation, including
petitioner Reynoso, became employees of CCC-Equity. While petitioner continued to be
the Resident Manager of CCC-QC, he drew his salaries and allowances from CCC-
Equity. Furthermore, although an employee of CCC-Equity, petitioner, as well as all
employees of CCC-QC, became qualified members of the Commercial Credit
Corporation Employees Pension Plan.

As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and

supervised its employees. The business activities of CCC-QC pertain to the acceptance
of funds from depositors who are issued interest-bearing promissory notes. The
amounts deposited are then loaned out to various borrowers. Petitioner, in order to
boost the business activities of CCC-QC, deposited his personal funds in the company.
In return, CCC-QC issued to him its interest-bearing promissory notes.

On August 15, 1980, a complaint for sum of money with preliminary

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

In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and
asserted that the sum of P1,300,593.11 represented his money placements in CCC-QC,
as shown by twenty-three (23) checks which he issued to the said company.3

The case was subsequently transferred to the Regional Trial Court of Quezon City,
Branch 86, pursuant to the Judiciary Reorganization Act of 1980.

On January 14, 1985, the trial court rendered its decision, the decretal portion of which
states:

Premises considered, the Court finds the complaint without merit. Accordingly, said
complaint is hereby DISMISSED.

By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation,

humiliation and mental anguish.

On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is

hereby ordered:

a) to pay defendant the sum of P185,000.00 plus 14% interest per annum from
October 2, 1980 until fully paid;

b) to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per
annum from June 24, 1981, the date of filing of Amended Answer, until fully paid;
from this amount may be deducted the remaining obligation of defendant under
the promissory note of October 24, 1977, in the sum of P9,738.00 plus penalty at
the rate of 1% per month from December 24, 1977 until fully paid;

c) to pay defendants P200,000.00 as moral damages;

d) to pay defendants P100,000.00 as exemplary damages;

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

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

Hence, the decision became final and, accordingly, a Writ of Execution was issued on
July 24, 1989.4 However, the judgment remained unsatisfied,5 prompting petitioner to file
a Motion for Alias Writ of Execution, Examination of Judgment Debtor, and to Bring
Financial Records for Examination to Court. CCC-QC filed an Opposition to petitioner’s
motion,6 alleging that the possession of its premises and records had been taken over by
CCC.

Meanwhile, in 1983, CCC became known as the General Credit Corporation.

On November 22, 1991, the Regional Trial Court of Quezon City issued an Order
directing General Credit Corporation to file its comment on petitioner’s motion for alias
writ of execution.7 General Credit Corporation filed a Special Appearance and
Opposition on December 2, 1991,8 alleging that it was not a party to the case, and
therefore petitioner should direct his claim against CCC-QC and not General Credit
Corporation. Petitioner filed his reply,9 stating that the CCC-QC is an adjunct
instrumentality, conduit and agency of CCC. Furthermore, petitioner invoked the
decision of the Securities and Exchange Commission in SEC Case No. 2581,
entitled, "Avelina G. Ramoso, et al., Petitioner versus General Credit Corp., et al.,
Respondents," where it was declared that General Credit Corporation, CCC-Equity and
other franchised companies including CCC-QC were declared as one corporation.

On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of
an alias writ of execution.10On December 20, 1991, General Credit Corporation filed an
Omnibus Motion,11 alleging that SEC Case No. 2581 was still pending appeal, and
maintaining that the levy on properties of the General Credit Corporation by the deputy
sheriff of the court was erroneous.

In his Opposition to the Omnibus Motion, petitioner insisted that General Credit
Corporation is just the new name of Commercial Credit Corporation; hence, General
Credit Corporation and Commercial Credit Corporation should be treated as one and
the same entity.

On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus
Motion.12 On March 5, 1992, it issued an Order directing the issuance of an alias writ of
execution.13

Previously, on February 21, 1992, General Credit Corporation instituted a complaint

before the Regional Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C.
Tanangco, in his capacity as Deputy Sheriff of Quezon City,14docketed as Civil Case No.
61777, praying that the levy on its parcel of land located in Pasig, Metro Manila and
covered by Transfer Certificate of Title No. 29940 be declared null and void, and that
defendant sheriff be enjoined from consolidating ownership over the land and from
further levying on other properties of General Credit Corporation to answer for any
liability under the decision in Civil Case No. Q-30583.

The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining
order. Thus, General Credit Corporation instituted two (2) petitions for certiorari with the
Court of Appeals, docketed as CA-G.R. SP No. 2751815and CA-G.R. SP No. 27683.
These cases were later consolidated.

On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated
cases, the dispositive portion of which reads:

WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal
to issue a restraining order as having been rendered moot by our Resolution of 7 April
1992 which, by way of injunctive relief, provided that "the respondents and their
representatives are hereby enjoined from conducting an auction sale (on execution) of
petitioner's properties as well as initiating similar acts of levying (upon) and selling on
execution other properties of said petitioner". The injunction thus granted, as modified
by the words in parenthesis, shall remain in force until Civil Case No. 61777 shall have
been finally terminated.

In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET
ASIDE, for having been issued in excess of jurisdiction, the Order of 13 February 1992
in Civil Case No. Q-30583 as well as any other order or process through which the
petitioner is made liable under the judgment in said Civil Case No. Q-30583.

No damages and no costs.

SO ORDERED.16

Hence, this petition for review anchored on the following arguments:

1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683

WHEN IT NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND
OTHER ORDERS OR PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL
COURT OF QUEZON CITY THROUGH WHICH GENERAL CREDIT
CORPORATION IS MADE LIABLE UNDER THE JUDGMENT THAT WAS
RENDERED IN CIVIL CASE NO. Q-30583.

2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518

WHEN IT ENJOINED THE AUCTION SALE ON EXECUTION OF THE
PROPERTIES OF GENERAL CREDIT CORPORATION AS WELL AS
INITIATING SIMILAR ACTS OF LEVYING UPON AND SELLING ON
EXECUTION OF OTHER PROPERTIES OF GENERAL CREDIT
CORPORATION.
 3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
GENERAL CREDIT CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-
30583, INSTEAD OF, DECLARING THAT COMMERCIAL CREDIT
CORPORATION OF QUEZON CITY IS THE ALTER EGO, INSTRUMENTALITY,
CONDUIT OR ADJUNCT OF COMMERCIAL CREDIT CORPORATION AND ITS
SUCCESSOR GENERAL CREDIT CORPORATION.

At the outset, it must be stressed that there is no longer any controversy over
petitioner’s claims against his former employer, CCC-QC, inasmuch as the decision in
Civil Case No. Q-30583 of the Regional Trial Court of Quezon City has long become
final and executory. The only issue, therefore, to be resolved in the instant petition is
whether or not the judgment in favor of petitioner may be executed against respondent
General Credit Corporation. The latter contends that it is a corporation separate and
distinct from CCC-QC and, therefore, its properties may not be levied upon to satisfy the
monetary judgment in favor of petitioner. In short, respondent raises corporate fiction as
its defense. Hence, we are necessarily called upon to apply the doctrine of piercing the
veil of corporate entity in order to determine if General Credit Corporation, formerly
CCC, may be held liable for the obligations of CCC-QC.

The petition is impressed with merit.

A corporation is an artificial being created by operation of law, having the right of

succession and the powers, attributes, and properties expressly authorized by law or
incident to its existence.17 It is an artificial being invested by law with a personality
separate and distinct from those of the persons composing it as well as from that of any
other legal entity to which it may be related.18 It was evolved to make possible the
aggregation and assembling of huge amounts of capital upon which big business
depends. It also has the advantage of non-dependence on the lives of those who
compose it even as it enjoys certain rights and conducts activities of natural persons.

Precisely because the corporation is such a prevalent and dominating factor in the
business life of the country, the law has to look carefully into the exercise of powers by
these artificial persons it has created.

Any piercing of the corporate veil has to be done with caution. However, the Court will
not hesitate to use its supervisory and adjudicative powers where the corporate fiction is
used as an unfair device to achieve an inequitable result, defraud creditors, evade
contracts and obligations, or to shield it from the effects of a court decision. The
corporate fiction has to be disregarded when necessary in the interest of justice.

In First Philippine International Bank v. Court of Appeals, et al.,19 we held:

When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a

vehicle for the evasion of an existing obligation, the circumvention of statutes, the
achievement or perfection of a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from the members
or stockholders who compose it will be lifted to allow for its consideration merely as an
aggregation of individuals.

Also in the above-cited case, we stated that this Court has pierced the veil of corporate
fiction in numerous cases where it was used, among others, to avoid a judgment
credit;20 to avoid inclusion of corporate assets as part of the estate of a decedent; 21 to
avoid liability arising from debt;22 when made use of as a shield to perpetrate fraud
and/or confuse legitimate issues;23 or to promote unfair objectives or otherwise to shield
them.24

In the appealed judgment, the Court of Appeals sustained respondent’s arguments of

separateness and its character as a different corporation which is a non-party or
stranger to this case.

The defense of separateness will be disregarded where the business affairs of a

subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies
only when such fiction is used to defeat public convenience, justify wrong, protect fraud
or defend crime.25

We stated in Tomas Lao Construction v. National Labor Relations Commission,26 that the
legal fiction of a corporation being a judicial entity with a distinct and separate
personality was envisaged for convenience and to serve justice. Therefore, it should not
be used as a subterfuge to commit injustice and circumvent the law.

Precisely for the above reasons, we grant the instant petition.

It is obvious that the use by CCC-QC of the same name of Commercial Credit
Corporation was intended to publicly identify it as a component of the CCC group of
companies engaged in one and the same business, i.e., investment and financing.
Aside from CCC-Quezon City, other franchise companies were organized such as CCC-
North Manila and CCC-Cagayan Valley. The organization of subsidiary corporations as
what was done here is usually resorted to for the aggrupation of capital, the ability to
cover more territory and population, the decentralization of activities best decentralized,
and the securing of other legitimate advantages. But when the mother corporation and
its subsidiary cease to act in good faith and honest business judgment, when the
corporate device is used by the parent to avoid its liability for legitimate obligations of
the subsidiary, and when the corporate fiction is used to perpetrate fraud or promote
injustice, the law steps in to remedy the problem. When that happens, the corporate
character is not necessarily abrogated. It continues for legitimate objectives. However, it
is pierced in order to remedy injustice, such as that inflicted in this case.

Factually and legally, the CCC had dominant control of the business operations of CCC-
QC. The exclusive management contract insured that CCC-QC would be managed and
controlled by CCC and would not deviate from the commands of the mother corporation.
In addition to the exclusive management contract, CCC appointed its own employee,
petitioner, as the resident manager of CCC-QC.

Petitioner’s designation as "resident manager" implies that he was placed in CCC-QC

by a superior authority. In fact, even after his assignment to the subsidiary corporation,
petitioner continued to receive his salaries, allowances, and benefits from CCC, which
later became respondent General Credit Corporation. Not only that. Petitioner and the
other permanent employees of CCC-QC were qualified members and participants of the
Employees Pension Plan of CCC.

There are other indications in the record which attest to the applicability of the identity
rule in this case, namely: the unity of interests, management, and control; the transfer of
funds to suit their individual corporate conveniences; and the dominance of policy and
practice by the mother corporation insure that CCC-QC was an instrumentality or
agency of CCC.

As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line
of business involving a single transaction process. Under their discounting
arrangements, CCC financed the operations of CCC-QC. The subsidiary sold,
discounted, or assigned its accounts receivables to CCC.

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

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

The challenged decision of the Court of Appeals states that CCC, now General Credit
Corporation, is not a formal party in the case. The reason for this is that the complaint
was filed by CCC-QC against petitioner. The choice of parties was with CCC-QC. The
judgment award in this case arose from the counterclaim which petitioner set up against
CCC-QC.

The circumstances which led to the filing of the aforesaid complaint are quite
revealing. As narrated above, the discounting agreements through which CCC
1âw phi 1

controlled the finances of its subordinates became unlawful when Central Bank adopted
the DOSRI prohibitions. Under this rule the directors, officers, and stockholders are
prohibited from borrowing from their company. Instead of adhering to the letter and spirit
of the regulations by avoiding DOSRI loans altogether, CCC used the corporate device
to continue the prohibited practice. CCC organized still another corporation, the CCC-
Equity Corporation. However, as a wholly owned subsidiary, CCC-Equity was in fact
only another name for CCC. Key officials of CCC, including the resident managers of
subsidiary corporations, were appointed to positions in CCC-Equity.
In order to circumvent the Central Bank’s disapproval of CCC-QC’s mode of reducing its
DOSRI lender accounts and its directive to follow Central Bank requirements, resident
managers, including petitioner, were told to observe a pseudo-compliance with the
phasing out orders. For his unwillingness to satisfactorily conform to these directives
and his reluctance to resort to illegal practices, petitioner earned the ire of his
employers. Eventually, his services were terminated, and criminal and civil cases were
filed against him.

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

difficulties faced by the firm in implementing the required phase-out program. Funds
from his current account in the Far East Bank and Trust Company were transferred to
CCC-QC. These monies were alleged in the criminal complaints against him as having
been stolen. Complaints for qualified theft and estafa were brought by CCC-QC against
petitioner. These criminal cases were later dismissed. Similarly, the civil complaint
1âwphi1

which was filed with the Court of First Instance of Pasig and later transferred to the
Regional Trial Court of Quezon City was dismissed, but his counterclaims were granted.

Faced with the financial obligations which CCC-QC had to satisfy, the mother firm
closed CCC-QC, in obvious fraud of its creditors. CCC-QC, instead of opposing its
closure, cooperated in its own demise. Conveniently, CCC-QC stated in its opposition to
the motion for alias writ of execution that all its properties and assets had been
transferred and taken over by CCC.

Under the foregoing circumstances, the contention of respondent General Credit

Corporation, the new name of CCC, that the corporate fiction should be appreciated in
its favor is without merit.

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

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

If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment

debt and work an injustice. The decision raised to us for review is an invitation to
multiplicity of litigation. As we stated in Islamic Directorate vs. Court of Appeals,30 the
ends of justice are not served if further litigation is encouraged when the issue is
determinable based on the records.

A court judgment becomes useless and ineffective if the employer, in this case CCC as
a mother corporation, is placed beyond the legal reach of the judgment creditor who,
after protracted litigation, has been found entitled to positive relief. Courts have been
organized to put an end to controversy. This purpose should not be negated by an
inapplicable and wrong use of the fiction of the corporate veil.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and ASIDE.
The injunction against the holding of an auction sale for the execution of the decision in
Civil Case No. Q-30583 of properties of General Credit Corporation, and the levying
upon and selling on execution of other properties of General Credit Corporation, is
LIFTED.

SO ORDERED.
G.R. No. 129459 September 29, 1998

SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,

vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.

PANGANIBAN, J.:

May corporate treasurer, by herself and without any authorization from he board of
directors, validly sell a parcel of land owned by the corporation?. May the veil of
corporate fiction be pierced on the mere ground that almost all of the shares of stock of
the corporation are owned by said treasurer and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for
Review on Certiorari before us, assailing the March 18, 1997 Decision 1 of the Court of
Appeals 2 in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of
the Regional Trial Court of Makati, Metro Manila, Branch 633 in Civil Case No. 89-3511.
The RTC dismissed both the Complaint and the Counterclaim filed by the parties. On
the other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the appealed decision is AFFIRMED

WITH MODIFICATION ordering defendant-appellee Nenita Lee
Gruenberg to REFUND or return to plaintiff-appellant the downpayment of
P100,000.00 which she received from plaintiff-appellant. There is no
pronouncement as to costs. 4

The petition also challenges the June 10, 1997 CA Resolution denying
reconsideration. 5

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s

amended complaint alleged that on 14 February 1989, plaintiff-appellant
entered into an agreement with defendant-appellee Motorich Sales
Corporation for the transfer to it of a parcel of land identified as Lot 30,
Block 1 of the Acropolis Greens Subdivision located in the District of
Murphy, Quezon City. Metro Manila, containing an area of Four Hundred
Fourteen (414) square meters, covered by TCT No. (362909) 2876: that
as stipulated in the Agreement of 14 February 1989, plaintiff-appellant
paid the downpayment in the sum of One Hundred Thousand
(P100,000.00) Pesos, the balance to be paid on or before March 2, 1989;
that on March 1, 1989. Mr. Andres T. Co, president of plaintiff-appellant
corporation, wrote a letter to defendant-appellee Motorich Sales
Corporation requesting for a computation of the balance to be paid: that
said letter was coursed through defendant-appellee's broker. Linda Aduca,
who wrote the computation of the balance: that on March 2, 1989, plaintiff-
appellant was ready with the amount corresponding to the balance,
covered by Metrobank Cashier's Check No. 004223, payable to
defendant-appellee Motorich Sales Corporation; that plaintiff-appellant and
defendant-appellee Motorich Sales Corporation were supposed to meet in
the office of plaintiff-appellant but defendant-appellee's treasurer, Nenita
Lee Gruenberg, did not appear; that defendant-appellee Motorich Sales
Corporation despite repeated demands and in utter disregard of its
commitments had refused to execute the Transfer of Rights/Deed of
Assignment which is necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded as a necessary party
since Transfer Certificate of Title No. (362909) 2876 is still in the name of
said defendant; while defendant JNM Realty & Development Corp. is
likewise impleaded as a necessary party in view of the fact that it is the
transferor of right in favor of defendant-appellee Motorich Sales
Corporation: that on April 6, 1989, defendant ACL Development
Corporation and Motorich Sales Corporation entered into a Deed of
Absolute Sale whereby the former transferred to the latter the subject
property; that by reason of said transfer, the Registry of Deeds of Quezon
City issued a new title in the name of Motorich Sales Corporation,
represented by defendant-appellee Nenita Lee Gruenberg and Reynaldo
L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a formal Transfer of
Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal
damages which may be assessed against defendants-appellees in the
sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's unjustified and unwarranted failure to execute the required
Transfer of Rights/Deed of Assignment or formal deed of sale in favor of
plaintiff-appellant, defendants-appellees should be assessed exemplary
damages in the sum of One Hundred Thousand (P100,000.00) Pesos;
that by reason of defendants-appellees' bad faith in refusing to execute a
Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant, the
latter lost the opportunity to construct a residential building in the sum of
One Hundred Thousand (P100,000.00) Pesos; and that as a consequence
of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a deed of sale in favor of
plaintiff-appellant, it has been constrained to obtain the services of
counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos
plus appearance fee for every appearance in court hearings.

In its answer, defendants-appellees Motorich Sales Corporation and

Nenita Lee Gruenberg interposed as affirmative defense that the
President and Chairman of Motorich did not sign the agreement adverted
to in par. 3 of the amended complaint; that Mrs. Gruenberg's signature on
the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind
Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President
and Chairman of Motorich, is required: that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of Rights (Annex B of
amended complaint) at the time the Agreement (Annex B of amended
complaint) was signed; that plaintiff-appellant itself drafted the Agreement
and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest
money; that granting, without admitting, the enforceability of the
agreement, plaintiff-appellant nonetheless failed to pay in legal tender
within the stipulated period (up to March 2, 1989); that it was the
understanding between Mrs. Gruenberg and plaintiff-appellant that the
Transfer of Rights/Deed of Assignment will be signed only upon receipt of
cash payment; thus they agreed that if the payment be in check, they will
meet at a bank designated by plaintiff-appellant where they will encash the
check and sign the Transfer of Rights/Deed. However, plaintiff-appellant
informed Mrs. Gruenberg of the alleged availability of the check, by phone,
only after banking hours.

On the basis of the evidence, the court a quo rendered the judgment
appealed from[,] dismissing plaintiff-appellant's complaint, ruling that:

The issue to be resolved is: whether plaintiff had the right to

compel defendants to execute a deed of absolute sale in
accordance with the agreement of February 14, 1989: and if
so, whether plaintiff is entitled to damage.

As to the first question, there is no evidence to show that

defendant Nenita Lee Gruenberg was indeed authorized by
defendant corporation. Motorich Sales, to dispose of that
property covered by T.C.T. No. (362909) 2876. Since the
property is clearly owned by the corporation. Motorich Sales,
then its disposition should be governed by the requirement
laid down in Sec. 40. of the Corporation Code of the
Philippines, to wit:

Sec. 40, Sale or other disposition of assets.

Subject to the provisions of existing laws on
illegal combination and monopolies, a
 corporation may by a majority vote of its board
of directors . . . sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets
including its goodwill . . . when authorized by
the vote of the stockholders representing at
least two third (2/3) of the outstanding capital
stock . . .

No such vote was obtained by defendant Nenita Lee

Gruenberg for that proposed sale[;] neither was there
evidence to show that the supposed transaction was ratified
by the corporation. Plaintiff should have been on the look out
under these circumstances. More so, plaintiff himself [owns]
several corporations (tsn dated August 16, 1993, p. 3) which
makes him knowledgeable on corporation matters.

Regarding the question of damages, the Court likewise,

does not find substantial evidence to hold defendant Nenita
Lee Gruenberg liable considering that she did not in anyway
misrepresent herself to be authorized by the corporation to
sell the property to plaintiff (tsn dated September 27, 1991,
p. 8).

In the light of the foregoing, the Court hereby renders

judgment DISMISSING the complaint at instance for lack of
merit.

"Defendants" counterclaim is also DISMISSED for lack of

basis. (Decision, pp. 7-8; Rollo, pp. 34-35)

For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:

AGREEMENT

KNOW ALL MEN BY THESE PRESENTS:

This Agreement, made and entered into by and between:

MOTORICH SALES CORPORATION, a corporation duly

organized and existing under and by virtue of Philippine
Laws, with principal office address at 5510 South Super Hi-
way cor. Balderama St., Pio del Pilar. Makati, Metro Manila,
represented herein by its Treasurer, NENITA LEE
GRUENBERG, hereinafter referred to as the
TRANSFEROR;
 — and —

SAN JUAN STRUCTURAL & STEEL FABRICATORS, a

corporation duly organized and existing under and by virtue
of the laws of the Philippines, with principal office address at
Sumulong Highway, Barrio Mambungan, Antipolo, Rizal,
represented herein by its President, ANDRES T. CO,
hereinafter referred to as the TRANSFEREE.

WITNESSETH, That:

WHEREAS, the TRANSFEROR is the owner of a parcel of land identified

as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION located at
the District of Murphy, Quezon City, Metro Manila, containing an area of
FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered by a
TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the
Transferor and Motorich Sales Corp. as the Transferee;

NOW, THEREFORE, for and in consideration of the foregoing premises,

the parties have agreed as follows:

1. That the purchase price shall be at FIVE THOUSAND

TWO HUNDRED PESOS (P5,200.00) per square meter;
subject to the following terms:

a. Earnest money amounting to ONE

HUNDRED THOUSAND PESOS
(P100,000.00), will be paid upon the execution
of this agreement and shall form part of the
total purchase price;

b. Balance shall be payable on or before March

2, 1989;

2. That the monthly amortization for the month of February

1989 shall be for the account of the Transferor; and that the
monthly amortization starting March 21, 1989 shall be for the
account of the Transferee;

The transferor warrants that he [sic] is the lawful owner of the above-
described property and that there [are] no existing liens and/or
encumbrances of whatsoever nature;

In case of failure by the Transferee to pay the balance on the date

specified on 1, (b), the earnest money shall be forfeited in favor of the
Transferor.
 That upon full payment of the balance, the TRANSFEROR agrees to
execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of
the TRANSFEREE.

IN WITNESS WHEREOF, the parties have hereunto set their hands this
14th day of February, 1989 at Greenhills, San Juan, Metro Manila,
Philippines.

MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL &

STEEL FABRICATORS

TRANSFEROR TRANSFEREE

[SGD.] [SGD.]

By. NENITA LEE GRUENBERG By: ANDRES T. CO

Treasurer President

Signed In the presence of:

[SGD.] [SGD.]

————————————— ———————————6

In its recourse before the Court of Appeals, petitioner insisted:

1. Appellant is entitled to compel the appellees to execute a

Deed of Absolute Sale in accordance with the Agreement of
February 14, 1989,

2. Plaintiff is entitled to damages. 7

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed
the Decision of the RTC with the modification that Respondent Nenita Lee Gruenberg
was ordered to refund P100,000 to petitioner, the amount remitted as "downpayment" or
"earnest money." Hence, this petition before us.8

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate

fiction is applicable in the instant case
 II. Whether or not the appellate court may consider matters
which the parties failed to raise in the lower court

III. Whether or not there is a valid and enforceable contract

between the petitioner and the respondent corporation

IV. Whether or not the Court of Appeals erred in holding that

there is a valid correction/substitution of answer in the
transcript of stenographic note[s].

V. Whether or not respondents are liable for damages and

attorney's fees 9

The Court synthesized the foregoing and will thus discuss them seriatim as follows:

1. Was there a valid contract of sale between petitioner and

Motorich?

2. May the doctrine of piercing the veil of corporate fiction be

applied to Motorich?

3. Is the alleged alteration of Gruenberg's testimony as

recorded in the transcript of stenographic notes material to
the disposition of this case?

4. Are respondents liable for damages and attorney's fees?

The Court's Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14,
1989, it entered through its president, Andres Co, into the disputed Agreement with
Respondent Motorich Sales Corporation, which was in turn allegedly represented by its
treasurer, Nenita Lee Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co
affixed their signatures on the contract they both consented to be bound by the terms
thereof." Ergo, petitioner contends that the contract is binding on the two corporations.
We do not agree.

True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to
which a lot owned by Motorich Sales Corporation was purportedly sold. Such contract,
however, cannot bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members without
express authorization from the corporation's board of directors. 10 Section 23 of BP 68,
otherwise known as the Corporation Code of the Philippines, provides;

Sec. 23. The Board of Directors or Trustees. — Unless otherwise provided

in this Code, the corporate powers of all corporations formed under this
Code shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified.

Indubitably, a corporation may act only through its board of directors or, when
authorized either by its bylaws or by its board resolution, through its officers or agents in
the normal course of business. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law. 11 Thus, this Court has held that "a
corporate officer or agent may represent and bind the corporation in transactions with
third persons to the extent that the authority to do so has been conferred upon him, and
this includes powers which have been intentionally conferred, and also such powers as,
in the usual course of the particular business, are incidental to, or may be implied from,
the powers intentionally conferred, powers added by custom and usage, as usually
pertaining to the particular officer or agent, and such apparent powers as the
corporation has caused persons dealing with the officer or agent to believe that it has
conferred." 12

Furthermore, the Court has also recognized the rule that "persons dealing with an
assumed agent, whether the assumed agency be a general or special one bound at
their peril, if they would hold the principal liable, to ascertain not only the fact of agency
but also the nature and extent of authority, and in case either is controverted, the
burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
19)." 13 Unless duly authorized, a treasurer, whose powers are limited, cannot bind the
corporation in a sale of its assets. 14

In the case at bar, Respondent Motorich categorically denies that it ever authorized
Nenita Gruenberg, its treasurer, to sell the subject parcel of land. 15 Consequently,
petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to
represent and bind Motorich in the transaction. Petitioner failed to discharge this
burden. Its offer of evidence before the trial court contained no proof of such
authority. 16 It has not shown any provision of said respondent's articles of incorporation,
bylaws or board resolution to prove that Nenita Gruenberg possessed such power.

That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to represent the corporation.
Petitioner cannot assume that she, by virtue of her position, was authorized to sell the
property of the corporation. Selling is obviously foreign to a corporate treasurer's
function, which generally has been described as "to receive and keep the funds of the
corporation, and to disburse them in accordance with the authority given him by the
board or the properly authorized officers." 17

Neither was such real estate sale shown to be a normal business activity of Motorich.
The primary purpose of Motorich is marketing, distribution, export and import in relation
to a general merchandising business. 18Unmistakably, its treasurer is not cloaked with
actual or apparent authority to buy or sell real property, an activity which falls way
beyond the scope of her general authority.

Art. 1874 and 1878 of the Civil Code of the Philippines provides:

Art. 1874. When a sale of a piece of land or any interest therein is through
an agent, the authority of the latter shall be in writing: otherwise, the sale
shall be void.

Art. 1878. Special powers of attorney are necessary in the following case:

xxx xxx xxx

(5) To enter any contract by which the ownership of an immovable is

transmitted or acquired either gratuitously or for a valuable consideration;

xxx xxx xxx.

Petitioner further contends that Respondent Motorich has ratified said contract of sale
because of its "acceptance of benefits," as evidenced by the receipt issued by
Respondent Gruenberg. 19 Petitioner is clutching at straws.

As a general rule, the acts of corporate officers within the scope of their authority are
binding on the corporation. But when these officers exceed their authority, their actions
"cannot bind the corporation, unless it has ratified such acts or is estopped from
disclaiming them." 20

In this case, there is a clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the authority, to sell its
land or to receive the earnest money. Neither was there any proof that Motorich ratified,
expressly or impliedly, the contract. Petitioner rests its argument on the receipt which,
however, does not prove the fact of ratification. The document is a hand-written one, not
a corporate receipt, and it bears only Nenita Gruenberg's signature. Certainly, this
document alone does not prove that her acts were authorized or ratified by Motorich.

Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1)
consent of the contracting parties; (2) object certain which is the subject matter of the
contract; (3) cause of the obligation which is established." As found by the trial
court 21 and affirmed by the Court of Appeals, 22 there is no evidence that Gruenberg was
authorized to enter into the contract of sale, or that the said contract was ratified by
Motorich. This factual finding of the two courts is binding on this Court. 23 As the consent
of the seller was not obtained, no contract to bind the obligor was perfected. Therefore,
there can be no valid contract of sale between petitioner and Motorich.

Because Motorich had never given a written authorization to Respondent Gruenberg to

sell its parcel of land, we hold that the February 14, 1989 Agreement entered into by the
latter with petitioner is void under Article 1874 of the Civil Code. Being inexistent and
void from the beginning, said contract cannot be ratified. 24

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced,
because the latter is a close corporation. Since "Spouses Reynaldo L. Gruenberg and
Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the
subscribed capital stock" 25 of Motorich, petitioner argues that Gruenberg needed no
authorization from the board to enter into the subject contract. 26 It adds that, being
solely owned by the Spouses Gruenberg, the company can treated as a close
corporation which can be bound by the acts of its principal stockholder who needs no
specific authority. The Court is not persuaded.

First, petitioner itself concedes having raised the issue belatedly, 27 not having done so
during the trial, but only when it filed its sur-rejoinder before the Court of
Appeals. 28 Thus, this Court cannot entertain said issue at this late stage of the
proceedings. It is well-settled the points of law, theories and arguments not brought to
the attention of the trial court need not be, and ordinarily will not be, considered by a
reviewing court, as they cannot be raised for the first time on appeal. 29 Allowing
petitioner to change horses in midstream, as it were, is to run roughshod over the basic
principles of fair play, justice and due process.

Second, even if the above mentioned argument were to be addressed at this time, the
Court still finds no reason to uphold it. True, one of the advantages of a corporate form
of business organization is the limitation of an investor's liability to the amount of the
investment. 30 This feature flows from the legal theory that a corporate entity is separate
and distinct from its stockholders. However, the statutorily granted privilege of a
corporate veil may be used only for legitimate purposes. 31 On equitable considerations,
the veil can be disregarded when it is utilized as a shield to commit fraud, illegality or
inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter
ego or business conduit of a person or an instrumentality, agency or adjunct of another
corporation. 32

Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of
perpetrating a fraud or an illegal act or as vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly
or generally the perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it will be lifted
to allow for its consideration merely as an aggregation of individuals." 33

We stress that the corporate fiction should be set aside when it becomes a shield
against liability for fraud, illegality or inequity committed on third persons. The question
of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the
present case, however, the Court finds no reason to pierce the corporate veil of
Respondent Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged fraudulent or
illegal activities of its officers or stockholders; or that the said veil was used to conceal
fraud, illegality or inequity at the expense of third persons like petitioner.

Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of
the Corporation Code defines a close corporation as follows:

Sec. 96. Definition and Applicability of Title. — A close corporation, within

the meaning of this Code, is one whose articles of incorporation provide
that: (1) All of the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20); (2) All of the issued stock
of all classes shall be subject to one or more specified restrictions on
transfer permitted by this Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of its stock of any
class. Notwithstanding the foregoing, a corporation shall be deemed not a
close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. . . . .

The articles of incorporation 34 of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a
preemption of shares is restricted in favor of any stockholder or of the corporation, or (3)
listing its stocks in any stock exchange or making a public offering of such stocks is
prohibited. From its articles, it is clear that Respondent Motorich is not a close
corporation. 35 Motorich does not become one either, just because Spouses Reynaldo
and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The "[m]ere
ownership by a single stockholder or by another corporation of all or capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate
personalities." 36 So, too, a narrow distribution of ownership does not, by itself, make a
close corporation.

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals 37 wherein the
Court ruled that ". . . petitioner corporation is classified as a close corporation and,
consequently, a board resolution authorizing the sale or mortgage of the subject
property is not necessary to bind the corporation for the action of its president." 38 But
the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of
real property was contracted by the president of a close corporation with the knowledge
and acquiescence of its board of directors. 39 In the present case, Motorich is not a close
corporation, as previously discussed, and the agreement was entered into by the
corporate treasurer without the knowledge of the board of directors.

The Court is not unaware that there are exceptional cases where "an action by a
director, who singly is the controlling stockholder, may be considered as a binding
corporate act and a board action as nothing more than a mere formality." 40 The present
case, however, is not one of them.

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost

99.866%" of Respondent Motorich. 41Since Nenita is not the sole controlling stockholder
of Motorich, the aforementioned exception does not apply. Granting arguendo that the
corporate veil of Motorich is to be disregarded, the subject parcel of land would then be
treated as conjugal property of Spouses Gruenberg, because the same was acquired
during their marriage. There being no indication that said spouses, who appear to have
been married before the effectivity of the Family Code, have agreed to a different
property regime, their property relations would be governed by conjugal partnership of
gains. 42 As a consequence, Nenita Gruenberg could not have effected a sale of the
subject lot because "[t]here is no co-ownership between the spouses in the properties of
the conjugal partnership of gains. Hence, neither spouse can alienate in favor of
another his or interest in the partnership or in any property belonging to it; neither
spouse can ask for a partition of the properties before the partnership has been legally
dissolved." 43

Assuming further, for the sake of argument, that the spouses' property regime is the
absolute community of property, the sale would still be invalid. Under this regime,
"alienation of community property must have the written consent of the other spouse or
he authority of the court without which the disposition or encumbrance is void." 44 Both
requirements are manifestly absent in the instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic
notes (TSN):

Q Did you ever represent to Mr. Co that you were authorized

by the corporation to sell the property?

A Yes, sir. 45

Petitioner claims that the answer "Yes" was crossed out, and, in its place was written a
"No" with an initial scribbled above it. 46 This, however, is insufficient to prove that Nenita
Gruenberg was authorized to represent Respondent Motorich in the sale of its
immovable property. Said excerpt be understood in the context of her whole testimony.
During her cross-examination. Respondent Gruenberg testified:

Q So, you signed in your capacity as the treasurer?

[A] Yes, sir.

Q Even then you kn[e]w all along that you [were] not
authorized?

A Yes, sir.

Q You stated on direct examination that you did not

represent that you were authorized to sell the property?

A Yes, sir.

Q But you also did not say that you were not authorized to
sell the property, you did not tell that to Mr. Co, is that
correct?

A That was not asked of me.

Q Yes, just answer it.

A I just told them that I was the treasurer of the corporation

and it [was] also the president who [was] also authorized to
sign on behalf of the corporation.

Q You did not say that you were not authorized nor did you
say that you were authorized?

A Mr. Co was very interested to purchase the property and

he offered to put up a P100,000.00 earnest money at that
time. That was our first meeting. 47

Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its
property. On the other hand, her testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw caution to the wind by offering
and paying the earnest money without first verifying Gruenberg's authority to sell the lot.

Fourth Issue:
Damages and Attorney's Fees

Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter
display of malice and bad faith, respondents attempted and succeeded in impressing on
the trial court and [the] Court of Appeals that Gruenberg did not represent herself as
authorized by Respondent Motorich despite the receipt issued by the former specifically
indicating that she was signing on behalf of Motorich Sales Corporation. Respondent
Motorich likewise acted in bad faith when it claimed it did not authorize Respondent
Gruenberg and that the contract [was] not binding, [insofar] as it [was] concerned,
despite receipt and enjoyment of the proceeds of Gruenberg's act." 48 Assuming that
Respondent Motorich was not a party to the alleged fraud, petitioner maintains that
Respondent Gruenberg should be held liable because she "acted fraudulently and in
bad faith [in] representing herself as duly authorized by [R]espondent [C]orporation." 49

As already stated, we sustain the findings of both the trial and the appellate courts that
the foregoing allegations lack factual bases. Hence, an award of damages or attorney's
fees cannot be justified. The amount paid as "earnest money" was not proven to have
redounded to the benefit of Respondent Motorich. Petitioner claims that said amount
was deposited to the account of Respondent Motorich, because "it was deposited with
the account of Aren Commercial c/o Motorich Sales Corporation." 50 Respondent
Gruenberg, however, disputes the allegations of petitioner. She testified as follows:

Q You voluntarily accepted the P100,000.00, as a matter of

fact, that was encashed, the check was encashed.

A Yes. sir, the check was paid in my name and I deposit[ed]

it.

Q In your account?

A Yes, sir. 51

In any event, Gruenberg offered to return the amount to petitioner ". . . since the
sale did not push through." 52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business.
He has been the president of Petitioner Corporation for more than ten years and has
also served as chief executive of two other corporate entities. 53 Co cannot feign
ignorance of the scope of the authority of a corporate treasurer such as Gruenberg.
Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's
authorization to enter into a contract to sell a parcel of land belonging to Motorich.

Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade
the Court. Indubitably, petitioner appears to be the victim of its own officer's negligence
in entering into a contract with and paying an unauthorized officer of another
corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be

ordered to return to petitioner the amount she received as earnest money, as "no one
shall enrich himself at the expense of another." 54 a principle embodied in Article 2154 of
Civil Code. 55 Although there was no binding relation between them, petitioner paid
Gruenberg on the mistaken belief that she had the authority to sell the property of
Motorich. 56 Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake in
the contruction or application of a difficult question of law may come within the scope of
the preceding article."

WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.

SO ORDERED.
G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,

vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT,
INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S.
LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,

vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and
MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of
Appeals in CA-G.R. CV No. 66195 which modified the decision of the then Court of First
Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R.
No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but
in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim

requiring Lim to pay plaintiff the amount of P311,056.02, with interest at
the rate of 12% per annum compounded monthly; plus 15% of the amount
awarded to plaintiff as attorney's fees from July 2,1966, until full payment
is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of
P184,878.74. Defendant Jacob S. Lim is further required to pay cross
party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the
 other half, the amount of Pl84,878.74 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from the filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the

Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer

against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as
attorney's fees and the amount of P4,379.21, per year from 1966 with
legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the

amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action

was filed in good faith. The fact that the properties of the Bormaheco and
the Cervanteses were attached and that they were required to file a
counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with
moral or exemplary damages. Furthermore, the rights exercised were
provided for in the Rules of Court, and it was the court that ordered it, in
the exercise of its discretion.

No damage is decided against Malayan Insurance Company, Inc., the

third-party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be liable for damages in
performing an act which is clearly within its power and which is the reason
for its being, then nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody is declared by this
Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline
business as owner-operator of Southern Air Lines (SAL) a single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into
and executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A
Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in Manila on July
18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in
G.R. No. 84197) as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in
favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and
spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana
(respondents in both petitions) contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their contributions to a
new corporation proposed by Lim to expand his airline business. They executed two (2)
separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed
by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the
Cervanteses. The indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold and save
harmless Pioneer from and against any/all damages, losses, costs, damages, taxes,
penalties, charges and expenses of whatever kind and nature which Pioneer may incur
in consequence of having become surety upon the bond/note and to pay, reimburse and
make good to Pioneer, its successors and assigns, all sums and amounts of money
which it or its representatives should or may pay or cause to be paid or become liable to
pay on them of whatever kind and nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in
favor of Pioneer as deed of chattel mortgage as security for the latter's suretyship in
favor of the former. It was stipulated therein that Lim transfer and convey to the surety
the two aircrafts. The deed (Exhibit D) was duly registered with the Office of the
Register of Deeds of the City of Manila and with the Civil Aeronautics Administration
pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.
776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request

payments from the surety. Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage
before the Sheriff of Davao City. The Cervanteses and Maglana, however, filed a third
party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a
writ of preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against
Lim alleging that they were not privies to the contracts signed by Lim and, by way of
counterclaim, sought for damages for being exposed to litigation and for recovery of the
sums of money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the
plaintiffs complaint against all the defendants was dismissed. In all other respects the
trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT

DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND
THAT PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF
THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT
IT CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT
FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE
TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer

had reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00. Defendants' alleged obligation to Pioneer amounts to
P295,000.00, hence, plaintiffs instant action for the recovery of the amount
of P298,666.28 from defendants will no longer prosper. Plaintiff Pioneer is
not the real party in interest to institute the instant action as it does not
stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover

the amount from defendants, hence, it instituted the action is utterly devoid
of merit. Plaintiff did not even present any evidence that it is the attorney-
in-fact of the reinsurance company, authorized to institute an action for
and in behalf of the latter. To qualify a person to be a real party in interest
in whose name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol. I,
Comments on the Rules of Court, 1979 ed., p. 155). It has been held that
the real party in interest is the party who would be benefited or injured by
the judgment or the party entitled to the avails of the suit (Salonga v.
Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is
meant a present substantial interest as distinguished from a mere
expectancy or a future, contingent, subordinate or consequential interest
 (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E.
2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. City of
Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered

as the real party in interest as it has already been paid by the reinsurer the
sum of P295,000.00 — the bulk of defendants' alleged obligation to
Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff

Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total
amount of P37,050.00 from the sale of the mortgaged chattels. Adding the
sum of P37,050.00, to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to
only P298,666.28. To allow plaintiff Pioneer to recover from defendants
the amount in excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New
Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding
that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has
never been raised by any of the parties herein both in their answers in the court below
and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming
hypothetically that it was paid by its reinsurer, still none of the respondents had any
interest in the matter since the reinsurance is strictly between the petitioner and the re-
insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money
was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues
threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so

much of its obligations to JDA as has been paid with reinsurance money?
 2. If the answer to the preceding question is in the negative, has Pioneer
still any claim against defendants, considering the amount it has realized
from the sale of the mortgaged properties? (Record on Appeal, p. 359,
Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond
it had executed in favor of JDA, collected the proceeds of such
reinsurance in the sum of P295,000, and paid with the said amount the
bulk of its alleged liability to JDA under the said surety bond, it is plain that
on this score it no longer has any right to collect to the extent of the said
amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that

is suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer
says: The reinsurers opted instead that the Pioneer Insurance & Surety
Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety
Corporation is representing the reinsurers to recover the amount.' In other
words, insofar as the amount paid to it by the reinsurers Pioneer is suing
defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint
that Pioneer is suing as attorney-in- fact of the reinsurers for any amount.
Lastly, and most important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the reinsurers. It is
well-settled that an action brought by an attorney-in-fact in his own name
instead of that of the principal will not prosper, and this is so even where
the name of the principal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules of Court provides that

'Every action must be prosecuted in the name of the real
party in interest.' This provision is mandatory. The real party
in interest is the party who would be benefitted or injured by
the judgment or is the party entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact

is not a real party in interest, that there is no law permitting
an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v.
Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinos Industrial
Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA
706, 710-714.
 The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer
has collected P295,000.00 from the reinsurers, the uninsured portion of
what it paid to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may sue defendants,
assuming that the indemnity agreement is still valid and effective. But
since the amount realized from the sale of the mortgaged chattels are
P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
Pioneer has no more claim against defendants. (Record on Appeal, pp.
360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate
court. Considering this admitted payment, the only issue that cropped up was the effect
of payment made by the reinsurers to the petitioner. Therefore, the petitioner's
argument that the respondents had no interest in the reinsurance contract as this is
strictly between the petitioner as insured and the reinsuring company pursuant to
Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by

subrogation as are acquired in similar cases where the original insurer
pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F
2nd 925).

The rules of practice in actions on original insurance policies are in

general applicable to actions or contracts of reinsurance. (Delaware, Ins.
Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con.
1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received
indemnity from the insurance company for the injury or loss arising out of
the wrong or breach of contract complained of, the insurance company
shall be subrogated to the rights of the insured against the wrongdoer or
the person who has violated the contract. If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved
party shall be entitled to recover the deficiency from the person causing
the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied in Manila Mahogany
Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity
from the insurer, it is provided in said article that the insurer is deemed
subrogated to the rights of the insured against the wrongdoer and if the
 amount paid by the insurer does not fully cover the loss, then the
aggrieved party is the one entitled to recover the deficiency. Evidently,
under this legal provision, the real party in interest with regard to the
portion of the indemnity paid is the insurer and not the insured. (Emphasis
supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-
fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the
petitioner's complaint as against the respondents for the reason that the petitioner was
not the real party in interest in the complaint and, therefore, has no cause of action
against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors
should not have been dismissed on the premise that the evidence on record shows that
it is entitled to recover from the counter indemnitors. It does not, however, cite any
grounds except its allegation that respondent "Maglanas defense and evidence are
certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence
to substantiate its finding that the counter-indemnitors are not liable to the petitioner.
The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to

be valid and effective after the execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts and the spare parts
involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in
Japan and could not be mortgaged here in the Philippines. As soon as the
aircrafts were brought to the Philippines, they would be mortgaged to
Pioneer Insurance to cover the bond, and this indemnity agreement would
be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties

have impaired and rendered insufficient the security under
the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no
other security for the claim sought to be enforced by this action, which
necessarily means that the indemnity agreement had ceased to have any
force and effect at the time this action was instituted. Sec 2, Rule 129,
Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel

mortgage on the planes and spare parts, no longer has any further action
against the defendants as indemnitors to recover any unpaid balance of
the price. The indemnity agreement was ipso jure extinguished upon the
foreclosure of the chattel mortgage. These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they
make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the

remedy of foreclosure precludes any further action to recover any unpaid
balance of the price.

SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the payments
to JDA, the alternative remedies open to Pioneer were as provided in
Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both

by extrajudicial foreclosure and the instant suit. Such being the case, as
provided by the aforementioned provisions, Pioneer shall have no further
action against the purchaser to recover any unpaid balance and any
agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment &
Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through

the contention that Pioneer is not the vendor but JDA. The reason is that
Pioneer is actually exercising the rights of JDA as vendor, having
subrogated it in such rights. Nor may the application of the provision be
validly opposed on the ground that these defendants and defendant
Maglana are not the vendee but indemnitors. Pascual, et al. v. Universal
Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their
maturity dates discharged these defendants from any liability as alleged
indemnitors. The change of the maturity dates of the obligations of Lim, or
SAL extinguish the original obligations thru novations thus discharging the
indemnitors.

The principal hereof shall be paid in eight equal successive

three months interval installments, the first of which shall be
due and payable 25 August 1965, the remainder of which ...
 shall be due and payable on the 26th day x x x of each
succeeding three months and the last of which shall be due
and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum

executed by SAL or Lim and JDA, modifying the maturity dates of the
obligations, as follows:

The principal hereof shall be paid in eight equal successive

three month interval installments the first of which shall be
due and payable 4 September 1965, the remainder of which
... shall be due and payable on the 4th day ... of each
succeeding months and the last of which shall be due and
payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes
bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates,

effected twice, were done without the knowledge, much less, would have it
believed that these defendants Maglana (sic). Pioneer's official Numeriano
Carbonel would have it believed that these defendants and defendant
Maglana knew of and consented to the modification of the obligations. But
if that were so, there would have been the corresponding documents in
the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this
was the extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of
Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor

without the consent of the guarantor extinguishes the
guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of
itself constitute any extension time referred to herein, (New
Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
 Pioneer's liability as surety to JDA had already prescribed when Pioneer
paid the same. Consequently, Pioneer has no more cause of action to
recover from these defendants, as supposed indemnitors, what it has paid
to JDA. By virtue of an express stipulation in the surety bond, the failure of
JDA to present its claim to Pioneer within ten days from default of Lim or
SAL on every installment, released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these

defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him

to reimbursement from his co-debtors if such payment is
made after the obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees

from Pioneer and its surety by reason of the filing of the instant case
against them and the attachment and garnishment of their properties. The
instant action is clearly unfounded insofar as plaintiff drags these
defendants and defendant Maglana.' (Record on Appeal, pp. 363-369,
Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose

agreement was to do business through the corporate vehicle but who
failed to incorporate the entity in which they had chosen to invest? How
are the losses to be treated in situations where their contributions to the
intended 'corporation' were invested not through the corporate form? This
Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of
respondents Bormaheco, Spouses Cervantes, Constancio Maglana and petitioner Lim
to incorporate, a de facto partnership among them was created, and that as a
consequence of such relationship all must share in the losses and/or gains of the
venture in proportion to their contribution. The petitioner, therefore, questions the
appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:
 However, defendant Lim should be held liable to pay his co-defendants'
cross-claims in the total amount of P184,878.74 as correctly found by the
trial court, with interest from the filing of the cross-complaints until the
amount is fully paid. Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to
defendant Maglana. It is established in the records that defendant Lim had
duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the
subject airplanes and spare parts (Exhibit 58). In addition, the cross-party
plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed
by the supposed charter and the laws of the state relating thereto and not
by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on business under
the corporate name occupy the position of partners inter se (Lynch v.
Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase
property to carry on a business, and their organization is so defective as to
come short of creating a corporation within the statute, they become in
legal effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker,
29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him,
and no stock was ever issued in the corporation, it was treated as a
trustee for the associates in an action between them for an accounting,
and its capital stock was treated as partnership assets, sold, and the
proceeds distributed among them in proportion to the value of the property
contributed by each (Shorb v. Beaudry, 56 Cal. 446). However, such a
relation does not necessarily exist, for ordinarily persons cannot be made
to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist (London Assur. Corp. v.
Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it
should be implied only when necessary to do justice between the parties;
thus, one who takes no part except to subscribe for stock in a proposed
corporation which is never legally formed does not become a partner with
other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for
 settlement of the alleged partnership and contribution (Ward v. Brigham,
127 Mass. 24). A partnership relation between certain stockholders and
other stockholders, who were also directors, will not be implied in the
absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44
N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p. 464). (Italics
supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his
failure to appear during the pretrial despite notification. In his answer, the petitioner
denied having received any amount from respondents Bormaheco, the Cervanteses
and Maglana. The trial court and the appellate court, however, found through Exhibit 58,
that the petitioner received the amount of P151,000.00 representing the participation of
Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes
and spare parts. The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with
the respondents despite his representations to them. This gives credence to the cross-
claims of the respondents to the effect that they were induced and lured by the
petitioner to make contributions to a proposed corporation which was never formed
because the petitioner reneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco

Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary certificates of
public convenience and necessity as well as the required permits for the
operation thereof. Maglana sometime in May 1965, gave Cervantes his
share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of
the undertaking. Lim in an undertaking sometime on or about August
9,1965, promised to incorporate his airline in accordance with their
agreement and proceeded to acquire the planes on his own account.
Since then up to the filing of this answer, Lim has refused, failed and still
refuses to set up the corporation or return the money of Maglana. (Record
on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer,

counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering
defendants to purchase two airplanes and spare parts from Japan which
the latter considered as their lawful contribution and participation in the
proposed corporation to be known as SAL. Arrangements and
negotiations were undertaken by defendant Lim. Down payments were
advanced by defendants Bormaheco and the Cervanteses and
 Constancio Maglana (Exh. E- 1). Contrary to the agreement among the
defendants, defendant Lim in connivance with the plaintiff, signed and
executed the alleged chattel mortgage and surety bond agreement in his
personal capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and misrepresentation
of the other, Jacob Lim, when the herein plaintiff chattel mortgage (sic)
allegedly executed by defendant Lim, thereby forcing them to file an
adverse claim in the form of third party claim. Notwithstanding repeated
oral demands made by defendants Bormaheco and Cervanteses, to
defendant Lim, to surrender the possession of the two planes and their
accessories and or return the amount advanced by the former amounting
to an aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with them.
(Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily,
no de facto partnership was created among the parties which would entitle the petitioner
to a reimbursement of the supposed losses of the proposed corporation. The record
shows that the petitioner was acting on his own and not in behalf of his other would-be
incorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the
Court of Appeals is AFFIRMED.

SO ORDERED.
G.R. No. 113375 May 5, 1994

KILOSBAYAN, INCORPORATED, JOVITO R. SALONGA, CIRILO A. RIGOS, ERME

CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO,
FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON,
RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S.
DOROMAL, SEN. FREDDIE WEBB, SEN. WIGBERTO TAÑADA, and REP. JOKER
P. ARROYO, petitioners,
vs.
TEOFISTO GUINGONA, JR., in his capacity as Executive Secretary, Office of the
President; RENATO CORONA, in his capacity as Assistant Executive Secretary
and Chairman of the Presidential review Committee on the Lotto, Office of the
President; PHILIPPINE CHARITY SWEEPSTAKES OFFICE; and PHILIPPINE
GAMING MANAGEMENT CORPORATION, respondents.

Jovito R. Salonga, Fernando Santiago, Emilio C. Capulong, Jr. and Felipe L. Gozon for
petitioners.

Renato L. Cayetano and Eleazar B. Reyes for PGMC.

Gamaliel G. Bongco, Oscar Karaan and Jedideoh Sincero for intervenors.

DAVIDE, JR., J.:

This is a special civil action for prohibition and injunction, with a prayer for a temporary
restraining order and preliminary injunction, which seeks to prohibit and restrain the
implementation of the "Contract of Lease" executed by the Philippine Charity
Sweepstakes Office (PCSO) and the Philippine Gaming Management Corporation
(PGMC) in connection with the on- line lottery system, also known as "lotto."

Petitioner Kilosbayan, Incorporated (KILOSBAYAN) avers that it is a non-stock

domestic corporation composed of civic-spirited citizens, pastors, priests, nuns, and lay
leaders who are committed to the cause of truth, justice, and national renewal. The rest
of the petitioners, except Senators Freddie Webb and Wigberto Tañada and
Representative Joker P. Arroyo, are suing in their capacities as members of the Board
of Trustees of KILOSBAYAN and as taxpayers and concerned citizens. Senators Webb
and Tañada and Representative Arroyo are suing in their capacities as members of
Congress and as taxpayers and concerned citizens of the Philippines.

The pleadings of the parties disclose the factual antecedents which triggered off the
filing of this petition.

Pursuant to Section 1 of the charter of the PCSO (R.A. No. 1169, as amended by B.P.
Blg. 42) which grants it the authority to hold and conduct "charity sweepstakes races,
lotteries and other similar activities," the PCSO decided to establish an on- line lottery
system for the purpose of increasing its revenue base and diversifying its sources of
funds. Sometime before March 1993, after learning that the PCSO was interested in
operating an on-line lottery system, the Berjaya Group Berhad, "a multinational
company and one of the ten largest public companies in Malaysia," long "engaged in,
among others, successful lottery operations in Asia, running both Lotto and Digit games,
thru its subsidiary, Sports Toto Malaysia," with its "affiliate, the International Totalizator
Systems, Inc., . . . an American public company engaged in the international sale or
provision of computer systems, softwares, terminals, training and other technical
services to the gaming industry," "became interested to offer its services and resources
to PCSO." As an initial step, Berjaya Group Berhad (through its individual nominees)
organized with some Filipino investors in March 1993 a Philippine corporation known as
the Philippine Gaming Management Corporation (PGMC), which "was intended to be
the medium through which the technical and management services required for the
project would be offered and delivered to PCSO." 1

Before August 1993, the PCSO formally issued a Request for Proposal (RFP) for the
Lease Contract of an on-line lottery system for the PCSO. 2 Relevant provisions of the
RFP are the following:

1. EXECUTIVE SUMMARY

xxx xxx xxx

1.2. PCSO is seeking a suitable contractor which shall build, at its own
expense, all the facilities ('Facilities') needed to operate and maintain a
nationwide on-line lottery system. PCSO shall lease the Facilities for a
fixed percentage ofquarterly gross receipts. All receipts from ticket sales
shall be turned over directly to PCSO. All capital, operating expenses and
expansion expenses and risks shall be for the exclusive account of the
Lessor.

xxx xxx xxx

1.4. The lease shall be for a period not exceeding fifteen (15) years.

1.5. The Lessor is expected to submit a comprehensive nationwide lottery

development plan ("Development Plan") which will include the game, the
marketing of the games, and the logistics to introduce the games to all the
cities and municipalities of the country within five (5) years.

xxx xxx xxx

1.7. The Lessor shall be selected based on its technical expertise,

hardware and software capability, maintenance support, and financial
resources. The Development Plan shall have a substantial bearing on the
choice of the Lessor. The Lessor shall be a domestic corporation, with at
least sixty percent (60%) of its shares owned by Filipino shareholders.

xxx xxx xxx

The Office of the President, the National Disaster Control Coordinating

Council, the Philippine National Police, and the National Bureau of
Investigation shall be authorized to use the nationwide
telecommunications system of the Facilities Free of Charge.

1.8. Upon expiration of the lease, the Facilities shall be owned by PCSO
without any additional consideration. 3

xxx xxx xxx

2.2. OBJECTIVES

The objectives of PCSO in leasing the Facilities from a private entity are
as follows:

xxx xxx xxx

2.2.2. Enable PCSO to operate a nationwide on-line Lottery system at no

expense or risk to the government.

xxx xxx xxx

2.4. DUTIES AND RESPONSIBILITIES OF THE LESSOR

xxx xxx xxx

2.4.2. THE LESSOR

The Proponent is expected to furnish and maintain the Facilities, including

the personnel needed to operate the computers, the communications
network and sales offices under a build-lease basis. The printing of tickets
shall be undertaken under the supervision and control of PCSO. The
Facilities shall enable PCSO to computerize the entire gaming system.

The Proponent is expected to formulate and design consumer-oriented

Master Games Plan suited to the marketplace, especially geared to
Filipino gaming habits and preferences. In addition, the Master Games
Plan is expected to include a Product Plan for each game and explain how
each will be introduced into the market. This will be an integral part of the
Development Plan which PCSO will require from the Proponent.
 xxx xxx xxx

The Proponent is expected to provide upgrades to modernize the entire

gaming system over the life ofthe lease contract.

The Proponent is expected to provide technology transfer to PCSO

technical personnel. 4

7. GENERAL GUIDELINES FOR PROPONENTS

xxx xxx xxx

Finally, the Proponent must be able to stand the acid test of proving that it
is an entity able to take on the role of responsible maintainer of the on-line
lottery system, and able to achieve PSCO's goal of formalizing an on-line
lottery system to achieve its mandated objective. 5

xxx xxx xxx

16. DEFINITION OF TERMS

Facilities: All capital equipment, computers, terminals, software,

nationwide telecommunication network, ticket sales offices, furnishings,
and fixtures; printing costs; cost of salaries and wages; advertising and
promotion expenses; maintenance costs; expansion and replacement
costs; security and insurance, and all other related expenses needed to
operate nationwide on-line lottery system.6

Considering the above citizenship requirement, the PGMC claims that the Berjaya
Group "undertook to reduce its equity stakes in PGMC to 40%," by selling 35% out of
the original 75% foreign stockholdings to local investors.

On 15 August 1993, PGMC submitted its bid to the PCSO.7

The bids were evaluated by the Special Pre-Qualification Bids and Awards Committee
(SPBAC) for the on-line lottery and its Bid Report was thereafter submitted to the Office
of the President. 8 The submission was preceded by complaints by the Committee's
Chairperson, Dr. Mita Pardo de Tavera. 9

On 21 October 1993, the Office of the President announced that it had given the
respondent PGMC the go-signal to operate the country's on-line lottery system and that
the corresponding implementing contract would be submitted not later than 8 November
1993 "for final clearance and approval by the Chief Executive." 10 This announcement
was published in the Manila Standard, Philippine Daily Inquirer, and the Manila Times
on 29 October 1993. 11
On 4 November 1993, KILOSBAYAN sent an open letter to Presidential Fidel V. Ramos
strongly opposing the setting up to the on-line lottery system on the basis of serious
moral and ethical considerations. 12

At the meeting of the Committee on Games and Amusements of the Senate on 12

November 1993, KILOSBAYAN reiterated its vigorous opposition to the on-line lottery
on account of its immorality and illegality. 13

On 19 November 1993, the media reported that despite the opposition, "Malacañang
will push through with the operation of an on-line lottery system nationwide" and that it is
actually the respondent PCSO which will operate the lottery while the winning corporate
bidders are merely "lessors." 14

On 1 December 1993, KILOSBAYAN requested copies of all documents pertaining to

the lottery award from Executive Secretary Teofisto Guingona, Jr. In his answer of 17
December 1993, the Executive Secretary informed KILOSBAYAN that the requested
documents would be duly transmitted before the end of the month. 15. However, on that
same date, an agreement denominated as "Contract of Lease" was finally executed by
respondent PCSO and respondent PGMC. 16 The President, per the press statement
issued by the Office of the President, approved it on 20 December 1993. 17

In view of their materiality and relevance, we quote the following salient provisions of
the Contract of Lease:

1. DEFINITIONS

The following words and terms shall have the following respective
meanings:

1.1 Rental Fee — Amount to be paid by PCSO to the LESSOR as

compensation for the fulfillment of the obligations of the LESSOR under
this Contract, including, but not limited to the lease of the Facilities.

xxx xxx xxx

1.3 Facilities — All capital equipment, computers, terminals, software

(including source codes for the On-Line Lottery application software for
the terminals, telecommunications and central systems), technology,
intellectual property rights, telecommunications network, and furnishings
and fixtures.

1.4 Maintenance and Other Costs — All costs and expenses relating to
printing, manpower, salaries and wages, advertising and promotion,
maintenance, expansion and replacement, security and insurance, and all
other related expenses needed to operate an On-Line Lottery System,
which shall be for the account of the LESSOR. All expenses relating to the
setting-up, operation and maintenance of ticket sales offices of dealers
and retailers shall be borne by PCSO's dealers and retailers.

1.5 Development Plan — The detailed plan of all games, the marketing
thereof, number of players, value of winnings and the logistics required to
introduce the games, including the Master Games Plan as approved by
PCSO, attached hereto as Annex "A", modified as necessary by the
provisions of this Contract.

xxx xxx xxx

1.8 Escrow Deposit — The proposal deposit in the sum of Three Hundred
Million Pesos (P300,000,000.00) submitted by the LESSOR to PCSO
pursuant to the requirements of the Request for Proposals.

2. SUBJECT MATTER OF THE LEASE

The LESSOR shall build, furnish and maintain at its own expense and risk
the Facilities for the On-Line Lottery System of PCSO in the Territory on
an exclusive basis. The LESSOR shall bear all Maintenance and Other
Costs as defined herein.

xxx xxx xxx

3. RENTAL FEE

For and in consideration of the performance by the LESSOR of its

obligations herein, PCSO shall pay LESSOR a fixed Rental Fee equal to
four point nine percent (4.9%) of gross receipts from ticket sales, payable
net of taxes required by law to be withheld, on a semi-monthly basis.
Goodwill, franchise and similar fees shall belong to PCSO.

4. LEASE PERIOD

The period of the lease shall commence ninety (90) days from the date of
effectivity of this Contract and shall run for a period of eight (8) years
thereafter, unless sooner terminated in accordance with this Contract.

5. RIGHTS AND OBLIGATIONS OF PCSO AS OPERATOR OF THE ON-

LINE LOTTERY SYSTEM

PCSO shall be the sole and individual operator of the On-Line Lottery
System. Consequently:

5.1 PCSO shall have sole responsibility to decide whether to implement,

fully or partially, the Master Games Plan of the LESSOR. PCSO shall
have the sole responsibility to determine the time for introducing new
games to the market. The Master Games Plan included in Annex "A"
hereof is hereby approved by PCSO.

5.2 PCSO shall have control over revenues and receipts of whatever
nature from the On-Line Lottery System. After paying the Rental Fee to
the LESSOR, PCSO shall have exclusive responsibility to determine the
Revenue Allocation Plan; Provided, that the same shall be consistent with
the requirement of R.A. No. 1169, as amended, which fixes a prize fund of
fifty five percent (55%) on the average.

5.3 PCSO shall have exclusive control over the printing of tickets,
including but not limited to the design, text, and contents thereof.

5.4 PCSO shall have sole responsibility over the appointment of dealers or
retailers throughout the country. PCSO shall appoint the dealers and
retailers in a timely manner with due regard to the implementation
timetable of the On-Line Lottery System. Nothing herein shall preclude the
LESSOR from recommending dealers or retailers for appointment by
PCSO, which shall act on said recommendation within forty-eight (48)
hours.

5.5 PCSO shall designate the necessary personnel to monitor and audit
the daily performance of the On-Line Lottery System. For this purpose,
PCSO designees shall be given, free of charge, suitable and adequate
space, furniture and fixtures, in all offices of the LESSOR, including but
not limited to its headquarters, alternate site, regional and area offices.

5.6 PCSO shall have the responsibility to resolve, and exclusive

jurisdiction over, all matters involving the operation of the On-Line Lottery
System not otherwise provided in this Contract.

5.7 PCSO shall promulgate procedural and coordinating rules governing

all activities relating to the On-Line Lottery System.

5.8 PCSO will be responsible for the payment of prize monies,

commissions to agents and dealers, and taxes and levies (if any)
chargeable to the operator of the On-Line Lottery System. The LESSOR
will bear all other Maintenance and Other Costs, except as provided in
Section 1.4.

5.9 PCSO shall assist the LESSOR in the following:

5.9.1 Work permits for the LESSOR's staff;

5.9.2 Approvals for importation of the Facilities;

 5.9.3 Approvals and consents for the On-Line Lottery
System; and

5.9.4 Business and premises licenses for all offices of the

LESSOR and licenses for the telecommunications network.

5.10 In the event that PCSO shall pre-terminate this Contract or suspend
the operation of the On-Line Lottery System, in breach of this Contract
and through no fault of the LESSOR, PCSO shall promptly, and in any
event not later than sixty (60) days, reimburse the LESSOR the amount of
its total investment cost associated with the On-Line Lottery System,
including but not limited to the cost of the Facilities, and further
compensate the LESSOR for loss of expected net profit after tax,
computed over the unexpired term of the lease.

6. DUTIES AND RESPONSIBILITIES OF THE LESSOR

The LESSOR is one of not more than three (3) lessors of similar facilities
for the nationwide On-Line Lottery System of PCSO. It is understood that
the rights of the LESSOR are primarily those of a lessor of the Facilities,
and consequently, all rights involving the business aspects of the use of
the Facilities are within the jurisdiction of PCSO. During the term of the
lease, the LESSOR shall.

6.1 Maintain and preserve its corporate existence, rights and privileges,
and conduct its business in an orderly, efficient, and customary manner.

6.2 Maintain insurance coverage with insurers acceptable to PCSO on all

Facilities.

6.3 Comply with all laws, statues, rules and regulations, orders and
directives, obligations and duties by which it is legally bound.

6.4 Duly pay and discharge all taxes, assessments and government
charges now and hereafter imposed of whatever nature that may be
legally levied upon it.

6.5 Keep all the Facilities in fail safe condition and, if necessary, upgrade,
replace and improve the Facilities from time to time as new technology
develops, in order to make the On-Line Lottery System more cost-effective
and/or competitive, and as may be required by PCSO shall not impose
such requirements unreasonably nor arbitrarily.

6.6 Provide PCSO with management terminals which will allow real-time
monitoring of the On-Line Lottery System.
6.7 Upon effectivity of this Contract, commence the training of PCSO and
other local personnel and the transfer of technology and expertise, such
that at the end of the term of this Contract, PCSO will be able to effectively
take-over the Facilities and efficiently operate the On-Line Lottery System.

6.8 Undertake a positive advertising and promotions campaign for both

institutional and product lines without engaging in negative advertising
against other lessors.

6.9 Bear all expenses and risks relating to the Facilities including, but not
limited to, Maintenance and Other Costs and:

xxx xxx xxx

6.10 Bear all risks if the revenues from ticket sales, on an annualized
basis, are insufficient to pay the entire prize money.

6.11 Be, and is hereby, authorized to collect and retain for its own
account, a security deposit from dealers and retailers, in an amount
determined with the approval of PCSO, in respect of equipment supplied
by the LESSOR. PCSO's approval shall not be unreasonably withheld.

xxx xxx xxx

6.12 Comply with procedural and coordinating rules issued by PCSO.

7. REPRESENTATIONS AND WARRANTIES

The LESSOR represents and warrants that:

7.1 The LESSOR is corporation duly organized and existing under the
laws of the Republic of the Philippines, at least sixty percent (60%) of the
outstanding capital stock of which is owned by Filipino shareholders. The
minimum required Filipino equity participation shall not be impaired
through voluntary or involuntary transfer, disposition, or sale of shares of
stock by the present stockholders.

7.2 The LESSOR and its Affiliates have the full corporate and legal power
and authority to own and operate their properties and to carry on their
business in the place where such properties are now or may be
conducted. . . .

7.3 The LESSOR has or has access to all the financing and funding
requirements to promptly and effectively carry out the terms of this
Contract. . . .
7.4 The LESSOR has or has access to all the managerial and technical
expertise to promptly and effectively carry out the terms of this Contract. . .
.

xxx xxx xxx

10. TELECOMMUNICATIONS NETWORK

The LESSOR shall establish a telecommunications network that will

connect all municipalities and cities in the Territory in accordance with, at
the LESSOR's option, either of the LESSOR's proposals (or a
combinations of both such proposals) attached hereto as Annex "B," and
under the following PCSO schedule:

xxx xxx xxx

PCSO may, at its option, require the LESSOR to establish the

telecommunications network in accordance with the above Timetable in
provinces where the LESSOR has not yet installed terminals. Provided,
that such provinces have existing nodes. Once a municipality or city is
serviced by land lines of a licensed public telephone company, and such
lines are connected to Metro Manila, then the obligation of the LESSOR to
connect such municipality or city through a telecommunications network
shall cease with respect to such municipality or city. The voice facility will
cover the four offices of the Office of the President, National Disaster
Control Coordinating Council, Philippine National Police and the National
Bureau of Investigation, and each city and municipality in the Territory
except Metro Manila, and those cities and municipalities which have easy
telephone access from these four offices. Voice calls from the four offices
shall be transmitted via radio or VSAT to the remote municipalities which
will be connected to this voice facility through wired network or by radio.
The facility shall be designed to handle four private conversations at any
one time.

xxx xxx xxx

13. STOCK DISPERSAL PLAN

Within two (2) years from the effectivity of this Contract, the LESSOR shall
cause itself to be listed in the local stock exchange and offer at least
twenty five percent (25%) of its equity to the public.

14. NON-COMPETITION
The LESSOR shall not, directly or indirectly, undertake any activity or
business in competition with or adverse to the On-Line Lottery System of
PCSO unless it obtains the latter's prior written consent thereto.

15. HOLD HARMLESS CLAUSE

15.1 The LESSOR shall at all times protect and defend, at its cost and
expense, PCSO from and against any and all liabilities and claims for
damages and/or suits for or by reason of any deaths of, or any injury or
injuries to any person or persons, or damages to property of any kind
whatsoever, caused by the LESSOR, its subcontractors, its authorized
agents or employees, from any cause or causes whatsoever.

15.2 The LESSOR hereby covenants and agrees to indemnify and hold
PCSO harmless from all liabilities, charges, expenses (including
reasonable counsel fees) and costs on account of or by reason of any
such death or deaths, injury or injuries, liabilities, claims, suits or losses
caused by the LESSOR's fault or negligence.

15.3 The LESSOR shall at all times protect and defend, at its own cost
and expense, its title to the facilities and PCSO's interest therein from and
against any and all claims for the duration of the Contract until transfer to
PCSO of ownership of the serviceable Facilities.

16. SECURITY

16.1 To ensure faithful compliance by the LESSOR with the terms of the
Contract, the LESSOR shall secure a Performance Bond from a reputable
insurance company or companies acceptable to PCSO.

16.2 The Performance Bond shall be in the initial amount of Three

Hundred Million Pesos (P300,000,000.00), to its U.S. dollar equivalent,
and shall be renewed to cover the duration of the Contract. However, the
Performance Bond shall be reduced proportionately to the percentage of
unencumbered terminals installed; Provided, that the Performance Bond
shall in no case be less than One Hundred Fifty Million Pesos
(P150,000,000.00).

16.3 The LESSOR may at its option maintain its Escrow Deposit as the
Performance Bond. . . .

17. PENALTIES

17.1 Except as may be provided in Section 17.2, should the LESSOR fail
to take remedial measures within seven (7) days, and rectify the breach
within thirty (30) days, from written notice by PCSO of any wilfull or grossly
negligent violation of the material terms and conditions of this Contract, all
unencumbered Facilities shall automatically become the property of PCSO
without consideration and without need for further notice or demand by
PCSO. The Performance Bond shall likewise be forfeited in favor of
PCSO.

17.2 Should the LESSOR fail to comply with the terms of the Timetables
provided in Section 9 and 10, it shall be subject to an initial Penalty of
Twenty Thousand Pesos (P20,000.00), per city or municipality per every
month of delay; Provided, that the Penalty shall increase, every ninety (90)
days, by the amount of Twenty Thousand Pesos (P20,000.00) per city or
municipality per month, whilst shall failure to comply persists. The penalty
shall be deducted by PCSO from the rental fee.

xxx xxx xxx

20. OWNERSHIP OF THE FACILITIES

After expiration of the term of the lease as provided in Section 4, the

Facilities directly required for the On-Line Lottery System mentioned in
Section 1.3 shall automatically belong in full ownership to PCSO without
any further consideration other than the Rental Fees already paid during
the effectivity of the lease.

21. TERMINATION OF THE LEASE

PCSO may terminate this Contract for any breach of the material
provisions of this Contract, including the following:

21.1 The LESSOR is insolvent or bankrupt or unable to pay its debts,

stops or suspends or threatens to stop or suspend payment of all or a
material part of its debts, or proposes or makes a general assignment or
an arrangement or compositions with or for the benefit of its creditors; or

21.2 An order is made or an effective resolution passed for the winding up

or dissolution of the LESSOR or when it ceases or threatens to cease to
carry on all or a material part of its operations or business; or

21.3 Any material statement, representation or warranty made or

furnished by the LESSOR proved to be materially false or misleading;

said termination to take effect upon receipt of written notice

of termination by the LESSOR and failure to take remedial
action within seven (7) days and cure or remedy the same
within thirty (30) days from notice.
 Any suspension, cancellation or termination of this Contract
shall not relieve the LESSOR of any liability that may have
already accrued hereunder.

xxx xxx xxx

Considering the denial by the Office of the President of its protest and the statement of
Assistant Executive Secretary Renato Corona that "only a court injunction can stop
Malacañang," and the imminent implementation of the Contract of Lease in February
1994, KILOSBAYAN, with its co-petitioners, filed on 28 January 1994 this petition.

In support of the petition, the petitioners claim that:

. . . X X THE OFFICE OF THE PRESIDENT, ACTING

THROUGH RESPONDENTS EXECUTIVE SECRETARY
AND/OR ASSISTANT EXECUTIVE SECRETARY FOR
LEGAL AFFAIRS, AND THE PCSO GRAVELY ABUSE[D]
THEIR DISCRETION AND/OR FUNCTIONS TANTAMOUNT
TO LACK OF JURISDICTION AND/OR AUTHORITY IN
RESPECTIVELY: (A) APPROVING THE AWARD OF THE
CONTRACT TO, AND (B) ENTERING INTO THE SO-
CALLED "CONTRACT OF LEASE" WITH, RESPONDENT
PGMC FOR THE INSTALLATION, ESTABLISHMENT AND
OPERATION OF THE ON-LINE LOTTERY AND
TELECOMMUNICATION SYSTEMS REQUIRED AND/OR
AUTHORIZED UNDER THE SAID CONTRACT,
CONSIDERING THAT:

a) Under Section 1 of the Charter of the PCSO, the PCSO is prohibited

from holding and conducting lotteries "in collaboration, association or joint
venture with any person, association, company or entity";

b) Under Act No. 3846 and established jurisprudence, a Congressional

franchise is required before any person may be allowed to establish and
operate said telecommunications system;

c) Under Section 11, Article XII of the Constitution, a less than 60%
Filipino-owned and/or controlled corporation, like the PGMC, is
disqualified from operating a public service, like the said
telecommunications system; and

d) Respondent PGMC is not authorized by its charter and under the

Foreign Investment Act (R.A. No. 7042) to install, establish and operate
the on-line lotto and telecommunications systems.18
Petitioners submit that the PCSO cannot validly enter into the assailed Contract of
Lease with the PGMC because it is an arrangement wherein the PCSO would hold and
conduct the on-line lottery system in "collaboration" or "association" with the PGMC, in
violation of Section 1(B) of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits
the PCSO from holding and conducting charity sweepstakes races, lotteries, and other
similar activities "in collaboration, association or joint venture with any person,
association, company or entity, foreign or domestic." Even granting arguendo that a
lease of facilities is not within the contemplation of "collaboration" or "association," an
analysis, however, of the Contract of Lease clearly shows that there is a "collaboration,
association, or joint venture between respondents PCSO and PGMC in the holding of
the On-Line Lottery System," and that there are terms and conditions of the Contract
"showing that respondent PGMC is the actual lotto operator and not respondent
PCSO."19

The petitioners also point out that paragraph 10 of the Contract of Lease requires or
authorizes PGMC to establish a telecommunications network that will connect all the
municipalities and cities in the territory. However, PGMC cannot do that because it has
no franchise from Congress to construct, install, establish, or operate the network
pursuant to Section 1 of Act No. 3846, as amended. Moreover, PGMC is a 75% foreign-
owned or controlled corporation and cannot, therefore, be granted a franchise for that
purpose because of Section 11, Article XII of the 1987 Constitution. Furthermore, since
"the subscribed foreign capital" of the PGMC "comes to about 75%, as shown by
paragraph EIGHT of its Articles of Incorporation," it cannot lawfully enter into the
contract in question because all forms of gambling — and lottery is one of them — are
included in the so-called foreign investments negative list under the Foreign
Investments Act (R.A. No. 7042) where only up to 40% foreign capital is allowed. 20

Finally, the petitioners insist that the Articles of Incorporation of PGMC do not authorize
it to establish and operate an on-line lottery and telecommunications systems.21

Accordingly, the petitioners pray that we issue a temporary restraining order and a writ
of preliminary injunction commanding the respondents or any person acting in their
places or upon their instructions to cease and desist from implementing the challenged
Contract of Lease and, after hearing the merits of the petition, that we render judgment
declaring the Contract of Lease void and without effect and making the injunction
permanent. 22

We required the respondents to comment on the petition.

In its Comment filed on 1 March 1994, private respondent PGMC asserts that "(1) [it] is
merely an independent contractor for a piece of work, (i.e., the building and
maintenance of a lottery system to be used by PCSO in the operation of its lottery
franchise); and (2) as such independent contractor, PGMC is not a co-operator of the
lottery franchise with PCSO, nor is PCSO sharing its franchise, 'in collaboration,
association or joint venture' with PGMC — as such statutory limitation is viewed from
the context, intent, and spirit of Republic Act 1169, as amended by Batas Pambansa
42." It further claims that as an independent contractor for a piece of work, it is neither
engaged in "gambling" nor in "public service" relative to the telecommunications
network, which the petitioners even consider as an "indispensable requirement" of an
on-line lottery system. Finally, it states that the execution and implementation of the
contract does not violate the Constitution and the laws; that the issue on the "morality"
of the lottery franchise granted to the PCSO is political and not judicial or legal, which
should be ventilated in another forum; and that the "petitioners do not appear to have
the legal standing or real interest in the subject contract and in obtaining the reliefs
sought." 23

In their Comment filed by the Office of the Solicitor General, public respondents
Executive Secretary Teofisto Guingona, Jr., Assistant Executive Secretary Renato
Corona, and the PCSO maintain that the contract of lease in question does not violate
Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and that the petitioner's
interpretation of the phrase "in collaboration, association or joint venture" in Section 1 is
"much too narrow, strained and utterly devoid of logic" for it "ignores the reality that
PCSO, as a corporate entity, is vested with the basic and essential prerogative to enter
into all kinds of transactions or contracts as may be necessary for the attainment of its
purposes and objectives." What the PCSO charter "seeks to prohibit is that
arrangement akin to a "joint venture" or partnership where there is "community of
interest in the business, sharing of profits and losses, and a mutual right of control," a
characteristic which does not obtain in a contract of lease." With respect to the
challenged Contract of Lease, the "role of PGMC is limited to that of a lessor of the
facilities" for the on-line lottery system; in "strict technical and legal sense," said contract
"can be categorized as a contract for a piece of work as defined in Articles 1467, 1713
and 1644 of the Civil Code."

They further claim that the establishment of the telecommunications system stipulated
in the Contract of Lease does not require a congressional franchise because PGMC will
not operate a public utility; moreover, PGMC's "establishment of a telecommunications
system is not intended to establish a telecommunications business," and it has been
held that where the facilities are operated "not for business purposes but for its own
use," a legislative franchise is not required before a certificate of public convenience can
be granted. 24 Even granting arguendo that PGMC is a public utility, pursuant to Albano
S.
Reyes, 25 "it can establish a telecommunications system even without a legislative
franchise because not every public utility is required to secure a legislative franchise
before it could establish, maintain, and operate the service"; and, in any case, "PGMC's
establishment of the telecommunications system stipulated in its contract of lease with
PCSO falls within the exceptions under Section 1 of Act No. 3846 where a legislative
franchise is not necessary for the establishment of radio stations."

They also argue that the contract does not violate the Foreign Investment Act of 1991;
that the Articles of Incorporation of PGMC authorize it to enter into the Contract of
Lease; and that the issues of "wisdom, morality and propriety of acts of the executive
department are beyond the ambit of judicial review."
Finally, the public respondents allege that the petitioners have no standing to maintain
the instant suit, citing our resolution in Valmonte vs. Philippine Charity Sweepstakes
Office. 26

Several parties filed motions to intervene as petitioners in this case, 27 but only the
motion of Senators Alberto Romulo, Arturo Tolentino, Francisco Tatad, Gloria
Macapagal-Arroyo, Vicente Sotto III, John Osmeña, Ramon Revilla, and Jose
Lina 28 was granted, and the respondents were required to comment on their petition in
intervention, which the public respondents and PGMC did.

In the meantime, the petitioners filed with the Securities and Exchange Commission on
29 March 1994 a petition against PGMC for the nullification of the latter's General
Information Sheets. That case, however, has no bearing in this petition.

On 11 April 1994, we heard the parties in oral arguments. Thereafter, we resolved to

consider the matter submitted for resolution and pending resolution of the major issues
in this case, to issue a temporary restraining order commanding the respondents or any
person acting in their place or upon their instructions to cease and desist from
implementing the challenged Contract of Lease.

In the deliberation on this case on 26 April 1994, we resolved to consider only these
issues: (a) the locus standi of the petitioners, and (b) the legality and validity of the
Contract of Lease in the light of Section 1 of R.A. No. 1169, as amended by B.P. Blg.
42, which prohibits the PCSO from holding and conducting lotteries "in collaboration,
association or joint venture with any person, association, company or entity, whether
domestic or foreign." On the first issue, seven Justices voted to sustain the locus
standi of the petitioners, while six voted not to. On the second issue, the seven Justices
were of the opinion that the Contract of Lease violates the exception to Section 1(B) of
R.A. No. 1169, as amended by B.P. Blg. 42, and is, therefore, invalid and contrary to
law. The six Justices stated that they wished to express no opinion thereon in view of
their stand on the first issue. The Chief Justice took no part because one of the
Directors of the PCSO is his brother-in-law.

This case was then assigned to this ponente for the writing of the opinion of the Court.

The preliminary issue on the locus standi of the petitioners should, indeed, be resolved
in their favor. A party's standing before this Court is a procedural technicality which it
may, in the exercise of its discretion, set aside in view of the importance of the issues
raised. In the landmark Emergency Powers Cases, 29 this Court brushed aside this
technicality because "the transcendental importance to the public of these cases
demands that they be settled promptly and definitely, brushing aside, if we must,
technicalities of procedure. (Avelino vs. Cuenco, G.R. No. L-2821)." Insofar as
taxpayers' suits are concerned, this Court had declared that it "is not devoid of
discretion as to whether or not it should be entertained," 30 or that it "enjoys an open
discretion to entertain the same or not." 31 In De La Llana vs. Alba, 32 this Court declared:
 1. The argument as to the lack of standing of petitioners is easily resolved.
As far as Judge de la Llana is concerned, he certainly falls within the
principle set forth in Justice Laurel's opinion in People vs. Vera [65 Phil. 56
(1937)]. Thus: "The unchallenged rule is that the person who impugns the
validity of a statute must have a personal and substantial interest in the
case such that he has sustained, or will sustain, direct injury as a result of
its enforcement [Ibid, 89]. The other petitioners as members of the bar and
officers of the court cannot be considered as devoid of "any personal and
substantial interest" on the matter. There is relevance to this excerpt from
a separate opinion in Aquino, Jr. v. Commission on Elections [L-40004,
January 31, 1975, 62 SCRA 275]: "Then there is the attack on the
standing of petitioners, as vindicating at most what they consider a public
right and not protecting their rights as individuals. This is to conjure the
specter of the public right dogma as an inhibition to parties intent on
keeping public officials staying on the path of constitutionalism. As was so
well put by Jaffe; "The protection of private rights is an essential
constituent of public interest and, conversely, without a well-ordered state
there could be no enforcement of private rights. Private and public
interests are, both in a substantive and procedural sense, aspects of the
totality of the legal order." Moreover, petitioners have convincingly shown
that in their capacity as taxpayers, their standing to sue has been amply
demonstrated. There would be a retreat from the liberal approach followed
in Pascual v. Secretary of Public Works, foreshadowed by the very
decision of People v. Vera where the doctrine was first fully discussed, if
we act differently now. I do not think we are prepared to take that step.
Respondents, however, would hard back to the American Supreme Court
doctrine in Mellon v. Frothingham, with their claim that what petitioners
possess "is an interest which is shared in common by other people and is
comparatively so minute and indeterminate as to afford any basis and
assurance that the judicial process can act on it." That is to speak in the
language of a bygone era, even in the United States. For as Chief Justice
Warren clearly pointed out in the later case of Flast v. Cohen, the barrier
thus set up if not breached has definitely been lowered.

In Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, 33 reiterated

in Basco vs. Philippine Amusements and Gaming Corporation,34 this Court stated:

Objections to taxpayers' suits for lack of sufficient personality standing or

interest are, however, in the main procedural matters. Considering the
importance to the public of the cases at bar, and in keeping with the
Court's duty, under the 1987 Constitution, to determine whether or not the
other branches of government have kept themselves within the limits of
the Constitution and the laws and that they have not abused the discretion
given to them, this Court has brushed aside technicalities of procedure
and has taken cognizance of these petitions.
and in Association of Small Landowners in the Philippines, Inc. vs. Secretary of
Agrarian Reform,35 it declared:

With particular regard to the requirement of proper party as applied in the

cases before us, we hold that the same is satisfied by the petitioners and
intervenors because each of them has sustained or is in danger of
sustaining an immediate injury as a result of the acts or measures
complained of. [Ex ParteLevitt, 303 US 633]. And even if, strictly speaking,
they are not covered by the definition, it is still within the wide discretion of
the Court to waive the requirement and so remove the impediment to its
addressing and resolving the serious constitutional questions raised.

In the first Emergency Powers Cases, ordinary citizens and taxpayers

were allowed to question the constitutionality of several executive orders
issued by President Quirino although they were invoking only an indirect
and general interest shared in common with the public. The Court
dismissed the objective that they were not proper parties and ruled that
the transcendental importance to the public of these cases demands that
they be settled promptly and definitely, brushing aside, if we must,
technicalities of procedure. We have since then applied this exception in
many other cases. (Emphasis supplied)

In Daza vs. Singson, 36 this Court once more said:

. . . For another, we have early as in the Emergency Powers Cases that

where serious constitutional questions are involved, "the transcendental
importance to the public of these cases demands that they be settled
promptly and definitely, brushing aside, if we must, technicalities of
procedure." The same policy has since then been consistently followed by
the Court, as in Gonzales vs. Commission on Elections [21 SCRA 774] . . .

The Federal Supreme Court of the United States of America has also expressed its
discretionary power to liberalize the rule on locus standi. In United States vs. Federal
Power Commission and Virginia Rea Association vs. Federal Power Commission,37 it
held:

We hold that petitioners have standing. Differences of view, however,

preclude a single opinion of the Court as to both petitioners. It would not
further clarification of this complicated specialty of federal jurisdiction, the
solution of whose problems is in any event more or less determined by the
specific circumstances of individual situations, to set out the divergent
grounds in support of standing in these cases.

In line with the liberal policy of this Court on locus standi, ordinary taxpayers, members
of Congress, and even association of planters, and non-profit civic organizations were
allowed to initiate and prosecute actions before this Court to question the
constitutionality or validity of laws, acts, decisions, rulings, or orders of various
government agencies or instrumentalities. Among such cases were those assailing the
constitutionality of (a) R.A. No. 3836 insofar as it allows retirement gratuity and
commutation of vacation and sick leave to Senators and Representatives and to
elective officials of both Houses of Congress;38 (b) Executive Order No. 284, issued by
President Corazon C. Aquino on 25 July 1987, which allowed members of the cabinet,
their undersecretaries, and assistant secretaries to hold other government offices or
positions; 39 (c) the automatic appropriation for debt service in the General
Appropriations Act; 40 (d) R.A. No. 7056 on the holding of desynchronized elections; 41 (d)
R.A. No. 1869 (the charter of the Philippine Amusement and Gaming Corporation) on
the ground that it is contrary to morals, public policy, and order; 42 and (f) R.A. No. 6975,
establishing the Philippine National
Police. 43

Other cases where we have followed a liberal policy regarding locus standi include
those attacking the validity or legality of (a) an order allowing the importation of rice in
the light of the prohibition imposed by R.A. No. 3452; 44 (b) P.D. Nos. 991 and 1033
insofar as they proposed amendments to the Constitution and P.D. No. 1031 insofar as
it directed the COMELEC to supervise, control, hold, and conduct the referendum-
plebiscite on 16 October 1976; 45(c) the bidding for the sale of the 3,179 square meters
of land at Roppongi, Minato-ku, Tokyo, Japan; 46 (d) the approval without hearing by the
Board of Investments of the amended application of the Bataan Petrochemical
Corporation to transfer the site of its plant from Bataan to Batangas and the validity of
such transfer and the shift of feedstock from naphtha only to naphtha and/or liquefied
petroleum gas; 47 (e) the decisions, orders, rulings, and resolutions of the Executive
Secretary, Secretary of Finance, Commissioner of Internal Revenue, Commissioner of
Customs, and the Fiscal Incentives Review Board exempting the National Power
Corporation from indirect tax and duties; 48 (f) the orders of the Energy Regulatory Board
of 5 and 6 December 1990 on the ground that the hearings conducted on the second
provisional increase in oil prices did not allow the petitioner substantial cross-
examination; 49 (g) Executive Order No. 478 which levied a special duty of P0.95 per liter
or P151.05 per barrel of imported crude oil and P1.00 per liter of imported oil
products; 50 (h) resolutions of the Commission on Elections concerning the
apportionment, by district, of the number of elective members of Sanggunians; 51 and (i)
memorandum orders issued by a Mayor affecting the Chief of Police of Pasay City. 52

In the 1975 case of Aquino vs. Commission on Elections, 53 this Court, despite its
unequivocal ruling that the petitioners therein had no personality to file the petition,
resolved nevertheless to pass upon the issues raised because of the far-reaching
implications of the petition. We did no less in De Guia vs. COMELEC 54 where, although
we declared that De Guia "does not appear to have locus standi, a standing in law, a
personal or substantial interest," we brushed aside the procedural infirmity "considering
the importance of the issue involved, concerning as it does the political exercise of
qualified voters affected by the apportionment, and petitioner alleging abuse of
discretion and violation of the Constitution by respondent."
We find the instant petition to be of transcendental importance to the public. The issues
it raised are of paramount public interest and of a category even higher than those
involved in many of the aforecited cases. The ramifications of such issues
immeasurably affect the social, economic, and moral well-being of the people even in
the remotest barangays of the country and the counter-productive and retrogressive
effects of the envisioned on-line lottery system are as staggering as the billions in pesos
it is expected to raise. The legal standing then of the petitioners deserves recognition
and, in the exercise of its sound discretion, this Court hereby brushes aside the
procedural barrier which the respondents tried to take advantage of.

And now on the substantive issue.

Section 1 of R.A. No. 1169, as amending by B.P. Blg. 42, prohibits the PCSO from
holding and conducting lotteries "in collaboration, association or joint venture with any
person, association, company or entity, whether domestic or foreign." Section 1
provides:

Sec. 1. The Philippine Charity Sweepstakes Office. — The Philippine

Charity Sweepstakes Office, hereinafter designated the Office, shall be
the principal government agency for raising and providing for funds for
health programs, medical assistance and services and charities of national
character, and as such shall have the general powers conferred in section
thirteen of Act Numbered One thousand four hundred fifty-nine, as
amended, and shall have the authority:

A. To hold and conduct charity sweepstakes races, lotteries

and other similar activities, in such frequency and manner,
as shall be determined, and subject to such rules and
regulations as shall be promulgated by the Board of
Directors.

B. Subject to the approval of the Minister of Human

Settlements, to engage in health and welfare-related
investments, programs, projects and activities which may be
profit-oriented, by itself or in collaboration, association or
joint venture with any person, association, company or
entity, whether domestic or foreign, except for the activities
mentioned in the preceding paragraph (A), for the purpose of
providing for permanent and continuing sources of funds for
health programs, including the expansion of existing ones,
medical assistance and services, and/or charitable grants:
Provided, That such investment will not compete with the
private sector in areas where investments are adequate as
may be determined by the National Economic and
Development Authority. (emphasis supplied)
The language of the section is indisputably clear that with respect to its franchise or
privilege "to hold and conduct charity sweepstakes races, lotteries and other similar
activities," the PCSO cannot exercise it "in collaboration, association or joint venture"
with any other party. This is the unequivocal meaning and import of the phrase "except
for the activities mentioned in the preceding paragraph (A)," namely, "charity
sweepstakes races, lotteries and other similar activities."

B.P. Blg. 42 originated from Parliamentary Bill No. 622, which was covered by
Committee Report No. 103 as reported out by the Committee on Socio-Economic
Planning and Development of the Interim Batasang Pambansa. The original text of
paragraph B, Section 1 of Parliamentary Bill No. 622 reads as follows:

To engage in any and all investments and related profit-oriented projects

or programs and activities by itself or in collaboration, association or joint
venture with any person, association, company or entity, whether
domestic or foreign, for the main purpose of raising funds for health and
medical assistance and services and charitable grants. 55

During the period of committee amendments, the Committee on Socio-Economic

Planning and Development, through Assemblyman Ronaldo B. Zamora, introduced an
amendment by substitution to the said paragraph B such that, as amended, it should
read as follows:

Subject to the approval of the Minister of Human Settlements, to engage

in health-oriented investments, programs, projects and activities which
may be profit- oriented, by itself or in collaboration, association, or joint
venture with any person, association, company or entity, whether
domestic or foreign, for the purpose of providing for permanent and
continuing sources of funds for health programs, including the expansion
of existing ones, medical assistance and services and/or charitable
grants. 56

Before the motion of Assemblyman Zamora for the approval of the amendment could be
acted upon, Assemblyman Davide introduced an amendment to the amendment:

MR. DAVIDE.

Mr. Speaker.

THE SPEAKER.

The gentleman from Cebu is recognized.

MR. DAVIDE.
 May I introduce an amendment to the
committee amendment? The amendment
would be to insert after "foreign" in the
amendment just read the following: EXCEPT
FOR THE ACTIVITY IN LETTER (A) ABOVE.

When it is joint venture or in collaboration with

any entity such collaboration or joint venture
must not include activity activity letter (a) which
is the holding and conducting of sweepstakes
races, lotteries and other similar acts.

MR. ZAMORA.

We accept the amendment, Mr. Speaker.

MR. DAVIDE.

Thank you, Mr. Speaker.

THE SPEAKER.

Is there any objection to the amendment?

(Silence) The amendment, as amended, is
approved. 57

Further amendments to paragraph B were introduced and approved. When

Assemblyman Zamora read the final text of paragraph B as further amended, the earlier
approved amendment of Assemblyman Davide became "EXCEPT FOR THE
ACTIVITIES MENTIONED IN PARAGRAPH (A)"; and by virtue of the amendment
introduced by Assemblyman Emmanuel Pelaez, the word PRECEDING was inserted
before PARAGRAPH. Assemblyman Pelaez introduced other amendments. Thereafter,
the new paragraph B was approved. 58

This is now paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42.

No interpretation of the said provision to relax or circumvent the prohibition can be

allowed since the privilege to hold or conduct charity sweepstakes races, lotteries, or
other similar activities is a franchise granted by the legislature to the PCSO. It is a
settled rule that "in all grants by the government to individuals or corporations of rights,
privileges and franchises, the words are to be taken most strongly against the grantee
.... [o]ne who claims a franchise or privilege in derogation of the common rights of the
public must prove his title thereto by a grant which is clearly and definitely expressed,
and he cannot enlarge it by equivocal or doubtful provisions or by probable inferences.
Whatever is not unequivocally granted is withheld. Nothing passes by mere
implication." 59
In short then, by the exception explicitly made in paragraph B, Section 1 of its charter,
the PCSO cannot share its franchise with another by way of collaboration, association
or joint venture. Neither can it assign, transfer, or lease such franchise. It has been said
that "the rights and privileges conferred under a franchise may, without doubt, be
assigned or transferred when the grant is to the grantee and assigns, or is authorized by
statute. On the other hand, the right of transfer or assignment may be restricted by
statute or the constitution, or be made subject to the approval of the grantor or a
governmental agency, such as a public utilities commission, exception that an existing
right of assignment cannot be impaired by subsequent legislation." 60

It may also be pointed out that the franchise granted to the PCSO to hold and conduct
lotteries allows it to hold and conduct a species of gambling. It is settled that "a statute
which authorizes the carrying on of a gambling activity or business should be strictly
construed and every reasonable doubt so resolved as to limit the powers and rights
claimed under its authority." 61

Does the challenged Contract of Lease violate or contravene the exception in Section 1
of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the PCSO from holding
and conducting lotteries "in collaboration, association or joint venture with" another?

We agree with the petitioners that it does, notwithstanding its denomination or

designation as a (Contract of Lease). We are neither convinced nor moved or fazed by
the insistence and forceful arguments of the PGMC that it does not because in reality it
is only an independent contractor for a piece of work, i.e., the building and maintenance
of a lottery system to be used by the PCSO in the operation of its lottery franchise.
Whether the contract in question is one of lease or whether the PGMC is merely an
independent contractor should not be decided on the basis of the title or designation of
the contract but by the intent of the parties, which may be gathered from the provisions
of the contract itself. Animus hominis est anima scripti. The intention of the party is the
soul of the instrument. In order to give life or effect to an instrument, it is essential to
look to the intention of the individual who executed it. 62 And, pursuant to Article 1371 of
the Civil Code, "to determine the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered." To put it more
bluntly, no one should be deceived by the title or designation of a contract.

A careful analysis and evaluation of the provisions of the contract and a consideration of
the contemporaneous acts of the PCSO and PGMC indubitably disclose that the
contract is not in reality a contract of lease under which the PGMC is merely an
independent contractor for a piece of work, but one where the statutorily
proscribed collaboration or association, in the least, or joint venture, at the most, exists
between the contracting parties. Collaboration is defined as the acts of working together
in a joint project. 63 Association means the act of a number of persons in uniting together
for some special purpose or business. 64 Joint venture is defined as an association of
persons or companies jointly undertaking some commercial enterprise; generally all
contribute assets and share risks. It requires a community of interest in the performance
of the subject matter, a right to direct and govern the policy in connection therewith, and
duty, which may be altered by agreement to share both in profit and
losses.65

The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had
neither funds of its own nor the expertise to operate and manage an on-line lottery
system, and that although it wished to have the system, it would have it "at no expense
or risks to the government." Because of these serious constraints and unwillingness to
bear expenses and assume risks, the PCSO was candid enough to state in its RFP that
it is seeking for "a suitable contractor which shall build, at its own expense, all the
facilities needed to operate and maintain" the system; exclusively bear "all capital,
operating expenses and expansion expenses and risks"; and submit "a comprehensive
nationwide lottery development plan . . . which will include the game, the marketing of
the games, and the logistics to introduce the game to all the cities and municipalities of
the country within five (5) years"; and that the operation of the on-line lottery system
should be "at no expense or risk to the government" — meaning itself, since it is a
government-owned and controlled agency. The facilities referred to means "all capital
equipment, computers, terminals, software, nationwide telecommunications network,
ticket sales offices, furnishings and fixtures, printing costs, costs of salaries and wages,
advertising and promotions expenses, maintenance costs, expansion and replacement
costs, security and insurance, and all other related expenses needed to operate a
nationwide on-line lottery system."

In short, the only contribution the PCSO would have is its franchise or authority to
operate the on-line lottery system; with the rest, including the risks of the business,
being borne by the proponent or bidder. It could be for this reason that it warned that
"the proponent must be able to stand to the acid test of proving that it is an entity able to
take on the role of responsible maintainer of the on-line lottery system." The PCSO,
however, makes it clear in its RFP that the proponent can propose a period of the
contract which shall not exceed fifteen years, during which time it is assured of a
"rental" which shall not exceed 12% of gross receipts. As admitted by the PGMC, upon
learning of the PCSO's decision, the Berjaya Group Berhad, with its affiliates, wanted to
offer its services and resources to the PCSO. Forthwith, it organized the PGMC as "a
medium through which the technical and management services required for the project
would be offered and delivered to PCSO." 66

Undoubtedly, then, the Berjaya Group Berhad knew all along that in connection with an
on-line lottery system, the PCSO had nothing but its franchise, which it solemnly
guaranteed it had in the General Information of the RFP. 67Howsoever viewed then, from
the very inception, the PCSO and the PGMC mutually understood that any arrangement
between them would necessarily leave to the PGMC the technical, operations, and
managementaspects of the on-line lottery system while the PCSO would, primarily,
provide the franchise. The words Gaming andManagement in the corporate name of
respondent Philippine Gaming Management Corporation could not have been
conceived just for euphemistic purposes. Of course, the RFP cannot substitute for the
Contract of Lease which was subsequently executed by the PCSO and the PGMC.
Nevertheless, the Contract of Lease incorporates their intention and understanding.
The so-called Contract of Lease is not, therefore, what it purports to be. Its
denomination as such is a crafty device, carefully conceived, to provide a built-in
defense in the event that the agreement is questioned as violative of the exception in
Section 1 (B) of the PCSO's charter. The acuity or skill of its draftsmen to accomplish
that purpose easily manifests itself in the Contract of Lease. It is outstanding for its
careful and meticulous drafting designed to give an immediate impression that it is a
contract of lease. Yet, woven therein are provisions which negate its title and betray the
true intention of the parties to be in or to have a joint venture for a period of eight years
in the operation and maintenance of the on-line lottery system.

Consistent with the above observations on the RFP, the PCSO has only its franchise to
offer, while the PGMC represents and warrants that it has access to all managerial and
technical expertise to promptly and effectively carry out the terms of the contract. And,
for a period of eight years, the PGMC is under obligation to keep all the Facilitiesin safe
condition and if necessary, upgrade, replace, and improve them from time to time as
new technology develops to make the on-line lottery system more cost-effective and
competitive; exclusively bear all costs and expenses relating to the printing, manpower,
salaries and wages, advertising and promotion, maintenance, expansion and
replacement, security and insurance, and all other related expenses needed to operate
the on-line lottery system; undertake a positive advertising and promotions campaign for
both institutional and product lines without engaging in negative advertising against
other lessors; bear the salaries and related costs of skilled and qualified personnel
for administrative and technical operations; comply with procedural and coordinating
rulesissued by the PCSO; and to train PCSO and other local personnel and to effect the
transfer of technology and other expertise, such that at the end of the term of the
contract, the PCSO will be able to effectively take over the Facilities and efficiently
operate the on-line lottery system. The latter simply means that, indeed, the managers,
technicians or employees who shall operate the on-line lottery system are not
managers, technicians or employees of the PCSO, but of the PGMC and that it is only
after the expiration of the contract that the PCSO will operate the system. After eight
years, the PCSO would automatically become the owner of the Facilities without any
other further consideration.

For these reasons, too, the PGMC has the initial prerogative to prepare the detailed
plan of all games and the marketing thereof, and determine the number of players,
value of winnings, and the logistics required to introduce the games, including the
Master Games Plan. Of course, the PCSO has the reserved authority to disapprove
them. 68 And, while the PCSO has the sole responsibility over the appointment of dealers
and retailers throughout the country, the PGMC may, nevertheless, recommend for
appointment dealers and retailers which shall be acted upon by the PCSO within forty-
eight hours and collect and retain, for its own account, a security deposit from dealers
and retailers in respect of equipment supplied by it.

This joint venture is further established by the following:

(a) Rent is defined in the lease contract as the amount to be paid to the PGMC as
compensation for the fulfillment of its obligations under the contract, including, but not
limited to the lease of the Facilities. However, this rent is not actually a fixed amount.
Although it is stated to be 4.9% of gross receipts from ticket sales, payable net of taxes
required by law to be withheld, it may be drastically reduced or, in extreme cases,
nothing may be due or demandable at all because the PGMC binds itself to "bear all
risks if the revenue from the ticket sales, on an annualized basis, are insufficient to pay
the entire prize money." This risk-bearing provision is unusual in a lessor-lessee
relationship, but inherent in a joint venture.

(b) In the event of pre-termination of the contract by the PCSO, or its suspension of
operation of the on-line lottery system in breach of the contract and through no fault of
the PGMC, the PCSO binds itself "to promptly, and in any event not later than sixty (60)
days, reimburse the Lessor the amount of its total investment cost associated with the
On-Line Lottery System, including but not limited to the cost of the Facilities, and further
compensate the LESSOR for loss of expected net profit after tax, computed over the
unexpired term of the lease." If the contract were indeed one of lease, the payment of
the expected profits or rentals for the unexpired portion of the term of the contract would
be enough.

(c) The PGMC cannot "directly or indirectly undertake any activity or business in
competition with or adverse to the On-Line Lottery System of PCSO unless it obtains
the latter's prior written consent." If the PGMC is engaged in the business of leasing
equipment and technology for an on-line lottery system, we fail to see any acceptable
reason why it should allow a restriction on the pursuit of such business.

(d) The PGMC shall provide the PCSO the audited Annual Report sent to its
stockholders, and within two years from the effectivity of the contract, cause itself to be
listed in the local stock exchange and offer at least 25% of its equity to the public. If the
PGMC is merely a lessor, this imposition is unreasonable and whimsical, and could only
be tied up to the fact that the PGMC will actually operate and manage the system;
hence, increasing public participation in the corporation would enhance public interest.

(e) The PGMC shall put up an Escrow Deposit of P300,000,000.00 pursuant to the
requirements of the RFP, which it may, at its option, maintain as its initial performance
bond required to ensure its faithful compliance with the terms of the contract.

(f) The PCSO shall designate the necessary personnel to monitor and audit the daily
performance of the on-line lottery system; and promulgate procedural and coordinating
rules governing all activities relating to the on-line lottery system. The first further
confirms that it is the PGMC which will operate the system and the PCSO may, for the
protection of its interest, monitor and audit the daily performance of the system. The
second admits the coordinating and cooperative powers and functions of the parties.
(g) The PCSO may validly terminate the contract if the PGMC becomes insolvent or
bankrupt or is unable to pay its debts, or if it stops or suspends or threatens to stop or
suspend payment of all or a material part of its debts.

All of the foregoing unmistakably confirm the indispensable role of the PGMC in the
pursuit, operation, conduct, and management of the On-Line Lottery System. They
exhibit and demonstrate the parties' indivisible community of interest in the conception,
birth and growth of the on-line lottery, and, above all, in its profits, with each having a
right in the formulation and implementation of policies related to the business and
sharing, as well, in the losses — with the PGMC bearing the greatest burden because
of its assumption of expenses and risks, and the PCSO the least, because of its
confessed unwillingness to bear expenses and risks. In a manner of speaking, each is
wed to the other for better or for worse. In the final analysis, however, in the light of the
PCSO's RFP and the above highlighted provisions, as well as the "Hold Harmless
Clause" of the Contract of Lease, it is even safe to conclude that the actual lessor in this
case is the PCSO and the subject matter thereof is its franchise to hold and conduct
lotteries since it is, in reality, the PGMC which operates and manages the on-line lottery
system for a period of eight years.

We thus declare that the challenged Contract of Lease violates the exception provided
for in paragraph B, Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, and is,
therefore, invalid for being contrary to law. This conclusion renders unnecessary further
discussion on the other issues raised by the petitioners.

WHEREFORE, the instant petition is hereby GRANTED and the challenged Contract of
Lease executed on 17 December 1993 by respondent Philippine Charity Sweepstakes
Office (PCSO) and respondent Philippine Gaming Management Corporation (PGMC) is
hereby DECLARED contrary to law and invalid.

The Temporary Restraining Order issued on 11 April 1994 is hereby MADE

PERMANENT.

No pronouncement as to costs.

SO ORDERED.
 SECOND DIVISION
[G.R. No. L-7231. March 28, 1956.]
BENGUET CONSOLIDATED MINING CO., Petitioner, vs. MARIANO PINEDA, in his capacity as Securities
and Exchange Commissioner, Respondent. CONSOLIDATED MINES, INC., Intervenor.

DECISION
REYES, J. B. L., J.:
Appeal under Rule 43 from a decision of the Securities and Exchange Commissioner, denying the right of
a sociedad anonima to extend its corporate existence by amendment of its original articles of
association, or alternatively, to reform and continue existing under the Corporation Law (Act 1459)
beyond the original period.
The Petitioner, the Benguet Consolidated Mining Co. (hereafter termed “Benguet” for short), was
organized on June 24,1903, as a sociedad anonima regulated by Articles 151 et seq., of the Spanish Code
of Commerce of 1886, then in force in the Philippines. The articles of association expressly provided that
it was organized for a term of fifty (50) years. In 1906, the governing Philippine Commission enacted Act
1459, commonly known as the Corporation Law, establishing in the islands the American type of juridical
entities known as corporation, to take effect on April 1, 1906. Of its enactment, this Court said in its
decision in Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, at pp. 145-146, and 147: chanroblesvirtuallawlibrary

“When the Philippine Islands passed to the sovereignty of the United States, the attention of the
Philippine Commission was early drawn to the fact there is no entity in Spanish law exactly
corresponding to the motion of the corporation in English and American law; and in the Philippine Bill,
chan roblesvirtualawlibrary

approved July 1, 1906, the Congress of the United States inserted certain provisions, under the head of
Franchises, which were intended to control the lawmaking power in the Philippine Islands in the matter
of granting of franchises, privileges and concessions. These provisions are found in sections 74 and 75 of
the Act. The provisions of section 74 have been superseded by section 28 of the Act of Congress of
August 29, 1916, but in section 75 there is a provision referring to mining corporations, which still
remains the law, as amended. This provision, in its original form, reads as follows: it shall be unlawful chanrobl esvirtuallawlibrary cralaw

for any member of a corporation engaged in agriculture or mining and for any corporation organized for
any purpose except irrigation to be in any wise interested in any other corporation engaged in
agriculture or in mining.
Under the guidance of this and certain other provisions thus enacted by Congress, the Philippine
Commission entered upon the enactment of a general law authorizing the creation of corporations in
the Philippine Islands. This rather elaborate piece of legislation is embodied in what is called our
Corporation Law (Act No. 1459 of the Philippine Commission). The evident purpose of the commission
was to introduce the American corporation into the Philippine Islands as the standard commercial entity
and to hasten the day when the sociedad anonima of the Spanish law would be obsolete. That statute is
a sort of codification of American corporate law.”
“As it was the intention of our lawmakers to stimulate the introduction of the American corporation into
the Philippine law in the place of the sociedad anonima, it was necessary to make certain adjustment
resulting from the continued co-existence, for a time, of the two forms of commercial entities.
Accordingly, in section 75 of the Corporation Law, a provision is found making the sociedad anonima
subject to the provisions of the Corporation Law ‘so far as such provisions may be applicable’ and giving
to the sociedades anonimas previously created in the Islands the option to continue business as such or
to reform and organize under the provisions of the Corporation Law. Again, in section 191 of the
Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades anonimas. The
purpose of the commission in repealing this part of the Code of Commerce was to compel commercial
entities thereafter organized to incorporate under the Corporation Law, unless they should prefer to
adopt some form or other of the partnership. To this provision was added another to the effect that
existing sociedades anonimas, which elected to continue their business as such, instead of reforming
and reorganizing under the Corporation Law, should continue to be governed by the laws that were in
force prior to the passage of this Act ‘in relation to their organization and method of transacting
business and to the rights of members thereof as between themselves, but their relations to the public
and public officials shall be governed by the provisions of this Act.’“
Specifically, the two sections of Act No. 1459 referring to sociedades anonimas then already existing,
provide as follows: chanroblesvirtuallawlibrary

“SEC. 75. Any corporation or a sociedad anonima formed, organized, and existing under the laws of the
Philippines on the date of the passage of this Act, shall be subject to the provisions hereof so far as such
provisions may be applicable and shall be entitled at its option either to continue business as such
corporation or to reform and organize under and by virtue of the provisions of this Act, transferring all
corporate interests to the new corporation which, if a stock corporation, is authorized to issue its shares
of stock at par to the stockholders or members of the old corporation according to their interests.”
“SEC. 191. The Code of Commerce, in so far as it relates to corporation or sociedades anonimas, and all
other Acts or parts of Acts in conflict or inconsistent with this Act, are hereby repealed with the
exception of Act Numbered fifty-two, entitled ‘An Act providing for examinations of banking institutions
in the Philippines, and for reports by their officers,’ as amended, and Act Numbered Six hundred sixty-
seven, entitled ‘An Act prescribing the method of applying to governments of municipalities, except the
city of Manila and of provinces for franchises to contract and operate street railway, electric light and
power and telephone lines, the conditions upon which the same may be granted, certain powers of the
grantee of said franchises, and of grantees of similar franchises under special Act of the Commission,
and for other purposes.’ Provided, however, That nothing in this Act contained shall be deemed to
repeal the existing law relating to those classes of associations which are termed sociedades colectivas,
and sociedades de cuentas en participacion, as to which association the existing law shall be deemed to
be still in force; And provided, further, That existing corporations or sociedades anonimas, lawfully
chan roblesvirtualawlibrary

organized as such, which elect to continue their business as such sociedades anonimas instead of
reforming and reorganizing under and by virtue of the provisions of this Act, shall continue to be
governed by the laws that were in force prior to the passage of this Act in relation to their organization
and method of transacting business and to the rights of members thereof as between themselves, but
their relations to the public and public officials shall be governed by the provisions of this Act.”
As the expiration of its original 50 year term of existence approached, the Board of Directors of Benguet
adopted in 1946 a resolution to extend its life for another 50 years from July 3, 1946 and submitted it
for registration to the Respondent Securities and Exchange Commissioner. Upon advice of the Secretary
of Justice (Op. No. 45, Ser. 1917) that such extension was contrary to law, the registration was denied.
The matter was dropped, allegedly because the stockholders of Benguet did not approve of the
Directors’ action.
Some six years later in 1953, the shareholders of Benguet adopted a resolution empowering the Director
to “effectuate the extension of the Company’s business life for not less than 20 and not more than 50
years, and this by either (1) an amendment to the Articles of Association or Charter of this Company or
(2) by reforming and reorganizing the Company as a Philippine Corporation, or (3) by both or (4) by any
other means.” Accordingly, the Board of Directors on May 27, 1953, adopted a resolution to the
following effect —
“Be It
Resolved, that the Company be reformed, reorganized and organized under the provisions of section 75
and other provisions of the Philippine Corporation Law as a Philippine corporation with a corporate life
and corporate powers as set forth in the Articles of Incorporation attached hereto as Schedule ‘I’ and
made a part hereof by this reference; and chan roblesvirtualawlibrary

Be It
‘FURTHER RESOLVED, that any five or more of the following shareholders of the Company be and they
hereby are authorized as instructed to act for and in behalf of the share holders of the Company and of
the Company as Incorporators in the reformation, reorganization and organization of the Company
under and in accordance with the provisions aforesaid of said Philippine Corporation Law, and in such
capacity, they are hereby authorized and instructed to execute the aforesaid Articles of Incorporation
attached to these Minutes as Schedule ‘I’ hereof, with such amendments, deletion and additions thereto
as any five or more of those so acting shall deem necessary, proper, advisable or convenient to effect
prompt registration of said Articles under Philippine Law; and five or more of said Incorporators are chan roblesvirtualawlibrary

hereby further authorized and directed to do all things necessary, proper, advisable or convenient to
effect such registration.”
In pursuance of such resolution, Benguet submitted in June, 1953, to the Securities and Exchange
Commissioner, for alternative registration, two documents: (1) Certification as to the Modification of chanroblesvirtuallawlibrary

(the articles of association of) the Benguet Consolidated Mining Company, extending the term of its
existence to another fifty years from June 15, 1953; and (2) articles of incorporation, covering its chan roblesvirtualawlibrary

reformation or reorganization as a corporation in accordance with section 75 of the Philippine

Corporation Law.
Relying mainly upon the adverse opinion of the Secretary of Justice (Op. No. 180, s. 1953), the Securities
and Exchange Commissioner denied the registration and ruled: chanrobl esvirtuallawlibrary

(1) That the Benguet, as sociedad anonima, had no right to extend the original term of corporate
existence stated in its Articles of Association, by subsequent amendment thereof adopted after
enactment of the Corporation Law (Act No. 1459); and chan roblesvirtualawlibrary

(2) That Benguet, by its conduct, had chosen to continue as sociedad anonima, under section 75 of Act
No. 1459, and could no longer exercise the option to reform into a corporation, specially since it would
indirectly produce the effect of extending its life.
This ruling is the subject of the present appeal.
Petitioner Benguet contends: chanroblesvirtuallawlibrary

(1) That the proviso of section 18 of the Corporation Law to the effect —
“that the life of said corporation shall not be extended by amendment beyond the time fixed in the
original articles.”
does not apply to sociedades anonimas already in existence at the passage of the law,
like Petitioner herein;
(2) That to apply the said restriction imposed by section 18 of the Corporation Law to sociedades
anonimas already functioning when the said law was enacted would be in violation of constitutional
inhibitions;
(3) That even assuming that said restriction was applicable to it, Benguet could still exercise the option
of reforming and reorganizing under section 75 of the Corporation Law, thereby prolonging its corporate
existence, since the law is silent as to the time when such option may be exercised or availed of.
The first issue arises because the Code of Commerce of 1886 under which Benguet was organized,
contains no prohibition (to extend the period of corporate existence), equivalent to that set forth in
section 18 of the Corporation Law. Neither does it expressly authorize the extension. But the text of
Article 223, reading: chanroble svirtuallawlibrary

“ART. 223. After the termination of the period for which commercial associations are constituted, it
shall not be understood as extended by the implied or presumed will of the members; and if the chan roble svirtualawlibrary

members desire to continue in association, they shall draw up new articles, subject to all the formalities
prescribed for their creation as provided in Article 119.” (Code of Commerce.)
would seem to imply that the period of existence of the sociedad anonimas (or of any other commercial
association for that matter) may be extended if the partners or members so agree before the expiration
of the original period.
While the Code of Commerce, in so far as sociedades anonimas are concerned, was repealed by Act No
1459, Benguet claims that article 223 is still operative in its favor under the last proviso of section 191 of
the Corporation law (ante, p. 4 to the effect that existing sociedades anonimas would continue to be
governed by the law in force before Act 1459,
“in relation to their organization and method of transacting business and to the rights of members
among themselves, but their relations to the public and public officials shall be governed by the
provisions of this Act.”
Benguet contends that the period of corporate life relates to its organization and the rights of its
members inter se, and not to its relations to the public or public officials.
We find this contention untenable.
The term of existence of association (partnership or sociedad anonima) is coterminous with their
possession of an independent legal personality, distinct from that of their component members. When
the period expires, the sociedad anonima loses the power to deal and enter into further legal relations
with other persons; it is no longer possible for it to acquire new rights or incur new obligations, have
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only as may be required by the process of liquidating and winding up its affairs. By the same token, its
officers and agents can no longer represent it after the expiration of the life term prescribed, save for
settling its business. Necessarily, therefore, third persons or strangers have an interest in knowing the
duration of the juridical personality of the sociedad anonima, since the latter cannot be dealt with after
that period; wherefore its prolongation or cessation is a matter directly involving the company’s
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relations to the public at large.

On the importance of the term of existence set in the articles of association of commercial companies
under the Spanish Code of Commerce, D. Lorenzo Benito y Endar, professor of mercantile law in the
Universidad Central de Madrid, has this to say: chanroblesvirtuallawlibrary

“La duracion de la Sociedad. — La necesidad de consignar este requisito en el contrato social tiene un
valor analogo al que dijimos tenia el mismo al tratar de las compañias colectivas, aun cuando respecto
de las anonimas no haya de tenerse en cuenta para nada lo que dijimos entonces acerca de la
trascendencia que ello tiene para los socios; porque no existiendo en las anonimas la serie dechan roblesvirtualawlibrary

responsibilidades de caracter personal que afectan a los socios colectivos, es claro que la duracion de la
sociedad importa conocerla a los socios y los terceros, porque ella marca al limite natural del
desenvolvimiento de la empresa constituida y el comienzo de la liquidacion de la sociedad.” (3 Benito,
Derecho Mercantil, 292-293.)
“Interesa, pues, la fijacion de la vida de la compañia, desenvolviendose con normalidad y regularidad,
tanto a los asociados como a los terceros. A aquellos, porque su libertad economica, en cierto modo
limitada por la existencia del contrato de compañia, se recobra despues de realizada, mas o menos
cumplidamente, la finalidad comun perseguida; y a los terceros, porque les advierte el momento en chan roblesvirtualawlibrary

que, extinguida la compañia, no cabe y a la creacion con ella de nuevas relaciones juridicas, de que
nazcan reciprocamente derechos y obligaciones, sino solo la liquidacion de los negocios hasta entonces
convenidos, sin otra excepcion que la que luego mas adelante habremos de señalar”. (3 Benito, Derecho
Mercantil, p. 245.)
The State and its officers also have an obvious interest in the term of life of associations, since the
conferment of juridical capacity upon them during such period is a privilege that is derived from statute.
It is obvious that no agreement between associates can result in giving rise to a new and distinct
personality, possessing independent rights and obligations, unless the law itself shall decree such result.
And the State is naturally interested that this privilege be enjoyed only under the conditions and not
beyond the period that it sees fit to grant; and, particularly, that it be not abused in fraud and to the chan roblesvirtualawlibrary

detriment of other parties; and for this reason it has been ruled that “the limitation (of corporate
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existence) to a definite period is an exercise of control in the interest of the public” (Smith vs. Eastwood
Wire Manufacturing Co., 43 Atl. 568).
We cannot assent to the thesis of Benguet that its period of corporate existence has relation to its
“organization”. The latter term is defined in Webster’s International Dictionary as: chanrobl esvirtuallawlibrary

“The executive structure of a business; the personnel of management, with its several duties and chan roblesvirtualawlibrary

places in administration; the various persons who conduct a business, considered as a unit.”
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The legal definitions of the term “organization” are concordant with that given above: chanroblesvirtuallawlibrary

“Organize or ‘organization,’ as used in reference to corporations, has a well-understood meaning, which

is the election of officers, providing for the subscription and payment of the capital stock, the adoption
of by-laws, and such other steps as are necessary to endow the legal entity with the capacity to transact
the legitimate business for which it was created. Waltson vs. Oliver, 30 P. 172, 173, 49 Kan. 107, 33 Am.
St. Rep. 355; Topeka Bridge Co. vs. Cummings, 3 Kan. 55, 77; Hunt vs. Kansas & M. Bridge Co., 11
chan roblesvirtualawlibrary chan roblesvirtualawlibrary

Kan. 412, 439; Aspen Water & Light Co., vs. City of Aspen, 37 P. 728, 730, 6 Colo. App. 12; Nemaha
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Coal & Mining Co., vs. Settle 38 P. 483, 484, 54 Kan. 424.
Under a statute providing that, until articles of incorporation should be recorded, the corporation
should transact no business except its own organization, it is held that the term “organization” means
simply the process of forming and arranging into suitable disposition the parties who are to act together
in, and defining the objects of, the compound body, and that this process, even when complete in all its
parts, does not confer a franchise either valid or defective, but, on the contrary, it is only the act of the
individuals, and something else must be done to secure the corporate franchise. Abbott vs. Omaha
Smelting & Refining Co. 4 Neb. 416, 421.” (30 Words and Phrases, p. 282.)
It is apparent from the foregoing definitions that the term “organization” relates merely to the
systematization and orderly arrangement of the internal and managerial affairs and organs of
the Petitioner Benguet, and has nothing to do with the prorogation of its corporate life.
From the double fact that the duration of its corporate life (and juridical personality) has evident
connection with the Petitioner’s relations to the public, and that it bears none to the Petitioner’s
organization and method of transacting business, we derive the conclusion that the prohibition
contained in section 18 of the Corporation Law (Act No. 1459) against extension of corporate life by
amendment of the original articles was designed and intended to apply to “compañias anonimas” that,
like Petitioner Benguet, were already existing at the passage of said law. This conclusion is reinforced by
the avowed policy of the law to hasten the day when compañias anonimas would be extinct, and replace
them with the American type of corporation (Harden vs. Benguet Consolidated Mining Co., supra), for
the indefinite prorogation of the corporation life of sociedades anonimas would maintain the
unnecessary duality of organizational types instead of reducing them to a single one; and what is chan roblesvirtualawlibrary

more, it would confer upon these sociedades anonimas, whose obsolescence was sought, the
advantageous privilege of perpetual existence that the new corporation could not possess.
Of course, the retroactive application of the limitations on the terms of corporate existence could not be
made in violation of constitutional inhibitions specially those securing equal protection of the laws and
prohibiting impairment of the obligation of contracts. It needs no argument to show that if Act No. 1459
allowed existing compañias anonimas to be governed by the old law in respect to their organization,
methods of transacting business and the rights of the members among themselves, it was precisely in
deference to the vested rights already acquired by the entity and its members at the time the
Corporation Law was enacted. But we do not agree with PetitionerBenguet (and here lies the second
issue in this appeal) that the possibility to extend its corporate life under the Code of Commerce
constituted a right already vested when Act No. 1459 was adopted. At that time, Benguet’s existence
was well within the 50 years period set in its articles of association; and its members had not entered
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into any agreement that such period should be extended. It is safe to say that none of the members of
Benguet anticipated in 1906 any need to reach an agreement to increase the term of its corporate life,
barely three years after it had started. The prorogation was purely speculative; a mere possibility that chan roblesvirtualawlibrary

could not be taken for granted. It was as yet conditional, depending upon the ultimate decision of the
members and directors. They might agree to extend Benguet’s existence beyond the original 50 years; chan

or again they might not. It must be remembered that in 1906, the success of Benguet in its mining
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ventures was by no means so certain as to warrant continuation of its operations beyond the 50 years
set in its articles. The records of this Court show that Benguet ran into financial difficulties in the early
part of its existence, to the extent that, as late as 1913, ten years after it was found, 301,100 shares of
its capital stock (with a par value of $1 per share) were being offered for sale at 25 centavos per share in
order to raise the sum of P75,000 that was needed to rehabilitate the company (Hanlon vs. Hausermann
and Beam, 40 Phil., 796). Certainly the prolongation of the corporate existence of Benguet in 1906 was
merely a possibility in futuro, a contingency that did not fulfill the requirements of a vested right
entitled to constitutional protection, defined by this Court in Balboa vs. Farrales, 51 Phil., 498, 502, as
follows: chanroblesvirtuallawlibrary

“Vested right is ‘some right or interest in the property which has become fixed and established, and is
no longer open to doubt or controversy,”
“A ‘vested’ right is defined to be an immediate fixed right of present or future enjoyment, and rights are
‘vested’ in contradistinction to being expectant or contingent” (Pearsall vs. Great Northern R. Co., 161 U.
S. 646, 40 L. Ed. 838).
In Corpus Juris Secundum we find: chanroblesvirtuallawlibrary

“Rights are vested when the right to enjoyment, present or prospective, has become the property of
some particular person or persons as a present interest. The right must be absolute, complete, and
unconditional, independent of a contingency, and a mere expectancy of future benefit, or a contingent
interest in property founded on anticipated continuance of existing laws, does not constitute a vested
right. So, inchoate rights which have not been acted on are not vested.” (16 C.J.S. 214-215.)
Since there was no agreement as yet to extend the period of Benguet’s corporate existence (beyond the
original 50 years) when the Corporation Law was adopted in 1906, neither Benguet nor its members had
any actual or vested right to such extension at that time. Therefore, when the Corporation Law, by
section 18, forbade extensions of corporate life, neither Benguet nor its members were deprived of any
actual or fixed right constitutionally protected.
To hold, as Petitioner Benguet asks, that the legislative power could not deprive Benguet or its members
of the possibility to enter at some indefinite future time into an agreement to extend Benguet’s
corporate life, solely because such agreements were authorized by the Code of Commerce, would be
tantamount to saying that the said Code was irrepealable on that point. It is a well settled rule that no
person has a vested interest in any rule of law entitling him to insist that it shall remain unchanged for
his benefit. (New York C. R. Co. vs. White, 61 L. Ed (U.S.) 667; Mondou vs. New York N. H. & H. R. Co., chan roblesvirtualawlibrary

56 L. Ed. 327; Rainey vs. U. S., 58 L. Ed. 617; Lilly Co. vs. Saunders, 125 ALR. 1308; Shea vs. Olson,
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111 ALR. 998).

“There can be no vested right in the continued existence of a statute or rule of the common law which
precludes its change or repeal, nor in any omission to legislate on a particular matter or subject. Any
right conferred by statute may be taken away by statute before it has become vested, but after a right
has vested, repeal of the statute or ordinance which created the right does not and cannot affect much
right.” (16 C.J. S. 222-223.)
It is a general rule of constitutional law that a person has no vested right in statutory privileges and
exemptions” (Brearly School vs. Ward, 201 NY. 358, 40 LRA NS. 1215; also, Cooley, Constitutional chan roblesvirtualawlibrary

Limitations, 7th ed., p. 546).

It is not amiss to recall here that after Act No. 1459 the Legislature found it advisable to impress further
restrictions upon the power of corporations to deal in public lands, or to hold real estate beyond a
maximum area; and to prohibit any corporation from endeavouring to control or hold more than 15
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per cent of the voting stock of an agricultural or mining corporation (Act No. 3518). These prohibitions
are so closely integrated with our public policy that Commonwealth Act No. 219 sought to extend such
restrictions to associations of all kinds. It would be subversive of that policy to enable Benguet to
prolong its peculiar status of sociedad anonimas, and enable it to cast doubt and uncertainty on
whether it is, or not, subject to those restrictions on corporate power, as it once endeavoured to do in
the previous case of Harden vs. Benguet Mining Corp. 58 Phil., 149.
Stress has been laid upon the fact that the Compañia Maritima (like Benguet, a sociedad anonima
established before the enactment of the Corporation Law) has been twice permitted to extend its
corporate existence by amendment of its articles of association, without objection from the officers of
the defunct Bureau of Commerce and Industry, then in charge of the enforcement of the Corporation
Laws, although the exact question was never raised then. Be that as it may, it is a well established rule in
this jurisdiction that the government is never estopped by mistake or error on the part of its agents”
(Pineda vs. Court of First Instance of Tayabas, 52 Phil., 803, 807), and that estopped cannot give validity
to an act that is prohibited by law or is against public policy (Eugenio vs. Perdido, (97 Phil., 41, May 19,
1955; 19 Am. Jur. 802); so that the Respondent, Securities and Exchange Commissioner, was not
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bound by the rulings of his predecessor if they be inconsistent with law. Much less could erroneous
decisions of executive officers bind this Court and induce it to sanction an unwarranted interpretation or
application of legal principles.
We now turn to the third and last issue of this appeal, concerning the exercise of the option granted by
section 75 of the Corporation Law to every sociedad anonima “formed, organized and existing under the
laws of the Philippines on the date of the passage of this Act” to either continue business as such
sociedad anonima or to reform and organize under the provisions of the Corporation Law. Petitioner-
Appellant Benguet contends that as the law does not determine the period within which such option
may be exercised, Benguet may exercise it at any time during its corporate existence; and that in fact chan roblesvirtualawlibrary

on June 22, 1953, it chose to reform itself into a corporation for a period of 50 years from that date,
filing the corresponding papers and by-laws with the Respondent Commissioner of Securities and
Exchange registration; but the latter refused to accept them as belatedly made.
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The Petitioner’s argument proceeds from the unexpressed assumption that Benguet, as sociedad
anonima, had not exercised the option given by section 75 of the Corporation Law until 1953. This we
find to be incorrect. Under that section, by continuing to do business as sociedad anonima, Benguet in
fact rejected the alternative to reform as a corporation under Act No. 1459. It will be noted from the
text of section 75 (quoted earlier in this opinion) that no special act or manifestation is required by the
law from the existing sociedades anonimas that prefer to remain and continue as such. It is when they
choose to reform and organize under the Corporation Law that they must, in the words of the section,
“transfer all corporate interests to the new corporation”. Hence if they do not so transfer, the
sociedades anonimas affected are to be understood to have elected the alternative “to continue
business as such corporation” (sociedad anonima) 2
The election of Benguet to remain a sociedad anonima after the enactment of the Corporation Law is
evidence, not only by its failure, from 1906 to 1953, to adopt the alternative to transfer its corporate
interests to a new corporation, as required by section 75; it also appears from positive acts. Thus
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around 1933, Benguet claimed and defended in court its acquisition of shares of the capital stock of the
Balatoc Mining Company, on the ground that as a sociedad anonima it (Benguet) was not a corporation
within the purview of the laws prohibiting a mining corporation from becoming interested in another
mining corporation (Harden vs. Benguet Mining Corp., 58 Phil., p. 149). Even in the present proceedings,
Benguet has urged its right to amend its original articles of association as “sociedad anonima” and
extend its life as such under the provisions of the Spanish Code of Commerce. Such appeals to privileges
as “sociedad anonima” under the Code of 1886 necessarily imply that Benguet has rejected the
alternative of reforming under the Corporation Law. As Respondent Commissioner’s order, now under
appeal, has stated —
“A sociedad anonima could not claim the benefit of both, but must have to choose one and discard the
other. If it elected to become a corporation it could not continue as a sociedad anonima; and if it chan roblesvirtualawlibrary

choose to remain as a sociedad anonima, it could not become a corporation.”

Having thus made its choice, Benguet may not now go back and seek to change its position and adopt
the reformation that it had formerly repudiated. The election of one of several alternatives is
irrevocable once made (as now expressly recognized in article 940 of the new Civil Code of the
Philippines): such rule is inherent in the nature of the choice, its purpose being to clarify and render
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definite the rights of the one exercising the option, so that other persons may act in consequence. While
successive choices may be provided there is nothing in section 75 of the Corporation Law to show or
hint that a sociedad anonima may make more than one choice thereunder, since only one option is
provided for.
While no express period of time is fixed by the law within which sociedades anonimas may elect under
section 75 of Act No. 1459 either to reform or to retain their status quo, there are powerful reasons to
conclude that the legislature intended such choice to be made within a reasonable time from the
effectivity of the Act. To enable a sociedad anonima to choose reformation when its stipulated period of
existence is nearly ended, would be to allow it to enjoy a term of existence far longer than that granted
to corporations organized under the Corporation Law; in Benguet’s case, 50 years as sociedad
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anonima, and another 50 years as an American type of corporation under Act 1459; a result chan roble svirtualawlibrary
incompatible with the avowed purpose of the Act to hasten the disappearance of the sociedades
anonimas. Moreover, such belated election, if permitted, would enable sociedades anonimas to reap
the full advantage of both types of organization. Finally, it would permit sociedades anonimas to prolong
their corporate existence indirectly by belated reformation into corporations under Act No. 1459, when
they could not do so directly by amending their articles of association.
Much stress is laid upon allegedly improper motives on the part of the intervenor, Consolidated Mines,
Inc., in supporting the orders appealed from, on the ground that intervenor seeks to terminate
Benguet’s operating contract and appropriate the profits that are the result of Benguet’s efforts in
developing the mines of the intervenor. Suffice it to say that whatever such motives should be, they are
wholly irrelevant to the issues in this appeal, that exclusively concern the legal soundness of the order of
the Respondent Securities and Exchange Commissioner rejecting the claims of the Benguet Consolidated
Mining Company to extend its corporate life.
Neither are we impressed by the prophesies of economic chaos that would allegedly ensure with the
cessation of Benguet’s activities. If its mining properties are really susceptible of profitable operation,
inexorable economic laws will ensure their exploitation; if, on the other hand, they can no longer be
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worked at a profit, then catastrophe becomes inevitable, whether or not Petitioner Benguet retains
corporate existence.
Sustaining the opinions of the Respondent Securities and Exchange Commissioner and of the Secretary
of Justice, we rule that:
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(1) The prohibition contained in section 18 of Act No. 1459, against extending the period of corporate
existence by amendment of the original articles, was intended to apply, and does apply, to sociedades
anonimas already formed, organized and existing at the time of the effectivity of the Corporation Law
(Act No. 1459) in 1906;
(2) The statutory prohibition is valid and impairs no vested rights or constitutional inhibition where no
agreement to extend the original period of corporate life was perfected before the enactment of the
Corporation Law;
(3) A sociedad anonima, existing before the Corporation Law, that continues to do business as such for
a reasonable time after its enactments, is deemed to have made its election and may not subsequently
claim to reform into a corporation under section 75 of Act No. 1459.
In view of the foregoing, the order appealed from is affirmed. Costs against Petitioner-AppellantBenguet
Consolidated Mining Company.
Padilla, Montemayor, Reyes, A. Labrador, Concepcion and Endencia, JJ., concur.

Separate Opinions
PARAS, C.J., dissenting: chanr oblesvirt uallawlibrary

The Petitioner, Benguet Consolidated Mining Company, was organized as a sociedad anonima on June
24, 1903, under the provisions of the Code of Commerce, and its term as fixed in the articles of
association was fifty years. It has been a leading enterprise, long and widely reputed to have pioneered
in and boosted the mining industry, distributed profits among its shareholders, and given employment
to thousands. To be more approximately exact, the Petitioner has kept on its payrolls over four thousand
Filipino employees who have about twenty thousand dependents. The taxes and other dues paid by it to
the Government have been in enormous amounts. It has always been subject to such supervision and
control of Government officials as are prescribed by law.
When, therefore, the Petitioner on June 3, 1953, presented all necessary documents to the Respondent,
the Securities and Exchange Commissioner, with a view to the extension of its term as a sociedad
anonima for a period of fifty years from June 15, 1953; when on June 22, 1953, it filed with chan roblesvirtualawlibrary

said Respondent the necessary articles of incorporation and other documents, with a view to reforming
itself as a corporation under the Corporation Law for a period of fifty years from June 22, 1953, followed
by the filing on July 22, 1953, of the corresponding by-laws; and when on October 27, 1953, chan roblesvirtualawlibrary

the Respondent issued an order denying the registration of the instruments as well for extension as for
reformation, Petitioner’s corporate life was being snapped out with such lightning abruptness as
undoubtedly to spell damage and prejudice not so much to its shareholders as to its beneficiaries —
thousands of employees and their dependents — and even to the Government which stands to lose a
good source of revenue.
The Petitioner contends (1) that the Respondent had the ministerial duty of registering the documents
presented either for extension of Petitioner’s term as a sociedad anonima or for its reformation under
the Corporation Law, in the absence (as in this case) of any pretense that said documents are formally
defective or that Petitioner’s purposes are unlawful; and (2) that as the Petitioner had organized as a
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sociedad anonima under the Code of Commerce, it has acquired a vested right which cannot
subsequently be affected or taken away by the Corporation Law enacted on April 1, 1906. I would not
dwell upon these contentions, because I hold that, even under the provisions of the Corporation Law,
the Petitioner may either extend its life as a sociedad anonima or reform as a corporation.
Section 75 of the Corporation Law provides: chanroblesvirtuallawlibrary

“Any corporation or sociedad anonima formed, organized and existing under the laws of the Philippine
Islands and lawfully transacting business in the Philippine Islands on the date of the passage of this Act,
shall be subject to the provisions hereof so far as such provisions may be applicable and shall be entitled
at its option either to continue business as such corporation or to reform and organize under, and by
virtue of the provisions of this Act, transferring all corporate interests to the new corporation which, if a
stock corporation, is authorized to issue its shares of stock at par to the stockholders or members of the
old corporation according to their interests.”
Upon the other hand, section 191 reads as follows: chanroblesvirtuallawlibrary

“The Code of Commerce, in so far as it relates to corporations or sociedades anonimas, and all other or
parts of Acts in conflict or inconsistent with this Act, are hereby repealed And provided, further, That cralaw

existing corporations or sociedades anonimas lawfully organized as such, which elect to continue their
business as such sociedades anonimas instead of reforming and reorganizing under and by virtue of the
provisions of this Act, shall continue to be governed by the laws that were in force prior to the passage
of this Act in relation to their organization and method of transacting business and to the rights of
members thereof as between themselves, but their relations to the public and public officials shall be
governed by the provisions of this Act.”
It is noteworthy that section 75 has not limited the optional continuance of a sociedad anonima to its
unexpired term, and section 191 expressly allows a sociedad anonima which has elected to continue its
business as such to be governed by the laws in force prior to the enactment of the Corporation Law in
relation to its organization and method of transacting business and to the rights of members as between
themselves. It is admitted that the Code of Commerce, while containing no express provision allowing it,
does not prohibit a sociedad anonima from extending its term; and commentators Gay de Montella chan roblesvirtualawlibrary

(Tratado Practico de Sociedad Marcantiles — Compañias Anonimas, Tomo II, p. 285) and Cesar Vivante
(Tratado de Derecho Mercantil, pp. 254, 258) have observed that a sociedad anonima may prolong its
corporate duration by amendment of its articles of association before the expiration of the term.
When a business or commercial association is organized, the members are naturally interested in
knowing not only their rights and obligations but also the duration of their legal relations. While
“organization” in a strict sense may refer to formalities like election of officers, adoption of by-laws, and
subscription and payment of capital stock, it cannot be spoken of or conceived in a wider sense without
necessarily involving the specification of the term of the entity formed. Extension of corporation life is
thus essentially an incident of “organization” and, in any event, a matter directly affecting or in relation
to the rights of the shareholders as between themselves, within the contemplation of section 191, and
should accordingly be governed by the Code of Commerce. As pointed out by the Supreme Court of
Wyoming in the case of Drew vs. Beckwith, (114 P. 2d. 98), extension “merely involves an additional
privilege to carry out the business of enterprise undertaken by the corporation,” and is “but an
enlargement of the enterprise undertaken by the corporation.” It is true that the duration of a sociedad
anonima is of some concern to the public and public officials who ought to know the time when it will
cease to exist and its business will be wound up. Notice to the world is however served by the
registration of Petitioner’s articles of association as a sociedad anonima or articles of incorporation as a
reformed corporation with the Securities and Exchange Commission.
When section 191 mentions “relations to the public and public officials” as being governed by the
provisions of the Corporation Law, the idea is obviously more to enable the Government to enforce its
powers of supervision, inspection and investigation, than to restrict the freedom of the corporate entity
as to organizational or substantive rights of members as between themselves. In one of the public
hearings conducted by the Philippine Commission before the enactment of the Corporation Law,
Commissioner Ide pertinently expressed, “Of course, whether they (sociedades) come under the new
law or not they would be subject to inspection, regulations, and examination for the purpose of
protecting the community.” The Attorney General in turn held that sociedades anonimas, although
governed by the Code of Commerce, are subject to the examination provided in section 54 of the
Corporation Law (5 Op. Atty. Gen. 442). In this connection, the Petitioner has admittedly subjected itself
to the provisions of the Corporation Law.
In Harden vs. Benguet Consolidated Mining Co., 58 Phil., 141, it was remarked: “The purpose of the chanroblesvirtuallawlibrary

commission in repealing this part of the Code of Commerce was to compel commercial entities
thereafter organized to incorporate under the Corporation Law, unless they should prefer to adopt
some form or other of the partnership.” This Court already indicated that the commercial entities
compelled to incorporate under the Corporation Law were those organized after its enactment.
Section 6, subsection 4, of the Corporation Law provides that the term for which corporations shall exist
shall not exceed fifty years; section 18 provides that the life of a corporation shall not be extended by
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amendment beyond the time fixed in the original articles; and section 11 provides that upon the
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issuance by the Securities and Exchange Commissioner of the certificate of incorporation, the persons
organizing the corporation shall constitute a body politic and corporate for the term specified in the
articles of incorporation, not exceeding fifty years. The corporations contemplated are those defined in
section 22 — corporations organized under the Corporation Law. They cannot be sociedades anonimas
formed under the Code of Commerce and licensed to continue as such in virtue of sections 75 and 191.
Otherwise the words “or sociedad anonima” would have been added to the term “corporation” in
section 18, as was done in sections 75 and 191. A similar observation was made in Harden vs. Benguet
Consolidated Mining Co., supra: “But when the word corporation is used in the sense of sociedad
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anonima and close discrimination is necessary, it should be associated with the Spanish expression
sociedad anonima either in parenthesis or connected by the word ‘or’. This latter device was adopted in
sections 75 and 191 of the Corporation Law.”
The citation from 3 Benito, Derecho Mercantil, p. 245, invoked in the majority decision, to the effect
that the duration of a sociedad anonima is of interest both to its members and to third persons, is
clearly an authority for our conclusions that the extension of Petitioner’s term is in relation “to the rights
of members thereof as between themselves.” Section 191 does not say that a sociedad anonima shall be
governed by the provisions of the Corporation Law when the matter involved affects not only “the rights
of members thereof as between themselves” but also “the public and public officials.”
We are also of the opinion that alternatively, under section 75, the Petitioner may elect to reform and
organize under the Corporation Law, transferring all its corporate interests to the new corporation.
Contrary to the ruling of the Respondent, we are convinced that, as no period was fixed within which it
should exercise the option either of continuing as a sociedad anonima or reforming and organizing
under the Corporation Law, the Petitioner was entitled to have its articles of incorporation and by-laws
presented respectively on June 22 and July 22, 1953, registered by the Respondent. Section 75 did not
take away Petitioner’s right to exhaust its term as a sociedad anonima, already vested before the
enactment of the Corporation Law, but merely granted it the choice to organize as a regular
corporation, instead of extending its life as a sociedad anonima. The only limitation imposed is that
prescribed in section 191, namely, that if a sociedad anonima elects to continue its business as such, it
shall be governed by the prior law in relation to its organization and method of transacting business and
to the rights of its members as between themselves, and by the provisions of the Corporation Law as to
its relations to the public and public officials. If the intention were to fix a period for reformation, the
law would have expressly so provided, in the same way that section 19 fixes two years during which a
corporation should formally organize and commence the transaction of its business, otherwise its
corporate powers would cease; section 77 fixes three years from the dissolution of a corporation
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within which it may clear and settle its affairs; and section 78 fixes the same period of three years
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within which a corporation may convey its properties to a trustee for the benefit of its stockholders and
other interested persons.
It is not correct to argue that the Petitioner is not entitled to elect to continue as a sociedad anonima
and at the same time reform and organize as a regular corporation, because when it continued as a
sociedad anonima after the passage of the Corporation Law and during its full term of fifty years, it
merely exercised a right it theretofore had; and the Petitioner can be said properly to have availed
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itself of the other option only when in June 1953 it filed the necessary papers of incorporation under the
Corporation Law. It is likewise not accurate to contend that, as the Respondent ruled,
the Petitioner could reform as and be a regular corporation at most only for the remainder of its term as
a sociedad anonima. Section 75, in allowing a sociedad anonima to reform and organize under the
Corporation Law, also authorizes the transfer of its corporate interests to the new corporation. This
“new” corporation should have the advantage of the prescribed maximum duration, regardless of the
original term of the old or substituted entity. There is no basis for the criticism that, if
the Petitioner were allowed to exhaust its full term as a sociedad anonima, and afterwards to reform as
a regular corporation for another fifty years, it would have a span of life twice as long as that granted to
corporations organized under the Corporation Law. The simple reason is that the Petitioner was already
a corporate entity before the enactment of the Corporation Law, with a fixed duration under its original
articles of association. It was clearly not in parity with any corporation organized under and coming into
existence after the effectivity of the Corporation Law which has no choice on the matter and can
therefore have only the prerogative granted by said law, — no more no less.
The Respondent has suggested that the Petitioner, if desirous of continuing its business, may organize a
new corporation — a suggestion which need not be made because no one would probably think of
denying it that right. But we cannot see any cogent reason or practical purpose for the suggestion. In the
first place, the filing of Petitioner’s articles of incorporation and by-laws in July, 1953, in effect amounted
to the formation of a new corporation. To require more is to give greater importance to form than to
substance. In the second place, the public and public officials may not as a matter of fact be adversely
affected by allowing the Petitioner to reform, instead of requiring it technically to form a new
corporation. It will acquire no greater rights or obligations by simple reformation than by newly
organizing another corporation. Conversely, the public and public officials will acquire no greater benefit
or control by requiring the Petitioner to form a new corporation, than by allowing it to reform. And as
already stated, whatever interest the public and public officials may have in determining the duration of
a sociedad anonima or any corporation for that matter, is amply protected by registration in the
Securities and Exchange Commission.
The Respondent and the intervenor, Consolidated Mines, Inc., have tried to show that
the Petitioner holds or owns interests in eight mining companies, in violation of section 13, subsection 5
of the Corporation Law, in that it has operating contracts with the intervenor and seven other mining
companies, besides owning the majority shares in Balatoc Mining Co. This matter has not merited any
attention or favorable comment in the majority decision, and rightly of course. Even so, we may observe
that the alleged violation was not the subject of any finding by the Respondent, nor relied upon in his
order of denial; that the Petitioner has denied the charge; that the holding by the Petitioner of
chan roblesvirtualawlibrary chan roblesvirtualawlibrary

shares of stock in Balatoc Mining Co., if really illegal, may look into only in a quo warranto proceeding
instituted by the Government; that at any rate the Petitioner has always been ready and willing to
chan roblesvirtualawlibrary

dispose of said shares and, in a proper proceeding, it should be given reasonable time to do so, as this
Court gave the Philippine Sugar Estates a period of six months after final decision within which to
“liquidate, dissolve and separate absolutely in every respect and in all of its relations, complained of in
the petition, with the Tayabas Land Company” (Government vs. Philippine Sugar Estates Co., 38 Phil.,
15).
With special reference to the intervenor, it may be of some moment to know the antecedents and
nature of business relations existing between it and the Petitioner, at least to demonstrate the
righteousness of the position of one or the other even from a factual point of view. The following
excerpts from “Petitioner’s Reply to a portion of Intervenor’s Brief” are in point: chanroblesvirtuallawlibrary

“What has happened in our case is that prior to the execution of the Operating Agreement of July 9,
1934, the stockholders, directors, and officers of the intervenor, Consolidated Mines, Inc., did not want
to risk one centavo of their own funds for the development of their chrome ore mining claims in
Zambales province, and proposed to the Petitioner herein, Benguet Consolidated Mining Company, to
explore, develop and operate their mining claims, Benguet to furnish all the funds that might be
necessary, and to explore, develop, mine and concentrate and market ‘all the pay are found on or within
paid claims or properties’, the intervenor, Consolidated Mines, Inc., and the Petitioner, Benguet
Consolidated Mining Company, after the latter had reimbursed itself for all its advances, to divide half
and half the excess of receipts over disbursements. Benguet agreed to it, and advanced approximately
three million pesos, one-half thereof before the war, and the other half after the war (the intervenor’s
properties having been destroyed during the war). Paragraph XII of the intervenor’s complaint in the
civil action instituted by it against Benguet in the Court of First Instance of Manila, No. 18938, and to
which counsel for the intervenor refer in page 5 of their brief, makes mention of the large sums of
money that Benguet advanced, as follows: chanroble svirtuallawlibrary
‘Initial advances amounting to approximately P1,500,000 made by Defendant during the first phases of
said Operating Agreement which had been fully reimbursed to it before the war, end of the amounts
likewise advanced by it (Benguet) for rehabilitation amounting to close P1,500,000.00.’
“While Benguet risked and poured approximately three million pesos (P3,000,000) into the venture, and
while Benguet was looking for, and establishing, a market for intervenor’s chrome ore, the intervenor,
Consolidated Mines, Inc., considered the said Operating Agreement of July 9, 1934, as valid. Now that
Benguet’s efforts have been crowned with success, and Benguet has established a market for
intervenor’s chrome ore, the intervenor claims that its said operating Agreement of July 9, 1934, with
the Petitioner, Benguet, is contrary to law because Benguet has become interested in intervenor’s
chrome ore mining claims (although the agreement expressly states that Benguet has no interest
therein), and objects to the registration of the documents which Benguet filed with
the Respondent Securities and Exchange Commissioner, extending its life as a sociedad anonima, and
reforming itself s a corporation, in accordance with the provisions of section 75 of the Corporation Law.
“Under the foregoing facts, the intervenor, Consolidated Mines, Inc., cannot be heard to complain
against Benguet. No court can give now a helping hand to the intervenor, which claims that Benguet no
longer lives, and wants to keep for itself all the products of Benguet’s efforts after the latter risked into
the venture approximately three million pesos (P3,000,000).”
The foregoing considerations may not constitute a legal justification for ruling that the Petitionershould
be allowed either to extend its life as a sociedad anonima or to reform and organize under the
provisions of the Corporation Law, but they may aid in resolving in Petitioner’s favor and doubt as to the
clarity or definiteness of sections 75 and 191 of the Corporation Law regarding its right to exercise either
option in the manner claimed by it.
The same result may be arrived at if, in addition, we bear in mind the possible economic harm that may
be brought about by the affirmance of the order complained of. This aspect is adequately touched
in Petitioner’s brief, as follows:
chanroblesvirtuallawlibrary

“1. A loss of employment in the Baguio district by about 4,000 Filipino and a loss of direct living from
the Benguet operation supplied to 20,000, that is, the 4,000 employed and their dependents.
“(a) This would be calamity to the district of the highest order which could very well produce a snow
balling depression which could react all over the Philippine Islands.
“2. Losses of direct and indirect taxes to the Philippine Government in an extremely large yearly
amount.
“3. No one would be able to continue the Benguet and Balatoc mines in operation should a liquidation
of Benguet take place because the net profits after labor and material costs and taxes in the last two
years or more from the gold mining operations have not warranted their continued operation as
independent units. The profits in 1953 certainly do not warrant it. It is merely a case of taking gold out
of the ground in order to pay for labor, materials and taxes with very little return to the stockholders
and on the huge investment made in the reconstruction since 1946.
“(a) The relief provided by the elimination of the 17 per cent Excise Tax, the 7 per cent Compensating
Tax and the lowering of the Extraction Tax, when counter-balanced against consistently increasing costs
from month to month up to this very month, is now nothing but an offsetting item against constantly
increasing costs.”
For whatever persuasive effect it may have, we cannot help calling attention to the fact that there are
only about nine sociedades anonimas in the country, foremost among them being Compañia Maritima,
which have existed for years and along with the Petitioner figured prominently in our economic
development. Compañia Maritima, in particular, has been twice allowed to extend its life by
amendment of its articles of incorporation. It may be argued that if there was an official mistake in
acceding to the extension of the term of Compañia Maritima, the same should not warrant the
commission of another mistake. But it will go to show that sections 75 and 191 of the Corporation Law
are, on the points herein involved, of doubtful construction; and it is for this reason that we had to
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advert hereinabove to the somewhat unequitable position of the intervenor and to the possible adverse
effect on Philippine economy of the abrupt termination of Petitioner’s corporate existence.
By and large, it is my considered opinion that the Respondent’s order of denial dated October 27, 1953,
should be reversed and the Respondent ordered to register at least the documents presented by
the Petitioner, reforming and organizing itself as a corporation under the provisions of the Corporation
Law. This would be in line with the policy of doing away with sociedad anonimas, at the same time
saving “the goose that lays the golden egg.”
Jugo and Bautista Angelo, JJ., concur.
 [G.R. No. 124715. January 24, 2000]

RUFINA LUY LIM petitioner, vs. COURT OF APPEALS, AUTO TRUCK TBA
CORPORATION, SPEED DISTRIBUTING, INC., ACTIVE DISTRIBUTORS,
ALLIANCE MARKETING CORPORATION, ACTION COMPANY,
INC. respondents.

DECISION

BUENA, J.:

May a corporation, in its universality, be the proper subject of and be included in the inventory
of the estate of a deceased person?

Petitioner disputes before us through the instant petition for review on certiorari, the
decision[1] of the Court of Appeals promulgated on 18 April 1996, in CA-GR SP No. 38617,
which nullified and set aside the orders dated 04 July 1995[2], 12 September 1995[3] and 15
September 1995[4] of the Regional Trial Court of Quezon City, Branch 93, sitting as a probate
court.

Petitioner Rufina Luy Lim is the surviving spouse of the late Pastor Y. Lim whose estate is the
subject of probate proceedings in Special Proceedings Q-95-23334, entitled, "In Re: Intestate
Estate of Pastor Y. Lim Rufina Luy Lim, represented by George Luy, Petitioner".

Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed

Distributing, Inc., Active Distributing, Inc. and Action Company are corporations formed,
organized and existing under Philippine laws and which owned real properties covered under the
Torrens system.

On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly
represented by her nephew George Luy, filed on 17 March 1995, a joint petition[5] for the
administration of the estate of Pastor Y. Lim before the Regional Trial Court of Quezon City.

Private respondent corporations, whose properties were included in the inventory of the estate of
Pastor Y. Lim, then filed a motion[6] for the lifting of lis pendens and motion[7] for exclusion of
certain properties from the estate of the decedent.

In an order[8] dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93, sitting as
a probate court, granted the private respondents twin motions, in this wise:

"Wherefore, the Register of Deeds of Quezon City is hereby ordered to lift,

expunge or delete the annotation of lis pendens on Transfer Certificates of Title
Nos. 116716, 116717, 116718, 116719 and 5182 and it is hereby further ordered
that the properties covered by the same titles as well as those properties by (sic)
Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236 are
excluded from these proceedings.
 SO ORDERED."

Subsequently, Rufina Luy Lim filed a verified amended petition[9] which contained the following
averments:

"3. The late Pastor Y. Lim personally owned during his lifetime the following
business entities, to wit:

Business Entity Address:

XXXX

Alliance Marketing ,Inc. Block 3, Lot 6, Dacca

BF Homes,

Paraaque,

Metro Manila.

XXXX

Speed Distributing Inc. 910 Barrio Niog,

Aguinaldo Highway,

Bacoor, Cavite.

XXXX

Auto Truck TBA Corp. 2251 Roosevelt Avenue,

Quezon City.

XXXX

Active Distributors, Inc. Block 3, Lot 6, Dacca BF

Homes, Paraaque,

Metro Manila.

XXXX

Action Company 100 20th Avenue

Murphy, Quezon City

or

92-D Mc-Arthur Highway

Valenzuela Bulacan.

"3.1 Although the above business entities dealt and engaged in business with the
public as corporations, all their capital, assets and equity were however,
personally owned by the late Pastor Y Lim. Hence the alleged stockholders and
officers appearing in the respective articles of incorporation of the above business
entities were mere dummies of Pastor Y. Lim, and they were listed therein only
for purposes of registration with the Securities and Exchange Commission.

"4. Pastor Lim, likewise, had Time, Savings and Current Deposits with the
following banks: (a) Metrobank, Grace Park, Caloocan City and Quezon Avenue,
Quezon City Branches and (b) First Intestate Bank (formerly Producers Bank),
Rizal Commercial Banking Corporation and in other banks whose identities are
yet to be determined.

"5. That the following real properties, although registered in the name of the
above entities, were actually acquired by Pastor Y. Lim during his marriage with
petitioner, to wit:

Corporation Title Location

XXXX

k. Auto Truck TCT No. 617726 Sto. Domingo

TBA Corporation Cainta, Rizal

q. Alliance Marketing TCT No. 27896 Prance,

Metro Manila

Copies of the above-mentioned Transfer Certificate of Title and/or Tax

Declarations are hereto attached as Annexes "C" to "W".

XXXX

"7. The aforementioned properties and/or real interests left by the late Pastor Y.
Lim, are all conjugal in nature, having been acquired by him during the existence
of his marriage with petitioner.
 "8. There are other real and personal properties owned by Pastor Y. Lim which
petitioner could not as yet identify. Petitioner, however will submit to this
Honorable Court the identities thereof and the necessary documents covering the
same as soon as possible."

On 04 July 1995, the Regional Trial Court acting on petitioners motion issued an order[10], thus:

"Wherefore, the order dated 08 June 1995 is hereby set aside and the Registry of
Deeds of Quezon City is hereby directed to reinstate the annotation of lis pendens
in case said annotation had already been deleted and/or cancelled said TCT Nos.
116716, 116717, 116718, 116719 and 51282.

Further more (sic), said properties covered by TCT Nos. 613494, 365123, 236256
and 236237 by virtue of the petitioner are included in the instant petition.

SO ORDERED."

On 04 September 1995, the probate court appointed Rufina Lim as special administrator[11] and
Miguel Lim and Lawyer Donald Lee, as co-special administrators of the estate of Pastor Y. Lim,
after which letters of administration were accordingly issued.

In an order[12] dated 12 September 1995, the probate court denied anew private respondents
motion for exclusion, in this wise:

"The issue precisely raised by the petitioner in her petition is whether the
corporations are the mere alter egos or instrumentalities of Pastor Lim, Otherwise
(sic) stated, the issue involves the piercing of the corporate veil, a matter that is
clearly within the jurisdiction of this Honorable Court and not the Securities and
Exchange Commission. Thus, in the case of Cease vs. Court of Appeals, 93
SCRA 483, the crucial issue decided by the regular court was whether the
corporation involved therein was the mere extension of the decedent. After
finding in the affirmative, the Court ruled that the assets of the corporation are
also assets of the estate.

A reading of P.D. 902, the law relied upon by oppositors, shows that the SECs
exclusive (sic) applies only to intra-corporate controversy. It is simply a suit to
settle the intestate estate of a deceased person who, during his lifetime, acquired
several properties and put up corporations as his instrumentalities.

SO ORDERED."

On 15 September 1995, the probate court acting on an ex parte motion filed by petitioner, issued
an order[13] the dispositive portion of which reads:

"Wherefore, the parties and the following banks concerned herein under
enumerated are hereby ordered to comply strictly with this order and to produce
 and submit to the special administrators , through this Honorable Court within (5)
five days from receipt of this order their respective records of the savings/current
accounts/time deposits and other deposits in the names of Pastor Lim and/or
corporations above-mentioned, showing all the transactions made or done
concerning savings /current accounts from January 1994 up to their receipt of this
court order.

XXX XXX XXX

SO ORDERED."

Private respondent filed a special civil action for certiorari[14], with an urgent prayer for a
restraining order or writ of preliminary injunction, before the Court of Appeals questioning the
orders of the Regional Trial Court, sitting as a probate court.

On 18 April 1996, the Court of Appeals, finding in favor of herein private respondents, rendered
the assailed decision[15], the decretal portion of which declares:

"Wherefore, premises considered, the instant special civil action for certiorari is
hereby granted, The impugned orders issued by respondent court on July 4,1995
and September 12, 1995 are hereby nullified and set aside. The impugned order
issued by respondent on September 15, 1995 is nullified insofar as petitioner
corporations" bank accounts and records are concerned.

SO ORDERED."

Through the expediency of Rule 45 of the Rules of Court, herein petitioner Rufina Luy Lim now
comes before us with a lone assignment of error[16]:

"The respondent Court of Appeals erred in reversing the orders of the lower court
which merely allowed the preliminary or provisional inclusion of the private
respondents as part of the estate of the late deceased (sic) Pastor Y. Lim with the
respondent Court of Appeals arrogating unto itself the power to repeal, to disobey
or to ignore the clear and explicit provisions of Rules 81,83,84 and 87 of the
Rules of Court and thereby preventing the petitioner, from performing her duty as
special administrator of the estate as expressly provided in the said Rules."

Petitioners contentions tread on perilous grounds.

In the instant petition for review, petitioner prays that we affirm the orders issued by the probate
court which were subsequently set aside by the Court of Appeals.

Yet, before we delve into the merits of the case, a review of the rules on jurisdiction over probate
proceedings is indeed in order.
The provisions of Republic Act 7691[17], which introduced amendments to Batas Pambansa Blg.
129, are pertinent:

"Section 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the

"Judiciary Reorganization Act of 1980", is hereby amended to read as follows:

Section 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise
exclusive jurisdiction:

xxx xxx xxx

(4) In all matters of probate, both testate and intestate, where the gross value of
the estate exceeds One Hundred Thousand Pesos (P100,000) or, in probate
matters in Metro Manila, where such gross value exceeds Two Hundred Thousand
Pesos (P200,000);

xxx xxx xxx

Section 3. Section 33 of the same law is hereby amended to read as follows:

Section 33. Jurisdiction of Metropolitan Trial Courts, Municipal

Trial Courts and Municipal Circuit Trial Courts in Civil Cases.-
Metropolitan Trial Courts, Municipal Trial Courts and Municipal
Circuit Trial Courts shall exercise:

1. Exclusive original jurisdiction over civil actions and probate

proceedings, testate and intestate, including the grant of
provisional remedies in proper cases, where the value of the
personal property, estate or amount of the demand does not exceed
One Hundred Thousand Pesos(P100,000) or, in Metro Manila
where such personal property, estate or amount of the demand does
not exceed Two Hundred Thousand Pesos (P200,000), exclusive of
interest, damages of whatever kind, attorneys fees, litigation
expenses and costs, the amount of which must be specifically
alleged, Provided, that interest, damages of whatever kind,
attorneys, litigation expenses and costs shall be included in the
determination of the filing fees, Provided further, that where there
are several claims or causes of actions between the same or
different parties, embodied in the same complaint, the amount of
the demand shall be the totality of the claims in all the causes of
action, irrespective of whether the causes of action arose out of the
same or different transactions;

xxx xxx xxx"

Simply put, the determination of which court exercises jurisdiction over matters of probate
depends upon the gross value of the estate of the decedent.

As to the power and authority of the probate court, petitioner relies heavily on the principle that a
probate court may pass upon title to certain properties, albeit provisionally, for the purpose of
determining whether a certain property should or should not be included in the inventory.

In a litany of cases, We defined the parameters by which the court may extend its probing arms
in the determination of the question of title in probate proceedings.

This Court, in PASTOR, JR. vs. COURT OF APPEALS,[18] held:

"X X X As a rule, the question of ownership is an extraneous matter which the

probate court cannot resolve with finality. Thus, for the purpose of determining
whether a certain property should or should not be included in the inventory of
estate properties, the Probate Court may pass upon the title thereto, but such
determination is provisional, not conclusive, and is subject to the final decision in
a separate action to resolve title."

We reiterated the rule in PEREIRA vs. COURT OF APPEALS[19]:

"X X X The function of resolving whether or not a certain property should be

included in the inventory or list of properties to be administered by the
administrator is one clearly within the competence of the probate court. However,
the courts determination is only provisional in character, not conclusive, and is
subject to the final decision in a separate action which may be instituted by the
parties."

Further, in MORALES vs. CFI OF CAVITE[20] citing CUIZON vs. RAMOLETE[21], We made an
exposition on the probate courts limited jurisdiction:

"It is a well-settled rule that a probate court or one in charge of proceedings

whether testate or intestate cannot adjudicate or determine title to properties
claimed to be a part of the estate and which are equally claimed to belong to
outside parties. All that the said court could do as regards said properties is to
determine whether they should or should not be included in the inventory or list of
properties to be administered by the administrator. If there is no dispute, well and
good; but if there is, then the parties, the administrator and the opposing parties
have to resort to an ordinary action for a final determination of the conflicting
claims of title because the probate court cannot do so."

Again, in VALERA vs. INSERTO[22], We had occasion to elucidate, through Mr. Justice Andres
Narvasa[23]:

"Settled is the rule that a Court of First Instance (now Regional Trial Court),
acting as a probate court, exercises but limited jurisdiction, and thus has no power
 to take cognizance of and determine the issue of title to property claimed by a
third person adversely to the decedent, unless the claimant and all other parties
having legal interest in the property consent, expressly or impliedly, to the
submission of the question to the probate court for adjudgment, or the interests of
third persons are not thereby prejudiced, the reason for the exception being that
the question of whether or not a particular matter should be resolved by the court
in the exercise of its general jurisdiction or of its limited jurisdiction as a special
court (e.g. probate, land registration, etc.), is in reality not a jurisdictional but in
essence of procedural one, involving a mode of practice which may be waived. x
xx

x x x. These considerations assume greater cogency where, as here, the

Torrens title is not in the decedents name but in others, a situation on which
this Court has already had occasion to rule x x x."(emphasis Ours)

Petitioner, in the present case, argues that the parcels of land covered under the Torrens system
and registered in the name of private respondent corporations should be included in the inventory
of the estate of the decedent Pastor Y. Lim, alleging that after all the determination by the
probate court of whether these properties should be included or not is merely provisional in
nature, thus, not conclusive and subject to a final determination in a separate action brought for
the purpose of adjudging once and for all the issue of title.

Yet, under the peculiar circumstances, where the parcels of land are registered in the name of
private respondent corporations, the jurisprudence pronounced in BOLISAY vs., ALCID[24] is of
great essence and finds applicability, thus:

"It does not matter that respondent-administratrix has evidence purporting to

support her claim of ownership, for, on the other hand, petitioners have a Torrens
title in their favor, which under the law is endowed with incontestability until
after it has been set aside in the manner indicated in the law itself, which, of
course, does not include, bringing up the matter as a mere incident in special
proceedings for the settlement of the estate of deceased persons. x x x"

"x x x. In regard to such incident of inclusion or exclusion, We hold that if a

property covered by Torrens title is involved, the presumptive conclusiveness of
such title should be given due weight, and in the absence of strong compelling
evidence to the contrary, the holder thereof should be considered as the owner of
the property in controversy until his title is nullified or modified in an appropriate
ordinary action, particularly, when as in the case at bar, possession of the property
itself is in the persons named in the title. x x x"

A perusal of the records would reveal that no strong compelling evidence was ever presented by
petitioner to bolster her bare assertions as to the title of the deceased Pastor Y. Lim over the
properties. Even so, P.D. 1529, otherwise known as, " The Property Registration Decree",
proscribes collateral attack on Torrens Title, hence:
 "xxx xxx xxx

Section 48. Certificate not subject to collateral attack.

- A certificate of title shall not be subject to collateral attack. It cannot be altered,

modified or cancelled except in a direct proceeding in accordance with law."

In CUIZON vs. RAMOLETE, where similarly as in the case at bar, the property subject of the
controversy was duly registered under the Torrens system, We categorically stated:

"x x x Having been apprised of the fact that the property in question was in the
possession of third parties and more important, covered by a transfer certificate of
title issued in the name of such third parties, the respondent court should have
denied the motion of the respondent administrator and excluded the property in
question from the inventory of the property of the estate. It had no authority to
deprive such third persons of their possession and ownership of the property. x x
x"

Inasmuch as the real properties included in the inventory of the estate of the late Pastor Y. Lim
are in the possession of and are registered in the name of private respondent corporations, which
under the law possess a personality separate and distinct from their stockholders, and in the
absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness
of said titles in favor of private respondents should stand undisturbed.

Accordingly, the probate court was remiss in denying private respondents motion for exclusion.
While it may be true that the Regional Trial Court, acting in a restricted capacity and exercising
limited jurisdiction as a probate court, is competent to issue orders involving inclusion or
exclusion of certain properties in the inventory of the estate of the decedent, and to
adjudge, albeit, provisionally the question of title over properties, it is no less true that such
authority conferred upon by law and reinforced by jurisprudence, should be exercised
judiciously, with due regard and caution to the peculiar circumstances of each individual case.

Notwithstanding that the real properties were duly registered under the Torrens system in the
name of private respondents, and as such were to be afforded the presumptive conclusiveness of
title, the probate court obviously opted to shut its eyes to this gleamy fact and still proceeded to
issue the impugned orders.

By its denial of the motion for exclusion, the probate court in effect acted in utter disregard of
the presumption of conclusiveness of title in favor of private respondents. Certainly, the probate
court through such brazen act transgressed the clear provisions of law and infringed settled
jurisprudence on this matter.

Moreover, petitioner urges that not only the properties of private respondent corporations are
properly part of the decedents estate but also the private respondent corporations themselves. To
rivet such flimsy contention, petitioner cited that the late Pastor Y. Lim during his lifetime,
organized and wholly-owned the five corporations, which are the private respondents in the
instant case.[25] Petitioner thus attached as Annexes "F"[26] and "G"[27] of the petition for review
affidavits executed by Teresa Lim and Lani Wenceslao which among others, contained
averments that the incorporators of Uniwide Distributing, Inc. included on the list had no actual
participation in the organization and incorporation of the said corporation. The affiants added
that the persons whose names appeared on the articles of incorporation of Uniwide Distributing,
Inc., as incorporators thereof, are mere dummies since they have not actually contributed any
amount to the capital stock of the corporation and have been merely asked by the late Pastor Y.
Lim to affix their respective signatures thereon.

It is settled that a corporation is clothed with personality separate and distinct from that of the
persons composing it. It may not generally be held liable for that of the persons composing it. It
may not be held liable for the personal indebtedness of its stockholders or those of the entities
connected with it.[28]

Rudimentary is the rule that a corporation is invested by law with a personality distinct and
separate from its stockholders or members. In the same vein, a corporation by legal fiction and
convenience is an entity shielded by a protective mantle and imbued by law with a character
alien to the persons comprising it.

Nonetheless, the shield is not at all times invincible. Thus, in FIRST PHILIPPINE
INTERNATIONAL BANK vs. COURT OF APPEALS[29], We enunciated:

"x x x When the fiction is urged as a means of perpetrating a fraud or an illegal

act or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates
the corporation from the members or stockholders who compose it will be lifted
to allow for its consideration merely as an aggregation of individuals. x x x"

Piercing the veil of corporate entity requires the court to see through the protective shroud which
exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes
one corporation from a seemingly separate one, were it not for the existing corporate fiction.[30]

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is
just but the alter ego of a person or of another corporation. Where badges of fraud exist, where
public convenience is defeated; where a wrong is sought to be justified thereby, the corporate
fiction or the notion of legal entity should come to naught.[31]

Further, 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 right; and (3) The aforesaid control and breach of
duty must proximately cause the injury or unjust loss complained of. The absence of any of these
elements prevent "piercing the corporate veil".[32]

Mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of
separate corporate personalities.[33]

Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must
be clearly and convincingly established. It cannot be presumed.[34]

Granting arguendo that the Regional Trial Court in this case was not merely acting in a limited
capacity as a probate court, petitioner nonetheless failed to adduce competent evidence that
would have justified the court to impale the veil of corporate fiction. Truly, the reliance reposed
by petitioner on the affidavits executed by Teresa Lim and Lani Wenceslao is unavailing
considering that the aforementioned documents possess no weighty probative value pursuant to
the hearsay rule. Besides it is imperative for us to stress that such affidavits are inadmissible in
evidence inasmuch as the affiants were not at all presented during the course of the proceedings
in the lower court. To put it differently, for this Court to uphold the admissibility of said
documents would be to relegate from Our duty to apply such basic rule of evidence in a manner
consistent with the law and jurisprudence.

Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs. LEONIDAS[35] finds
pertinence:

"Affidavits are classified as hearsay evidence since they are not generally
prepared by the affiant but by another who uses his own language in writing the
affiants statements, which may thus be either omitted or misunderstood by the one
writing them. Moreover, the adverse party is deprived of the opportunity to cross-
examine the affiants. For this reason, affidavits are generally rejected for being
hearsay, unless the affiant themselves are placed on the witness stand to testify
thereon."

As to the order[36] of the lower court, dated 15 September 1995, the Court of Appeals correctly
observed that the Regional Trial Court, Branch 93 acted without jurisdiction in issuing said
order; The probate court had no authority to demand the production of bank accounts in the name
of the private respondent corporations.

WHEREFORE, in view of the foregoing disquisitions, the instant petition is hereby

DISMISSED for lack of merit and the decision of the Court of Appeals which nullified and set
aside the orders issued by the Regional Trial Court, Branch 93, acting as a probate court, dated
04 July 1995 and 12 September 1995 is AFFIRMED.

SO ORDERED.
G.R. No. 141617 August 14, 2001

ADALIA B. FRANCISCO and MERRYLAND DEVELOPMENT

CORPORATION, petitioners,
vs.
RITA C. MEJIA, as Executrix of Testate Estate of ANDREA CORDOVA VDA. DE
GUTERREZ, respondent.

GONZAGA-REYES,J.:

In this petition for review by certiorari, petitioners pray for the setting aside of the
Decision of the Court Appeals promulgated on 13 April 1999 and its 15 December 1999
Resolution in CA-G.R. CV No. 19281.

As culled from the decisions of the lower courts and the pleadings of the parties, the
factual background of this case is as set out herein:

Andrea Cordova Vda. de Gutierrez (Gutierrez) was the registered owner of a parcel of
land in Camarin, Caloocan City known as Lot 861 of the Tala Estate. The land had an
aggregate area of twenty-five (25) hectares and was covered by Transfer Certificate of
Title (TCT) No. 5779 of the Registry of Deeds of Caloocan City. The property was later
subdivided into five lots with an area of five hectares each and pursuant thereto, TCT
No. 5779 was cancelled and five new transfer certificates of title were issued in the
name of Gutierrez, namely TCT No. 7123 covering Lot 861-A, TCT No. 7124 covering
Lot 861-B, TCT No. 7125 covering Lot 861-C, TCT No. 7126 covering Lot 861-D and
TCT No. 7127 covering Lot 861-E.

On 21 December 1964, Gutierrez and Cardale Financing and Realty Corporation

(Cardale) executed a Deed of Sale with Mortgage relating to the lots covered by TCT
Nos. 7124, 7125, 7126 and 7127, for the consideration of P800,000.00. Upon the
execution of the deed, Cardale paid Gutierrez P171,000.00. It was agreed that the
balance of P629,000.00 would be paid in several installments within five years from the
date of the deed, at an interest of nine percent per annum "based on the successive
unpaid principal balances." Thereafter, the titles of Gutierrez were cancelled and in lieu
thereof TCT Nos. 7531 to 7534 were issued in favor of Cardale.

To secure payment of the balance of the purchase price, Cardale constituted a

mortgage on three of the four parcels of land covered by TCT Nos. 7531, 7532 and
7533, encompassing fifteen hectares of land.1 The encumbrance was annotated upon
the certificates of title and the owner's duplicate certificates. The owner's duplicates
were retained by Gutierrez.

On 26 August 1968, owing to Cardale's failure to settle its mortgage obligation,

Gutierrez filed a complaint for rescission of the contract with the Quezon City Regional
Trial Court (RTC), which was docketed as Civil Case No. Q-12366.2 On 20 October
1969, during the pendency of the rescission case, Gutierrez died and was substituted
by her executrix, respondent Rita C. Mejia (Mejia). In 1971, plaintiff's presentation of
evidence was terminated. However, Cardale, which was represented by petitioner
Adalia B. Francisco (Francisco) in her capacity as Vice-President and Treasurer of
Cardale, lost interest in proceeding with the presentation of its evidence and the case
lapsed into inactive status for a period of about fourteen years.

In the meantime, the mortgaged parcels of land covered by TCT Nos. 7532 and 7533
became delinquent in the payment of real estate taxes in the amount of P102,300.00,
while the other mortgaged property covered by TCT No. 7531 became delinquent in the
amount of P89,231.37, which culminated in their levy and auction sale on 1 and 12
September 1983, in satisfaction of the tax arrears. The highest bidder for the three
parcels of land was petitioner Merryland Development Corporation (Merryland), whose
President and majority stockholder is Francisco. A memorandum based upon the
certificate of sale was then made upon the original copies of TCT Nos. 7531 to 7533.

On 13 August 1984, before the expiration of the one year redemption period, Mejia filed
a Motion for Decision with the trial court. The hearing of said motion was deferred,
however, due to a Motion for Postponement filed by Cardale through Francisco, who
signed the motion in her capacity as "officer-in-charge," claiming that Cardale needed
time to hire new counsel. However, Francisco did not mention the tax delinquencies and
sale in favor of Merryland. Subsequently, the redemption period expired and Merryland,
acting through Francisco, filed petitions for consolidation of title,3 which culminated in the
issuance of certain orders4 decreeing the cancellation of Cardales' TCT Nos. 7531 to
7533 and the issuance of new transfer certificates of title "free from any encumbrance or
third-party claim whatsoever" in favor of Merryland. Pursuant to such orders, the
Register of Deeds of Caloocan City issued new transfer certificates of title in the name
of Merryland which did not bear a memorandum of the mortgage liens in favor of
Gutierrez.

Thereafter, sometime in June 1985, Francisco filed in Civil Case No. Q-12366 an
undated Manifestation to the effect that the properties subject of the mortgage and
covered by TCT Nos. 7531 to 7533 had been levied upon by the local government of
Caloocan City and sold at a tax delinquency sale. Francisco further claimed that the
delinquency sale had rendered the issues in Civil Case No. Q-12366 moot and
academic. Agreeing with Francisco, the trial court dismissed the case, explaining that
since the properties mortgaged to Cardale had been transferred to Merryland which was
not a party to the case for rescission, it would be more appropriate for the parties to
resolve their controversy in another action.

On 14 January 1987, Mejia, in her capacity as executrix of the Estate of Gutierrez, filed
with the RTC of Quezon City a complaint for damages with prayer for preliminary
attachment against Francisco, Merryland and the Register of Deeds of Caloocan City.
The case was docketed as Civil Case No. Q-49766. On 15 April 1988, the trial court
rendered a decision5 in favor of the defendants, dismissing the complaint for damages
filed by Mejia. It was held that plaintiff Mejia, as executrix of Gutierrez's estate, failed to
establish by clear and convincing evidence her allegations that Francisco controlled
Cardale and Merryland and that she had employed fraud by intentionally causing
Cardale to default in its payment of real property taxes on the mortgaged properties so
that Merryland could purchase the same by means of a tax delinquency sale. Moreover,
according to the trial court, the failure to recover the property subject of the Deed of
Sale with Mortgage was due to Mejia's failure to actively pursue the action for rescission
(Civil Case No. 12366), allowing the case to drag on for eighteen years. Thus, it ruled
that —

xxx xxx xxx

The act of not paying or failing to pay taxes due the government by the defendant
Adalia B. Francisco, as treasurer of Cardale Financing and Realty Corporation do
not, per se, constitute perpetration of fraud or an illegal act. It do [sic] not also
constitute an act of evasion of an existing obligation (to plaintiff) if there is no
clear showing that such an act of non-payment of taxes was deliberately made
despite its (Cardale's) solvency and capability to pay. There is no evidence
showing that Cardale Financing and Realty Corporation was financially capable
of paying said taxes at the time.

"There are times when the corporate fiction will be disregarded: (1) where all the
members or stockholders commit illegal act; (2) where the corporation is used as
dummy to commit fraud or wrong; (3) where the corporation is an agency for a
parent corporation; and (4) where the stock of a corporation is owned by one
person." (I, Fletcher, 58, 59, 61 and 63). None of the foregoing reasons can be
applied to the incidents in this case: (1) there appears no illegal act committed by
the stockholders of defendant Merryland Development Corporation and Cardale
Financing and Realty Corporation; (2) the incidents proven by evidence of the
plaintiff as well as that of the defendants do not show that either or both
corporations were used as dummies by defendant Adalia B. Francisco to commit
fraud or wrong. To be used as [a] dummy, there has to be a showing that the
dummy corporation is controlled by the person using it. The evidence of plaintiff
failed to prove that defendant Adalia B. Francisco has controlling interest in either
or both corporations. On the other hand, the evidence of defendants clearly show
that defendant Francisco has no control over either of the two corporations; (3)
none of the two corporations appears to be an agency for a parent (the other)
corporation; and (4) the stock of either of the two corporation [sic] is not owned
by one person (defendant Adalia B. Francisco). Except for defendant Adalia B.
Francisco, the incorporators and stockholders of one corporation are different
from the other.

xxx xxx xxx

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

xxx xxx xxx

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

xxx xxx xxx

The dispositive portion of the trial court's decision states —

WHEREFORE, in view of all the foregoing consideration, the court hereby

renders judgment in favor of the defendants Register of Deeds of Caloocan City,
Merryland Development Corporation and Adalia B. Francisco, and against
plaintiff Rita C. Mejia, as Executrix of the Testate Estate of Andrea Cordova Vda.
De Gutierrez, and hereby orders:

1. That this case for damages be dismissed, at the same time, plaintiffs motion
for reconsideration dated September 23, 1987 is denied;

2. Plaintiff pay the defendants Merryland Development Corporation and the

Register of Deeds the sum of P20,000.00, and another sum of P20,000.00 to the
 defendant Adalia B. Francisco, as and for attorney's fees and litigation expenses,
and pay the costs of the proceedings.

SO ORDERED.

The Court of Appeals,6 in its decision7 promulgated on 13 April 1999, reversed the trial
court, holding that the corporate veil of Cardale and Merryland must be pierced in order
to hold Francisco and Merryland solidarily liable since these two corporations were used
as dummies by Francisco, who employed fraud in allowing Cardale to default on the
realty taxes for the properties mortgaged to Gutierrez so that Merryland could acquire
the same free from all liens and encumbrances in the tax delinquency sale and, as a
consequence thereof, frustrating Gutierrez's rights as a mortgagee over the subject
properties. Thus, the Court of Appeals premised its findings of fraud on the following
circumstances —

xxx xxx xxx

. . . Appellee Francisco knew that Cardale of which she was vice-president and
treasurer had an outstanding obligation to Gutierrez for the unpaid balance of the
real properties covered by TCT Nos. 7531 to 7533, which Cardale purchased
from Gutierrez which account, as of December 1988, already amounted to
P4,414,271.43 (Exh. K, pp. 39-44, record); she also knew that Gutierrez had a
mortgage lien on the said properties to secure payment of the aforesaid
obligation; she likewise knew that the said mortgaged properties were under
litigation in Civil Case No. Q-12366 which was an action filed by Gutierrez
against Cardale for rescission of the sale and/or recovery of said properties (Exh.
E). Despite such knowledge, appellee Francisco did not inform Gutierrez's Estate
or the Executrix (herein appellant) as well as the trial court that the mortgaged
properties had incurred tax delinquencies, and that Final Notices dated July 9,
1982 had been sent by the City Treasurer of Caloocan demanding payment of
such tax arrears within ten (10) days from receipt thereof (Exhs. J & J-1, pp. 37-
38, record). Both notices which were addressed to —

Cardale Financing & Realty Corporation c/o Merryland Development Corporation

and sent to appellee Francisco's address at 83 Katipunan Road, White Plains, Quezon
City, gave warning that if the taxes were not paid within the aforesaid period, the
properties would be sold at public auction to satisfy the tax delinquencies.

To reiterate, notwithstanding receipt of the aforesaid notices, appellee Francisco did not
inform the Estate of Gutierrez or her executrix about the tax delinquencies and of the
impending auction sale of the said properties. Even a modicum of good faith and fair
play should have encouraged appellee Francisco to at least advise Gutierrez's Estate
through her executrix (herein appellant) and the trial court which was hearing the
complaint for rescission and recovery of said properties of such fact, so that the Estate
of Gutierrez, which had a real interest on the properties as mortgagee and as plaintiff in
the rescission and recovery suit, could at least take steps to forestall the auction sale
and thereby preserve the properties and protect its interests thereon. And not only did
appellee Francisco allow the auction sale to take place, but she used her other
corporation (Merryland) in participating in the auction sale and in acquiring the very
properties which her first corporation (Cardale) had mortgaged to Gutierrez. Again,
appellee Francisco did not thereafter inform the Estate of Gutierrez or its executrix
(herein appellant) about the auction sale, thus precluding the Estate from exercising its
right of redemption. And it was only after the expiration of the redemption period that
appellee Francisco filed a Manifestation in Civil Case No. Q-12366 (Exh. 1, p. 36,
record), in which she disclosed for the first time to the trial court and appellant that the
properties subject of the case and on which Gutierrez or her Estate had a mortgage
lien, had been sold in a tax delinquency sale. And in order to further conceal her
deceptive maneuver, appellee Francisco did not divulge in her aforesaid Manifestation
that it was her other corporation (Merryland) that acquired the properties in the auction
sale.

We are not impressed by appellee's submission that no evidence was adduced

to prove that Cardale had the capacity to pay the tax arrears and therefore she or
Cardale may not be faulted for the tax delinquency sale of the properties in
question. Appellee Francisco's bad faith or deception did not necessarily lie in
Cardale's or her failure to settle the tax deliquencies in question, but in not
disclosing to Gutierrez's estate or its executrix (herein appellant) which had a
mortgage lien on said properties the tax delinquencies and the impending auction
sale of the encumbered properties.

Appellee Francisco's deception is further shown by her concealment of the tax

delinquency sale of the properties from the estate or its executrix, thus
preventing the latter from availing of the right of redemption of said properties.
That appellee Francisco divulged the auction sale of the properties only after
such redemption period had lapsed clearly betrays her intention to keep
Gutierrez's Estate or its Executrix from availing of such right. And as the
evidence would further show, appellee Francisco had a hand in securing for
Merryland consolidation of its ownership of the properties and in seeing to it that
Merryland's torrens certificates for the properties were free from liens and
encumbrances. All these appellee Francisco did even as she was fully aware that
Gutierrez or her estate had a valid and subsisting mortgage lien on the said
properties.

It is likewise worthy of note that early on appellee Francisco had testified in the
action for rescission of sale and recovery of possession and ownership of the
properties which Gutierrez filed against Cardale (Civil Case No. Q-12366) in her
capacity as defendant Cardale's vice-president and treasurer. But then, for no
plausible reason whatsoever, she lost interest in continuing with the presentation
of evidence for defendant Cardale. And then, when appellant Mejia as executrix
of Gutierrez's Estate filed on August 13, 1984 a Motion for Decision in the
aforesaid case, appellee Francisco moved to defer consideration of appellant's
 Motion on the pretext that defendant Cardale needed time to employ another
counsel. Significantly, in her aforesaid Motion for Postponement dated August
16, 1984 which appellee Francisco personally signed as Officer-in-Charge of
Cardale, she also did not disclose the fact that the properties subject matter of
the case had long been sold at a tax delinquency sale and acquired by her other
corporation Merryland.

And as if what she had already accomplished were not enough fraudulence,
appellee Francisco, acting in behalf of Merryland, caused the issuance of new
transfer certificates of title in the name of Merryland, which did not anymore bear
the mortgage lien in favor of Gutierrez. In the meantime, to further avoid payment
of the mortgage indebtedness owing to Gutierrez's estate, Cardale corporation
was dissolved. Finally, to put the properties beyond the reach of the mortgagee,
Gutierrez's estate, Merryland caused the subdivision of such properties, which
were subsequently sold on installment basis.

In its petition for certiorari, petitioners argue that there is no law requiring the mortgagor
to inform the mortgagee of the tax delinquencies, if any, of the mortgaged properties.
Moreover, petitioners claim that Cardale's failure to pay the realty taxes, per se, does
not constitute fraud since it was not proven that Cardale was capable of paying the
taxes' Petitioners also contend that if Mejia, as executrix of Gutierrez's estate, was not
remiss in her duty to pursue Civil Case No. 12366, she could have easily learned of the
non-payment of realty taxes on the subject properties and of the auction sale that
followed and thus, have redeemed the properties or availed of some other remedy to
conserve the estate of Gutierrez. In addition, Mejia could have annotated a notice oflis
pendens on the titles of the mortgaged properties, but she failed to do so. It is the stand
of petitioners that respondent has not adduced any proof that Francisco controlled both
Cardale and Merryland and that she used these two corporations to perpetuate a fraud
upon Gutierrez or her estate. Petitioners maintain that the "evidence shows that, apart
form the meager share of petitioner Francisco, the stockholdings of both corporations
comprise other shareholders, and the stockholders of either of them, aside from
petitioner Francisco, are composed of different persons." As to Civil Case No. 12366,
petitioners insist that the decision of the trial court in that case constitutesres judicata to
the instant case.8

It is dicta in corporation law that a corporation is a juridical person with a separate and
distinct personality from mat of the stockholders or members who compose it 9 However,
when the legal fiction of the separate corporate personality is abused, such as when the
same is used for fraudulent or wrongful ends, the courts have not hesitated to pierce the
corporate veil. One of the earliest formulations of this doctrine of piercing the corporate
veil was made in the American case ofUnited States v. Milwaukee Refrigerator Transit
Co.10 —

If any general rule can be laid down, in the present state of authority, it is that a
corporation will be looked upon as a legal entity as a general rule, and until
sufficient reason to the contrary appears; but, when the notion of legal entity is
 used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons.

Since then a good number of cases have firmly implanted this doctrine in Philippine
jurisprudence.11 One such case isUmali v. Court of Appeals12 wherein the Court declared
that —

Under the doctrine of piercing the veil of corporate entity, when valid grounds
therefore exist, the legal fiction that a corporation is an entity with a juridical
personality separate and distinct from its members or stockholders may be
disregarded. In such cases, the corporation will be considered as a mere
association of persons. The members or stockholders of the corporation will be
considered as the corporation, that is, liability will attach directly to the officers
and stockholders. The doctrine applies when the corporate fiction is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, or when
it is made as a shield to confuse the legitimate issues, or where a corporation is
the merealter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.

With specific regard to corporate officers, the general rule is that the officer cannot be
held personally liable with the corporation, whether civilly or otherwise, for the
consequences of his acts, if he acted for and in behalf of the corporation, within the
scope of his authority and in good faith. In such cases, the officer's acts are properly
attributed to the corporation.13 However, if it is proven that the officer has used the
corporate fiction to defraud a third party,14 or that he has acted negligently, maliciously or
in bad faith,15 then the corporate veil shall be lifted and he shall be held personally liable
for the particular corporate obligation involved.

The Court, after an assiduous study of this case, is convinced that the totality of the
circumstances appertaining conduce to the inevitable conclusion that petitioner
Francisco acted in bad faith. The events leading up to the loss by the Gutierrez estate of
its mortgage security attest to this. It has been established that Cardale failed to comply
with its obligation to pay the balance of the purchase price for the four parcels of land it
bought from Gutierrez covered by TCT Nos. 7531 to 7534, which obligation was
secured by a mortgage upon the lands covered by TCT Nos. 7531, 7532 and 7533. This
prompted Gutierrez to file an action for rescission of the Deed of Sale with Mortgage
(Civil Case No. Q-12366), but the case dragged on for about fourteen years when
Cardale, as represented by Francisco, who was Vice-President and Treasurer of the
same,16 lost interest in completing its presentation of evidence.

Even before 1984 when Mejia, in her capacity as executrix of Gutierrez's estate, filed a
Motion for Decision with the trial court, there is no question that Francisco knew that the
properties subject of the mortgage had become tax delinquent. In fact, as treasurer of
Cardale, Francisco herself was the officer charged with the responsibility of paying the
realty taxes on the corporation's properties. This was admitted by the trial court in its
decision.17 In addition, notices dated 9 July 1982 from the City Treasurer of Caloocan
demanding payment of the tax arrears on the subject properties and giving warning that
if the realty taxes were not paid within the given period then such properties would be
sold at public auction to satisfy the tax delinquencies were sent directly to Francisco's
address in White Plains, Quezon City.18 Thus, as early as 1982, Francisco could have
informed the Gutierrez estate or the trial court in Civil Case No. Q-12366 of the tax
arrears and of the notice from the City Treasurer so that the estate could have taken the
necessary steps to prevent the auction sale and to protect its interests in the mortgaged
properties, but she did no such thing. Finally, in 1983, the properties were levied upon
and sold at public auction wherein Merryland — a corporation where Francisco is a
stockholder19 and concurrently acts as President and director20 — was the highest bidder.

When Mejia filed the Motion for Decision in Civil Case No. Q-12366,21 the period for
redeeming the properties subject of the tax sale had not yet expired.22 Under the Realty
Property Tax Code,23 pursuant to which the tax levy and sale were prosecuted,24 both the
delinquent taxpayer and in his absence, any person holding a lien or claim over the
property shall have the right to redeem the property within one year from the date of
registration of the sale.25 However, if these persons fail to redeem the property within the
time provided, then the purchaser acquires the property "free from any encumbrance or
third party claim whatsoever."26 Cardale made no attempts to redeem the mortgaged
property during this time. Moreover, instead of informing Mejia or the trial court in Q-
12366 about the tax sale, the records show that Francisco filed a Motion for
Postponement27 in behalf of Cardale — even signing the motion in her capacity as
"officer-in-charge" — which worked to defer the hearing of Mejia's Motion for Decision.
No mention was made by Francisco of the tax sale in the motion for postponement.
Only after the redemption period had expired did Francisco decide to reveal what had
transpired by filing a Manifestation stating that the properties subject of the mortgage in
favor of Gutierrez had been sold at a tax delinquency sale; however, Francisco failed to
mention that it was Merryland that acquired the properties since she was probably afraid
that if she did so the court would see behind her fraudulent scheme. In this regard, it is
also significant to note that it was Francisco herself who filed the petitions for
consolidation of title and who helped secure for Merryland titles over the subject
properties "free from any encumbrance or third-party claim whatsoever."

It is exceedingly apparent to the Court that the totality of Francisco's actions clearly
betray an intention to conceal the tax delinquencies, levy and public auction of the
subject properties from the estate of Gutierrez and the trial court in Civil Case No. Q-
12366 until after the expiration of the redemption period when the remotest possibility
for the recovery of the properties would be extinguished.28 Consequently, Francisco had
effectively deprived the estate of Gutierrez of its rights as mortgagee over the three
parcels of land which were sold to Cardale. If Francisco was acting in good faith, then
she should have disclosed the status of the mortgaged properties to the trial court in
Civil Case No. Q-12366 —especially after Mejia had filed a Motion for Decision, in
response to which she filed a motion for postponement wherein she could easily have
mentioned the tax sale — since this action directly affected such properties which were
the subject of both the sale and mortgage.
That Merryland acquired the property at the public auction only serves to shed more
light upon Francisco's fraudulent purposes. Based on the findings of the Court of
Appeals, Francisco is the controlling stockholder and President of Merryland.29 Thus,
aside from the instrumental role she played as an officer of Cardale, in evading that
corporation's legitimate obligations to Gutierrez, it appears that Francisco's actions were
also oriented towards securing advantages for another corporation in which she had a
substantial interest. We cannot agree, however, with the Court of Appeals' decision to
hold Merryland solidarily liable with Francisco. The only act imputable to Merryland in
relation to the mortgaged properties is that it purchased the same and this by itself is
not a fraudulent or wrongful act. No evidence has been adduced to establish that
Merryland was a mere alter ego or business conduit of Francisco. Time and again it has
been reiterated that mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for
disregarding the separate corporate personality.30 Neither has it been alleged or proven
that Merryland is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of Cardale. 31 Even
assuming that the businesses of Cardale and Merryland are interrelated, this alone is
not justification for disregarding their separate personalities, absent any showing that
Merryland was purposely used as a shield to defraud creditors and third persons of their
rights.32 Thus, Merryland's separate juridical personality must be upheld.

Based on a statement of account submitted by Mejia, the Court of Appeals awarded

P4,314,271.43 in favor of the estate of Gutierrez which represents the unpaid balance
of the purchase price in the amount of P629,000.00 with an interest rate of nine percent
(9% ) per annum, in accordance with the agreement of the parties under the Deed of
Sale with Mortgage,33 as of December 1988.34 Therefore, in addition to the amount
awarded by the appellate court, Francisco should pay the estate of Gutierrez interest on
the unpaid balance of the purchase price (in the amount of P629,000.00) at the rate of
nine percent (9%) per annum computed from January, 1989 until fully satisfied.

Finally, contrary to petitioner's assertions, we agree with the Court of Appeals that the
decision of the trial court in Civil Case No. Q-12366 does not constituteres
judicata insofar as the present case is concerned because the decision in the first case
was not a judgment on the merits. Rather, it was merely based upon the premise that
since Cardale had been dissolved and the property acquired by another corporation, the
action for rescission would not prosper. As a matter of fact, it was even expressly stated
by the trial court that the parties should ventilate their issues in another action.

WHEREFORE, the 13 April 1999 Decision of the Court of Appeals is hereby accordingly
MODIFIED so as to hold ADALIA FRANCISCO solely liable to the estate of Gutierrez
for the amount of P4,314,271.43 and for interest on the unpaid balance of the purchase
price (in the amount of P629,000.00) at the rate of nine percent (9%) per annum
computed from January, 1989 until fully satisfied. MERRYLAND is hereby absolved
from all liability.

SO ORDERED.Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ.,concur.

ARB CONSTRUCTION CO., INC., and MARK MOLINA, petitioners,
vs. COURT OF APPEALS, TBS SECURITY AND INVESTIGATION
AGENCY represented by CECILIA R. BACLAY, respondents.

DECISION

BELLOSILLO, J.:

ARB CONSTRUCTION CO., INC. (ARBC) and MARK MOLINA, Vice President for
Operations of ARBC, in this consolidated petition, assail the Decision of the Court of
Appeals in CA-G.R. SP Nos. 36330 and 36489 as well as the orders of the trial court
dated 9 September 1994 and 9 December 1994 granting private respondent TBS
Security and Investigation Agencys Motion for Leave to File Amended and
Supplemental Complaint and denying petitioner Mark Molina's Motion to Dismiss,
respectively.

On 15 August 1993 TBS Security and Investigation Agency (TBSS) entered into two (2)
Service Contracts with ARBC wherein TBSS agreed to provide and post security guards
in the five (5) establishments being maintained by ARBC. Clause 10 of the Service
Contracts provides -

10. This contract shall be effective for a period of one (1) year
commencing from 15th August 1993 and shall be considered
automatically renewed for the same period unless otherwise a written
notice of termination shall have been given by one party to the other party
thirty (30) days in advance.

In a letter dated 23 February 1994 ARBC informed TBSS of its desire to terminate the
Service Contracts effective thirty (30) days after receipt of the letter. Also, in a letter
dated 22 March 1994, ARBC through its Vice President for Operations, Mark Molina,
informed TBSS that it was replacing its security guards with those of Global Security
Investigation Agency (GSIA).

In response to both letters, TBSS informed ARBC that the latter could not preterminate
the Service Contracts nor could it post security guards from GSIA as it would run
counter to the provisions of their Service Contracts.

On 23 March 1994 Molina wrote TBSS conceding that indeed the "security contract
dated 15 August 1993 stipulates that the duration of the service shall be for a period of
one year, ending on 15 August 1994 x x x and could not be preterminated until
then."[1] Nevertheless, Molina decreased the security guards to only one (1) allegedly
pursuant to Clause 2 of the Service Contracts which provides -

2. The AGENCY shall adopt a guarding system and post guards in

accordance thereof, in the premises of the client throughout the whole 24
hours daily, using variable shifts of the guards at such hours as may be
 designated by the CLIENT or AGENCY. As required by the CLIENT, the
security guards to be assigned by the AGENCY shall consist initially of the
following x x x subject to be increased or decreased by the CLIENT at its
sole discretion depending on the security situation or the exigency of the
service, by giving the AGENCY at least SEVEN (7) days prior notice. [2]

Thus on 28 March 1994 TBSS filed a Complaint for Preliminary Injunction against
ARBC and GSIA praying -

A. Forthwith and Ex-parte, that a Temporary Restraining Order be issued

declaring the status quo and directing the Defendants or any person(s)
acting in their behalf from performing acts of replacing the Plaintiffs
security guards from other agencies;

B. After due hearing that a Writ of Preliminary Injunction, in like tenor, be

issued upon posting of such bond as the Honorable Court may require;

C. After due hearing, that judgment be rendered -

1. Declaring the two (2) contracts for Security Services

between Plaintiff and ARBC to be subsisting until August 15,
1994;

2. Ordering Defendant GLOBAL to refrain from taking over

the security services of ARBC and to withdraw its guards
from the premises of ARBC, if they have been posted earlier;

3. Ordering ARBC to pay Plaintiff attorneys fees in the

amount of P50,000.00 x x x [3]

In Answer, ARBC claimed that it decreased the number of security guards being posted
at its establishments to only one (1) as the security guards assigned by TBSS were
found to be grossly negligent and inefficient, citing the following incidents -

8. On February 6, 1994, a Mitsubishi roadgrader of herein defendant was

stripped of parts amounting to P58,642.00;

9. On February 25, 1994, a concrete vibrator and mercury light assembly

were stolen from the construction site of the Multipurpose Hall beside the
swimming pool of herein defendant which is worth P2,800.00 x x x x[4]

In conclusion, it prayed that the complaint against it be dismissed for lack of merit.

On 16 May 1994 TBSS filed a Motion for Leave to File Attached Amended and
Supplemental Complaint. TBSS submitted that it now desired to pursue a case for Sum
of Money and Damages instead of the one previously filed for Preliminary Injunction. It
maintained that the Amended and Supplemental Complaintwould not substantially alter
its cause of action as both the original and amended complaint were based on the same
set of facts.[5]

In addition to the allegations in its original complaint, TBSS alleged in its Amended and
Supplemental Complaint that ARBC illegally deducted from the payroll the amounts
of P15,500.00 and P2,800.00 representing the value of one (1) unit concrete vibrator
and cassette recorder, respectively. It further argued that ARBC withheld additional
amounts from its payroll as payment for the parts of the grader that were stolen. [6] TBSS
maintained that ARBC had an outstanding obligation of P472,080.46. Corollarily, TBSS
prayed for moral damages of P500,000.00, exemplary damages of P200.000.00 and
attorney's fees of P50,000.00.

On 2 May 1994 the trial court issued a temporary restraining order but due to the
exigency of the situation TBSS decided to withdraw its security contingent from ARBC's
premises on 13 May 1994.

ARBC opposed the Motion for Leave to File Amended and Supplemental
Complaint [7] contending that the cause of action had been substantially altered.

On 9 September 1994 the RTC of Makati, Br. 59, granted the motion of TBSS to file
the Amended and Supplemental Complaint rationalizing thus -

Should the court find the allegations in the pleadings to be inadequate, the
Court should allow the party to file proper amendments in accordance with
the mandate of the Rules of Court that amendments to pleadings are
favored and should be liberally allowed, particularly in the early stages of
the law suit, so that the actual merit of the controversy may be speedily
determined without regard to technicalities and in the most expeditious
and inexpensive manner x x x x [8]

ARBC filed a Motion for Reconsideration but on 3 November 1994 the motion was
denied.

Meanwhile, Mark Molina filed a Motion to Dismiss [9] the Amended and Supplemental
Complaint on the ground that it did not state a cause of action insofar as he was
concerned. But on 9 December 1994 the trial court denied the motion to dismiss and
directed Molina instead to file his answer within ten (10) days from receipt of the order.

On 30 January 1995 ARBC filed a Petition [10] with the Court of Appeals alleging that the
trial court committed grave abuse of discretion in issuing the Orders of 9 September
1994 and 3 November 1994. On 15 February 1995 Molina likewise filed
a Petition before the Court of Appeals similarly attributing grave abuse of discretion to
the trial court in issuing the order of 9 December 1994.
Parenthetically, upon motion of TBSS, the petition of Mark Molina in CA-G.R. SP No.
36484 was consolidated with the petition of ARBC in CA-G.R. SP No. 36330.

On 16 August 1996 the Court of Appeals rendered a Decision [11] denying both petitions
of ARBC and Molina. On 3 October 1996 petitioners Motion for Reconsideration [12] was
denied. Hence, this petition.

In their consolidated Petition before this Court, petitioners first submit that THE COURT
OF APPEALS ERRED IN HOLDING THAT PRIVATE RESPONDENT HAD THE RIGHT
TO CHANGE ITS CAUSE OF ACTION IN VIEW OF A CHANGE IN THE SITUATION
OF THE PARTIES AFTER THE FILING OF THE ORIGINAL COMPLAINT.[13] In support
of this assigned error petitioners insist that -

x x x (T)here was not only a substantial change in private respondents

cause of action but there was even an alteration in the theory of the case x
x x (W)hile in the original complaint the only thing alleged and is being
prayed for is for petitioner ARB (ARBC) to be enjoined from replacing the
security guards of private respondent x x x and for the two contracts x x x
to be enforced until August 15, 1994 and for petitioner ARB (ARBC) to be
ordered to pay x x x attorneys fees, what is alleged and is being prayed for
in the amended and supplemental complaint is for both petitioners to be
ordered to pay P171,853.80 (for unpaid services) x x x and P300,226.66
(for lost income) x x x plus moral and exemplary damages and attorneys
fees.

Obviously, petitioner ARB (ARBC) is being required to answer for a liability

or legal obligation under the amended and supplemental complaint wholly
different from that stated in the original complaint such as but not limited to
the amount of P171,852.80 which was never mentioned in the original
contract. Under these circumstances, a different cause of action was
introduced by the amendment.

Also, there was a change in the theory of the case. Whereas in the original
contract what is sought for by private respondent is the enforcement of the
two (2) contracts which is what is known in legal parlance as specific
performance, in the amended and supplemental complaint what is sought
for is x x x a rescission of the contracts with damages x x x x [14]

We cannot subscribe to the contention of petitioners that the Amended and

Supplemental Complaint substantially changed TBSS' cause of action nor was there
any alteration in the theory of the case. As correctly observed by the Court of Appeals,
"the amendatory allegations are mere amplifications of the cause of action for damages
x x x x An amendment will not be considered as stating a new cause of action if the
facts alleged in the amended complaint show substantially the same wrong with respect
to the same transaction, or if what are alleged refer to the same matter but are more
fully and differently stated, or where averments which were implied are made in
expressed terms, and the subject of the controversy or the liability sought to be
enforced remains the same."[15]

The original as well as amended and supplemental complaints readily disclose that the
averments contained therein are almost identical. In the original complaint, TBSS prays,
among others, that the two (2) Service Contracts be declared as subsisting until 15
August 1994 and that petitioners be made to pay P50,000.00 as attorneys
fees.[16] Significantly, in its penultimate paragraph, TBSS prays "for such other reliefs that
are considered just and equitable under the premises."[17] This is a "catch-all" phrase
which definitely covers the amplifications and additional averments contained in
the Amended and Supplemental Complaint. Due to events supervening after the filing of
the original complaint, it became incumbent upon TBSS to amend its original complaint.
One of the supervening events was the withholding by petitioner ARBC of some
amounts intended for the payroll of TBSS due to pilferage or losses which allegedly
occurred due to the negligence and inefficiency of TBSS' security guards. Plainly, this
withholding of the payroll was only an offshoot of the pretermination of the two (2)
Service Contracts on the part of ARBC.

Significantly, the pretermination of the Service Contracts was already alleged in the
original complaint. In fact it was one, if not the most basic, issue discussed therein.
Since the withholding of the payroll was only an offshoot of the issue on the
pretermination of the contract, we can safely conclude that the allegation on the
withholding of the payroll in the Amended and Supplemental Complaint was only an
amplification of an issue that was already included and discussed in the original
complaint. It was therefore error on the part of petitioners to conclude that private
respondent changed its cause of action in the Amended and Supplemental Complaint.
Neither could they say that they were being made to answer for a liability or legal
obligation that was wholly different from that stated in the original complaint.

Grave abuse of discretion therefore could not be imputed to the trial court for admitting
the Amended and Supplemental Complaint of private respondent TBSS. It also follows
that the appellate court could not be faulted for putting its stamp of approval on the
order of the trial court admitting the same.

Petitioners also argue, as their second assigned error, that THE COURT OF APPEALS
ERRED IN HOLDING THAT THE ALLEGATIONS IN THE AMENDED AND
SUPPLEMENTAL COMPLAINT WERE SUFFICIENT TO HOLD PETITIONER MOLINA
LIABLE TO PRIVATE RESPONDENT IN HIS PERSONAL CAPACITY. In support of
their contention petitioners submit -

x x x (W)hen x x x Molina allegedly applied P171,853.80 payable to

private respondent to the losses suffered by petitioner ARB (ARBC) due to
the negligence and indifference of the private respondents security guards
and when petitioner Molina replaced the said security guards x x x Molina
was not acting in his personal capacity but x x x as officer of petitioner
ARB (ARBC).
 Since petitioner Molina did not so act in his personal capacity but only in
his official capacity as officer of petitioner ARB (ARBC) then petitioner
Molina cannot be held personally liable for the alleged liability of petitioner
ARB (ARBC) x x x x [18]

In affirming the order of the trial court denying petitioner Molinas Motion to Dismiss, the
appellate court ruled -

Similarly, We find no error committed by respondent Judge in denying the

motion to dismiss.

In paragraphs 5, 17, 18 of the amended and supplemental complaint, it is

alleged:

5. But fate would have it that defendant ARBC would

subsequently breach the aforesaid contracts by
surreptitiously preterminating the same and as precursor
thereto, defendant ARBC, through defendant Mark Molina,
would impute against plaintiff pretended and fabricated
violations and baselessly blame plaintiff for alleged losses of
company properties by just deducting the values thereof
from plaintiffs billings without even complying with the
procedure agreed upon in the contracts x x x x

It may be pertinent to state that all these accusations and

imputations, albeit false and concocted, were made by
defendant Mark P. Molina x x x x

17. Such unsalutary breach of contract by defendant ARBC through

defendant Mark Molina has resulted to plaintiffs damage and prejudice by
way of lost income consisting of the unexpired portion of the contract, i.e.,
up to August 15, 1994, entailing a total amount of P300, 266.66 x x x x

The above allegations, particularly the subparagraph, "It may be pertinent

to state that all these accusations and imputations, albeit false and
concocted, were made by defendant Mark P. Molina," are sufficient
statement of a cause of action against petitioner Mark Molina in his
personal capacity.[19]

In this regard, we agree with petitioners. It is basic that a corporation is invested by law
with a personality separate and distinct from those of the persons composing it as well
as from that of any other legal entity to which it may be related. As a general rule, a
corporation may not be made to answer for acts or liabilities of its stockholders or those
of the legal entities to which it may be connected and vice versa. However, the veil of
corporate fiction may be pierced when it is used as a shield to further an end subversive
of justice; or for purposes that could not have been intended by the law that created it;
or to defeat public convenience, justify wrong, protect fraud, or defend crime; or to
perpetuate deception; or as an alter ego, adjunct or business conduit for the sole benefit
of the stockholders.[20]

Prescinding from the foregoing, the general rule is that officers of a corporation are not
personally liable for their official acts unless it is shown that they have exceeded their
authority.[21] Article 31 of the Corporation Code is in point -

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees

who willfully and knowingly vote for or assent to patently unlawful acts of
the corporation or who are guilty of gross negligence or bad faith in
directing the affairs of the corporation or acquire any personal or
pecuniary interest in conflict with their duty as such directors, or trustees
shall be liable jointly and severally for all damages resulting therefrom
suffered by the corporation, its stockholders or members and other
persons x x x x

On the basis hereof, petitioner Molina could not be held jointly and severally liable for
any obligation which petitioner ARBC may be held accountable for, absent any proof of
bad faith or malice on his part. Corollarily, it is also incorrect on the part of the Court of
Appeals to conclude that there was a sufficient cause of action against Molina as to
make him personally liable for his actuations as Vice President for Operations of ARBC.
A cursory reading of the records of the instant case would reveal that Molina did not
summarily withhold certain amounts from the payroll of TBSS. Instead, he enumerated
instances [22] which in his view were enough bases to do so.

Finally, petitioners contend that THE COURT OF APPEALS ERRED IN HOLDING

THAT THE TRIAL COURT DID NOT GRAVELY ABUSE ITS DISCRETION IN
GRANTING PRIVATE RESPONDENTS MOTION FOR LEAVE TO FILE AMENDED
AND SUPPLEMENTAL COMPLAINT AND IN DENYING PETITIONER MOLINAS
MOTION TO DISMISS. In support hereof, petitioners submit that -

x x x (T)he trial court admitted the amended and supplemental complaint

which substantially changed the cause of action and theory of the case of
the private respondent. Therefore, there is (sic) abuse of discretion on the
part of the trial court contrary to the ruling of the Court of Appeals that
there is none.[23]

As already discussed, the Amended and Supplemental Complaint did not substantially
alter the cause of action and theory of the case. Consequently, the trial court and the
appellate court could not be charged with grave abuse of discretion in admitting the
same.

WHEREFORE, the PETITION is PARTIALLY GRANTED. The assailed Decision of the

Court of Appeals in CA-G.R. SP No. 36489 affirming the 9 December 1994 Order of the
Regional Trial Court-Br. 59, Makati City, which denied the Motion to Dismiss of
petitioner Mark Molina is REVERSED and SET ASIDE.

However, the assailed Decision of the appellate court in CA-G.R. SP No. 36330
affirming the 9 September 1994 Order of the Regional Trial Court-Br. 59, Makati City,
granting TBS Security and Investigation Agency's Motion for Leave to File Amended
and Supplemental Complaint is likewise AFFIRMED. The case is remanded to the trial
court for further proceedings. No costs.

SO ORDERED.

Mendoza, and Buena, JJ., concur.

Quisumbing, and De Leon, Jr., on leave.

G.R. No. 82797 February 27, 1991

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

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

A.E. Dacanay for petitioners.

Antonio Quintos Law Office for private respondent.

PARAS, J.:

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

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

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

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

Judgment is hereby rendered ordering defendants (herein petitioners) and all

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

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

After considering the motion for the issuance of a writ of execution filed by
counsel for the plaintiff (herein respondents) and the opposition filed in relation
thereto and finding that the defendant failed to file the necessary supersedeas
bond, this court resolved to grant the same for being meritorious. (Rollo, p. 112)

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

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

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

GEE appealed and by coincidence. was raffled to the same Court, RTC Branch IX.
Roces moved to dismiss the appeal but the Court denied the motion. On certiorari, the
Court of Appeals dismissed Roces' petition and remanded the case to the RTC.
Meantime, Branch IX became vacant and the case was re-raffled to Branch XLIV.
On April 6, 1987, the Regional Trial Court of Manila, finding that the amount of P1
million evidenced by Exhibit "I" and another P1 million evidenced by the pacto de
retro sale instrument (Exhibit "2") were in full satisfaction of the judgment obligation,
reversed the decision of the Municipal Trial Court, the dispositive portion of which reads:

Premises considered, judgment is hereby rendered reversing the Resolution

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

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

WHEREFORE, the judgment appealed from is hereby REVERSED and the

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

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

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

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

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

Finding that the common exhibit, Exhibit 1/A had been signed by persons other than
judgment creditors (Roces-Reyes Realty, Inc.) coupled with the fact that said exhibit
was not even alleged by GEE and Lim Ka Ping in their original motion to quash
the alias writ of execution (Rollo, p. 37) but produced only during the hearing (Ibid.)
which production resulted in petitioners having to claim belatedly that there was an
"overpayment" of about half a million pesos (Rollo, pp. 25-27) and remarking on the
utter absence of any writing in Exhibits "1/A" and "2/B" to indicate payment of the
judgment debt, respondent Appellate Court correctly concluded that there was in
fact no payment of the judgment debt. As aptly observed by the said court:
 What immediately catches one's attention is the total absence of any writing
alluding to or referring to any settlement between the parties of private
respondents' (petitioners') judgment obligation. In moving for the dismissal of the
appeal Lim Ka Ping who was then assisted by counsel simply stated that
defendants (herein petitioners) are satisfied with the decision of the Metropolitan
Trial Court (Records of CA, p. 54).

Notably, in private respondents' (petitioners') Motion to Quash the Writ of

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

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

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

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

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

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

The absence of a note to evidence the loan is explained by Jesus Marcos Roces who
testified that the IOU was subsequently delivered to private respondents (Rollo, pp. 97-
98). Contrary to the Regional Trial Court's premise that it was incumbent upon
respondent corporation to prove that the amount was delivered to the Roces brothers in
the payment of the loan in the latter's favor, the delivery of the amount to and the receipt
thereof by the Roces brothers in their names raises the presumption that the said
amount was due to them. There is a disputable presumption that money paid by one to
1âwphi1

the other was due to the latter (Sec. 5(f) Rule 131, Rules of Court). It is for GEE and Lim
Ka Ping to prove otherwise. In other words, it is for the latter to prove that the payments
made were for the satisfaction of their judgment debt and not vice versa.

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

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

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

Petitioners' averments that the respondent court had gravely abused its discretion in
arriving at the assailed factual findings as contrary to the evidence and applicable
decisions of this Honorable Court are therefore, patently unfounded. Respondent court
was correct in stating that it "cannot go beyond what appears in the documents
submitted by petitioners themselves (Exhibits "1" and "2") in the absence of clear and
convincing evidence" that would support its claim that the judgment obligation has
indeed been fully satisfied which would warrant the quashal of the Alias Writ of
Execution.
It has been an established rule that when the existence of a debt is fully established by
the evidence (which has been done in this case), the burden of proving that it has been
extinguished by payment devolves upon the debtor who offers such a defense to the
claim of the plaintiff creditor (herein respondent corporation) (Chua Chienco v. Vargas,
11 Phil. 219; Ramos v. Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30 Phil. 365). For
indeed, it is well-entrenched in Our jurisprudence that each party in a case must prove
his own affirmative allegations by the degree of evidence required by law (Stronghold
Insurance Co. v. CA, G.R. No. 83376, May 29,1989; Tai Tong Chuache & Co. v.
Insurance Commission, 158 SCRA 366).

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

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

SO ORDERED.
 [G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF

APPEALS and SPOUSES GREGORIO and LIBRADA
MANUEL, respondents.

DECISION
QUISUMBING, J.:

This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul
the decision[1] of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision
rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural
antecedents of this petition are as follows:
On January 23, 1985, petitioner filed a complaint[2] against private respondents to recover
three thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the
jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four
hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost
of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorneys
fees.[3] To the original balance on the price of jeep body were added the costs of repair.[4] In their
answer, private respondents interposed a counterclaim for unpaid legal services by Gregorio
Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators,
directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor
of petitioner in regard to the petitioners claim for money, but also allowed the counter-claim of
private respondents. Both parties appealed. On April 15, 1991, the Court of Appeals sustained
the trial courts decision.[5] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim which private
respondents filed together with their answer to petitioners complaint for a sum of money. Private
respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioners
Assistant Legal Officer, he represented members of the Francisco family in the intestate estate
proceedings of the late Benita Trinidad. However, even after the termination of the proceedings,
his services were not paid. Said family members, he said, were also incorporators, directors and
officers of petitioner. Hence to counter petitioners collection suit, he filed a permissive
counterclaim for the unpaid attorneys fees.[6]
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in
default on this score, and evidence ex-parte was presented on the counterclaim.The trial court
ruled in favor of private respondents and found that Gregorio Manuel indeed rendered legal
services to the Francisco family in Special Proceedings Number 7803- In the Matter of Intestate
Estate of Benita Trinidad. Said court also found that his legal services were not compensated
despite repeated demands, and thus ordered petitioner to pay him the amount of fifty thousand
(P50,000.00) pesos.[7]
 Dissatisfied with the trial courts order, petitioner elevated the matter to the Court of
Appeals, posing the following issues:
I.

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS

NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE
PERSON OF THE DEFENDANT.
II.

WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN

THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE
TO THE CLAIM OF DEFENDANT-APPELLEES.
III.

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

APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.[8]

Petitioner contended that the trial court did not acquire jurisdiction over it because no
summons was validly served on it together with the copy of the answer containing the permissive
counterclaim. Further, petitioner questions the propriety of its being made party to the case
because it was not the real party in interest but the individual members of the Francisco family
concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a
counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of
Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a
counterclaim was set up against him. Failure to serve summons, said respondent court, did not
effectively negate trial courts jurisdiction over petitioner in the matter of the counterclaim. It
likewise pointed out that there was no reason for petitioner to be excused from answering the
counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the
copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for
petitioner. Moreover when petitioners new counsel, Jose N. Aquino, entered his appearance,
three (3) days still remained within the period to file an answer to the counterclaim. Having
failed to answer, petitioner was correctly considered in default by the trial court.[9] Even
assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said,
but having filed a motion for reconsideration seeking relief from the said order of default,
petitioner was estopped from further questioning the trial courts jurisdiction.[10]
On the question of its liability for attorneys fees owing to private respondent Gregorio
Manuel, petitioner argued that being a corporation, it should not be held liable therefor because
these fees were owed by the incorporators, directors and officers of the corporation in their
personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the
corporation, vis--vis the individual persons who hired the services of private respondent, is
separate and distinct,[11] hence, the liability of said individuals did not become an obligation
chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:

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

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

Now before us, petitioner assigns the following errors:

I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF

PIERCING THE VEIL OF CORPORATE ENTITY.
II.

THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS

JURISDICTION OVER PETITIONER WITH RESPECT TO THE
COUNTERCLAIM.[13]

Petitioner submits that respondent court should not have resorted to piercing the veil of
corporate fiction because the transaction concerned only respondent Gregorio Manuel and the
heirs of the late Benita Trinidad. According to petitioner, there was no cause of action by said
respondent against petitioner; personal concerns of the heirs should be distinguished from those
involving corporate affairs. Petitioner further contends that the present case does not fall among
the instances wherein the courts may look beyond the distinct personality of a
corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to
collect fees from petitioner are personal in nature. Hence, it avers the heirs should have been
sued in their personal capacity, and not involve the corporation.[14]
With regard to the permissive counterclaim, petitioner also insists that there was no proper
service of the answer containing the permissive counterclaim. It claims that the counterclaim is a
separate case which can only be properly served upon the opposing party through
summons. Further petitioner states that by nature, a permissive counterclaim is one which does
not arise out of nor is necessarily connected with the subject of the opposing partys
claim. Petitioner avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is
considered an action independent from the answer, according to petitioner, then in effect there
should be two simultaneous actions between the same parties: each party is at the same time both
plaintiff and defendant with respect to the other,[15] requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They
defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving
separate summonses on petitioner in regard to their permissive counterclaim contained in the
answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio
Manuel was employed as assistant legal officer of petitioner corporation, and that his services
were solicited by the incorporators, directors and members to handle and represent them in
Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They
assert that the members of petitioner corporation took advantage of their positions by not
compensating respondent Gregorio Manuel after the termination of the estate proceedings
despite his repeated demands for payment of his services. They cite findings of the appellate
court that support piercing the veil of corporate identity in this particular case. They assert that
the corporate veil may be disregarded when it is used to defeat public convenience, justify
wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the
corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of
the stockholders or of another corporate entity. In these instances, they aver, the corporation
should be treated merely as an association of individual persons.[16]
Private respondents dispute petitioners claim that its right to due process was violated when
respondents counterclaim was granted due course, although no summons was served upon
it. They claim that no provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the petitioner filed its
complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As a
consequence, the issuance of summons on it was no longer necessary. Private respondents say
they served a copy of their answer with affirmative defenses and counterclaim on petitioners
former counsel, Nicanor G. Alvarez.While petitioner would have the Court believe that
respondents served said copy upon Alvarez after he had withdrawn his appearance as counsel for
the petitioner, private respondents assert that this contention is utterly baseless. Records disclose
that the answer was received two (2) days before the former counsel for petitioner withdrew his
appearance, according to private respondents. They maintain that the present petition is but a
form of dilatory appeal, to set off petitioners obligations to the respondents by running up more
interest it could recover from them. Private respondents therefore claim damages against
petitioner.[17]
 To resolve the issues in this case, we must first determine the propriety of piercing the veil
of corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct
from its stockholders and from other corporations to which it may be connected.[18] However,
under the doctrine of piercing the veil of corporate entity, the corporations separate juridical
personality may be disregarded, for example, when the corporate identity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation is a mere
alter ego or business conduit of a person, or where the corporation is so organized and controlled
and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be ignored.[19] In these
circumstances, the courts will treat the corporation as a mere aggrupation of persons and the
liability will directly attach to them. The legal fiction of a separate corporate personality in those
cited instances, for reasons of public policy and in the interest of justice, will be justifiably set
aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing
the corporate veil has no relevant application here. Respondent court erred in permitting the trial
courts resort to this doctrine. The rationale behind piercing a corporations identity in a given case
is to remove the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities. However, in the case at bar, instead of holding certain
individuals or persons responsible for an alleged corporate act, the situation has been reversed. It
is the petitioner as a corporation which is being ordered to answer for the personal liability of
certain individual directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation. Note that according to
private respondent Gregorio Manuel his services were solicited as counsel for members of the
Francisco family to represent them in the intestate proceedings over Benita Trinidads
estate. These estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members
but also from petitioner corporation on the claims that its management had requested his services
and he acceded thereto as an employee of petitioner from whom it could be deduced he was also
receiving a salary. His move to recover unpaid legal fees through a counterclaim against
Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep
body could only result from an obvious misapprehension that petitioners corporate assets could
be used to answer for the liabilities of its individual directors, officers, and incorporators. Such
result if permitted could easily prejudice the corporation, its own creditors, and even other
stockholders; hence, clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said
incorporators, directors and officers of the corporation had incurred, it was incurred in their
personal capacity. When directors and officers of a corporation are unable to compensate a party
for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or
promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there
are no hard and fast rules on disregarding separate corporate identity, we must always be mindful
of its function and purpose. A court should be careful in assessing the milieu where the doctrine
of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may
result from its erroneous application.
The personality of the corporation and those of its incorporators, directors and officers in
their personal capacities ought to be kept separate in this case. The claim for legal fees against
the concerned individual incorporators, officers and directors could not be properly directed
against the corporation without violating basic principles governing corporations. Moreover,
every action including a counterclaim must be prosecuted or defended in the name of the real
party in interest.[20] It is plainly an error to lay the claim for legal fees of private respondent
Gregorio Manuel at the door of petitioner (FMC) rather than individual members of the
Francisco family.
However, with regard to the procedural issue raised by petitioners allegation, that it needed
to be summoned anew in order for the court to acquire jurisdiction over it, we agree with
respondent courts view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a
counterclaim or cross-claim must be answered within ten (10) days from service. Nothing in the
Rules of Court says that summons should first be served on the defendant before an answer to
counterclaim must be made. The purpose of a summons is to enable the court to acquire
jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the plaintiff in the
original complaint, has already submitted to the jurisdiction of the court. Following Rule 9,
Section 3 of the 1997 Rules of Civil Procedure,[21] if a defendant (herein petitioner) fails to
answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in
default. This is what happened to petitioner in this case, and this Court finds no procedural error
in the disposition of the appellate court on this particular issue. Moreover, as noted by the
respondent court, when petitioner filed its motion seeking to set aside the order of default, in
effect it submitted itself to the jurisdiction of the court. As well said by respondent court:

Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show

that upon its request, plaintiff-appellant was granted time to file a motion for
reconsideration of the disputed decision. Plaintiff-appellant did file its motion for
reconsideration to set aside the order of default and the judgment rendered on the
counterclaim.

Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the

counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the courts jurisdiction when it filed the motion for reconsideration
seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped
from assailing the jurisdiction of a court after voluntarily submitting himself to its
jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any
claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).[22]

WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby
REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation
owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing
the proper suit against the concerned members of the Francisco family in their personal
capacity. No pronouncement as to costs.
SO ORDERED.
G.R. No. 80767 April 22, 1991

BOY SCOUTS OF THE PHILIPPINES, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION, FORTUNATO ESGUERRA,
ROBERTO MALABORBOR, ESTANISLAO MISA, VICENTE EVANGELISTA, and
MARCELINO GARCIA, respondents.

Julio O. Lopez for petitioner.

FELICIANO, J.:

This Petition for Certiorari is directed at (1) the Decision,1 dated 27 February 1987, and
(2) the Resolution2 dated 16 October 1987, both issued by the National Labor Relations
Commission ("NLRC") in Case No. 1637-84.

Private respondents Fortunato C. Esquerra, Roberto O. Malaborbor, Estanislao M.

Misa, Vicente N. Evangelista and Marcelino P. Garcia, had all been rank-and-file
employees of petitioner Boy Scouts of the Philippines ("BSP"). At the time of termination
of their services in February 1985, private respondents were stationed at the BSP Camp
in Makiling, Los Baños, Laguna.

The events which led to such termination of services are as follows:

On 19 October 1984, the Secretary-General of petitioner BSP issued Special Orders

Nos. 80, 81, 83, 84 and 85 addressed separately to the five (5) private respondents,
informing them that on 20 November 1984, they were to be transferred from the BSP
Camp in Makiling to the BSP Land Grant in Asuncion, Davao del Norte. These Orders
were opposed by private respondents who, on 4 November 1984, appealed the matter
to the BSP National President.

On 6 November 1984, petitioner BSP conducted a pre-transfer briefing at its National

Headquarters in Manila. Private respondents were in attendance during the briefing and
they were there assured that their transfer to Davao del Norte would not involve any
diminution in salary, and that each of them would receive a relocation allowance
equivalent to one (1) month's basic pay. This assurance, however, failed to persuade
private respondents to abandon their opposition to the transfer orders issued by the
BSP Secretary-General.

On 13 November 1984, a complaint3

(docketed as NLRC Case No. 16-84J) for illegal transfer was filed with the then Ministry
of Labor and Employment, Sub-Regional Arbitration Branch IV, San Pablo City, Laguna.
Private respondents there sought to enjoin implementation of Special Orders Nos. 80,
81, 83, 84 and 85, alleging, among other things, that said orders were "indubitable and
irrefutable action[s] prejudicial not only to [them] but to [their] families and [would]
seriously affect [their] economic stability and solvency considering the present cost of
living."

On 21 November 1984 (or the day immediately following the date of scheduled
transfer), the BSP Camp Manager in Makiling issued a Memorandum requiring the five
(5) private respondents to explain why they should not be charged administratively for
insubordination. The Memorandum was a direct result of the refusal by private
respondents, two (2) days earlier, to accept from petitioner BSP their respective boat
tickets to Davao del Norte and their relocation allowances.

Meanwhile, in a letter of the same date, the BSP National President informed private
respondents that their refusal to comply with the Special Orders was not sufficiently
justified and constituted rank disobedience. Memoranda subsequently issued by the
BSP Secretary-General stressed that such refusal as well as the explanations proffered
therefor, were unacceptable and could altogether result in termination of employment
with petitioner BSP. These warnings notwithstanding, private respondents continued
pertinaciously to disobey the disputed transfer orders.

Petitioner BSP consequently imposed a five-day suspension on the five (5) private
respondents, in the latter part of January 1985. Subsequently, by Special Order dated
12 February 1985 issued by the BSP Secretary-General, private respondents' services
were ordered terminated effective 15 February 1985.

On 22 February 1985, private respondents amended their original complaint to include

charges of illegal dismissal and unfair labor practice against petitioner BSP.4

The Labor Arbiter thereafter proceeded to hear the complaint.

In a decision5 dated 31 July 1985, the Labor Arbiter ordered the dismissal of private
respondents' complaint for lack of merit.

On 27 February 1987, however, the ruling of the Labor Arbiter was reversed by public
respondent, NLRC, which held that private respondents had been illegally dismissed by
petitioner BSP. The dispositive portion of the NLRC decision read:

WHEREFORE, premises considered the Decision appealed from is hereby SET

ASIDE and a new one entered ordering the respondent-appellee [petitioner BSP]
to reinstate the complainants-appellants [private respondents] to their former
positions without loss of seniority rights and other benefits appurtenant thereto
and with full backwages from the time they were illegally dismissed from the
service up to the date of their actual reinstatement.

SO ORDERED.
The Court notes at the outset that in the Position Paper6 filed by petitioner BSP with the
Labor Arbiter, it was alleged in the second paragraph thereof, that petitioner is a "civic
service, non-stock and non-profit organization, relying mostly [on] government and
public support, existing under and by virtue of Commonwealth Act No. 111, as
amended, by Presidential Decree No. 460 . . . " A similar allegation was contained in the
Brief for Appellee7 and in the Petition8 and Memorandum9 filed by petitioner BSP with
public respondent NLRC and this Court, respectively. The same allegation, moreover,
appeared in the Comment10 (also treated as the Memorandum) submitted to this Court
by the Solicitor General on behalf of public respondent NLRC; for their part, private
respondents stated in their Appeal Memorandum11 with the NLRC that petitioner BSP is
"by mandate of law a Public Corporation," a statement reiterated by them in their
Memorandum12 before this Court.

In a Resolution dated 9 August 1989, this Court required the parties and the Office of
the Government Corporate Counsel to file a comment on the question of whether or not
petitioner BSP is in fact a government-owned or controlled corporation.

Petitioner, private respondents, the Office of the Solicitor General and the Office of the
Government Corporate Counsel filed their respective comments.

The central issue is whether or not the BSP is embraced within the Civil Service as that
term is defined in Article IX (B) (2) (1) of the 1987 Constitution which reads as follows:

The Civil Service embraces all branches, subdivisions, instrumentality mentalities

and agencies of the Government, including government-owned or controlled
corporations with original charters.

xxx xxx xxx

The answer to the central issue will determine whether or not private respondent NLRC
had jurisdiction to render the Decision and Resolution which are here sought to be
nullified.

The responses of the parties, on the one hand, and of the Office of the Solicitor General
and the Office of the Government Corporate Counsel, upon the other hand, in
compliance with the Resolution of this Court of 9 August 1989, present a noteworthy
uniformity. Petitioner BSP and private respondents submit substantially the same view
"that the BSP is a purely private organization". In contrast, the Solicitor General and the
Government Corporate Counsel take much the same position, that is, that the BSP is a
"public corporation' or a "quasi-public corporation" and, as well, a "government
controlled corporation." Petitioner BSP's compliance with our Resolution invokes the
following provisions of its Constitution and By-laws:

The Boy Scouts of the Philippines declares that it is an independent, voluntary,

non-political, non-sectarian and non-governmental organization, with obligations
towards nation building and with international orientation.
The BSP, petitioner stresses, does not receive any monetary or financial subsidy from
the Government whether on the national or local level.13 Petitioner declares that it is a
"purely private organization" directed and controlled by its National Executive Board the
members of which are, it is said, all "voluntary scouters," including seven (7) Cabinet
Secretaries.14

Private respondents submitted a supplementary memorandum arguing that while

petitioner BSP was created as a public corporation, it had lost that status when Section
2 of Commonwealth Act No. 111 as amended by P.D. No. 460 conferred upon it the
powers which ordinary private corporations organized under the Corporation Code
have:

Sec. 2. The said corporation shall have perpetual succession with power to sue
and be sued; to hold such real and personal estate as shall be necessary for
corporate purposes, and to receive real and personal property by gift, devise, or
bequest; to adopt a seal, and to alter or destroy the same at pleasure; to have
offices and conduct its business and affairs in the City of Manila and in the
several provinces; to make and adopt by-laws, rules and regulations not
inconsistent with 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 the
Act and promote the purposes of said corporation.

Private respondents also point out that the BSP is registered as a private employer with
the Social Security System and that all its staff members and employees are covered by
the Social Security Act, indicating that the BSP had lost its personality or standing as a
public corporation. It is further alleged that the BSP's assets and liabilities, official
transactions and financial statements have never been subjected to audit by the
government auditing office, i.e., the Commission on Audit, being audited rather by the
private auditing firm of Sycip Gorres Velayo and Co. Private respondents finally state
that the appointments of BSP officers and staff were not approved or confirmed by the
Civil Service Commission.

The views of the Office of the Solicitor General and the Office of the Government
Corporate Counsel on the above issue appeared to be generally similar. The Solicitor
General's Office, although it had appeared for the NLRC and filed a Comment on the
latter's behalf on the merits of the Petition for Certiorari, submitted that the BSP is a
government-owned or controlled corporation, having been created by virtue of
Commonwealth Act No. 111 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." The
Solicitor General stressed that the BSP was created in order to "promote, through
organization, and cooperation with other agencies the ability of boys to do things for
themselves and others, to train them in scoutcraft, and to teach them patriotism,
courage, self-reliance, and kindred virtues, using the methods which are now in
common use by boy scouts."5 He further noted that the BSP's objectives and purposes
are "solely of a benevolent character and not for pecuniary profit by its members. 16 The
Solicitor General also underscored the extent of government participation in the BSP
under its charter as reflected in the composition of its governing body:

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. . . .17 (Emphasis
supplied)

The Government Corporate Counsel, like the Solicitor General, describes the BSP as a
"public corporation" but, unlike the Solicitor General, suggests that the BSP is more of a
"quasi corporation" than a "public corporation." The BSP, unlike most public
corporations which are created for a political purpose, is not vested with political or
governmental powers to be exercised for the public good or public welfare in connection
with the administration of civil government. The Government Corporate Counsel
submits, more specifically, that the BSP falls within the ambit of the term "government-
owned or controlled corporation" as defined in Section 2 of P.D. No. 2029 (approved on
4 February 1986) which reads as follows:

A government-owned or controlled corporation is a stock or a non-stock

corporation, whether performing governmental or proprietary functions, which is
directly chartered by special law or if organized under the general corporation law
is owned or controlled by the government directly, or indirectly through a parent
corporation or subsidiary corporation, to the extent of at least a majority of its
outstanding capital stock or its outstanding voting capital stock.

xxx xxx xxx

(Emphasis supplied)

Examining the relevant statutory provisions and the arguments outlined above, the
Court considers that the following need to be considered in arriving at the appropriate
legal characterization of the BSP for purposes of determining whether its officials and
staff members are embraced in the Civil Service. Firstly, BSP's functions as set out in its
statutory charter do have a public aspect. BSP's functions do relate to the fostering of
the public virtues of citizenship and patriotism and the general improvement of the moral
spirit and fiber of our youth. The social value of activities like those to which the BSP
dedicates itself by statutory mandate have in fact, been accorded constitutional
recognition. Article II of the 1987 Constitution includes in the "Declaration of Principles
and State Policies," the following:

Sec. 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.

At the same time, BSP's sanctions do not relate to the governance of any part of
territory of the Philippines; BSP is not a public corporation in the same sense that
municipal corporations or local governments are public corporations. BSP's functions
can not also be described as proprietary functions in the same sense that the functions
or activities of government-owned or controlled corporations like the National
Development Company or the National Steel Corporation can be described as
proprietary or "business-like" in character. Nevertheless, the public character of BSP's
functions and activities must be conceded, for they pertain to the educational, civic and
social development of the youth which constitutes a very substantial and important part
of the nation.

The second aspect that the Court must take into account relates to the governance of
the BSP. The composition of the National Executive Board of the BSP includes, as
noted from Section 5 of its charter quoted earlier, includes seven (7) Secretaries of
Executive Departments. The seven (7) Secretaries (now six [6] in view of the abolition of
the Department of Youth and Sports and merger thereof into the Department of
Education, Culture and Sports) by themselves do not constitute a majority of the
members of the National Executive Board. We must note at the same time that the
appointments of members of the National Executive Board, except only the
appointments of the Regional Chairman and Scouts of Senior age from the various
Scout Regions, are subject to ratification and confirmation by the Chief Scout, who is
the President of the Philippines. Vacancies to the Board are filled by a majority vote of
the remaining members thereof, but again subject to ratification and confirmation by the
Chief Scout.18 We must assume that such confirmation or ratification involves the
exercise of choice or discretion on the part of ratifying or confirming power. It does
appears therefore that there is substantial governmental (i.e., Presidential) participation
or intervention in the choice of the majority of the members of the National Executive
Board of the BSP.

The third aspect relates to the character of the assets and funds of the BSP. The
original assets of the BSP were acquired by purchase or gift or other equitable
arrangement with the Boy Scouts of America, of which the BSP was part before the
establishment of the Commonwealth of the Philippines. The BSP charter, however,
does not indicate that such assets were public or statal in character or had originated
from the Government or the State. According to petitioner BSP, its operating funds used
for carrying out its purposes and programs, are derived principally from membership
dues paid by the Boy Scouts themselves and from property rentals. In this respect, the
BSP appears similar to private non-stock, non-profit corporations, although its charter
expressly envisages donations and contributions to it from the Government and any of
its agencies and instrumentalities.19 We note only that BSP funds have not apparently
heretofore been regarded as public funds by the Commission on Audit, considering that
such funds have not been audited by the Commission.

While the BSP may be seen to be a mixed type of entity, combining aspects of both
public and private entities, we believe that considering the character of its purposes and
its functions, the statutory designation of the BSP as "a public corporation" and the
substantial participation of the Government in the selection of members of the National
Executive Board of the BSP, the BSP, as presently constituted under its charter, is a
government-controlled corporation within the meaning of Article IX. (B) (2) (1) of the
Constitution.

We are fortified in this conclusion when we note that the Administrative Code of 1987
designates the BSP as one of the attached agencies of the Department of Education,
Culture and Sports ("DECS").20 An "agency of the Government" is defined as referring to
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.21"Government instrumentality" is in turn defined in the 1987
Administrative Code in the following manner:

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. This
term includesregulatory agencies, chartered institutions and government-owned
or controlled corporations.22 (Emphasis supplied)

The same Code describes a "chartered institution" in the following terms:

Chartered institution –– refers to any agency organized or operating under a

special charter, and vested by law with functions relating to specific constitutional
policies or objectives. This term includes the state universities and colleges, and
the monetary authority of the State.23 (Emphasis supplied)

We believe that the BSP is appropriately regarded as "a government instrumentality"

under the 1987 Administrative Code.

It thus appears that the BSP may be regarded as both a "government controlled
corporation with an original charter" and as an "instrumentality" of the Government
within the meaning of Article IX (B) (2) (1) of the Constitution. It follows that the
employees of petitioner BSP are embraced within the Civil Service and are accordingly
governed by the Civil Service Law and Regulations.

It remains only to note that even before the effectivity of the 1987 Constitution
employees of the BSP already fell within the scope of the Civil Service. In National
Housing Corporation v. Juco,24 decided in 1985, the Court, speaking through Mr. Justice
Gutierrez, held:

There should no longer be any question at this time that employees of

government-owned or controlled corporations are governed by the civil service
law and civil service rules and regulations.

Section 1, Article XII-B of the [19731 Constitution specifically provides:

The Civil Service embraces every branch, agency, subdivision and

instrumentality of the Government, including every government-owned or
controlled corporation. . . .

The 1935 Constitution had a similar provision in its Section 1, Article XII which
stated:

A Civil Service embracing all branches and subdivisions of the Government shall
be provided by law. 1âw phi 1

The inclusion of "government-owned or controlled corporations" within the

embrace of the civil service shows a deliberate effort of the framers to plug an
earlier loophole which allowed government-owned or controlled corporations to
avoid the full consequences of the all encompassing coverage of the civil service
system. The same explicit intent is shown by the addition of "agency" and
"instrumentality" to branches and subdivisions of the Government. All offices and
firms of the government are covered. The amendments introduced in 1973 are
not idle exercises or meaningless gestures. They carry the strong message that
civil service coverage is broad and all-embracing insofar as employment in the
government in any of its governmental or corporate arms is concerned. 25

The complaint in NLRC Case No. 1637-84 having been filed on 13 November 1984,
when the 1973 Constitution was still in force, our ruling in Juco applies in the case at
bar.26

In view of the foregoing, we hold that both the Labor Arbiter and public respondent
NLRC had no jurisdiction over the complaint filed by private respondents in NLRC Case
No. 1637-84; neither labor agency had before it any matter which could validly have
been passed upon by it in the exercise of original or appellate jurisdiction. The appealed
Decision and Resolution in this case, having been rendered without jurisdiction, vested
no rights and imposed no liabilities upon any of the parties here involved. That neither
party had expressly raised the issue of jurisdiction in the pleadings poses no obstacle to
this ruling of the Court, which may motu proprio take cognizance of the issue of
existence or absence of jurisdiction and pass upon the same.27

ACCORDINGLY, the Decision of the Labor Arbiter dated 31 July 1985, and the Decision
dated 27 February 1987 and Resolution dated 16 October 1987, issued by public
respondent NLRC, in NLRC Case No. 1637-84, are hereby SET ASIDE. All other orders
and resolutions rendered in this case by the Labor Arbiter and the NLRC are likewise
SET ASIDE. No pronouncement as to costs.

Fernan, C.J., Gutierrez, Jr., Bidin and Davide Jr., JJ., concur.
G.R. No. 79182 September 11, 1991

PNOC-ENERGY DEVELOPMENT CORPORATION, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION (Third Division) and DANILO
MERCADO, respondents.

Bacorro & Associates for petitioner.

Alberto L. Dalmacion for private respondent.

PARAS, J.:

This is a petition for certiorari to set aside the Resolution * dated July 3, 1987 of
respondent National Labor Relations Commission (NLRC for brevity) which affirmed the
decision dated April 30, 1986 of Labor Arbiter Vito J. Minoria of the NLRC, Regional
Arbitration Branch No. VII at Cebu City in Case No. RAB-VII-0556-85 entitled "Danilo
Mercado, Complainant, vs. Philippine National Oil Company-Energy Development
Corporation, Respondent", ordering the reinstatement of complainant Danilo Mercado
and the award of various monetary claims.

The factual background of this case is as follows:

Private respondent Danilo Mercado was first employed by herein petitioner Philippine
National Oil Company-Energy Development Corporation (PNOC-EDC for brevity) on
August 13, 1979. He held various positions ranging from clerk, general clerk to shipping
clerk during his employment at its Cebu office until his transfer to its establishment at
Palimpinon, Dumaguete, Oriental Negros on September 5, 1984. On June 30, 1985,
private respondent Mercado was dismissed. His last salary was P1,585.00 a month
basic pay plus P800.00 living allowance (Labor Arbiter's Decision, Annex "E" of Petition,
Rollo, p. 52).

The grounds for the dismissal of Mercado are allegedly serious acts of dishonesty
committed as follows:

1. On ApriI 12, 1985, Danilo Mercado was ordered to purchase 1,400 pieces of
nipa shingles from Mrs. Leonardo Nodado of Banilad, Dumaguete City, for the
total purchase price of Pl,680.00. Against company policy, regulations and
specific orders, Danilo Mercado withdrew the nipa shingles from the supplier but
paid the amount of P1,000.00 only. Danilo Mercado appropriated the balance of
P680.00 for his personal use;
 2. In the same transaction stated above, the supplier agreed to give the company
a discount of P70.00 which Danilo Mercado did not report to the company;

3. On March 28, 1985, Danilo Mercado was instructed to contract the services of
Fred R. Melon of Dumaguete City, for the fabrication of rubber stamps, for the
total amount of P28.66. Danilo Mercado paid the amount of P20.00 to Fred R.
Melon and appropriated for his personal use the balance of P8.66.

In addition, private respondent, Danilo Mercado violated company rules and

regulations in the following instances:

1. On June 5, 1985, Danilo Mercado was absent from work without leave, without
proper turn-over of his work, causing disruption and delay of company work
activities;

2. On June 15, 1985, Danilo Mercado went on vacation leave without prior leave,
against company policy, rules and regulations. (Petitioner's Memorandum, Rollo,
p. 195).

On September 23, 1985, private respondent Mercado filed a complaint for illegal
dismissal, retirement benefits, separation pay, unpaid wages, etc. against petitioner
PNOC-EDC before the NLRC Regional Arbitration Branch No. VII docketed as Case
No. RAB-VII-0556-85.

After private respondent Mercado filed his position paper on December 16, 1985 (Annex
"B" of the Petition, Rollo, pp. 28-40), petitioner PNOC-EDC filed its Position
Paper/Motion to Dismiss on January 15, 1986, praying for the dismissal of the case on
the ground that the Labor Arbiter and/or the NLRC had no jurisdiction over the case
(Annex "C" of the Petition, Rollo, pp. 41-45), which was assailed by private respondent
Mercado in his Opposition to the Position Paper/Motion to Dismiss dated March 12,
1986 (Annex "D" of the Petition, Rollo, pp. 46-50).

The Labor Arbiter ruled in favor of private respondent Mercado. The dispositive onion of
said decision reads as follows:

WHEREFORE, in view of the foregoing, respondents are hereby ordered:

1) To reinstate complainant to his former position with full back wages from the
date of his dismissal up to the time of his actual reinstatement without loss of
seniority rights and other privileges;

2) To pay complainant the amount of P10,000.00 representing his personal share

of his savings account with the respondents;

3) To pay complainants the amount of P30,000.00 moral damages; P20,000.00

exemplary damages and P5,000.00 attorney's fees;
 4) To pay complainant the amount of P792.50 as his proportionate 13th month
pay for 1985.

Respondents are hereby further ordered to deposit the aforementioned amounts

with this Office within ten days from receipt of a copy of this decision for further
disposition.

SO ORDERED.
(Labor Arbiter's Decision, Rollo, p. 56)

The appeal to the NLRC was dismissed for lack of merit on July 3, 1987 and the
assailed decision was affirmed.

Hence, this petition.

The issues raised by petitioner in this instant petition are:

1. Whether or not matters of employment affecting the PNOC-EDC, a

government-owned and controlled corporation, are within the jurisdiction of the
Labor Arbiter and the NLRC.

2. Assuming the affirmative, whether or not the Labor Arbiter and the NLRC are
justified in ordering the reinstatement of private respondent, payment of his
savings, and proportionate 13th month pay and payment of damages as well as
attorney's fee.

Petitioner PNOC-EDC alleges that it is a corporation wholly owned and controlled by the
government; that the Energy Development Corporation is a subsidiary of the Philippine
National Oil Company which is a government entity created under Presidential Decree
No. 334, as amended; that being a government-owned and controlled corporation, it is
governed by the Civil Service Law as provided for in Section 1, Article XII-B of the 1973
Constitution, Section 56 of Presidential Decree No. 807 (Civil Service Decree) and
Article 277 of Presidential Decree No. 442, as amended (Labor Code).

The 1973 Constitution provides:

The Civil Service embraces every branch, agency, subdivision and

instrumentality of the government including government-owned or controlled
corporations.

Petitioner PNOC-EDC argued that since Labor Arbiter Minoria rendered the decision at
the time when the 1973 Constitution was in force, said decision is null and void because
under the 1973 Constitution, government-owned and controlled corporations were
governed by the Civil Service Law. Even assuming that PNOC-EDC has no original or
special charter and Section 2(i), Article IX-B of the 1987 Constitution provides that:
 The Civil Service embraces all branches, subdivision, instrumentalities and
agencies of the Government, including government-owned or controlled
corporations with original charters.

such circumstances cannot give validity to the decision of the Labor Arbiter (Ibid., pp.
192-193).

This issue has already been laid to rest in the case of PNOC-EDC vs. Leogardo, 175
SCRA 26 (July 5, 1989), involving the same petitioner and the same issue, where this
Court ruled that the doctrine that employees of government-owned and/or con
controlled corporations, whether created by special law or formed as subsidiaries under
the General Corporation law are governed by the Civil Service Law and not by the
Labor Code, has been supplanted by the present Constitution. "Thus, under the present
state of the law, the test in determining whether a government-owned or controlled
corporation is subject to the Civil Service Law are the manner of its creation, such that
government corporations created by special charter are subject to its provisions while
those incorporated under the General Corporation Law are not within its coverage."

Specifically, the PNOC-EDC having been incorporated under the General Corporation
Law was held to be a government owned or controlled corporation whose employees
are subject to the provisions of the Labor Code (Ibid.).

The fact that the case arose at the time when the 1973 Constitution was still in effect,
does not deprive the NLRC of jurisdiction on the premise that it is the 1987 Constitution
that governs because it is the Constitution in place at the time of the decision (NASECO
v. NLRC, G.R. No. 69870, 168 SCRA 122 [1988]).

In the case at bar, the decision of the NLRC was promulgated on July 3, 1987.
Accordingly, this case falls squarely under the rulings of the aforementioned cases.

As regards the second issue, the record shows that PNOC-EDC's accusations of
dishonesty and violations of company rules are not supported by evidence.
Nonetheless, while acknowledging the rule that administrative bodies are not governed
by the strict rules of evidence, petitioner PNOC-EDC alleges that the labor arbiter's
propensity to decide the case through the position papers submitted by the parties is
violative of due process thereby rendering the decision null and void (Ibid., p. 196).

On the other hand, private respondent contends that as can be seen from petitioner's
Motion for Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the
Petition, Rollo, pp. 57- 64), the latter never questioned the findings of facts of the Labor
Arbiter but simply limited its objection to the lack of legal basis in view of its stand that
the NLRC had no jurisdiction over the case (Private Respondent's Memorandum, Rollo,
p. 104).

Petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss dated January 15, 1986
(Annex "C" of the Petition Rollo, pp. 41-45) before the Regional Arbitration Branch No.
VII of Cebu City and its Motion for Reconsideration and/or Appeal dated July 28, 1986
(Annex "F" of the Petition, Rollo, pp. 57-64) before the NLRC of Cebu City. Indisputably,
the requirements of due process are satisfied when the parties are given an opportunity
to submit position papers. What the fundamental law abhors is not the absence of
previous notice but rather the absolute lack of opportunity to ventilate a party's side.
There is no denial of due process where the party submitted its position paper and flied
its motion for reconsideration (Odin Security Agency vs. De la Serna, 182 SCRA 472
[February 21, 1990]). Petitioner's subsequent Motion for Reconsideration and/or Appeal
has the effect of curing whatever irregularity might have been committed in the
proceedings below (T.H. Valderama and Sons, Inc. vs. Drilon, 181 SCRA 308 [January
22, 1990]).

Furthermore, it has been consistently held that findings of administrative agencies which
have acquired expertise because their jurisdiction is confined to specific matters are
accorded not only respect but even finality (Asian Construction and Development
Corporation vs. NLRC, 187 SCRA 784 [July 27, 1990]; Lopez Sugar Corporation vs.
Federation of Free Workers, 189 SCRA 179 [August 30, 1990]). Judicial review by this
Court does not go so far as to evaluate the sufficiency of the evidence but is limited to
issues of jurisdiction or grave abuse of discretion (Filipinas Manufacturers Bank vs.
NLRC, 182 SCRA 848 [February 28, 1990]). A careful study of the records shows no
substantive reason to depart from these established principles.

While it is true that loss of trust or breach of confidence is a valid ground for dismissing
an employee, such loss or breach of trust must have some basis (Gubac v. NLRC, 187
SCRA 412 [July 13, 1990]). As found by the Labor Arbiter, the accusations of petitioner
PNOC-EDC against private respondent Mercado have no basis. Mrs. Leonardo
Nodado, from whom the nipa shingles were purchased, sufficiently explained in her
affidavit (Rollo, p. 36) that the total purchase price of P1,680.00 was paid by respondent
Mercado as agreed upon. The alleged discount given by Mrs. Nodado is not supported
by evidence as well as the alleged appropriation of P8.66 from the cost of fabrication of
rubber stamps. The Labor Arbiter, likewise, found no evidence to support the alleged
violation of company rules. On the contrary, he found respondent Mercado's explanation
in his affidavit (Rollo, pp. 38-40) as to the alleged violations to be satisfactory.
Moreover, these findings were never contradicted by petitioner petitioner PNOC-EDC.

PREMISES CONSIDERED, the petition is DENIED and the resolution of respondent

NLRC dated July 3, 1987 is AFFIRMED with the modification that the moral damages
are reduced to Ten Thousand (P10,000.00) Pesos, and the exemplary damages
reduced to Five Thousand (P5,000.00) Pesos.

SO ORDERED.
BALTAZAR G. CAMPOREDONDO, petitioner, vs. NATIONAL LABOR
RELATIONS COMMISSION (NLRC), Fifth Division, Cagayan de Oro
City, THE PHILIPPINE NATIONAL RED CROSS (PNRC),
represented by GOVERNOR ROMEO C. ESPINO and DR. CELSO
SAMSON, respondents.

DECISION
PARDO, J.:

At issue in this case is whether the Philippine National Red Cross (PNRC for short) is a
government owned and controlled corporation or it has been impliedly converted to a private
organization subject to the jurisdiction of labor tribunals in a complaint filed by petitioner, a
former PNRC chapter administrator in Surigao del Norte, for illegal dismissal and damages, as
he was forced to "retire" after he was required to restitute shortages and unremitted collections in
the total sum of P135,927.78.
Having obviously no merit, we dismiss the petition.
All suitors must come to court with clean hands. This is especially true of paid staff of the
Philippine National Red Cross. Like its unpaid volunteers, they must be men of unquestioned
honesty and integrity serving in selfless manner to aid the sick and wounded of armed forces in
time of war, acting in voluntary relief in time of peace and war, maintaining a system of national
and international relief in meeting emergency relief needs caused by typhoons, floods, fires,
earthquakes, and other natural disasters, and promoting such service in time of peace and war to
improve the health, safety and welfare of the Filipino people.[1] Paid staff of the PNRC are
government employees who are members of the Government Service Insurance System and
covered by the Civil Service Law. Unlike government service in other agencies, Red Cross
service demands of its paid staff uberrima fides, the utmost good faith and dedication to work.
Since 1980, petitioner was employed with the PNRC, and until his early "retirement" on
December 15, 1995, he was administrator of the Surigao del Norte Chapter, Philippine National
Red Cross.[2]
In July, 1995, a field auditor of the PNRC conducted an audit of the books of account of the
Surigao del Norte Chapter headed by petitioner and found him short in the total sum of
P109,000.00.[3]
On November 21, 1995, Dr. Celso Samson, Secretary General of the PNRC wrote petitioner
requiring him to restitute within seventy two (72) hours from notice, the total sum of
P135,927.78 representing cash shortage, technical shortage and unremitted collections.[4]
On December 15, 1995, petitioner applied for early retirement from the service, and later
wrote Dr. Samson requesting for a re-audit by an independent auditor of his accounts. However,
Dr. Samson denied the request.[5]
On May 28, 1996, petitioner filed with the National Labor Relations Commission, Sub-
Regional Arbitration Branch X, Butuan City, a complaint for illegal dismissal, damages and
underpayment of wages against the Philippine National Red Cross and its key officials.[6]
 On June 14, 1996, respondent Philippine National Red Cross filed with the Surigao del
Norte provincial office, Department of Labor and Employment, a motion to dismiss the
complaint for lack of jurisdiction over the subject matter of the case because the PNRC is a
government corporation whose employees are members of the Government Service Insurance
System (GSIS), and embraced within the Civil Service Law and regulations.[7]
On July 25, 1996, petitioner filed an opposition to motion to dismiss arguing that there was
between the PNRC and its duly appointed paid staff, an employer-employee relationship,
governed by the Labor Code of the Philippines.[8]
On October 11, 1996, the Labor Arbiter issued an order dismissing the complaint for lack of
jurisdiction, finding that the Philippine National Red Cross is a government corporation with an
original charter, having been created by Republic Act No. 95.[9]
On November 12, 1996, the Labor Arbiter denied petitioner's motion for reconsideration
filed on October 14, 1996.[10]
On November 20, 1996, petitioner filed a notice of appeal and appeal memorandum with the
National Labor Relations Commission.[11]
On March 21, 1997, the National Labor Relations Commission, Fifth Division, issued a
resolution dismissing the appeal and confirming the decision of the Labor Arbiter that dismissed
petitioner's complaint for lack of jurisdiction.[12]
Hence, this recourse.
On July 7, 1997, we resolved to require respondents to comment on the petition within ten
(10) days from notice.[13]
On August 7, 1997, respondent Philippine National Red Cross filed its comment.[14] On
November 7, 1997, the Solicitor General filed its comment.[15]
Resolving the issue set out in the opening paragraph of this opinion, we rule that the
Philippine National Red Cross (PNRC) is a government owned and controlled corporation, with
an original charter under Republic Act No. 95, as amended. The test to determine whether a
corporation is government owned or controlled, or private in nature is simple. Is it created by its
own charter for the exercise of a public function, or by incorporation under the general
corporation law? Those with special charters are government corporations subject to its
provisions, and its employees are under the jurisdiction of the Civil Service Commission, and are
compulsory members of the Government Service Insurance System. The PNRC was not
"impliedly converted to a private corporation" simply because its charter was amended to vest in
it the authority to secure loans, be exempted from payment of all duties, taxes, fees and other
charges of all kinds on all importations and purchases for its exclusive use, on donations for its
disaster relief work and other services and in its benefits and fund raising drives, and be alloted
one lottery draw a year by the Philippine Charity Sweepstakes Office for the support of its
disaster relief operation in addition to its existing lottery draws for blood program.
Having served in the Philippine National Red Cross for a number of years since his initial
employment, he must know that it is a government corporation with its own charter and that he
was covered by compulsory membership in the Government Service Insurance System, which is
why he could apply, as he did, for "early" retirement from the service under Presidential Decree
No. 1146 or Republic Act No. 1616.[16]
WHEREFORE, the Court hereby DISMISSES the petition, and AFFIRMS the ruling of the
National Labor Relations Commission.
Double costs taxed against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Ynares-Santiago, JJ., concur.
 December 13, 2017

G.R. No. 191525

INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS

(I/AME), Petitioner
vs.
LITTON AND COMPANY, INC., Respondent

DECISION

SERENO, CJ.:

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Court of Appeals (CA) Decision1 and Resolution2 in CA-G.R. SP No.
107727.

The CA affirmed the Judgment3 and Order4 of the Regional Trial Court (RTC) of Manila
in Special Civil Action No. 06-115547 reinstating the Order5 of the Metropolitan Trial
Court (Me TC) of Manila in favor of Litton and Company, Inc. (Litton).

THE FACTS

The facts, as culled from the records, are as follows:

Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed
the latter rental arrears as well as his share of the payment of realty taxes. 6

Consequently, Litton filed a complaint for unlawful detainer against Santos before the
MeTC of Manila. The MeTC ruled in Litton’s favor and ordered Santos to vacate A.I.D.
Building and Litton Apartments and to pay various sums of money representing unpaid
arrears, realty taxes, penalty, andattorney’s fees.7

It appears however that the judgment was not executed. Litton subsequently filed an
action for revival of judgment, which was granted by the RTC.8 Santos then appealed
the RTC decision to the CA, which nevertheless affirmed the RTC.9 The said CA
decision became final and executory on 22 March 1994.10

On l 1 November 1996, the sheriff of the MeTC of Manila levied on a piece of real
property covered by Transfer Certificate of Title (TCT) No. 187565 and registered in the
name of International Academy of Management and Economics Incorporated (I/AME),
in order to execute the judgment against Santos.11 The annotations on TCT No. 187565
indicated that such was "only up to the extent of the share of Emmanuel T. Santos."12

I/AME filed with Me TC a "Motion to Lift or Remove Annotations Inscribed in TCT No.
187565 of the Register of Deeds of Makati City."13 I/AME claimed that it has a separate
and distinct personality from Santos; hence, its properties should not be made to
answer for the latter's liabilities. The motion was denied in an Order dated 29 October
2004.

Upon motion for reconsideration of I/AME, the Me TC reversed its earlier ruling and
ordered the cancellation of the annotations of levy as well as the writ of execution. Litton
then elevated the case to the RTC, which in turn reversed the Order granting I/AME’s
motion for reconsideration and reinstated the original Order dated 29 October 2004.

I/AME then filed a petition with the CA to contest the judgment of the RTC, which was
eventually denied by the appellate court.

THE CA RULING

The CA upheld the Judgment and Order of the RTC and held that no grave abuse of
discretion was committed when the trial court pierced the corporate veil of I/AME. 14

It took note of how Santos had utilized I/ AME to insulate the Makati real property
covered by TCT No. 187565 from the execution of the judgment rendered against him,
for the following reasons:

First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being the
.President, was representing I/AME as the vendee.15 However, records show that it was
only in 1985 that I/AME was organized as a juridical entity.16 Obviously, Santos could not
have been President of a non-existent corporation at that time.17

Second, the CA noted that the subject real property was transferred to I/AME during the
pendency of the appeal for the revival of the judgment in the ejectment case in the CA.18

Finally, the CA observed that the Register of Deeds of Makati City issued TCT No.
187565 only on 17 November 1993, fourteen (14) years after the execution of the Deed
of Absolute Sale and more than eight (8) years after I/AME was incorporated. 19

Thus, the CA concluded that Santos merely used I/ AME as a shield to protect his
property from the coverage of the writ of execution; therefore, piercing the veil of
corporate fiction is proper.20

THE ISSUES

The issues boil down to the alleged denial of due process when the court pierced the
corporate veil of I/ AME and its property was made to answer for the liability of Santos.

OUR RULING

We deny the petition.

There was no violation of due
process against I/AME

Petitioner avers that its right to due process was violated when it was dragged into the
case and its real property made an object of a writ of execution in a judgment against
Santos. It argues that since it was not impleaded in the main case, the court a
quo never acquired jurisdiction over it. Indeed, compliance with the recognized modes
of acquisition ofjurisdiction cannot be dispensed with even in piercing the veil of
corporation.21

In a petition for review on certiorari under Rule 45, only questions of law shall be
entertained. This Court considers the determination of the existence of any of the
circumstances that would warrant the piercing of the veil of corporate fiction as a
question of fact which ordinarily cannot be the subject of a petition for review
on certiorariunder Rule 45. We will only take cognizance of factual issues if the findings
of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.22 Once the CA affirms the factual findings of the trial court,
such findings are deemed final and conclusive and thus, may not be reviewed on
appeal, unless the judgment of the CA depends on a misapprehension of facts, which if
properly considered, would justify a different conclusion.23 Such exception however, is
not applicable in this case.

The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one
in accord on the matters presented before this Court.

In general, corporations, whether stock or non-stock, are treated as separate and

distinct legal entities from the natural persons composing them. The privilege of being
considered a distinct and separate entity is confined to legitimate uses, and is subject to
equitable limitations to prevent its being exercised for fraudulent, unfair or illegal
purposes.24 However, once equitable limitations are breached using the coverture of the
corporate veil, courts may step in to pierce the same.

As we held in Lanuza, Jr. v. BF Corporation:25

Piercing the corporate veil is warranted when "[the separate personality of a

corporation] is used as a means to perpetrate fraud or an illegal act, or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, or to confuse
legitimate issues." It is also warranted in 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."

When [the] corporate veil is pierced, the corporation and persons who are normally
treated as distinct from the corporation are treated as one person, such that when the
corporation is adjudged liable, these persons, too, become liable as if they were the
corporation.
The piercing of the corporate veil is premised on the fact that the corporation concerned
must have been properly served with summons or properly subjected to the jurisdiction
of the court a quo. Corollary thereto, it cannot be subjected to a writ of execution meant
for another in violation of its right to due process.26

There exists, however, an exception to this rule: if it is shown "by clear and convincing
proof that the separate and distinct personality of the corporation was purposefully
employed to evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings. "27

The resistance of the Court to offend the right to due process of a corporation that is a
nonparty in a main case, may disintegrate not only when its director, officer,
shareholder, trustee or member is a party to the main case, but when it finds facts which
show that piercing of the corporate veil is merited.28

Thus, as the Court has already ruled, a party whose corporation is vulnerable to
piercing of its corporate veil cannot argue violation of due process.29

In this case, the Court confirms the lower courts' findings that Santos had an existing
obligation based on a court judgment that he owed monthly rentals and unpaid realty
taxes under a lease contract he entered into as lessee with the Littons as lessor. He
was not able to comply with this particular obligation, and in fact, refused to comply
therewith.

This Court agrees with the CA that Santos used I/AME as a means to defeat judicial
processes and to evade his obligation to Litton.30 Thus, even while I/AME was not imp
leaded in the main case and yet was so named in a writ of execution to satisfy a court
judgment against Santos, it is vulnerable to the piercing of its corporate veil. We will
further expound on this matter.

Piercing the Corporate Veil may

Apply to Non-stock Corporations

Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to
stock corporations, and not to non-stock, nonprofit corporations such as I/AME since
there are no stockholders to hold liable in such a situation but instead only members.
Hence, they do not have investments or shares of stock or assets to answer for possible
liabilities.

Thus, no one in a non-stock corporation can be held liable in case the corporate veil is
disregarded or pierced.31

The CA disagreed. It ruled that since the law does not make a distinction between a
stock and non-stock corporation, neither should there be a distinction in case the
doctrine of piercing the veil of corporate fiction has to be applied. While I/AME is an
educational institution, the CA further ruled, it still is a registered corporation conducting
its affairs as such.32

This Court agrees with the CA.

In determining the propriety of applicability of piercing the veil of corporate fiction, this
Court, in a number of cases, did not put in issue whether a corporation is a stock or
non-stock corporation. In Sula ng Bayan, Inc. v. Gregorio Araneta, Inc. ,33 we considered
but ultimately refused to pierce the corporate veil of a non-stock non-profit corporation
which sought to institute an action for reconveyance of real property on behalf of its
members. This Court held that the non-stock corporation had no personality to institute
a class suit on behalf of its members, considering that the non-stock corporation was
not an assignee or transferee of the real property in question, and did not have an
identity that was one and the same as its members.

In another case, this Court did not put in issue whether the corporation is a non-stock,
non-profit, non-governmental corporation in considering the application of the doctrine
of piercing of corporate veil. In Republic of the Philippines v. Institute for Social
Concern,34 while we did not allow the piercing of the corporate veil, this Court affirmed
the finding of the CA that the Chairman of the Institute for Social Concern cannot be
held jointly and severally liable with the aforesaid non-governmental organization (NGO)
at the time the Memorandum of Agreement was entered into with the Philippine
Government. We found no fraud in that case committed by the Chairman that would
have justified the piercing of the corporate veil of the NG0.35

In the United States, from which we have adopted our law on corporations, non-profit
corporations are not immune from the doctrine of piercing the corporate veil. Their
1âw phi 1

courts view piercing of the corporation asan equitable remedy, which justifies said
courts to scrutm1ze any organization however organized and in whatever manner it
operates. Moreover, control of ownership does not hinge on stock ownership.

As held in Barineau v. Barineau:36

[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself
preclude a court from applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the substance of the
organization, and its decision is not controlled by the statutory framework under which
the corporation was formed and operated. While it may appear to be impossible for a
person to exercise ownership control over a non-stock, not-for-profit corporation, a
person can be held personally liable under the alter ego theory if the evidence shows
that the person controlling the corporation did in fact exercise control, even though there
was no stock ownership.

In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal
Reserve System,37 the U.S. Court allowed the piercing of the corporate veil of the
Foundation headed by the plaintiff, in order to avoid inequitable results. Plaintiff was
found to be the sole trustee, the sole member of the board, and the sole financial
contributor to the Foundation. In the end, the Court found that the plaintiff used the
Foundation to avoid paying attorneys’ fees.

The concept of equitable ownership, for stock or non-stock corporations, in piercing of

the corporate veil scenarios, may also be considered. An equitable owner is an
individual who is a non-shareholder defendant, who exercises sufficient control or
considerable authority over the corporation to the point of completely disregarding the
corporate form and acting as though its assets are his or her alone to manage and
distribute.38

Given the foregoing, this Court sees no reason why a non-stock corporation such as
I/AME, may not be scrutinized for purposes of piercing the corporate veil or fiction.

Piercing the Corporate Veil may

Apply to Natural Persons

The petitioner also insists that the piercing of the corporate veil cannot be applied to a
natural person - in this case, Santos - simply because as a human being, he has no
corporate veil shrouding or covering his person.39

a) When the Corporation is the Alter Ego of a Natural Person

As cited in Sula ng Bayan, Inc. v. Araneta, Inc. ,40 "[t]he doctrine of alter ego is based
upon the misuse of a corporation by an individual for wrongful or inequitable
purposes, and in such case the court merely disregards the corporate entity and holds
the individual responsible for acts knowingly and intentionally done in the name of the
corporation." This, Santos has done in this case. Santos formed I/AME, using the non-
stock corporation, to evade paying his judgment creditor, Litton.

The piercing of the corporate veil may apply to corporations as well as natural persons
involved with corporations. This Court has held that the "corporate mask may be lifted
and the corporate veil may be pierced when a corporation is just but the alter ego of a
person or of another corporation."41

We have considered a deceased natural person as one and the same with his
corporaticc to protect the succession rights of his legal heirs to his estate. In Cease v.
Court of Appeals, 42 the predecessor-in-interest organized a close corporation which
acquired properties during its existence. When he died intestate, trouble ensued
amongst his children on whether or not to consider his company one and the same with
his person. The Court agreed with the trial court when it pierced the corporate veil of the
decedent's corporation. It found that said corporation was his business conduit and alter
ego. Thus, the acquired properties were actually properties of the decedent and as
such, should be divided among the decedent's legitimate children in the partition of his
estate.43
In another instance, this Court allowed the piercing of the corporate veil against another
natural person, in Arcilla v. Court of Appeals. 44 The case stemmed from a complaint for
sum of money against Arcilla for his failure to pay his loan from the private respondent.
Arcilla, in his defense, alleged that the loan was in the name of his family corporation,
CSAR Marine Resources, Inc. He further argued that the CA erred in holding CSAR
Marine Resources liable to the private respondent since the latter was not impleaded as
a party in the case. This Court allowed the piercing of the corporate veil and held that
Arcilla used "his capacity as President, x x x [as] a sanctuary for a defense x x x to
avoid complying with the liability adjudged against him x x x. " 45 We held that his liability
remained attached even if he was impleaded as a party, and not the corporation, to
thecollection case and even if he ceased to be corporate president. 46 Indeed, even if
Arcilla had ceased to be corporate president, he remained personally liable for the
judgment debt to pay his personal loan, for we treated him and the corporation as one
and the same. CSAR Marine was deemed his alter ego.

We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was
adjudged liable to pay on a judgment against him; (2) he became President of a
corporation; (3) he formed a corporation to conceal assets which were supposed to pay
for the judgment against his favor; (4) the corporation which has Santos as its
President, is being asked by the court to pay on the judgment; and (5) he may not use
as a defense that he is no longer President of I/AME (although a visit to the website of
the school shows he is the current President).47

This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the
natural person - is the alter ego of I/AME. Santos falsely represented himself as
President of I/AME in the Deed of Absolute Sale when he bought the Makati real
property, at a time when I/ AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of Me TC showing Santos and I/ AME as being one and the
same person:

(1) Santos is the conceptualizer and implementor of I/AME;

(2) Santos’ contribution is ₱1,200,000.00 (One Million Two Hundred Thousand

Pesos) out of the ₱1,500,000.00 (One Million Five Hundred Thousand Pesos),
making him the majority contributor of I/AME; and,

(3) The building being occupied by I/AME is named after Santos using his known
nickname (to date it is called, the "Noli Santos Inte1national Tower").48

This Court deems I/AME and Santos as alter egos of each other based on the former’s
own admission in its pleadings before the trial court. In its Answer (to Amended Petition)
with the RTC entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil Case
No. 06-115547, I/AME admitted the allegations found in paragraphs 2, 4 and 5 of the
amended petition of Litton, particularly paragraph number 4 which states:
4. Respondent, International Academy of Management and Economics
Inc. (hereinafter referred to as Respondent I/ AME), is a corporation organized and
existing under Philippine laws with address at 1061 Metropolitan Avenue, San Antonie
Village, Makati City, where it may be served with summons and other judicial
processes. It is the corporate entity used by Respondent Santos as his alter ego
for the purpose of shielding his assets from the reach of his creditors, one of
which is herein Petitioner.49 (Emphases ours)

Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to
evade the execution on the Makati property, thus frustrating the satisfaction of the
judgment won by Litton.

b) Reverse Piercing of the Corporate Veil

This Court in Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a
money judgment against its erstwhile President, Arcilla.

We borrow from American parlance what is called reverse piercing or reverse corporate
piercing or piercing the corporate veil "in reverse."

As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership, 50 "in a
traditional veil-piercing action, a court disregards the existence of the corporate entity so
a claimant can reach the assets of a corporate insider. In a reverse piercing action,
however, the plaintiff seeks to reach the assets of a corporation to satisfy claims against
a corporate insider."

"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing)

and makes the corporation liable for the debt of the shareholders."51

It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider
reverse piercing occurs when a party with a claim against an individual or corporation
attempts to be repaid with assets of a corporation owned or substantially controlled by
the defendant.52 In contrast, in insider reverse piercing, the controlling members will
attempt to ignore the corporate fiction in order to take advantage of a benefit available
to the corporation, such as an interest in a lawsuit or protection of personal assets. 53

Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment

creditor, seeks the Court's intervention to pierce the corporate veil of I/AME in order to
make its Makati real property answer for a judgment against Santos, who formerly
owned and still substantially controls I/AME.

In the U.S. case Acree v. McMahan, 54 the American court held that "[ o ]utsider reverse
veil-piercing extends the traditional veil-piercing doctrine to permit a third-party creditor
to pierce the veil to satisfy the debts of an individual out of the corporation's assets."
The Court has pierced the corporate veil in a reverse manner in the instances when the
scheme was to avoid corporate assets to be included in the estate of a decedent as in
the Cease case and when the corporation was used to escape a judgment to pay a debt
as in the Arcilla case.

In a 1962 Philippine case, this Court also employed what we now call reverse-piercing
of the corporate veil. In Palacio v. Fely Transportation Co., 55 we found that the president
and general manager of the private respondent company formed the corporation to
evade his subsidiary civil liability resulting from the conviction of his driver who ran over
the child of the petitioner, causing injuries and medical expenses. The Court agreed
with the plaintiffs that the president and general manager, and Fely Transportation, may
be regarded as one and the same person. Thus, even if the president and general
manager was not a party to the case, we reversed the lower court and declared both
him and the private respondent company, jointly and severally liable to the plaintiffs.
Thus, this Court allowed the outsider-plaintiffs to pierce the corporate veil of Fely
Transportation to run after its corporate assets and pay the subsidiary civil liability of the
company's president and general manager.

This notwithstanding, the equitable remedy of reverse corporate piercing or reverse

piercing was not meant to encourage a creditor’s failure to undertake such remedies
that could have otherwise been available, to the detriment of other creditors.56

Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead
to disastrous consequences for both stock and non-stock corporations. We are aware
that ordinary judgment collection procedures or other legal remedies are preferred over
that which would risk damage to third parties (for instance, innocent stockholders or
voluntary creditors) with unprotected interests in the assets of the beleaguered
corporation.57

Thus, this Court would recommend the application of the current 1997 Rules on Civil
Procedure on Enforcement of Judgments. Under the current Rules of Court on Civil
Procedure, when it comes to satisfaction by levy, a judgment obligor is given the option
to immediately choose which property or part thereof may be levied upon to satisfy the
judgment. If the judgmentobligor does not exercise the option, personal properties, if
any, shall be first levied and then on real properties if the personal properties are
deemed insufficient to answer for the judgment.58

In the instant case, it may be possible for this Court to recommend that Litton run after
the other properties of Santos that could satisfy the money judgment - first personal,
then other real properties other than that of the school. However, if we allow this, we
frustrate the decades-old yet valid MeTC judgment which levied on the real property
now titled under the name of the school. Moreover, this Court will unwittingly condone
the action of Santos in hiding all these years behind the corporate form to evade paying
his obligation under the judgment in the court a quo. This we cannot countenance
without being a party to the injustice.
Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on
execution of the Makati real property where the school now stands is applied.

WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA

Decision in CA-G.R. SP No. 107727 dated 30 October 2009 and its Resolution on 12
March 2010 are hereby AFFIRMED. The MeTC Order dated 29 October 2004 is
hereby REINSTATED.

Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with

dispatch the MeTC Order dated 29 October 2004 against Santos.

SO ORDERED.

MARIA LOURDES P.A. SERENO

Chief Justice, Chairperson

WE CONCUR:
G.R. No. 220926

LUIS JUAN L. VIRATA and UEMMARA PHILIPPINES CORPORATION (now known

as CAVITEXINFRASTRUCTURE CORPORATION), Petitioners
vs.
ALEJANDRO NG WEE, WESTMONT INVESTMENT CORP., ANTHONY T. REYES,
SIMEON CUA, VICENTE CUALOPING, HENRY CUALOPING, MARIZA
SANTOSTAN, and MANUEL ESTRELLA, Respondents

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

G.R. No. 221058

WESTMONT INVESTMENT, CORPORATION, Petitioner,

vs.
ALEJANDRO NG WEE, Respondent.

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

G.R. No. 221109

MANUEL ESTRELLA, Petitioner,

vs.
ALEJANDRO NG WEE, Respondent.

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

G.R. No. 221135

SIMEON CUA, VICENTE CUALOPING, and HENRY CUALOPING, Petitioners,

vs.
ALEJANDRO NG WEE, Respondent.

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

G.R. No. 221218

ANTHONY T. REYES, Petitioner,

vs.
ALEJANDRO NG WEE, LUIS JUAN VIRATA, UEM-MARA PHILIPPINES CORP.,
WESTMONT INVESTMENT CORP., MARIZA SANTOS-TAN, SIMEON CUA,
VICENTE CUALOPING, HENRY CUALOPING, and MANUEL
ESTRELLA, Respondents

DECISION
VELASCO, JR., J.:

Nature of the Case

For resolution is the consolidated petitions assailing the September 30, 2014
Decision1 and October 14, 2015 Resolution2 of the Court of Appeals (CA) in CA-G.R.
CV. No. 97817.3 Said rulings affirmed the trial court judgment declaring petitioners
solidarily liable to Alejandro Ng Wee (Ng Wee) in the amount of ₱213,290,410.36, plus
interests and damages.

The Facts

Ng Wee was a valued client of Westmont Bank. Sometime in 1998, he was enticed by
the bank manager to make money placements with Westmont Investment Corporation
(Wincorp), a domestic corporation organized and licensed to operate as an investment
house, and one of the bank's affiliates.4 Offered to him were "sans
recourse" transactions with the following mechanics as summarized by the CA:

x x x A corporate borrower who needs financial assistance or funding to run its business
or to serve as working capital is screened by Wincorp. Once it qualifies as an accredited
borrower, Wincorp enters into a Credit Line Agreement for a specific amount with the
corporation which the latter can draw upon in a series of availments over a period of
time. The agreement stipulates that Wincorp shall extend a credit facility on "best effort"
basis and that every drawdown by the accredited borrower shall be evidenced by a
promissory note executed in favor of Wincorp and/or the investor/s who has/have
agreed to extend the credit facility. Wincorp then scouts for investors willing to provide
the funds needed by the accredited borrower. The investor is matched with the
accredited borrower. An investor who provides the fund is issued a Confirmation Advice
which indicates the amount of his investment, the due date, the term, the yield, the
maturity and the name of the borrower.5

Lured by representations that the "sans recourse" transactions are safe, stable, high-
yielding, and involve little to no risk, Ng Wee, sometime in 1998, placed investments
thereon under accounts in his own name, or in those of his trustees: Angel Archangel,
Elizabeth Ng Wee, Roberto Tabada Tan, and Alex Lim Tan.6 In exchange, Wincorp
issued Ng Wee and his trustees Confirmation Advices informing them of the identity of
the borrower with whom they were matched, and the terms under which the said
borrower would repay them. The contents of a Confirmation Advice are typically as
follows:

This is to confirm that pursuant to your authority, we have acted in your behalf and/or for
your benefit, risk or account without recourse or liability, real or contingent, to Westmont
Investment Corporation in respect of the loan granted to the Borrower named and under
the terms specified hereunder

Borrower: _______
 Amount Rate: % Term: Value Date: Due Date:
Yield: Tax: Maturity Value: Instrument:
Payment on Value Date TO No.

For your convenience but without any obligation on our part, we may act as your
collecting and paying agent for this transaction. Kindly note that your receipt hereof is
an indication of your conformity to the foregoing terms and conditions of the
transaction.7

Special Power of Attorneys (SPAs) are also prepared for the signature of the lender
investor. The SP As uniformly provide:

The undersigned, whose personal circumstances are stated hereunder, hereby, by

these presents, appoints, names and constitutes Westmont Investment Corporation
(Wincorp ), a corporation duly organized and existing under and by virtue of the laws of
the Philippines, with office address at in Floor, Westmont Bank Building, 411 Quintin
Paredes Street, Binondo, .Manila, as the Attorney-in-Fact of the undersigned:

To agree, deliver, sign, execute loan documents relative to the borrowing of:
_______________ ("The Borrower") to whom the undersigned, thru Wincorp, agreed to
lend the principal sum of PESOS ________________

HEREBY GIVING AND GRANTING unto said Attorney-in-Fact power and authority to
do and perform all and every act and thing whatsoever requisite or necessary to be
done in and about the premises, HEREBY RATIFYING AND CONFIRMING all that said
Attorney-in-Fact shall lawfully do or cause to be done by virtue of these presents. 8

Ng Wee's initial investments were matched with Hottick Holdings Corporation (Hottick),
one of Wincorp's accredited borrowers, the majority shares of which was owned by a
Malaysian national by the name of Tan Sri Halim Saad (Halim Saad). Halim Saad was
then the controlling shareowner of UEM-MARA, which has substantial interests in the
Manila Cavite Express Tollway Project (Cavitex).9

Hottick was extended a credit facility10 with a maximum drawdown of ₱l,500,908,026.87

in consideration of the following securities it issued in favor of Wincorp: (1) a Suretyship
Agreement11 executed by herein petitioner Luis Juan Virata (Virata); (2) a Suretyship
Agreement12 executed by YBHG Tan Sri Halim Saad; and (3) a Third Party Real Estate
Mortgage13 executed by National Steel Corporation (NSC). Hottick fully availed of the
loan facility extended by Wincorp, but it defaulted in paying its outstanding obligations
when the Asian financial crisis struck. As a result, Wincorp filed a collection suit against
Hottick, Halim Saad, and NSC for the repayment of the loan and related costs. 14A Writ of
Preliminary Attachment was then issued against Halim Saad's properties, which
included the assets of UEM-MARA Philippines Corporation (UEM-MARA).15 Virata was
not impleaded as a party defendant in the case.
To induce the parties to settle, petitioner Virata offered to guarantee the full payment of
the loan. The guarantee was embodied in the July 27, 1999 Memorandum of
Agreement16 between him and Wincorp. Virata was then able to broker a compromise
between Wincorp and Halim Saad that paved the way for the execution of a Settlement
Agreement17 dated July 28, 1999. In the Settlement Agreement, Halim Saad agreed to
pay USDl,000,000.00 to Wincorp in satisfaction of any and all claims the latter may
have against the former under the Surety Agreement that secured Hottick's loan. As a
result, Wincorp dropped Halim Saad from the case and the Writ of Preliminary
Attachment over the assets of UEM-MARA was dissolved.18

Thereafter, Wincorp executed a Waiver and Quitclaim19 dated December 1, 1999 in

favor of Virata, releasing the latter from any obligation arising from the Memorandum of
Agreement, except for his obligation to transfer forty percent (40%) equity of UEM
Development Philippines, Inc. (UPDI) and forty percent (40%) of UPDI's interest in the
tollway project to Wincorp. Apparently, the Memorandum of Agreement is a mere
accommodation that is not meant to give rise to any legal obligation in Wincorp's favor
as against Virata, other than the stipulated equity transfer.

Alarmed by the news of Hottick's default and financial distress, Ng Wee confronted
Wincorp and inquired about the status of his investments. Wincorp assured him that the
losses from the Hottick account will be absorbed by the company and that his
investments would be transferred instead to a new borrower account. In view of these
representations, Ng Wee continued making money placements, rolling over his previous
investments in Hottick and even increased his stakes in the new borrower account -
Power Merge Corporation (Power Merge).20

Incorporated on August 4, 1997, Power Merge21 is a domestic corporation, the primary

purpose of which is to "invest in, purchase, or othe-rwise acquire and own, hold, use,
sell, assign, transfer, mortgage, pledge, exchange or otherwise dispose of real or
personal property of every kind and description."22 Petitioner Virata is the majority
stockholder of the corporation, owning 374 ,996 out of its 375, 000 subscribed capital
stock.23

In a special meeting of Wincorp's board of directors held on February 9, 1999, the

investment house resolved to file the collection case against Halim Saad and
Hottick,24 and, on even date, approved Power Merge' s application for a credit line,
extending a credit facility to the latter in the maximum amount of
₱l,300,000,000.00.25 Based on the minutes of the special meeting,26 board chairman
John Anthony B. Espiritu, Wincorp President Antonio T. Ong (Ong), Mariza Santos-Tan
(Santos-Tan), Manuel N. Tankiansee (Tankiansee),27 and petitioners Manuel A. Estrella
(Estrella), Simeon Cua, Henry T. Cualoping, and Vicente Cualoping (Cua and the
Cualopings) were allegedly in attendance. Thus, on February 15, 1999, Wincorp
President Ong and Vice-President for Operations petitioner Anthony Reyes (Reyes)
executed a Credit Line Agreement28 in favor of Power Merge with petitioner Virata's
conformity.
Barely a month later, on March 11, 1999, Wincorp, through another board meeting
allegedly attended by the same personalities, increased Power Merge's maximum credit
limit to ₱2,500,000,000.00.29 Accordingly, an Amendment to the Credit Line
Agreement30 (Amendment) was executed on March 15, 1999 by the same
representatives of the two parties.

Power Merge made a total of six (6) drawdowns from the amended Credit Line
Agreement in the aggregate amount of P2,183,755,253.11. 31 Following protocol, Power
Merge issued Promissory Notes in favor of Wincorp, either for itself or as agent for or on
behalf of certain investors, for each drawdown. The Promissory Notes issued can be
summarized thusly:32

Promissory Availment Maturity Date Principal

Note No. Date
February 12, February 12,
1411 ₱8,618,877.35
1999 2000
February 10, February 10,
1537 ₱1,124,781,081.10
1999 2000
March 12, March 11,
1538 ₱215,660.99
1999 2000
March 12, March 11,
1539 ₱671,402,608.61
1999 2000
March 17, March 16,
1540 ₱378,381,629.15
1999 2000
March 22, March 21,
1541 ₱355,395.91
1999 2000
Total ₱2,183,755,253.11

And pertinently, the template for the Promissory Notes read:

PROMISSORY NOTE

For value received, I/We hereby promise to pay WESTMONT INVESTMENT

CORPORATION (WINCORP), either for itself or as agent for and on behalf of certain
INVESTORS who have placed/invested funds with WINCORP the principal sum of
__________ (_______), Philippine Currency, on _____ with interest rate of _________
percent (___%) per annum, or equivalently the Maturity Amount of ___________
PESOS Philippine Currency.

Demand and Dishonor Waived: In case of default in the payment of this Promissory
Note, an additional interest on the Maturity Amount at the rate of three percent (3%) per
month shall accrue from the date immediately following the Maturity Date hereof until
the same is fully paid. In addition, I/We shall be liable to pay liquidated damages in the
amount equivalent to twenty percent (20%) of the Maturity amount.

If this Note is placed in the hands of an attorney for collection, or if payment herein is
collected by suit or through other legal proceedings, I/We promise to pay WINCORP a
sum equal to twenty-five (25%) of the total amount due and payable as and for
attorney's fees and cost of collection.33

After receiving the promissory notes from Power Merge, Wincorp, in turn, issued
Confirmation Advices to Ng Wee and his trustees, as well as to the other investors who
were matched with Power Merge. A summary of the said Confirmation Advices reveals
that out of the ₱2,183,755,253.11 drawn by Power Merge, the aggregate amount of
₱213,290,410.36 was sourced from Ng Wee's money placements under the names of
his trustees:34

Serial Principal Amount

Name Due Date Maturity Value
No. of Placement
Angel
90029 1,559,927.96 3/27/2000 1,584,496.83
Archangel
Robert
90821 Tabada 2,300,000.00 3/22/2000 2,336,225.00
Tan
Robert
90823 Tabada 11,937,401.91 3/23/2000 12, 125,415.99
Tan
Robert
90825 Tabada 2, 722,325.59 3/23/2000 2, 765,202.22
Tan
Robert
90827 Tabada 1,857,896.78 3/22/2000 1,885,765.23
Tan
Robert
90832 Tabada 17,908,989.04 3/29/2000 18, 191,055.62
Tan
Robert
90834 Tabada 2,263,514.95 3/30/2009 2,299, 165.31
Tan
Robert
90835 Tabada 1,970,590.89 3/30/2009 2,001,627.70
Tan
Alex Lim
90839 406,825.00 3/24/2000 412,164.58
Tan
 Alex Lim
90844 1,835,610.44 4/3/2000 1,866,662.85
Tan
Alex Lim
90860 2,144,975.50 3/31/2000 2,170,715.21
Tan
Alex Lim
90861 8,649,113.51 3/31/2000 8,752,902.87
Tan
Alex Lim
90864 2,051,965.81 4/3/2000 2,078,128.37
Tan
Alex Lim
90866 8,749,275.96 4/4/2000 8,860,829.23
Tan
Alex Lim
90869 4,175,382.61 4/4/2000 4,228,618.74
Tan
Elizabeth
91319 1,000,000.00 4/7/2000 1,012,000.00
Ng Wee
Robert
91337 Tabada 1,587,553.58 4/7/2000 1,606,604.22
Tan
Robert
91654 Tabada 322,117.07 4/11/2000 326,224.06
Tan
Elizabeth
91712 1,610,325.19 4/2/2000 1,630,856.84
Ng Wee
Robert
91713 Tabada 11,615,297.69 4/12/2000 11,763,392.74
Tan
Robert
91735 Tabada 28,877,638.89 4/12/2000 29,245,828.79
Tan
Elizabeth
92673 1,301,666.89 4/4/2000 1,318,263.14
Ng Wee
Elizabeth
92761 2,415,487.78 4/12/2000 2, 446,285 .25
Ng Wee
Robert
92804 Tabada 10,635,489.17 3/23/2000 10,691,325.49
Tan
Robert
92805 Tabada 8,439, 180.56 4/12/2000 8,546, 780.11
Tan
92900 Robert 652,571.11 4/13/2000 660,891.39
 Tabada
Tan
Robert
92965 Tabada 39,028,875.33 4/14/2000 39,497,221.83
Tan
Robert
92980 Tabada 6,799,438.05 4/14/2000 6,881,031.31
Tan
Robert
93001 Tabada 5,000,000.00 4/14/2000 5,060,000.00
Tan
Robert
93062 Tabada 1,536,373. 70 4/17/2000 1,555,962.46
Tan
Robert
93073 Tabada 3,447,004.47 4/17/2000 3,490,953.78
Tan
Robert
93075 Tabada 12,000,000.00 4/17/2000 12, 153,000.00
Tan
Alex Lim
93619 508,683.02 4/26/2000 515,741.00
Tan
Alex Lim
93625 1,933,335.42 4/26/2000 1,960, 160.45
Tan
Alex Lim
93795 351,157.75 4/28/2000 356,161.75
Tan
Elizabeth
93308 1,000,000.00 4/19/2000 1,012,750.00
Ng Wee
Total 210,595,991.62 213,290,410.36

Unknown to Ng Wee, however, was that on the very same dates the Credit Line
Agreement and its subsequent Amendment were entered into by Wincorp and Power
Merge, additional contracts (Side Agreements) were likewise executed by the two
corporations absolving Power Merge of liability as regards the Promissory Notes it
issued. Pertinently, the Side Agreement dated February 15, 1999 reads:

WHEREAS, Powermerge has entered into the Credit Line Agreement with Wincorp as
an accommodation in order to allow Wincorp to hold Powermerge paper instead of the
obligations of Hettick which are right now held by Wincorp.

xxxx
1. Powermerge hereby agrees to execute promissory notes in the aggregate principal
sum of ₱1,200,000,000.00 in favor of Wincorp and in exchange therefore, Wincorp
hereby assigns, transfers, and conveys to Powermerge all of its rights, titles and
interests by way of a subparticipation over the promissory notes and other obligations
executed by Hettick in favor of Wincorp; Provided however that the only obligation of
Powermerge to Wincorp shall be to return and deliver to Wincorp all the rights, title and
interests conveyed by Wincorp hereby to Powermerge over the Hottick obligations.
Powermerge shall have no obligation to pay under its promissory notes executed in
favor of Wincorp but shall be obligated merely to return whatever [it] may have received
from Wincorp pursuant to this agreement.

xxxx

3. Win corp confirms and agrees that this accommodation being entered into by the
parties is not intended to create a payment obligation on the part of
Powermerge.35 (emphasis added)

Save for the amount, identical provisions were included in the March 15, 1999 Side
Agreement.36 By virtue of these contracts, Wincorp was able to assign its rights to the
uncollected Hottick obligations and hold Power Merge papers instead. 37 However, this
also meant that if Power Merge subsequently defaults in the payment of its obligations,
it would refuse, as it did in fact refuse, payment to its investors.

Despite repeated demands,38 Ng Wee was not able to collect Power Merge's
outstanding obligation under the Confirmation Advices in the amount of
₱213,290,410.36. This prompted Ng Wee, on October 19, 2000, to institute a Complaint
for Sum of Money with Damages with prayer for the issuance of a Writ of Preliminary
Attachment (Complaint),39 docketed as Civil Case No. 00-99006 before the Regional
Trial Court (RTC), Branch 39 of Manila (R TC). Of the seventeen (17) named
defendants therein, only Virata, Power Merge, UPDI, UEM-MARA, Wincorp, Ong,
Reyes, Cua, Tankiansee, Santos-Tan, Vicente and Henry Cualoping, and Estrella were
duly served with summons.40

In his Complaint, Ng Wee claimed that he fell prey to the intricate scheme of fraud and
deceit that was hatched by Wincorp and Power Merge. As he later discovered, Power
Merge's default was inevitable from the very start since it only had subscribed capital in
the amount of ₱37,500,000.00, of which only ₱9,375,000.00 is actually paid up. He then
attributed gross negligence, if not fraud and bad faith, on the part of Wincorp and its
directors for approving Power Merge's credit line application and its subsequent
increase to the amount of ₱2,500,000,000.00 despite its glaring inability to pay.

Wincorp officers Ong and Reyes were likewise impleaded for signing the Side
Agreements that would allow Power Merge to avoid paying its obligations to the
investors. Ng Wee also sought to pierce the separate juridical personality of Power
1âw phi1

Merge since Virata owns almost all of the company's stocks. It was further alleged that
Virata acquired interest in UEM-MARA using the funds swindled from the Wincorp
investors.

As an annex to the Complaint, Ng Wee cited the May 5, 2000 Cease and Desist
Order41 issued by the Prosecution and Enforcement Department of the Securities and
Exchange Commission (SEC) in PED Case No. 20-237842 after its routine audit of the
operations of the investment house. Data gathered by the SEC showed that, as of
December 31, 1999, Wincorp has sourced funds from 2,200 individuals with an average
of ₱7,000,000,000.00 worth of commercial papers per month.43 In its subsequent
October 27, 2000 Resolution,44 the SEC found that the Confirmation Advices that
Wincorp had been issuing to its investors takes the form of a security that ought to have
been registered before being offered to the public,45 and that the investment house had
also been advancing the payment of interest to the investors to cover up its borrowers'
insolvency.46

The defendants moved for the dismissal of the case for failure to state a cause of
action, among other reasons, moored on the fact that the investments were not
recorded in the name of Ng Wee. These motions, however, were denied by the RTC on
October 4, 2001, which denial was elevated by way of certiorari to the CA, only for the
trial court ruling to be affirmed on August 21, 2003. The issue eventually made its way
to this Court and was docketed as G.R. No. 162928. The Court however, found no
reversible error on the part of the CA when the appellate court sustained the denial of
the motions to dismiss.47

In their respective Answers, the Wincorp and Power Merge camps presented opposing
defenses.48

Wincorp admitted that it brokered Power Merge Promissory Notes to investors

through "sans recourse" transactions. It contended, however, that its only role was to
match an investor with corporate borrowers and, hence, assumed no liability for the
monies that Ng Wee loaned to Power Merge. As proof thereof, Wincorp brought to the
attention of the R TC the language of the SP As executed by the investors.

"Sans recourse" transactions, Wincorp added, are perfectly legal under Presidential
Decree No. 129 (PD 129), otherwise known as the Investment Houses Law, and forms
part of the brokering functions of an investment house. As a duly licensed investment
house, it was authorized to offer the "sans recourse" transactions to the public, even
without a license to perform quasi-banking functions.

For their part, the Wincorp directors argued that they can only be held liable under
Section 31 of Batas Pambansa Big. (BP) 68,49 the Corporation Code, if they assented to
a patently unlawful act, or are guilty of either gross negligence or bad faith in directing
the affairs of the corporation. They explained that the provision is inapplicable since the
approval of Power Merge's credit line application was done in good faith and that they
merely relied on the vetting done by the various departments of the company.
Additionally, Estrella and Tankiansee argued that they were not present during the
special meetings when Power Merge's credit line application was approved and even
objected against the same when they came to know of such fact.

Reyes meanwhile asseverated that the first paragraph of Sec. 31 cannot find application
to his case since he is not a director of Wincorp, but its officer. It is his argument that he
can only be held liable under the second paragraph of the provision if he is guilty of
conflict of interest, which he is not. He likewise claimed that he was duly authorized to
sign the side Credit Line Agreements and Side Agreements on behalf of Wincorp.

The Wincorp camp reiterated that Ng Wee's Complaint failed to state a cause of action
because the money placements were not registered under his name. It was their
postulation then that the alleged trustees should have instituted the case in their own
names.

On the other hand, petitioners Virata and UEM-MARA harped on the underlying
arrangement between Hottick, Power Merge, and Wincorp. Under the framework,
Hottick will issue Promissory Notes to Wincorp, which will then transfer the same to
Power Merge. In exchange for the transfer, Power Merge will issue its own Promissory
Notes to Wincorp. That way, Wincorp will be holding Power Merge papers, instead of
Hottick.

To implement this arrangement, Wincorp and Power Merge entered into a Credit Line
Agreement with the understanding that Power Merge and Virata's only obligation
thereunder would be to collect payments on the Hottick papers. The Credit Line
Agreement and the issuance of the promissory notes, according to Virata, were mere
accommodations to help Wincorp enforce the outstanding obligations of Hottick. It was
then contrary to their agreement for Wincorp to have offered the Power Merge papers to
investors since it was allegedly agreed upon that Power Merge would incur no liability to
pay the promissory notes it issued Wincorp.

Ruling of the Trial Court

On July 8, 2011, the RTC rendered a Decision50 in Civil Case No. 00- 99006 in favor of
Ng Wee. Thefallo of the Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff,

ordering the defendants Luis L. Virata, UEM-MARA Philippines Corporation, Westmont
Investment Corporation (Wincorp), Antonio T. Ong, Anthony T. Reyes, Simeon Cua,
Vicente and Henry Cualoping, Mariza Santos-Tan, and Manuel Estrella to jointly and
severally pay plaintiff as follows:

1. The sum of Two Hundred Thirteen Million Two Hundred Ninety

Thousand Four Hundred Ten and 36/100 Pesos (P213,290,410.36), which
is the maturity amount of plaintiffs investment with legal interest at the rate
of twelve (12%) percent per annum from the date of filing of the complaint
until fully paid;
 2. Liquidated damages equivalent to twenty percent (20%) of the maturity
amount, and attorney's fees equivalent to 25% of the total amount due
plus legal interest at the rate of twelve (12%) percent per annum from the
date of filing of the complaint until fully paid;

3. ₱l00,000.00 as moral damages.

4. The complaint against defendant Tankiansee is dismissed for lack of

merit.

Defendants' counterclaim (sic) are dismissed for lack of merit, while the crossclaims
filed by defendants against each other are likewise dismissed, there being no evidence
to support the same.

Cost against the defendants, except defendant Tankiansee.

SO ORDERED.51

Disposing first the procedural issue, the RTC reminded the parties that whether or not
Ng Wee had legal standing had already been settled when the defendants' motions to
dismiss were denied with finality. They are then precluded from re-raising the issue in
their memoranda.52

On the merits, the trial court explained that there was no dispute on the factual
circumstances of the case and that, based on these facts, Wincorp and Power Merge
colluded, if not connived, to defraud Ng Wee of his investments. The RTC ratiocinated
that the "sans recourse" transactions were used to conceal Wincorp' s direct borrowing;
that Wincorp negated its acts and practices under the "sans recourse" transactions
when it advanced the accrued interest due to the investors to conceal the fact that their
borrowers have already defaulted in their obligations; that Wincorp is a vendor in bad
faith since it knew that the Power Merge notes were uncollectible from the beginning by
virtue of the Side Agreements; and that, in any event, Wincorp violated its fiduciary
responsibilities as the investors' agent. The R TC held Power Merge equally guilty
because Wincorp could not have perpetrated the fraud without its indispensable
participation as a conduit for the scheme.53

The RTC likewise ruled that Ng Wee presented sufficient evidence against the
individual directors and officers for them to be held liable for fraud and/or bad faith
under Sec. 31 of the Corporation Code, except for Tankiansee. The claim against
Tankiansee was dropped since his immigration records established that he could not
have participated in the special meetings of the Wincorp directors, having been out of
the country during the material dates. Moreover, he filed a civil and criminal case
against Wincorp, negating any charge of conspiracy.54

The RTC further found compelling need to pierce through the separate juridical
personality of Power Merge since Virata exercised complete control thereof, owning
374,996 out of 375,000 of its subscribed capital stock. Similarly, the separate juridical
personality of UEM-MARA was pierced to reach the illegal proceeds of the funds
sourced from the defrauded investors.55

The motions for reconsideration from the afore-quoted ruling were denied on September
9, 2011.56 Separate appeals were then lodged by the following parties: (1) Wincorp, (2)
Santos-Tan, (3) Cua and the Cualopings, (4) Virata and UEM-MARA Philippines Corp.,
(5) Reyes; and (6) Estrella. In due time, the appellants and appellees filed their
respective briefs.57

Ruling of the Court of Appeals

On September 30, 2014, the CA promulgated the challenged ruling substantially

affirming the findings of the trial court, viz:

WHEREFORE, the appeal is DISMISSED. The Decision dated July 8, 2011 and Order
dated September 9, 2011 issued by the Regional Trial Court of Manila, Branch 39 in
Civil Case No. 00-99006 are AFFIRMED with the modification in that defendants-
appellants are jointly and severally liable to pay an interest of twelve percent (12%) per
annum of the total monetary awards, computed from the date of the filing of the
complaint until June 30, 2013 and six percent (6%) per annum from July 1, 2013 until
their full satisfaction.

SO ORDERED.58

Preliminarily, the CA upheld the finding of the RTC that Ng Wee is a real party in
interest and that the Complaint stated a cause of action despite the money placements
being made under the name of Ng Wee's trustees.59

The CA likewise found that Wincorp and Power Merge perpetrated an elaborate
scheme of fraud to inveigle Ng Wee into investing funds. Ng Wee would not have
placed his investments in the "sans recourse" transactions had he not been deceived
into believing that Power Merge is financially capable of paying the returns on his
investments. In sync with the R TC, the CA found that Wincorp misrepresented Power
Merge's financial capacity when it accredited Power Merge as a corporate borrower and
granted it a ₱2,500,000,000.00 credit facility despite the telling signs that the latter
would not be able to perform its obligations, to wit: (1) Power Merge had only been in
existence for two years when it was granted the credit facility; (2) Power Merge was
thinly capitalized with only ₱37,500,000.00 subscribed capital; (3) Power Merge was not
an on-going concern since it never secured the necessary permits and licenses to
conduct business, it never engaged in any lucrative business, and it did not file the
necessary reports with the SEC; and (4) No security was demanded by Wincorp or was
furnished by Power Merge in relation to the latter's drawdowns.60

The intent of Wincorp to deceive became even more manifest when it entered into the
Side Agreements with Power Merge. The Side Agreements rendered worthless Power
Merge's Promissory Notes that Wincorp offered to Ng Wee and the other investors.
Meanwhile, the "sans recourse" nature of the transactions prevented the investors from
recovering their investments from the investment house.61

Because of the foregoing fraudulent acts, Wincorp was held liable to Ng Wee as a
vendor of security in bad faith, and for acting beyond the scope of its authority as Ng
Wee's agent when it knowingly purchased worthless securities for him and his co-
investors.62

The CA likewise did not find merit in Power Merge's defense that it was a mere
accommodation party. Power Merge's participation was indispensable in deceiving Ng
Wee into placing more investments and amounted to actionable fraud. Its conduct that
led to this conclusion include: (1) setting up the Power Merge borrower account; (2) the
laborious execution of Credit Line Agreement, Side Agreements, and promissory notes;
(3) allowing Wincorp to sell worthless Power Merge papers/notes; and (4) receiving
valuable consideration through its drawdowns.63

Anent the liability of the directors, the appellate court sustained the trial court's
application of the doctrine on the piercing of the corporate veil, and also held that under
Sec. 31 of the Corporation Code, corporate officers can be held liable for having
assented to patently unlawful corporate acts, and for having acted in gross negligence
and/or bad faith in management.64

Here, the CA ratiocinated that the perpetrated investment scheme

constituted estafa under either Art. 315(l)(b) or Art. 315(2)(a) of the Revised Penal
Code65 due to Wincorp's violation of its fiduciary relation with Ng Wee, and its
employment of fraud or deceit to the latter's damage and prejudice. Moreover, Wincorp
violated various commercial laws when it offered the "sans recourse" transactions. For
though denominated as "sans recourse," Wincorp's actuations reveal that the
transactions are actually with recourse since Wincorp virtually borrowed from itself, for
itself. Assenting to these patently unlawful acts, according to the CA, exposed the
corporate directors and officers to liability.

Gross negligence can also be attributed to the Wincorp directors when they approved
Power Merge's credit line application and the subsequent increase of its credit limit to
₱2,500,000,000.00 despite Power Merge's evident weak financial structure and poor
capitalization, so the CA ruled.

The elaborate scheme of deceit and fraud, and the corresponding liability therefrom, is
then imputable to the directors of Wincorp. Meanwhile, Reyes and V irata cannot
escape liability since they signed the Side Agreements that rendered the Power Merge
papers worthless.

The CA also did not find compelling reason to depart from the RTC's conclusion as
regards UEM-MARA's liability. The appellate court saw the need to reach the illegal
proceeds of funds sourced from the defrauded investors.
Lastly, the CA held that the appellants are jointly and severally liable pursuant to Art.
1170 of the New Civil Code.66

The motions for reconsideration from the September 30, 2014 Decision were denied on
October 14, 2015 in the following wise:

WHEREFORE, finding no rationally persuasive reasons which would warrant a

modification much less, a reversal of our Decision dated September 30, 2014, all the
Motions for Reconsideration filed by the defendants-appellants are DENIED. The Notice
of Change of Name filed by Defendant Manuel Estrella, is hereby NOTED.

SO ORDERED.67

Grounds for the Petitions

Aside from Santos-Tan, defendants-appellants a quo appealed the September 30, 2014
Decision and October 14, 2015 Resolution of the CA via the instant recourses.

G.R. No. 220926: Petition for Review

on Certiorari of Luis Juan L. Virata
and UEM-MARA

In their Petition for Review on Certiorari,68 Virata and UEM-MARA claim that there is no
basis in implicating them in the scheme to defraud Ng Wee and the other investors
since there was no privity of contract between them; petitioners never interacted with Ng
Wee. This is allegedly consistent with the CA finding that Wincorp engaged in direct
borrowing with its investors. Thus, petitioners argue that Ng Wee cannot subsequently
claim that his funds were lent to Power Merge. Ng Wee likewise allegedly failed to prove
that Power Merge derived pecuniary benefits from the investment transactions.

Petitioners add that the Confirmation Advices were issued by Wincorp alone. Wincorp
had the sole discretion of selecting which corporate borrower to match with whom.
Power Merge, Virata, and UEM-MARA therefore had no control over the matter. Thus,
applying the doctrine of res inter alios acta alteri nocere non debet, third parties like
petitioners may not be prejudiced by the act, declaration, or omission of Wincorp.

The propriety of piercing the corporate veil is also challenged by petitioners. They argue
that Virata's ownership of almost all of the shares of Power Merge does not
automatically justify the application of the doctrine, absent fraud. And according to
petitioners, there was no evidence of fraud, bad faith, or gross negligence on the part of
Virata in the case at bar. It is the postulation that Virata could not be held liable for acts
done in his official capacity, including the execution of the Credit Line Agreement and
the Side Agreements, which allegedly are valid arm's length transactions duly
authorized by Power Merge, and that bad faith cannot be presumed from the mere
failure of Power Merge to pay its obligations.
Petitioners also see no valid reason to hold UEM-MARA liable since there is no
evidence of its participation in the allegedly fraudulent act. There is no proof that the
grant of the credit line was for the purpose of acquiring interests in UEM-MARA, or that
the funds obtained by Power Merge were the same funds used by Virata to acquire
interests therein. Petitioner Virata claims that he made use of a ₱600,000,000.00 credit
facility from Metrobank to facilitate the acquisition.

G.R. No. 221058: Petition for Review

on Certiorari of Wincorp

In its petition, Wincorp attributes reversible error69 to the CA when it rendered judgment
against the investment house. It claims that it merely performed its normal function as
an investment house by matching and marrying corporate borrowers with investors. The
arrangement it entered into was neither an investment contract between it and Ng Wee
nor an exercise of quasi-banking function, but the brokerage of a legitimate loan
agreement between Ng Wee and Power Merge. Ng Wee expected a fixed interest
income at the end of the term of the loan, and not a participation in the success or loss
of the borrower corporation.

Wincorp adds that it was clear to Ng Wee that what was involved was a loan
agreement, and that Wincorp was merely brokering the transaction. As a mere broker of
the transaction, not the beneficiary thereof, Wincorp asserts that it cannot be held liable
for the amount borrowed by Power Merge. Wincorp relies on the text of the
Confirmation Advices issued to Ng Wee to advance this point.70

Based on the language of the Confirmation Advices, Ng Wee knew of and approved the
transactions that Wincorp entered into with Power Merge as his agent; that Ng Wee's
conformity in the series of Confirmations Advices issued in his favor, and his execution
of the corresponding SP As thereafter, allegedly ratified Wincorp's acts of agency in the
execution of the loan agreement; and that Ng Wee had been renewing and rolling over
his initial placement, despite knowledge of this setup.

Wincorp further denies violating commercial laws since the transactions are "without
recourse, " in compliance with the Bangko Sentral ng Pilipinas (BSP) rule that only
institutions that are granted license to perform quasi-banking functions can engage in
transactions "with recourse." Moreover, the agreement with Ng Wee to broker a loan,
not being a quasi-banking function, is required to be marked as "without
recourse" under Sec. 4103N.2 of the BSP Manual of Regulations for Nonbank Financial
Institutions.

It is also the contention of Wincorp that it is within its discretion whether or not to
approve Power Merge's credit line. It was not an ultra vires act, and is instead covered
by the business judgment rule. The fact that the business strategy turned out to be
unfavorable should not so casually be used to impute liability to the corporation absent
showing of bad faith or gross negligence.
G.R. No. 221109: Petition/or Review
of Manuel Estrella

Petitioner Estrella, one of the directors of Wincorp, instituted a separate

petition71 anchored on the ground that he was a mere nominee in Wincorp of his
principals, Eduardo Espiritu and Wincorp board chairperson John Anthony Espiritu; that
he did not have any real beneficial interest in Wincorp as his appointment was a mere
accommodation to the Espiritus; and that he did not even receive any compensation,
salary, per diem or benefit of any kind from either the Espiritus or from Wincorp.

As a mere nominee, Estrella is involved solely in setting down company policies and
prescribing the general guidelines for the direction of the business and affairs of
Wincorp. In the performance of his duties, he relies heavily on the reports, memoranda,
and information provided them by management. He contends that he was never
involved in the day-to-day management and operations of the company. He then had no
knowledge and could not then have approved of the Side Agreements entered into by
Ong and petitioner Reyes. The Side Agreements were never presented in any of the
meetings Estrella attended, or so he claims.

He also questions the R TC and the CA's reliance on the minutes of the special
meetings naming him as one of the directors who approved Power Merge's credit line
application and its subsequent amendment. He argues that the minutes have already
been discredited when the charges against Tankiansee have been dropped. Estrella
reminds the Court that Tankiansee was likewise included in the list of directors in
attendance during the February 9, 1999 and March 11, 1999 special meetings, only to
be disproved later on by his immigration records that show that he was out of the
country during the material dates.

It was admitted that Estrella attended the February 9, 1999 special meeting, but claims
that he already left before the "other matters" in the agenda, which included Power
Merge's application, were discussed. He denies attending the March 11, 1999 special
meeting since he accompanied his wife that day to the hospital for her cancer treatment.
To substantiate these defenses, he brings to the Court's attention the fact that he did
not sign, as he refused to sign, the minutes of the February 9, 1999 and March 11, 1999
special meetings.

G.R. No. 221135: Petition/or Review

on Certiorari of Simeon Cua, Henry
Cualoping, and Vicente Cualoping

For their defense72 against civil liability in this case, petitioners Cua and the Cualopings
claim that Ng Wee failed to prove that they acted in bad faith or were grossly negligent
in managing the affairs of Wincorp, which is required for directors to be held liable under
Sec. 31 of the Corporation Code. They argued that the extent of their participation in the
alleged fraudulent scheme was limited to acting favorably on the executive committee's
recommendations regarding Power Merge's credit line application and its subsequent
amendment. Mere approval of Power Merge's applications, however, cannot be equated
with bad faith, for the directors relied on the vetting by the departments responsible for
doing so. They point out that Power Merge's applications underwent scrutiny by the
credit committee and executive committee prior to their approval. The approval cannot
then be considered as unlawful, and neither bad faith nor gross negligence can be
attributed to the directors. Rather, it was performed in the legitimate pursuit of Wincorp's
business as a duly-licensed investment house.

Moreover, petitioners deny any knowledge and participation in the execution of the Side
Agreements with Power Merge, and claim that the execution was performed by Wincorp
President Ong and petitioner Reyes without proper authorization from the board and,
hence, ultra vires. They add that they could not have defrauded Ng Wee since they had
no knowledge that the latter was matched with Power Merge.

G.R. No. 221218: Petition/or Review

on Certiorari of Anthony Reyes

Finally, the grounds73 invoked by petitioner Reyes to support his petition centered on the
argument that he had no hand in the approval of the credit line application or its
increase since he is not a director of Wincorp. He was merely the Vice-President for
Operations of Wincorp, duly authorized as the investment house's signatory for and to
all its documents, transactions and accounts. Thus, he alleges that he was under
obligation to sign the Credit Line Agreement, its Amendment, and the Side Agreements
in favor of Power Merge after the latter's application was approved by Wincorp's board
of directors.

Furthermore, he argues that Sec. 31 of the Corporation Code is inapplicable since he is

neither a director nor trustee of Wincorp, as required by the provision. And assuming
without conceding its applicability, he claims that he cannot be held solidarily liable
since he signed the agreements on behalf of the company in good faith.

The issue of whether or not Ng Wee is a real party in interest was again raised as an
issue in Reyes' petition.

The Comments

Comments of Wincorp

In G.R. No. 220926, filed by petitioners Virata and UEM-MARA, Wincorp admitted in its
Comment74 that the execution of the Side Agreements is highly irregular, but argues that
only Ong and Reyes should be held liable therefor since they acted beyond the scope of
their authority. Wincorp claims that the execution of the Side Agreements releasing
Power Merge from its obligations are ultra vires acts of the corporate officers, for which
the investment house cannot be held liable.
This argument was further amplified in its Comment75 in G.R. No. 221218, filed by
Reyes, wherein Wincorp reiterated that the actions of the two officers (Ong and Reyes)
in executing the Side Agreements, and thereby discharging Virata and Power Merge
from their obligations, was outside the scope of their authority and was not approved its
board of directors. Accordingly, their actions could not legitimately be considered as
actions of Wincorp.

Comment of Virata, UEM-MARA

Petitioners V irata and UEM-MARA argued in their Comment76 in G.R. No. 221218, the
only petition where they are impleaded as respondents, that petitioner Reyes' cross-
claim has no factual and legal basis. Aside from Reyes' general averments that Wincorp
and Power Merge connived and colluded to defraud the investors, he did not cite any
specific basis for holding Virata and UEM-MARA liable to him.

Comment of Ng Wee

Respondent Ng Wee filed his Comment77 on the consolidated petitions but merely
refuted petitioner Reyes' claims. Ng Wee emphasized that Reyes did not assail the
findings of the CA that the transactions between Wincorp and Power Merge were
impressed with fraud. Moreover, Reyes' indispensable participation in the fraud,
especially his signing of the Side Agreements, rendered him liable to respondent Ng
Wee. His signatures to the Side Agreements meant that he adhered to its contents,
including the release of Power Merge from its obligations under the Promissory Notes.

Meanwhile, petitioners Reyes, Estrella, Cua, and the Cualopings did not file their
respective comments78 despite due notice.79

The Issues

Succinctly stated, the issues raised in the consolidated petitions boil down to the
following:

1. Whether or not the case was prosecuted in the name of the real party in interest;

2. Whether or not Ng Wee was able to establish his cause/s of action against Wincorp
and Power Merge;

3. Whether or not it is proper to pierce the veil of corporate fiction under the
circumstances of the case;

4. Whether or not the counterclaims and cross-claims of the parties should prosper; and

5. Whether or not the award of damages to Ng Wee is proper.

The Court now resolves these issues in seriatim.

 The Court's Ruling

I.
Ng Wee is the Real Party in Interest

Petitioners present legal issues on both procedure and substance. Resolving first the
procedural aspect of the case, the Court rules that Ng Wee is a real party in interest,
contrary to the petitioners' claim.

Law of the Case doctrine bars the relitigation of a settled issue

As a general rule, every action must be prosecuted or defended in the name of the real
party in interest.80 Section 2, Rule 3 of the Rules of Court defines a real party in interest
as "the party who stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit."

In this case, it is worth recalling that the procedural issue on whether or not Ng Wee is
the real party in interest had already been resolved by this Court in G.R. No. 162928.
There, the Court found neither abuse of discretion on the part of the R TC nor reversible
error on the CA when they ruled that Ng Wee had the legal personality to file the
Complaint to recover his investments. The resolutions by the CA and this Court
sustaining the October 4, 2001 Order had already attained finality and could no longer
be modified. Concomitantly, the parties are barred from re-raising the issues settled
therein, pursuant to the law of the case doctrine.

The law of the case doctrine applies in a situation where an appellate court has made a
ruling on a question on appeal and thereafter remands the case to the lower court for
further proceedings; the question settled by the appellate court becomes the law of the
case at the lower court and in any subsequent appeal. It means that whatever is
irrevocably established as the controlling legal rule or decision between the same
parties in the same case continues to be the law of the case, whether correct on general
principles or not, so long as the facts on which the legal rule or decision was predicated
continue to be the facts of the case before the court.81

It is inconsequential that the issue raised in G.R. No. 162928 pertained to the alleged
grave abuse of discretion committed by the R TC in denying the motions to dismiss, and
not to the merits of the motions to dismiss per se. For as the Court has elucidated
in Banco de Oro-EPCI, Inc. v. Tansipek:

x x x there is no substantial distinction between an appeal and a Petition

for Certiorari when it comes to the application of the Doctrine of the Law of the Case.
The doctrine is founded on the policy of ending litigation. The doctrine is necessary to
enable the appellate court to perform its duties satisfactorily and efficiently, which would
be impossible if a question once considered and decided by it were to be litigated anew
in the same case upon any and every subsequent appeal.82 (emphasis added)
We are then constrained to abide by Our prior ruling in G.R. No. 162928 that Ng Wee is
a real party in interest in this case.

Ng Wee successfully stated a cause

of action based on a hypothetical
admission of the allegations in his
complaint

To be sure, hornbook doctrine is that when the affirmative defense of dismissal is

grounded on the failure to state a cause of action, a ruling thereon should be based on
the facts alleged in the complaint.83 Otherwise stated, whether or not Ng Wee
successfully stated a cause of action requires hypothetically admitting and scrutinizing
the allegations in his Complaint. A reproduction of its pertinent contents is hence
apropos:

xxxx

2.5 Relying on said representations, [Ng Wee] placed substantial amounts of money in
his own name and in the names of others with defendant Wincorp on several occasions.
Some of the outstanding placements of [Ng Wee] with defendant Wincorp, which were
loaned to defendant Virata/Power Merge, are in the names of Robert Tabada Tan,
Elizabeth Ng Wee, Alex Lim Tan and Angel Archangel who hold said placements in
trust for [Ng Wee].84

As aptly noted by the trial court in its October 4, 2001 Order denying the motions to
dismiss:

In the Complaint, [Ng Wee] has clearly averred that he placed some of his money
placements in the names of other persons and that said persons held the said money
placements in trust for him (paragraph 2.5 of the complaint). With such allegation of
ownership of the funds, [Ng Wee] is clearly the real party in interest as he stands to be
benefited or injured by the judgment in the instant case. (Section 2, Rule 3, Rules of
Court)

xxxx

Hence, this Court cannot grant the dismissal of the Complaint on this ground, since the
allegations in the Complaint show, on the contrary, that [Ng Wee] is the real party in
interest.85 (words in brackets added)

The RTC is correct in its observation that there is sufficient allegation that Ng Wee is the
actual injured party in the failed investment. As the alleged owner of the funds placed
under the names of Robert Tabada Tan, Elizabeth Ng Wee, Alex Lim Tan and Angel
Archangel in Wincorp, Ng Wee lost ₱213,290,410.36 from Power Merge's default and
non-payment of its obligations under the credit facility extended by the investment
house. This controverts petitioners' claim that Ng Wee is not the real party in interest
herein.

Testimonial evidence on record

established Ng Wee's ownership over
the invested funds; Ng Wee does not
lack cause of action

Even the evidence on record would belie petitioners' claim that Ng Wee is not the real
party in interest. Elizabeth Ng Wee, Alex Lim Tan and Angel Archangel were
straightforward in their testimonies that the funds invested in Power Merge belonged to
Ng Wee, albeit recorded under their names. They likewise executed documents
denominated as "Declaration of Trust" wherein they categorically stated that they
merely held the funds in trust for Ng Wee, the beneficial owner.

Angel Archangel admitted the trust relation in the following manner:

Q: What can you say about the money placement in Wincorp?

A: It is not my money, sir.

Q: And whose money is it, Madam Witness?

A: Alejandro Ng Wee.

Q: And what is your participation insofar as that money placement is concerned?

A: None, sir.86

Elizabeth Ng Wee, meanwhile, testified in the following wise:

Q: Now you said you transacted with this Gilda because you were instructed by your
brother to transact with her?

A: Yes, sir.

Q: And why did you follow his instruction?

A: It is his money.

Q: Which one?

A: Those placements, sir.

xxxx
Q: And why are these money placements under your name, Madam Witness, if these
are his money?

A: He requested me to handle this money on behalf of him, sir.

Q: And you earlier identified five (5) confirmation advices, what relation do these
confirmation advices have to the confirmation which you have identified and said that
you surrendered to your brother?

A: They are the same, sir.

Q: I see. Why did you surrender them to your brother?

A: Simply because they are not my money, sir. Those are his, so it is up to him to do
something about what will happen.

xxxx

Q: I am holding before me a document introduced by the lawyer of your brother

previously marked as Exhibit "JJJ'' entitled Declaration of Trust, kindly go over the
document.

A: Okay.

Q: There is a signature at the bottom portion of the document, whose signature is that?

A That is my signature, sir.87

And when Alex Lim Tan took the witness stand:

xxxx

A: He [referring to Alejandro Ng Wee] called me up and he requested me if he can use

my name in placing his money with Westmont for money placement.

Q: You mentioned Westmont. What is that Westmont?

A: Westmont Investment Corporation, sir.

Q: And what was your response, if any, to the request of Plaintiff?

A: I agreed.

Q: And what happened next after you agreed?

A: He let me sign the documents specifically the Confirmation Advices, sir.

xxxx

Q: And what did you do after he sent these Confirmation Advices to you?

A: I signed it, sir.

Q: And after signing these documents, what else did you do if any?

A: I returned them to Mr. Wee, Sir.

Q: And why did you return these documents to him?

A: Because he owns it, sir.

xxxx

Q: Apart from the Confirmation Advices that you identified today, did you sign any other
document in connection with the investment represented by these Confirmation
Advices?

A: There was, sir.

Q: Can you tell us what was that document, Mr. Witness?

A: The Declaration of Trust, Sir.88

Finally, Wincorp employees Ruben Tobias and Gilda Lucena testified 89 that they were
instructed by Ng Wee to rename several of his investments under the Power Merge
Account to the names of Alex Lim Tan and Robert Tabada Tan. Effectively, Ruben
Tobias and Gilda Lucena corroborated the claim of Ng Wee that the investments in
Power Merge that were recorded under those names are actually respondent Ng Wee's.

From the foregoing evidence on record, it can no longer be gainsaid that Ng Wee is the
real party in interest in the present case. The allegation in his Complaint that he is the
actual owner of the ₱213,290,410.36 infused in Power Merge under the names of
Robert Tabada Tan, Elizabeth Ng Wee, Alex Lim Tan and Angel Archangel has been
established by preponderant evidence, and, more significantly, has already become the
law of the case. The procedural issue raised by petitioners therefore lacks merit.

II.
Liability of the Corporations to Ng Wee

With the procedural issue disposed, the Court will now proceed to ascertain the liability
of the parties to Ng Wee, beginning with the major players in this controversy. On this
point, worthy of note is that none of the petitioners disputed the fact that Ng Wee is
entitled to recover the amount that he has invested. What they only required, which they
also invoked as the ground for their motions to dismiss, is that Ng Wee prove that the
amounts invested actually belonged to him. Thus, having established that Ng Wee is
the real party in interest and that he is the beneficial owner of the investments under the
names of Robert Tabada Tan, Elizabeth Ng Wee, Alex Lim Tan and Angel Archangel,
his entitlement to recover the ₱213,290,410.36 becomes indubitable. The only question
that remains now is: from whom can Ng Wee recover the ₱213,290,410.36 investment?
To this, petitioners would pose clashing claims, which prompts this Court to elucidate on
their respective exposures to civil liability.

Only Wincorp is liable to Ng Wee for

fraud; Power Merge is liable based
on contract

a. That Wincorp defrauded Ng Wee is a finding

of fact that is conclusive on this Court

Axiomatic in this jurisdiction is that, as a general rule, only questions of law may be
raised in a Petition for Review on Certiorari under Rule 45 of the Rules of Court.90 The
appellate court's findings of fact being conclusive, the jurisdiction of this Court in
appealed cases is limited to reviewing and revising the errors of law.91 As We have
emphatically declared in a long line of cases, "it is not the function of the Supreme Court
to analyze or weigh such evidence all over again, its jurisdiction being limited to
reviewing errors of law that might have been committed by the lower court."92

Enumerated in Medina v. Mayor Asistio, Jr.93 are the recognized exceptions to the
general rule.94 But insofar as Wincorp is concerned, it failed to establish that any of
these exceptions obtain in the present case. Thus, the Court sustains the finding of the
trial court, as affirmed by the CA, that Wincorp is liable to Ng Wee for perpetrating an
elaborate scheme to defraud its investors. As held by the CA:

[Ng Wee] would not have placed funds or invested [in] the "sans recourse" transactions
under the Power Merge borrower account had he not been deceived into believing that
Power Merge is financially capable of paying the returns of his investments/money
placements. Wincorp accredited Power Merge as a borrower, given it a credit line in the
maximum amount of ₱2,500,000,000.00, Philippine Currency, allowed it to make
drawdowns up to ₱2,183,755,253.ll, Philippine Currency, matched it with [Ng Wee's]
investments/ money placements to the extent of ₱213,290,410.36, Philippine Currency,
notwithstanding telling signs which immediately cast doubt on its ability to perform its
obligations under the Credit Line Agreements, Promissory Notes and [Confirmation
Advices], to wit: (1) Power Merge had only been in existence as a corporation for barely
two (2) years when it was accredited as borrower by Wincorp; (2) Power Merge is a
thinly capitalized corporation with only ₱37,500,000.00 subscribed capital stock; (3)
Power Merge is not an ongoing concern because (a) Despite the fact that Power
Merge's principal place of business is at 151 Paseo de Roxas St., Makati City, it has
neither registered nor conducted any business at Makati City as evident from the
Certification dated January 3, 2006 issued by the Business Permits Office Of Makati
City; (b) it is not engaged in any lucrative business to finance its operation; Despite the
fact that its primary purpose is to "invest in, purchase, or otherwise acquire and own,
hold, use, sell, assign, transfer, mortgage, pledge, exchange, or otherwise dispose of
real or personal property of every kind and description ... ," no proof was adduced to
show that it was carrying out or has carried out this mandate in accordance with the law;
(c) From the time of its incorporation until the revocation of its Certificate of
Incorporation on March 15, 2004, Power Merge has failed to file annual reports required
by the SEC such as General Information Sheets and Financial Statements; (4) No
security whatsoever was demanded by Wincorp or furnished by Power Merge in relation
to its credit line and drawdowns. Indeed, no person in his proper frame of mind would
venture to lend hundreds of millions of pesos to a business entity having such a
financial setup. x x x

xxxx

The intent to defraud and deceive [Ng Wee] of his investments/ money placements was
manifest from the very start. Wincorp and Power Merge entered into a Credit Line
Agreement on February 15, 1999 and an Amendment to Credit Line Agreement on
March 15, 1999. It is interesting to note that they simultaneously executed two Side
Agreements which are peculiar because: (1) The dates of execution of the two Side
Agreements coincide with the dates of execution of the credit agreements; (2) [The] two
Side Agreements were executed by the same exact parties: Antonio Ong and Anthony
Reyes for and on behalf of Wincorp and [Virata] and Augusto Geluz for and on behalf of
Power Merge; (3) The Credit Line Agreement dated February 15, 1999 and the First
Side Agreement dated February 15, 1999 were both acknowledged before notary
public, Atty. Fina De La Cuesta-Tantuico while the Amendment to Credit Line
Agreement dated March 15, 1999 and the Second Side Agreement dated March 15,
1999 were both acknowledged before notary public, Atty. Eric R.G. Espiritu; (4) The two
Side Agreements have the same exact provisions as the two credit agreements insofar
as it purports to extend a credit line and increase the credit line of Power Merge but the
two Side Agreements relieve Power Merge from any liability arising from the execution
of the agreements and promissory notes.95

Jurisprudence defines "fraud" as the voluntary execution of a wrongful act, or a willful

omission, knowing and intending the effects which naturally and necessarily arise from
such act or omission. In its general sense, fraud is deemed to comprise anything
calculated to deceive, including all acts and omissions and concealment involving a
breach of legal or equitable duty, trust, or confidence justly reposed, resulting in
damage to another, or by which an undue and unconscientious advantage is taken of
another. Fraud is also described as embracing all multifarious means which human
ingenuity can device, and which are resorted to by one individual to secure an
advantage over another by false suggestions or by suppression of truth and includes all
surprise, trick, cunning, dissembling, and any unfair way by which another is cheated. 96

Under Article 1170 of the New Civil Code, those who in the performance of their
obligations are guilty of fraud are liable for damages. The fraud referred to in this Article
is the deliberate and intentional evasion of the normal fulfillment of obligation. 97 Clearly,
this provision is applicable in the case at bar. It is beyond quibble that Wincorp foisted
insidious machinations upon Ng Wee in order to inveigle the latter into investing a
significant amount of his wealth into a mere empty shell of a corporation. And instead of
guarding the investments of its clients, Wincorp executed Side Agreements that virtually
exonerated Power Merge of liability to them; Side Agreements that the investors could
not have been aware of, let alone authorize.

The summation of Wincorp's actuations establishes the presence of actionable fraud,

for which the company can be held liable. In Jason vs. People, the Court upheld the
ruling that where one states that the future profits or income of an enterprise shall be a
certain sum, but he actually knows that there will be none, or that they will be
substantially less than he represents, the statements constitute an actionable fraud
where the hearer believes him and relies on the statement to his injury. 98

Just as in Jason, it is abundantly clear in the present case that the profits which Wincorp
promised to the investors would not be realized by virtue of the Side Agreements. The
investors were kept in the dark as regards the existence of these documents, and were
instead presented with Confirmation Advices from Wincorp to give the transactions a
semblance of legitimacy, and to convince, if not deceive, the investors to roll over their
investments or to part with their money some more.

b. Power Merge is not guilty of fraud, but is

liable under contract nonetheless

The story, however, is different for Power Merge. The circumstances of this case points
to the conclusion that Power Merge and Virata were not active parties in defrauding Ng
Wee. Instead, the company was used as a mere conduit in order for Wincorp to be able
to conceal its act of directly borrowing funds for its own account. This is made evident
by one highly peculiar detail- the date of the Power Merge's drawdowns.

It must be remembered that the special meeting of Wincorp's board of directors was
conducted on February 9 and March 11 of 1999, while the Credit Line Agreement and
its Amendment were entered into on February 15 and March 15 of 1999, respectively.
But as indicated in Power Merge's schedule of drawdowns,99 Wincorp already released
to Power Merge the sum of ₱l,133,399,958.45 as of February 12, 1999, before the
Credit Line Agreement was executed. And as of March 12, 1999, prior to the
Amendment, ₱l,805,018,228.05 had already been released to Power Merge.

The fact that the proceeds were released to Power Merge before the signing of the
Credit Line Agreement and the Amendment thereto lends credence to Virata's claim that
Wincorp did not intend for Power Merge to be strictly bound by the terms of the credit
facility; and that there had already· been an understanding between the parties on what
their respective obligations will be, although this agreement had not yet been reduced
into writing. The underlying transaction would later on be revealed in black and white
through the Side Agreements, the tenor of which amounted to Wincorp's intentional
cancellation of Power Merge and Virata's obligation under their Promissory Notes. 100 In
exchange, Virata and Power Merge assumed the obligation to transfer equity shares in
UPDI and the tollway project in favor of Wincorp. An arm's length transaction has
indeed taken place, substituting Virata and Power Merge's obligations under the
Promissory Notes, in pursuance of the Memorandum of Agreement and Waiver and
Quitclaim executed by Virata and Wincorp. Thus, as far as Wincorp, Power Merge, and
Virata are concerned, the Promissory Notes had already been discharged.

It was the understanding of the two companies that the Promissory Notes would not be
passed on to the hands of third persons and that, in any event, Wincorp guaranteed
Virata that he and Power Merge would not be held liable thereon. Driven by the desire
to completely settle his obligation as a surety under the Hottick account, V irata took the
deal and relied in good faith that Wincorp's officials would honor their gentleman's
agreement. But as events unfolded, it turned out that Wincorp was in evident bad faith
when it subsequently assigned credits pertaining to portions of the loan and the
corresponding interests in the Promissory Notes to the investors in the form of
Confirmation Advices when it knew fully well of Power Merge's discharge from liability.

Between Wincorp and Power Merge, it is Wincorp, as the assignor of the portions of
credit, that is under obligation to disclose to the investors the existence and execution of
the Side Agreements. Failure to do so, to Our mind, only goes to show that the target of
Wincorp' s fraud is not any particular individual, but the public at large. On the other
hand, it was not Power Merge's positive legal duty to forewarn the investors of its
discharge since the company did not deal with them directly. Power Merge and Virata
were agnostic as to the source of funds since they relied on their underlying agreement
with Wincorp that they would not be liable for the Promissory Notes issued.

As far as it was concerned, Power Merge was merely laying the groundwork prescribed
by Wincorp towards fulfilling its obligations under the Waiver and Quitclaim. Virata was
not impelled by any Machiavellian mentality when he signed the Side Agreements in
Power Merge's behalf. Therefore, only Wincorp can be held liable for fraud.
Nevertheless, as will later on be discussed, Power Merge and Virata can still be held
liable under their contracts, but not for fraud.

The "sans recourse" transactions

cannot exempt Wincorp from
liability for having been offered in
violation of commercial laws

Wincorp attempts to evade liability by hiding behind the "sans recourse" nature of the
transactions with Ng Wee. It argues that as a mere agent or broker that matches an
investor with a borrower, it cannot be held liable for the invested amount in case of an
unsuccessful or failed match. As evidenced by the Confirmation Advices and SP As
signed by the investors, Wincorp is merely tasked to deliver the amount to be loaned to
the borrower, and does not guarantee its borrowers' financial capacity.
The argument deserves scant consideration.
a. The "sans recourse" transactions are
deemed "with recourse"

An investment house is an enterprise that engages in the underwriting of securities of

other corporations.101 Securities underwriting, in turn, refers to the process by which
underwriters raise capital investments on behalf of the corporation issuing the
securities. Thus, aside from performing the regular powers of a corporation under the
Corporation Code, a duly licensed investment house is granted additional powers under
Sec. 7102 of Presidential Decree No. (PD) 129.

Conspicuously absent in the enumerated additional powers of an investment house,

however, is the authority to perform quasi-banking functions. Even as a financial
intermediary, investment houses are not allowed to engage in quasi-banking functions,
unless authorized by the Monetary Board through the issuance of a Certificate of
Authority.104

The Omnibus Rules and Regulations for Investment Houses and Universal Banks
Registered as Underwriters defines "quasi-banking function " as the function
of "borrowing funds for the borrower's own account from 20 or more persons or
corporate lenders at any one time, through the issuance, endorsement or acceptance of
debt instruments of any kind other than deposits which may include but need not be
limited to acceptances, promissory notes, participations, certificates of assignment or
similar instruments with recourse, trust certificates or of repurchase agreements for
purposes of relending or purchasing of receivables and other obligations."105

Given the definition, it would appear on paper that offering the "sans
recourse" transactions does not qualify as the performance of a quasi-banking function
specifically because it is "sans recourse" against Wincorp.

As provided under S4101Q.3 of the Manual of Regulations for Non-Bank Financial

Institutions:

S4101Q.3. Transactions not considered quasi-banking. The following shall not

constitute quasi-banking:

xxxx

a. The mere buying and selling without recourse of instruments mentioned in

Sec.4101Q: Provided that:

(1) The institution selling without recourse shall indicate or stamp in conspicuous print
on the instrument/s, as well as on the confirmation of sale (COS), the phrase without
recourse or sans recourse and the following statement:
(2) In the absence of the phrase without recourse or sans recourse and without the
above-required accompanying statement, the instrument so issued, endorsed or
accepted shall automatically be considered as falling within the purview of the rules on
quasi-banking. (emphasis added)

However, the Court affirms the appellate court's finding that the true nature of the "sans
recourse" transactions contradicts Wincorp's averment. A perusal of the records would
show that Wincorp engaged in practices that rendered the transactions to be "with
recourse" and, consequently, within the ambit of quasi-banking rules.

First, Wincorp did not act as a mere financial intermediary between Ng Wee and Power
Merge, but effectively obtained the funds for its own account. To borrow funds for one's
own account should not only be taken in its literal meaning to the effect that Wincorp
and its beneficial owners literally borrowed the funds invested by Ng Wee. Rather, it
should be interpreted in this case while bearing in mind Wincorp's end goal - to assign
its rights to the uncollected, if not worthless, Hottick obligations and hold more valuable
Power Merge papers in their stead. Without enticing the investors to put up capital for
Power Merge, Wincorp would not have been able to facilitate the exchange. Thus, with
Power Merge as a conduit, Wincorp's borrowings from its investors redounded to its
benefit. This is bolstered by Wincorp's act of executing the Side Agreements releasing
Power Merge from its obligation to pay under its Promissory Notes, exposing itself to
liability to pay the same.

Second, in PED Case No. 20-2378, the Prosecution and Enforcement Department of
the SEC found that as of December 31, 1999, Wincorp has sourced funds from 2,200
individuals with an average of ₱7,000,000,000.00 worth of commercial papers per
month. This figure unquestionably exceeds the "20 or more persons or corporate
lenders" threshold.

Third, the Confirmation Advices that are marked "sans recourse" are actually "with
recourse." On this point, a reproduction of the succeeding paragraphs of S4101Q.3 of
the Manual of Regulations for Non-Bank Financial Institutions is in order:

xxxx

Provided further, that any of the following practices or practices similar and/or
tantamount thereto in connection with a without recourse transaction rendered such
transaction as with recourse and within the purview of the rules on quasi-banking.

xxxx

(iii) Payment with the funds of the financial intermediary which assigned, sold or
transferred the debt instrument without recourse, unless the financial intermediary can
show that the issuer has with the said financial intermediary funds corresponding to the
amount of the obligation. (emphasis added)
From the above provision, Wincorp's act of advancing the payment of interests when
the corporate borrower is unable to pay despite the borrowing being branded as without
recourse, rendered it to be with recourse. Coupled with the above-circumstances,
offering the "sans recourse" transactions should then be categorized as an exercise of a
quasi-banking function. The transactions were merely being denominated as "sans
recourse" by Wincorp to circumvent the license requirement under the law. The
alleged "sans recourse" nature of the transactions cannot then be used by Wincorp as a
shield against liability to Ng Wee.

b. Wincorp engaged in the sale of unregistered

securities

There is more to the "sans recourse" transactions than meets the eye, so much so that
the operations of Wincorp cannot be oversimplified as mere brokering of loans. As
discovered by the SEC in PED Case No. 20-2378, and as ruled by the CA, Wincorp
was, in reality, selling to the public securities, i.e., shares in the Power Merge credit in
the form of investment contracts.

Securities are shares, participation or interests in a corporation or in a commercial

enterprise or profit-making venture and evidenced by a certificate, contract, instruments,
whether written or electronic in character.106 As a general rule, securities are not to be
sold or offered for sale or distribution without due registration, and provided that
information on the securities shall be made available to prospective purchasers. 107

Included in the list of securities that require registration prior to offer, sale, or distribution
are investment contracts.108An investment contract refers to a contract, transaction or
scheme whereby a person invests his money in a common enterprise and is led to
expect profits primarily from the efforts of others.109 It is presumed to exist whenever a
person seeks to use the money or property of others on the promise of profits. 110

In this jurisdiction, the Court employs the Howey test, named after the landmark case
of Securities and Exchange Commission v. W.J. Howey Co.,111 to determine whether or
not the security being offered takes the form of an investment contract. The case served
as the foundation for the domestic definition of the said security.

Under the Howey test, the following must concur for an investment contract to exist: (1)
a contract, transaction, or scheme; (2) an investment of money; (3) investment is made
in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from
the efforts of others. Indubitably, all of the elements are present in the extant case.

First, Wincorp offered what it purported to be "sans recourse" transactions wherein the
investment house would allegedly match investors with pre-screened corporate
borrowers in need of financial assistance.

Second, Ng Wee invested the aggregate amount of ₱213,290,410.36 in the "sans

recourse" transactions through his trustees, as embodied in the Confirmation Advices.
Third, prior to being matched with a corporate borrower, all the monies infused by the
investors are pooled in an account maintained by Wincorp.112 This ensures that there are
enough funds to meet large drawdowns by single borrowers.

Fourth, the investors were induced to invest by Wincorp with promises of high yield. In
Ng Wee's case, his Confirmation Advices reveal that his funds were supposed to earn
13.5% at their respective maturity dates.

Fifth, the profitability of the enterprise depended largely on whether or not Wincorp, on
best effort basis, would be able to match the investors with their approved corporate
borrowers.

Apparent then is that the factual milieu of the case at bar sufficiently satisfies
the Howey test. The "sans recourse" transactions are, in actuality, investment contracts
wherein investors pool their resources to meet the financial needs of a borrowing
company. This does not stray far from the illustration given by former Associate Justice
Roberto A. Abad in Securities and Exchange Commission v. Prosperity.com, Inc., to wit:

An example that comes to mind would be the long-term commercial papers that large
companies, like San Miguel Corporation (SMC), offer to the public for raising funds that
it needs for expansion. When an investor buys these papers or securities, he invests his
money, together with others, in SMC with an expectation of profits arising from the
efforts of those who manage and operate that company. SMC has to register these
commercial papers with the SEC before offering them to investors.113

Likewise, in SEC Admin Case No. 09-07-88 entitled In Re: D 1st Cell Pawnshop,
Inc.,114 the SEC ruled that by soliciting investments from ₱50,000.00 up to ₱300,000.00
and promising a return of four percent (4%) per month, D 1st Cell Pawnshop offered
investment contracts to the public.

No error can then be attributed to the CA when it designated the "sans

recourse" transactions as investment contracts. No fault can also be ascribed to the
appellate court in finding that Wincorp virtually purchased and resold securities, and not
just brokered a loan. The most telling circumstance that negate Wincorp's claim of mere
brokerage, as mentioned earlier, is the fact that it paid for the interest payments due
from the corporate borrowers that defaulted. This effectively estopped Wincorp from
denying liability from its investors in this case.

Wincorp cannot hide behind its license to operate as an investment house when it
offered the "sans recourse" transactions to the public. For though investment houses
are authorized to do the following:115

xxxx

6. Act as financial consultant, investment adviser, or broker;

7. Act as porfolio manager, and/or financial agent xxx;

8. Encourage companies to go public, and initiate and/or promote, whenever warranted,

the formation, merger, consolidation, reorganization, or recapitalization of productive
enterprises, by providing assistance or participation in the form of debt or equity
financing or through the extension of financial or technical advice or service;

Xxx

their license to perform investment house functions does not excuse them from
complying with the security registration requirements under the law. For clarity, the
license requirement to operate as an investment houses is separate and distinct from
the registration requirement for the securities they are offering, if any.

In dealing in securities, Wincorp was under legal obligation to comply with the statutory
registration and disclosure requirements. Under BP 178, otherwise known as
the Revised Securities Act, which was still in force at the time material in this case,
investment contracts are securities, and their sale, transactions that are not exempt
from these requirements.116 As such, adherence to Sections 4 and 8 of BP 178 must be
strictly observed, to wit:

Section 4. Requirement of registration of securities. - (a) No securities, except of a class

exempt under any of the provisions of Section five hereof or unless sold in any
transaction exempt under any of the provisions of Section six hereof, shall be sold or
offered for sale or distribution to the public within the Philippines unless such securities
shall have been registered and permitted to be sold as hereinafter provided.

xxxx

Section. 8. Procedure for registration. - (a) All securities required to be registered under
subsection (a) of Section four of this Act shall be registered through the filing by the
issuer or by any dealer or underwriter interested in the sale thereof, in the office of the
Commission, of a sworn registration statement with respect to such securities,
containing or having attached thereto, the following:

xxxx

(8) A statement of the capitalization of the issuer and of all companies controlling,
controlled by or commonly controlled with the issuer, including the authorized and
outstanding amounts of its capital stock and the proportion thereof paid up; the number
and classes of shares in which such capital stock is divided; par value thereof, or if it
has no par value, the stated or assigned value thereof; a description of the respective
voting rights, preferences, conversion and exchange rights, rights to dividends, profits,
or capital of each class, with respect to each other class, including the retirement and
liquidation rights or values thereof
xxxx

(14) The specific purposes in detail and the approximate amounts to be devoted to such
purposes, so far as determinable, for which the security to be offered is to supply funds,
and if the funds are to be raised in part from other sources, the amounts and the
sources thereof.

xxxx

(27) A balance sheet as of a date not more than ninety days prior to the date of the filing
of the registration statement showing all of the assets of the issuer, the nature and cost
thereof, whenever determinable with intangible items segregated, including any loan to
or from any officer, director, stockholder or person directly or indirectly controlling or
controlled by the issuer, or person under direct or indirect common control with the
issuer. x x x All the liabilities of the issuer, including surplus of the issuer, showing how
and from what sources such surplus was created, all as of a date not more than ninety
days prior to the filing of the registration statement. x x x

(28) A profit and loss statement of the issuer showing earnings and income, the nature
and source thereof, and the expenses and fixed charges in such detail and such form
as the Commission shall prescribe for the latest fiscal year xxx Such statement shall
show what the practice of the issuer has been during the three years or lesser period as
to the character of the charges, dividends or other distributions made against its various
surplus accounts, and as to depreciation, depletion, and maintenance charges, and if
stock dividends or avails from the sale of rights have been credited to income, they shall
be shown separately with statement of the basis upon which credit is computed. Such
statement shall also differentiate between recurring and nonrecurring income and
between any investment and operating income. Such statement shall be certified by an
independent certified public accountant.

xxxx

(30) A copy of any agreement or agreements or, if identical agreements are used, the
forms thereof made with any underwriter, including all contracts and agreements
referred to in subparagraph (19) hereof (emphasis added)

In the guise of merely brokering loans between an investor and a corporate borrower,
that it is not in the business of selling securities, Wincorp conveniently failed to disclose
to the investors the necessary information under Section 8 of BP 178. To the mind of
the Court, offering the "sans recourse " transactions without compliance therewith
constitutes fraudulent transactions within the contemplation of Section 29 of the law.117

Non-disclosure of the capitalization details and the financial statements of the issuer
Power Merge under Secs. 8(8), (27), and (28) resulted in the failure of the investors to
pay heed to the red flags that the enterprise was doomed to fail: (1) the fact that it only
had an outstanding capital stock of ₱37,500,000.00, of which the total actually paid is
only ₱9,375,000.00; (2) that it has not been complying with the reportorial requirements,
including the submission of financial statements to the SEC; (3) and that Power Merge
is not an ongoing concern since it does not engage in any legitimate business. In
addition, non-compliance with Section 8(14) and (30) prevented the investors from
discovering the true intent behind the approval of the Power Merge credit line
application and the underlying transactions behind its issuance of Promissory Notes.

Clearly then, because Wincorp had been successful in its scheme of passing off
the "sans recourse" transactions as mere brokering of loans, it managed to circumvent
the registration and disclosure requirements under BP 178, and managed to commit
fraud in a massive scale against its investors to the latter's damage and prejudice, for
which Wincorp ought to be held liable.

c. Wincorp is liable as a vendor in bad faith

and for breach of warranty

Aside from its liability arising from its fraudulent transactions, Wincorp is also liable to
Ng Wee for breach of warranty. It cannot be emphasized enough that Wincorp is not the
mere agent that it claims to be; its operations ought not be reduced to the mere
matching of investors with corporate borrowers. Instead, it must be borne in mind that it
not only performed the functions of a financial intermediary duly registered and licensed
to perform the powers of an investment house, it is also engaged in the selling of
securities, albeit in violation of various commercial laws. And just as in any other
contracts of sale, the vendor of securities is likewise bound by certain warranties,
including those contained in Article 1628 of the New Civil Code on assignment of
credits, to wit:

Article 1628. The vendor in good faith shall be responsible for the existence and legality
of the credit at the time of the sale, unless it should have been sold as doubtful; but not
for the solvency of the debtor, unless it has been so expressly stipulated or unless the
insolvency was prior to the sale and of common knowledge.

xxxx

The vendor in bad faith shall always be answerable for the payment of all expenses,
and for damages. (emphasis added)

That the securities sold to Ng Wee turned out to be "with recourse," not "sans
recourse" as advertised, does not remove it from the coverage of the above article. In
fact, such circumstance would even classify Wincorp as a vendor in bad faith, within the
contemplation of the last paragraph of the provision. But other than the fraudulent
designation of the transaction as "sans recourse," Wincorp's bad faith was also brought
to the fore by the execution of the Side Agreements, which cast serious suspicion over,
if it did not effectively annul, the existence and legality of the credits assigned to Ng
Wee under the numerous Confirmation Advices in the name of his trustees.
Anent the claim that Wincorp allegedly did not warrant the capacity of Power Merge to
pay its obligations, the CA had this much to say:

[Petitioners] argue that the financial capacity of Power Merge has always been a matter
of public record. We are not persuaded. The material misrepresentations have been
made by Wincorp to [Ng Wee], to the effect that Power Merge was structurally sound
and financially able to undertake a series of loan transactions. Even if Power Merge' s
financial integrity is veritable from the articles of incorporation or other public records, it
does not follow that the elaborate scheme of fraud and deceit would be beyond
commission when precisely there are bending representations that Power Merge would
be able to meet its obligations. Moreover, [petitioners'] argument assumes that there is
a legal obligation on the part of [Ng Wee] to undertake investigation of Power Merge
before agreeing to the matching of his investments with the accredited borrower. There
is no such obligation. It is unfair to expect a person to procure every available public
record concerning an applicant for funds to satisfy himself of the latter's financial
standing. A least that is not the way an average person takes care of his concerns. In
addition, no amount of investigation could have revealed that the Power Merge papers
are rendered worthless and noncollectable (sic) [be]cause of the Side Agreements
entered into by Wincorp and Power Merge.

Wincorp's attempt to shift the blame on [Ng Wee] deserves no credence. Since the
transaction involve[s] a considerable sum of money, Wincorp presupposes that [Ng
Wee] would have taken great pains to scrutinize and understand all the documents
affecting his investment/ money placement. It also presumes that [Ng Wee] was fully
aware of the contents and meaning of the [Confirmation Advices] and [Special Power of
Attorneys] he signed. He took a calculated risk. As such, he should be estopped from
claiming that he suffered damage and prejudice.

The argument is specious. As ruled in People of the Philippines v. Priscilla Balasa:

-xxx-

The fact that the buyer makes an independent investigation or inspection has been held
not to preclude him from relying on the representation made by the seller where the
seller has superior knowledge and the falsity of such representation would not be
apparent from such examination or inspection, and, a .fortiori, where the efforts of a
buyer to learn the true profits or income of a business or property are thwarted by some
device of the seller, such efforts have been held not to preclude a recovery. It has often
been held that the buyer of a business or property is entitled to rely on the seller's
statements concerning its profits, income or rents. The rule - that where a speaker has
knowingly and deliberately made a statement concerning a fact the falsity of which is
not apparent to the hearer, and has thus accomplished a fraudulent result, he cannot
def end against the fraud by proving that the victim was negligent in failing to discover
the falsity of the statement - is said to be peculiarly applicable where the owner of the
property or a business intentionally makes a false statement concerning its rents, profits
or income.
Applying the foregoing to this case, assuming that [Ng Wee] made an investigation, that
should not preclude him from relying on the representations of Wincorp because: (1) It
is an investment house which is presumed to conduct an investigation of its borrowers
before it matches the same to its investors. As testified to by its employees, Wincorp
has an Investigation Credit Committee and Executive Committee which screen,
investigate and accredit borrowers before they are submitted for approval of the board
of directors; (2) It did not only materially misrepresent the financial incapacity of Power
Merge to pay, it also failed to disclose that the instruments executed by Power Merge in
connection with the investments/ money placements of [Ng Wee] are worthless in view
of the Side Agreements executed by the parties.118 (emphasis added)

Verily, the same acts of misrepresentations that constituted fraud in Wincorp's

transactions with Ng Wee are the very same acts that amounted to bad faith on its part
as vendor of securities. Inescapably, liability attaches because of Wincorp's dishonest
dealings.

d. Even as an agent, Wincorp can still be held liable

The argument that Wincorp is a mere agent that could not be held liable for Power
Merge's unpaid loan is equally unavailing. For even if the Court were to accede to the
argument and undercut the significance of Wincorp's participation from vendor of
securities to purely attorney-in-fact, the investment house would still not be immune.
Agency, in Wincorp's case, is not a veritable defense.

Through the contract of agency, a person binds himself to render some service or to do
something in representation or on behalf of another, with the consent or authority of the
latter.119 As the basis of agency is representation, there must be, on the part of the
principal, an actual intention to appoint, an intention naturally inferable from the
principal's words or actions. In the same manner, there must be an intention on the part
of the agent to accept the appointment and act upon it. Absent such mutual intent, there
is generally no agency.120

There is no dearth of statutory provisions in the New Civil Code that aim to preserve the
fiduciary character of the relationship between principal and agent. Of the established
rules under the code, one cannot be more basic than the obligation of the agent to carry
out the purpose of the agency within the bounds of his authority. 121 Though he may
perform acts in a manner more advantageous to the principal than that specified by
him,122 in no case shall the agent carry out the agency if its execution would manifestly
result or damage to the principal.123

In the instant case, the SPAs executed by Ng Wee constituted Wincorp as agent
relative to the borrowings of Power Merge, allegedly without risk of liability on the part of
Wincorp. However, the SPAs, as couched, do not specifically include a provision
empowering Wincorp to excuse Power Merge from repaying the amounts it had drawn
from its credit line via the Side Agreements. They merely authorize Wincorp "to agree,
deliver, sign, execute loan documents" relative to the borrowing of a corporate borrower.
Otherwise stated, Wincorp had no authority to absolve Power Merge from the latter's
indebtedness to its lenders. Doing so therefore violated the express terms of the SPAs
that limited Wincorp's authority to contracting the loan.

In no way can the execution of the Side Agreements be considered as part and parcel
of Wincorp's authority since it was not mentioned with specificity in the SP As. As far as
the investors are concerned, the Side Agreements amounted to a gratuitous waiver of
Power Merge's obligation, which authority is required under the law to be contained in
an SP A for its accomplishment.124

Finally, the benefit from the Side Agreements, if any, redounded instead to the agent
itself, Wincorp, which was able to hold Power Merge papers that are more valuable than
the outstanding Hottick obligations that it exchanged. In discharging its duties as an
alleged agent, Wincorp then elected to put primacy over its own interest than that of its
principal, in clear contravention of the law.125 And when Wincorp thereafter concealed
from the investors the existence of the Side Agreements, the company became liable
for fraud even as an agent.126

Power Merge is liable to Ng Wee

under its Promissory Notes

a. Virata is liable for the Promissory Notes

even as an accommodation party

A promissory note is a specie of negotiable instruments. Under Section 60 of the

Negotiable Instruments Law, the maker of a promissory note engages that he will pay it
according to its tenor. In this case, the Promissory Notes executed by Virata in behalf of
Power Merge are couched in the following wise:

PROMISSORY NOTE

For value received, I/We ____________________, hereby promise to pay WESTMONT

INVESTMENT CORPORATION (WINCORP), either for itself or as agent for and on
behalf of certain INVESTORS who have placed/invested funds with WINCORP the
principal sum of ________________ (__________), Philippine Currency, on _______
with interest rate of ___________ percent (___%) per annum, or equivalently the
Maturity Amount of ______________ PESOS (______________)Philippine Currency.
(emphasis added)

It is crystal clear that Power Merge, through Virata, obligated itself to pay Wincorp and
those who invested through it the values stated in the Promissory Notes. The validity
and due execution of the Promissory Notes were not even contested. Instead, Virata
postulates that he merely executed the Promissory Notes on behalf of Power Merge as
an accommodation for Wincorp, and that neither he nor Power Merge received any
pecuniary benefit from the credit facility. He thus claims that he and Power Merge
cannot be held liable for the Promissory Notes that were executed.
The argument is specious.

On its face, the documentary evidence on record reveals that Power Merge actually
received the proceeds from the Credit Line Agreement. But even if We assume for the
sake of argument that Power Merge, through Virata, is as a mere accommodation party
under the Promissory Notes, liability would still attach to them in favor of the holder of
the instrument for value.

In Gonzales v. Philippine Commercial and International Bank,127 the Court held that an
accommodation party lends his name to enable the accommodated party to obtain
credit or to raise money; he receives no part of the consideration for the instrument but
assumes liability to the other party or parties thereto. Prescinding from the foregoing, an
accommodation party is one who meets all the following three requisites, viz: (1) he
must be a party to the instrument, signing as maker, drawer, acceptor, or indorser; (2)
he must not receive value therefor; and (3) he must sign for the purpose of lending his
name or credit to some other person.128

The first element, that Power Merge, through Virata, executed the Promissory Notes as
maker cannot be disputed. Meanwhile, petitioners would have the Court hypothetically
admit that they did not receive the proceeds from the drawdowns, in satisfaction of the
second requisite. And lastly, this was allegedly done for the purpose of lending its name
to conceal Wincorp's direct borrowing from its clients.

In gratia argumenti that the above elements are established facts herein, liability will still
attach to the accommodation parties pursuant to Sec. 29 of the Negotiable Instruments
Law. The provision states:

Sec. 29. Liability of accommodation party. - An accommodation party is one who has
signed the instrument as maker, drawer, acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his name to some other person. Such a person
is liable on the instrument to a holder for value, notwithstanding such holder, at the time
of taking the instrument, knew him to be only an accommodation party. (emphasis
added)

The basis for the liability under Section 29 is the underlying relation between the
accommodated party and the accommodation party, which is one of principal and
surety. 129 In a contract of surety, a person binds himself solidarily liable with the principal
debtor of an obligation.130 But though a suretyship agreement is, in essence, accessory
or collateral to a valid principal obligation, the surety's liability to the creditor is
immediate, primary, and absolute. He is directly and equally bound with the principal. 131

In a similar fashion, the accommodation party cum surety in a negotiable instrument is

deemed an original promisor and debtor from the beginning; he is considered in law as
the same party as the debtor in relation to whatever is adjudged touching the obligation
of the latter since their liabilities are so interwoven as to be inseparable. 132 It is beyond
cavil then that Power Merge and Virata can be held liable for the amounts stated in the
Promissory Notes. Consequently, they are also liable for the assignment to Ng Wee of
portions thereof as embodied in the Confirmation Advices.

b. The Side Agreements do not bind third

parties thereto

Virata and Power Merge cannot invoke the Side Agreements as bases for its alleged
exemption from liability to Ng Wee, simply because the latter was not privy to the
covenants. Ng Wee cannot be charged with knowing the existence of the Side
Agreements, let alone ratify the same.

The basic principle of relativity of contracts is that, as a general rule, contracts take
effect only between the parties, their assigns and heirs.133 The sound reason for the
exclusion of non-parties to an agreement is the absence of a vinculum or juridical tie
which is the efficient cause for the establishment of an obligation.134

Needless to state, Ng Wee does not fall under any of the classes that are deemed privy
as far as the Side Agreements are concerned. At most, he only authorized Wincorp,
through the SPAs, to "agree, deliver, sign, [and} execute loan documents" relative to the
borrowing of Power Merge. This authority does not extend to excusing Power Merge
from paying its obligations under the Promissory Notes that it issued for the benefit of
the investors. Thus, even if we were to assume that the execution of the Side
Agreements was with the imprimatur of the Wincorp board of directors, Power Merge
would still have been able to determine, based on a cursory reading of the SPAs, that
Wincorp's acquiescence to the Side Agreements is an ultra vires act insofar as its
principals, Ng Wee included, are concerned.

c. Power Merge cannot escape liability to Ng

Wee under the Credit Line Agreement

That Power Merge did not directly transact with Ng Wee and the other investors does
not exonerate it from civil liability, for its liability also finds basis on the language of the
Credit Line Agreement.

To recall, Power Merge obtained a ₱2,500,000,000.00 credit facility from Wincorp, as

one of the latter's corporate borrowers. Under the terms of the credit facility, Power
Merge obligated itself to issue Promissory Notes in favor of Wincorp, for itself "or on
behalf of certain investors" for each of its drawdowns. The Credit Line Agreement
pertinently provides:

CREDIT LINE AGREEMENT

xxxx

WHEREAS, the BORROWER has applied for financial accommodation/credit line from
WINCORP.
WHEREAS, WINCORP by itself or on behalf of certain investors, have agreed to extend
the financial accommodation/credit line sought by the BORROWER under the terms
and conditions hereunder provided.

NOW, WHEREFORE, for and in consideration of the foregoing premises, the parties
hereto agreed as follows:

1. GRANT OF CREDIT FACILITY. WINCORP, either by itself or on behalf of certain

investors, shall extend to the BORROWER a credit facility, on best efforts basis, in the
amount of up to but not exceeding the equivalent sum of ONE BILLION TWO
HUNDRED MILLION PESOS (₱l,200,000,000.00), Philippine Currency, upon terms and
conditions embodied in this Agreement.

xxxx

3. PROMISSORY NOTE. Subject to the availability of funds, the BORROWER may

avail all or any portion of this credit facility under the terms and conditions hereunder
agreed upon, and the BORROWER shall execute in favor of WINCORP and/or the
investors who have agreed to extend the credit facility to the BORROWER a Promissory
Note corresponding to each drawdown to evidence its indebtedness.

4. INTEREST RATE. The BORROWER agrees to pay WINCORP, either by itself or on

behalf of its investors, interest on the principal amount of each availment at the rate
prevailing on the date of such availment as agreed upon in the corresponding
Promissory Note/s.135 (underscoring supplied, emphasis added)

Virata and Power Merge cannot then deny knowledge that the amounts that were drawn
against the credit facility may not necessarily be from Wincorp's own coffers, but may
potentially be from the monies pooled by its clients, even though their identities were at
that time anonymous to Power Merge. As can be gleaned, Power Merge was informed
through the plain text of the Credit Line Agreement that Wincorp may indorse portions of
the investment, and the corresponding interest in the Promissory Notes, to its willing
clients and act on the latter's behalf. It then matters not that Power Merge and Virata
never personally dealt with Ng Wee for given the setup; Ng Wee became privy to the
Credit Line Agreement when he was assigned his shares in the investment, and when
he expressed his conformity therewith through the Confirmation Advices.

Furthermore, it cannot escape the attention of the Court that this is not the first time for
Virata to transact with Wincorp. To refresh, Virata executed a Surety Agreement to
answer Hottick' s drawdowns from its own credit facility with Wincorp. He is then familiar
with the nature of Wincorp's primary functions, whether as a mere financial intermediary
or dealer in securities as in this case, rather than its true creditor. Power Merge and V
irata cannot then feign ignorance that the money they have been receiving are from the
clients that Wincorp attracted to invest.
 III.
Piercing the Corporate Veil

Indubitably, Wincorp and Power Merge are liable to Ng Wee for fraud and under
contract, respectively. The thrust of majority of the petitioners, however, is that they
cannot be held liable for the business judgments of the corporations they are part of
given the latter's separate juridical personalities.

G.R. No. 220926: The liabilities of

Luis Juan L. Virata and UEMMARA

a. Virata is liable for the obligations of Power Merge

Petitioner Virata reiterates his claim that piercing the corporate veil of Power Merge for
the sole reason that he owns majority of its shares is improper. He adds that the Credit
Line Agreements and Side Agreements were valid arm's length transactions, and that
their executions were in the performance of his official capacity, which he cannot be
made personally liable for in the absence of fraud, bad faith, or gross negligence on his
part.

The Court rejects these arguments.

Concept Builders, Inc. v. NLRC instructs that as a fundamental principle of corporation

law, 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.
Thus, authorities discuss that when the notion of separate juridical personality is used
(1) to defeat public convenience, justify wrong, protect fraud or defend crime; (2) as a
device to defeat the labor laws; or (3) when the corporation is merely an adjunct, a
business conduit or an alter ego of another corporation, this separate personality of the
corporation may be disregarded or the veil of corporate fiction pierced.136

The circumstances of Power Merge clearly present an alter ego case that warrants the
piercing of the corporate veil.

To elucidate, case law lays down a three-pronged test to determine the application of
the alter-ego 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.137

In the present case, Virata not only owned majority of the Power Merge shares; he
exercised complete control thereof. He is not only the company president, he also owns
374,996 out of 375,000 of its subscribed capital stock. Meanwhile, the remainder was
left for the nominal incorporators of the business. The reported address of petitioner
Virata and the principal office of Power Merge are even one and the same. 138 The
clearest indication of all: Power Merge never operated to perform its business functions,
but for the benefit of Virata. Specifically, it was merely created to fulfill his obligations
under the Waiver and Quitclaim, the same obligations for his release from liability
arising from Hottick's default and non-payment.

Virata would later on use his control over the Power Merge corporation in order to fulfill
his obligation under the Waiver and Quitclaim. Impelled by the desire to settle the
outstanding obligations of Hottick under the terms of the settlement agreement, Virata
effectively allowed Power Merge to be used as Wincorp's pawn in avoiding its legal duty
to pay the investors under the failed investment scheme. Pursuant to the alter ego
doctrine, petitioner Virata should then be made liable for his and Power Merge's
obligations.

b. UEM-MARA cannot be held liable

There is, however, merit in the argument that UEM-MARA cannot be held liable to
respondent Ng Wee. The RIC and the CA held that the corporation ought to be held
solidarily liable with the other petitioners "in order that justice can reach the illegal
proceeds from the defrauded investments of [Ng Wee] under the Power Merge
account."139According to the trial court, Virata laundered the proceeds of the Power
Merge borrowings and stashed them in UEM-MARA to prevent detection and discovery
and hence, UEM-MARA should likewise be held solidarily liable.

We disagree.

UEM-MARA is an entity distinct and separate from Power Merge, and it was not
established that it was guilty in perpetrating fraud against the investors. It was a non-
party to the "sans recourse" transactions, the Credit Line Agreement, the Side
Agreements, the Promissory Notes, the Confirmation Advices, and to the other
transactions that involved Wincorp, Power Merge, and Ng Wee. There is then no reason
to involve UEM-MARA in the fray. Otherwise stated, respondent Ng Wee has no cause
of action against UEM-MARA. UEM-MARA should not have been impleaded in this
case.

A cause of action is the act or omission by which a party violates a right of

another.140 The essential elements of a cause of action are (1) a right in favor of the
plaintiff by whatever means and under whatever law it arises or is created; (2) an
obligation on the part of the named defendant to respect or not to violate such right; and
(3) an act or omission on the part of such defendant in violation of the right of the
plaintiff or constituting a breach of the obligation of the defendant to the plaintiff for
which the latter may maintain an action for recovery of damages or other appropriate
relief.141

The third requisite is severely lacking in this case. Respondent Ng Wee cannot point to
a specific wrong committed by UEM-MARA against him in relation to his investments in
Wincorp, other than being the object of Wincorp's desires. He merely alleged that the
proceeds of the Power Merge loan was used by Virata in order to acquire interests in
DEM-MARA, but this does not, however, constitute a valid cause of action against the
company even if we were to assume the allegation to be true. It would indeed be a giant
leap in logic to say that being Wincorp' s objective automatically makes UEM-MARA a
party to the fraud. DEM-Mara's involvement in this case is merely incidental, not direct.

G.R No. 221218: The liability of

Anthony Reyes

To restate, basic is the rule that a corporation is invested by law with a personality
separate and distinct from that of the persons composing it as well as from that of any
other legal entity to which it may be related. Following this, obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities,
and said personalities are generally not held personally liable thereon. 142

By way of exception, a corporate director, a trustee or an officer, may be held solidarily

liable with the corporation under Sec. 31 of the Corporation Code which reads:

Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or
acquire any personal or pecuniary interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all damages resulting therefrom suffered
by the corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquire, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed
in him in confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for the profits
which otherwise would have accrued to the corporation. (emphasis added)

Petitioner Reyes relies on the black letter law in his bid for absolution. He claims that he
is not a director of Wincorp, but its Vice-President for Operations. Thus, he can only be
held liable under the second paragraph of the provision. As can be read, officers are
only precluded from acquiring or attempting to acquire any interest in conflict with that of
the company he is serving. There being no allegation of him being guilty of conflict of
interest, Reyes argues that he cannot be held liable under the provision.
The argument is bereft of merit.

Ascribing liability to a corporate director, trustee, or officer by invoking Sec. 31 of the

Corporation Code is distinct from the remedial concept of piercing the corporate veil.
While Sec. 31 expressly lays down specific instances wherein the mentioned
personalities can be held liable in their personal capacities, the doctrine of piercing the
corporate veil, on the other hand, is an equitable remedy resorted to only when the
corporate fiction is used, among others, to defeat public convenience, justify wrong,
protect fraud or defend a crime.143

Applying the doctrine, petitioner cannot escape liability by claiming that he was merely
performing his function as Vice-President for Operations and was duly authorized to
sign the Side Agreements in Wincorp's behalf. The Credit Line Agreement is patently
contradictory if not irreconcilable with the Side Agreements, which he executed on the
same day as the representative for Wincorp. The execution of the Side Agreements was
the precursor to the fraud. Taken with Wincorp's subsequent offer to its clients of
the "sans recourse" transactions allegedly secured by the Promissory Notes, it is a clear
indicia of fraud for which Reyes must be held accountable.

G.R. No. 221135: The liabilities of

Cua and the Cualopings

On the other hand, the liabilities of Cua and the Cualopings are more straightforward.
They admit of approving the Credit Line Agreement and its subsequent Amendment
during the special meetings of the Wincorp board of directors, but interpose the defense
that they did so because the screening committee found the application to be above
board. They deny knowledge of the Side Agreements and of Power Merge's inability to
pay.

We are not persuaded.

Cua and the Cualopings cannot effectively distance themselves from liability by raising
the defenses they did. As ratiocinated by the CA:

Such submission creates a loophole, especially in this age of compartmentalization, that

would create a nearly fool-proof scheme whereby well-organized enterprises can evade
liability for financial fraud. Behind the veil of compartmentalized departments, such
enterprise could induce the investing public to invest in a corporation which is financially
unable to pay with promises of definite returns on investment. If we follow the reasoning
of defendants-appellants, we allow the masterminds and profiteers from the scheme to
take the money and run without fear of liability from law simply because the defrauded
investor would be hard-pressed to identify or pinpoint from among the various
departments of a corporation which directly enticed him to part with his money. 144

Petitioners Cua and the Cualopings bewail that the above-quoted statement is
overarching, sweeping, and bereft of legal or factual basis. But as per the records, the
totality of circumstances in this case proves that they are either complicit to the fraud, or
at the very least guilty of gross negligence, as regards the "sans recourse" transactions
from the Power Merge account.

The board of directors is expected to be more than mere rubber stamps of the
corporation and its subordinate departments. It wields all corporate powers bestowed by
the Corporation Code, including the control over its properties and the conduct of its
business.145 Being stewards of the company, the board is primarily charged with
protecting the assets of the corporation in behalf of its stakeholders.

Cua and the Cualopings failed to observe this fiduciary duty when they assented to
extending a credit line facility to Power Merge. In PED Case No. 20-2378, the SEC
discovered that Power Merge is actually Wincorp's largest borrower at about 30% of the
total borrowings.146 It was then incumbent upon the board of directors to have been more
circumspect in approving its credit line facility, and should have made an independent
evaluation of Power Merge' s application before agreeing to expose it to a
₱2,500,000,00.00 risk.

Had it fulfilled its fiduciary duty, the obvious warning signs would have cautioned it from
approving the loan in haste. To recapitulate: (1) Power Merge has only been in
existence for two years when it was granted a credit facility; (2) Power Merge was thinly
capitalized with only ₱37 ,500,000.00 subscribed capital; (3) Power Merge was not an
ongoing concern since it never secured the necessary permits and licenses to conduct
business, it never engaged in any lucrative business, and it did not file the necessary
reports with the SEC; and (4) no security other than its Promissory Notes was
demanded by Wincorp or was furnished by Power Merge in relation to the latter's
drawdowns.

It cannot also be ignored that prior to Power Merge' s application for a credit facility, its
controller Virata had already transacted with Wincorp. A perusal of his records with the
company would have revealed that he was a surety for the Hottick obligations that were
still unpaid at that time. This means that at the time the Credit Line Agreement was
executed on February 15, 1999, Virata still had direct obligations to Wincorp under the
Hottick account. But instead of impleading him in the collection suit against Hottick,
Wincorp's board of directors effectively released Virata from liability, and, ironically,
granted him a credit facility in the amount of ₱l,300,000,000.00 on the very same day.

This only goes to show that even if Cua and the Cualopings are not

guilty of fraud, they would nevertheless still be liable for gross negligence 147 in managing
the affairs of the company, to the prejudice of its clients and stakeholders. Under such
circumstances, it becomes immaterial whether or not they approved of the Side
Agreements or authorized Reyes to sign the same since this could have all been
avoided if they were vigilant enough to disapprove the Power Merge credit application.
Neither can the business judgment rule148apply herein for it is elementary in corporation
law that the doctrine admits of exceptions: bad faith being one of them, gross
negligence, another.149 The CA then correctly held petitioners Cua and the Cualopings
liable to respondent Ng Wee in their personal capacity.

G.R. No. 221109: The liability of

Manuel Estrella

To refresh, Estrella echoes the defense of Tankiansee, who was exempted from liability
by the trial court. He claims that just like Tankiansee, he was not present during
Wincorp's special board meetings where Power Merge's credit line was approved and
subsequently amended. Both also claimed that they protested and opposed the board's
actions. But despite the parallels in their defenses, the trial court was unconvinced that
Estrella should be released from liability. Estrella appealed to the CA, but the adverse
ruling was sustained.

We agree with the findings of the courts a quo.

The minutes of the February 9, 1999 and March 11, 1999 Wincorp Special Board
Meetings were considered as damning evidence against Estrella, just as they were for
Cua and the Cualopings. Although they were said to be unreliable insofar as
Tankiansee is concerned, the trial court rightly distinguished between the circumstances
of Estrella and Tankiansee to justify holding Estrella liable.

For perspective, Tankiansee was exempted from liability upon establishing that it was
physically impossible for him to have participated in the said meetings since his
immigration records clearly show that he was outside the country during those specific
dates. In contrast, no similar evidence of impossibility was ever offered by Estrella to
support his position that he and Tankiansee are similarly situated.

Estrella submitted his departure records proving that he had left the country in July 1999
and returned only in February of 2000. Be that as it may, this is undoubtedly insufficient
to establish his defense that he was not present during the February 9, 1999 and March
11, 1999 board meetings.

Instead, the minutes clearly state that Estrella was present during the meetings when
the body approved the grant of a credit line facility to Power Merge. Estrella would even
admit being present during the February 9, 1999 meeting, but attempted to evade
responsibility by claiming that he left the meeting before the "other matters," including
Power Merge's application, could have been discussed.

Unfortunately, no concrete evidence was ever offered to confirm Estrella's alibi. In both
special meetings scheduled, Estrella averred that he accompanied his wife to a hospital
for her cancer screening and for dialogues on possible treatments. However, this claim
was never corroborated by any evidence coming from the hospital or from his wife's
physicians. Aside from his mere say-so, no other credible evidence was presented to
substantiate his claim. Thus, the Court is not inclined to lend credence to Estrella's self-
serving denials.
Neither can petitioner Estrella be permitted to raise the defense that he is a mere
nominee of John Anthony Espiritu, the then chairman of the Wincorp board of directors.
It is of no moment that he only had one nominal share in the corporation, which he did
not even pay for, just as it is inconsequential whether or not Estrella had been receiving
compensation or honoraria for attending the meetings of the board.

The practice of installing undiscerning directors cannot be tolerated, let alone allowed to
perpetuate. This must be curbed by holding accountable those who fraudulently and
negligently perform their duties as corporate directors, regardless of the accident by
which they acquired their respective positions.

In this case, the fact remains that petitioner Estrella accepted the directorship in the
Wincorp board, along with the obligations attached to the position, without question or
qualification. The fiduciary duty of a company director cannot conveniently be separated
from the position he occupies on the trifling argument that no monetary benefit was
being derived therefrom. The gratuitous performance of his duties and functions is not
sufficient justification to do a poor job at steering the company away from foreseeable
pitfalls and perils. The careless management of corporate affairs, in itself, amounts to a
betrayal of the trust reposed by the corporate investors, clients, and stakeholders,
regardless of whether or not the board or its individual members are being paid. The
RTC and the CA, therefore, correctly disregarded the defense of Estrella that he is a
mere nominee.

IV.
Effect of the Side Agreements
Effect of the Side Agreements on the
solidary liability of the petitioners

The courts a quo dismissed all counterclaims and cross-claims lodged by petitioners
against Ng Wee and each other. However, the Court finds reason to grant the cross-
claim of Virata that he be reimbursed by his co-parties of the amount that he and UEM-
MARA may be adjudged to be liable for.152

The reinstatement and grant of the cross-claim is anchored on the stipulation under the
Side Agreements. Worthy of note is that neither the R TC nor the CA nullified the
contract, despite their acerbic language towards the same. They merely held that the
agreements cannot be used as protection against liability for repayment to the investors,
without more. The Side Agreements even served as basis for the courts a quo to
declare that the confirmation advices being issued to the investors were worthless and
uncollectible credit instruments, and to label the "sans recourse" transactions as without
any economically-valuable object.

As such, the Side Agreements remain to be binding and enforceable on the parties
thereto: Wincorp, Virata, and Power Merge. We give credence to the argument of Virata
that, as per the language of the Side Agreements themselves, what transpired was an
arm's length transaction, wherein in exchange for Wincorp assuming liability for Power
Merge's drawdowns and promissory notes, Power Merge obligated itself "to return and
deliver to Wincorp all the rights, title and interests conveyed by Wincorp hereby to
[Power Merge] over the Hottick obligations." It appears then that there is ample
consideration for the release.

Indeed, the Court must not only look at the "sans recourse" transactions in isolation, but
also consider the underlying transactions and ascertain the true intention of the
contracting parties. On this score, a narration on the relationship between Hottick, W
incorp, and Power Merge bears reiteration:

On February 21, 1997, Hottick, through a credit facility, borrowed money from Wincorp
in the amount of Pl,500,908,026.00, as evidenced by a Promissory Note issued by
Hottick in favor of the investment hosue, and guaranteed by Halim Saad and petitioner
Virata. When the Asian financial crisis struck, Hottick experienced financial distress and
was unable to pay its obligations. This prompted Wincorp to file a collection case
against Hottick and Halim Saad.

Virata was not impleaded in the collection suit, and he would turn out to be instrumental
in brokering a settlement agreement between Wincorp and Hottick. But in exchange for
his exclusion in the proceedings, he executed a Memorandum of Agreement under
which he assumes the obligation to transfer forty percent (40%) of UPDI's outstanding
shares and forty percent (40%) of UPDI' s interest in the tollway project to Wincorp,
among others. It would be clarified in the December 1, 1999 Waiver and Quitclaim,
however, that the equity transfers would be Virata's only obligation under the
Memorandum of Agreement. Said Waiver and Quitclaim provides:

This is to confirm that notwithstanding the terms of the Memorandum of Agreement

dated July 27, 1999 between our company and yourself, our company hereby
irrevocably and unconditionally releases, waives and agrees to forever hold you, your
heirs and assigns free and harmless from and against any claim, obligation or liability
arising out of or in connection with the Memorandum of Agreement; provided, however,
that your undertaking to cause the assignment, transfer and delivery to our company of
at least forty percent (40%) of the equity of UEM Development Philippines, Inc. ("UPDI")
and at least forty percent (40%) of the interest/share of UPDI in the Manila Cavite
Express Tollway Project (the "Project") shall have been fully complied with. We hereby
reiterate that, except for your aforesaid obligation to assign, transfer and deliver to our
company at least forty (40%) of UPDI's outstanding shares and at least forty percent
(40%) of UPDI's interest/share in the Project, the Memorandum of Agreement is a mere
accommodation on your part and does not give rise to any legal rights or consequences
in our company's favour as against yourself, your heirs or assigns.153 (emphasis added)

As can be gleaned, the significant portions of the Waiver and Quitclaim mirror the
content of the Side Agreements. But based on the peculiar transactions between the
players herein, the similarity does not end with the content, but extends to the intent.
Reproducing the salient provisions of the Side Agreements:
WHEREAS, Powermerge has entered into the Credit Line Agreement with Wincorp as
an accommodation in order to allow Wincorp to hold Powermerge paper instead of the
obligations of Hottick which are right now held by Wincorp.

xxxx

1. Powermerge hereby agrees to execute promissory notes in the aggregate principal

sum of ₱l,200,000,000.00 in favor of Wincorp and in exchange therefore, Wincorp
hereby assigns, transfers, and conveys to Powermerge all of its rights, titles and interest
by way of a subparticipation over the promissory notes and other obligations executed
by Hottick in favor of Wincorp; Provided however that the only obligation of Powermerge
to Wincorp shall be to return and deliver to Wincorp all the rights, title and interests
conveyed by Wincorp hereby to Powermerge over the Hottick obligations. Powermerge
shall have no obligation to pay under its promissory notes executed in favor of Wincorp
but shall be obligated merely to return whatever may have received from Wincorp
pursuant to this agreement.

xxxx

3. Wincorp confirms and agrees that this accommodation being entered into by the
parties is not intended to create a payment obligation on the part of
Powermerge.154 (emphasis added)

The above documents, besides the non-suit against Virata, readily convey that the
parties did not intend to create a payment obligation on the part of Power Merge; the
latter was merely used as a conduit by Wincorp for the acquisition of equity shares.
They also confirm that Power Merge was just a mere accommodation party to the
issuance of the Promissory Notes that Wincorp sold to its clients, consistent with the
findings of the courts a quo that Wincorp borrowed the funds for its own account.
Though these circumstances do not exculpate Power Merge and Virata from paying a
holder for value under the negotiable instruments they issued, they nevertheless entitle
Power Merge and Virata, as surety, to indemnification by way of reimbursement from
Wincorp and its liable directors and officers, the main debtors, for any amount stated in
the note that petitioners Virata and Power Merge would be compelled to defray,
pursuant to Art. 2066 of the New Civil Code.155

V.
Award of Damages

Beyond doubt, Ng Wee is entitled to recover the investments he infused in Win corp.
This was never the central issue in this case. Other than raising Ng Wee's alleged
failure to state a cause of action in his complaint, none of the petitioners questioned his
right to be compensated for the losses he suffered in the fraudulent investment scheme.
Having ascertained the extent of the liabilities of the petitioners, the Court will now
determine the amount to be awarded to Ng Wee.
The trial and appellate court correctly held that Ng Wee should first be recompensed for
the maturity amount of the investments he made in Power Merge through Wincorp,
which totalled ₱213,290,410.36. Pursuant to our ruling in the seminal case of Nacar v.
Gallery Frames,156 the amount shall earn interest at twelve percent (12%) per
annum from the date of filing of the Complaint on October 19, 2000 until June 30, 2013,
and six percent (6%) from July 1, 2013 until full satisfaction.

Moreover, the Credit Line Agreement provides for a stipulation of three percent (3%)
additional monthly interest as penalty, twenty percent (20%) interest of the entire
amount due as liquidated damages, and twentyfive percent (25%) of the entire amount
due as attorney's fees. These additional rates of interest are likewise reflected in the
promissory notes issued by Power Merge for which the liable petitioners can be held
responsible. However, unlike the trial court and the CA, the Court finds that these
contractual stipulations cannot fully be imposed.

The freedom to contract is not absolute. And one of the more general restrictions
thereon is enshrined in Article 1306 of the Civil Code which precludes the contracting
parties from establishing stipulations, clauses, terms, and conditions that are contrary to
law, morals, good customs, public order, and public policy. In this jurisdiction, the Court
has never shied away from striking down iniquitous and unconscionable interest rates
for failing to meet this standard.157 We see no reason to depart from the practice in this
case.

That said, the Court herein refuses to impose the three percent (3% ) additional monthly
penalty interest, and instead affirms the trial and appellate court's nullification of the
same. Such exorbitant interest rate is void for being contrary to morals, if not against the
law.158 Being a void stipulation, the monthly penalty interest is deemed inexistent from
the beginning.159 In its stead, the imposition of legal interest pursuant to Nacar is deemed
sufficient.

Anent the twenty percent (20%) liquidated damages, the Court sees the need to reduce
the amount. Liquidated damages are those agreed upon by the parties to a contract, to
be paid in case of breach thereof.160 Although it can conclusively be deduced from the
contracts that the parties intended to impose such additional charges, the Court
nevertheless, by express provision in Article 2227 of the New Civil Code, has the right
to temper them if they are unconscionable.161 Considering that the base amount of the
indebtedness in this case is by itself already staggering, imposing an additional twenty
percent (20%) interest against the persons liable would prove to be too cumbersome.
The Court therefore sees the need to reduce the amount to only ten percent (10%) of
the total maturity value of Ng Wee's investment in Power Merge.

The same downward modification is in order as regards the award of attorney's fees.
Although Ng Wee finds justification for the entitlement to the award under Article 2208
of the New Civil Code,162 the same provision mandates that "in all cases, the attorney's
fees and expenses of litigation must be reasonable." Just as We have reduced the rate
for liquidated damages, the Court likewise tempers the stipulated rate of attorney's fees
to five percent (5%) of the total amount due on Ng Wee's investment.

Finally, the Court sees no cogent reason to disturb the RTC's award of moral damages
in favor of Ng Wee in the amount of ₱100,000.00, as affirmed by the appellate court.
Discussed in the following wise in Philippine Savings Bank v. Sps. Manalac, Jr. is the
concept of moral damages:

Moral damages are meant to compensate the claimant for any physical suffering,
mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation and similar injuries unjustly caused. Although incapable of
pecuniary estimation, the amount must somehow be proportional to and in
approximation of the suffering inflicted. Moral damages are not punitive in nature and
were never intended to enrich the claimant at the expense of the def end ant. There is
no hard-and-fast rule in determining what would be a fair and reasonable amount of
moral damages, since each case must be governed by its own peculiar facts. Trial
courts are given discretion in determining the amount, with the limitation that it should
not be palpably and scandalously excessive. Indeed, it must be commensurate to the
loss or injury suffered.163 (emphasis added)

Ng Wee's claim for moral damages in the amount of ₱5,000,000.00 is indeed too
excessive, even with the principal amount in mind. To reiterate, moral damages were
never meant to enrich the claimant. The court therefore upholds the RTC and the CA's
grant of the reduced amount of ₱100,000.00.

Finally, the judgment of liability shall earn additional six percent (6%) interest reckoned
from finality, also pursuant to the Nacar ruling.

WHEREFORE, premises considered, the Court resolves:

1. To PARTIALLY GRANT the Petition for Review on Certiorari of Luis

Juan L. Virata and UEM-MARA, docketed as G.R. No. 220926;

2. To DENY the Petition for Review on Certiorari of Westmont Investment

Corporation, docketed as G.R. No. 221058;

3. To DENY the Petition for Review of Manuel Estrella, docketed as G.R.

No. 221109;

4. To DENY the Petition for Review on Certiorari of Simeon Cua, Henry

Cualoping, and Vicente Cualoping, docketed as G.R No. 221135;and

5. To DENY the Petition for Review on Certiorari of Anthony Reyes,

docketed as G.R. No. 221218.
The September 30, 2014 Decision and October 14, 2015 Resolution of the Court of
Appeals in CA-G.R. CV. No. 97817 affirming the July 8, 2011, Decision of the Regional
Trial Court, Branch 39 of Manila is hereby AFFIRMED with MODIFICATION. As
modified, the dispositive portion of the trial court Decision in Civil Case No. 00-99006
shall read:

WHEREFORE, premises considered, judgment is hereby rendered in favor of plaintiff,

ordering the defendants Luis L. Virata, Westmont Investment Corporation (Wincorp),
Antonio T. Ong, Anthony T. Reyes, Simeon Cua, Vicente and Henry Cualoping, Mariza
Santos-Tan, and Manuel Estrella to jointly and severally pay plaintiff as follows:

1. The sum of Two Hundred Thirteen Million Two Hundred Ninety Thousand Four
Hundred Ten and 36/100 Pesos (₱213,290,410.36), which is the maturity amount of
plaintiffs investment with legal interest at the rate of twelve (12%) percent per
annum from the date of filing of the complaint on October 19. 2000 until June 30, 2013
and six percent (6%) from July l, 2013 until fully paid;

2. Liquidated damages equivalent to ten percent (10%) of the maturity amount, and
attorney's fees equivalent to five percent (5%) of the total amount due plus legal interest
at the rate of twelve (12%) percent per annum from the date of filing of the complaint
until June 30, 2013 and six percent (6%) from July 1, 2013 until fully paid;

3. ₱100,000.00 as moral damages.

4. Additional interest of six percent (6%) per annum of the total monetary awards,
computed from finality of judgment until full satisfaction.

5. The complaint against defendants Manuel Tankiansee and UEMMARA Philippines

Corporation is dismissed for lack of merit.

The cross claim of Luis Juan L. Virata is hereby GRANTED. Westmont Investment
Corporation (Wincorp), Antonio T. Ong, Anthony T. Reyes, Simeon Cua, Vicente and
Henry Cualoping, Mariza Santos-Tan. and Manuel Estrella are hereby ordered jointly
and severally liable to pay and reimburse Luis Juan L. Virata for any payment or
contribution he (Luis Juan L. Virata) may make or be compelled to make to satisfy the
amount due to plaintiff Alejandro Ng Wee. All other counterclaims against Alejandro Ng
Wee and cross-claims by the defendants as against each other are dismissed for lack of
merit.

Cost against the defendants, except defendants Manuel Tankiansee and UEM-MARA
Philippines Corporation.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice
G.R. No. 199687

PACIFIC REHOUSE CORPORATION, Petitioners,

vs.
COURT OF APPEALS and EXPORT AND INDUSTRY BANK, INC., Respondents.

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

G.R. No. 201537

PACIFIC REHOUSE CORPORATION, PACIFIC CONCORDE CORPORATION,

MIZPAH HOLDINGS, INC., FORUM HOLDINGS CORPORATION and EAST ASIA
OIL COMPANY, INC., Petitioners,
vs.
EXPORT AND INDUSTRY BANK, INC., Respondent.

DECISION

REYES, J.:

On the scales of justice precariously lie the right of a prevailing party to his victor's cup,
no more, no less; and the right of a separate entity from being dragged by the ball and
chain of the vanquished party.

The facts of this case as garnered from the Decision1 dated April 26, 2012 of the Court
of Appeals (CA) in CA-G.R. SP No. 120979 are as follows:

We trace the roots of this case to a complaint instituted with the Makati City Regional
Trial Court (RTC), Branch 66, against EIB Securities Inc. (E-Securities) for unauthorized
sale of 32,180,000 DMCI shares of private respondents Pacific Rehouse Corporation,
Pacific Concorde Corporation, Mizpah Holdings, Inc., Forum Holdings Corporation, and
East Asia Oil Company, Inc. In its October 18, 2005 Resolution, the RTC rendered
judgment on the pleadings. The fallo reads:

WHEREFORE, premises considered, judgment is hereby rendered directing the

defendant [E-Securities] to return the plaintiffs’ [private respondents
herein] 32,180,000 DMCI shares, as of judicial demand.

On the other hand, plaintiffs are directed to reimburse the defendant the amount of
[P]10,942,200.00, representing the buy back price of the 60,790,000 KPP shares of
stocks at [P]0.18 per share.

SO ORDERED. x x x

The Resolution was ultimately affirmed by the Supreme Court and attained finality.
When the Writ of Execution was returned unsatisfied, private respondents moved for the
issuance of an alias writ of execution to hold Export and Industry Bank, Inc. liable for the
judgment obligation as E- Securities is "a wholly-owned controlled and dominated
subsidiary of Export and Industry Bank, Inc., and is[,] thus[,] a mere alter ego and
business conduit of the latter. E-Securities opposed the motion[,] arguing that it has a
corporate personality that is separate and distinct from petitioner. On July 27, 2011,
private respondents filed their (1) Reply attaching for the first time a sworn statement
executed by Atty. Ramon F. Aviado, Jr., the former corporate secretary of petitioner and
E-Securities, to support their alter ego theory; and (2) Ex-Parte Manifestation alleging
service of copies of the Writ of Execution and Motion for Alias Writ of Execution on
petitioner.

On July 29, 2011, the RTC concluded that E-Securities is a mere business conduit or
alter ego of petitioner, the dominant parent corporation, which justifies piercing of the
veil of corporate fiction. The trial court brushed aside E-Securities’ claim of denial of due
process on petitioner as "xxx case records show that notices regarding these
proceedings had been tendered to the latter, which refused to even receive them.
Clearly, [petitioner] had been sufficiently put on notice and afforded the chance to give
its side[,] yet[,] it chose not to." Thus, the RTC disposed as follows:

WHEREFORE, xxx,

Let an Alias Writ of Execution be issued relative to the above-entitled case and pursuant
to the RESOLUTION dated October 18, 2005 and to this Order directing defendant EIB
Securities, Inc., and/or Export and Industry Bank, Inc., to fully comply therewith.

The Branch Sheriff of this Court is directed to cause the immediate implementation of
the given alias writ in accordance with the Order of Execution to be issued anew by the
Branch Clerk of Court.

SO ORDERED. x x x

With this development, petitioner filed an Omnibus Motion (Ex Abundanti Cautela)
questioning the alias writ because it was not impleaded as a party to the case. The RTC
denied the motion in its Order dated August 26, 2011 and directed the garnishment of
P1,465,799,000.00, the total amount of the 32,180,000 DMCI shares at P45.55 per
share, against petitioner and/or E-Securities.2 x x x. (Citations omitted)

The Regional Trial Court (RTC) ratiocinated that being one and the same entity in the
eyes of the law, the service of summons upon EIB Securities, Inc. (E-Securities) has
bestowed jurisdiction over both the parent and wholly-owned subsidiary.3 The RTC cited
the cases of Sps. Violago v. BA Finance Corp. et al.4 and Arcilla v. Court of
Appeals5where the doctrine of piercing the veil of corporate fiction was applied
notwithstanding that the affected corporation was not brought to the court as a party.
Thus, the RTC held in its Order6 dated August 26, 2011:
WHEREFORE, premises considered, the Motion for Reconsideration with Motion to
Inhibit filed by defendant EIB Securities, Inc. is denied for lack of merit. The Omnibus
Motion Ex Abundanti C[au]tela is likewise denied for lack of merit.

Pursuant to Rule 39, Section 10 (a) of the Rules of Court, the Branch Clerk of Court or
the Branch Sheriff of this Court is hereby directed to acquire 32,180,000 DMCI shares
of stock from the Philippine Stock Exchange at the cost of EIB Securities, Inc. and
Export and Industry Bank[,] Inc. and to deliver the same to the plaintiffs pursuant to this
Court’s Resolution dated October 18, 2005.

To implement this Order, let GARNISHMENT issue against ALL THOSE HOLDING
MONEYS, PROPERTIES OF ANY AND ALL KINDS, REAL OR PERSONAL
BELONGING TO OR OWNED BY DEFENDANT EIB SECURITIES, INC. AND/OR
EXPORT AND INDUSTRY BANK[,] INC., [sic] in such amount as may be sufficient to
acquire 32,180,000 DMCI shares of stock to the Philippine Stock Exchange, based on
the closing price of Php45.55 per share of DMCI shares as of August 1, 2011, the date
of the issuance of the Alias Writ of Execution, or the total amount of
PhP1,465,799,000.00.

SO ORDERED.7

CA-G.R. SP No. 120979

Export and Industry Bank, Inc. (Export Bank) filed before the CA a petition for certiorari
with prayer for the issuance of a temporary restraining order (TRO)8 seeking the
nullification of the RTC Order dated August 26, 2011 for having been made with grave
abuse of discretion amounting to lack or excess of jurisdiction. In its petition, Export
Bank made reference to several rulings9 of the Court upholding the separate and distinct
personality of a corporation.

In a Resolution10 dated September 2, 2011, the CA issued a 60-day TRO enjoining the
execution of the Orders of the RTC dated July 29, 2011 and August 26, 2011, which
granted the issuance of an alias writ of execution and ordered the garnishment of the
properties of E-Securities and/or Export Bank. The CA also set a hearing to determine
the necessity of issuing a writ of injunction, viz:

Considering the amount ordered to be garnished from petitioner Export and Industry
Bank, Inc. and the fiduciary duty of the banking institution to the public, there is grave
and irreparable injury that may be caused to [Export Bank] if the assailed Orders are
immediately implemented. We thus resolve to GRANT the Temporary Restraining Order
effective for a period of sixty (60) days from notice, restraining/enjoining the Sheriff of
the Regional Trial Court of Makati City or his deputies, agents, representatives or any
person acting in their behalf from executing the July 29, 2011 and August 26, 2011
Orders. [Export Bank] is DIRECTED to POST a bond in the sum of fifty million pesos
(P50,000,000.00) within ten (10) days from notice, to answer for any damage which
private respondents may suffer by reason of this Temporary Restraining Order;
otherwise, the same shall automatically become ineffective.

Let the HEARING be set on September 27, 2011 at 2:00 in the afternoon at the Paras
Hall, Main Building, Court of Appeals, to determine the necessity of issuing a writ of
preliminary injunction. The Division Clerk of Court is DIRECTED to notify the parties and
their counsel with dispatch.

xxxx

SO ORDERED.11

Pacific Rehouse Corporation (Pacific Rehouse), Pacific Concorde Corporation, Mizpah

Holdings, Inc., Forum Holdings Corporation and East Asia Oil Company, Inc.
(petitioners) filed their Comment12 to Export Bank’s petition and proffered that the cases
mentioned by Export Bank are inapplicable owing to their clearly different factual
antecedents. The petitioners alleged that unlike the other cases, there are
circumstances peculiar only to E-Securities and Export Bank such as: 499,995 out of
500,000 outstanding shares of stocks of E-Securities are owned by Export
Bank;13 Export Bank had actual knowledge of the subject matter of litigation as the
lawyers who represented E-Securities are also lawyers of Export Bank.14 As an alter
ego, there is no need for a finding of fraud or illegality before the doctrine of piercing the
veil of corporate fiction can be applied.15

After oral arguments before the CA, the parties were directed to file their respective
memoranda.16

On October 25, 2011, the CA issued a Resolution,17 granting Export Bank’s application
for the issuance of a writ of preliminary injunction, viz:

WHEREFORE, finding [Export Bank’s] application for the ancillary injunctive relief to be
meritorious, and it further appearing that there is urgency and necessity in restraining
the same, a Writ of Preliminary Injunction is hereby GRANTED and ISSUED against the
Sheriff of the Regional Trial Court of Makati City, Branch 66, or his deputies, agents,
representatives or any person acting in their behalf from executing the July 29, 2011
and August 26, 2011 Orders. Public respondents are ordered to CEASE and DESIST
from enforcing and implementing the subject orders until further notice from this Court. 18

The petitioners filed a Manifestation19 and Supplemental Manifestation20 challenging the

above-quoted CA resolution for lack of concurrence of Associate Justice Socorro B.
Inting (Justice Inting), who was then on official leave.

On December 22, 2011, the CA, through a Special Division of Five, issued another
Resolution,21 which reiterated the Resolution dated October 25, 2011 granting the
issuance of a writ of preliminary injunction.
On January 2, 2012, one of the petitioners herein, Pacific Rehouse filed before the
Court a petition for certiorari22under Rule 65, docketed as G.R. No. 199687,
demonstrating its objection to the Resolutions dated October 25, 2011 and December
22, 2011 of the CA.

On April 26, 2012, the CA rendered the assailed Decision23 on the merits of the case,
granting Export Bank’s petition. The CA disposed of the case in this wise:

We GRANT the petition. The Orders dated July 29, 2011 and August 26, 2011 of the
Makati City Regional Trial Court, Branch 66, insofar as [Export Bank] is concerned, are
NULLIFIED. The Writ of Preliminary Injunction (WPI) is rendered PERMANENT.

SO ORDERED.24

The CA explained that the alter ego theory cannot be sustained because ownership of a
subsidiary by the parent company is not enough justification to pierce the veil of
corporate fiction. There must be proof, apart from mere ownership, that Export Bank
exploited or misused the corporate fiction of E-Securities. The existence of interlocking
incorporators, directors and officers between the two corporations is not a conclusive
indication that they are one and the same.25 The records also do not show that Export
Bank has complete control over the business policies, affairs and/or transactions of E-
Securities. It was solely E-Securities that contracted the obligation in furtherance of its
legitimate corporate purpose; thus, any fall out must be confined within its limited
liability.26

The petitioners, without filing a motion for reconsideration, filed a Petition for
Review27 under Rule 45 docketed as G.R. No. 201537,28 impugning the Decision dated
April 26, 2012 of the CA.

Considering that G.R. Nos. 199687 and 201537 originated from the same set of facts,
involved the same parties and raised intertwined issues, the cases were then
consolidated per Resolution dated September 26, 2012, for a thorough discussion of the
merits of the case.

Issues

In précis, the issues for resolution of this Court are the following:

In G.R. No. 199687,

WHETHER THE CA COMMITTED GRAVE ABUSE OF DISCRETION IN GRANTING

EXPORT BANK’S APPLICATION FOR THE ISSUANCE OF A WRIT OF
PRELIMINARY INJUNCTION.

In G.R. No. 201537,

 I.

WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN RULING THAT

EXPORT BANK MAY NOT BE HELD LIABLE FOR A FINAL AND EXECUTORY
JUDGMENT AGAINST E-SECURITIES IN AN ALIAS WRIT OF EXECUTION BY
PIERCING ITS VEIL OF CORPORATE FICTION; and

II.

WHETHER THE CA COMMITTED A REVERSIBLE ERROR IN RULING THAT THE

ALTER EGO DOCTRINE IS NOT APPLICABLE.

Ruling of the Court

G.R. No. 199687

The Resolution dated October 25, 2011 was initially challenged by the petitioners in its
Manifestation29 and Supplemental Manifestation30 due to the lack of concurrence of
Justice Inting, which according to the petitioners rendered the aforesaid resolution null
and void.

To the petitioners’ mind, Section 5, Rule VI of the Internal Rules of the CA

(IRCA)31 requires the submission of the resolution granting an application for TRO or
preliminary injunction to the absent Justice/s when they report back to work for
ratification, modification or recall, such that when the absent Justice/s do not agree with
the issuance of the TRO or preliminary injunction, the resolution is recalled and without
force and effect.32 Since the resolution which granted the application for preliminary
injunction appears short of the required number of consensus, owing to the absence of
Justice Inting’s signature, the petitioners contest the validity of said resolution.

The petitioners also impugn the CA Resolution dated December 22, 2011 rendered by
the Special Division of Five. The petitioners maintain that pursuant to Batas Pambansa
Bilang 12933 and the IRCA,34 such division is created only when the three members of a
division cannot reach a unanimous vote in deciding a case on the merits. 35Furthermore,
for petitioner Pacific Rehouse, this Resolution is likewise infirm because the purpose of
the formation of the Special Division of Five is to decide the case on the merits and not
to grant Export Bank’s application for a writ of preliminary injunction. 36

We hold that the opposition to the CA resolutions is already nugatory because the CA
has already rendered its Decision on April 16, 2012, which disposed of the substantial
merits of the case. Consequently, the petitioners’ concern that the Special Division of
Five should have been created to resolve cases on the merits has already been
addressed by the rendition of the CA Decision dated April 16, 2012.

"It is well-settled that courts will not determine questions that have become moot and
academic because there is no longer any justiciable controversy to speak of. The
judgment will not serve any useful purpose or have any practical legal effect because, in
the nature of things, it cannot be enforced."37 In such cases, there is no actual
substantial relief to which the petitioners would be entitled to and which would be
negated by the dismissal of the petition.38Thus, it would be futile and pointless to
address the issue in G.R. No. 199687 as this has become moot and academic.

G.R. No. 201537

The petitioners bewail that the certified true copy of the CA Decision dated April 26,
2012 along with its Certification at the bottom portion were not signed by the
Chairperson39 of the Special Division of Five; thus, it is not binding upon the
parties.40 The petitioners quoted this Court’s pronouncement in Limkaichong v.
Commission on Elections,41that a decision must not only be signed by the Justices who
took part in the deliberation, but must also be promulgated to be considered a
Decision.42

A cursory glance on a copy of the signature page43 of the decision attached to the
records would show that, indeed, the same was not signed by CA Associate Justice
Magdangal M. De Leon. However, it must be noted that the CA, on May 7, 2012, issued
a Resolution44 explaining that due to inadvertence, copies of the decision not bearing the
signature of the Chairperson were sent to the parties on the same day of promulgation.
The CA directed the Division Clerk of Court to furnish the parties with copies of the
signature page with the Chairperson’s signature. Consequently, as the mistake was
immediately clarified and remedied by the CA, the lack of the Chairperson’s signature
on the copies sent to the parties has already become a non-issue.

It must be emphasized that the instant cases sprang from Pacific Rehouse Corporation
v. EIB Securities, Inc.45which was decided by this Court last October 13, 2010.
Significantly, Export Bank was not impleaded in said case but was unexpectedly
included during the execution stage, in addition to E-Securities, against whom the writ of
execution may be enforced in the Order46 dated July 29, 2011 of the RTC. In including
Export Bank, the RTC considered E-Securities as a mere business conduit of Export
Bank.47 Thus, one of the arguments interposed by the latter in its Opposition 48 that it was
never impleaded as a defendant was simply set aside.

This action by the RTC begs the question: may the RTC enforce the alias writ of
execution against Export Bank?

The question posed before us is not novel.

The Court already ruled in Kukan International Corporation v. Reyes49 that compliance
with the recognized modes of acquisition of jurisdiction cannot be dispensed with even
in piercing the veil of corporate fiction, to wit:

The principle of piercing the veil of corporate fiction, and the resulting treatment of two
related corporations as one and the same juridical person with respect to a given
transaction, is basically applied only to determine established liability; it is not available
to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be
subject to the court’s process of piercing the veil of its corporate fiction. In that
situation, the court has not acquired jurisdiction over the corporation and, hence, any
proceedings taken against that corporation and its property would infringe on its right to
due process. Aguedo Agbayani, a recognized authority on Commercial Law, stated as
much:

"23. Piercing the veil of corporate entity applies to determination of liability not of
jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired
jurisdiction over the corporation. Hence, before this doctrine can be applied, based
on the evidence presented, it is imperative that the court must first have jurisdiction over
the corporation. x x x"50 (Citations omitted)

From the preceding, it is therefore correct to say that the court must first and foremost
acquire jurisdiction over the parties; and only then would the parties be allowed to
present evidence for and/or against piercing the veil of corporate fiction. If the court has
no jurisdiction over the corporation, it follows that the court has no business in piercing
its veil of corporate fiction because such action offends the corporation’s right to due
process.

"Jurisdiction over the defendant is acquired either upon a valid service of summons or
the defendant’s voluntary appearance in court. When the defendant does not voluntarily
submit to the court’s jurisdiction or when there is no valid service of summons, ‘any
judgment of the court which has no jurisdiction over the person of the defendant is null
and void.’"51 "The defendant must be properly apprised of a pending action against him
and assured of the opportunity to present his defenses to the suit. Proper service of
summons is used to protect one’s right to due process."52

As Export Bank was neither served with summons, nor has it voluntarily appeared
before the court, the judgment sought to be enforced against E-Securities cannot be
made against its parent company, Export Bank. Export Bank has consistently disputed
the RTC jurisdiction, commencing from its filing of an Omnibus Motion53 by way of
special appearance during the execution stage until the filing of its Comment 54 before
the Court wherein it was pleaded that "RTC [of] Makati[, Branch] 66 never acquired
jurisdiction over Export [B]ank. Export [B]ank was not pleaded as a party in this case. It
was never served with summons by nor did it voluntarily appear before RTC [of]
Makati[, Branch] 66 so as to be subjected to the latter’s jurisdiction."55

In dispensing with the requirement of service of summons or voluntary appearance of

Export Bank, the RTC applied the cases of Violago and Arcilla. The RTC concluded that
in these cases, the Court decided that the doctrine of piercing the veil of corporate
personality can be applied even when one of the affected parties has not been brought
to the Court as a party.56

A closer perusal on the rulings of this Court in Violago and Arcilla, however, reveals that
the RTC misinterpreted the doctrines on these cases. We agree with the CA that these
cases are not congruent to the case at bar. In Violago, Spouses Pedro and Florencia
Violago (Spouses Violago) filed a third party complaint against their cousin Avelino
Violago (Avelino), who is also the president of Violago Motor Sales Corporation
(VMSC), for selling them a vehicle which was already sold to someone else. VMSC was
not impleaded as a third party defendant. Avelino contended that he was not a party to
the transaction personally, but VMSC. The Court ruled that "[t]he fact that VMSC was
not included as defendant in [Spouses Violago’s] third party complaint does not
preclude recovery by Spouses Violago from Avelino; neither would such non-inclusion
constitute a bar to the application of the piercing-of-the-corporate-veil doctrine."57 It
should be pointed out that although VMSC was not made a third party defendant, the
person who was found liable in Violago, Avelino, was properly made a third party
defendant in the first instance. The present case could not be any more poles apart
from Violago, because Export Bank, the parent company which was sought to be
accountable for the judgment against E-Securities, is not a party to the main case.

In Arcilla, meanwhile, Calvin Arcilla (Arcilla) obtained a loan in the name of Csar Marine
Resources, Inc. (CMRI) from Emilio Rodulfo. A complaint was then filed against Arcilla
for non-payment of the loan. CMRI was not impleaded as a defendant. The trial court
eventually ordered Arcilla to pay the judgment creditor for such loan. Arcilla argued that
he is not personally liable for the adjudged award because the same constitutes a
corporate liability which cannot even bind the corporation as the latter is not a party to
the collection suit. The Court made the succeeding observations:

[B]y no stretch of even the most fertile imagination may one be able to conclude that the
challenged Amended Decision directed Csar Marine Resources, Inc. to pay the
amounts adjudged. By its clear and unequivocal language, it is the petitioner who was
declared liable therefor and consequently made to pay. x x x, even if We are to
assume arguendo that the obligation was incurred in the name of the corporation, the
petitioner would still be personally liable therefor because for all legal intents and
purposes, he and the corporation are one and the same. Csar Marine Resources, Inc. is
nothing more than his business conduit and alter ego. The fiction of a separate juridical
personality conferred upon such corporation by law should be disregarded. x x
x.58 (Citation omitted)

It is important to bear in mind that although CMRI was not a party to the suit, it was
Arcilla, the defendant himself who was found ultimately liable for the judgment award.
CMRI and its properties were left untouched from the main case, not only because of
the application of the alter ego doctrine, but also because it was never made a party to
that case.
The disparity between the instant case and those of Violago and Arcilla is that in said
cases, although the corporations were not impleaded as defendant, the persons made
liable in the end were already parties thereto since the inception of the main case.
Consequently, it cannot be said that the Court had, in the absence of fraud and/or bad
faith, applied the doctrine of piercing the veil of corporate fiction to make a non-party
liable. In short, liabilities attached only to those who are parties. None of the non-party
corporations (VMSC and CMRI) were made liable for the judgment award against
Avelino and Arcilla.

The Alter Ego Doctrine is not applicable

"The question of whether one corporation is merely an alter ego of another is purely one
of fact. So is the question of whether a corporation is a paper company, a sham or
subterfuge or whether petitioner adduced the requisite quantum of evidence warranting
the piercing of the veil of respondent’s corporate entity." 59

As a rule, the parties may raise only questions of law under Rule 45, because the
Supreme Court is not a trier of facts. Generally, we are not duty-bound to analyze again
and weigh the evidence introduced in and considered by the tribunals below.60 However,
justice for all is of primordial importance that the Court will not think twice of reviewing
the facts, more so because the RTC and the CA arrived in contradicting conclusions.

"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."61

"Where one corporation is so organized and controlled and its affairs are conducted so
that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the
corporate entity of the "instrumentality" may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but such domination of
finances, policies and practices that the controlled corporation has, so to speak, no
separate mind, will or existence of its own, and is but a conduit for its principal. It must
be kept in mind that the control must be shown to have been exercised at the time the
acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made." 62

The Court has laid down a three-pronged control test to establish when the alter ego
doctrine should be operative:
 (1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;

(2) Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff’s legal right; and

(3) The aforesaid control and breach of duty must [have] proximately caused the
injury or unjust loss complained of.63

The absence of any one of these elements prevents ‘piercing the corporate veil’ in
applying the ‘instrumentality’ or ‘alter ego’ doctrine, the courts are concerned with reality
and not form, with how the corporation operated and the individual defendant’s
relationship to that operation.64 Hence, all three elements should concur for the alter ego
doctrine to be applicable.

In its decision, the RTC maintained that the subsequently enumerated factors betray the
true nature of E-Securities as a mere alter ego of Export Bank:

1. Defendant EIB Securities, a subsidiary corporation 100% totally owned by

Export and Industry Bank, Inc., was only re-activated by the latter in 2002-2003
and the continuance of its operations was geared for no other reason tha[n] to
serve as the securities brokerage arm of said parent corporation bank;

2. It was the parent corporation bank that provided and infused the fresh working
cash capital needed by defendant EIB Securities which prior thereto was non-
operating and severely cash-strapped. [This was so attested by the then
Corporate Secretary of both corporations, Atty. Ramon Aviado, Jr., in his
submitted Sworn Statement which is deemed allowable "evidence on motion",
under Sec. 7, Rule 133, Rules on Evidence; Bravo vs. Borja, 134 SCRA 438];

3. For effective control purposes, defendant EIB Securities and its operating
office and staff are all housed in Exportbank Plaza located at Chino Roces cor.
Sen. Gil Puyat Avenue, Makati City which is the same building w[h]ere the bank
parent corporation has its headquarters;

4. As shown in the General Information Sheets annually filed with the S.E.C. from
2002 to 2011, both defendant EIB Securities and the bank parent corporation
share common key Directors and corporate officers. Three of the 5-man Board of
Directors of defendant EIB Securities are Directors of the bank parent
corporation, namely: Jaime C. Gonzales, Pauline C. Tan and Dionisio E. Carpio,
Jr. In addition, Mr. Gonzales is Chairman of the Board of both corporations,
whereas Pauline C. Tan is concurrently President/General Manager of EIB
 Securities, and Dionisio Carpio Jr., is not only director of the bank, but also
Director Treasurer of defendant EIB Securities;

5. As admitted by the bank parent corporation in its consolidated audited financial

statements[,] EIB Securities is a CONTROLLED SUBSIDIARY, and for which
reason its financial condition and results of operations are included and
integrated as part of the group’s consolidated financial statements, examined and
audited by the same auditing firm;

6. The lawyers handling the suits and legal matters of defendant EIB Securities
are the same lawyers in the Legal Department of the bank parent
corporation. The Court notes that in [the] above-entitled suit, the lawyers who at
1âwphi1

the start represented said defendant EIB Securities and filed all the pleadings
and filings in its behalf are also the lawyers in the Legal Services Division of the
bank parent corporation. They are Attys. Emmanuel A. Silva, Leonardo C. Bool,
Riva Khristine E. Maala and Ma. Esmeralda R. Cunanan, all of whom worked at
the Legal Services Division of Export Industry Bank located at 36/F, Exportbank
Plaza, Don Chino Roces Avenue, cor. Sen. Gil Puyat Avenue, Makati City.

7. Finally[,] and this is very significant, the control and sway that the bank parent
corporation held over defendant EIB Securities was prevailing in June 2004 when
the very act complained of in plaintiff’s Complaint took place, namely the
unauthorized disposal of the 32,180,000 DMCI shares of stock. Being then under
the direction and control of the bank parent corporation, the unauthorized
disposal of those shares by defendant EIB Securities is attributable to, and the
responsibility of the former.65

All the foregoing circumstances, with the exception of the admitted stock ownership,
were however not properly pleaded and proved in accordance with the Rules of
Court.66 These were merely raised by the petitioners for the first time in their Motion for
Issuance of an Alias Writ of Execution67 and Reply,68 which the Court cannot consider.
"Whether the separate personality of the corporation should be pierced hinges on
obtaining facts appropriately pleaded or proved." 69

Albeit the RTC bore emphasis on the alleged control exercised by Export Bank upon its
subsidiary E-Securities, "[c]ontrol, by itself, does not mean that the controlled
corporation is a mere instrumentality or a business conduit of the mother company.
Even control over the financial and operational concerns of a subsidiary company does
not by itself call for disregarding its corporate fiction. There must be a perpetuation of
fraud behind the control or at least a fraudulent or illegal purpose behind the control in
order to justify piercing the veil of corporate fiction. Such fraudulent intent is lacking in
this case."70

Moreover, there was nothing on record demonstrative of Export Bank’s wrongful intent
in setting up a subsidiary, E-Securities. If used to perform legitimate functions, a
subsidiary’s 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
business.71 To justify treating the sole stockholder or holding company as responsible, it
is not enough that the subsidiary is so organized and controlled as to make it "merely an
instrumentality, conduit or adjunct" of its stockholders. It must further appear that to
recognize their separate entities would aid in the consummation of a wrong. 72

As established in the main case73 and reiterated by the CA, the subject 32,180,000
DMCI shares which E-Securities is obliged to return to the petitioners were originally
bought at an average price of P0.38 per share and were sold for an average price of
P0.24 per share. The proceeds were then used to buy back 61,100,000 KPP shares
earlier sold by E-Securities. Quite unexpectedly however, the total amount of these
DMCI shares ballooned to P1,465,799,000.00.74 It must be taken into account that this
unexpected turnabout did not inure to the benefit of E-Securities, much less Export
Bank.

Furthermore, ownership by Export Bank of a great majority or all of stocks of E-

Securities and the existence of interlocking directorates may serve as badges of control,
but ownership of another corporation, per se, without proof of actuality of the other
conditions are insufficient to establish an alter ego relationship or connection between
the two corporations, which will justify the setting aside of the cover of corporate fiction.
The 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." The 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."75

While the courts have been granted the colossal authority to wield the sword which
pierces through the veil of corporate fiction, concomitant to the exercise of this power, is
the responsibility to uphold the doctrine of separate entity, when rightly so; as it has for
so long encouraged businessmen to enter into economic endeavors fraught with risks
and where only a few dared to venture.

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be
certain that the corporate fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of its rights. The wrongdoing must
be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice
that was never unintended may result from an erroneous application.76

In closing, we understand that the petitioners are disgruntled at the turnout of this case-
that they cannot enforce the award due them on its entirety; however, the Court cannot
supplant a remedy which is not sanctioned by our laws and prescribed rules.

WHEREFORE, the petition in G.R. No. 199687 is hereby DISMISSED for having been
rendered moot and academic. The petition in G.R. No. 201537, meanwhile, is hereby
DENIED for lack of merit. Consequently, the Decision dated April 26, 2012 of the Court
of Appeals in CA-G.R. SP No. 120979 is AFFIRMED.

SO ORDERED.

BIENVENIDO L. REYES
Associate Justice

WE CONCUR:
 I. INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS (Section 10-22)

G.R. No. 137592 December 12, 2001

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA

BANSANG PILIPINAS, INC.,petitioner,
vs.
IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
KATOTOHANAN, respondent.

YNARES-SANTIAGO, J.:

This is a petition for review assailing the Decision dated October 7, 19971 and the
Resolution dated February 16, 19992 of the Court of Appeals in CA-G.R. SP No. 40933,
which affirmed the Decision of the Securities and Exchange and Commission (SEC) in
SEC-AC No. 539.3

Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church
of God in Christ Jesus, the Pillar and Ground of Truth),4 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.

On July 16, 1979, 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, which petition was docketed as SEC Case No. 1774. On May 4, 1988,
the SEC rendered judgment in favor of respondent, ordering 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.5No appeal was taken from
said decision.

It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the
registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng
Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands
for Haligi at Saligan ng Katotohanan.6

On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as
SEC Case No. 03-94-4704, praying that petitioner be 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.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion
to dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared
in default and respondent was allowed to present its evidence ex parte.

On November 20, 1995, the SEC rendered a decision ordering petitioner to change its
corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the

petitioner (respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa
Bansang Pilipinas (petitioner herein) is hereby MANDATED to change its
corporate name to another not deceptively similar or identical to the same
already used by the Petitioner, any corporation, association, and/or partnership
presently registered with the Commission.

Let a copy of this Decision be furnished the Records Division and the Corporate
and Legal Department [CLD] of this Commission for their records, reference
and/or for whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.7

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC
No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above
decision, upon a finding that petitioner's corporate name was identical or confusingly or
deceptively similar to that of respondent's corporate name.8

Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the
Court of Appeals rendered the assailed decision affirming the decision of the SEC En
Banc. Petitioner's motion for reconsideration was denied by the Court of Appeals on
February 16, 1992.

Hence, the instant petition for review, raising the following assignment of errors:

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT

PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON
TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE

CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY
RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF
ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS
INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY

APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE
APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT
CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE

SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM,
THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONER'S RIGHTS. 9

Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that the decision of
the Court of Appeals and the SEC should be set aside because the negligence of its
former counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its
motion to dismiss was denied by the SEC, deprived them of their day in court.

The contention is without merit. As a general rule, the negligence of counsel binds the
client. This is based on the rule that any act performed by a lawyer within the scope of
his general or implied authority is regarded as an act of his client.11 An exception to the
foregoing is where the reckless or gross negligence of the counsel deprives the client of
due process of law. 12 Said exception, however, does not obtain in the present case.

In Legarda v. Court of Appeals, the effort of the counsel in defending his client's cause
consisted in filing a motion for extension of time to file answer before the trial court.
When his client was declared in default, the counsel did nothing and allowed the
judgment by default to become final and executory. Upon the insistence of his client, the
counsel filed a petition to annul the judgment with the Court of Appeals, which denied
the petition, and again the counsel allowed the denial to become final and executory.
This Court found the counsel grossly negligent and consequently declared as null and
void the decision adverse to his client.

The factual antecedents of the case at bar are different. Atty. Garaygay filed before the
SEC a motion to dismiss on the ground of lack of cause of action. When his client was
declared in default for failure to file an answer, Atty. Garaygay moved for
reconsideration and lifting of the order of default.13 After judgment by default was
rendered against petitioner corporation, Atty. Garaygay filed a motion for extension of
time to appeal/motion for reconsideration, and thereafter a motion to set aside the
decision.14
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file
an answer that led to the rendition of a judgment by default against petitioner, his efforts
were palpably real, albeit bereft of zeal.15

Likewise, the issue of prescription, which petitioner raised for the first time on appeal to
the Court of Appeals, is untenable. Its failure to raise prescription before the SEC can
only be construed as a waiver of that defense.16 At any rate, the SEC has the authority
to de-register at all times and under all circumstances corporate names which in its
estimation are likely to spawn confusion. It is the duty of the SEC 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.17

Section 18 of the Corporation Code provides:

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 is 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.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names
states:

(d) If the proposed name contains a word similar to a word already used as part
of the firm name or style of a registered company, the proposed name must
contain two other words different from the name of the company already
registered;

Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a nonprofit
organization, if misleading or likely to injure in the exercise of its corporate functions,
regardless of intent, may be prevented by the corporation having a prior right, by a suit
for injunction against the new corporation to prevent the use of the name. 18

Petitioner claims that it complied with the aforecited SEC guideline by adding not only
two but eight words to their registered name, to wit: "Ang Mga Kaanib" and "Sa
Bansang Pilipinas, Inc.," which, petitioner argues, effectively distinguished it from
respondent corporation.

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.;19 not to mention the fact that both are espousing religious beliefs and operating
in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by
petitioner stands for "Haligi at Saligan ng Katotohanan."20

Then, too, the records reveal that in holding out their corporate name to the public,
petitioner highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS,
HALIGI AT SALIGAN NG KATOTOHANAN," which is strikingly similar to respondent's
corporate name, thus making it even more evident that the additional words "Ang Mga
Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely descriptive of and pertaining to the
members of respondent corporation.21

Significantly, the only difference between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY. These words are synonymous —
both mean ground, foundation or support. Hence, this case is on all fours with Universal
Mills Corporation v. Universal Textile Mills, Inc.,22 where the Court ruled that the
corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are
undisputably so similar that even under the test of "reasonable care and observation"
confusion may arise.

Furthermore, the wholesale appropriation by petitioner of respondent's corporate name

cannot find justification under the generic word rule. We agree with the Court of
Appeals' conclusion that a contrary ruling would encourage other corporations to adopt
verbatim and register an existing and protected corporate name, to the detriment of the
public.

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.23

We need not belabor the fourth issue raised by petitioner. Certainly, 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.

WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED.
The appealed decision of the Court of Appeals is AFFIRMED in toto.

SO ORDERED.
G.R. No. 122174 October 3, 2002

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.

AUSTRIA-MARTINEZ, J.:

Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due
course and dismissing the petition filed by Industrial Refractories Corp. of the
Philippines (IRCP).

Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly

organized on October 13, 1976 for the purpose of engaging in the business of
manufacturing, producing, selling, exporting and otherwise dealing in any and all
refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its
corporate and business name with the Bureau of Domestic Trade.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally
under the name "Synclaire Manufacturing Corporation". It amended its Articles of
Incorporation on August 23, 1985 to change its corporate name to "Industrial
Refractories Corp. of the Philippines". It is engaged in the business of manufacturing all
kinds of ceramics and other products, except paints and zincs.

Both companies are the only local suppliers of monolithic gunning mix. 1

Discovering that petitioner was using such corporate name, respondent RCP filed on
April 14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel
petitioner to change its corporate name on the ground that its corporate name is
confusingly similar with that of petitioner’s such that the public may be confused or
deceived into believing that they are one and the same corporation.2

The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993
with the following dispositive portion:

"WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the
respondent declaring the latter’s corporate name ‘Industrial Refractories Corporation of
the Philippines’ as deceptively and confusingly similar to that of petitioner’s corporate
name ‘Refractories Corporation of the Philippines’. Accordingly, respondent is hereby
directed to amend its Articles of Incorporation by deleting the name ‘Refractories
Corporation of the Philippines’ in its corporate name within thirty (30) days from finality
of this Decision. Likewise, respondent is hereby ordered to pay the petitioner the sum of
P50,000.00 as attorney’s fees."3
Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction
over the case, and that respondent RCP has no right to the exclusive use of its
corporate name as it is composed of generic or common words.4

In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in
that petitioner was ordered to delete or drop from its corporate name only the word
"Refractories".5

Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review
on certiorari to the Court of Appeals which then rendered the herein assailed decision.
The appellate court upheld the jurisdiction of the SEC over the case and ruled that the
corporate names of petitioner IRCP and respondent RCP are confusingly or deceptively
similar, and that respondent RCP has established its prior right to use the word
"Refractories" as its corporate name.6 The appellate court also found that the petition
was filed beyond the reglementary period.7

Hence, herein petition which we must deny.

Petitioner contends that the petition before the Court of Appeals was timely filed. It must
be noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the
governing rule on appeals from quasi-judicial agencies like the SEC was Supreme
Court Circular No. 1-91. As provided therein, the remedy should have been a petition
for review filed before the Court of Appeals within fifteen (15) days from notice, raising
questions of fact, of law, or mixed questions of fact and law.8 A motion for
reconsideration suspends the running of the period.9

In the case at bench, there is a discrepancy between the dates provided by petitioner
and respondent. Petitioner alleges the following dates of receipt and filing: 10

June 10, 1994 Receipt of SEC’s Decision dated May 10, 1994

June 20, 1994 Filing of Motion for Reconsideration

September 1, 1994 Receipt of SEC’s Order dated August 3, 1994 denying

petitioner’s motion for reconsideration

September 2, 1994 Filing of Motion for extension of time

September 6, 1994 Filing of Petition

Respondent RCP, however, asserts that the foregoing dates are incorrect as the
certifications issued by the SEC show that petitioner received the SEC’s Decision dated
May 10, 1994 on June 9, 1994, filed the motion for reconsideration via registered mail
on June 25, 1994, and received the Order dated August 3, 1994 on August 15,
1994.11 Thus, the petition was filed twenty-one (21) days beyond the reglementary
period provided in Supreme Court Circular No. 1-91.12
If reckoned from the dates supplied by petitioner, then the petition was timely filed. On
the other hand, if reckoned from the dates provided by respondent RCP, then it was
filed way beyond the reglementary period. On this score, we agree with the appellate
court’s finding that petitioner failed to rebut respondent RCP’s allegations of material
dates of receipt and filing.13 In addition, the certifications were executed by the SEC
officials based on their official records14 which enjoy the presumption of regularity.15 As
such, these are prima facie evidence of the facts stated therein.16 And based on such
dates, there is no question that the petition was filed with the Court of Appeals beyond
the fifteen (15) day period. On this ground alone, the instant petition should be denied
as the SEC En Banc’s decision had already attained finality and the SEC’s findings of
fact, when supported by substantial evidence, is final.17

Nevertheless, to set the matters at rest, we shall delve into the other issues posed by
petitioner.

Petitioner’s arguments, substantially, are as follows: (1) jurisdiction is vested with the
regular courts as the present case is not one of the instances provided in P.D. 902-A;
(2) respondent RCP is not entitled to use the generic name "refractories"; (3) there is no
confusing similarity between their corporate names; and (4) there is no basis for the
award of attorney’s fees.18

Petitioner’s argument on the SEC’s jurisdiction over the case is utterly myopic. The
jurisdiction of the SEC is not merely confined to the adjudicative functions provided in
Section 5 of P.D. 902-A, as amended.19 By express mandate, it has absolute
jurisdiction, supervision and control over all corporations.20 It also exercises regulatory
and administrative powers to implement and enforce the Corporation Code,21 one of
which is Section 18, which provides:

"SEC. 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."

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, and it
has authority to de-register at all times and under all circumstances corporate names
which in its estimation are likely to generate confusion.22 Clearly therefore, the present
case falls within the ambit of the SEC’s regulatory powers.23

Likewise untenable is petitioner’s argument that there is no confusing or deceptive

similarity between petitioner and respondent RCP’s corporate names. Section 18 of
the Corporation Code expressly prohibits the use of a corporate name which 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 the foregoing prohibition is to avoid fraud upon the
public that will have occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and supervision
over corporation.24

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership
Names25 specifically requires that: (1) a corporate name shall not be identical,
misleading or confusingly similar to one already registered by another corporation with
the Commission;26 and (2) 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.27

As held in Philips Export B.V. vs. Court of Appeals,28 to fall within the prohibition of
the law, two requisites must be proven, to wit:

(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) deceptively 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.

As regards the first requisite, it has been held that the right to the exclusive use of a
corporate name with freedom from infringement by similarity is determined by priority
of adoption.29 In this case, respondent RCP was incorporated on October 13, 1976 and
since then has been using the corporate name "Refractories Corp. of the Philippines".
Meanwhile, petitioner was incorporated on August 23, 1979 originally under the name
"Synclaire Manufacturing Corporation". It only started using the name "Industrial
Refractories Corp. of the Philippines" when it amended its Articles of Incorporation on
August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus,
being the prior registrant, respondent RCP has acquired the right to use the word
"Refractories" as part of its corporate name.

Anent the second requisite, 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 and the Court must look to the record as well as the
names themselves.30 Petitioner’s corporate name is "Industrial Refractories Corp. of the
Phils.", while respondent’s is "Refractories Corp. of the Phils." Obviously, both names
contain the identical words "Refractories", "Corporation" and "Philippines". The only
word that distinguishes petitioner from respondent RCP is the word "Industrial" which
merely identifies a corporation’s general field of activities or operations. We need not
linger on these two corporate names to conclude that they are patently similar that even
with reasonable care and observation, confusion might arise.31 It must be noted that
both cater to the same clientele, i.e.¸ the steel industry. In fact, the SEC found that there
were instances when different steel companies were actually confused between the
two, especially since they also have similar product packaging.32 Such findings are
accorded not only great respect but even finality, and are binding upon this Court,
unless it is shown that it had arbitrarily disregarded or misapprehended evidence before
it to such an extent as to compel a contrary conclusion had such evidence been
properly appreciated. 33 And even without such proof of actual confusion between the
two corporate names, it suffices that confusion is probable or likely to occur.34

Refractory materials are described as follows:

"Refractories are structural materials used at high temperatures to [sic] industrial

furnaces. They are supplied mainly in the form of brick of standard sizes and of special
shapes. Refractories also include refractory cements, bonding mortars, plastic firebrick,
castables, ramming mixtures, and other bulk materials such as dead-burned grain
magneside, chrome or ground ganister and special clay."35

While the word "refractories" is a generic term, its usage is not widespread and is
limited merely to the industry/trade in which it is used, and its continuous use by
respondent RCP for a considerable period has made the term so closely identified with
it. 36 Moreover, as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo
Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus,
Haligi at Suhay ng Katotohanan,petitioner’s appropriation of respondent's corporate
name cannot find justification under the generic word rule. 37 A contrary ruling would
encourage other corporations to adopt verbatim and register an existing and protected
corporate name, to the detriment of the public.38

Finally, we find the award of P50,000.00 as attorney's fees to be fair and

reasonable. Article 2208 of the Civil Code allows the award of such fees when its
claimant is compelled to litigate with third persons or to incur expenses to protect its just
and valid claim. In this case, despite its undertaking to change its corporate name in
case another firm has acquired a prior right to use such name,39 it refused to do so, thus
compelling respondent to undergo litigation and incur expenses to protect its corporate
name.

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

Costs against petitioner.

SO ORDERED.
G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS

INDUSTRIAL DEVELOPMENT, INC., petitioners,
vs.
COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD
PHILIPS CORPORATION, respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-
GR Sp. No. 20067, upholding the Order of the Securities and Exchange Commission,
dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the
cancellation or removal of the word "PHILIPS" from private respondent's corporate
name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of
the Netherlands, although not engaged in business here, is the registered owner of the
trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration
Nos. R-1641 and R-1674, respectively issued by the Philippine Patents Office (presently
known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners
Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial
Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks
PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25
May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of
Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was
issued a Certificate of Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities &
Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS" from
Private Respondent's corporate name in view of the prior registration with the Bureau of
Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the
name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical
and Philips Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation,

Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743)
praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that
Private Respondent's use of the word PHILIPS amounts to an infringement and clear
violation of Petitioners' exclusive right to use the same considering that both parties
engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV
has no legal capacity to sue; that its use of its corporate name is not at all similar to
Petitioners' trademark PHILIPS when considered in its entirety; and that its products
consisting of chain rollers, belts, bearings and cutting saw are grossly different from
Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing
Officer, on 27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit.
In so ruling, the latter declared that inasmuch as the SEC found no sufficient ground for
the granting of injunctive relief on the basis of the testimonial and documentary
evidence presented, it cannot order the removal or cancellation of the word "PHILIPS"
from Private Respondent's corporate name on the basis of the same evidence
adopted in toto during trial on the merits. Besides, Section 18 of the Corporation Code
(infra) is applicable only when the corporate names in question are identical. Here, there
is no confusing similarity between Petitioners' and Private Respondent's corporate
names as those of the Petitioners contain at least two words different from that of the
Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June
1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names
of Petitioners and Private Respondent hardly breed confusion inasmuch as each
contains at least two different words and, therefore, rules out any possibility of confusing
one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review
on Certiorari before this Court, which Petition was later referred to the Court of Appeals
in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court of

Appeals1 swept aside Petitioners' claim that following the ruling in Converse Rubber
Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906,
January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private
Respondent's corporate name as the same constitutes a dominant part of Petitioners'
corporate names. In so holding, the Appellate Court observed that the Converse case is
not four-square with the present case inasmuch as the contending parties
in Converse are engaged in a similar business, that is, the manufacture of rubber
shoes. Upholding the SEC, the Appellate Court concluded that "private respondents'
products consisting of chain rollers, belts, bearings and cutting saw are unrelated and
non-competing with petitioners' products i.e. electrical lamps such that consumers
would not in any probability mistake one as the source or origin of the product of the
other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November

1990, hence, this Petition which was given due course on 22 April 1991, after which the
parties were required to submit their memoranda, the latest of which was received on 2
July 1991. In December 1991, the SEC was also required to elevate its records for the
perusal of this Court, the same not having been apparently before respondent Court of
Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court
declared that a corporation's right to use its corporate and trade name is a property
right, a right in rem, which it may assert and protect against the world in the same
manner as it may protect its tangible property, real or personal, against trespass or
conversion. It is regarded, to a certain extent, as a property right and one which cannot
be impaired or defeated by subsequent appropriation by another corporation in the
same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20
Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation

(American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160;
Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington
Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of
its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general
rule as to corporations is that each corporation must have a name by which it is to sue
and be sued and do all legal acts. The name of a corporation in this respect designates
the corporation in the same manner as the name of an individual designates the person
(Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg.
Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part
of the corporate franchise as any other privilege granted (Federal Secur. Co. vs.
Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or
similar to one already appropriated by a senior corporation while an individual's name is
thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of
California, 56 F 2d 973, 977). A corporation can no more use a corporate name in
violation of the rights of others than an individual can use his name legally acquired so
as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A
308).

Our own Corporation Code, in its Section 18, expressly provides that:
 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 law. Where a change in a corporate name is approved, the
commission shall issue an amended certificate of incorporation under the
amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites
must be proven, namely:

(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) deceptively 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.

The right to the exclusive use of a corporate name with freedom from infringement by
similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v.
Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75
Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners'
prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips
Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956,
respectively, while Respondent Standard Philips was issued a Certificate of Registration
on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also
used the trademark "PHILIPS" on electrical lamps of all types and their accessories
since 30 September 1922, as evidenced by Certificate of Registration No. 1651.

The second requisite no less exists in this case. 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. In so doing, the Court must
look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life
Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private
Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS
EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the
dominant word in that all the companies affiliated or associated with the principal
corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of
Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of
actual confusion or deception of the public much less a single purchaser of their product
who has been deceived or confused or showed any likelihood of confusion. It is settled,
however, that proof of actual confusion need not be shown. It suffices that confusion is
probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line
of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing
and the like, while petitioners deal principally with electrical products. It is significant to
note, however, that even the Director of Patents had denied Private Respondent's
application for registration of the trademarks "Standard Philips & Device" for chain,
rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its
subsidiaries in the Philippines equipment, machines and their parts which fall under
international class where "chains, rollers, belts, bearings and cutting saw," the goods in
connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also
belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in
its Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise

acquire, dispose of, and deal in and deal with any kind of goods, wares,
and merchandise such as but not limited to plastics, carbon products,
office stationery and supplies, hardware parts, electrical wiring devices,
electrical component parts, and/or complement of industrial, agricultural or
commercial machineries, constructive supplies, electrical supplies and
other merchandise which are or may become articles of commerce except
food, drugs and cosmetics and to carry on such business as
manufacturer, distributor, dealer, indentor, factor, manufacturer's
representative capacity for domestic or foreign companies. (emphasis
ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including

electronic, mechanical and other similar products . . . (p. 30, Record of
SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could

prevent it from dealing in the same line of business of electrical devices, products or
supplies which fall under its primary purposes. Besides, there is showing that Private
Respondent not only manufactured and sold ballasts for fluorescent lamps with their
corporate name printed thereon but also advertised the same as, among others,
Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp.
16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice
of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . .
tends to show said respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The
subsequent appropriator of the name or one confusingly similar thereto usually seeks
an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc.
v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC
maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC.
and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different
from that of the corporate name of respondent STANDARD PHILIPS CORPORATION,
which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names
formulated by the SEC, the proposed name "should not be similar to one already used
by another corporation or partnership. If the proposed name contains a word already
used as part of the firm name or style of a registered company; the proposed name
must contain two other words different from the company already registered" (Emphasis
ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have
two words different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was
registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use
which must be free from any infringement by similarity. A corporation has an exclusive
right to the use of its name, which may be protected by injunction upon a principle
similar to that upon which persons are protected in the use of trademarks and
tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud
on the corporation which has acquired a right to that name and perhaps carried on its
business thereunder, that another should attempt to use the same name, or the same
name with a slight variation in such a way as to induce persons to deal with it in the
belief that they are dealing with the corporation which has given a reputation to the
name (6 Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v. Borden's
Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually
contains only a single word, that is, "STANDARD", different from that of Petitioners
inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the
Purpose of distinguishing the corporation from partnerships and other business
organizations.

The fact that there are other companies engaged in other lines of business using the
word "PHILIPS" as part of their corporate names is no defense and does not warrant
the use by Private Respondent of such word which constitutes an essential feature of
Petitioners' corporate name previously adopted and registered and-having acquired the
status of a well-known mark in the Philippines and internationally as well (Bureau of
Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records).
In support of its application for the registration of its Articles of Incorporation with the
SEC, Private Respondent had submitted an undertaking "manifesting 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." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at

their peril; and the use of a name similar to one adopted by another
corporation, whether a business or a nonbusiness or non-profit
organization if misleading and likely to injure it in the exercise in its
corporate functions, regardless of intent, may be prevented by the
corporation having the prior right, by a suit for injunction against the new
corporation to prevent the use of the name (American Gold Star Mothers,
Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27
ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its
Resolution dated 20 November 1990, are SET ASIDE and a new one entered
ENJOINING private respondent from using "PHILIPS" as a feature of its corporate
name, and ORDERING the Securities and Exchange Commission to amend private
respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate
name of private respondent.

No costs.

SO ORDERED.
1. S.EC. MEMO NO. 21, s. 2013
G.R. No. 101897. March 5, 1993.

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM

OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM
OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.

Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for petitioner.

Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for
respondents.

Froilan Siobal for Western Pangasinan Lyceum.

SYLLABUS

1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED

NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY
EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION
EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO
THE WORD "LYCEUM". — The Articles of Incorporation of a corporation must, among
other things, set out the name of the corporation. Section 18 of the Corporation Code
establishes a restrictive rule insofar as corporate names are concerned: "Section 18.
Corporate name. — No corporate name may be allowed by the Securities an 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." The policy underlying the prohibition in
Section 18 against the registration of a corporate name which is "identical or deceptively
or confusingly similar" to that of any existing corporation or which is "patently deceptive"
or "patently confusing" or "contrary to existing laws," is the avoidance of fraud upon the
public which would have 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. We do not consider that the corporate names of private respondent
institutions are "identical with, or deceptively or confusingly similar" to that of the
petitioner institution. True enough, the corporate names of private respondent entities all
carry the word "Lyceum" but confusion and deception are effectively precluded by the
appending of geographic names to the word "Lyceum." Thus, we do not believe that the
"Lyceum of Aparri" can be mistaken by the general public for the Lyceum of the
Philippines, or that the "Lyceum of Camalaniugan" would be confused with the Lyceum
of the Philippines.

2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT

ATTENDED WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the word
"Lyceum" has acquired a secondary meaning in relation to petitioner with the result that
word, although originally a generic, has become appropriable by petitioner to the
exclusion of other institutions like private respondents herein. The doctrine of secondary
meaning originated in the field of trademark law. Its application has, however, been
extended to corporate names sine 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. In Philippine Nut Industry, Inc. v. Standard Brands, Inc., the
doctrine of secondary meaning was elaborated in the following terms: " . . . a word or
phrase originally incapable of exclusive appropriation with reference to an article on the
market, because geographically or otherwise descriptive, might nevertheless have been
used so long and so exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase has come to mean
that the article was his product." The question which arises, therefore, is whether or not
the use by petitioner of "Lyceum" in its corporate name has been for such length of time
and with such exclusivity as to have become associated or identified with the petitioner
institution in the mind of the general public (or at least that portion of the general public
which has to do with schools). The Court of Appeals recognized this issue and
answered it in the negative: "Under the doctrine of secondary meaning, 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 so long and so exclusively by one producer with reference to this article that, in
that trade and to that group of the purchasing public, the word or phrase has come to
mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This
circumstance has been referred to as the distinctiveness into which the name or phrase
has evolved through the substantial and exclusive use of the same for a considerable
period of time. . . . No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there was any of this kind, the same tend
to prove only that the appellant had been using the disputed word for a long period of
time. . . . In other words, while the appellant may have proved that it had been using the
word 'Lyceum' for a long period of time, this fact alone did not amount to mean that the
said word had acquired 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. More
so, there was no evidence presented to prove that confusion will surely arise if the same
word were to be used by other educational institutions. Consequently, the allegations of
the appellant in its first two assigned errors must necessarily fail." We agree with the
Court of Appeals. The number alone of the private respondents in the case at bar
suggests strongly that petitioner's use of the word "Lyceum" has not been attended with
the exclusivity essential for applicability of the doctrine of secondary meaning.
Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared with the
Western Pangasinan Lyceum and a little later with other private respondent institutions
which registered with the SEC using "Lyceum" as part of their corporation names. There
may well be other schools using Lyceum or Liceo in their names, but not registered with
the SEC because they have not adopted the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER
THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER
CORPORATE ENTITY'S NAME. — petitioner institution is not entitled to a legally
enforceable exclusive right to use the word "Lyceum" in its corporate name and that
other institutions may use "Lyceum" as part of their corporate names. To determine
whether a given corporate name is "identical" or "confusingly or deceptively similar" with
another entity's corporate name, it is not enough to ascertain the presence of "Lyceum"
or "Liceo" in both names. One must evaluate corporate names in their entirety and
when the name of petitioner is juxtaposed with the names of private respondents, they
are not reasonably regarded as "identical" or "confusingly or deceptively similar" with
each other.

DECISION

FELICIANO, J p:

Petitioner is an educational institution duly registered with the Securities and Exchange
Commission ("SEC"). When it first registered with the SEC on 21 September 1950, it
used the corporate name Lyceum of the Philippines, Inc. and has used that name ever
since.

On 24 February 1984, petitioner instituted proceedings before the SEC to compel the
private respondents, which are also educational institutions, to delete the word
"Lyceum" from their corporate names and permanently to enjoin them from using
"Lyceum" as part of their respective names.

Some of the private respondents actively participated in the proceedings before the
SEC. These are the following, the dates of their original SEC registration being set out
below opposite their respective names:

Western Pangasinan Lyceum — 27 October 1950

Lyceum of Cabagan — 31 October 1962

Lyceum of Lallo, Inc. — 26 March 1972

Lyceum of Aparri — 28 March 1972

Lyceum of Tuao, Inc. — 28 March 1972

Lyceum of Camalaniugan — 28 March 1972

The following private respondents were declared in default for failure to file an answer
despite service of summons:

Buhi Lyceum;
Central Lyceum of Catanduanes;

Lyceum of Eastern Mindanao, Inc.; and

Lyceum of Southern Philippines

Petitioner's original complaint before the SEC had included three (3) other entities:

1. The Lyceum of Malacanay;

2. The Lyceum of Marbel; and

3. The Lyceum of Araullo

The complaint was later withdrawn insofar as concerned the Lyceum of Malacanay and
the Lyceum of Marbel, for failure to serve summons upon these two (2) entities. The
case against the Liceum of Araullo was dismissed when that school motu proprio
change its corporate name to "Pamantasan ng Araullo."

The background of the case at bar needs some recounting. Petitioner had sometime
before commenced in the SEC a proceeding (SEC-Case No. 1241) against the Lyceum
of Baguio, Inc. to require it to change its corporate name and to adopt another name not
"similar [to] or identical" with that of petitioner. In an Order dated 20 April 1977,
Associate Commissioner Julio Sulit held that the corporate name of petitioner and that
of the Lyceum of Baguio, Inc. were substantially identical because of the presence of a
"dominant" word, i.e., "Lyceum," the name of the geographical location of the campus
being the only word which distinguished one from the other corporate name. The SEC
also noted that petitioner had registered as a corporation ahead of the Lyceum of
Baguio, Inc. in point of time, 1 and ordered the latter to change its name to another
name "not similar or identical [with]" the names of previously registered entities.

The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme Court in
a case docketed as G.R. No. L-46595. In a Minute Resolution dated 14 September
1977, the Court denied the Petition for Review for lack of merit. Entry of judgment in that
case was made on 21 October 1977. 2

Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then wrote all
the educational institutions it could find using the word "Lyceum" as part of their
corporate name, and advised them to discontinue such use of "Lyceum." When, with the
passage of time, it became clear that this recourse had failed, petitioner instituted
before the SEC SEC-Case No. 2579 to enforce what petitioner claims as its proprietary
right to the word "Lyceum." The SEC hearing officer rendered a decision sustaining
petitioner's claim to an exclusive right to use the word "Lyceum." The hearing officer
relied upon the SEC ruling in the Lyceum of Baguio, Inc. case (SEC-Case No. 1241)
and held that the word "Lyceum" was capable of appropriation and that petitioner had
acquired an enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of the
hearing officer was reversed and set aside. The SEC En Banc did not consider the word
"Lyceum" to have become so identified with petitioner as to render use thereof by other
institutions as productive of confusion about the identity of the schools concerned in the
mind of the general public. Unlike its hearing officer, the SEC En Banc held that the
attaching of geographical names to the word "Lyceum" served sufficiently to distinguish
the schools from one another, especially in view of the fact that the campuses of
petitioner and those of the private respondents were physically quite remote from each
other. 3

Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28 June
1991, however, the Court of Appeals affirmed the questioned Orders of the SEC En
Banc. 4 Petitioner filed a motion for reconsideration, without success.

Before this Court, petitioner asserts that the Court of Appeals committed the following
errors:

1. The Court of Appeals erred in holding that the Resolution of the Supreme Court in
G.R. No. L-46595 did not constitute stare decisis as to apply to this case and in not
holding that said Resolution bound subsequent determinations on the right to exclusive
use of the word Lyceum.

2. The Court of Appeals erred in holding that respondent Western Pangasinan Lyceum,
Inc. was incorporated earlier than petitioner.

3. The Court of Appeals erred in holding that the word Lyceum has not acquired a
secondary meaning in favor of petitioner.

4. The Court of Appeals erred in holding that Lyceum as a generic word cannot be
appropriated by the petitioner to the exclusion of others. 5

We will consider all the foregoing ascribed errors, though not necessarily seriatim. We
begin by noting that the Resolution of the Court in G.R. No. L-46595 does not, of
course, constitute res adjudicata in respect of the case at bar, since there is no identity
of parties. Neither is stare decisis pertinent, if only because the SEC En Banc itself has
re-examined Associate Commissioner Sulit's ruling in the Lyceum of Baguio case. The
Minute Resolution of the Court in G.R. No. L-46595 was not a reasoned adoption of the
Sulit ruling.

The Articles of Incorporation of a corporation must, among other things, set out the
name of the corporation. 6 Section 18 of the Corporation Code establishes a restrictive
rule insofar as corporate names are concerned:

"SECTION 18. Corporate name. — No corporate name may be allowed by the

Securities an 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." (Emphasis supplied)

The policy underlying the prohibition in Section 18 against the registration of a corporate
name which is "identical or deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently confusing" or "contrary to
existing laws," is the avoidance of fraud upon the public which would have 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. 7

We do not consider that the corporate names of private respondent institutions are
"identical with, or deceptively or confusingly similar" to that of the petitioner institution.
True enough, the corporate names of private respondent entities all carry the word
"Lyceum" but confusion and deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, we do not believe that the "Lyceum of
Aparri" can be mistaken by the general public for the Lyceum of the Philippines, or that
the "Lyceum of Camalaniugan" would be confused with the Lyceum of the Philippines.

Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which in turn
referred to a locality on the river Ilissius in ancient Athens "comprising an enclosure
dedicated to Apollo and adorned with fountains and buildings erected by Pisistratus,
Pericles and Lycurgus frequented by the youth for exercise and by the philosopher
Aristotle and his followers for teaching." 8 In time, the word "Lyceum" became
associated with schools and other institutions providing public lectures and concerts and
public discussions. Thus today, the word "Lyceum" generally refers to a school or an
institution of learning. While the Latin word "lyceum" has been incorporated into the
English language, the word is also found in Spanish (liceo) and in French (lycee). As the
Court of Appeals noted in its Decision, Roman Catholic schools frequently use the term;
e.g., "Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate,"
"Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word "university."
In the name of the petitioner, "Lyceum" appears to be a substitute for "university;" in
other places, however, "Lyceum," or "Liceo" or "Lycee" frequently denotes a secondary
school or a college. It may be (though this is a question of fact which we need not
resolve) that the use of the word "Lyceum" may not yet be as widespread as the use of
"university," but it is clear that a not inconsiderable number of educational institutions
have adopted "Lyceum" or "Liceo" as part of their corporate names. Since "Lyceum" or
"Liceo" denotes a school or institution of learning, it is not unnatural to use this word to
designate an entity which is organized and operating as an educational institution.

It is claimed, however, by petitioner that the word "Lyceum" has acquired a secondary
meaning in relation to petitioner with the result that that word, although originally a
generic, has become appropriable by petitioner to the exclusion of other institutions like
private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its
application has, however, been extended to corporate names sine 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. 10 In Philippine Nut
Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary meaning was
elaborated in the following terms:

" . . . a word or phrase originally incapable of exclusive appropriation with reference to

an article on the market, because geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively by one producer with
reference to his article that, in that trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was his product." 12

The question which arises, therefore, is whether or not the use by petitioner of "Lyceum"
in its corporate name has been for such length of time and with such exclusivity as to
have become associated or identified with the petitioner institution in the mind of the
general public (or at least that portion of the general public which has to do with
schools). The Court of Appeals recognized this issue and answered it in the negative:

"Under the doctrine of secondary meaning, 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 so long and so exclusively
by one producer with reference to this article that, in that trade and to that group of the
purchasing public, the word or phrase has come to mean that the article was his
produce (Ana Ang vs. Toribio Teodoro, 74 Phil. 56). This circumstance has been
referred to as the distinctiveness into which the name or phrase has evolved through
the substantial and exclusive use of the same for a considerable period of time.
Consequently, the same doctrine or principle cannot be made to apply where the
evidence did not prove that the business (of the plaintiff) has continued for so long a
time that it has become of consequence and acquired a 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 (by the defendant) (Ang Si Heng vs.
Wellington Department Store, Inc., 92 Phil. 448).

With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the
aforementioned requisites. No evidence was ever presented in the hearing before the
Commission which sufficiently proved that the word 'Lyceum' has indeed acquired
secondary meaning in favor of the appellant. If there was any of this kind, the same tend
to prove only that the appellant had been using the disputed word for a long period of
time. Nevertheless, its (appellant) exclusive use of the word (Lyceum) was never
established or proven as in fact the evidence tend to convey that the cross-claimant was
already using the word 'Lyceum' seventeen (17) years prior to the date the appellant
started using the same word in its corporate name. Furthermore, educational institutions
of the Roman Catholic Church had been using the same or similar word like 'Liceo de
Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de Albay'
long before appellant started using the word 'Lyceum'. The appellant also failed to prove
that the word 'Lyceum' has become so identified with its educational institution that
confusion will surely arise in the minds of the public if the same word were to be used
by other educational institutions.

In other words, while the appellant may have proved that it had been using the word
'Lyceum' for a long period of time, this fact alone did not amount to mean that the said
word had acquired 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. More so,
there was no evidence presented to prove that confusion will surely arise if the same
word were to be used by other educational institutions. Consequently, the allegations of
the appellant in its first two assigned errors must necessarily fail." 13 (Underscoring
partly in the original and partly supplied)

We agree with the Court of Appeals. The number alone of the private respondents in
the case at bar suggests strongly that petitioner's use of the word "Lyceum" has not
been attended with the exclusivity essential for applicability of the doctrine of secondary
meaning. It may be noted also that at least one of the private respondents, i.e., the
Western Pangasinan Lyceum, Inc., used the term "Lyceum" seventeen (17) years
before the petitioner registered its own corporate name with the SEC and began using
the word "Lyceum." It follows that if any institution had acquired an exclusive right to the
word "Lyceum," that institution would have been the Western Pangasinan Lyceum, Inc.
rather than the petitioner institution.

In this connection, petitioner argues that because the Western Pangasinan Lyceum, Inc.
failed to reconstruct its records before the SEC in accordance with the provisions of
R.A. No. 62, which records had been destroyed during World War II, Western
Pangasinan Lyceum should be deemed to have lost all rights it may have acquired by
virtue of its past registration. It might be noted that the Western Pangasinan Lyceum,
Inc. registered with the SEC soon after petitioner had filed its own registration on 21
September 1950. Whether or not Western Pangasinan Lyceum, Inc. must be deemed to
have lost its rights under its original 1933 registration, appears to us to be quite
secondary in importance; we refer to this earlier registration simply to underscore the
fact that petitioner's use of the word "Lyceum" was neither the first use of that term in
the Philippines nor an exclusive use thereof. Petitioner's use of the word "Lyceum" was
not exclusive but was in truth shared with the Western Pangasinan Lyceum and a little
later with other private respondent institutions which registered with the SEC using
"Lyceum" as part of their corporation names. There may well be other schools using
Lyceum or Liceo in their names, but not registered with the SEC because they have not
adopted the corporate form of organization.

We conclude and so hold that petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other
institutions may use "Lyceum" as part of their corporate names. To determine whether a
given corporate name is "identical" or "confusingly or deceptively similar" with another
entity's corporate name, it is not enough to ascertain the presence of "Lyceum" or
"Liceo" in both names. One must evaluate corporate names in their entirety and when
the name of petitioner is juxtaposed with the names of private respondents, they are not
reasonably regarded as "identical" or "confusingly or deceptively similar" with each
other.

WHEREFORE, the petitioner having failed to show any reversible error on the part of
the public respondent Court of Appeals, the Petition for Review is DENIED for lack of
merit, and the Decision of the Court of Appeals dated 28 June 1991 is hereby
AFFIRMED. No pronouncement as to costs.

SO ORDERED.
G.R. No. 150416 July 21, 2006

SEVENTH DAY ADVENTIST CONFERENCE CHURCH OF SOUTHERN

PHILIPPINES, INC., and/or represented by MANASSEH C. ARRANGUEZ, BRIGIDO
P. GULAY, FRANCISCO M. LUCENARA, DIONICES O. TIPGOS, LORESTO C.
MURILLON, ISRAEL C. NINAL, GEORGE G. SOMOSOT, JESSIE T. ORBISO,
LORETO PAEL and JOEL BACUBAS, petitioners,
vs.
NORTHEASTERN MINDANAO MISSION OF SEVENTH DAY ADVENTIST, INC.,
and/or represented by JOSUE A. LAYON, WENDELL M. SERRANO, FLORANTE P.
TY and JETHRO CALAHAT and/or SEVENTH DAY ADVENTIST CHURCH [OF]
NORTHEASTERN MINDANAO MISSION,* Respondents.

DECISION

CORONA, J.:

This petition for review on certiorari assails the Court of Appeals (CA) decision1 and
resolution2 in CA-G.R. CV No. 41966 affirming, with modification, the decision of the
Regional Trial Court (RTC) of Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.

This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT) No.
4468 in Bayugan, Agusan del Sur originally owned by Felix Cosio and his wife, Felisa
Cuysona.

On April 21, 1959, the spouses Cosio donated the land to the South Philippine Union
Mission of Seventh Day Adventist Church of Bayugan Esperanza, Agusan (SPUM-SDA
Bayugan).3 Part of the deed of donation read:

KNOW ALL MEN BY THESE PRESENTS:

That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age,
[h]usband and wife, both are citizen[s] of the Philippines, and resident[s] with post office
address in the Barrio of Bayugan, Municipality of Esperanza, Province of Agusan,
Philippines, do hereby grant, convey and forever quit claim by way of Donation or gift
unto the South Philippine [Union] Mission of Seventh Day Adventist Church of Bayugan,
Esperanza, Agusan, all the rights, title, interest, claim and demand both at law and as
well in possession as in expectancy of in and to all the place of land and portion situated
in the Barrio of Bayugan, Municipality of Esperanza, Province of Agusan, Philippines,
more particularly and bounded as follows, to wit:

1. a parcel of land for Church Site purposes only.

2. situated [in Barrio Bayugan, Esperanza].

3. Area: 30 meters wide and 30 meters length or 900 square meters.

4. Lot No. 822-Pls-225. Homestead Application No. V-36704, Title No. P-285.

5. Bounded Areas

North by National High Way; East by Bricio Gerona; South by Serapio Abijaron and
West by Feliz Cosio xxx. 4

The donation was allegedly accepted by one Liberato Rayos, an elder of the Seventh
Day Adventist Church, on behalf of the donee.

Twenty-one years later, however, on February 28, 1980, the same parcel of land was
sold by the spouses Cosio to the Seventh Day Adventist Church of Northeastern
Mindanao Mission (SDA-NEMM).5 TCT No. 4468 was thereafter issued in the name of
SDA-NEMM.6

Claiming to be the alleged donee’s 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.

On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a suit
for cancellation of title, quieting of ownership and possession, declaratory relief and
reconveyance with prayer for preliminary injunction and damages), in the RTC of
Bayugan, Agusan del Sur. After trial, the trial court rendered a decision 7 on November
20, 1992 upholding the sale in favor of respondents.

On appeal, the CA affirmed the RTC decision but deleted the award of moral damages
and attorney’s fees.8Petitioners’ motion for reconsideration was likewise denied. Thus,
this petition.

The issue in this petition is simple: should SDA-NEMM’s ownership of the lot covered by
TCT No. 4468 be upheld?9We answer in the affirmative.

The controversy between petitioners and respondents involves two supposed transfers
of the lot previously owned by the spouses Cosio: (1) a donation to petitioners’ alleged
predecessors-in-interest in 1959 and (2) a sale to respondents in 1980.

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.
Petitioners contend that the appellate court should not have ruled on the validity of the
donation since it was not among the issues raised on appeal. This is not correct
because an appeal generally opens the entire case for review.

We agree with the appellate court that the alleged donation to petitioners was void.

Donation is an act of liberality whereby a person disposes gratuitously of a thing or right

in favor of another personwho 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.

Declaring themselves a de facto corporation, petitioners allege that they should benefit
from the donation.

But there are stringent requirements before one can qualify as a de facto corporation:

(a) the existence of a valid law under which it may be incorporated;

(b) an attempt in good faith to incorporate; and

(c) assumption of corporate powers.10

While there existed the old Corporation Law (Act 1459),11 a law under which SPUM-
SDA Bayugan could have been organized, there is no proof that there was an attempt
to incorporate at that time.

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 organize14 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 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.19

Sustaining the validity of respondents’ title as well as their right of ownership over the
property, the trial court stated:

[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx he
acknowledged that the same was his xxx but that it was not his intention to sell the
controverted property because he had previously donated the same lot to the South
Philippine Union Mission of SDA Church of Bayugan-Esperanza. Cosio avouched that
had it been his intendment to sell, he would not have disposed of it for a
mere P2,000.00 in two installments but for P50,000.00 or P60,000.00. According to him,
the P2,000.00 was not a consideration of the sale but only a form of help extended.

A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale

disclosed that it has the essential requisites of contracts pursuant to xxx Article
1318 of the Civil Code, except that the consideration of P2,000.00 is somewhat
insufficient for a [1,069-square meter] land. Would then this inadequacy of the
consideration render the contract invalid?

Article 1355 of the Civil Code provides:

Except in cases specified by law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue influence.

No evidence [of fraud, mistake or undue influence] was adduced by [petitioners].

xxx
Well-entrenched is the rule that a Certificate of Title is generally a conclusive
evidence of [ownership] of the land. There is that strong and solid presumption that
titles were legally issued and that they are valid. It is irrevocable and indefeasible and
the duty of the Court is to see to it that the title is maintained and respected unless
challenged in a direct proceeding. xxx The title shall be received as evidence in all the
Courts and shall be conclusive as to all matters contained therein.

[This action was instituted almost seven years after the certificate of title in respondents’
name was issued in 1980.]20

According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be
transferred to the vendee upon the actual or constructive delivery thereof. On this, the
noted author Arturo Tolentino had this to say:

The execution of [a] public instrument xxx transfers the ownership from the vendor to
the vendee who may thereafter exercise the rights of an owner over the same 21

Here, transfer of ownership from the spouses Cosio to SDA-NEMM was made upon
constructive delivery of the property on February 28, 1980 when the sale was made
through a public instrument.22 TCT No. 4468 was thereafter issued and it remains in the
name of SDA-NEMM.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.
G.R. No. 15574 September 17, 1919 (note: sir 1920)

SMITH, BELL & COMPANY (LTD.), petitioner,

vs.
JOAQUIN NATIVIDAD, Collector of Customs of the port of Cebu, respondent.

Ross and Lawrence for petitioner.

Attorney-General Paredes for respondent.

MALCOLM, J.:

A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad, Collector of Customs of the port of
Cebu, Philippine Islands, to compel him to issue a certificate of Philippine registry to the petitioner for its motor vessel Bato.
The Attorney-General, acting as counsel for respondent, demurs to the petition on the general ground that it does not state
facts sufficient to constitute a cause of action. While the facts are thus admitted, and while, moreover, the pertinent
provisions of law are clear and understandable, and interpretative American jurisprudence is found in abundance, yet the
issue submitted is not lightly to be resolved. The question, flatly presented, is, whether Act. No. 2761 of the Philippine
Legislature is valid — or, more directly stated, whether the Government of the Philippine Islands, through its Legislature, can
deny the registry of vessels in its coastwise trade to corporations having alien stockholders.

FACTS.

Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine Islands. A majority of its
stockholders are British subjects. It is the owner of a motor vessel known as the Bato built for it in the Philippine Islands in
1916, of more than fifteen tons gross The Bato was brought to Cebu in the present year for the purpose of transporting
plaintiff's merchandise between ports in the Islands. Application was made at Cebu, the home port of the vessel, to the
Collector of Customs for a certificate of Philippine registry. The Collector refused to issue the certificate, giving as his reason
that all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the United States or of the Philippine Islands.
The instant action is the result.

LAW.

The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but reenacting a portion of section 3 of
this Law, and still in force, provides in its section 1:

That until Congress shall have authorized the registry as vessels of the United States of vessels owned in the
Philippine Islands, the Government of the Philippine Islands is hereby authorized to adopt, from time to time, and
enforce regulations governing the transportation of merchandise and passengers between ports or places in the
Philippine Archipelago. (35 Stat. at L., 70; Section 3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)

The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in force, provides in section 3, (first
paragraph, first sentence), 6, 7, 8, 10, and 31, as follows.

SEC. 3. That no law shall be enacted in said Islands which shall deprive any person of life, liberty, or property
without due process of law, or deny to any person therein the equal protection of the laws. . . .

SEC. 6. That the laws now in force in the Philippines shall continue in force and effect, except as altered,
amended, or modified herein, until altered, amended, or repealed by the legislative authority herein provided or by
Act of Congress of the United States.

SEC. 7. That the legislative authority herein provided shall have power, when not inconsistent with this Act, by due
enactment to amend, alter modify, or repeal any law, civil or criminal, continued in force by this Act as it may from
time to time see fit

This power shall specifically extend with the limitation herein provided as to the tariff to all laws relating to revenue
provided as to the tariff to all laws relating to revenue and taxation in effect in the Philippines.

SEC. 8. That general legislative power, except as otherwise herein provided, is hereby granted to the Philippine
Legislature, authorized by this Act.
 SEC. 10. That while this Act provides that the Philippine government shall have the authority to enact a tariff law
the trade relations between the islands and the United States shall continue to be governed exclusively by laws of
the Congress of the United States: Provided, That tariff acts or acts amendatory to the tariff of the Philippine
Islands shall not become law until they shall receive the approval of the President of the United States, nor shall
any act of the Philippine Legislature affecting immigration or the currency or coinage laws of the Philippines
become a law until it has been approved by the President of the United States: Provided further, That the
President shall approve or disapprove any act mentioned in the foregoing proviso within six months from and after
its enactment and submission for his approval, and if not disapproved within such time it shall become a law the
same as if it had been specifically approved.

SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict with any of the provisions of this
Act are hereby continued in force and effect." (39 Stat at L., 546.)

On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section of this law amended section 1172
of the Administrative Code to read as follows:

SEC. 1172. Certificate of Philippine register. — Upon registration of a vessel of domestic ownership, and of more
than fifteen tons gross, a certificate of Philippine register shall be issued for it. If the vessel is of domestic
ownership and of fifteen tons gross or less, the taking of the certificate of Philippine register shall be optional with
the owner.

"Domestic ownership," as used in this section, means ownership vested in some one or more of the following
classes of persons: (a) Citizens or native inhabitants of the Philippine Islands; (b) citizens of the United States
residing in the Philippine Islands; (c) any corporation or company composed wholly of citizens of the Philippine
Islands or of the United States or of both, created under the laws of the United States, or of any State thereof, or of
thereof, or the managing agent or master of the vessel resides in the Philippine Islands

Any vessel of more than fifteen gross tons which on February eighth, nineteen hundred and eighteen, had a
certificate of Philippine register under existing law, shall likewise be deemed a vessel of domestic ownership so
long as there shall not be any change in the ownership thereof nor any transfer of stock of the companies or
corporations owning such vessel to person not included under the last preceding paragraph.

Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative Code to read as follows:

SEC. 1176. Investigation into character of vessel. — No application for a certificate of Philippine register shall be
approved until the collector of customs is satisfied from an inspection of the vessel that it is engaged or destined to
be engaged in legitimate trade and that it is of domestic ownership as such ownership is defined in section eleven
hundred and seventy-two of this Code.

The collector of customs may at any time inspect a vessel or examine its owner, master, crew, or passengers in
order to ascertain whether the vessel is engaged in legitimate trade and is entitled to have or retain the certificate
of Philippine register.

SEC. 1202. Limiting number of foreign officers and engineers on board vessels. — No Philippine vessel operating
in the coastwise trade or on the high seas shall be permitted to have on board more than one master or one mate
and one engineer who are not citizens of the United States or of the Philippine Islands, even if they hold licenses
under section one thousand one hundred and ninety-nine hereof. No other person who is not a citizen of the
United States or of the Philippine Islands shall be an officer or a member of the crew of such vessel. Any such
vessel which fails to comply with the terms of this section shall be required to pay an additional tonnage tax of fifty
centavos per net ton per month during the continuance of said failure.

ISSUES.

Predicated on these facts and provisions of law, the issues as above stated recur, namely, whether Act No 2761 of the
Philippine Legislature is valid in whole or in part — whether the Government of the Philippine Islands, through its
Legislature, can deny the registry of vessel in its coastwise trade to corporations having alien stockholders .

OPINION.
1. Considered from a positive standpoint, there can exist no measure of doubt as to the power of the Philippine Legislature
to enact Act No. 2761. The Act of Congress of April 29, 1908, with its specific delegation of authority to the Government of
the Philippine Islands to regulate the transportation of merchandise and passengers between ports or places therein, the
liberal construction given to the provisions of the Philippine Bill, the Act of Congress of July 1, 1902, by the courts, and the
grant by the Act of Congress of August 29, 1916, of general legislative power to the Philippine Legislature, are certainly
superabundant authority for such a law. While the Act of the local legislature may in a way be inconsistent with the Act of
Congress regulating the coasting trade of the Continental United States, yet the general rule that only such laws of the
United States have force in the Philippines as are expressly extended thereto, and the abnegation of power by Congress in
favor of the Philippine Islands would leave no starting point for convincing argument. As a matter of fact, counsel for
petitioner does not assail legislative action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport
[1859] 22 How., 227.)

2. It is from the negative, prohibitory standpoint that counsel argues against the constitutionality of Act No. 2761. The first
paragraph of the Philippine Bill of Rights of the Philippine Bill, repeated again in the first paragraph of the Philippine Bill of
Rights as set forth in the Jones Law, provides "That no law shall be enacted in said Islands which shall deprive any person
of life, liberty, or property without due process of law, or deny to any person therein the equal protection of the laws."
Counsel says that Act No. 2761 denies to Smith, Bell & Co., Ltd., the equal protection of the laws because it, in effect,
prohibits the corporation from owning vessels, and because classification of corporations based on the citizenship of one or
more of their stockholders is capricious, and that Act No. 2761 deprives the corporation of its properly without due process
of law because by the passage of the law company was automatically deprived of every beneficial attribute of ownership in
the Bato and left with the naked title to a boat it could not use .

The guaranties extended by the Congress of the United States to the Philippine Islands have been used in the same sense
as like provisions found in the United States Constitution. While the "due process of law and equal protection of the laws"
clause of the Philippine Bill of Rights is couched in slightly different words than the corresponding clause of the Fourteenth
Amendment to the United States Constitution, the first should be interpreted and given the same force and effect as the
latter. (Kepner vs. U.S. [1904], 195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull [1910], 15 Phil., 7.)
The meaning of the Fourteenth Amendment has been announced in classic decisions of the United States Supreme Court.
Even at the expense of restating what is so well known, these basic principles must again be set down in order to serve as
the basis of this decision.

The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, are universal in
their application to all person within the territorial jurisdiction, without regard to any differences of race, color, or nationality.
The word "person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.)
Private corporations, likewise, are "persons" within the scope of the guaranties in so far as their property is concerned.
(Santa Clara County vs. Southern Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs. Pennsylvania [1888],.125
U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford [1896], 164 U. S., 578.) Classification with the end in view of
providing diversity of treatment may be made among corporations, but must be based upon some reasonable ground and
not be a mere arbitrary selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U. S., 150.) Examples of laws
held unconstitutional because of unlawful discrimination against aliens could be cited. Generally, these decisions relate to
statutes which had attempted arbitrarily to forbid aliens to engage in ordinary kinds of business to earn their living.
(State vs. Montgomery [1900], 94 Maine, 192, peddling — but see. Commonwealth vs. Hana [1907], 195 Mass., 262;
Templar vs. Board of Examiners of Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356,
discrimination against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott [1880], 1 Fed , 481;
Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata Limestone Co. vs. Fagley [1898], 187 Penn., 193, all
relating to the employment of aliens by private corporations.)

A literal application of general principles to the facts before us would, of course, cause the inevitable deduction that Act No.
2761 is unconstitutional by reason of its denial to a corporation, some of whole members are foreigners, of the equal
protection of the laws. Like all beneficient propositions, deeper research discloses provisos. Examples of a denial of rights to
aliens notwithstanding the provisions of the Fourteenth Amendment could be cited. (Tragesser vs.Gray [1890], 73 Md., 250,
licenses to sell spirituous liquors denied to persons not citizens of the United States; Commonwealth vs. Hana [1907], 195
Mass , 262, excluding aliens from the right to peddle; Patsone vs.Commonwealth of Pennsylvania [1914], 232 U. S. , 138,
prohibiting the killing of any wild bird or animal by any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla.,
442, discriminating in favor of citizens with reference to the taking for private use of the common property in fish and oysters
found in the public waters of the State; Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York [1915], 239 U. S.,
195, limiting employment on public works by, or for, the State or a municipality to citizens of the United States.)

One of the exceptions to the general rule, most persistent and far reaching in influence is, that neither the Fourteenth
Amendment to the United States Constitution, broad and comprehensive as it is, nor any other amendment, "was designed
to interfere with the power of the State, sometimes termed its `police power,' to prescribe regulations to promote the health,
peace, morals, education, and good order of the people, and legislate so as to increase the industries of the State, develop
its resources and add to its wealth and prosperity. From the very necessities of society, legislation of a special character,
having these objects in view, must often be had in certain districts." (Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans
Gas Co. vs. Lousiana Light Co. [1885], 115 U.S., 650.) This is the same police power which the United States Supreme
Court say "extends to so dealing with the conditions which exist in the state as to bring out of them the greatest welfare in of
its people." (Bacon vs.Walker [1907], 204 U.S., 311.) For quite similar reasons, none of the provision of the Philippine
Organic Law could could have had the effect of denying to the Government of the Philippine Islands, acting through its
Legislature, the right to exercise that most essential, insistent, and illimitable of powers, the sovereign police power, in the
promotion of the general welfare and the public interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs. Rafferty
[1915], 32 Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable exception permits of the
regulation or distribution of the public domain or the common property or resources of the people of the State, so that use
may be limited to its citizens. (Ex parte Gilleti [1915], 70 Fla., 442; McCready vs. Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still another exception permits of the limitation of
employment in the construction of public works by, or for, the State or a municipality to citizens of the United States or of the
State. (Atkin vs. Kansas [1903],191 U. S., 207; Heim vs. McCall [1915], 239 U.S., 175; Crane vs. New York [1915], 239 U.
S., 195.) Even as to classification, it is admitted that a State may classify with reference to the evil to be prevented; the
question is a practical one, dependent upon experience. (Patsone vs.Commonwealth of Pennsylvania [1914], 232 U. S.,
138.)

To justify that portion of Act no. 2761 which permits corporations or companies to obtain a certificate of Philippine registry
only on condition that they be composed wholly of citizens of the Philippine Islands or of the United States or both, as not
infringing Philippine Organic Law, it must be done under some one of the exceptions here mentioned This must be done,
moreover, having particularly in mind what is so often of controlling effect in this jurisdiction — our local experience and our
peculiar local conditions.

To recall a few facts in geography, within the confines of Philippine jurisdictional limits are found more than three thousand
islands. Literally, and absolutely, steamship lines are, for an Insular territory thus situated, the arteries of commerce. If one
be severed, the life-blood of the nation is lost. If on the other hand these arteries are protected, then the security of the
country and the promotion of the general welfare is sustained. Time and again, with such conditions confronting it, has the
executive branch of the Government of the Philippine Islands, always later with the sanction of the judicial branch, taken a
firm stand with reference to the presence of undesirable foreigners. The Government has thus assumed to act for the all-
sufficient and primitive reason of the benefit and protection of its own citizens and of the self-preservation and integrity of its
dominion. (In re Patterson [1902], 1 Phil., 93; Forbes vs.Chuoco, Tiaco and Crossfield [1910], 16 Phil., 534;.228 U.S.,
549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by foreigners, particularly by such solid and reputable firms as
the instant claimant, might indeed traverse the waters of the Philippines for ages without doing any particular harm. Again,
some evilminded foreigner might very easily take advantage of such lavish hospitality to chart Philippine waters, to obtain
valuable information for unfriendly foreign powers, to stir up insurrection, or to prejudice Filipino or American commerce.
Moreover, under the Spanish portion of Philippine law, the waters within the domestic jurisdiction are deemed part of the
national domain, open to public use. (Book II, Tit. IV, Ch. I, Civil Code; Spanish Law of Waters of August 3, 1866, arts 1, 2,
3.) Common carriers which in the Philippines as in the United States and other countries are, as Lord Hale said, "affected
with a public interest," can only be permitted to use these public waters as a privilege and under such conditions as to the
representatives of the people may seem wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)

In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein before mentioned, Justice Holmes
delivering the opinion of the United States Supreme Court said:

This statute makes it unlawful for any unnaturalized foreign-born resident to kill any wild bird or animal except in
defense of person or property, and `to that end' makes it unlawful for such foreign-born person to own or be
possessed of a shotgun or rifle; with a penalty of $25 and a forfeiture of the gun or guns. The plaintiff in error was
found guilty and was sentenced to pay the abovementioned fine. The judgment was affirmed on successive
appeals. (231 Pa., 46; 79 Atl., 928.) He brings the case to this court on the ground that the statute is contrary to the
14th Amendment and also is in contravention of the treaty between the United States and Italy, to which latter
country the plaintiff in error belongs .

Under the 14th Amendment the objection is twofold; unjustifiably depriving the alien of property, and discrimination
against such aliens as a class. But the former really depends upon the latter, since it hardly can be disputed that if
the lawful object, the protection of wild life (Geer vs. Connecticut, 161 U.S., 519; 40 L. ed., 793; 16 Sup. Ct. Rep.,
600), warrants the discrimination, the, means adopted for making it effective also might be adopted. . . .

The discrimination undoubtedly presents a more difficult question. But we start with reference to the evil to be
prevented, and that if the class discriminated against is or reasonably might be considered to define those from
whom the evil mainly is to be feared, it properly may be picked out. A lack of abstract symmetry does not matter.
The question is a practical one, dependent upon experience. . . .
 The question therefore narrows itself to whether this court can say that the legislature of Pennsylvania was not
warranted in assuming as its premise for the law that resident unnaturalized aliens were the peculiar source of the
evil that it desired to prevent. (Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052; 33 Sup. Ct. Rep., 692.)

Obviously the question, so stated, is one of local experience, on which this court ought to be very slow to declare
that the state legislature was wrong in its facts (Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed., 971,.977; 33
Sup. Ct. Rep., 610.) If we might trust popular speech in some states it was right; but it is enough that this court has
no such knowledge of local conditions as to be able to say that it was manifestly wrong. . . .

Judgment affirmed.

We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien stockholders, is entitled to the
protection afforded by the due-process of law and equal protection of the laws clause of the Philippine Bill of Rights,
nevertheless, Act No. 2761 of the Philippine Legislature, in denying to corporations such as Smith, Bell &. Co. Ltd., the right
to register vessels in the Philippines coastwise trade, does not belong to that vicious species of class legislation which must
always be condemned, but does fall within authorized exceptions, notably, within the purview of the police power, and so
does not offend against the constitutional provision.

This opinion might well be brought to a close at this point. It occurs to us, however, that the legislative history of the United
States and the Philippine Islands, and, probably, the legislative history of other countries, if we were to take the time to
search it out, might disclose similar attempts at restriction on the right to enter the coastwise trade, and might thus furnish
valuable aid by which to ascertain and, if possible, effectuate legislative intention.

3. The power to regulate commerce, expressly delegated to the Congress by the Constitution, includes the power
to nationalize ships built and owned in the United States by registries and enrollments, and the recording of the
muniments of title of American vessels. The Congress "may encourage or it may entirely prohibit such commerce,
and it may regulate in any way it may see fit between these two extremes." (U.S. vs.Craig [1886], 28 Fed., 795;
Gibbons vs. Ogden [1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)

Acting within the purview of such power, the first Congress of the United States had not been long convened before it
enacted on September 1, 1789, "An Act for Registering and Clearing Vessels, Regulating the Coasting Trade, and for other
purposes." Section 1 of this law provided that for any ship or vessel to obtain the benefits of American registry, it must
belong wholly to a citizen or citizens of the United States "and no other." (1 Stat. at L., 55.) That Act was shortly after
repealed, but the same idea was carried into the Acts of Congress of December 31, 1792 and February 18, 1793. (1 Stat. at
L., 287, 305.).Section 4 of the Act of 1792 provided that in order to obtain the registry of any vessel, an oath shall be taken
and subscribed by the owner, or by one of the owners thereof, before the officer authorized to make such registry, declaring,
"that there is no subject or citizen of any foreign prince or state, directly or indirectly, by way of trust, confidence, or
otherwise, interested in such vessel, or in the profits or issues thereof." Section 32 of the Act of 1793 even went so far as to
say "that if any licensed ship or vessel shall be transferred to any person who is not at the time of such transfer a citizen of
and resident within the United States, ... every such vessel with her tackle, apparel, and furniture, and the cargo found on
board her, shall be forefeited." In case of alienation to a foreigner, Chief Justice Marshall said that all the privileges of an
American bottom were ipso facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as late as 1873, the
Attorney-General of the United States was of the opinion that under the provisions of the Act of December 31, 1792, no
vessel in which a foreigner is directly or indirectly interested can lawfully be registered as a vessel of the United. States. (14
Op. Atty.-Gen. [U.S.], 340.)

These laws continued in force without contest, although possibly the Act of March 3, 1825, may have affected them, until
amended by the Act of May 28, 1896 (29 Stat. at L., 188) which extended the privileges of registry from vessels wholly
owned by a citizen or citizens of the United States to corporations created under the laws of any of the states thereof. The
law, as amended, made possible the deduction that a vessel belonging to a domestic corporation was entitled to registry or
enrollment even though some stock of the company be owned by aliens. The right of ownership of stock in a corporation
was thereafter distinct from the right to hold the property by the corporation (Humphreys vs. McKissock [1890], 140 U.S.,
304; Queen vs. Arnaud [1846], 9 Q. B., 806; 29 Op. Atty.-Gen. [U.S.],188.)

On American occupation of the Philippines, the new government found a substantive law in operation in the Islands with a
civil law history which it wisely continued in force Article fifteen of the Spanish Code of Commerce permitted any foreigner to
engage in Philippine trade if he had legal capacity to do so under the laws of his nation. When the Philippine Commission
came to enact the Customs Administrative Act (No. 355) in 1902, it returned to the old American policy of limiting the
protection and flag of the United States to vessels owned by citizens of the United States or by native inhabitants of the
Philippine Islands (Sec. 117.) Two years later, the same body reverted to the existing Congressional law by permitting
certification to be issued to a citizen of the United States or to a corporation or company created under the laws of the
United States or of any state thereof or of the Philippine Islands (Act No. 1235, sec. 3.) The two administration codes
repeated the same provisions with the necessary amplification of inclusion of citizens or native inhabitants of the Philippine
Islands (Adm. Code of 1916, sec. 1345; Adm. Code of 1917, sec. 1172). And now Act No. 2761 has returned to the
restrictive idea of the original Customs Administrative Act which in turn was merely a reflection of the statutory language of
the first American Congress.

Provisions such as those in Act No. 2761, which deny to foreigners the right to a certificate of Philippine registry, are thus
found not to be as radical as a first reading would make them appear.

Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be to enact an anti-alien shipping act.
The ultimate purpose of the Legislature is to encourage Philippine ship-building. This, without doubt, has, likewise, been the
intention of the United States Congress in passing navigation or tariff laws on different occasions. The object of such a law,
the United States Supreme Court once said, was to encourage American trade, navigation, and ship-building by giving
American ship-owners exclusive privileges. (Old Dominion Steamship Co. vs.Virginia [1905], 198 U.S., 299; Kent's
Commentaries, Vol. 3, p. 139.)

In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1) is found the following:

Licensing acts, in fact, in legislation, are universally restraining acts; as, for example, acts licensing gaming
houses, retailers of spirituous liquors, etc. The act, in this instance, is distinctly of that character, and forms part of
an extensive system, the object of which is to encourage American shipping, and place them on an equal footing
with the shipping of other nations. Almost every commercial nation reserves to its own subjects a monopoly of its
coasting trade; and a countervailing privilege in favor of American shipping is contemplated, in the whole
legislation of the United States on this subject. It is not to give the vessel an American character, that the license is
granted; that effect has been correctly attributed to the act of her enrollment. But it is to confer on her American
privileges, as contradistinguished from foreign; and to preserve the. Government from fraud by foreigners, in
surreptitiously intruding themselves into the American commercial marine, as well as frauds upon the revenue in
the trade coastwise, that this whole system is projected.

The United States Congress in assuming its grave responsibility of legislating wisely for a new country did so imbued with a
spirit of Americanism. Domestic navigation and trade, it decreed, could only be carried on by citizens of the United States. If
the representatives of the American people acted in this patriotic manner to advance the national policy, and if their action
was accepted without protest in the courts, who can say that they did not enact such beneficial laws under the all-pervading
police power, with the prime motive of safeguarding the country and of promoting its prosperity? Quite similarly, the
Philippine Legislature made up entirely of Filipinos, representing the mandate of the Filipino people and the guardian of their
rights, acting under practically autonomous powers, and imbued with a strong sense of Philippinism, has desired for these
Islands safety from foreign interlopers, the use of the common property exclusively by its citizens and the citizens of the
United States, and protection for the common good of the people. Who can say, therefore, especially can a court, that with
all the facts and circumstances affecting the Filipino people before it, the Philippine Legislature has erred in the enactment of
Act No. 2761?

Surely, the members of the judiciary are not expected to live apart from active life, in monastic seclusion amidst dusty tomes
and ancient records, but, as keen spectators of passing events and alive to the dictates of the general — the national —
welfare, can incline the scales of their decisions in favor of that solution which will most effectively promote the public policy.
All the presumption is in favor of the constitutionally of the law and without good and strong reasons, courts should not
attempt to nullify the action of the Legislature. "In construing a statute enacted by the Philippine Commission (Legislature),
we deem it our duty not to give it a construction which would be repugnant to an Act of Congress, if the language of the
statute is fairly susceptible of another construction not in conflict with the higher law." (In re Guariña [1913], 24. Phil., 36;
U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true construction which will best carry legislative intention into effect.

With full consciousness of the importance of the question, we nevertheless are clearly of the opinion that the limitation of
domestic ownership for purposes of obtaining a certificate of Philippine registry in the coastwise trade to citizens of the
Philippine Islands, and to citizens of the United States, does not violate the provisions of paragraph 1 of section 3 of the Act
of Congress of August 29, 1916 No treaty right relied upon Act No. 2761 of the Philippine Legislature is held valid and
constitutional .

The petition for a writ of mandamus is denied, with costs against the petitioner. So ordered.
G.R. No. L-19550 June 19, 1967

HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL

BECK, petitioners,
vs.
HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE
LUKBAN, in his capacity as Acting Director, National Bureau of Investigation;
SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL
VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN,
Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila;
JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City
Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon
City, respondents.

Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer and Juan T. David
for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Pacifico P.
de Castro, Assistant Solicitor General Frine C. Zaballero, Solicitor Camilo D. Quiason
and Solicitor C. Padua for respondents.

CONCEPCION, C.J.:

Upon application of the officers of the government named on the margin1 — hereinafter
referred to as Respondents-Prosecutors — several judges2 — hereinafter referred to as
Respondents-Judges — issued, on different dates,3 a total of 42 search warrants
against petitioners herein4 and/or the corporations of which they were officers,5 directed
to the any peace officer, to search the persons above-named and/or the premises of
their offices, warehouses and/or residences, and to seize and take possession of the
following personal property to wit:

Books of accounts, financial records, vouchers, correspondence, receipts,

ledgers, journals, portfolios, credit journals, typewriters, and other documents
and/or papers showing all business transactions including disbursements
receipts, balance sheets and profit and loss statements and Bobbins (cigarette
wrappers).

as "the subject of the offense; stolen or embezzled and proceeds or fruits of the
offense," or "used or intended to be used as the means of committing the offense,"
which is described in the applications adverted to above as "violation of Central Bank
Laws, Tariff and Customs Laws, Internal Revenue (Code) and the Revised Penal
Code."

Alleging that the aforementioned search warrants are null and void, as contravening the
Constitution and the Rules of Court — because, inter alia: (1) they do not describe with
particularity the documents, books and things to be seized; (2) cash money, not
mentioned in the warrants, were actually seized; (3) the warrants were issued to fish
evidence against the aforementioned petitioners in deportation cases filed against them;
(4) the searches and seizures were made in an illegal manner; and (5) the documents,
papers and cash money seized were not delivered to the courts that issued the
warrants, to be disposed of in accordance with law — on March 20, 1962, said
petitioners filed with the Supreme Court this original action for certiorari,
prohibition, mandamus and injunction, and prayed that, pending final disposition of the
present case, a writ of preliminary injunction be issued restraining Respondents-
Prosecutors, their agents and /or representatives from using the effects seized as
aforementioned or any copies thereof, in the deportation cases already adverted to, and
that, in due course, thereafter, decision be rendered quashing the contested search
warrants and declaring the same null and void, and commanding the respondents, their
agents or representatives to return to petitioners herein, in accordance with Section 3,
Rule 67, of the Rules of Court, the documents, papers, things and cash moneys seized
or confiscated under the search warrants in question.

In their answer, respondents-prosecutors alleged, 6 (1) that the contested search

warrants are valid and have been issued in accordance with law; (2) that the defects of
said warrants, if any, were cured by petitioners' consent; and (3) that, in any event, the
effects seized are admissible in evidence against herein petitioners, regardless of the
alleged illegality of the aforementioned searches and seizures.

On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the
petition. However, by resolution dated June 29, 1962, the writ was partially lifted or
dissolved, insofar as the papers, documents and things seized from the offices of the
corporations above mentioned are concerned; but, the injunction was maintained as
regards the papers, documents and things found and seized in the residences of
petitioners herein.7

Thus, the documents, papers, and things seized under the alleged authority of the
warrants in question may be split into two (2) major groups, namely: (a) those found and
seized in the offices of the aforementioned corporations, and (b) those found and seized
in the residences of petitioners herein.

As regards the first group, we hold that petitioners herein have no cause of action to
assail the legality of the contested warrants and of the seizures made in pursuance
thereof, for the simple reason that said corporations have their respective personalities,
separate and distinct from the personality of herein petitioners, regardless of the amount
of shares of stock or of the interest of each of them in said corporations, and whatever
the offices they hold therein may be.8 Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose rights have been impaired
thereby,9 and that the objection to an unlawful search and seizure is purely
personal and cannot be availed of by third parties. 10 Consequently, petitioners herein
may not validly object to the use in evidence against them of the documents, papers
and things seized from the offices and premises of the corporations adverted to above,
since the right to object to the admission of said papers in evidence
belongs exclusively to the corporations, to whom the seized effects belong, and may not
be invoked by the corporate officers in proceedings against them in their individual
capacity. 11 Indeed, it has been held:

. . . that the Government's action in gaining possession of papers belonging to

the corporation did not relate to nor did it affect the personal defendants. If these
papers were unlawfully seized and thereby the constitutional rights of or any one
were invaded, they were the rights of the corporation and not the rights of
the other defendants. Next, it is clear that a question of the lawfulness of a
seizure can be raised only by one whose rights have been invaded. Certainly,
such a seizure, if unlawful, could not affect the constitutional rights of
defendants whose property had not been seized or the privacy of whose homes
had not been disturbed; nor could they claim for themselves the benefits of the
Fourth Amendment, when its violation, if any, was with reference to the rights
of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It follows,
therefore, that the question of the admissibility of the evidence based on an
alleged unlawful search and seizure does not extend to the personal defendants
but embraces only the corporation whose property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis
supplied.)

With respect to the documents, papers and things seized in the residences of
petitioners herein, the aforementioned resolution of June 29, 1962, lifted the writ of
preliminary injunction previously issued by this Court, 12 thereby, in effect, restraining
herein Respondents-Prosecutors from using them in evidence against petitioners
herein.

In connection with said documents, papers and things, two (2) important questions need
be settled, namely: (1) whether the search warrants in question, and the searches and
seizures made under the authority thereof, are valid or not, and (2) if the answer to the
preceding question is in the negative, whether said documents, papers and things may
be used in evidence against petitioners herein. 1äwphï1.ñët

Petitioners maintain that the aforementioned search warrants are in the nature of
general warrants and that accordingly, the seizures effected upon the authority there of
are null and void. In this connection, the Constitution 13provides:

The right of the people to be secure in their persons, houses, papers, and effects
against unreasonable searches and seizures shall not be violated, and no
warrants shall issue but upon probable cause, to be determined by the judge
after examination under oath or affirmation of the complainant and the witnesses
he may produce, and particularly describing the place to be searched, and the
persons or things to be seized.

Two points must be stressed in connection with this constitutional mandate, namely: (1)
that no warrant shall issue but upon probable cause, to be determined by the judge in
the manner set forth in said provision; and (2) that the warrant shall particularly describe
the things to be seized.

None of these requirements has been complied with in the contested warrants. Indeed,
the same were issued upon applications stating that the natural and juridical person
therein named had committed a "violation of Central Ban Laws, Tariff and Customs
Laws, Internal Revenue (Code) and Revised Penal Code." In other words,
no specific offense had been alleged in said applications. The averments thereof with
respect to the offense committed were abstract. As a consequence, it
was impossible for the judges who issued the warrants to have found the existence of
probable cause, for the same presupposes the introduction of competent proof that the
party against whom it is sought has performed particular acts, or
committed specific omissions, violating a given provision of our criminal laws. As a
matter of fact, the applications involved in this case do not allege any specific acts
performed by herein petitioners. It would be the legal heresy, of the highest order, to
convict anybody of a "violation of Central Bank Laws, Tariff and Customs Laws, Internal
Revenue (Code) and Revised Penal Code," — as alleged in the aforementioned
applications — without reference to any determinate provision of said laws or

To uphold the validity of the warrants in question would be to wipe out completely one of
the most fundamental rights guaranteed in our Constitution, for it would place the
sanctity of the domicile and the privacy of communication and correspondence at the
mercy of the whims caprice or passion of peace officers. This is precisely the evil
sought to be remedied by the constitutional provision above quoted — to outlaw the so-
called general warrants. It is not difficult to imagine what would happen, in times of keen
political strife, when the party in power feels that the minority is likely to wrest it, even
though by legal means.

Such is the seriousness of the irregularities committed in connection with the disputed
search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the
former Rules of Court 14 by providing in its counterpart, under the Revised Rules of
Court 15 that "a search warrant shall not issue but upon probable cause in connection
with one specific offense." Not satisfied with this qualification, the Court added thereto a
paragraph, directing that "no search warrant shall issue for more than one specific
offense."

The grave violation of the Constitution made in the application for the contested search
warrants was compounded by the description therein made of the effects to be
searched for and seized, to wit:

Books of accounts, financial records, vouchers, journals, correspondence,

receipts, ledgers, portfolios, credit journals, typewriters, and other documents
and/or papers showing all business transactions including disbursement receipts,
balance sheets and related profit and loss statements.
Thus, the warrants authorized the search for and seizure of records pertaining to all
business transactions of petitioners herein, regardless of whether the transactions
were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners
and the aforementioned corporations, whatever their nature, thus openly contravening
the explicit command of our Bill of Rights — that the things to be seized
be particularly described — as well as tending to defeat its major objective: the
elimination of general warrants.

Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors
maintain that, even if the searches and seizures under consideration were
unconstitutional, the documents, papers and things thus seized are admissible in
evidence against petitioners herein. Upon mature deliberation, however, we are
unanimously of the opinion that the position taken in the Moncado case must be
abandoned. Said position was in line with the American common law rule, that the
criminal should not be allowed to go free merely "because the constable has
blundered," 16 upon the theory that the constitutional prohibition against unreasonable
searches and seizures is protected by means other than the exclusion of evidence
unlawfully obtained, 17 such as the common-law action for damages against the
searching officer, against the party who procured the issuance of the search warrant
and against those assisting in the execution of an illegal search, their criminal
punishment, resistance, without liability to an unlawful seizure, and such other legal
remedies as may be provided by other laws.

However, most common law jurisdictions have already given up this approach and
eventually adopted the exclusionary rule, realizing that this is the only practical means
of enforcing the constitutional injunction against unreasonable searches and seizures.
In the language of Judge Learned Hand:

As we understand it, the reason for the exclusion of evidence competent as such,
which has been unlawfully acquired, is that exclusion is the only practical way of
enforcing the constitutional privilege. In earlier times the action of trespass
against the offending official may have been protection enough; but that is true
no longer. Only in case the prosecution which itself controls the seizing officials,
knows that it cannot profit by their wrong will that wrong be repressed.18

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:

If letters and private documents can thus be seized and held and used in
evidence against a citizen accused of an offense, the protection of the 4th
Amendment, declaring his rights to be secure against such searches and
seizures, is of no value, and, so far as those thus placed are concerned, might as
well be stricken from the Constitution. The efforts of the courts and their officials
to bring the guilty to punishment, praiseworthy as they are, are not to be aided by
the sacrifice of those great principles established by years of endeavor and
suffering which have resulted in their embodiment in the fundamental law of the
land.19
This view was, not only reiterated, but, also, broadened in subsequent decisions on the
same Federal Court. 20After reviewing previous decisions thereon, said Court held,
in Mapp vs. Ohio (supra.):

. . . Today we once again examine the Wolf's constitutional documentation of the

right of privacy free from unreasonable state intrusion, and after its dozen years
on our books, are led by it to close the only courtroom door remaining open to
evidence secured by official lawlessness in flagrant abuse of that basic right,
reserved to all persons as a specific guarantee against that very same unlawful
conduct. We hold that all evidence obtained by searches and seizures in violation
of the Constitution is, by that same authority, inadmissible in a State.

Since the Fourth Amendment's right of privacy has been declared enforceable
against the States through the Due Process Clause of the Fourteenth, it is
enforceable against them by the same sanction of exclusion as it used against
the Federal Government. Were it otherwise, then just as without the Weeks rule
the assurance against unreasonable federal searches and seizures would be "a
form of words," valueless and underserving of mention in a perpetual charter of
inestimable human liberties, so too, without that rule the freedom from state
invasions of privacy would be so ephemeral and so neatly severed from its
conceptual nexus with the freedom from all brutish means of coercing evidence
as not to permit this Court's high regard as a freedom "implicit in the concept of
ordered liberty." At the time that the Court held in Wolf that the amendment was
applicable to the States through the Due Process Clause, the cases of this Court
as we have seen, had steadfastly held that as to federal officers the Fourth
Amendment included the exclusion of the evidence seized in violation of its
provisions. Even Wolf "stoutly adhered" to that proposition. The right to when
conceded operatively enforceable against the States, was not susceptible of
destruction by avulsion of the sanction upon which its protection and enjoyment
had always been deemed dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive protections of due process to all
constitutionally unreasonable searches — state or federal — it was logically and
constitutionally necessarily that the exclusion doctrine — an essential part of the
right to privacy — be also insisted upon as an essential ingredient of the right
newly recognized by the Wolf Case. In short, the admission of the new
constitutional Right by Wolf could not tolerate denial of its most important
constitutional privilege, namely, the exclusion of the evidence which an accused
had been forced to give by reason of the unlawful seizure. To hold otherwise is to
grant the right but in reality to withhold its privilege and enjoyment. Only last year
the Court itself recognized that the purpose of the exclusionary rule to "is to deter
— to compel respect for the constitutional guaranty in the only effectively
available way — by removing the incentive to disregard it" . . . .

The ignoble shortcut to conviction left open to the State tends to destroy the
entire system of constitutional restraints on which the liberties of the people rest.
Having once recognized that the right to privacy embodied in the Fourth
 Amendment is enforceable against the States, and that the right to be secure
against rude invasions of privacy by state officers is, therefore constitutional in
origin, we can no longer permit that right to remain an empty promise. Because it
is enforceable in the same manner and to like effect as other basic rights secured
by its Due Process Clause, we can no longer permit it to be revocable at the
whim of any police officer who, in the name of law enforcement itself, chooses to
suspend its enjoyment. Our decision, founded on reason and truth, gives to the
individual no more than that which the Constitution guarantees him to the police
officer no less than that to which honest law enforcement is entitled, and, to the
courts, that judicial integrity so necessary in the true administration of justice.
(emphasis ours.)

Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit
of the constitutional injunction against unreasonable searches and seizures. To be sure,
if the applicant for a search warrant has competent evidence to establish probable
cause of the commission of a given crime by the party against whom the warrant is
intended, then there is no reason why the applicant should not comply with the
requirements of the fundamental law. Upon the other hand, if he has no such competent
evidence, then it is not possible for the Judge to find that there is probable cause, and,
hence, no justification for the issuance of the warrant. The only possible explanation
(not justification) for its issuance is the necessity of fishing evidence of the commission
of a crime. But, then, this fishing expedition is indicative of the absence of evidence to
establish a probable cause.

Moreover, the theory that the criminal prosecution of those who secure an illegal search
warrant and/or make unreasonable searches or seizures would suffice to protect the
constitutional guarantee under consideration, overlooks the fact that violations thereof
are, in general, committed By agents of the party in power, for, certainly, those
belonging to the minority could not possibly abuse a power they do not have.
Regardless of the handicap under which the minority usually — but, understandably —
finds itself in prosecuting agents of the majority, one must not lose sight of the fact that
the psychological and moral effect of the possibility 21 of securing their conviction, is
watered down by the pardoning power of the party for whose benefit the illegality had
been committed.

In their Motion for Reconsideration and Amendment of the Resolution of this Court
dated June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen
Apartments, House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and
Room No. 304 of the Army-Navy Club, should be included among the premises
considered in said Resolution as residences of herein petitioners, Harry S. Stonehill,
Robert P. Brook, John J. Brooks and Karl Beck, respectively, and that, furthermore, the
records, papers and other effects seized in the offices of the corporations above
referred to include personal belongings of said petitioners and other effects under their
exclusive possession and control, for the exclusion of which they have a standing under
the latest rulings of the federal courts of federal courts of the United States. 22
We note, however, that petitioners' theory, regarding their alleged possession of and
control over the aforementioned records, papers and effects, and the alleged "personal"
nature thereof, has Been Advanced, not in their petition or amended petition herein, but
in the Motion for Reconsideration and Amendment of the Resolution of June 29, 1962.
In other words, said theory would appear to be readjustment of that followed in said
petitions, to suit the approach intimated in the Resolution sought to be reconsidered and
amended. Then, too, some of the affidavits or copies of alleged affidavits attached to
said motion for reconsideration, or submitted in support thereof, contain either
inconsistent allegations, or allegations inconsistent with the theory now advanced by
petitioners herein.

Upon the other hand, we are not satisfied that the allegations of said petitions said
motion for reconsideration, and the contents of the aforementioned affidavits and other
papers submitted in support of said motion, have sufficiently established the facts or
conditions contemplated in the cases relied upon by the petitioners; to warrant
application of the views therein expressed, should we agree thereto. At any rate, we do
not deem it necessary to express our opinion thereon, it being best to leave the matter
open for determination in appropriate cases in the future.

We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is
hereby, abandoned; that the warrants for the search of three (3) residences of herein
petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the
searches and seizures therein made are illegal; that the writ of preliminary injunction
heretofore issued, in connection with the documents, papers and other effects thus
seized in said residences of herein petitioners is hereby made permanent; that the writs
prayed for are granted, insofar as the documents, papers and other effects so seized in
the aforementioned residences are concerned; that the aforementioned motion for
Reconsideration and Amendment should be, as it is hereby, denied; and that the
petition herein is dismissed and the writs prayed for denied, as regards the documents,
papers and other effects seized in the twenty-nine (29) places, offices and other
premises enumerated in the same Resolution, without special pronouncement as to
costs.

It is so ordered.

Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

CASTRO, J., concurring and dissenting:

From my analysis of the opinion written by Chief Justice Roberto Concepcion and from
the import of the deliberations of the Court on this case, I gather the following distinct
conclusions:

1. All the search warrants served by the National Bureau of Investigation in this
case are general warrants and are therefore proscribed by, and in violation of,
paragraph 3 of section 1 of Article III (Bill of Rights) of the Constitution;
 2. All the searches and seizures conducted under the authority of the said search
warrants were consequently illegal;

3. The non-exclusionary rule enunciated in Moncado vs. People, 80 Phil. 1,

should be, and is declared, abandoned;

4. The search warrants served at the three residences of the petitioners

are expressly declared null and void the searches and seizures therein made
are expressly declared illegal; and the writ of preliminary injunction heretofore
issued against the use of the documents, papers and effect seized in the said
residences is made permanent; and

5. Reasoning that the petitioners have not in their pleadings satisfactorily

demonstrated that they have legal standing to move for the suppression of the
documents, papers and effects seized in the places other than the three
residences adverted to above, the opinion written by the Chief
Justice refrains from expressly declaring as null and void the such warrants
served at such other places and as illegal the searches and seizures made
therein, and leaves "the matter open for determination in appropriate cases in the
future."

It is precisely the position taken by the Chief Justice summarized in the immediately
preceding paragraph (numbered 5) with which I am not in accord.

I do not share his reluctance or unwillingness to expressly declare, at this time, the
nullity of the search warrants served at places other than the three residences, and the
illegibility of the searches and seizures conducted under the authority thereof. In my
view even the exacerbating passions and prejudices inordinately generated by the
environmental political and moral developments of this case should not deter this Court
from forthrightly laying down the law not only for this case but as well for future cases
and future generations. All the search warrants, without exception, in this case are
admittedly general, blanket and roving warrants and are therefore admittedly and
indisputably outlawed by the Constitution; and the searches and seizures made were
therefore unlawful. That the petitioners, let us assume in gratia argumente, have no
legal standing to ask for the suppression of the papers, things and effects seized from
places other than their residences, to my mind, cannot in any manner affect, alter or
otherwise modify the intrinsic nullity of the search warrants and the intrinsic illegality of
the searches and seizures made thereunder. Whether or not the petitioners possess
legal standing the said warrants are void and remain void, and the searches and
seizures were illegal and remain illegal. No inference can be drawn from the words of
the Constitution that "legal standing" or the lack of it is a determinant of the nullity or
validity of a search warrant or of the lawfulness or illegality of a search or seizure.

On the question of legal standing, I am of the conviction that, upon the pleadings
submitted to this Court the petitioners have the requisite legal standing to move for the
suppression and return of the documents, papers and effects that were seized from
places other than their family residences.

Our constitutional provision on searches and seizures was derived almost verbatim from
the Fourth Amendment to the United States Constitution. In the many years of judicial
construction and interpretation of the said constitutional provision, our courts have
invariably regarded as doctrinal the pronouncement made on the Fourth Amendment by
federal courts, especially the Federal Supreme Court and the Federal Circuit Courts of
Appeals.

The U.S. doctrines and pertinent cases on standing to move for the suppression or
return of documents, papers and effects which are the fruits of an unlawful search and
seizure, may be summarized as follows; (a) ownership of documents, papers and
effects gives "standing;" (b) ownership and/or control or possession — actual or
constructive — of premises searched gives "standing"; and (c) the "aggrieved person"
doctrine where the search warrant and the sworn application for search warrant are
"primarily" directed solely and exclusively against the "aggrieved person," gives
"standing."

An examination of the search warrants in this case will readily show that, excepting
three, all were directed against the petitioners personally. In some of them, the
petitioners were named personally, followed by the designation, "the President and/or
General Manager" of the particular corporation. The three warrants excepted named
three corporate defendants. But the "office/house/warehouse/premises" mentioned in
the said three warrants were also the same "office/house/warehouse/premises"
declared to be owned by or under the control of the petitioners in all the other search
warrants directed against the petitioners and/or "the President and/or General Manager"
of the particular corporation. (see pages 5-24 of Petitioners' Reply of April 2, 1962). The
searches and seizures were to be made, and were actually made, in the
"office/house/warehouse/premises" owned by or under the control of the petitioners.

Ownership of matters seized gives "standing."

Ownership of the properties seized alone entitles the petitioners to bring a motion to
return and suppress, and gives them standing as persons aggrieved by an unlawful
search and seizure regardless of their location at the time of seizure. Jones vs. United
States, 362 U.S. 257, 261 (1960) (narcotics stored in the apartment of a friend of the
defendant); Henzel vs. United States, 296 F. 2d. 650, 652-53 (5th Cir. 1961), (personal
and corporate papers of corporation of which the defendant was president), United
States vs. Jeffers, 342 U.S. 48 (1951) (narcotics seized in an apartment not belonging
to the defendant); Pielow vs. United States, 8 F. 2d 492, 493 (9th Cir. 1925) (books
seized from the defendant's sister but belonging to the defendant); Cf. Villano vs. United
States, 310 F. 2d 680, 683 (10th Cir. 1962) (papers seized in desk neither owned by nor
in exclusive possession of the defendant).
In a very recent case (decided by the U.S. Supreme Court on December 12, 1966), it
was held that under the constitutional provision against unlawful searches and seizures,
a person places himself or his property within a constitutionally protected area, be it his
home or his office, his hotel room or his automobile:

Where the argument falls is in its misapprehension of the fundamental nature

and scope of Fourth Amendment protection. What the Fourth Amendment
protects is the security a man relies upon when he places himself or his property
within a constitutionally protected area, be it his home or his office, his hotel room
or his automobile. There he is protected from unwarranted governmental
intrusion. And when he puts some thing in his filing cabinet, in his desk drawer,
or in his pocket, he has the right to know it will be secure from an unreasonable
search or an unreasonable seizure. So it was that the Fourth Amendment could
not tolerate the warrantless search of the hotel room in Jeffers, the purloining of
the petitioner's private papers in Gouled, or the surreptitious electronic
surveilance in Silverman. Countless other cases which have come to this Court
over the years have involved a myriad of differing factual contexts in which the
protections of the Fourth Amendment have been appropriately invoked. No
doubt, the future will bring countless others. By nothing we say here do we either
foresee or foreclose factual situations to which the Fourth Amendment may be
applicable. (Hoffa vs. U.S., 87 S. Ct. 408 (December 12, 1966). See also U.S. vs.
Jeffers, 342 U.S. 48, 72 S. Ct. 93 (November 13, 1951). (Emphasis supplied).

Control of premises searched gives "standing."

Independent of ownership or other personal interest in the records and documents

seized, the petitioners have standing to move for return and suppression by virtue of
their proprietary or leasehold interest in many of the premises searched. These
proprietary and leasehold interests have been sufficiently set forth in their motion for
reconsideration and need not be recounted here, except to emphasize that the
petitioners paid rent, directly or indirectly, for practically all the premises searched
(Room 91, 84 Carmen Apts; Room 304, Army & Navy Club; Premises 2008, Dewey
Boulevard; 1436 Colorado Street); maintained personal offices within the corporate
offices (IBMC, USTC); had made improvements or furnished such offices; or had paid
for the filing cabinets in which the papers were stored (Room 204, Army & Navy Club);
and individually, or through their respective spouses, owned the controlling stock of the
corporations involved. The petitioners' proprietary interest in most, if not all, of the
premises searched therefore independently gives them standing to move for the return
and suppression of the books, papers and affects seized therefrom.

In Jones vs. United States, supra, the U.S. Supreme Court delineated the nature and
extent of the interest in the searched premises necessary to maintain a motion to
suppress. After reviewing what it considered to be the unduly technical standard of the
then prevailing circuit court decisions, the Supreme Court said (362 U.S. 266):
 We do not lightly depart from this course of decisions by the lower courts. We are
persuaded, however, that it is unnecessarily and ill-advised to import into the law
surrounding the constitutional right to be free from unreasonable searches and
seizures subtle distinctions, developed and refined by the common law in
evolving the body of private property law which, more than almost any other
branch of law, has been shaped by distinctions whose validity is largely historical.
Even in the area from which they derive, due consideration has led to the
discarding of those distinctions in the homeland of the common law. See
Occupiers' Liability Act, 1957, 5 and 6 Eliz. 2, c. 31, carrying out Law Reform
Committee, Third Report, Cmd. 9305. Distinctions such as those between
"lessee", "licensee," "invitee," "guest," often only of gossamer strength, ought not
be determinative in fashioning procedures ultimately referable to constitutional
safeguards. See also Chapman vs. United States, 354 U.S. 610, 616-17 (1961).

It has never been held that a person with requisite interest in the premises searched
must own the property seized in order to have standing in a motion to return and
suppress. In Alioto vs. United States, 216 F. Supp. 48 (1963), a Bookkeeper for several
corporations from whose apartment the corporate records were seized successfully
moved for their return. In United States vs. Antonelli, Fireworks Co., 53 F. Supp. 870,
873 (W D. N. Y. 1943), the corporation's president successfully moved for the return
and suppression is to him of both personal and corporate documents seized from his
home during the course of an illegal search:

The lawful possession by Antonelli of documents and property, "either his own or
the corporation's was entitled to protection against unreasonable search and
seizure. Under the circumstances in the case at bar, the search and seizure were
unreasonable and unlawful. The motion for the return of seized article and the
suppression of the evidence so obtained should be granted. (Emphasis
supplied).

Time was when only a person who had property in interest in either the place searched
or the articles seize had the necessary standing to invoke the protection of the
exclusionary rule. But in MacDonald vs. Unite States, 335 U.S. 461 (1948), Justice
Robert Jackson joined by Justice Felix Frankfurter, advanced the view that "even a
guest may expect the shelter of the rooftree he is under against criminal intrusion." This
view finally became the official view of the U.S. Supreme Court and was articulated
in United States vs. Jeffers, 432 U.S 48 (1951). Nine years later, in 1960, in Jones vs.
Unite States, 362 U.S. 257, 267, the U.S. Supreme Court went a step further. Jones
was a mere guest in the apartment unlawfully searched but the Court nonetheless
declared that the exclusionary rule protected him as well. The concept of "person
aggrieved by an unlawful search and seizure" was enlarged to include "anyone
legitimately on premise where the search occurs."

Shortly after the U.S. Supreme Court's Jones decision the U.S. Court of Appeals for the
Fifth Circuit held that the defendant organizer, sole stockholder and president of a
corporation had standing in a mail fraud prosecution against him to demand the return
and suppression of corporate property. Henzel vs. United States, 296 F 2d 650, 652
(5th Cir. 1961), supra. The court conclude that the defendant had standing on two
independent grounds: First —he had a sufficient interest in the property seized,
and second — he had an adequate interest in the premises searched (just like in the
case at bar). A postal inspector had unlawfully searched the corporation' premises and
had seized most of the corporation's book and records. Looking to Jones, the court
observed:

Jones clearly tells us, therefore, what is not required qualify one as a "person
aggrieved by an unlawful search and seizure." It tells us that appellant should not
have been precluded from objecting to the Postal Inspector's search and seizure
of the corporation's books and records merely because the appellant did not
show ownership or possession of the books and records or a substantial
possessory interest in the invade premises . . . (Henzel vs. United States, 296 F.
2d at 651). .

Henzel was soon followed by Villano vs. United States, 310 F. 2d 680, 683, (10th Cir.
1962). In Villano, police officers seized two notebooks from a desk in the defendant's
place of employment; the defendant did not claim ownership of either; he asserted that
several employees (including himself) used the notebooks. The Court held that the
employee had a protected interest and that there also was an invasion of privacy.
Both Henzel and Villano considered also the fact that the search and seizure were
"directed at" the moving defendant. Henzel vs. United States, 296 F. 2d at 682; Villano
vs. United States, 310 F. 2d at 683.

In a case in which an attorney closed his law office, placed his files in storage and went
to Puerto Rico, the Court of Appeals for the Eighth Circuit recognized his standing to
move to quash as unreasonable search and seizure under the Fourth Amendment of
the U.S. Constitution a grand jury subpoena duces tecum directed to the custodian of
his files. The Government contended that the petitioner had no standing because the
books and papers were physically in the possession of the custodian, and because the
subpoena was directed against the custodian. The court rejected the contention, holding
that

Schwimmer legally had such possession, control and unrelinquished personal

rights in the books and papers as not to enable the question of unreasonable
search and seizure to be escaped through the mere procedural device of
compelling a third-party naked possessor to produce and deliver
them. Schwimmer vs. United States, 232 F. 2d 855, 861 (8th Cir. 1956).

Aggrieved person doctrine where the search warrant s primarily directed against said
person gives "standing."

The latest United States decision squarely in point is United States vs. Birrell, 242 F.
Supp. 191 (1965, U.S.D.C. S.D.N.Y.). The defendant had stored with an attorney
certain files and papers, which attorney, by the name of Dunn, was not, at the time of
the seizing of the records, Birrell's attorney. * Dunn, in turn, had stored most of the
records at his home in the country and on a farm which, according to Dunn's affidavit,
was under his (Dunn's) "control and management." The papers turned out to be private,
personal and business papers together with corporate books and records of certain
unnamed corporations in which Birrell did not even claim ownership. (All of these type
records were seized in the case at bar). Nevertheless, the search in Birrell was held
invalid by the court which held that even though Birrell did not own the premises where
the records were stored, he had "standing" to move for the return ofall the papers and
properties seized. The court, relying on Jones vs. U.S., supra; U.S. vs. Antonelli
Fireworks Co., 53 F. Supp. 870, Aff'd 155 F. 2d 631: Henzel vs. U.S.,
supra; and Schwimmer vs. U.S., supra, pointed out that

It is overwhelmingly established that the searches here in question were directed

solely and exclusively against Birrell. The only person suggested in the papers as
having violated the law was Birrell. The first search warrant described the records
as having been used "in committing a violation of Title 18, United States Code,
Section 1341, by the use of the mails by one Lowell M. Birrell, . . ." The second
search warrant was captioned: "United States of America vs. Lowell M. Birrell. (p.
198)

Possession (actual or constructive), no less than ownership, gives standing to

move to suppress. Such was the rule even before Jones. (p. 199)

If, as thus indicated Birrell had at least constructive possession of the records
stored with Dunn, it matters not whether he had any interest in the premises
searched. See also Jeffers v. United States, 88 U.S. Appl. D.C. 58, 187 F. 2d
498 (1950), affirmed 432 U.S. 48, 72 S. Ct. 93, 96 L. Ed. 459 (1951).

The ruling in the Birrell case was reaffirmed on motion for reargument; the United States
did not appeal from this decision. The factual situation in Birrell is strikingly similar to the
case of the present petitioners; as in Birrell, many personal and corporate papers were
seized from premises not petitioners' family residences; as in Birrell, the searches were
"PRIMARILY DIRECTED SOLETY AND EXCLUSIVELY" against the petitioners. Still
both types of documents were suppressed in Birrell because of the illegal search. In the
case at bar, the petitioners connection with the premises raided is much closer than
in Birrell.

Thus, the petitioners have full standing to move for the quashing of all the warrants
regardless whether these were directed against residences in the narrow sense of the
word, as long as the documents were personal papers of the petitioners or (to the extent
that they were corporate papers) were held by them in a personal capacity or under
their personal control.

Prescinding a from the foregoing, this Court, at all events, should order the return to the
petitioners all personal and private papers and effects seized, no matter where these
were seized, whether from their residences or corporate offices or any other place or
places. The uncontradicted sworn statements of the petitioners in their, various
pleadings submitted to this Court indisputably show that amongst the things seized from
the corporate offices and other places were personal and private papers and effects
belonging to the petitioners.

If there should be any categorization of the documents, papers and things which where
the objects of the unlawful searches and seizures, I submit that the grouping should be:
(a) personal or private papers of the petitioners were they were unlawfully seized, be it
their family residences offices, warehouses and/or premises owned and/or possessed
(actually or constructively) by them as shown in all the search and in the sworn
applications filed in securing the void search warrants and (b) purely corporate papers
belonging to corporations. Under such categorization or grouping, the determination of
which unlawfully seized papers, documents and things are personal/private of the
petitioners or purely corporate papers will have to be left to the lower courts which
issued the void search warrants in ultimately effecting the suppression and/or return of
the said documents.

And as unequivocally indicated by the authorities above cited, the petitioners likewise
have clear legal standing to move for the suppression of purely corporate papers as
"President and/or General Manager" of the corporations involved as specifically
mentioned in the void search warrants.

Finally, I must articulate my persuasion that although the cases cited in my disquisition
were criminal prosecutions, the great clauses of the constitutional proscription on illegal
searches and seizures do not withhold the mantle of their protection from cases not
criminal in origin or nature.

Footnotes
 [G.R. No. L-32409. February 27, 1971.]

BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M. RUIZ, MISAEL P. VERA, in
his capacity as Commissioner of Internal Revenue, ARTURO LOGRONIO, RODOLFO DE LEON, GAVINO VELASQUEZ, MIMIR
DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE, and JOHN DOE, Respondents.

San Juan, Africa, Gonzales & San Agustin, for Petitioners.

Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor Pedro A. Ramirez and Special
Attorney Jaime M. Maza for Respondents.

DECISION

VILLAMOR, J.:

This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary mandatory and prohibitory injunction.
In their petition Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the laws of the Philippines, and its President,
Frederick E. Seggerman, pray this Court to declare null and void Search Warrant No. 2-M-70 issued by respondent Judge on February 25,
1970; to order respondents to desist from enforcing the same and/or keeping the documents, papers and effects seized by virtue thereof, as
well as from enforcing the tax assessments on petitioner corporation alleged by petitioners to have been made on the basis of the said
documents, papers and effects, and to order the return of the latter to petitioners. We gave due course to the petition but did not issue the
writ of preliminary injunction prayed for therein.

The pertinent facts of this case, as gathered from record, are as follows: c hanro b 1es virtual 1aw l ibra ry

On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter addressed to respondent Judge Vivencio
M. Ruiz requesting the issuance of a search warrant against petitioners for violation of Section 46(a) of the National Internal Revenue Code, in
relation to all other pertinent provisions thereof, particularly Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de
Leon, one of herein respondents, to make and file the application for search warrant which was attached to the letter.

In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent Arturo Logronio, went to the Court
of First Instance of Rizal. They brought with them the following papers: respondent Vera’s aforesaid letter-request; an application for search
warrant already filled up but still unsigned by respondent De Leon; an affidavit of respondent Logronio subscribed before respondent De Leon;
a deposition in printed form of respondent Logronio already accomplished and signed by him but not yet subscribed; and a search warrant
already accomplished but still unsigned by respondent Judge.

At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of Court to take the
depositions of respondents De Leon and Logronio. After the session had adjourned, respondent Judge was informed that the depositions had
already been taken. The stenographer, upon request of respondent Judge, read to him her stenographic notes; and thereafter, respondent
Judge asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis, he
could be charged for perjury. Respondent Judge signed respondent de Leon’s application for search warrant and respondent Logronio’s
deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and accordingly issued.

Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant petitioners at the offices of
petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners’ lawyers protested the search on the ground that no formal complaint or
transcript of testimony was attached to the warrant. The agents nevertheless proceeded with their search which yielded six boxes of
documents.

On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search warrant be quashed, dissolved
or recalled, that preliminary prohibitory and mandatory writs of injunction be issued, that the search warrant be declared null and void, and
that the respondents be ordered to pay petitioners, jointly and severally, damages and attorney’s fees. On March 18, 1970, the respondents,
thru the Solicitor General, filed an answer to the petition. After hearing, the court, presided over by respondent Judge, issued on July 29,
1970, an order dismissing the petition for dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureau of Internal
Revenue made tax assessments on petitioner corporation in the total sum of P2,594,729.97, partly, if not entirely, based on the documents
thus seized. Petitioners came to this Court.

The petition should be granted for the following reasons: chan rob1e s virtual 1aw l ibra ry

1. Respondent Judge failed to personally examine the complainant and his witness.

The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court are: jgc:c hanrobles. com.ph

"(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable searches and seizures shall not be
violated, and no warrants shall issue but upon probable cause, to be determined by the judge after examination under oath or affirmation of
the complainant and the witnesses he may produce, and particularly describing the place to be searched, and the persons or things to be
seized." (Art. III, Sec. 1, Constitution.)

"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon probable cause in connection with one specific
offense to be determined by the judge or justice of the peace after examination under oath or affirmation of the complainant and the
witnesses he may produce, and particularly describing the place to be searched and the persons or things to be seized.

"No search warrant shall issue for more than one specific offense.

"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing the warrant, personally examine on oath or
affirmation the complainant and any witnesses he may produce and take their depositions in writing, and attach them to the record, in
addition to any affidavits presented to him." (Rule 126, Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of the Constitution, and by Secs.
3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the judge himself and not by others. The phrase "which shall be
determined by the judge after examination under oath or affirmation of the complainant and the witnesses he may produce," appearing in the
said constitutional provision, was introduced by Delegate Francisco as an amendment to the draft submitted by the Sub-Committee of Seven.
The following discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine Constitutional Convention, Vol. III, pp. 755-
757) is enlightening: jgc:c hanro bles. com.ph

"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.

En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia mediante el registro inmediato y la
incautacion del cuerpo del delito, no cree Su Señoria que causaria cierta demora el procedimiento apuntado en su enmienda en tal forma que
podria frustrar los fines de la justicia o si Su Señoria encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia
con los derechos del individuo en su persona, bienes etcetera, etcetera.

"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la siguiente razon: el que solicita un
mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez sin que alguien vaya el juez a presentar
ese escrito o peticion de sucuestro. Esa persona que presenta el registro puede ser el mismo denunciante o alguna persona que solicita dicho
mandamiento de registro. Ahora toda la enmienda en esos casos consiste en que haya peticion de registro y el juez no se atendra solamente
a sea peticion sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.

"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito siempre requeriria algun tiempo?.

"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las vejaciones injustas con la
expedicion arbitraria de los mandamientos de registro. Creo que entre dos males debemos escoger. el menor.

x x x

"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our constitution something of a
fundamental character. Now, before a judge could issue a search warrant, he must be under the obligation to examine personally under oath
the complainant and if he has any witness, the witnesses that he may produce . . ." cralaw virtua1aw l ibra ry

The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it requires the judge, before issuing
a search warrant, to "personally examine on oath or affirmation the complainant and any witnesses he may produce . . ." cralaw virtua1aw l ibra ry

Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the existence or non-
existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3, Rule 126 of the Revised Rules of Court,
both of which prohibit the issuance of warrants except "upon probable cause." The determination of whether or not a probable cause exists
calls for the exercise of judgment after a judicial appraisal of facts and should not be allowed to be delegated in the absence of any rule to the
contrary.

In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant (respondent De Leon) and his
witness (respondent Logronio). While it is true that the complainant’s application for search warrant and the witness’ printed-form deposition
were subscribed and sworn to before respondent Judge, the latter did not ask either of the two any question the answer to which could
possibly be the basis for determining whether or not there was probable cause against herein petitioners. Indeed, the participants seem to
have attached so little significance to the matter that notes of the proceedings before respondent Judge were not even taken. At this juncture
it may be well to recall the salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex J-2 of the Petition) taken at the
hearing of this case in the court below shows that per instruction of respondent Judge, Mr. Eleodoro V. Gonzales, Special Deputy Clerk of
Court, took the depositions of the complainant and his witness, and that stenographic notes thereof were taken by Mrs. Gaspar. At that time
respondent Judge was at the sala hearing a case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer
Gaspar, complainant De Leon and witness Logronio went to respondent Judge’s chamber and informed the Judge that they had finished the
depositions. Respondent Judge then requested the stenographer to read to him her stenographic notes. Special Deputy Clerk Gonzales
testified as follows:jgc:cha nrob les.co m.ph

"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them, requested Mr. Logronio to raise his
hand and warned him if his deposition will be found to be false and without legal basis, he can be charged criminally for perjury. The
Honorable Court told Mr. Logronio whether he affirms the facts contained in his deposition and the affidavit executed before Mr. Rodolfo de
Leon.

"Q And thereafter?

"A And thereafter, he signed the deposition of Mr. Logronio.

"Q Who is this he?

"A The Honorable Judge.

"Q The deposition or the affidavit?

"A The affidavit, Your Honor." c ralaw vi rtua1aw l ibra ry

Thereafter, respondent Judge signed the search warrant.

The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M-70 was thus limited to listening
to the stenographer’s readings of her notes, to a few words of warning against the commission of perjury, and to administering the oath to
the complainant and his witness. This cannot be consider a personal examination. If there was an examination at all of the complainant and
his witness, it was the one conducted by the Deputy Clerk of Court. But, as stated, the Constitution and the rules require a personal
examination by the judge. It was precisely on account of the intention of the delegates to the Constitutional Convention to make it a duty of
the issuing judge to personally examine the complainant and his witnesses that the question of how much time would be consumed by the
judge in examining them came up before the Convention, as can be seen from the record of the proceedings quoted above. The reading of
the stenographic notes to respondent Judge did not constitute sufficient compliance with the constitutional mandate and the rule; for by that
manner respondent Judge did not have the opportunity to observe the demeanor of the complainant and his witness, and to propound initial
and follow-up questions which the judicial mind, on account of its training, was in the best position to conceive. These were important in
arriving at a sound inference on the all-important question of whether or not there was probable cause.

2. The search warrant was issued for more than one specific offense.

Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code in relation to all other pertinent
provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said search warrant issued "in connection with one
specific offense," as required by Sec. 3, Rule 126?

To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to above. Thus we find the
following: chanrob1e s virtual 1aw l ib rary

Sec. 46(a) requires the filing of income tax returns by corporations.

Sec. 53 requires the withholding of income taxes at source.

Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent returns.

Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information required under the Tax Code.

Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article subject to a specific tax, without
having paid the privilege tax therefore, or who aids or abets in the conduct of illicit distilling, rectifying, compounding, or illicit manufacture of
any article subject to specific tax . . .," and provides that in the case of a corporation, partnership, or association, the official and/or employee
who caused the violation shall be responsible.

Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed, or to pay the tax due thereon.

The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is the violation of Sec. 46(a), Sec.
72 and Sec. 73 (the filing of income tax returns), which are interrelated. The second is the violation of Sec. 53 (withholding of income taxes
at source). The third is the violation of Sec. 208 (unlawful pursuit of business or occupation); and the fourth is the violation of Sec. 209
(failure to make a return of receipts, sales, business or gross value of output actually removed or to pay the tax due thereon). Even in their
classification the six above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income
Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and Occupation).

Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not applicable, because there the
search warrants were issued for "violation of Central Bank Laws, Internal Revenue (Code) and Revised Penal Code;" whereas, here Search
Warrant No 2-M-70 was issued for violation of only one code, i.e., the National Internal Revenue Code. The distinction more apparent than
real, because it was precisely on account of the Stonehill incident, which occurred sometime before the present Rules of Court took effect on
January 1, 1964, that this Court amended the former rule by inserting therein the phrase "in connection with one specific offense," and
adding the sentence "No search warrant shall issue for more than one specific offense," in what is now Sec. 3, Rule 126. Thus we said in
Stonehill:jgc:chan roble s.com. ph

"Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this Court deemed it fit to
amend Section 3 of Rule 122 of the former Rules of Court that ‘a search warrant shall not issue but upon probable cause in connection with
one specific offense.’ Not satisfied with this qualification, the Court added thereto a paragraph, directing that ‘no search warrant shall issue for
more than one specific offense.’"

3. The search warrant does not particularly describe the things to be seized.

The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this manner: jgc:cha nrob les.co m.ph

"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books, customers ledgers); receipts
for payments received; certificates of stocks and securities; contracts, promissory notes and deeds of sale; telex and coded messages;
business communications, accounting and business records; checks and check stubs; records of bank deposits and withdrawals; and records
of foreign remittances, covering the years 1966 to 1970." c ralaw virtua1aw l ibra ry

The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the Revised Rules of Court,
that the warrant should particularly describe the things to be seized.

In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said: jgc:chan robles. com.ph

"The grave violation of the Constitution made in the application for the contested search warrants was compounded by the description therein
made of the effects to be searched for and seized, to wit: cha nrob 1es vi rtua l 1aw lib ra ry

‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit journals, typewriters, and other
documents and/or paper showing all business transactions including disbursement receipts, balance sheets and related profit and loss
statements.’

"Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of petitioners herein, regardless of
whether the transactions were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners and the aforementioned
corporations, whatever their nature, thus openly contravening the explicit command of our Bill of Rights — that the things to be seized be
particularly described — as well as tending to defeat its major objective: the elimination of general warrants." cra law virtua1aw lib ra ry

While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant nevertheless tends to defeat the
major objective of the Bill of Rights, i.e., the elimination of general warrants, for the language used therein is so all-embracing as to include
all conceivable records of petitioner corporation, which, if seized, could possibly render its business inoperative.

In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the purpose of the requirement that the
warrant should particularly describe the place to be searched and the things to be seized, to wit: jgc:chan rob les.com. ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search warrant should particularly describe
the place to be searched and the things to be seized. The evident purpose and intent of this requirement is to limit the things to be seized to
those, and only those, particularly described in the search warrant — to leave the officers of the law with no discretion regarding what articles
they shall seize, to the end that ‘unreasonable searches and seizures’ may not be made, — that abuses may not be committed. That this is
the correct interpretation of this constitutional provision is borne out by American authorities." cralaw virtua1aw l ibra ry

The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in this case.

A search warrant may be said to particularly describe the things to be seized when the description therein is as specific as the circumstances
will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description expresses a conclusion of fact — not of law — by which the
warrant officer may be guided in making the search and seizure (idem., dissent of Abad Santos, J.,); or when the things described are limited
to those which bear direct relation to the offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein
search warrant does not conform to any of the foregoing tests. If the articles desired to be seized have any direct relation to an offense
committed, the applicant must necessarily have some evidence, other than those articles, to prove the said offense; and the articles subject
of search and seizure should come in handy merely to strengthen such evidence. In this event, the description contained in the herein
disputed warrant should have mentioned, at least, the dates, amounts, persons, and other pertinent data regarding the receipts of payments,
certificates of stocks and securities, contracts, promissory notes, deeds of sale, messages and communications, checks, bank deposits and
withdrawals, records of foreign remittances, among others, enumerated in the warrant.

Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration of respondent Judge’s order of
July 29, 1970. The contention is without merit. In the first place, when the questions raised before this Court are the same as those which
were squarely raised in and passed upon by the court below, the filing of a motion for reconsideration in said court before certiorari can be
instituted in this Court is no longer a prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the
filing of a motion for reconsideration before an application for a writ of certiorari can be entertained was never intended to be applied without
considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is of the essence in view of the tax
assessments sought to be enforced by respondent officers of the Bureau of Internal Revenue against petitioner corporation, On account of
which immediate and more direct action becomes necessary. (Matute v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not
apply where, as in this case, the deprivation of petitioners’ fundamental right to due process taints the proceeding against them in the court
below not only with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)

It is next contended by respondents that a corporation is not entitled to protection against unreasonable search and seizures. Again, we find
no merit in the contention.

"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged with a violation of a statute of
the state of its creation, or of an act of Congress passed in the exercise of its constitutional powers, cannot refuse to produce the books and
papers of such corporation, we do not wish to be understood as holding that a corporation is not entitled to immunity, under the 4th
Amendment, against unreasonable searches and seizures. A corporation is, after all, but an association of individuals under an assumed name
and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its
property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected, under the 14th
Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed. 652.)

"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a corporation, the ground that it
was not privileged from producing its books and papers. But the rights of a corporation against unlawful search and seizure are to be
protected even if the same result might have been achieved in a lawful way." (Silverthorne Lumber Company, Et. Al. v. United States of
America, 251 U.S. 385, 64 L. ed. 319.)

In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to object against unreasonable searches
and seizures, thus: jgc:c hanro bles. com.ph

"As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the contested warrants and of the
seizures made in pursuance thereof, for the simple reason that said corporations have their respective personalities, separate and distinct
from the personality of herein petitioners, regardless of the amount of shares of stock or the interest of each of them in said corporations,
whatever, the offices they hold therein may be. Indeed, it is well settled that the legality of a seizure can be contested only by the party
whose rights have been impaired thereby, and that the objection to an unlawful search and seizure is purely personal and cannot be availed
of by third parties. Consequently, petitioners herein may not validly object to the use in evidence against them of the documents, papers and
things seized from the offices and premises of the corporations adverted to above, since the right to object to the admission of said papers in
evidence belongs exclusively to the corporations, to whom the seized effects belong, and may not be invoked by the corporate officers in
proceedings against them in their individual capacity . . ." cralaw vi rtua1 aw lib rary

In the Stonehill case only the officers of the various corporations in whose offices documents, papers and effects were searched and seized
were the petitioners. In the case at bar, the corporation to whom the seized documents belong, and whose rights have thereby been
impaired, is itself a petitioner. On that score, petitioner corporation here stands on a different footing from the corporations in Stonehill.

The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by petitioners — at least partly — as in effect
admitted by respondents — based on the documents seized by virtue of Search Warrant No. 2-M-70. Furthermore, the fact that the
assessments were made some one and one-half months after the search and seizure on February 25, 1970, is a strong indication that the
documents thus seized served as basis for the assessments. Those assessments should therefore not be enforced.

PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent Judge is declared null and
void; respondents are permanently enjoined from enforcing the said search warrant; the documents, papers and effects seized thereunder
are ordered to be returned to petitioners; and respondent officials the Bureau of Internal Revenue and their representatives are permanently
enjoined from enforcing the assessments mentioned in Annex "G" of the present petition, as well as other assessments based on the
documents, papers and effects seized under the search warrant herein nullified, and from using the same against petitioners in any criminal
or other proceeding. No pronouncement as to costs.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Fernando, Teehankee and Makasiar, JJ., concur.

Reyes, J.B.L., J., concurs with Mr. Justice Barredo.

Castro, J., concurs in the result.

G.R. No. 75885 May 27, 1987

BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,

vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN JOVITO
SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA, COMMISSIONER
RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.
DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.

Apostol, Bernas, Gumaru, Ona and Associates for petitioner.

Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:

Challenged in this special civil action of certiorari and prohibition by a private

corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive
Orders Numbered 1 and 2, promulgated by President Corazon C. Aquino on February
28, 1986 and March 12, 1986, respectively, and (2) the sequestration, takeover, and
other orders issued, and acts done, in accordance with said executive orders by the
Presidential Commission on Good Government and/or its Commissioners and agents,
affecting said corporation.

1. The Sequestration, Takeover, and Other Orders Complained of

a. The Basic Sequestration Order

The sequestration order which, in the view of the petitioner corporation, initiated all its
misery was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It
was addressed to three of the agents of the Commission, hereafter simply referred to as
PCGG. It reads as follows:

RE: SEQUESTRATION ORDER

By virtue of the powers vested in the Presidential Commission on Good

Government, by authority of the President of the Philippines, you are
hereby directed to sequester the following companies.

1. Bataan Shipyard and Engineering Co., Inc. (Engineering

Island Shipyard and Mariveles Shipyard)

2. Baseco Quarry

3. Philippine Jai-Alai Corporation

 4. Fidelity Management Co., Inc.

5. Romson Realty, Inc.

6. Trident Management Co.

7. New Trident Management

8. Bay Transport

9. And all affiliate companies of Alfredo "Bejo" Romualdez

You are hereby ordered:

1. To implement this sequestration order with a minimum disruption of

these companies' business activities.

2. To ensure the continuity of these companies as going concerns, the

care and maintenance of these assets until such time that the Office of the
President through the Commission on Good Government should decide
otherwise.

3. To report to the Commission on Good Government periodically.

Further, you are authorized to request for Military/Security Support from

the Military/Police authorities, and such other acts essential to the
achievement of this sequestration order. 1
b. Order for Production of Documents

On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the
PCGG, addressed a letter dated April 18, 1986 to the President and other officers of
petitioner firm, reiterating an earlier request for the production of certain documents, to
wit:

1. Stock Transfer Book

2. Legal documents, such as:

2.1. Articles of Incorporation

2.2. By-Laws

2.3. Minutes of the Annual Stockholders Meeting from 1973

to 1986
 2.4. Minutes of the Regular and Special Meetings of the
Board of Directors from 1973 to 1986

2.5. Minutes of the Executive Committee Meetings from

1973 to 1986

2.6. Existing contracts with suppliers/contractors/others.

3. Yearly list of stockholders with their corresponding share/stockholdings

from 1973 to 1986 duly certified by the Corporate Secretary.

4. Audited Financial Statements such as Balance Sheet, Profit & Loss and
others from 1973 to December 31, 1985.

5. Monthly Financial Statements for the current year up to March 31, 1986.

6. Consolidated Cash Position Reports from January to April 15, 1986.

7. Inventory listings of assets up dated up to March 31, 1986.

8. Updated schedule of Accounts Receivable and Accounts Payable.

9. Complete list of depository banks for all funds with the authorized
signatories for withdrawals thereof.

10. Schedule of company investments and placements. 2

The letter closed with the warning that if the documents were not submitted within five
days, the officers would be cited for "contempt in pursuance with Presidential Executive
Order Nos. 1 and 2."

c. Orders Re Engineer Island

(1) Termination of Contract for Security Services

A third order assailed by petitioner corporation, hereafter referred to simply as

BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of
the task force assigned to carry out the basic sequestration order. He sent a letter to
BASECO's Vice-President for Finance, 3 terminating the contract for security services
within the Engineer Island compound between BASECO and "Anchor and FAIRWAYS"
and "other civilian security agencies," CAPCOM military personnel having already been
assigned to the area,

(2) Change of Mode of Payment of Entry Charges

On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck
Owners and Contractors," particularly a "Mr. Buddy Ondivilla National Marine
Corporation," advising of the amendment in part of their contracts with BASECO in the
sense that the stipulated charges for use of the BASECO road network were made
payable "upon entry and not anymore subject to monthly billing as was originally agreed
upon." 4

d. Aborted Contract for Improvement of Wharf at Engineer Island

On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of
BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the latter
undertook to introduce improvements costing approximately P210,000.00 on the
BASECO wharf at Engineer Island, allegedly then in poor condition, avowedly to
"optimize its utilization and in return maximize the revenue which would flow into the
government coffers," in consideration of Deltamarine's being granted "priority in using
the improved portion of the wharf ahead of anybody" and exemption "from the payment
of any charges for the use of wharf including the area where it may install its bagging
equipments" "until the improvement remains in a condition suitable for port
operations." 5 It seems however that this contract was never consummated. Capt. Jorge
B. Siacunco, "Head- (PCGG) BASECO Management Team," advised Deltamarine by
letter dated July 30, 1986 that "the new management is not in a position to honor the
said contract" and thus "whatever improvements * * (may be introduced) shall be
deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6

e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan

By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG
agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards
maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by
conventional methods;" but afterwards, Commissioner Bautista, in representation of the
PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at
Mariveles, Bataan, an agreement to this effect having been executed by them on
September 17, 1986. 7

f. Order to Dispose of Scrap, etc.

By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's compound,"
and in this connection, to dispose of or sell "metal scraps" and other materials,
equipment and machineries no longer usable, subject to specified guidelines and
safeguards including audit and verification. 8

g. The TAKEOVER Order

By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional
takeover by the PCGG of BASECO, "the Philippine Dockyard Corporation and all their
affiliated companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive Order
No. 1, empowering the Commission —

* * To provisionally takeover in the public interest or to prevent its disposal

or dissipation, business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close to
former President Marcos, until the transactions leading to such acquisition
by the latter can be disposed of by the appropriate authorities.

A management team was designated to implement the order, headed by Capt.

Siacunco, and was given the following powers:

1. Conducts all aspects of operation of the subject companies;

2. Installs key officers, hires and terminates personnel as necessary;

3. Enters into contracts related to management and operation of the

companies;

4. Ensures that the assets of the companies are not dissipated and used
effectively and efficiently; revenues are duly accounted for; and disburses
funds only as may be necessary;

5. Does actions including among others, seeking of military support as

may be necessary, that will ensure compliance to this order;

6. Holds itself fully accountable to the Presidential Commission on Good

Government on all aspects related to this take-over order.

h. Termination of Services of BASECO Officers

Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises
M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of
their services by the PCGG. 10

2. Petitioner's Plea and Postulates

It is the foregoing specific orders and acts of the PCGG and its members and agents
which, to repeat, petitioner BASECO would have this Court nullify. More particularly,
BASECO prays that this Court-

1) declare unconstitutional and void Executive Orders Numbered 1 and 2;

2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the takeover order
of July 14, 1986 and the termination of the services of the BASECO executives. 11
 a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover
Orders

While BASECO concedes that "sequestration without resorting to judicial action, might
be made within the context of Executive Orders Nos. 1 and 2 before March 25,
1986 when the Freedom Constitution was promulgated, under the principle that the law
promulgated by the ruler under a revolutionary regime is the law of the land, it ceased to
be acceptable when the same ruler opted to promulgate the Freedom Constitution on
March 25, 1986 wherein under Section I of the same, Article IV (Bill of Rights) of the
1973 Constitution was adopted providing, among others, that "No person shall be
deprived of life, liberty and property without due process of law." (Const., Art. I V, Sec.
1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well as the Sequestration Order * * and Takeover Order * *
issued purportedly under the authority of said Executive Orders, rests on four fundamental considerations: First, no notice and hearing was
accorded * * (it) before its properties and business were taken over; Second, the PCGG is not a court, but a purely investigative agency and
therefore not competent to act as prosecutor and judge in the same cause; Third, there is nothing in the issuances which envisions any
proceeding, process or remedy by which petitioner may expeditiously challenge the validity of the takeover after the same has been effected;
and Fourthly, being directed against specified persons, and in disregard of the constitutional presumption of innocence and general rules and
procedures, they constitute a Bill of Attainder." 13

b. Re Order to Produce Documents

It argues that the order to produce corporate records from 1973 to 1986, which it has
apparently already complied with, was issued without court authority and infringed its
constitutional right against self-incrimination, and unreasonable search and seizure. 14

c. Re PCGG's Exercise of Right of Ownership and Management

BASECO further contends that the PCGG had unduly interfered with its right of
dominion and management of its business affairs by —

1) terminating its contract for security services with Fairways & Anchor, without the
consent and against the will of the contracting parties; and amending the mode of
payment of entry fees stipulated in its Lease Contract with National Stevedoring &
Lighterage Corporation, these acts being in violation of the non-impairment clause of
the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with Deltamarine Integrated Port Services, Inc., giving the
latter free use of BASECO premises; 16

3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its
rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment, machinery and other materials; 18

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP
Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal
Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20

8) allowing willingly or unwillingly its personnel to take, steal, carry away from
petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11,
1986; 21

9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed

to have been buried therein. 22

3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders

Many misconceptions and much doubt about the matter of sequestration, takeover and
freeze orders have been engendered by misapprehension, or incomplete
comprehension if not indeed downright ignorance of the law governing these remedies.
It is needful that these misconceptions and doubts be dispelled so that uninformed and
useless debates about them may be avoided, and arguments tainted b sophistry or
intellectual dishonesty be quickly exposed and discarded. Towards this end, this opinion
will essay an exposition of the law on the matter. In the process many of the objections
raised by BASECO will be dealt with.

4. The Governing Law

a. Proclamation No. 3

The impugned executive orders are avowedly meant to carry out the explicit command
of the Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in
the exercise of legislative power which she was authorized to continue to wield "(until a
legislature is elected and convened under a new Constitution" — "shall give priority to
measures to achieve the mandate of the people," among others to (r)ecover ill-gotten
properties amassed by the leaders and supporters of the previous regime and protect
the interest of the people through orders of sequestration or freezing of assets or
accounts." 24

b. Executive Order No. 1

Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and
postulates that "vast resources of the government have been amassed by former
President Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad." 25 Upon these premises, the Presidential Commission on Good
Government was created, 26 "charged with the task of assisting the President in regard
to (certain specified) matters," among which was precisely-
 * * The recovery of all in-gotten wealth accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and
close associates, whether located in the Philippines or abroad, including
the takeover or sequestration of all business enterprises and entities
owned or controlled by them, during his administration, directly or through
nominees, by taking undue advantage of their public office and/or using
their powers, authority, influence, connections or relationship. 27

In relation to the takeover or sequestration that it was authorized to undertake in the

fulfillment of its mission, the PCGG was granted "power and authority" to do the
following particular acts, to wit:

1. To sequester or place or cause to be placed under its control or

possession any building or office wherein any ill-gotten wealth or
properties may be found, and any records pertaining thereto, in order to
prevent their destruction, concealment or disappearance which would
frustrate or hamper the investigation or otherwise prevent the Commission
from accomplishing its task.

2. To provisionally take over in the public interest or to prevent the

disposal or dissipation, business enterprises and properties taken over by
the government of the Marcos Administration or by entities or persons
close to former President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the appropriate authorities.

3. To enjoin or restrain any actual or threatened commission of acts by

any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual the efforts of the Commission to carry out its
task under this order. 28

So that it might ascertain the facts germane to its objectives, it was granted power to
conduct investigations; require submission of evidence by subpoenae ad
testificandum and duces tecum; administer oaths; punish for contempt. 29It was given
power also to promulgate such rules and regulations as may be necessary to carry out
the purposes of * * (its creation). 30

c. Executive Order No. 2

Executive Order No. 2 gives additional and more specific data and directions respecting
"the recovery of ill-gotten properties amassed by the leaders and supporters of the
previous regime." It declares that:

1) * * the Government of the Philippines is in possession of evidence

showing that there are assets and properties purportedly pertaining to
former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates,
 dummies, agents or nominees which had been or were acquired by them
directly or indirectly, through or as a result of the improper or illegal use of
funds or properties owned by the government of the Philippines or any of
its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the
Republic of the Philippines:" and

2) * * said assets and properties are in the form of bank accounts,

deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and
personal properties in the Philippines and in various countries of the
world." 31

Upon these premises, the President-

1) froze "all assets and properties in the Philippines in which former

President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their
close relatives, subordinates, business associates, dummies, agents, or
nominees have any interest or participation;

2) prohibited former President Ferdinand Marcos and/or his wife * *, their

close relatives, subordinates, business associates, duties, agents, or
nominees from transferring, conveying, encumbering, concealing or
dissipating said assets or properties in the Philippines and abroad,
pending the outcome of appropriate proceedings in the Philippines to
determine whether any such assets or properties were acquired by them
through or as a result of improper or illegal use of or the conversion of
funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or
by taking undue advantage of their official position, authority, relationship,
connection or influence to unjustly enrich themselves at the expense and
to the grave damage and prejudice of the Filipino people and the Republic
of the Philippines;

3) prohibited "any person from transferring, conveying, encumbering or

otherwise depleting or concealing such assets and properties or from
assisting or taking part in their transfer, encumbrance, concealment or
dissipation under pain of such penalties as are prescribed by law;" and

4) required "all persons in the Philippines holding such assets or

properties, whether located in the Philippines or abroad, in their names as
nominees, agents or trustees, to make full disclosure of the same to the
Commission on Good Government within thirty (30) days from publication
of * (the) Executive Order, * *. 32
 d. Executive Order No. 14

A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of the Solicitor General and other
government agencies, * * to file and prosecute all cases investigated by it * * as may be
warranted by its findings." 34 All such cases, whether civil or criminal, are to be filed "with
the Sandiganbayan which shall have exclusive and original jurisdiction
thereof." 35 Executive Order No. 14 also pertinently provides that civil suits for restitution,
reparation of damages, or indemnification for consequential damages, forfeiture
proceedings provided for under Republic Act No. 1379, or any other civil actions under
the Civil Code or other existing laws, in connection with * * (said Executive Orders
Numbered 1 and 2) may be filed separately from and proceed independently of any
criminal proceedings and may be proved by a preponderance of evidence;" and that,
moreover, the "technical rules of procedure and evidence shall not be strictly applied to*
* (said)civil cases." 36

5. Contemplated Situations

The situations envisaged and sought to be governed are self-evident, these being:

1) that "(i)ll-gotten properties (were) amassed by the leaders and

supporters of the previous regime"; 37

a) more particularly, that ill-gotten wealth (was) accumulated by former

President Ferdinand E. Marcos, his immediate family, relatives,
subordinates and close associates, * * located in the Philippines or
abroad, * * (and) business enterprises and entities (came to be) owned or
controlled by them, during * * (the Marcos) administration, directly or
through nominees, by taking undue advantage of their public office and/or
using their powers, authority, influence, Connections or relationship; 38

b) otherwise stated, that "there are assets and properties purportedly

pertaining to former President Ferdinand E. Marcos, and/or his wife Mrs.
Imelda Romualdez Marcos, their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were
acquired by them directly or indirectly, through or as a result of the
improper or illegal use of funds or properties owned by the Government of
the Philippines or any of its branches, instrumentalities, enterprises, banks
or financial institutions, or by taking undue advantage of their office,
authority, influence, connections or relationship, resulting in their unjust
enrichment and causing grave damage and prejudice to the Filipino
people and the Republic of the Philippines"; 39

c) that "said assets and properties are in the form of bank accounts.
deposits, trust. accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real and
 personal properties in the Philippines and in various countries of the
world;" 40 and

2) that certain "business enterprises and properties (were) taken over by

the government of the Marcos Administration or by entities or persons
close to former President Marcos. 41

6. Government's Right and Duty to Recover All Ill-gotten Wealth

There can be no debate about the validity and eminent propriety of the Government's
plan "to recover all ill-gotten wealth."

Neither can there be any debate about the proposition that assuming the above
described factual premises of the Executive Orders and Proclamation No. 3 to be true,
to be demonstrable by competent evidence, the recovery from Marcos, his family and
his dominions of the assets and properties involved, is not only a right but a duty on the
part of Government.

But however plain and valid that right and duty may be, still a balance must be sought
with the equally compelling necessity that a proper respect be accorded and adequate
protection assured, the fundamental rights of private property and free enterprise which
are deemed pillars of a free society such as ours, and to which all members of that
society may without exception lay claim.

* * Democracy, as a way of life enshrined in the Constitution, embraces as

its necessary components freedom of conscience, freedom of expression,
and freedom in the pursuit of happiness. Along with these freedoms are
included economic freedom and freedom of enterprise within reasonable
bounds and under proper control. * * Evincing much concern for the
protection of property, the Constitution distinctly recognizes the preferred
position which real estate has occupied in law for ages. Property is bound
up with every aspect of social life in a democracy as democracy is
conceived in the Constitution.The Constitution realizes the indispensable
role which property, owned in reasonable quantities and used legitimately,
plays in the stimulation to economic effort and the formation and growth of
a solid social middle class that is said to be the bulwark of democracy and
the backbone of every progressive and happy country. 42

a. Need of Evidentiary Substantiation in Proper Suit

Consequently, the factual premises of the Executive Orders cannot simply be assumed.
They will have to be duly established by adequate proof in each case, in a proper
judicial proceeding, so that the recovery of the ill-gotten wealth may be validly and
properly adjudged and consummated; although there are some who maintain that the
fact-that an immense fortune, and "vast resources of the government have been
amassed by former President Ferdinand E. Marcos, his immediate family, relatives, and
close associates both here and abroad," and they have resorted to all sorts of clever
schemes and manipulations to disguise and hide their illicit acquisitions-is within the
realm of judicial notice, being of so extensive notoriety as to dispense with proof thereof,
Be this as it may, the requirement of evidentiary substantiation has been expressly
acknowledged, and the procedure to be followed explicitly laid down, in Executive Order
No. 14.

b. Need of Provisional Measures to Collect and Conserve Assets Pending

Suits

Nor may it be gainsaid that pending the institution of the suits for the recovery of such
"ill-gotten wealth" as the evidence at hand may reveal, there is an obvious and
imperative need for preliminary, provisional measures to prevent the concealment,
disappearance, destruction, dissipation, or loss of the assets and properties subject of
the suits, or to restrain or foil acts that may render moot and academic, or effectively
hamper, delay, or negate efforts to recover the same.

7. Provisional Remedies Prescribed by Law

To answer this need, the law has prescribed three (3) provisional remedies. These are:
(1) sequestration; (2) freeze orders; and (3) provisional takeover.

Sequestration and freezing are remedies applicable generally to unearthed instances of

"ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where
"business enterprises and properties (were) taken over by the government of the
Marcos Administration or by entities or persons close to former President Marcos." 43

a. Sequestration

By the clear terms of the law, the power of the PCGG to sequester property claimed to
be "ill-gotten" means to place or cause to be placed under its possession or control said
property, or any building or office wherein any such property and any records pertaining
thereto may be found, including "business enterprises and entities,"-for the purpose of
preventing the destruction, concealment or dissipation of, and otherwise conserving and
preserving, the same-until it can be determined, through appropriate judicial
proceedings, whether the property was in truth will- gotten," i.e., acquired through or as
a result of improper or illegal use of or the conversion of funds belonging to the
Government or any of its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of official position, authority relationship,
connection or influence, resulting in unjust enrichment of the ostensible owner and
grave damage and prejudice to the State. 44 And this, too, is the sense in which the term
is commonly understood in other jurisdictions. 45

b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property alleged to
constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise
depleting or concealing such property, or from assisting or taking part in its transfer,
encumbrance, concealment, or dissipation." 46 In other words, it commands the
possessor to hold the property and conserve it subject to the orders and disposition of
the authority decreeing such freezing. In this sense, it is akin to a garnishment by which
the possessor or ostensible owner of property is enjoined not to deliver, transfer, or
otherwise dispose of any effects or credits in his possession or control, and thus
becomes in a sense an involuntary depositary thereof. 47

c. Provisional Takeover

In providing for the remedy of "provisional takeover," the law acknowledges the
apparent distinction between "ill gotten" "business enterprises and entities" (going
concerns, businesses in actual operation), generally, as to which the remedy of
sequestration applies, it being necessarily inferred that the remedy entails no
interference, or the least possible interference with the actual management and
operations thereof; and "business enterprises which were taken over by the government
government of the Marcos Administration or by entities or persons close to him," in
particular, as to which a "provisional takeover" is authorized, "in the public interest or to
prevent disposal or dissipation of the enterprises." 48 Such a "provisional takeover"
imports something more than sequestration or freezing, more than the placing of the
business under physical possession and control, albeit without or with the least possible
interference with the management and carrying on of the business itself. In a
"provisional takeover," what is taken into custody is not only the physical assets of the
business enterprise or entity, but the business operation as well. It is in fine the
assumption of control not only over things, but over operations or on- going activities.
But, to repeat, such a "provisional takeover" is allowed only as regards "business
enterprises * * taken over by the government of the Marcos Administration or by entities
or persons close to former President Marcos."

d. No Divestment of Title Over Property Seized

It may perhaps be well at this point to stress once again the provisional, contingent
character of the remedies just described. Indeed the law plainly qualifies the remedy of
take-over by the adjective, "provisional." These remedies may be resorted to only for a
particular exigency: to prevent in the public interest the disappearance or dissipation of
property or business, and conserve it pending adjudgment in appropriate proceedings of
the primary issue of whether or not the acquisition of title or other right thereto by the
apparent owner was attended by some vitiating anomaly. None of the remedies is
meant to deprive the owner or possessor of his title or any right to the property
sequestered, frozen or taken over and vest it in the sequestering agency, the
Government or other person. This can be done only for the causes and by the
processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take over
is to be understood and exercised, the language of the executive orders in question
leaves no doubt. Executive Order No. 1 declares that the sequestration of property the
acquisition of which is suspect shall last "until the transactions leading to such
acquisition * * can be disposed of by the appropriate authorities." 49 Executive Order No.
2 declares that the assets or properties therein mentioned shall remain frozen "pending
the outcome of appropriate proceedings in the Philippines to determine whether any
such assets or properties were acquired" by illegal means. Executive Order No. 14
makes clear that judicial proceedings are essential for the resolution of the basic issue
of whether or not particular assets are "ill-gotten," and resultant recovery thereof by the
Government is warranted.

e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional

Command

There is thus no cause for the apprehension voiced by BASECO 50 that sequestration,
freezing or provisional takeover is designed to be an end in itself, that it is the device
through which persons may be deprived of their property branded as "ill-gotten," that it
is intended to bring about a permanent, rather than a passing, transitional state of
affairs. That this is not so is quite explicitly declared by the governing rules.

Be this as it may, the 1987 Constitution should allay any lingering fears about the
duration of these provisional remedies. Section 26 of its Transitory Provisions, 51 lays
down the relevant rule in plain terms, apart from extending ratification or confirmation
(although not really necessary) to the institution by presidential fiat of the remedy of
sequestration and freeze orders:

SEC. 26. The authority to issue sequestration or freeze orders under

Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-
gotten wealth shag remain operative for not more than eighteen
months after the ratification of this Constitution. However, in the national
interest, as certified by the President, the Congress may extend said
period.

A sequestration or freeze order shall be issued only upon showing of

a prima facie case. The order and the list of the sequestered or frozen
properties shall forthwith be registered with the proper court. For orders
issued before the ratification of this Constitution, the corresponding judicial
action or proceeding shall be filed within six months from its ratification.
For those issued after such ratification, the judicial action or proceeding
shall be commenced within six months from the issuance thereof.

The sequestration or freeze order is deemed automatically lifted if no

judicial action or proceeding is commenced as herein provided. 52

f. Kinship to Attachment Receivership

As thus described, sequestration, freezing and provisional takeover are akin to the
provisional remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff
seizes property of a defendant in a civil suit so that it may stand as security for the
satisfaction of any judgment that may be obtained, and not disposed of, or dissipated, or
lost intentionally or otherwise, pending the action. 54 By receivership, property, real or
personal, which is subject of litigation, is placed in the possession and control of a
receiver appointed by the Court, who shall conserve it pending final determination of the
title or right of possession over it. 55 All these remedies — sequestration, freezing,
provisional, takeover, attachment and receivership — are provisional, temporary,
designed for-particular exigencies, attended by no character of permanency or finality,
and always subject to the control of the issuing court or agency.

g. Remedies, Non-Judicial

Parenthetically, that writs of sequestration or freeze or takeover orders are not issued
by a court is of no moment. The Solicitor General draws attention to the writ of distraint
and levy which since 1936 the Commissioner of Internal Revenue has been by law
authorized to issue against property of a delinquent taxpayer. 56 BASECO itself declares
that it has not manifested "a rigid insistence on sequestration as a purely judicial
remedy * * (as it feels) that the law should not be ossified to a point that makes it
insensitive to change." What it insists on, what it pronounces to be its "unyielding
position, is that any change in procedure, or the institution of a new one, should conform
to due process and the other prescriptions of the Bill of Rights of the Constitution." 57 It
is, to be sure, a proposition on which there can be no disagreement.

h. Orders May Issue Ex Parte

Like the remedy of preliminary attachment and receivership, as well as delivery of

personal property in replevin suits, sequestration and provisional takeover writs may
issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of
personality, no objection of any significance may be raised to the ex parte issuance of
an order of sequestration, freezing or takeover, given its fundamental character of
temporariness or conditionality; and taking account specially of the constitutionally
expressed "mandate of the people to recover ill-gotten properties amassed by the
leaders and supporters of the previous regime and protect the interest of the
people;" 59 as well as the obvious need to avoid alerting suspected possessors of "ill-
gotten wealth" and thereby cause that disappearance or loss of property precisely
sought to be prevented, and the fact, just as self-evident, that "any transfer, disposition,
concealment or disappearance of said assets and properties would frustrate, obstruct or
hamper the efforts of the Government" at the just recovery thereof. 60

8. Requisites for Validity

What is indispensable is that, again as in the case of attachment and receivership, there
exist a prima facie factual foundation, at least, for the sequestration, freeze or takeover
order, and adequate and fair opportunity to contest it and endeavor to cause its
negation or nullification. 61

Both are assured under the executive orders in question and the rules and regulations
promulgated by the PCGG.

a. Prima Facie Evidence as Basis for Orders

Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness
and due process." 62Executive Order No. 2 declares that with respect to claims on
allegedly "ill-gotten" assets and properties, "it is the position of the new democratic
government that President Marcos * * (and other parties affected) be afforded fair
opportunity to contest these claims before appropriate Philippine authorities." 63 Section
7 of the Commission's Rules and Regulations provides that sequestration or freeze (and
takeover) orders issue upon the authority of at least two commissioners, based on
the affirmation or complaint of an interested party, or motu proprio when the
Commission has reasonable grounds to believe that the issuance thereof is
warranted. 64 A similar requirement is now found in Section 26, Art. XVIII of the 1987
Constitution, which requires that a "sequestration or freeze order shall be issued only
upon showing of a prima facie case." 65

b. Opportunity to Contest

And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by
which a party may seek to set aside a writ of sequestration or freeze order, viz:

SECTION 5. Who may contend.-The person against whom a writ of

sequestration or freeze or hold order is directed may request the lifting
thereof in writing, either personally or through counsel within five (5) days
from receipt of the writ or order, or in the case of a hold order, from date of
knowledge thereof.

SECTION 6. Procedure for review of writ or order.-After due hearing or

motu proprio for good cause shown, the Commission may lift the writ or
order unconditionally or subject to such conditions as it may deem
necessary, taking into consideration the evidence and the circumstance of
the case. The resolution of the commission may be appealed by the party
concerned to the Office of the President of the Philippines within fifteen
(15) days from receipt thereof.

Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth"
were not expressly imposed by some rule or regulation as a condition to warrant the
sequestration or freezing of property contemplated in the executive orders in question, it
would nevertheless be exigible in this jurisdiction in which the Rule of Law prevails and
official acts which are devoid of rational basis in fact or law, or are whimsical and
capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies

If any doubt should still persist in the face of the foregoing considerations as to the
validity and propriety of sequestration, freeze and takeover orders, it should be dispelled
by the fact that these particular remedies and the authority of the PCGG to issue them
have received constitutional approbation and sanction. As already mentioned, the
Provisional or "Freedom" Constitution recognizes the power and duty of the President to
enact "measures to achieve the mandate of the people to * * * (recover ill- gotten
properties amassed by the leaders and supporters of the previous regime and protect
the interest of the people through orders of sequestration or freezing of assets or
accounts." And as also already adverted to, Section 26, Article XVIII of the 1987
Constitution 67 treats of, and ratifies the "authority to issue sequestration or freeze orders
under Proclamation No. 3 dated March 25, 1986."

The institution of these provisional remedies is also premised upon the State's inherent
police power, regarded, as t lie power of promoting the public welfare by restraining and
regulating the use of liberty and property," 68 and as "the most essential, insistent and
illimitable of powers * * in the promotion of general welfare and the public interest," 69and
said to be co-extensive with self-protection and * * not inaptly termed (also) the'law of
overruling necessity." "70

10. PCGG not a "Judge"; General Functions

It should also by now be reasonably evident from what has thus far been said that the
PCGG is not, and was never intended to act as, a judge. Its general function is to
conduct investigations in order to collect evidence establishing instances of "ill-gotten
wealth;" issue sequestration, and such orders as may be warranted by the evidence
thus collected and as may be necessary to preserve and conserve the assets of which it
takes custody and control and prevent their disappearance, loss or dissipation; and
eventually file and prosecute in the proper court of competent jurisdiction all cases
investigated by it as may be warranted by its findings. It does not try and decide, or hear
and determine, or adjudicate with any character of finality or compulsion, cases
involving the essential issue of whether or not property should be forfeited and
transferred to the State because "ill-gotten" within the meaning of the Constitution and
the executive orders. This function is reserved to the designated court, in this case, the
Sandiganbayan. 71 There can therefore be no serious regard accorded to the accusation,
leveled by BASECO, 72that the PCGG plays the perfidious role of prosecutor and judge
at the same time.

11. Facts Preclude Grant of Relief to Petitioner

Upon these premises and reasoned conclusions, and upon the facts disclosed by the
record, hereafter to be discussed, the petition cannot succeed. The writs of certiorari
and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled by
President Marcos "during his administration, through nominees, by taking undue
advantage of his public office and/or using his powers, authority, or influence, " and that
it was by and through the same means, that BASECO had taken over the business
and/or assets of the National Shipyard and Engineering Co., Inc., and other
government-owned or controlled entities.

12. Organization and Stock Distribution of BASECO

BASECO describes itself in its petition as "a shiprepair and shipbuilding company * *
incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium of
Filipino shipowners and shipping executives. Its main office is at Engineer Island, Port
Area, Manila, where its Engineer Island Shipyard is housed, and its main shipyard is
located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized
capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with
a value of P12,000,000.00 have been subscribed, and on said subscription, the
aggregate sum of P3,035,000.00 has been paid by the incorporators. 74The same
articles Identify the incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas,
(2) Anthony P. Lee, (3) Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso
Tanseco, (6) Emilio T. Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino
de la Cruz, (10) Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13)
Manuel S. Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be
stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias
Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this
year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and Transfer
Book. 75Their names and the number of shares respectively held by them are as follows:

1. Jose A. Rojas
1,248
shares
2. Severino 1,248
G. de la Cruz shares
3. Emilio T. 2,508
Yap shares
4. Jose 1,248
Fernandez shares
5. Jose 128
Francisco shares
6. Manuel S. 96
Mendoza shares
7. Anthony P. 1,248
 Lee shares
8. Hilario M. 32
Ruiz shares
9. Constante 8
L. Fariñas shares
10. Fidelity 65,882
Management, shares
Inc.
11. Trident 7,412
Management shares
12. United 1,240
Phil. Lines shares
13. Renato 8
M. Tanseco shares
14. Fidel 8
Ventura shares
15. Metro 136,370
Bay Drydock shares
16. Manuel 1 share
Jacela
17. Jonathan 1 share
G. Lu
18. Jose J. 1 share
Tanchanco
19. Dioscoro 128
Papa shares
20. Edward 4
T. Marcelo shares
TOTAL 218,819
shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National Shipyard &
Steel Corporation, or NASSCO, a government-owned or controlled corporation, the
latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS),
and — except for NASSCO's Engineer Island Shops and certain equipment of the BNS,
consigned for future negotiation — all its structures, buildings, shops, quarters, houses,
plants, equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of
Purchase and Sale with Chattel Mortgage" executed on February 13, 1973. The price
was P52,000,000.00. As partial payment thereof, BASECO delivered to NASSCO a
cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum, compounded semi-
annually, was stipulated to be paid in equal semi-annual installments over a term of nine
(9) years, payment to commence after a grace period of two (2) years from date of
turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to

P24,311,550.00, about eight (8) months later. A document to this effect was executed
on October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO
by Arturo Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines,
as General Manager. 77 This agreement bore, at the top right corner of the first page, the
word "APPROVED" in the handwriting of President Marcos, followed by his usual full
signature. The document recited that a down payment of P5,862,310.00 had been
made by BASECO, and the balance of P19,449,240.00 was payable in equal semi-
annual installments over nine (9) years after a grace period of two (2) years, with
interest at 7% per annum.

15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in

Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00 of
which, as set out in the document of sale, P2,000.000.00 was paid upon its execution,
and the balance stipulated to be payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with
the intervention of President Marcos, acquired ownership of the rest of the assets of
NASSCO which had not been included in the first two (2) purchase documents. This
was accomplished by a deed entitled "Contract of Purchase and Sale," 79 which, like the
Memorandum of Agreement dated October 9, 1973 supra also bore at the upper right-
hand corner of its first page, the handwritten notation of President Marcos reading,
"APPROVED, July 29, 1973," and underneath it, his usual full signature. Transferred to
BASECO were NASSCO's "ownership and all its titles, rights and interests over all
equipment and facilities including structures, buildings, shops, quarters, houses, plants
and expendable or semi-expendable assets, located at the Engineer Island, known as
the Engineer Island Shops, including all the equipment of the Bataan National
Shipyards (BNS) which were excluded from the sale of NBS to BASECO but retained by
BASECO and all other selected equipment and machineries of NASSCO at J.
Panganiban Smelting Plant." In the same deed, NASSCO committed itself to cooperate
with BASECO for the acquisition from the National Government or other appropriate
Government entity of Engineer Island. Consideration for the sale was set at
P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the
balance was stipulated to be paid at 7% interest per annum in equal semi annual
installments over a term of nine (9) years, to commence after a grace period of two (2)
years. Mr. Arturo Pacificador again signed for NASSCO, together with the general
manager, Mr. David R. Ines.

17. Loans Obtained

It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken
from "the last available Japanese war damage fund of $19,000,000.00," to pay for
"Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got
another loan also from the NDC in the amount of P30,000,000.00 (id.). And on January
28, 1976, it got still another loan, this time from the GSIS, in the sum of
P12,400,000.00. 81 The claim has been made that not a single centavo has been paid on
these loans. 82

18. Reports to President Marcos

In September, 1977, two (2) reports were submitted to President Marcos regarding
BASECO. The first was contained in a letter dated September 5, 1977 of Hilario M.
Ruiz, BASECO president. 83 The second was embodied in a confidential memorandum
dated September 16, 1977 of Capt. A.T. Romualdez. 84 They further disclose the fine
hand of Marcos in the affairs of BASECO, and that of a Romualdez, a relative by
affinity.

a. BASECO President's Report

In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that
there had been "no orders or demands for ship construction" for some time and
expressed the fear that if that state of affairs persisted, BASECO would not be able to
pay its debts to the Government, which at the time stood at the not inconsiderable
amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be
a "spin-off (of their) shipbuilding activities which shall be handled exclusively by an
entirely new corporation to be created;" and towards this end, he informed Marcos that
BASECO was —

* * inviting NDC and LUSTEVECO to participate by converting the NDC

shipbuilding loan to BASECO amounting to P341.165M and assuming and
converting a portion of BASECO's shipbuilding loans from REPACOM
amounting to P52.2M or a total of P83.365M as NDC's equity contribution
in the new corporation. LUSTEVECO will participate by absorbing and
converting a portion of the REPACOM loan of Bay Shipyard and Drydock,
Inc., amounting to P32.538M.86
 b. Romualdez' Report

Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It
opened with the following caption:

MEMORANDUM:

FOR : The President

SUBJECT: An Evaluation and Re-assessment of a Performance of a

Mission

FROM: Capt. A.T. Romualdez.

Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan
obligations due chiefly to the fact that "orders to build ships as expected * * did not
materialize."

He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4)
Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is
already dead and Mr. Jose A. Rojas had a major heart attack," he made the following
quite revealing, and it may be added, quite cynical and indurate recommendation, to wit:

* * (that) their replacements (be effected) so we can register their names

in the stock book prior to the implementation of your instructions to pass a
board resolution to legalize the transfers under SEC regulations;

2. By getting their replacements, the families cannot question us later

on; and

3. We will owe no further favors from them. 87

He also transmitted to Marcos, together with the report, the following documents: 88

1. Stock certificates indorsed and assigned in blank with assignments and

waivers; 89

2. The articles of incorporation, the amended articles, and the by-laws of

BASECO;

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of

land in "Engineer Island", Port Area, Manila;

4. Transfer Certificate of Title No. 124822 in the name of BASECO,

covering "Engineer Island";
 5. Contract dated October 9, 1973, between NASSCO and BASECO re-
structure and equipment at Mariveles, Bataan;

6. Contract dated July 16, 1975, between NASSCO and BASECO re-
structure and equipment at Engineer Island, Port Area Manila;

7. Contract dated October 1, 1974, between EPZA and BASECO re 300

hectares of land at Mariveles, Bataan;

8. List of BASECO's fixed assets;

9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC

of P30,000,000.00;

10. BASECO-REPACOM Agreement dated May 27, 1975;

11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for
the housing facilities for BASECO's rank-and-file employees. 90

Capt. Romualdez also recommended that BASECO's loans be restructured "until such
period when BASECO will have enough orders for ships in order for the company to
meet loan obligations," and that —

An LOI may be issued to government agencies using floating equipment,

that a linkage scheme be applied to a certain percent of BASECO's net
profit as part of BASECO's amortization payments to make it justifiable for
you, Sir. 91

It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or

officer of BASECO, yet he has presented a report on BASECO to President Marcos,
and his report demonstrates intimate familiarity with the firm's affairs and problems.

19. Marcos' Response to Reports

President Marcos lost no time in acting on his subordinates' recommendations,

particularly as regards the "spin-off" and the "linkage scheme" relative to "BASECO's
amortization payments."

a. Instructions re "Spin-Off"

Under date of September 28, 1977, he addressed a Memorandum to Secretary

Geronimo Velasco of the Philippine National Oil Company and Chairman Constante
Fariñas of the National Development Company, directing them "to participate in the
formation of a new corporation resulting from the spin-off of the shipbuilding component
of BASECO along the following guidelines:
 a. Equity participation of government shall be through LUSTEVECO and
NDC in the amount of P115,903,000 consisting of the following obligations
of BASECO which are hereby authorized to be converted to equity of the
said new corporation, to wit:

1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)

2. LUSTEVECO P32,538,000 (Reparation)

b. Equity participation of government shall be in the form of non- voting

shares.

For immediate compliance. 92

Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two
(22) days after receiving their president's memorandum, Messrs. Hilario M. Ruiz,
Constante L. Fariñas and Geronimo Z. Velasco, in representation of their respective
corporations, executed a PRE-INCORPORATION AGREEMENT dated October 20,
1977. 93 In it, they undertook to form a shipbuilding corporation to be known as "PHIL-
ASIA SHIPBUILDING CORPORATION," to bring to realization their president's
instructions. It would seem that the new corporation ultimately formed was actually
named "Philippine Dockyard Corporation (PDC)." 94

b. Letter of Instructions No. 670

Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions.
On February 14, 1978, he issued Letter of Instructions No. 670 addressed to the
Reparations Commission REPACOM the Philippine National Oil Company (PNOC), the
Luzon Stevedoring Company (LUSTEVECO), and the National Development Company
(NDC). What is commanded therein is summarized by the Solicitor General, with pithy
and not inaccurate observations as to the effects thereof (in italics), as follows:

* * 1) the shipbuilding equipment procured by BASECO through

reparations be transferred to NDC subject to reimbursement by NDC to
BASECO (of) the amount of s allegedly representing the handling and
incidental expenses incurred by BASECO in the installation of said
equipment (so instead of NDC getting paid on its loan to BASECO, it was
made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in
the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.)
be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding
equipment (thus) transferred be invested by LUSTEVECO, acting through
PNOC and NDC, as the government's equity participation in a shipbuilding
corporation to be established in partnership with the private sector.

xxx xxx xxx

 And so, through a simple letter of instruction and memorandum,
BASECO's loan obligation to NDC and REPACOM * * in the total amount
of P83.365M and BSD's REPACOM loan of P32.438M were wiped out
and converted into non-voting preferred shares. 95

20. Evidence of Marcos'

Ownership of BASECO

It cannot therefore be gainsaid that, in the context of the proceedings at bar, the
actuality of the control by President Marcos of BASECO has been sufficiently shown.

Other evidence submitted to the Court by the Solicitor General proves that President
Marcos not only exercised control over BASECO, but also that he actually owns well
nigh one hundred percent of its outstanding stock.

It will be recalled that according to petitioner- itself, as of April 23, 1986, there were
218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay
Drydock, recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882
shares; (3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240
shares. The first three corporations, among themselves, own an aggregate of 209,664
shares of BASECO stock, or 95.82% of the outstanding stock.

Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance
that found in Malacanang shortly after the sudden flight of President Marcos, were
certificates corresponding to more than ninety-five percent (95%) of all the outstanding
shares of stock of BASECO, endorsed in blank, together with deeds of assignment of
practically all the outstanding shares of stock of the three (3) corporations above
mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof
although not notarized. 97

More specifically, found in Malacanang (and now in the custody of the PCGG) were:

1) the deeds of assignment of all 600 outstanding shares of Fidelity

Management Inc. — which supposedly owns as aforesaid 65,882 shares
of BASECO stock;

2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding

shares of Metro Bay Drydock Corporation — which allegedly owns
136,370 shares of BASECO stock;

3) the deeds of assignment of 800 outstanding shares of Trident

Management Co., Inc. — which allegedly owns 7,412 shares of BASECO
stock, assigned in blank; 98 and
 4) stock certificates corresponding to 207,725 out of the 218,819
outstanding shares of BASECO stock; that is, all but 5 % — all endorsed
in blank. 99

While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court
that the BASECO stockholders were still in possession of their respective stock
certificates and had "never endorsed * * them in blank or to anyone else," 100 that denial is
exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rather than a verifiable factual declaration.

By resolution dated September 25, 1986, this Court granted BASECO's counsel a
period of 10 days "to SUBMIT, as undertaken by him, * * the certificates of stock issued
to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the
petition.' 101 Counsel thereafter moved for extension; and in his motion dated October 2, 1986, he declared inter alia that "said
certificates of stock are in the possession of third parties, among whom being the respondents themselves * * and petitioner is still
endeavoring to secure copiesthereof from them." 102 On the same day he filed another motion praying that he be allowed "to secure
copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other Certificates, of Stock of petitioner's stockholders in
possession of respondents." 103

In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that counsel's aforestated motion to secure
copies of the stock certificates "confirms the fact that stockholders of petitioner corporation are not in possession of * * (their) certificates of
stock," and the reason, according to him, was "that 95% of said shares * * have been endorsed in blank and found in Malacañang after the
former President and his family fled the country." To this manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really assigned their stock. 105

In view of the parties' conflicting declarations, this Court resolved on November 27, 1986 among other things "to require * * the petitioner * *
to deposit upon proper receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its possession or
accessible to it, mentioned and described in Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice." 106 In a
motion filed on December 5, 1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with
the owners (of the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it
needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to produce the originals of the
stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * * (him) to borrow said certificates, * *
some of * * (them) claimed that they had delivered the certificates to third parties by way of pledge and/or to secure performance of
obligations, while others allegedly have entrusted them to third parties in view of last national emergency." 108 He has conveniently omitted,
nor has he offered to give the details of the transactions adverted to by him, or to explain why he had not impressed on the supposed
stockholders the primordial importance of convincing this Court of their present custody of the originals of the stock, or if he had done so,
why the stockholders are unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be
exhibited to the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for the
simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their possession, these having
already been assigned in blank to then President Marcos.

21. Facts Justify Issuance of Sequestration and Takeover Orders

In the light of the affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter
egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the conclusion cannot be
avoided that said stockholders and directors have no basis and no standing whatever to cause the filing and prosecution of the instant
proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect be to restore the assets, properties and business
sequestered and taken over by the PCGG to persons who are "dummies," nominees or alter egos of the former president.

From the standpoint of the PCGG, the facts herein stated at some length do indeed
show that the private corporation known as BASECO was "owned or controlled by
former President Ferdinand E. Marcos * * during his administration, * * through
nominees, by taking advantage of * * (his) public office and/or using * * (his) powers,
authority, influence * *," and that NASSCO and other property of the government had
been taken over by BASECO; and the situation justified the sequestration as well as the
provisional takeover of the corporation in the public interest, in accordance with the
terms of Executive Orders No. 1 and 2, pending the filing of the requisite actions with
the Sandiganbayan to cause divestment of title thereto from Marcos, and its
adjudication in favor of the Republic pursuant to Executive Order No. 14.

As already earlier stated, this Court agrees that this assessment of the facts is correct;
accordingly, it sustains the acts of sequestration and takeover by the PCGG as being in
accord with the law, and, in view of what has thus far been set out in this opinion,
pronounces to be without merit the theory that said acts, and the executive orders
pursuant to which they were done, are fatally defective in not according to the parties
affected prior notice and hearing, or an adequate remedy to impugn, set aside or
otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge
at the same time.

22. Executive Orders Not a Bill of Attainder

Neither will this Court sustain the theory that the executive orders in question are a bill
of attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the
substitution of a legislative for a judicial determination of guilt." 112

In the first place, nothing in the executive orders can be reasonably construed as a determination or declaration of guilt. On the contrary, the
executive orders, inclusive of Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing or acquisition of "ill-
gotten wealth" is to be handed down by a judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and prosecuted by the
PCGG. In the second place, no punishment is inflicted by the executive orders, as the merest glance at their provisions will immediately
make apparent. In no sense, therefore, may the executive orders be regarded as a bill of attainder.

23. No Violation of Right against Self-Incrimination and Unreasonable Searches and

Seizures

BASECO also contends that its right against self incrimination and unreasonable
searches and seizures had been transgressed by the Order of April 18, 1986 which
required it "to produce corporate records from 1973 to 1986 under pain of contempt of
the Commission if it fails to do so." The order was issued upon the authority of Section 3
(e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas
requiring * * the production of such books, papers, contracts, records, statements of
accounts and other documents as may be material to the investigation conducted by the
Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to
"require all persons in the Philippines holding * * (alleged "ill-gotten") assets or
properties, whether located in the Philippines or abroad, in their names as nominees,
agents or trustees, to make full disclosure of the same * *." The contention lacks merit.

It is elementary that the right against self-incrimination has no application to juridical

persons.

While an individual may lawfully refuse to answer incriminating questions

unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises, may refuse to
show its hand when charged with an abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
 * * corporations are not entitled to all of the constitutional protections
which private individuals have. * * They are not at all within the privilege
against self-incrimination, although this court more than once has said that
the privilege runs very closely with the 4th Amendment's Search and
Seizure provisions. It is also settled that an officer of the company cannot
refuse to produce its records in its possession upon the plea that they will
either incriminate him or may incriminate it." (Oklahoma Press Publishing
Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).

* * The corporation is a creature of the state. It is presumed to be

incorporated for the benefit of the public. It received certain special
privileges and franchises, and holds them subject to the laws of the state
and the limitations of its charter. Its powers are limited by law. It can make
no contract not authorized by its charter. Its rights to act as a corporation
are only preserved to it so long as it obeys the laws of its creation. There
is a reserve right in the legislature to investigate its contracts and find out
whether it has exceeded its powers. It would be a strange anomaly to hold
that a state, having chartered a corporation to make use of certain
franchises, could not, in the exercise of sovereignty, inquire how these
franchises had been employed, and whether they had been abused, and
demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation
which is charged with a criminal violation of the statute may plead the
criminality of such corporation as a refusal to produce its books. To state
this proposition is to answer it. While an individual may lawfully refuse to
answer incriminating questions unless protected by an immunity statute, it
does not follow that a corporation, vested with special privileges and
franchises may refuse to show its hand when charged with an abuse of
such privileges. (Wilson v. United States, 55 Law Ed., 771, 780 [emphasis,
the Solicitor General's])

At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14
assures protection to individuals required to produce evidence before the PCGG against
any possible violation of his right against self-incrimination. It gives them immunity from
prosecution on the basis of testimony or information he is compelled to present. As
amended, said Section 4 now provides that —

xxx xxx xxx

The witness may not refuse to comply with the order on the basis of his
privilege against self-incrimination; but no testimony or other information
compelled under the order (or any information directly or indirectly derived
from such testimony, or other information) may be used against the
witness in any criminal case, except a prosecution for perjury, giving a
false statement, or otherwise failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds no
application to the case at bar either. There has been no search undertaken by any
agent or representative of the PCGG, and of course no seizure on the occasion thereof.

24. Scope and Extent of Powers of the PCGG

One other question remains to be disposed of, that respecting the scope and extent of
the powers that may be wielded by the PCGG with regard to the properties or
businesses placed under sequestration or provisionally taken over. Obviously, it is not a
question to which an answer can be easily given, much less one which will suffice for
every conceivable situation.

a. PCGG May Not Exercise Acts of Ownership

One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts
of dominion over property sequestered, frozen or provisionally taken over. AS already
earlier stressed with no little insistence, the act of sequestration; freezing or provisional
takeover of property does not import or bring about a divestment of title over said
property; does not make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an
owner. Therefore, it can not perform acts of strict ownership; and this is specially true in
the situations contemplated by the sequestration rules where, unlike cases of
receivership, for example, no court exercises effective supervision or can upon due
application and hearing, grant authority for the performance of acts of dominion.

Equally evident is that the resort to the provisional remedies in question should entail
the least possible interference with business operations or activities so that, in the event
that the accusation of the business enterprise being "ill gotten" be not proven, it may be
returned to its rightful owner as far as possible in the same condition as it was at the
time of sequestration.

b. PCGG Has Only Powers of Administration

The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, 115 such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding debts; and
generally do such other acts and things as may be necessary to fulfill its mission as conservator and administrator. In this context, it may in
addition enjoin or restrain any actual or threatened commission of acts by any person or entity that may render moot and academic, or
frustrate or otherwise make ineffectual its efforts to carry out its task; punish for direct or indirect contempt in accordance with the Rules of
Court; and seek and secure the assistance of any office, agency or instrumentality of the government. 116 In the case of sequestered
businesses generally (i.e., going concerns, businesses in current operation), as in the case of sequestered objects, its essential role, as
already discussed, is that of conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.

c. Powers over Business Enterprises Taken Over by Marcos or Entities or

Persons Close to him; Limitations Thereon

Now, in the special instance of a business enterprise shown by evidence to have been
"taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos," 117 the PCGG is given power and authority, as already adverted to, to "provisionally
take (it) over in the public interest or to prevent * * (its) disposal or dissipation;" and since the term is obviously employed in reference to
going concerns, or business enterprises in operation, something more than mere physical custody is connoted; the PCGG may in this case
exercise some measure of control in the operation, running, or management of the business itself. But even in this special situation, the
intrusion into management should be restricted to the minimum degree necessary to accomplish the legislative will, which is "to prevent the
disposal or dissipation" of the business enterprise. There should be no hasty, indiscriminate, unreasoned replacement or substitution of
management officials or change of policies, particularly in respect of viable establishments. In fact, such a replacement or substitution should
be avoided if at all possible, and undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the
PCGG. And it goes without saying that where replacement of management officers may be called for, the greatest prudence, circumspection,
care and attention - should accompany that undertaking to the end that truly competent, experienced and honest managers may be
recruited. There should be no role to be played in this area by rank amateurs, no matter how wen meaning. The road to hell, it has been said,
is paved with good intentions. The business is not to be experimented or played around with, not run into the ground, not driven to
bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the ultimate objective of the whole exercise, which is to turn over the
business to the Republic, once judicially established to be "ill-gotten." Reason dictates that it is only under these conditions and
circumstances that the supervision, administration and control of business enterprises provisionally taken over may legitimately be exercised.

d. Voting of Sequestered Stock; Conditions Therefor

So, too, it is within the parameters of these conditions and circumstances that the
PCGG may properly exercise the prerogative to vote sequestered stock of corporations,
granted to it by the President of the Philippines through a Memorandum dated June 26,
1986. That Memorandum authorizes the PCGG, "pending the outcome of proceedings
to determine the ownership of * * (sequestered) shares of stock," "to vote such shares
of stock as it may have sequestered in corporations at all stockholders' meetings called
for the election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a manner as to be
consistent with, and not contradictory of the Executive Orders earlier promulgated on
the same matter. There should be no exercise of the right to vote simply because the
right exists, or because the stocks sequestered constitute the controlling or a substantial
part of the corporate voting power. The stock is not to be voted to replace directors, or
revise the articles or by-laws, or otherwise bring about substantial changes in policy,
program or practice of the corporation except for demonstrably weighty and defensible
grounds, and always in the context of the stated purposes of sequestration or
provisional takeover, i.e., to prevent the dispersion or undue disposal of the corporate
assets. Directors are not to be voted out simply because the power to do so exists.
Substitution of directors is not to be done without reason or rhyme, should indeed be
shunned if at an possible, and undertaken only when essential to prevent
disappearance or wastage of corporate property, and always under such circumstances
as assure that the replacements are truly possessed of competence, experience and
probity.

In the case at bar, there was adequate justification to vote the incumbent directors out
of office and elect others in their stead because the evidence showed prima facie that
the former were just tools of President Marcos and were no longer owners of any stock
in the firm, if they ever were at all. This is why, in its Resolution of October 28,
1986; 118 this Court declared that —

Petitioner has failed to make out a case of grave abuse or excess of

jurisdiction in respondents' calling and holding of a stockholders' meeting
for the election of directors as authorized by the Memorandum of the
President * * (to the PCGG) dated June 26, 1986, particularly, where as in
this case, the government can, through its designated directors, properly
exercise control and management over what appear to be properties and
 assets owned and belonging to the government itself and over which the
persons who appear in this case on behalf of BASECO have failed to
show any right or even any shareholding in said corporation.

It must however be emphasized that the conduct of the PCGG nominees in the
BASECO Board in the management of the company's affairs should henceforth be
guided and governed by the norms herein laid down. They should never for a moment
allow themselves to forget that they are conservators, not owners of the business; they
are fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required.

25. No Sufficient Showing of Other Irregularities

As to the other irregularities complained of by BASECO, i.e., the cancellation or

revision, and the execution of certain contracts, inclusive of the termination of the
employment of some of its executives, 119 this Court cannot, in the present state of the evidence on record, pass
upon them. It is not necessary to do so. The issues arising therefrom may and will be left for initial determination in the appropriate action.
But the Court will state that absent any showing of any important cause therefor, it will not normally substitute its judgment for that of the
PCGG in these individual transactions. It is clear however, that as things now stand, the petitioner cannot be said to have established the
correctness of its submission that the acts of the PCGG in question were done without or in excess of its powers, or with grave abuse of
discretion.

WHEREFORE, the petition is dismissed. The temporary restraining order issued on

October 14, 1986 is lifted.

Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

 [G.R. No. 116123. March 13, 1997]

SERGIO F. NAGUIAT, doing business under the name and style

SERGIO F. NAGUIAT ENT., INC., & CLARK FIELD TAXI,
INC.,petitioners, vs. NATIONAL LABOR RELATIONS
COMMISSION (THIRD DIVISION), NATIONAL ORGANIZATION OF
WORKINGMEN and its members, LEONARDO T. GALANG, et
al., respondents.

DECISION
PANGANIBAN, J.:

Are private respondent-employees of petitioner Clark Field Taxi, Inc., who were
separated from service due to the closure of Clark Air Base, entitled to separation pay
and, if so, in what amount? Are officers of corporations ipso facto liable jointly and
severally with the companies they represent for the payment of separation pay?
These questions are answered by the Court in resolving this petition
for certiorari under Rule 65 of the Rules of Court assailing the Resolutions of the
National Labor Relations Commission (Third Division)[1] promulgated on February 28,
1994,[2] and May 31, 1994.[3] The February 28, 1994 Resolution affirmed with
modifications the decision[4] of Labor Arbiter Ariel C. Santos in NLRC Case No. RAB-III-
12-2477-91. The second Resolution denied the motion for reconsideration of herein
petitioners.
The NLRC modified the decision of the labor arbiter by granting separation pay to
herein individual respondents in the increased amount of US$120.00 for every year of
service or its peso equivalent, and holding Sergio F. Naguiat Enterprises, Inc., Sergio F.
Naguiat and Antolin T. Naguiat, jointly and severally liable with Clark Field Taxi, Inc.
("CFTI").

The Facts

The following facts are derived from the records of the case:

Petitioner CFTI held a concessionaire's contract with the Army Air Force Exchange
Services ("AAFES") for the operation of taxi services within Clark Air Base. Sergio
F. Naguiat was CFTI's president, while Antolin T. Naguiat was its vice-
president. Like Sergio F. Naguiat Enterprises, Incorporated ("Naguiat Enterprises"), a
trading firm, it was a family-owned corporation.
Individual respondents were previously employed by CFTI as taxicab drivers. During
their employment, they were required to pay a daily "boundary fee" in the amount of
US$26.50 for those working from 1:00 a.m. to 12:00 noon, and US$27.00 for those
working from 12:00 noon to 12:00 midnight. All incidental expenses for the
maintenance of the vehicles they were driving were accounted against them, including
gasoline expenses.

The drivers worked at least three to four times a week, depending on the availability
of taxicabs. They earned not less than US$15.00 daily.In excess of that amount,
however, they were required to make cash deposits to the company, which they could
later withdraw every fifteen days.

Due to the phase-out of the US military bases in the Philippines, from which Clark Air
Base was not spared, the AAFES was dissolved, and the services of individual
respondents were officially terminated on November 26, 1991.

The AAFES Taxi Drivers Association ("drivers' union"), through its local president,
Eduardo Castillo, and CFTI held negotiations as regards separation benefits that
should be awarded in favor of the drivers. They arrived at an agreement that the
separated drivers will be given P500.00 for every year of service as severance
pay. Most of the drivers accepted said amount in December 1991 and January
1992.However, individual respondents herein refused to accept theirs.

Instead, after disaffiliating themselves from the drivers' union, individual respondents,
through the National Organization of Workingmen ("NOWM"), a labor organization
which they subsequently joined, filed a complaint against "Sergio F. Naguiat doing
[5]

business under the name and style Sergio F. Naguiat Enterprises, Inc., Army-Air
Force Exchange Services (AAFES) with Mark Hooper as Area Service Manager,
Pacific Region, and AAFES Taxi Drivers Association with Eduardo Castillo as
President," for payment of separation pay due to termination/phase-out. Said
complaint was later amended to include additional taxi drivers who were similarly
[6]

situated as complainants, and CFTI with Antolin T. Naguiat as vice president and
general manager, as party respondent.

In their complaint, herein private respondents alleged that they were regular
employees of Naguiat Enterprises, although their individual applications for employment
were approved by CFTI. They claimed to have been assigned to Naguiat Enterprises
after having been hired by CFTI, and that the former thence managed, controlled and
supervised their employment. They averred further that they were entitled to separation
pay based on their latest daily earnings of US$15.00 for working sixteen (16) days a
month.
 In their position paper submitted to the labor arbiter, herein petitioners claimed that
the cessation of business of CFTI on November 26, 1991, was due to "great financial
losses and lost business opportunity" resulting from the phase-out of Clark Air Base
brought about by the Mt. Pinatubo eruption and the expiration of the RP-US military
bases agreement. They admitted that CFTI had agreed with the drivers' union, through
its President Eduardo Castillo who claimed to have had blanket authority to negotiate
with CFTI in behalf of union members, to grant its taxi driver-employees separation pay
equivalent to P500.00 for every year of service.
The labor arbiter, finding the individual complainants to be regular workers of CFTI,
ordered the latter to pay them P1,200.00 for every year of service "for humanitarian
consideration," setting aside the earlier agreement between CFTI and the drivers' union
of P500.00 for every year of service. The labor arbiter rejected the allegation of CFTI
that it was forced to close business due to "great financial losses and lost business
opportunity" since, at the time it ceased operations, CFTI was profitably earning and the
cessation of its business was due to the untimely closure of Clark Air Base. In not
awarding separation pay in accordance with the Labor Code, the labor-arbiter
explained:
"To allow respondents exemption from its (sic) obligation to pay separation
pay would be inhuman to complainants but to impose a monetary obligation
to an employer whose profitable business was abruptly shot (sic) down by
force majeure would be unfair and unjust to say the least." [7]

and thus, simply awarded an amount for "humanitarian consideration."

Herein individual private respondents appealed to the NLRC. In its Resolution, the
NLRC modified the decision of the labor arbiter by granting separation pay to the private
respondents. The concluding paragraphs of the NLRC Resolution read:
"The contention of complainant is partly correct. One-half month salary
should be US$120.00 but this amount can not be paid to the complainant in
U.S. Dollar which is not the legal tender in the Philippines. Paras, in
commenting on Art. 1249 of the New Civil Code, defines legal tender as 'that
which a debtor may compel a creditor to accept in payment of the debt. The
complainants who are the creditors in this instance can be compelled to accept
the Philippine peso which is the legal tender, in which case, the table of
conversion (exchange rate) at the time of payment or satisfaction of the
judgment should be used. However, since the choice is left to the debtor,
(respondents) they may choose to pay in US dollar.' (Phoenix Assurance Co.
vs. Macondray & Co. Inc., L-25048, May 13, 1975)
In discharging the above obligations, Sergio F. Naguiat Enterprises, which is
headed by Sergio F. Naguiat and Antolin Naguiat, father and son at the same
time the President and Vice-President and General Manager, respectively,
should be joined as indispensable party whose liability is joint and
several. (Sec. 7, Rule 3, Rules of Court)" [8]
 As mentioned earlier, the motion for reconsideration of herein petitioners was
denied by the NLRC. Hence, this petition with prayer for issuance of a temporary
restraining order. Upon posting by the petitioners of a surety bond, a temporary
restraining order[9] was issued by this Court enjoining execution of the assailed
Resolutions.

Issues

The petitioners raise the following issues before this Court for resolution:
"I. Whether or not public respondent NLRC (3rd Div.) committed grave
abuse of discretion amounting to lack of jurisdiction in issuing the
appealed resolution;
II. Whether or not Messrs. Teofilo Rafols and Romeo N. Lopez could
validly represent herein private respondents; and,
III. Whether or not the resolution issued by public respondent is contrary
to law." [10]

Petitioners also submit two additional issues by way of a supplement [11] to their
petition, to Wit: that Petitioners Sergio F. Naguiat and Antolin Naguiat were denied due
process; and that petitioners were not furnished copies of private respondents' appeal to
the NLRC. As to the procedural lapse of insufficient copies of the appeal, the proper
forum before which petitioners should have raised it is the NLRC. They, however, failed
to question this in their motion for reconsideration. As a consequence, they are deemed
to have waived the same and voluntarily submitted themselves to the jurisdiction of the
appellate body.
Anent the first issue raised in their original petition, petitioners contend that NLRC
committed grave abuse of discretion amounting to lack or excess of jurisdiction in
unilaterally increasing the amount of severance pay granted by the labor arbiter. They
claim that this was not supported by substantial evidence since it was based simply on
the self-serving allegation of respondents that their monthly take-home pay was not
lower than $240.00.
On the second issue, petitioners aver that NOWM cannot make legal
representations in behalf of individual respondents who should, instead, be bound by
the decision of the union (AAFES Taxi Drivers Association) of which they were
members.
As to the third issue, petitioners incessantly insist that Sergio F. Naguiat
Enterprises, Inc. is a separate and distinct juridical entity which cannot be held jointly
and severally liable for the obligations of CFTI. And similarly, Sergio F. Naguiat and
Antolin Naguiat were merely officers and stockholders of CFTI and, thus, could not be
held personally accountable for corporate debts.
 Lastly, Sergio and Antolin Naguiat assail the Resolution of NLRC holding them
solidarily liable despite not having been impleaded as parties to the complaint.
Individual respondents filed a comment separate from that of NOWM. In sum, both
aver that petitioners had the opportunity but failed to refute, the taxi drivers' claim of
having an average monthly earning of $240.00; that individual respondents became
members of NOWM after disaffiliating themselves from the AAFES Taxi Drivers
Association which, through the manipulations of its President Eduardo Castillo,
unconscionably compromised their separation pay; and that Naguiat Enterprises, being
their indirect employer, is solidarily liable under the law for violation of the Labor Code,
in this case, for nonpayment of their separation pay.
The Solicitor General unqualifiedly supports the allegations of private
respondents. In addition, he submits that the separate personalities of respondent
corporations and their officers should be disregarded and considered one and the same
as these were used to perpetrate injustice to their employees.

The Court's Ruling

As will be discussed below, the petition is partially meritorious.

First Issue: Amount of Separation Pay

Firmly, we reiterate the rule that in a petition for certiorari filed pursuant to Rule 65
of the Rules of Court, which is the only way a labor case may reach the Supreme Court,
the petitioner/s must clearly show that the NLRC acted without or in excess of
jurisdiction or with grave abuse of discretion.[12]
Long-standing and well-settled in Philippine jurisprudence is the judicial dictum that
findings of fact of administrative agencies and quasi-judicial bodies, which have
acquired expertise because their jurisdiction is confined to specific matters, are
generally accorded not only great respect but even finality; and are binding upon this
Court unless there is a showing of grave abuse of discretion, or where it is clearly
shown that they were arrived at arbitrarily or in disregard of the evidence on record.[13]
Nevertheless, this Court carefully perused the records of the instant case if only to
determine whether public respondent committed grave abuse of discretion, amounting
to lack of jurisdiction, in granting the clamor of private respondents that their separation
pay should be based on the amount of $240.00, allegedly their minimum monthly
earnings as taxi drivers of petitioners.
In their amended complaint before the Regional Arbitration Branch in San
Fernando, Pampanga, herein private respondents set forth in detail the work schedule
and financial arrangement they had with their employer. Therefrom they inferred that
their monthly take-home pay amounted to not less than $240.00. Herein petitioners did
not bother to refute nor offer any evidence to controvert said allegations. Remaining
undisputed, the labor arbiter adopted such facts in his decision. Petitioners did not even
appeal from the decision of the labor arbiter nor manifest any error in his findings and
conclusions. Thus, petitioners are in estoppel for not having questioned such facts when
they had all opportunity to do so. Private respondents, like petitioners, are bound by the
factual findings of Respondent Commission.
Petitioners also claim that the closure of their taxi business was due to great
financial losses brought about by the eruption of Mt. Pinatubo which made the roads
practically impassable to their taxicabs. Likewise well-settled is the rule that business
losses or financial reverses, in order to sustain retrenchment of personnel or closure of
business and warrant exemption from payment of separation pay, must be proved with
clear and satisfactory evidence.[14] The records, however, are devoid of such evidence.
The labor arbiter; as affirmed by NLRC, correctly found that petitioners stopped their
taxi business within Clark Air Base because of the phase-out of U.S. military presence
thereat. It was not due to any great financial loss because petitioners' taxi business was
earning profitably at the time of its closure.
With respect to the amount of separation pay that should be granted, Article 283 of
the Labor Code provides:
"x x x In case of retrenchment to prevent losses and in cases of closures or
cessation of operations of establishment or undertaking not due to serious
business losses or financial reverses, the separation pay shall be equivalent to
one (1) month pay or at least one-half () month pay for every year of service,
whichever is higher. A fraction of at least six (6) months shall be considered
one (1 ) whole year."
Considering the above, we find that NLRC did not commit grave abuse of discretion
in ruling that individual respondents were entitled to separation pay[15]in the amount
$120.00 (one-half of $240.00 monthly pay) or its peso equivalent for every year of
service.
Second Issue: NOWM's Personality to
Represent Individual Respondents-Employees

On the question of NOWM's authority to represent private respondents, we hold

petitioners in estoppel for not having seasonably raised this issue before the labor
arbiter or the NLRC. NOWM was already a party-litigant as the organization
representing the taxi driver-complainants before the labor arbiter. But petitioners who
were party-respondents in said complaint did not assail the juridical personality of
NOWM and the validity of its representations in behalf of the complaining taxi drivers
before the quasi-judicial bodies. Therefore, they are now estopped from raising such
question before this Court. In any event, petitioners acknowledged before this Court that
the taxi drivers allegedly represented by NOWM, are themselves parties in this case.[16]

Third Issue: Liability of Petitioner-

 Corporations and Their Respective Officers

The resolution of this issue involves another factual finding that Naguiat Enterprises
actually managed, supervised and controlled employment terms of the taxi drivers,
making it their indirect employer. As adverted to earlier, factual findings of quasi-judicial
bodies are binding upon the court in the absence of a showing of grave abuse of
discretion.
Unfortunately, the NLRC did not discuss or give any explanation for holding Naguiat
Enterprises and its officers jointly and severally liable in discharging CFTI's liability for
payment of separation pay. We again remind those concerned that decisions, however
concisely written, must distinctly and clearly set forth the facts and law upon which they
are based.[17] This rule applies as well to dispositions by quasi-judicial and administrative
bodies.

Naguiat Enterprises Not Liable

In impleading Naguiat Enterprises as solidarily liable for the obligations of CFTI,

respondents rely on Articles 106,[18] 107[19] and 109[20] of the Labor Code.
Based on factual submissions of the parties, the labor arbiter, however, found that
individual respondents were regular employees of CFTI who received wages on a
boundary or commission basis.
We find no reason to make a contrary finding. Labor-only contracting exists
where: (1) the person supplying workers to an employer does not have substantial
capital or investment in the form of tools, equipment, machinery, and work premises,
among others; and (2) the workers recruited and placed by such person are performing
activities which are directly related to the principal business of the
employer.[21] Independent contractors, meanwhile, are those who exercise independent
employment, contracting to do a piece of work according to their own methods without
being subject to control of their employer except as to the result of their work.[22]
From the evidence proffered by both parties, there is no substantial basis to hold
that Naguiat Enterprises is an indirect employer of individual respondents much less a
labor only contractor. On the contrary, petitioners submitted documents such as the
drivers' applications for employment with CFTI,[23] and social security remittances[24] and
payroll[25] of Naguiat Enterprises showing that none of the individual respondents were its
employees. Moreover, in the contract[26] between CFTI and AAFES, the former, as
concessionaire, agreed to purchase from AAFES for a certain amount within a specified
period a fleet of vehicles to be "ke(pt) on the road" by CFTI, pursuant to their
concessionaire's contract. This indicates that CFTI became the owner of the taxicabs
which became the principal investment and asset of the company.
Private respondents failed to substantiate their claim that Naguiat Enterprises
managed, supervised and controlled their employment. It appears that they were
confused on the personalities of Sergio F. Naguiat as an individual who was the
president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a separate corporate
entity with a separate business. They presumed that Sergio F. Naguiat, who was at the
same time a stockholder and director[27] of Sergio F. Naguiat Enterprises, Inc., was
managing and controlling the taxi business on behalf of the latter. A closer scrutiny and
analysis of the records, however, evince the truth of the matter: that Sergio F. Naguiat,
in supervising the-taxi drivers and determining their employment terms, was rather
carrying out his responsibilities as president of CFTI. Hence, Naguiat Enterprises as a
separate corporation does not appear to be involved at all in the taxi business.
To illustrate further, we refer to the testimony of a driver-claimant on cross
examination.
"Atty. Suarez
Is it not true that you applied not with Sergio F. Naguiat but with Clark Field Taxi?
Witness
I applied for (sic) Sergio F. Naguiat
Atty. Suarez
Sergio F. Naguiat as an individual or the corporation?
Witness
'Sergio F. Naguiat na tao.'
Atty. Suarez
Who is Sergio F. Naguiat?
Witness
He is the one managing the Sergio F. Naguiat Enterprises and he is the one whom
we believe as our employer.
Atty. Suarez
What is exactly the position of Sergio F. Naguiat with the Sergio F. Naguiat
Enterprises?
Witness
He is the owner, sir.
Atty. Suarez
How about with Clark Field Taxi Incorporated what is the position of Mr. Naguiat?
Witness
What I know is that he is a concessionaire.
xxx xxx xxx
Atty. Suarez
But do you also know that Sergio F. Naguiat is the President of Clark Field Taxi,
Incorporated?
 Witness
Yes. sir.
Atty. Suarez
How about Mr. Antolin Naguiat what is his role in the taxi services, the operation of
the Clark Field Taxi, Incorporated?
Witness
He is the vice president."[28]
And, although the witness insisted that Naguiat Enterprises was his employer, he
could not deny that he received his salary from the office of CFTI inside the base.[29]
Another driver-claimant admitted, upon the prodding of counsel for the corporations,
that Naguiat Enterprises was in the trading business while CFTI was in taxi services. [30]
In addition, the Constitution[31] of CFTI-AAFES Taxi Drivers Association which,
admittedly, was the union of individual respondents while still working at Clark Air Base,
states that members thereof are the employees of CFTI and "(f)or collective bargaining
purposes, the definite employer is the Clark Field Taxi Inc."
From the foregoing, the ineludible conclusion is that CFTI was the actual and direct
employer of individual respondents, and that Naguiat Enterprises was neither their
indirect employer nor labor-only contractor. It was not involved at all in the taxi business.

CFTI president solidarily liable

Petitioner-corporations would likewise want to avoid the solidary liability of their

officers. To bolster their position, Sergio F. Naguiat and Antolin T. Naguiat specifically
aver that they were denied due process since they were not parties to the complaint
below.[32] In the broader interest of justice, we, however, hold that Sergio F. Naguiat, in
his capacity as president of CFTI, cannot be exonerated from joint and several liability in
the payment of separation pay to individual respondents.
A.C. Ransom Labor Union-CCLU vs. NLRC[33] is the case in point. A.C. Ransom
Corporation was a family corporation, the stockholders of which were members of the
Hernandez family. In 1973, it filed an application for clearance to close or cease
operations, which was duly granted by the Ministry of Labor and Employment, without
prejudice to the right of employees to seek redress of grievance, if any. Backwages of
22 employees, who engaged in a strike prior to the closure, were subsequently
computed at P164,984.00. Up to September 1976, the union filed about ten (10)
motions for execution against the corporation, but none could be implemented,
presumably for failure to find leviable assets of said corporation. In its last motion for
execution, the union asked that officers and agents of the company be held personally
liable for payment of the backwages. This was granted by the labor arbiter. In the
corporation's appeal to the NLRC, one of the issues raised was: "Is the judgment
against a corporation to reinstate its dismissed employees with backwages, enforceable
against its officer and agents, in their individual, private and personal capacities, who
were not parties in the case where the judgment was rendered?" The NLRC answered
in the negative, on the ground that officers of a corporation are not liable personally for
official acts unless they exceeded the scope of their authority.
On certiorari, this Court reversed the NLRC and upheld the labor arbiter. In
imposing joint and several liability upon the company president, the Court, speaking
through Mme. Justice Ameurfina Melencio-Herrera, ratiocinated this wise:
"(b) How can the foregoing (Articles 265 and 273 of the Labor Code)
provisions be implemented when the employer is a corporation? The answer
is found in Article 212(c) of the Labor Code which provides:

'(c) 'Employer' includes any person acting in the interest of an employer, directly or
indirectly. The term shall not include any labor organization or any of its officers or
agents except when acting as employer.'

The foregoing was culled from Section 2 of RA 602, the Minimum Wage
Law. Since RANSOM is an artificial person, it must have an officer who can
be presumed to be the employer, being the 'person acting in the interest of
(the) employer' RANSOM. The corporation, only in the technical sense, is the
employer.
The responsible officer of an employer corporation can be held personally, not
to say even criminally, liable for nonpayment of back wages. That is the
policy of the law. x x x

(c) If the policy of the law were otherwise, the corporation employer can have devious
ways for evading payment of back wages. x x x

(d) The record does not clearly identify 'the officer or officers' of RANSOM directly
responsible for failure to pay the back wages of the 22 strikers. In the absence of
definite proof in that regard, we believe it should be presumed that the responsible
officer is the President of the corporation who can be deemed the chief operation
officer thereof. Thus, in RA 602, criminal responsibility is with the 'Manager or in his
default, the person acting as such.' In RANSOM, the President appears to be the
Manager." (Underscoring supplied.)

Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed the
business. Thus, applying the ruling in A. C. Ransom, he falls within the meaning of an
"employer" as contemplated by the Labor Code, who may be held jointly and severally
liable for the obligations of the corporation to its dismissed employees.
 Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were
"close family corporations"[34] owned by the Naguiat family. Section 100, paragraph 5,
(under Title XII on Close Corporations) of the Corporation Code, states:
"(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close corporation,
the stockholders shall be held to strict fiduciary duties to each other and
among themselves. Said stockholders shall be personally liable for corporate
torts unless the corporation has obtained reasonably adequate liability
insurance." (underscoring supplied)
Nothing in the records show whether CFTI obtained "reasonably adequate liability
insurance;" thus, what remains is to determine whether there was corporate tort.
Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially,
"tort" consists in the violation of a right given or the omission of a duty imposed by
law.[35] Simply stated, tort is a breach of a legal duty.[36] Article 283 of the Labor Code
mandates the employer to grant separation pay to employees in case of closure or
cessation of operations of establishment or undertaking not due to serious business
losses or financial reverses, which is the condition obtaining at bar. CFTI failed to
comply with this law-imposed duty or obligation. Consequently, its stockholder who was
actively engaged in the management or operation of the business should be held
personally liable.
Furthermore, in MAM Realty Development vs. NLRC,[37] the Court recognized that a
director or officer may still be held solidarily liable with a corporation by specific
provision of law. Thus:
"x x x A corporation, being a juridical entity, may act only through its
directors, officers and employees. Obligations incurred by them, acting as
such corporate agents, are not theirs but the direct accountabilities of the
corporation they represent. True, solidary liabilities may at times be incurred
but only when exceptional circumstances warrant such as, generally, in the
following cases: 

xxx xxx xxx

4. When a director, trustee or officer is made, by specific provision of law, personally

liable for his corporate action." (footnotes omitted)

As pointed out earlier, the fifth paragraph of Section 100 of the Corporation Code
specifically imposes personal liability upon the stockholder actively managing or
operating the business and affairs of the close corporation.
In fact, in posting the surety bond required by this Court for the issuance of a
temporary restraining order enjoining the execution of the assailed NLRC Resolutions,
only Sergio F. Naguiat, in his individual and personal capacity, principally bound himself
to comply with the obligation thereunder, i.e., "to guarantee the payment to private
respondents of any damages which they may incur by reason of the issuance of a
temporary restraining order sought, if it should be finally adjudged that said principals
were not entitled thereto."[38]
The Court here finds no application to the rule that a corporate officer cannot be
held solidarily liable with a corporation in the absence of evidence that he had acted in
bad faith or with malice.[39] In the present case, Sergio Naguiat is held solidarily liable for
corporate tort because he had actively engaged in the management and operation of
CFTI, a close corporation.

Antolin Naguiat not personally liable

Antolin T. Naguiat was the vice president of the CFTI. Although he carried the title
of "general manager" as well, it had not been shown that he had acted in such
capacity. Furthermore, no evidence on the extent of his participation in the management
or operation of the business was proffered. In this light, he cannot be held solidarily
liable for the obligations of CFTI and Sergio Naguiat to the private respondents.

Fourth Issue: No Denial of Due Process

Lastly, in petitioners' Supplement to their original petition, they assail the NLRC
Resolution holding Sergio F. Naguiat and Antolin T. Naguiat jointly and severally liable
with petitioner-corporations in the payment of separation pay, averring denial of due
process since the individual Naguiats were not impleaded as parties to the complaint.
We advert to the case of A.C. Ransom once more. The officers of the corporation
were not parties to the case when the judgment in favor of the employees was
rendered. The corporate officers raised this issue when the labor arbiter granted the
motion of the employees to enforce the judgment against them. In spite of this, the
Court held the corporation president solidarily liable with the corporation.
Furthermore, Sergio and Antolin Naguiat voluntarily submitted themselves to the
jurisdiction of the labor arbiter when they, in their individual capacities, filed a position
paper[40] together with CFTI, before the arbiter. They cannot now claim to have been
denied due process since they availed of the opportunity to present their positions.
WHEREFORE, the foregoing premises considered, the petition is PARTLY
GRANTED. The assailed February 28, 1994 Resolution of the NLRC is hereby
MODIFIED as follows:

(1) Petitioner Clark Field Taxi, Incorporated, and Sergio F. Naguiat, president and co-
owner thereof, are ORDERED to pay, jointly and severally, the individual respondents
their separation pay computed at US$120.00 for every year of service, or its peso
equivalent at the time of payment or satisfaction of the judgment;
(2) Petitioner Sergio F. Naguiat Enterprises, Incorporated, and Antolin T. Naguiat
are ABSOLVED from liability in the payment of separation pay to individual
respondents.

SO ORDERED.
G.R. No. 121413 January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF

ASIA AND AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK,
N.A., respondents.

G.R. No. 121479 January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL
INTERNATIONAL BANK, respondents.

G.R. No. 128604 January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT
OF APPEALS, respondents.

QUISUMBING, J.:

These consolidated petitions involve several fraudulently negotiated checks.

The original actions a quo were instituted by Ford Philippines to recover from the
drawee bank, CITIBANK, N.A. (Citibank) and collecting bank, Philippine Commercial
International Bank (PCIBank) [formerly Insular Bank of Asia and America], the value of
several checks payable to the Commissioner of Internal Revenue, which were
embezzled allegedly by an organized syndicate. 1âwphi1.nêt

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995
Decision1 of the Court of Appeals in CA-G.R. CV No. 25017, entitled "Ford Philippines,
Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now Philipppine
Commercial International Bank), and the August 8, 1995 Resolution,2 ordering the
collecting bank, Philippine Commercial International Bank, to pay the amount of
Citibank Check No. SN-04867.

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996
Decision3 of the Court of Appeals and its March 5, 1997 Resolution4 in CA-G.R. No.
28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine Commercial
International Bank," affirming in toto the judgment of the trial court holding the defendant
drawee bank, Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as
damages for the misapplied proceeds of the plaintiff's Citibanl Check Numbers SN-
10597 and 16508.

I. G.R. Nos. 121413 and 121479

The stipulated facts submitted by the parties as accepted by the Court of Appeals are
as follows:

"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No.
SN-04867 in the amount of P4,746,114.41, in favor of the Commissioner of
Internal Revenue as payment of plaintiff;s percentage or manufacturer's sales
taxes for the third quarter of 1977.

The aforesaid check was deposited with the degendant IBAA (now PCIBank) and
was subsequently cleared at the Central Bank. Upon presentment with the
defendant Citibank, the proceeds of the check was paid to IBAA as collecting or
depository bank.

The proceeds of the same Citibank check of the plaintiff was never paid to or
received by the payee thereof, the Commissioner of Internal Revenue.

As a consequence, upon demand of the Bureau and/or Commissioner of Internal

Revenue, the plaintiff was compelled to make a second payment to the Bureau of
Internal Revenue of its percentage/manufacturers' sales taxes for the third
quarter of 1977 and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the

transactions in question, plaintiff had been maintaining a checking account with
defendant Citibank; that Citibank Check No. SN-04867 which was drawn and
issued by the plaintiff in favor of the Commissioner of Internal Revenue was a
crossed check in that, on its face were two parallel lines and written in between
said lines was the phrase "Payee's Account Only"; and that defendant Citibank
paid the full face value of the check in the amount of P4,746,114.41 to the
defendant IBAA.

It has been duly established that for the payment of plaintiff's percentage tax for
the last quarter of 1977, the Bureau of Internal Revenue issued Revenue Tax
Receipt No. 18747002, dated October 20, 1977, designating therein in
Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang
branch to receive the tax payment of the plaintiff.

On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with
the Revenue Tax Receipt No. 18747002, was deposited with defendant IBAA,
through its Ermita Branch. The latter accepted the check and sent it to the
Central Clearing House for clearing on the samd day, with the indorsement at the
back "all prior indorsements and/or lack of indorsements guaranteed."
Thereafter, defendant IBAA presented the check for payment to defendant
Citibank on same date, December 19, 1977, and the latter paid the face value of
the check in the amount of P4,746,114.41. Consequently, the amount of
P4,746,114.41 was debited in plaintiff's account with the defendant Citibank and
the check was returned to the plaintiff.

Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the
amount of P4,746,114.41 was not paid to the Commissioner of Internal Revenue.
Hence, in separate letters dated October 26, 1979, addressed to the defendants,
the plaintiff notified the latter that in case it will be re-assessed by the BIR for the
payment of the taxes covered by the said checks, then plaintiff shall hold the
defendants liable for reimbursement of the face value of the same. Both
defendants denied liability and refused to pay.

In a letter dated February 28, 1980 by the Acting Commissioner of Internal

Revenue addressed to the plaintiff - supposed to be Exhibit "D", the latter was
officially informed, among others, that its check in the amount of P4, 746,114.41
was not paid to the government or its authorized agent and instead encashed by
unauthorized persons, hence, plaintiff has to pay the said amount within fifteen
days from receipt of the letter. Upon advice of the plaintiff's lawyers, plaintiff on
March 11, 1982, paid to the Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiff's percentage tax for the third
quarter of 1977.

As a consequence of defendant's refusal to reimburse plaintiff of the payment it

had made for the second time to the BIR of its percentage taxes, plaintiff filed on
January 20, 1983 its original complaint before this Court.

On December 24, 1985, defendant IBAA was merged with the Philippine
Commercial International Bank (PCI Bank) with the latter as the surviving entity.

Defendant Citibank maintains that; the payment it made of plaintiff's Citibank

Check No. SN-04867 in the amount of P4,746,114.41 "was in due course"; it
merely relied on the clearing stamp of the depository/collecting bank, the
defendant IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence
of defendant IBAA in indorsing the plaintiff's Citibank check in question.

It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank
Check No. SN-048867 was paid to defendant IBAA as collecting bank, plaintiff
was maintaining a checking account with defendant Citibank." 5
Although it was not among the stipulated facts, an investigation by the National Bureau
of Investigation (NBI) revealed that Citibank Check No. SN-04867 was recalled by
Godofredo Rivera, the General Ledger Accountant of Ford. He purportedly needed to
hold back the check because there was an error in the computation of the tax due to the
Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the
check with two of its own Manager's Checks (MCs). Alleged members of a syndicate
later deposited the two MCs with the Pacific Banking Corporation.

Ford, with leave of court, filed a third-party complaint before the trial court impleading
Pacific Banking Corporation (PBC) and Godofredo Rivera, as third party defendants.
But the court dismissed the complaint against PBC for lack of cause of action. The
course likewise dismissed the third-party complaint against Godofredo Rivera because
he could not be served with summons as the NBI declared him as a "fugitive from
justice".

On June 15, 1989, the trial court rendered its decision, as follows:

"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and
severally, to pay the plaintiff the amount of P4,746,114.41 representing
the face value of plaintiff's Citibank Check No. SN-04867, with interest
thereon at the legal rate starting January 20, 1983, the date when the
original complaint was filed until the amount is fully paid, plus costs;

"2. On defendant Citibank's cross-claim: ordering the cross-defendant

IBAA (now PCI Bank) to reimburse defendant Citibank for whatever
amount the latter has paid or may pay to the plaintiff in accordance with
next preceding paragraph;

"3. The counterclaims asserted by the defendants against the plaintiff, as

well as that asserted by the cross-defendant against the cross-claimant
are dismissed, for lack of merits; and

"4. With costs against the defendants.

SO ORDERED."6

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated
their respective petitions for review on certiorari to the Courts of Appeals. On March 27,
1995, the appellate court issued its judgment as follows:

"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed

decision with modifications.

The court hereby renderes judgment:

 1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant
Citibank N.A. is concerned;

2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the
amount of P4,746,114.41 representing the face value of plaintiff's Citibank
Check No. SN-04867, with interest thereon at the legal rate starting
January 20, 1983, the date when the original complaint was filed until the
amount is fully paid;

3. Dismissing the counterclaims asserted by the defendants against the

plaintiff as well as that asserted by the cross-defendant against the cross-
claimant, for lack of merits.

Costs against the defendant IBAA (now PCI Bank).

IT IS SO ORDERED."7

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while
Ford filed a "Motion for Partial Reconsideration." Both motions were denied for lack of
merit.

Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari
under Rule 45.

In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the
Twelfth Division of the Court of Appeals contending that it merely acted on the
instruction of Ford and such casue of action had already prescribed.

PCIBank sets forth the following issues for consideration:

I. Did the respondent court err when, after finding that the petitioner acted on the
check drawn by respondent Ford on the said respondent's instructions, it
nevertheless found the petitioner liable to the said respondent for the full amount
of the said check.

II. Did the respondent court err when it did not find prescription in favor of the
petitioner.8

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the
same decision and resolution of the Court of Appeals, and praying for the
reinstatement in toto of the decision of the trial court which found both PCIBank and
Citibank jointly and severally liable for the loss.

In G.R. No. 121479, appellant Ford presents the following propositions for
consideration:
 I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the

drawer of the subject check and a depositor of respondent Citibank, an
absolute and contractual duty to pay the proceeds of the subject check
only to the payee thereof, the Commissioner of Internal Revenue.

2. Respondent Citibank failed to observe its duty as banker with respect to

the subject check, which was crossed and payable to "Payee's Account
Only."

3. Respondent Citibank raises an issue for the first time on appeal; thus
the same should not be considered by the Honorable Court.

4. As correctly held by the trial court, there is no evidence of gross

negligence on the part of petitioner Ford.9

II. PCI Bank is liable to petitioner Ford considering that:

1. There were no instructions from petitioner Ford to deliver the proceeds

of the subject check to a person other than the payee named therein, the
Commissioner of the Bureau of Internal Revenue; thus, PCIBank's only
obligation is to deliver the proceeds to the Commissioner of the Bureau of
Internal Revenue.10

2. PCIBank which affixed its indorsement on the subject check ("All prior
indorsement and/or lack of indorsement guaranteed"), is liable as
collecting bank.11

3. PCIBank is barred from raising issues of fact in the instant

proceedings.12

4. Petitioner Ford's cause of action had not prescribed.13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time,
to settle Ford's percentage taxes appertaining to the second quarter of 1978 and the
first quarter of 1979.

The facts as narrated by the Court of Appeals are as follows:

Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of
P5,851,706.37 representing the percentage tax due for the second quarter of 1978
payable to the Commissioner of Internal Revenue. A BIR Revenue Tax Receipt No.
28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of
P6,311,591.73, representing the payment of percentage tax for the first quarter of 1979
and payable to the Commissioner of Internal Revenue. Again a BIR Revenue Tax
Receipt No. A-1697160 was issued for the said purpose.

Both checks were "crossed checks" and contain two diagonal lines on its upper corner
between, which were written the words "payable to the payee's account only."

The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980,
the BIR, Region 4-B, demanded for the said tax payments the corresponding periods
above-mentioned.

As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were
considered "fake and spurious". This anomaly was confirmed by the NBI upon the
initiative of the BIR. The findings forced Ford to pay the BIR a new, while an action was
filed against Citibank and PCIBank for the recovery of the amount of Citibank Check
Numbers SN-10597 and 16508.

The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings
on the modus operandi of the syndicate, as follows:

"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its
General Ledger Accountant. As such, he prepared the plaintiff's check marked
Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR. Instead, however,
fo delivering the same of the payee, he passed on the check to a co-conspirator
named Remberto Castro who was a pro-manager of the San Andres Branch of
PCIB.* In connivance with one Winston Dulay, Castro himself subsequently
opened a Checking Account in the name of a fictitious person denominated as
'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as
Assistant Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a

worthless Bank of America Check in exactly the same amount as the first FORD
check (Exh. "A", P5,851,706.37) while this worthless check was coursed through
PCIB's main office enroute to the Central Bank for clearing, replaced this
worthless check with FORD's Exhibit 'A' and accordingly tampered the
accompanying documents to cover the replacement. As a result, Exhibit 'A' was
cleared by defendant CITIBANK, and the fictitious deposit account of 'Reynaldo
Reyes' was credited at the PCIB Meralco Branch with the total amount of the
FORD check Exhibit 'A'. The same method was again utilized by the syndicate in
profiting from Exh. 'B' [Citibank Check No. SN-16508] which was subsequently
pilfered by Alexis Marindo, Rivera's Assistant at FORD.

From this 'Reynaldo Reyes' account, Castro drew various checks distributing the
sahres of the other participating conspirators namely (1) CRISANTO BERNABE,
the mastermind who formulated the method for the embezzlement; (2)
 RODOLFO R. DE LEON a customs broker who negotiated the initial contact
between Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3)
JUAN VASTILLO who assisted de Leon in the initial arrangements; (4)
GODOFREDO RIVERA, FORD's accountant who passed on the first check
(Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San
Andres who performed the switching of checks in the clearing process and
opened the fictitious Reynaldo Reyes account at the PCIB Meralco Branch; (6)
WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who
assisted Castro in switching the checks in the clearing process and facilitated the
opening of the fictitious Reynaldo Reyes' bank account; (7) ALEXIS MARINDO,
Rivera's Assistant at FORD, who gave the second check (Exh. "B") to Castro; (8)
ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and
spurious revenue tax receipts to make it appear that the BIR had received
FORD's tax payments.

Several other persons and entities were utilized by the syndicate as conduits in
the disbursements of the proceeds of the two checks, but like the aforementioned
participants in the conspiracy, have not been impleaded in the present case. The
manner by which the said funds were distributed among them are traceable from
the record of checks drawn against the original "Reynaldo Reyes" account and
indubitably identify the parties who illegally benefited therefrom and readily
indicate in what amounts they did so."14

On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank,
Citibank, liable for the value of the two checks while adsolving PCIBank from any
liability, disposing as follows:

"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to

reimburse plaintiff FORD the total amount of P12,163,298.10 prayed for in its
complaint, with 6% interest thereon from date of first written demand until full
payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay
the defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00
as attorney's fees and costs of litigation, and pay the costs.

SO ORDERED."15

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the
decision of the trial court. Hence, this petition.

Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of
Appeals decision and its resolution dated March 5, 1997, with respect to the dismissal
of the complaint against PCIBank and holding Citibank solely responsible for the
proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against
defendant PCIBank considering that:

I. Defendant PCIBank was clearly negligent when it failed to exercise the

diligence required to be exercised by it as a banking insitution.

II. Defendant PCIBank clearly failed to observe the diligence required in the
selection and supervision of its officers and employees.

III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or
damage resulting to the plaintiff Ford as a consequence of the substitution of the
check consistent with Section 5 of Central Bank Circular No. 580 series of 1977.

IV. Assuming arguedo that defedant PCIBank did not accept, endorse or
negotiate in due course the subject checks, it is liable, under Article 2154 of the
Civil Code, to return the money which it admits having received, and which was
credited to it its Central bank account.16

The main issue presented for our consideration by these petitions could be simplified as
follows: Has petitioner Ford the right to recover from the collecting bank (PCIBank) and
the drawee bank (Citibank) the value of the checks intended as payment to the
Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?

Note that in these cases, the checks were drawn against the drawee bank, but the title
of the person negotiating the same was allegedly defective because the instrument was
obtained by fraud and unlawful means, and the proceeds of the checks were not
remitted to the payee. It was established that instead of paying the checks to the CIR,
for the settlement of the approprite quarterly percentage taxes of Ford, the checks were
diverted and encashed for the eventual distribution among the mmbers of the syndicate.
As to the unlawful negotiation of the check the applicable law is Section 55 of the
Negotiable Instruments Law (NIL), which provides:

"When title defective -- The title of a person who negotiates an instrument is

defective within the meaning of this Act when he obtained the instrument, or any
signature thereto, by fraud, duress, or fore and fear, or other unlawful means, or
for an illegal consideration, or when he negotiates it in breach of faith or under
such circumstances as amount to a fraud."

Pursuant to this provision, it is vital to show that the negotiation is made by the
perpetator in breach of faith amounting to fraud. The person negotiating the checks
must have gone beyond the authority given by his principal. If the principal could prove
that there was no negligence in the performance of his duties, he may set up the
personal defense to escape liability and recover from other parties who. Though their
own negligence, alowed the commission of the crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers
belonging to a syndicate, are now fugitives from justice. They have, even if temporarily,
escaped liability for the embezzlement of millions of pesos. We are thus left only with
the task of determining who of the present parties before us must bear the burden of
loss of these millions. It all boils down to thequestion of liability based on the degree of
negligence among the parties concerned.

Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed
contributory negligence" that would defeat its claim for reimbursement, bearing ing mind
that its employees, Godofredo Rivera and Alexis Marindo, were among the members of
the syndicate.

Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to
negotiate the checks to his co-conspirators, instead of delivering them to the designated
authorized collecting bank (Metrobank-Alabang) of the payee, CIR. Citibank bewails the
fact that Ford was remiss in the supervision and control of its own employees, inasmuch
as it only discovered the syndicate's activities through the information given by the
payee of the checks after an unreasonable period of time.

PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera
to divert the proceeds of Citibank Check No. SN-04867, instead of using it to pay the
BIR. As to the subsequent run-around of unds of Citibank Check Nos. SN-10597 and
16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own
officers and employees who carried out the fradulent schemes and the transactions.
These circumstances were not checked by other officers of the company including its
comptroller or internal auditor. PCIBank contends that the inaction of Ford despite the
enormity of the amount involved was a sheer negligence and stated that, as between
two innocent persons, one of whom must suffer the consequences of a breach of trust,
the one who made it possible, by his act of negligence, must bear the loss.

For its part, Ford denies any negligence in the performance of its duties. It avers that
there was no evidence presented before the trial court showing lack of diligence on the
part of Ford. And, citing the case of Gempesaw vs. Court of Appeals,17 Ford argues that
even if there was a finding therein that the drawer was negligent, the drawee bank was
still ordered to pay damages.

Furthermore, Ford contends the Godofredo rivera was not authorized to make any
representation in its behalf, specifically, to divert the proceeds of the checks. It adds that
Citibank raised the issue of imputed negligence against Ford for the first time on appeal.
Thus, it should not be considered by this Court.

On this point, jurisprudence regarding the imputed negligence of employer in a master-

servant relationship is instructive. Since a master may be held for his servant's wrongful
act, the law imputes to the master the act of the servant, and if that act is negligent or
wrongful and proximately results in injury to a third person, the negligence or wrongful
conduct is the negligence or wrongful conduct of the master, for which he is liable. 18 The
general rule is that if the master is injured by the negligence of a third person and by the
concuring contributory negligence of his own servant or agent, the latter's negligence is
imputed to his superior and will defeat the superior's action against the third person,
asuming, of course that the contributory negligence was the proximate cause of the
injury of which complaint is made.19

Accordingly, we need to determine whether or not the action of Godofredo Rivera,

Ford's General Ledger Accountant, and/or Alexis Marindo, his assistant, was the
proximate cause of the loss or damage. AS defined, proximate cause is that which, in
the natural and continuous sequence, unbroken by any efficient, intervening cause
produces the injury and without the result would not have occurred. 20

It appears that although the employees of Ford initiated the transactions attributable to
an organized syndicate, in our view, their actions were not the proximate cause of
encashing the checks payable to the CIR. The degree of Ford's negligence, if any, could
not be characterized as the proximate cause of the injury to the parties.

The Board of Directors of Ford, we note, did not confirm the request of Godofredo
Rivera to recall Citibank Check No. SN-04867. Rivera's instruction to replace the said
check with PCIBank's Manager's Check was not in theordinary course of business
which could have prompted PCIBank to validate the same.

As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established
that these checks were made payable to the CIR. Both were crossed checks. These
checks were apparently turned around by Ford's emploees, who were acting on their
own personal capacity.

Given these circumstances, the mere fact that the forgery was committed by a drawer-
payor's confidential employee or agent, who by virtue of his position had unusual
facilities for perpertrating the fraud and imposing the forged paper upon the bank, does
notentitle the bank toshift the loss to the drawer-payor, in the absence of some
circumstance raising estoppel against the drawer.21 This rule likewise applies to the
checks fraudulently negotiated or diverted by the confidential employees who hold them
in their possession.

With respect to the negligence of PCIBank in the payment of the three checks involved,
separately, the trial courts found variations between the negotiation of Citibank Check
No. SN-04867 and the misapplication of total proceeds of Checks SN-10597 and
16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence
when the syndicate achieved its ultimate agenda of stealing the proceeds of these
checks.

G.R. Nos. 121413 and 121479

Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It
was coursed through the ordinary banking transaction, sent to Central Clearing with the
indorsement at the back "all prior indorsements and/or lack of indorsements
guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead
of remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled
the syndicate to encash the same.

On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks.
The neglect of PCIBank employees to verify whether his letter requesting for the
replacement of the Citibank Check No. SN-04867 was duly authorized, showed lack of
care and prudence required in the circumstances.

Furthermore, it was admitted that PCIBank is authorized to collect the payment of

taxpayers in behalf of the BIR. As an agent of BIR, PCIBank is duty bound to consult its
principal regarding the unwarranted instructions given by the payor or its agent. As aptly
stated by the trial court, to wit:

"xxx. Since the questioned crossed check was deposited with IBAA [now
PCIBank], which claimed to be a depository/collecting bank of BIR, it has the
responsibility to make sure that the check in question is deposited in Payee's
account only.

xxx xxx xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive
instructions only from its principal BIR and not from any other person especially
so when that person is not known to the defendant. It is very imprudent on the
part of the defendant IBAA to just rely on the alleged telephone call of the one
Godofredo Rivera and in his signature considering that the plaintiff is not a client
of the defendant IBAA."

It is a well-settled rule that the relationship between the payee or holder of commercial
paper and the bank to which it is sent for collection is, in the absence of an argreement
to the contrary, that of principal and agent.22 A bank which receives such paper for
collection is the agent of the payee or holder.23

Even considering arguendo, that the diversion of the amount of a check payable to the
collecting bank in behalf of the designated payee may be allowed, still such diversion
must be properly authorized by the payor. Otherwise stated, the diversion can be
justified only by proof of authority from the drawer, or that the drawer has clothed his
agent with apparent authority to receive the proceeds of such check.

Citibank further argues that PCI Bank's clearing stamp appearing at the back of the
questioned checks stating that ALL PRIOR INDORSEMENTS AND/OR LACK OF
INDORSEMENTS GURANTEED should render PCIBank liable because it made it pass
through the clearing house and therefore Citibank had no other option but to pay it.
Thus, Citibank had no other option but to pay it. Thus, Citibank assets that the
proximate cause of Ford's injury is the gross negligence of PCIBank. Since the
questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the
check in questions is deposited in Payee's account only.

Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning
that the check should be deposited only in the account of the CIR. Thus, it is the duty of
the collecting bank PCIBank to ascertain that the check be deposited in payee's account
only. Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the
check and to know its depositors before it could make the clearing indorsement "all prior
indorsements and/or lack of indorsement guaranteed".

In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation, 24 we
ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the
ruling of the PCHC's Board of Directors that:

'In presenting the checks for clearing and for payment, the defendant made an
express guarantee on the validity of "all prior endorsements." Thus, stamped at
the back of the checks are the defedant's clear warranty: ALL PRIOR
ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED.
Without such warranty, plaintiff would not have paid on the checks.'

No amount of legal jargon can reverse the clear meaning of defendant's

warranty. As the warranty has proven to be false and inaccurate, the defendant is
liable for any damage arising out of the falsity of its representation." 25

Lastly, banking business requires that the one who first cashes and negotiates the
check must take some percautions to learn whether or not it is genuine. And if the one
cashing the check through indifference or othe circumstance assists the forger in
committing the fraud, he should not be permitted to retain the proceeds of the check
from the drawee whose sole fault was that it did not discover the forgery or the defect in
the title of the person negotiating the instrument before paying the check. For this
reason, a bank which cashes a check drawn upon another bank, without requiring proof
as to the identity of persons presenting it, or making inquiries with regard to them,
cannot hold the proceeds against the drawee when the proceeds of the checks were
afterwards diverted to the hands of a third party. In such cases the drawee bank has a
right to believe that the cashing bank (or the collecting bank) had, by the usual proper
investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus,
one who encashed a check which had been forged or diverted and in turn received
payment thereon from the drawee, is guilty of negligence which proximately contributed
to the success of the fraud practiced on the drawee bank. The latter may recover from
the holder the money paid on the check.26
Having established that the collecting bank's negligence is the proximate cause of the
loss, we conclude that PCIBank is liable in the amount corresponding to the proceeds of
Citibank Check No. SN-04867.

G.R. No. 128604

The trial court and the Court of Appeals found that PCIBank had no official act in the
ordinary course of business that would attribute to it the case of the embezzlement of
Citibank Check Numbers SN-10597 and 16508, because PCIBank did not actually
receive nor hold the two Ford checks at all. The trial court held, thus:

"Neither is there any proof that defendant PCIBank contributed any official or
conscious participation in the process of the embezzlement. This Court is
convinced that the switching operation (involving the checks while in transit for
"clearing") were the clandestine or hidden actuations performed by the members
of the syndicate in their own personl, covert and private capacity and done
without the knowledge of the defendant PCIBank…"27

In this case, there was no evidence presented confirming the conscious particiapation of
PCIBank in the embezzlement. As a general rule, however, a banking corporation is
liable for the wrongful or tortuous acts and declarations of its officers or agents within
the course and scope of their employment.28 A bank will be held liable for the
negligence of its officers or agents when acting within the course and scope of their
employment. It may be liable for the tortuous acts of its officers even as regards that
species of tort of which malice is an essential element. In this case, we find a situation
where the PCIBank appears also to be the victim of the scheme hatched by a syndicate
in which its own management employees had particiapted.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received

Citibank Check Numbers SN-10597 and 16508. He passed the checks to a co-
conspirator, an Assistant Manager of PCIBank's Meralco Branch, who helped Castro
open a Checking account of a fictitious person named "Reynaldo Reyes." Castro
deposited a worthless Bank of America Check in exactly the same amount of Ford
checks. The syndicate tampered with the checks and succeeded in replacing the
worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and
16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager
apparently performed their activities using facilities in their official capacity or authority
but for their personal and private gain or benefit.

A bank holding out its officers and agents as worthy of confidence will not be permitted
to profit by the frauds these officers or agents were enabled to perpetrate in the
apparent course of their employment; nor will t be permitted to shirk its responsibility for
such frauds, even though no benefit may accrue to the bank therefrom. For the general
rule is that a bank is liable for the fraudulent acts or representations of an officer or
agent acting within the course and apparent scope of his employment or
authority.29 And if an officer or employee of a bank, in his official capacity, receives
money to satisfy an evidence of indebetedness lodged with his bank for collection, the
bank is liable for his misappropriation of such sum.30

Moreover, as correctly pointed out by Ford, Section 531 of Central Bank Circular No.
580, Series of 1977 provides that any theft affecting items in transit for clearing, shall be
for the account of sending bank, which in this case is PCIBank.

But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.

The evidence on record shows that Citibank as drawee bank was likewise negligent in
the performance of its duties. Citibank failed to establish that its payment of Ford's
checjs were made in due course and legally in order. In its defense, Citibank claims the
genuineness and due execution of said checks, considering that Citibank (1) has no
knowledge of any informity in the issuance of the checks in question (2) coupled by the
fact that said checks were sufficiently funded and (3) the endorsement of the Payee or
lack thereof was guaranteed by PCI Bank (formerly IBAA), thus, it has the obligation to
honor and pay the same.

For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute
and contractual duty to pay the proceeds of the subject check only to the payee thereof,
the CIR. Citing Section 6232 of the Negotiable Instruments Law, Ford argues that by
accepting the instrument, the acceptro which is Citibank engages that it will pay
according to the tenor of its acceptance, and that it will pay only to the payee, (the CIR),
considering the fact that here the check was crossed with annotation "Payees Account
Only."

As ruled by the Court of Appeals, Citibank must likewise answer for the damages
incurred by Ford on Citibank Checks Numbers SN 10597 and 16508, because of the
contractual relationship existing between the two. Citibank, as the drawee bank
breached its contractual obligation with Ford and such degree of culpability contributed
to the damage caused to the latter. On this score, we agree with the respondent court's
ruling.

Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before
paying the amount of the proceeds thereof to the collecting bank of the BIR. One thing
is clear from the record: the clearing stamps at the back of Citibank Check Nos. SN
10597 and 16508 do not bear any initials. Citibank failed to notice and verify the
absence of the clearing stamps. Had this been duly examined, the switching of the
worthless checks to Citibank Check Nos. 10597 and 16508 would have been
discovered in time. For this reason, Citibank had indeed failed to perform what was
incumbent upon it, which is to ensure that the amount of the checks should be paid only
to its designated payee. The fact that the drawee bank did not discover the irregularity
seasonably, in our view, consitutes negligence in carrying out the bank's duty to its
depositors. The point is that as a business affected with public interest and because of
the nature of its functions, the bank is under obligation to treat the accounts of its
depositors with meticulous care, always having in mind the fiduciary nature of their
relationship.33

Thus, invoking the doctrine of comparative negligence, we are of the view that both
PCIBank and Citibank failed in their respective obligations and both were negligent in
the selection and supervision of their employees resulting in the encashment of Citibank
Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable
for the loss of the proceeds of said checks issued by Ford in favor of the CIR.

Time and again, we have stressed that banking business is so impressed with public
interest where the trust and confidence of the public in general is of paramount
umportance such that the appropriate standard of diligence must be very high, if not the
highest, degree of diligence.34 A bank's liability as obligor is not merely vicarious but
primary, wherein the defense of exercise of due diligence in the selection and
supervision of its employees is of no moment.35

Banks handle daily transactions involving millions of pesos.36 By the very nature of their
work the degree of responsibility, care and trustworthiness expected of their employees
and officials is far greater than those of ordinary clerks and employees.37 Banks are
expected to exercise the highest degree of diligence in the selection and supervision of
their employees.38

On the issue of prescription, PCIBank claims that the action of Ford had prescribed
because of its inability to seek judicial relief seasonably, considering that the alleged
negligent act took place prior to December 19, 1977 but the relief was sought only in
1983, or seven years thereafter.

The statute of limitations begins to run when the bank gives the depositor notice of the
payment, which is ordinarily when the check is returned to the alleged drawer as a
voucher with a statement of his account,39 and an action upon a check is ordinarily
governed by the statutory period applicable to instruments in writing. 40

Our laws on the matter provide that the action upon a written contract must be brought
within ten year from the time the right of action accrues.41 hence, the reckoning time for
the prescriptive period begins when the instrument was issued and the corresponding
check was returned by the bank to its depositor (normally a month thereafter). Applying
the same rule, the cause of action for the recovery of the proceeds of Citibank Check
No. SN 04867 would normally be a month after December 19, 1977, when Citibank paid
the face value of the check in the amount of P4,746,114.41. Since the original complaint
for the cause of action was filed on January 20, 1984, barely six years had lapsed.
Thus, we conclude that Ford's cause of action to recover the amount of Citibank Check
No. SN 04867 was seasonably filed within the period provided by law.

Finally, we also find thet Ford is not completely blameless in its failure to detect the
fraud. Failure on the part of the depositor to examine its passbook, statements of
account, and cancelled checks and to give notice within a reasonable time (or as
required by statute) of any discrepancy which it may in the exercise of due care and
diligence find therein, serves to mitigate the banks' liability by reducing the award of
interest from twelve percent (12%) to six percent (6%) per annum. As provided in Article
1172 of the Civil Code of the Philippines, respondibility arising from negligence in the
performance of every kind of obligation is also demandable, but such liability may be
regulated by the courts, according to the circumstances. In quasi-delicts, the
contributory negligence of the plaintiff shall reduce the damages that he may recover.42

WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-
G.R. CV No. 25017 are AFFIRMED. PCIBank, know formerly as Insular Bank of Asia
and America, id declared solely responsible for the loss of the proceeds of Citibank
Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with six
percent (6%) interest thereon to Ford Philippines Inc. from the date when the original
complaint was filed until said amount is fully paid.

However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430
are MODIFIED as follows: PCIBank and Citibank are adjudged liable for and must share
the loss, (concerning the proceeds of Citibank Check Numbers SN 10597 and 16508
totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDERED to pay Ford
Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the
complaint was filed until full payment of said amount.
1âwphi 1.nêt

Costs against Philippine Commercial International Bank and Citibank N.A.

SO ORDERED.
G.R. No. L-28882 May 31, 1971

TIME, INC., petitioner,

vs.
HON. ANDRES REYES, as Judge of the Court of First Instance of Rizal, ELISEO S.
ZARI, as Deputy Clerk of Court, Branch VI, Court of First Instance of Rizal,
ANTONIO J. VILLEGAS and JUAN PONCE ENRILE, respondents.

Sycip, Salazar, Luna, Manalo & Feliciano for petitioner.

Angel C. Cruz Law Office for respondents.

REYES, J.B.L., J.:

Petition for certiorari and prohibition, with preliminary injunction, to annul certain orders
of the respondent Court of First Instance of Rizal, issued in its Civil Case No. 10403,
entitled "Antonio J. Villegas and Juan Ponce Enrile vs. Time, Inc., and Time-Life
International, Publisher of 'Time' Magazine (Asia Edition)", and to prohibit the said court
from further proceeding with the said civil case.

Upon petitioner's posting a bond of P1,000.00, this Court, as prayed for, ordered, on 15
April 1968, the issuance of a writ of preliminary injunction.

The petition alleges that petitioner Time, Inc.,1 is an American corporation with principal
offices at Rocketfeller Center, New York City, N. Y., and is the publisher of "Time", a
weekly news magazine; the petition, however, does not allege the petitioner's legal
capacity to sue in the courts of the Philippine.2

In the aforesaid Civil Case No. 10403, therein plaintiffs (herein respondents) Antonio J.
Villegas and Juan Ponce Enrile seek to recover from the herein petitioner damages
upon an alleged libel arising from a publication of Time (Asia Edition) magazine, in its
issue of 18 August 1967, of an essay, entitled "Corruption in Asia", which, in part, reads,
as follows:

The problem of Manila's mayor, ANTONIO VILLEGAS, is a case in point.

When it was discovered last year that the mayor's coffers contained far
more pesos than seemed reasonable in the light of his income, an
investigation was launched. Witnesses who had helped him out under
curious circumstance were asked to explain in court. One government
official admitted lending Villegas P30,000 pesos ($7,700) without interest
because he was the mayor's compadre. An assistant declared he had
given Villegas loans without collateral because he regarded the boss as
my own son. A wealthy Manila businessman testified that he had lent
Villegas' wife 15,000 pesos because the mayor was like a brother to me.
 With that, Villegas denounced the investigation as an invasion of his
family's privacy. The case was dismissed on a technicality, and Villegas is
still mayor.3

More specifically, the plaintiffs' complaint alleges, inter alia that:

(4) Defendants, conspiring and confederating, published a libelous article,

publicly, falsely and maliciously imputing to Plaintiffs the commission of
the crimes of graft, corruption and nepotism; that said publication
particularly referred to Plaintiff Mayor Antonio J. Villegas as a case in point
in connection with graft, corruption and nepotism in Asia; that said
publication without any doubt referred to co-plaintiff Juan Ponce Enrile as
the high government official who helped under curious circumstances
Plaintiff Mayor Antonio J. Villegas in lending the latter approximately
P30,000.00 ($7,700.00) without interest because he was the Mayor's
compadre; that the purpose of said Publications is to cause the dishonor,
discredit and put in public contempt the Plaintiffs, particularly Plaintiff
Mayor Antonio J. Villegas.

On motion of the respondents-plaintiffs, the respondent judge, on 25 November 1967,

granted them leave to take the depositions "of Mr. Anthony Gonzales, Time-Life
international", and "Mr. Cesar B. Enriquez, Muller & Phipps (Manila) Ltd.", in connection
with the activities and operations in the Philippines of the petitioner, and, on 27
November 1967, issued a writ of attachment on the real and personal estate of Time,
Inc.

Petitioner received the summons and a copy of the complaint at its offices in New York
on 13 December 1967 and, on 27 December 1967, it filed a motion to dismiss the
complaint for lack of jurisdiction and improper venue, relying upon the provisions of
Republic Act 4363. Private respondents opposed the motion.

In an order dated 26 February 1968, respondent court deferred the determination of the
motion to dismiss until after trial of the case on the merits, the court having considered
that the grounds relied upon in the motion do not appear to be indubitable.

Petitioner moved for reconsideration of the deferment private respondents again

opposed.

On 30 March 1968, respondent judge issued an order re-affirming the previous order of
deferment for the reason that "the rule laid down under Republic Act. No. 4363,
amending Article 360 of the Revised Penal Code, is not applicable to actions against
non-resident defendants, and because questions involving harassment and
inconvenience, as well as disruption of public service do not appear indubitable. ..."
Failing in its efforts to discontinue the taking of the depositions, previously adverted to,
and to have action taken, before trial, on its motion to dismiss, petitioner filed the instant
petition for certiorari and prohibition.

The orders for the taking of the said depositions, for deferring determination of the
motion to dismiss, and for reaffirming the deferment, and the writ of attachment are
sought to be annulled in the petition..

There is no dispute that at the time of the publication of the allegedly offending essay,
private respondents Antonio Villegas and Juan Ponce Enrile were the Mayor Of the City
of Manila and Undersecretary of Finance and concurrently Acting Commissioner of
Customs, respectively, with offices in the City of Manila. The issues in this case are:

1. Whether or not, under the provisions of Republic Act No. 4363 the respondent Court
of First Instance of Rizal has jurisdiction to take cognizance of the civil suit for damages
arising from an allegedly libelous publication, considering that the action was instituted
by public officers whose offices were in the City of Manila at the time of the publication;
if it has no jurisdiction, whether or not its erroneous assumption of jurisdiction may be
challenged by a foreign corporation by writ of certiorari or prohibition; and

2. Whether or not Republic Act 4363 is applicable to action against a foreign corporation
or non-resident defendant.

Provisions of Republic Act No. 4363, which are relevant to the resolution of the
foregoing issues, read, as follows:

Section 1. Article three hundred sixty of the Revised Penal Code, as

amended by Republic Act Numbered Twelve hundred and eighty-nine, is
further amended to read as follows:

'ART. 360. Persons responsible. — Any person who shall

publish, exhibit, or cause the publication or exhibition of any
defamation in writing or by similar means, shall be
responsible for the same.

The author or editor of a book or pamphlet, or the editor or business

manager of a daily newspaper, magazine or serial publication, shall be
responsible for the defamations contained therein to the extent as if he
were the author thereof.

The criminal and civil action for damages in cases of written defamations
as provided for in this chapter, shall be filed simultaneously or separately
with the court of first instance of the province or city where the libelous
article is printed and first published or where any of the offended parties
actually resides at the time of the commission of the
offense; Provided, however, That where one of the offended parties is a
 public officer whose office is in the City of Manila at the time of the
commission of the offense, the action shall be filed in the Court of First
Instance of the City of Manila or of the city or province where the libelous
article is printed and first published, and in case such public officer does
not hold office in the City of Manila, the action shall be filed in the Court of
First Instance of the province or city where he held office at the time of the
commission of the offense or where the libelous article is printed and first
published and in case one of the offended parties is a private individual,
the action shall be filed in the Court of First Instance of the province or city
where he actually resides at the time of the commission of the offense or
where the libelous matter is printed and first published; Provided,further,
That the civil action shall be filed in the same court where the criminal
action is filed and vice versa; Provided, furthermore, That the court where
the criminal action or civil action for damages is first filed, shall acquire
jurisdiction to the exclusion of other courts; And provided finally, That this
amendment shall not apply to cases of written defamations, the civil
and/or criminal actions which have been filed in court at the time of the
effectivity of the law

xxx xxx xxx

xxx xxx xxx

Sec. 3. This Act shall take effect only if and when, within thirty days from
its approval, the newspapermen in the Philippines shall organize, and
elect the members of, a Philippine Press Council, a private agency of the
said newspapermen, whose function shall be to promulgate a Code of
Ethics for them and the Philippine press investigate violations thereof, and
censure any newspaperman or newspaper guilty of any violation of the
said Code, and the fact that such Philippine Press Council has been
organized and its members have been duly elected in accordance
herewith shall be ascertained and proclaimed by the President of the
Philippines.

Under the first proviso in section 1, the venue of a civil action for damages in cases of
written defamations is localized upon the basis of, first, whether the offended party or
plaintiff is a public officer or a private individual; and second, if he is a public officer,
whether his office is in Manila or not in Manila, at the time of the commission of the
offense. If the offended party is a public officer in the office in the City of Manila, the
proviso limits him to two (2) choices of venue, namely, in the Court of First instance of
the City of Manila or in the city or province where the libelous article is printed and first
published ..."

The complaint lodged in the court of Rizal by respondents does not allege that the
libelous article was printed and first published in the province of Rizal and, since the
respondents-plaintiffs are public officers with offices in Manila at the time of the
commission of the alleged offense, it is clear that the only place left for them wherein to
file their action, is the Court of First Instance of Manila.

The limitation of the choices of venue, as introduced into the Penal Code through its
amendments by Republic Act 4363, was intended "to minimize or limit the filing of out-
of-town libel suits" to protect an alleged offender from "hardships, inconveniences and
harassments" and, furthermore, to protect "the interest of the public service" where one
of the offended parties is a public officer."4 The intent, of the law is clear: a libeled public
official might sue in the court of the locality where he holds office, in order that the
prosecution of the action should interfere as little as possible with the discharge of his
official duties and labors. The only alternative allowed him by law is to prosecute those
responsible for the libel in the place where the offending article was printed and first
published. Here, the law tolerates the interference with the libeled officer's duties only
for the sake of avoiding unnecessary harassment of the accused. Since the offending
publication was not printed in the Philippines, the alternative venue was not open to
respondent Mayor Villegas of Manila and Undersecretary of Finance Enrile, who were
the offended parties.

But respondents-plaintiffs argue that Republic Act No. 4363 is not applicable where the
action is against non-existent defendant, as petitioner Time, Inc., for several reasons.
They urge that, in enacting Republic Act No. 4363, Congress did not intend to protect
non-resident defendants as shown by Section 3, which provides for the effectivity of the
statute only if and when the "newspapermen in the Philippines" have organized a
"Philippine Press Council" whose function shall be to promulgate a Code of Ethics for
"them" and "the Philippine press"; and since a non-resident defendant is not in a
position to comply with the conditions imposed for the effectivity of the statute, such
defendant may not invoke its provisions; that a foreign corporation is not
inconvenienced by an out-of-town libel suit; that it would be absurd and incongruous, in
the absence of an extradition treaty, for the law to give to public officers with office in
Manila the second option of filing a criminal case in the court of the place where the
libelous article is printed and first published if the defendant is a foreign corporation and
that, under the "single publication" rule which originated in the United States and
imported into the Philippines, the rule was understood to mean that publications in
another state are not covered by venue statutes of the forum.

The implication of respondents' argument is that the law would not take effect as to non-
resident defendants or accused. We see nothing in the text of the law that would sustain
such unequal protection to some of those who may be charged with libel. The official
proclamation that a Philippine Press Council has been organized is made a pre-
condition to the effectivity of the entire Republic Act No. 4363, and no terms are
employed therein to indicate that the law can or will be effective only as to some, but not
all, of those that may be charged with libeling our public officers.

The assertion that a foreign corporation or a non-resident defendant is not

inconvenienced by an out-of-town suit is irrelevant and untenable, for venue and
jurisdiction are not dependent upon convenience or inconvenience to a party; and
moreover, venue was fixed under Republic Act No. 4363, pursuant to the basic policy of
the law that is, as previously stated, to protect the interest of the public service when the
offended party is a public officer, by minimizing as much as possible any interference
with the discharge of his duties.

That respondents-plaintiffs could not file a criminal case for libel against a non-resident
defendant does not make Republic Act No. 4363 incongruous of absurd, for such
inability to file a criminal case against a non-resident natural person equally exists in
crimes other than libel. It is a fundamental rule of international jurisdiction that no state
can by its laws, and no court which is only a creature of the state, can by its judgments
or decrees, directly bind or affect property or persons beyond the limits of the state.5 Not
only this, but if the accused is a corporation, no criminal action can lie against
it,6 whether such corporation or resident or non-resident. At any rate, the case filed by
respondents-plaintiffs is case for damages.

50 Am. Jur. 2d 659 differentiates the "multiple publication" and "single publication" rules
(invoked by private respondents) to be as follows:

The common law as to causes of action for tort arising out of a single
publication was to the effect that each communication of written or printed
matter was a distinct and separate publication of a libel contained therein,
giving rise to a separate cause of action. This rule ('multiple publication'
rule) is still followed in several American jurisdictions, and seems to be
favored by the American Law Institute. Other jurisdictions have adopted
the 'single publication' rule which originated in New York, under which any
single integrated publication, such as one edition of a newspaper, book, or
magazine, or one broadcast, is treated as a unit, giving rise to only one
cause of action, regardless of the number of times it is exposed to
different people. ...

These rules are not pertinent in the present scheme because the number of causes of
action that may be available to the respondents-plaintiffs is not here in issue. We are
here confronted by a specific venue statute, conferring jurisdiction in cases of libel
against Public officials to specified courts, and no other. The rule is that where a statute
creates a right and provides a remedy for its enforcement, the remedy is exclusive; and
where it confers jurisdiction upon a particular court, that jurisdiction is likewise exclusive,
unless otherwise provided. Hence, the venue provisions of Republic Act No. 4363
should be deemed mandatory for the party bringing the action, unless the question of
venue should be waived by the defendant, which was not the case here. Only thus can
the policy of the Act be upheld and maintained. Nor is there any reason why the
inapplicability of one alternative venue should result in rendering the other alternative,
also inapplicable.

The dismissal of the present petition is asked on the ground that the petitioner foreign
corporation failed to allege its capacity to sue in the courts of the Philippines.
Respondents rely on section 69 of the Corporation law, which provides:
 SEC. 69. No foreign corporation or corporations formed, organized, or
existing under any laws other than those of the Philippines shall be
permitted to ... maintain by itself or assignee any suit for the recovery of
any debt, claim, or demand whatever, unless it shall have the license
prescribed in the section immediately preceding. ..." ...;

They also invoke the ruling in Marshall-Wells Co. vs. Elser & Co., Inc.7 that no foreign
corporation may be permitted to maintain any suit in the local courts unless it shall have
the license required by the law, and the ruling in Atlantic Mutual Ins. Co., Inc. vs. Cebu
Stevedoring Co., Inc.8 that "where ... the law denies to a foreign corporation the right to
maintain suit unless it has previously complied with a certain requirement, then such
compliance or the fact that the suing corporation is exempt therefrom, becomes a
necessary averment in the complaint." We fail to see how these doctrines can be a
propos in the case at bar, since the petitioner is not "maintaining any suit" but is merely
defending one against itself; it did not file any complaint but only a corollary defensive
petition to prohibit the lower court from further proceeding with a suit that it had no
jurisdiction to entertain.

Petitioner's failure to aver its legal capacity to institute the present petition is not fatal,
for ...

A foreign corporation may, by writ of prohibition, seek relief against the

wrongful assumption of jurisdiction. And a foreign corporation seeking a
writ of prohibition against further maintenance of a suit, on the ground of
want of jurisdiction in which jurisdiction is not bound by the ruling of the
court in which the suit was brought, on a motion to quash service of
summons, that it has jurisdiction.9

It is also advanced that the present petition is premature, since respondent court has
not definitely ruled on the motion to dismiss, nor held that it has jurisdiction, but only
argument is untenable. The motion to dismiss was predicated on the respondent court's
lack of jurisdiction to entertain the action; and the rulings of this Court are that writs of
certiorari or prohibition, or both, may issue in case of a denial or deferment of action on
such a motion to dismiss for lack of jurisdiction.

If the question of jurisdiction were not the main ground for this petition for
review by certiorari, it would be premature because it seeks to have a
review of an interlocutory order. But as it would be useless and futile to go
ahead with the proceedings if the court below had no jurisdiction this
petition was given due course.' (San Beda vs. CIR, 51 O.G. 5636, 5638).

'While it is true that action on a motion to dismiss may be deferred until the
trial and an order to that effect is interlocutory, still where it clearly appears
that the trial judge or court is proceeding in excess or outside of its
jurisdiction, the remedy of prohibition would lie since it would be useless
and a waste of time to go ahead with the proceedings. (Philippine
 International Fair, Inc., et al. vs. Ibañez, et al., 50 Off. Gaz. 1036; Enrique
v. Macadaeg, et al., 47 Off. Gaz. 1207; see also San Beda College vs.
CIR, 51 Off. Gaz. 5636.)' (University of Sto. Tomas v. Villanueva, L-13748,
30 October 1959.).

Similarly, in Edward J. Nell Co. vs. Cubacub, L-20843, 23 June 1965, 14 SCRA 419,
this Court held:

'.......................................................... It is a settledrule that the jurisdiction

of a court over the subject-matter is determined by the allegations in the
complaint; and when a motion to dismiss is filed for lack of jurisdiction
those allegations are deemed admitted for purposes of such motion, so
that it may be resolved without waiting for the trial. Thus it has been held
that the consideration thereof may not be postponed in the hope that the
evidence may yield other qualifying or concurring data which would bring
the case under the court's jurisdiction.'

To the same effect are the rulings in: Ruperto vs. Fernando, 83 Phil. 943; Administrator
of Hacienda Luisita Estate vs. Alberto, L-12133, 21 October 1958.

Summing up, We hold:

(1) The under Article 360 of the Revised Penal Code, as amended by Republic Act No.
4363, actions for damages by public officials for libelous publications against them can
only be filed in the courts of first instance ofthe city or province where the offended
functionary held office at the time ofthe commission of the offense, in case the libelous
article was first printed or published outside the Philippines.

(2) That the action of a court in refusing to rule, or deferring its ruling, on a motion to
dismiss for lack of jurisdiction over the subject matter, or for improper venue, is in
excess of jurisdiction and correctable by writ of prohibition or certiorari sued out in the
appellate Court, even before trial on the merits is had.

WHEREFORE, the writs applied for are granted: the respondent Court of First Instance
of Rizal is declared without jurisdiction to take cognizance of its Civil Case No. 10403;
and its orders issued in connection therewith are hereby annulled and set aside,.
Respondent court is further commanded to desist from further proceedings in Civil case
No. 10403 aforesaid. Costs against private respondents, Antonio J. Villegas and Juan
Ponce Enrile.

The writ of preliminary injunction heretofore issued by this Supreme Court is made
permanent.

Concepcion, C.J., Dizon, Makalintal, Fernando, Teehankee, Barredo, Villamor and

concur.
G.R. No. L-22973 January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial
Sheriff of Camarines Norte,defendants-appellees.

Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant.

Tomas Besa and Jose B. Galang for defendants-appellees.

ANGELES, J.:

An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila
in Civil Case No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus
Philippine National Bank and Anacleto Heraldo, defendants", dismissing the complaint
against both defendants and sentencing the plaintiff to pay to defendant Philippine
National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of
6% per annum from December 22, 1961 until fully paid, and the costs of suit.

In seeking the reversal of the decision, the plaintiff advances several propositions in its
brief which may be restated as follows:

1. That its total indebtedness to the PNB as of November 21, 1961, was only
P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the
proceeds of the foreclosure sale of its real property alone in the amount of
P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB
thereafter was more than sufficient to liquidate its obligation, thereby rendering
the subsequent foreclosure sale of its chattels unlawful;

2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and
the additional sum of P298.54 as expenses of the foreclosure sale;

3. That the subsequent foreclosure sale of its chattels is null and void, not only
because it had already settled its indebtedness to the PNB at the time the sale
was effected, but also for the reason that the said sale was not conducted in
accordance with the provisions of the Chattel Mortgage Law and the venue
agreed upon by the parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its
value; and

5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter
disregard of plaintiff's vigorous opposition thereto, and in taking possession
thereof after the sale thru force, intimidation, coercion, and by detaining its "man-
in-charge" of said properties, the PNB is liable to plaintiff for damages and
attorney's fees.
The antecedent facts of the case, as found by the trial court, are as follows:

On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the
Naga Branch of defendant PNB and the former offered real estate, machinery,
logging and transportation equipments as collaterals. The application, however,
was approved for a loan of P100,000 only. To secure the payment of the loan,
the plaintiff mortgaged to defendant PNB a parcel of land, together with the
buildings and improvements existing thereon, situated in the poblacion of Jose
Panganiban (formerly Mambulao), province of Camarines Norte, and covered by
Transfer Certificate of Title No. 381 of the land records of said province, as well
as various sawmill equipment, rolling unit and other fixed assets of the plaintiff,
all situated in its compound in the aforementioned municipality.

On August 2, 1956, the PNB released from the approved loan the sum of
P27,500, for which the plaintiff signed a promissory note wherein it promised to
pay to the PNB the said sum in five equal yearly installments at the rate of
P6,528.40 beginning July 31, 1957, and every year thereafter, the last of which
would be on July 31, 1961.

On October 19, 1956, the PNB made another release of P15,500 as part of the
approved loan granted to the plaintiff and so on the said date, the latter executed
another promissory note wherein it agreed to pay to the former the said sum in
five equal yearly installments at the rate of P3,679.64 beginning July 31, 1957,
and ending on July 31, 1961.

The plaintiff failed to pay the amortization on the amounts released to and
received by it. Repeated demands were made upon the plaintiff to pay its
obligation but it failed or otherwise refused to do so. Upon inspection and
verification made by employees of the PNB, it was found that the plaintiff had
already stopped operation about the end of 1957 or early part of 1958.

On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of
Camarines Norte requesting him to take possession of the parcel of land,
together with the improvements existing thereon, covered by Transfer Certificate
of Title No. 381 of the land records of Camarines Norte, and to sell it at public
auction in accordance with the provisions of Act No. 3135, as amended, for the
satisfaction of the unpaid obligation of the plaintiff, which as of September 22,
1961, amounted to P57,646.59, excluding attorney's fees. In compliance with the
request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued
the corresponding notice of extra-judicial sale and sent a copy thereof to the
plaintiff. According to the notice, the mortgaged property would be sold at public
auction at 10:00 a.m. on November 21, 1961, at the ground floor of the Court
House in Daet, Camarines Norte.

On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of

Camarines Norte requesting him to take possession of the chattels mortgaged to
it by the plaintiff and sell them at public auction also on November 21, 1961, for
the satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from
September 23, 1961, attorney's fees equivalent to 10% of the amount due and
the costs and expenses of the sale. On the same day, the PNB sent notice to the
plaintiff that the former was foreclosing extrajudicially the chattels mortgaged by
the latter and that the auction sale thereof would be held on November 21, 1961,
between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the
mortgaged chattels were situated.

On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took

possession of the chattels mortgaged by the plaintiff and made an inventory
thereof in the presence of a PC Sergeant and a policeman of the municipality of
Jose Panganiban. On November 9, 1961, the said Deputy Sheriff issued the
corresponding notice of public auction sale of the mortgaged chattels to be held
on November 21, 1961, at 10:00 a.m., at the plaintiff's compound situated in the
municipality of Jose Panganiban, Province of Camarines Norte.

On November 19, 1961, the plaintiff sent separate letters, posted as registered
air mail matter, one to the Naga Branch of the PNB and another to the Provincial
Sheriff of Camarines Norte, protesting against the foreclosure of the real estate
and chattel mortgages on the grounds that they could not be effected unless a
Court's order was issued against it (plaintiff) for said purpose and that the
foreclosure proceedings, according to the terms of the mortgage contracts,
should be made in Manila. In said letter to the Naga Branch of the PNB, it was
intimated that if the public auction sale would be suspended and the plaintiff
would be given an extension of ninety (90) days, its obligation would be settled
satisfactorily because an important negotiation was then going on for the sale of
its "whole interest" for an amount more than sufficient to liquidate said obligation.

The letter of the plaintiff to the Naga Branch of the PNB was construed by the
latter as a request for extension of the foreclosure sale of the mortgaged chattels
and so it advised the Sheriff of Camarines Norte to defer it to December 21,
1961, at the same time and place. A copy of said advice was sent to the plaintiff
for its information and guidance.

The foreclosure sale of the parcel of land, together with the buildings and
improvements thereon, covered by Transfer Certificate of Title No. 381, was,
however, held on November 21, 1961, and the said property was sold to the PNB
for the sum of P56,908.00, subject to the right of the plaintiff to redeem the same
within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo
executed a certificate of sale in favor of the PNB and a copy thereof was sent to
the plaintiff.

In a letter dated December 14, 1961 (but apparently posted several days later),
the plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB,
allegedly in full settlement of the balance of the obligation of the plaintiff after the
application thereto of the sum of P56,908.00 representing the proceeds of the
foreclosure sale of parcel of land described in Transfer Certificate of Title No.
381. In the said letter, the plaintiff reiterated its request that the foreclosure sale
of the mortgaged chattels be discontinued on the grounds that the mortgaged
indebtedness had been fully paid and that it could not be legally effected at a
place other than the City of Manila.

In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of
Camarines Norte that it had fully paid its obligation to the PNB, and enclosed
therewith a copy of its letter to the latter dated December 14, 1961.

On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to
the plaintiff acknowledging the remittance of P738.59 with the advice, however,
that as of that date the balance of the account of the plaintiff was P9,161.76, to
which should be added the expenses of guarding the mortgaged chattels at the
rate of P4.00 a day beginning December 19, 1961. It was further explained in
said letter that the sum of P57,646.59, which was stated in the request for the
foreclosure of the real estate mortgage, did not include the 10% attorney's fees
and expenses of the sale. Accordingly, the plaintiff was advised that the
foreclosure sale scheduled on the 21st of said month would be stopped if a
remittance of P9,161.76, plus interest thereon and guarding fees, would be
made.

On December 21, 1961, the foreclosure sale of the mortgaged chattels was held
at 10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the
corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff
Heraldo.

In a letter dated December 26, 1961, the Manager of the Naga Branch of the
PNB advised the plaintiff giving it priority to repurchase the chattels acquired by
the former at public auction. This offer was reiterated in a letter dated January 3,
1962, of the Attorney of the Naga Branch of the PNB to the plaintiff, with the
suggestion that it exercise its right of redemption and that it apply for the
condonation of the attorney's fees. The plaintiff did not follow the advice but on
the contrary it made known of its intention to file appropriate action or actions for
the protection of its interests.

On May 24, 1962, several employees of the PNB arrived in the compound of the
plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado,
Chief Security Guard of the premises, that the properties therein had been
auctioned and bought by the PNB, which in turn sold them to Mariano Bundok.
Upon being advised that the purchaser would take delivery of the things he
bought, Salgado was at first reluctant to allow any piece of property to be taken
out of the compound of the plaintiff. The employees of the PNB explained that
should Salgado refuse, he would be exposing himself to a litigation wherein he
could be held liable to pay big sum of money by way of damages. Apprehensive
 of the risk that he would take, Salgado immediately sent a wire to the President
of the plaintiff in Manila, asking advice as to what he should do. In the meantime,
Mariano Bundok was able to take out from the plaintiff's compound two
truckloads of equipment.

In the afternoon of the same day, Salgado received a telegram from plaintiff's
President directing him not to deliver the "chattels" without court order, with the
information that the company was then filing an action for damages against the
PNB. On the following day, May 25, 1962, two trucks and men of Mariano
Bundok arrived but Salgado did not permit them to take out any equipment from
inside the compound of the plaintiff. Thru the intervention, however, of the local
police and PC soldiers, the trucks of Mariano Bundok were able finally to haul the
properties originally mortgaged by the plaintiff to the PNB, which were bought by
it at the foreclosure sale and subsequently sold to Mariano Bundok.

Upon the foregoing facts, the trial court rendered the decision appealed from which, as
stated in the first paragraph of this opinion, sentenced the Mambulao Lumber Company
to pay to the defendant PNB the sum of P3,582.52 with interest thereon at the rate of
6% per annum from December 22, 1961 (day following the date of the questioned
foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber
Company interposed the instant appeal.

We shall discuss the various points raised in appellant's brief in seriatim.

The first question Mambulao Lumber Company poses is that which relates to the
amount of its indebtedness to the PNB arising out of the principal loans and the accrued
interest thereon. It is contended that its obligation under the terms of the two promissory
notes it had executed in favor of the PNB amounts only to P56,485.87 as of November
21, 1961, when the sale of real property was effected, and not P58,213.51 as found by
the trial court.

There is merit to this claim. Examining the terms of the promissory note executed by the
appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00
— P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit
C-3), and P15,500.00 released on October 19, 1956, as per promissory note of the
same date (Exhibit C-4) — was six per cent (6%) per annum from the respective date of
said notes "until paid". In the statement of account of the appellant as of September 22,
1961, submitted by the PNB, it appears that in arriving at the total indebtedness of
P57,646.59 as of that date, the PNB had compounded the principal of the loan and the
accrued 6% interest thereon each time the yearly amortizations became due, and on
the basis of these compounded amounts charged additional delinquency interest on
them up to September 22, 1961; and to this erroneously computed total of P57,646.59,
the trial court added 6% interest per annum from September 23, 1961 to November 21
of the same year. In effect, the PNB has claimed, and the trial court has adjudicated to
it, interest on accrued interests from the time the various amortizations of the loan
became due until the real estate mortgage executed to secure the loan was extra-
judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655
expressly provides that in computing the interest on any obligation, promissory note or
other instrument or contract, compound interest shall not be reckoned, except by
agreement, or in default thereof, whenever the debt is judicially claimed. This is also the
clear mandate of Article 2212 of the new Civil Code which provides that interest due
shall earn legal interest only from the time it is judicially demanded, and of Article 1959
of the same code which ordains that interest due and unpaid shall not earn interest. Of
course, the parties may, by stipulation, capitalize the interest due and unpaid, which as
added principal shall earn new interest; but such stipulation is nowhere to be found in
the terms of the promissory notes involved in this case. Clearly therefore, the trial court
fell into error when it awarded interest on accrued interests, without any agreement to
that effect and before they had been judicially demanded.

Appellant next assails the award of attorney's fees and the expenses of the foreclosure
sale in favor of the PNB. With respect to the amount of P298.54 allowed as expenses of
the extra-judicial sale of the real property, appellant maintains that the same has no
basis, factual or legal, and should not have been awarded. It likewise decries the award
of attorney's fees which, according to the appellant, should not be deducted from the
proceeds of the sale of the real property, not only because there is no express
agreement in the real estate mortgage contract to pay attorney's fees in case the same
is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor
incurred any obligation to pay attorney's fees in connection with the said extra-judicial
foreclosure under consideration.

There is reason for the appellant to assail the award of P298.54 as expenses of the
sale. In this respect, the trial court said:

The parcel of land, together with the buildings and improvements existing
thereon covered by Transfer Certificate of Title No. 381, was sold for P56,908.
There was, however, no evidence how much was the expenses of the
foreclosure sale although from the pertinent provisions of the Rules of Court, the
Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the
Old Rules) and P297.54 as his commission for the sale (par. n, Sec. 7, Rule 130
of the Old Rules) or a total of P298.54.

There is really no evidence of record to support the conclusion that the PNB is entitled
to the amount awarded as expenses of the extra-judicial foreclosure sale. The court
below committed error in applying the provisions of the Rules of Court for purposes of
arriving at the amount awarded. It is to be borne in mind that the fees enumerated under
paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a
sheriff serving processes of the court in connection with judicial foreclosure of
mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial
foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135
which provides that the officer conducting the sale is entitled to collect a fee of P5.00 for
each day of actual work performed in addition to his expenses in connection with the
foreclosure sale. Admittedly, the PNB failed to prove during the trial of the case, that it
actually spent any amount in connection with the said foreclosure sale. Neither may
expenses for publication of the notice be legally allowed in the absence of evidence on
record to support it. 1 It is true, as pointed out by the appellee bank, that courts should
take judicial notice of the fees provided for by law which need not be proved; but in the
absence of evidence to show at least the number of working days the sheriff concerned
actually spent in connection with the extra-judicial foreclosure sale, the most that he
may be entitled to, would be the amount of P10.00 as a reasonable allowance for two
day's work — one for the preparation of the necessary notices of sale, and the other for
conducting the auction sale and issuance of the corresponding certificate of sale in
favor of the buyer. Obviously, therefore, the award of P298.54 as expenses of the sale
should be set aside.

But the claim of the appellant that the real estate mortgage does not provide for
attorney's fees in case the same is extra-judicially foreclosed, cannot be favorably
considered, as would readily be revealed by an examination of the pertinent provision of
the mortgage contract. The parties to the mortgage appear to have stipulated under
paragraph (c) thereof, inter alia:

. . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints

the Mortgagee his attorney-in-fact to sell the property mortgaged under Act 3135,
as amended, to sign all documents and to perform all acts requisite and
necessary to accomplish said purpose and to appoint its substitute as such
attorney-in-fact with the same powers as above specified. In case of judicial
foreclosure, the Mortgagor hereby consents to the appointment of the Mortgagee
or any of its employees as receiver, without any bond, to take charge of the
mortgaged property at once, and to hold possession of the same and the rents,
benefits and profits derived from the mortgaged property before the sale, less the
costs and expenses of the receivership; the Mortgagor hereby agrees further that
in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the total
indebtedness then unpaid which in no case shall be less than P100.00 exclusive
of all fees allowed by law, and the expenses of collection shall be the obligation
of the Mortgagor and shall with priority, be paid to the Mortgagee out of any sums
realized as rents and profits derived from the mortgaged property or from the
proceeds realized from the sale of the said property and this mortgage shall
likewise stand as security therefor. . . .

We find the above stipulation to pay attorney's fees clear enough to cover both cases of
foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the
phrase "in all cases" appears to be part of the second sentence, a reading of the whole
context of the stipulation would readily show that it logically refers to extra-judicial
foreclosure found in the first sentence and to judicial foreclosure mentioned in the next
sentence. And the ambiguity in the stipulation suggested and pointed out by the
appellant by reason of the faulty sentence construction should not be made to defeat
the otherwise clear intention of the parties in the agreement.
It is suggested by the appellant, however, that even if the above stipulation to pay
attorney's fees were applicable to the extra-judicial foreclosure sale of its real
properties, still, the award of P5,821.35 for attorney's fees has no legal justification,
considering the circumstance that the PNB did not actually spend anything by way of
attorney's fees in connection with the sale. In support of this proposition, appellant cites
authorities to the effect: (1) that when the mortgagee has neither paid nor incurred any
obligation to pay an attorney in connection with the foreclosure sale, the claim for such
fees should be denied; 2 and (2) that attorney's fees will not be allowed when the
attorney conducting the foreclosure proceedings is an officer of the corporation
(mortgagee) who receives a salary for all the legal services performed by him for the
corporation. 3 These authorities are indeed enlightening; but they should not be applied
in this case. The very same authority first cited suggests that said principle is not
absolute, for there is authority to the contrary. As to the fact that the foreclosure
proceeding's were handled by an attorney of the legal staff of the PNB, we are reluctant
to exonerate herein appellant from the payment of the stipulated attorney's fees on this
ground alone, considering the express agreement between the parties in the mortgage
contract under which appellant became liable to pay the same. At any rate, we find
merit in the contention of the appellant that the award of P5,821.35 in favor of the PNB
as attorney's fees is unconscionable and unreasonable, considering that all that the
branch attorney of the said bank did in connection with the foreclosure sale of the real
property was to file a petition with the provincial sheriff of Camarines Norte requesting
the latter to sell the same in accordance with the provisions of Act 3135.

The principle that courts should reduce stipulated attorney's fees whenever it is found
under the circumstances of the case that the same is unreasonable, is now deeply
rooted in this jurisdiction to entertain any serious objection to it. Thus, this Court has
explained:

But the principle that it may be lawfully stipulated that the legal expenses
involved in the collection of a debt shall be defrayed by the debtor does not imply
that such stipulations must be enforced in accordance with the terms, no matter
how injurious or oppressive they may be. The lawful purpose to be accomplished
by such a stipulation is to permit the creditor to receive the amount due him
under his contract without a deduction of the expenses caused by the
delinquency of the debtor. It should not be permitted for him to convert such a
stipulation into a source of speculative profit at the expense of the debtor.

Contracts for attorney's services in this jurisdiction stands upon an entirely

different footing from contracts for the payment of compensation for any other
services. By express provision of section 29 of the Code of Civil Procedure, an
attorney is not entitled in the absence of express contract to recover more than a
reasonable compensation for his services; and even when an express contract is
made the court can ignore it and limit the recovery to reasonable compensation if
the amount of the stipulated fee is found by the court to be unreasonable. This is
a very different rule from that announced in section 1091 of the Civil Code with
reference to the obligation of contracts in general, where it is said that such
 obligation has the force of law between the contracting parties. Had the plaintiff
herein made an express contract to pay his attorney an uncontingent fee of
P2,115.25 for the services to be rendered in reducing the note here in suit to
judgment, it would not have been enforced against him had he seen fit to oppose
it, as such a fee is obviously far greater than is necessary to remunerate the
attorney for the work involved and is therefore unreasonable. In order to enable
the court to ignore an express contract for an attorney's fees, it is not necessary
to show, as in other contracts, that it is contrary to morality or public policy (Art.
1255, Civil Code). It is enough that it is unreasonable or unconscionable. 4

Since then this Court has invariably fixed counsel fees on a quantum meruit basis
whenever the fees stipulated appear excessive, unconscionable, or unreasonable,
because a lawyer is primarily a court officer charged with the duty of assisting the court
in administering impartial justice between the parties, and hence, the fees should be
subject to judicial control. Nor should it be ignored that sound public policy demands
that courts disregard stipulations for counsel fees, whenever they appear to be a source
of speculative profit at the expense of the debtor or mortgagor. 5 And it is not material
that the present action is between the debtor and the creditor, and not between attorney
and client. As court have power to fix the fee as between attorney and client, it must
necessarily have the right to say whether a stipulation like this, inserted in a mortgage
contract, is valid. 6

In determining the compensation of an attorney, the following circumstances should be

considered: the amount and character of the services rendered; the responsibility
imposed; the amount of money or the value of the property affected by the controversy,
or involved in the employment; the skill and experience called for in the performance of
the service; the professional standing of the attorney; the results secured; and whether
or not the fee is contingent or absolute, it being a recognized rule that an attorney may
properly charge a much larger fee when it is to be contingent than when it is not. 7 From
the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is
10% of the total indebtedness, irrespective of the manner the foreclosure of the
mortgage is to be effected. The agreement is perhaps fair enough in case the
foreclosure proceedings is prosecuted judicially but, surely, it is unreasonable when, as
in this case, the mortgage was foreclosed extra-judicially, and all that the attorney did
was to file a petition for foreclosure with the sheriff concerned. It is to be assumed
though, that the said branch attorney of the PNB made a study of the case before
deciding to file the petition for foreclosure; but even with this in mind, we believe the
amount of P5,821.35 is far too excessive a fee for such services. Considering the above
circumstances mentioned, it is our considered opinion that the amount of P1,000.00
would be more than sufficient to compensate the work aforementioned.

The next issue raised deals with the claim that the proceeds of the sale of the real
properties alone together with the amount it remitted to the PNB later was more than
sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in
this claim. From the foregoing discussion of the first two errors assigned, and for
purposes of determining the total obligation of herein appellant to the PNB as of
November 21, 1961 when the real estate mortgage was foreclosed, we have the
following illustration in support of this conclusion:
1äwphï1.ñët

A. -
I. Principal Loan
(a) Promissory note dated August 2, 1956 P27,500.00
(1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 8,751.78
(b) Promissory note dated October 19, 1956 P15,500.00
(1) Interest at 6% per annum from Oct.19, 1956 to Nov. 21, 1961 4,734.08
II. Sheriff's fees [for two (2) day's work] 10.00
III. Attorney's fee 1,000.00

Total obligation as of Nov. 21, 1961 P57,495.86

B. -
Proceeds of the foreclosure sale of the real estate mortgage on Nov.
I. P56,908.00
21, 1961
II. Additional amount remitted to the PNB on Dec. 18, 1961 738.59

Total amount of Payment made to PNB as of Dec. 18, 1961 P57,646.59

Deduct: Total obligation to the PNB P57,495.86

Excess Payment to the PNB P 150.73

========

From the foregoing illustration or computation, it is clear that there was no further
necessity to foreclose the mortgage of herein appellant's chattels on December 21,
1961; and on this ground alone, we may declare the sale of appellant's chattels on the
said date, illegal and void. But we take into consideration the fact that the PNB must
have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in
the real estate mortgage was legally maintainable, and in accordance with such belief,
herein appellee bank insisted that the proceeds of the sale of appellant's real property
was deficient to liquidate the latter's total indebtedness. Be that as it may, however, we
still find the subsequent sale of herein appellant's chattels illegal and objectionable on
other grounds.

That appellant vigorously objected to the foreclosure of its chattel mortgage after the
foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as
shown not only by its letter to the PNB on November 19, 1961, but also in its letter to
the provincial sheriff of Camarines Norte on the same date. These letters were followed
by another letter to the appellee bank on December 14, 1961, wherein herein appellant,
in no uncertain terms, reiterated its objection to the scheduled sale of its chattels on
December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons therein
stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real
estate and its subsequent remittance of the amount of P738.59; and (2) that the
contemplated sale at Jose Panganiban would violate their agreement embodied under
paragraph (i) in the Chattel Mortgage which provides as follows:

(i) In case of both judicial and extra-judicial foreclosure under Act 1508, as
amended, the parties hereto agree that the corresponding complaint for
foreclosure or the petition for sale should be filed with the courts or the sheriff of
the City of Manila, as the case may be; and that the Mortgagor shall pay
attorney's fees hereby fixed at ten per cent (10%) of the total indebtedness then
unpaid but in no case shall it be less than P100.00, exclusive of all costs and
fees allowed by law and of other expenses incurred in connection with the said
foreclosure. [Emphasis supplied]

Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in

utter disregard of the objection of herein appellant to the sale of its chattels at Jose
Panganiban, Camarines Norte and not in the City of Manila as agreed upon, the PNB
proceeded with the foreclosure sale of said chattels. The trial court, however, justified
said action of the PNB in the decision appealed from in the following rationale:

While it is true that it was stipulated in the chattel mortgage contract that a
petition for the extra-judicial foreclosure thereof should be filed with the Sheriff of
the City of Manila, nevertheless, the effect thereof was merely to provide another
place where the mortgage chattel could be sold in addition to those specified in
the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot abrogate
much less impliedly repeal a specific provision of the statute. Considering that
Section 14 of Act No. 1508 vests in the mortgagee the choice where the
foreclosure sale should be held, hence, in the case under consideration, the PNB
had three places from which to select, namely: (1) the place of residence of the
mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the
place stipulated in the contract. The PNB selected the second and, accordingly,
the foreclosure sale held in Jose Panganiban, Camarines Norte, was legal and
valid.

To the foregoing conclusion, We disagree. While the law grants power and authority to
the mortgagee to sell the mortgaged property at a public place in the municipality where
the mortgagor resides or where the property is situated, 8 this Court has held that the
sale of a mortgaged chattel may be made in a place other than that where it is found,
provided that the owner thereof consents thereto; or that there is an agreement to this
effect between the mortgagor and the mortgagee. 9 But when, as in this case, the parties
agreed to have the sale of the mortgaged chattels in the City of Manila, which, any way,
is the residence of the mortgagor, it cannot be rightly said that mortgagee still retained
the power and authority to select from among the places provided for in the law and the
place designated in their agreement over the objection of the mortgagor. In providing
that the mortgaged chattel may be sold at the place of residence of the mortgagor or the
place where it is situated, at the option of the mortgagee, the law clearly contemplated
benefits not only to the mortgagor but to the mortgagee as well. Their right arising
thereunder, however, are personal to them; they do not affect either public policy or the
rights of third persons. They may validly be waived. So, when herein mortgagor and
mortgagee agreed in the mortgage contract that in cases of both judicial and extra-
judicial foreclosure under Act 1508, as amended, the corresponding complaint for
foreclosure or the petition for sale should be filed with the courts or the Sheriff of Manila,
as the case may be, they waived their corresponding rights under the law. The
correlative obligation arising from that agreement have the force of law between them
and should be complied with in good faith. 10

By said agreement the parties waived the legal venue, and such waiver is valid
and legally effective, because it, was merely a personal privilege they waived,
which is not contrary, to public policy or to the prejudice of third persons. It is a
general principle that a person may renounce any right which the law gives
unless such renunciation is expressly prohibited or the right conferred is of such
nature that its renunciation would be against public policy. 11

On the other hand, if a place of sale is specified in the mortgage and statutory
requirements in regard thereto are complied with, a sale is properly conducted in
that place. Indeed, in the absence of a statute to the contrary, a sale conducted
at a place other than that stipulated for in the mortgage is invalid, unless the
mortgagor consents to such sale. 12

Moreover, Section 14 of Act 1508, as amended, provides that the officer making the
sale should make a return of his doings which shall particularly describe the articles sold
and the amount received from each article. From this, it is clear that the law requires
that sale be made article by article, otherwise, it would be impossible for him to state the
amount received for each item. This requirement was totally disregarded by the Deputy
Sheriff of Camarines Norte when he sold the chattels in question in bulk,
notwithstanding the fact that the said chattels consisted of no less than twenty different
items as shown in the bill of sale. 13 This makes the sale of the chattels manifestly
objectionable. And in the absence of any evidence to show that the mortgagor had
agreed or consented to such sale in gross, the same should be set aside.

It is said that the mortgagee is guilty of conversion when he sells under the mortgage
but not in accordance with its terms, or where the proceedings as to the sale of
foreclosure do not comply with the statute. 14 This rule applies squarely to the facts of
this case where, as earlier shown, herein appellee bank insisted, and the appellee
deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at
Jose Panganiban, Camarines Norte, in utter disregard of the valid objection of the
mortgagor thereto for the reason that it is not the place of sale agreed upon in the
mortgage contract; and the said deputy sheriff sold all the chattels (among which were a
skagit with caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill
equipment consisting of a 150 HP Murphy Engine, plainer, large circular saws etc.) as a
single lot in violation of the requirement of the law to sell the same article by article. The
PNB has resold the chattels to another buyer with whom it appears to have actively
cooperated in subsequently taking possession of and removing the chattels from
appellant compound by force, as shown by the circumstance that they had to take along
PC soldiers and municipal policemen of Jose Panganiban who placed the chief security
officer of the premises in jail to deprive herein appellant of its possession thereof. To
exonerate itself of any liability for the breach of peace thus committed, the PNB would
want us to believe that it was the subsequent buyer alone, who is not a party to this
case, that was responsible for the forcible taking of the property; but assuming this to be
so, still the PNB cannot escape liability for the conversion of the mortgaged chattels by
parting with its interest in the property. Neither would its claim that it afterwards gave a
chance to herein appellant to repurchase or redeem the chattels, improve its position,
for the mortgagor is not under obligation to take affirmative steps to repossess the
chattels that were converted by the mortgagee. 15 As a consequence of the said
wrongful acts of the PNB and the Deputy Sheriff of Camarines Norte, therefore, We
have to declare that herein appellant is entitled to collect from them, jointly and
severally, the full value of the chattels in question at the time they were illegally sold by
them. To this effect was the holding of this Court in a similar situation. 16

The effect of this irregularity was, in our opinion to make the plaintiff liable to the
defendant for the full value of the truck at the time the plaintiff thus carried it off to
be sold; and of course, the burden is on the defendant to prove the damage to
which he was thus subjected. . . .

This brings us to the problem of determining the value of the mortgaged chattels at the
time of their sale in 1961. The trial court did not make any finding on the value of the
chattels in the decision appealed from and denied altogether the right of the appellant to
recover the same. We find enough evidence of record, however, which may be used as
a guide to ascertain their value. The record shows that at the time herein appellant
applied for its loan with the PNB in 1956, for which the chattels in question were
mortgaged as part of the security therefore, herein appellant submitted a list of the
chattels together with its application for the loan with a stated value of P107,115.85. An
official of the PNB made an inspection of the chattels in the same year giving it an
appraised value of P42,850.00 and a market value of P85,700.00. 17 The same chattels
with some additional equipment acquired by herein appellant with part of the proceeds
of the loan were reappraised in a re-inspection conducted by the same official in 1958,
in the report of which he gave all the chattels an appraised value of P26,850.00 and a
market value of P48,200.00. 18 Another re-inspection report in 1959 gave the appraised
value as P19,400.00 and the market value at P25,600.00. 19 The said official of the PNB
who made the foregoing reports of inspection and re-inspections testified in court that in
giving the values appearing in the reports, he used a conservative method of appraisal
which, of course, is to be expected of an official of the appellee bank. And it appears
that the values were considerably reduced in all the re-inspection reports for the reason
that when he went to herein appellant's premises at the time, he found the chattels no
longer in use with some of the heavier equipments dismantled with parts thereof kept in
the bodega; and finding it difficult to ascertain the value of the dismantled chattels in
such condition, he did not give them anymore any value in his reports. Noteworthy is the
fact, however, that in the last re-inspection report he made of the chattels in 1961, just a
few months before the foreclosure sale, the same inspector of the PNB reported that the
heavy equipment of herein appellant were "lying idle and rusty" but were "with a shed
free from rains" 20 showing that although they were no longer in use at the time, they
were kept in a proper place and not exposed to the elements. The President of the
appellant company, on the other hand, testified that its caterpillar (tractor) alone is worth
P35,000.00 in the market, and that the value of its two trucks acquired by it with part of
the proceeds of the loan and included as additional items in the mortgaged chattels
were worth no less than P14,000.00. He likewise appraised the worth of its Murphy
engine at P16,000.00 which, according to him, when taken together with the heavy
equipments he mentioned, the sawmill itself and all other equipment forming part of the
chattels under consideration, and bearing in mind the current cost of equipments these
days which he alleged to have increased by about five (5) times, could safely be
estimated at P120,000.00. This testimony, except for the appraised and market values
appearing in the inspection and re-inspection reports of the PNB official earlier
mentioned, stand uncontroverted in the record; but We are not inclined to accept such
testimony at its par value, knowing that the equipments of herein appellant had been
idle and unused since it stopped operating its sawmill in 1958 up to the time of the sale
of the chattels in 1961. We have no doubt that the value of chattels was depreciated
after all those years of inoperation, although from the evidence aforementioned, We
may also safely conclude that the amount of P4,200.00 for which the chattels were sold
in the foreclosure sale in question was grossly unfair to the mortgagor. Considering,
however, the facts that the appraised value of P42,850.00 and the market value of
P85,700.00 originally given by the PNB official were admittedly conservative; that two 6
x 6 trucks subsequently bought by the appellant company had thereafter been added to
the chattels; and that the real value thereof, although depreciated after several years of
inoperation, was in a way maintained because the depreciation is off-set by the marked
increase in the cost of heavy equipment in the market, it is our opinion that the market
value of the chattels at the time of the sale should be fixed at the original appraised
value of P42,850.00.

Herein appellant's claim for moral damages, however, seems to have no legal or factual
basis. Obviously, an artificial person like herein appellant corporation cannot experience
physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral
shock or social humiliation which are basis of moral damages. 21 A corporation may
have a good reputation which, if besmirched, may also be a ground for the award of
moral damages. The same cannot be considered under the facts of this case, however,
not only because it is admitted that herein appellant had already ceased in its business
operation at the time of the foreclosure sale of the chattels, but also for the reason that
whatever adverse effects of the foreclosure sale of the chattels could have upon its
reputation or business standing would undoubtedly be the same whether the sale was
conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place
agreed upon by the parties in the mortgage contract.

But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines
Norte in proceeding with the sale in utter disregard of the agreement to have the
chattels sold in Manila as provided for in the mortgage contract, to which their attentions
were timely called by herein appellant, and in disposing of the chattels in gross for the
miserable amount of P4,200.00, herein appellant should be awarded exemplary
damages in the sum of P10,000.00. The circumstances of the case also warrant the
award of P3,000.00 as attorney's fees for herein appellant.

WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed

from should be, as hereby, it is set aside. The Philippine National Bank and the Deputy
Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to
Mambulao Lumber Company the total amount of P56,000.73, broken as follows:
P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the
time of the sale with interest at the rate of 6% per annum from December 21, 1961, until
fully paid, P10,000.00 in exemplary damages, and P3,000.00 as attorney's fees. Costs
against both appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro and
Fernando, JJ., concur.
Bengzon, J.P. J., took no part.

Footnotes
G.R. No. L-14441 December 17, 1966
PEDRO R. PALTING, petitioner,
vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
BARRERA, J.:
This is a petition for review of the order of August 29, 1958,
later supplemented and amplified by another dated
September 9, 1958, of the Securities and Exchange
Commission denying the opposition to, and instead, granting
the registration, and licensing the sale in the Philippines, of
5,000,000 shares of the capital stock of the respondent-
appellee San Jose Petroleum, Inc. (hereafter referred to as
SAN JOSE PETROLEUM), a corporation organized and
existing in the Republic of Panama.
On September 7, 1956, SAN JOSE PETROLEUM filed with
the Philippine Securities and Exchange Commission a sworn
registration statement, for the registration and licensing for
sale in the Philippines Voting Trust Certificates representing
2,000,000 shares of its capital stock of a par value of $0.35 a
share, at P1.00 per share. It was alleged that the entire
proceeds of the sale of said securities will be devoted or used
exclusively to finance the operations of San Jose Oil
Company, Inc. (a domestic mining corporation hereafter to be
referred to as SAN JOSE OIL) which has 14 petroleum
exploration concessions covering an area of a little less than
1,000,000 hectares, located in the provinces of Pangasinan,
Tarlac, Nueva Ecija, La Union, Iloilo, Cotabato, Davao and
Agusan. It was the express condition of the sale that every
purchaser of the securities shall not receive a stock certificate,
but a registered or bearer-voting-trust certificate from the
voting trustees named therein James L. Buckley and Austin
G.E. Taylor, the first residing in Connecticut, U.S.A., and the
second in New York City. While this application for registration
was pending consideration by the Securities and Exchange
Commission, SAN JOSE PETROLEUM filed an amended
Statement on June 20, 1958, for registration of the sale in the
Philippines of its shares of capital stock, which was increased
from 2,000,000 to 5,000,000, at a reduced offering price of
from P1.00 to P0.70 per share. At this time the par value of
the shares has also been reduced from $.35 to $.01 per
share.1
Pedro R. Palting and others, allegedly prospective investors in
the shares of SAN JOSE PETROLEUM, filed with the
Securities and Exchange Commission an opposition to
registration and licensing of the securities on the grounds that
(1) the tie-up between the issuer, SAN JOSE PETROLEUM, a
Panamanian corporation and SAN JOSE OIL, a domestic
corporation, violates the Constitution of the Philippines, the
Corporation Law and the Petroleum Act of 1949; (2) the issuer
has not been licensed to transact business in the Philippines;
(3) the sale of the shares of the issuer is fraudulent, and
works or tends to work a fraud upon Philippine purchasers;
and (4) the issuer as an enterprise, as well as its business, is
based upon unsound business principles. Answering the
foregoing opposition of Palting, et al., the registrant SAN
JOSE PETROLEUM claimed that it was a "business
enterprise" enjoying parity rights under the Ordinance
appended to the Constitution, which parity right, with respect
to mineral resources in the Philippines, may be exercised,
pursuant to the Laurel-Langley Agreement, only through the
medium of a corporation organized under the laws of the
Philippines. Thus, registrant which is allegedly qualified to
exercise rights under the Parity Amendment, had to do so
through the medium of a domestic corporation, which is the
SAN JOSE OIL. It refused the contention that the Corporation
Law was being violated, by alleging that Section 13 thereof
applies only to foreign corporations doing business in the
Philippines, and registrant was not doing business here. The
mere fact that it was a holding company of SAN JOSE OIL
and that registrant undertook the financing of and giving
technical assistance to said corporation did not constitute
transaction of business in the Philippines. Registrant also
denied that the offering for sale in the Philippines of its shares
of capital stock was fraudulent or would work or tend to work
fraud on the investors. On August 29, 1958, and on
September 9, 1958 the Securities and Exchange
Commissioner issued the orders object of the present appeal.
The issues raised by the parties in this appeal are as follows:
1. Whether or not petitioner Pedro R. Palting, as a
"prospective investor" in respondent's securities, has
personality to file the present petition for review of the
order of the Securities and Exchange Commission;
2. Whether or not the issue raised herein is already moot
and academic;
3. Whether or not the "tie-up" between the respondent
SAN JOSE PETROLEUM, a foreign corporation, and
SAN JOSE OIL COMPANY, INC., a domestic mining
corporation, is violative of the Constitution, the Laurel-
Langley Agreement, the Petroleum Act of 1949, and the
Corporation Law; and
 4. Whether or not the sale of respondent's securities is
fraudulent, or would work or tend to work fraud to
purchasers of such securities in the Philippines.
1. In answer to the notice and order of the Securities and
Exchange Commissioner, published in 2 newspapers of
general circulation in the Philippines, for "any person who is
opposed" to the petition for registration and licensing of
respondent's securities, to file his opposition in 7 days, herein
petitioner so filed an opposition. And, the Commissioner,
having denied his opposition and instead, directed the
registration of the securities to be offered for sale, oppositor
Palting instituted the present proceeding for review of said
order.
Respondent raises the question of the personality of petitioner
to bring this appeal, contending that as a mere "prospective
investor", he is not an "Aggrieved" or "interested" person who
may properly maintain the suit. Citing a 1931 ruling of Utah
State Supreme Court2 it is claimed that the phrase "party
aggrieved" used in the Securities Act3and the Rules of
Court4 as having the right to appeal should refer only to
issuers, dealers and salesmen of securities.
It is true that in the cited case, it was ruled that the phrase
"person aggrieved" is that party "aggrieved by the judgment or
decree where it operates on his rights of property or bears
directly upon his interest", that the word "aggrieved" refers to
"a substantial grievance, a denial of some personal property
right or the imposition upon a party of a burden or obligation."
But a careful reading of the case would show that the appeal
therein was dismissed because the court held that an order of
registration was not final and therefore not appealable. The
foregoing pronouncement relied upon by herein respondent
was made in construing the provision regarding an order of
revocation which the court held was the one appealable. And
since the law provides that in revoking the registration of any
security, only the issuer and every registered dealer of the
security are notified, excluding any person or group of
persons having no such interest in the securities, said court
concluded that the phrase "interested person" refers only to
issuers, dealers or salesmen of securities.
We cannot consider the foregoing ruling by the Utah State
Court as controlling on the issue in this case. Our Securities
Act in Section 7(c) thereof, requires the publication and notice
of the registration statement. Pursuant thereto, the Securities
and Exchange Commissioner caused the publication of an
order in part reading as follows:
. . . Any person who is opposed with this petition must file
his written opposition with this Commission within said
period (2 weeks). . . .
In other words, as construed by the administrative office
entrusted with the enforcement of the Securities Act, any
person (who may not be "aggrieved" or "interested" within the
legal acceptation of the word) is allowed or permitted to file an
opposition to the registration of securities for sale in the
Philippines. And this is in consonance with the generally
accepted principle that Blue Sky Laws are enacted to protect
investors and prospective purchasers and to prevent fraud
and preclude the sale of securities which are in fact worthless
or worth substantially less than the asking price. It is for this
purpose that herein petitioner duly filed his opposition giving
grounds therefor. Respondent SAN JOSE PETROLEUM was
required to reply to the opposition. Subsequently both the
petition and the opposition were set for hearing during which
the petitioner was allowed to actively participate and did so by
cross-examining the respondent's witnesses and filing his
memorandum in support of his opposition. He therefore to all
intents and purposes became a party to the proceedings. And
under the New Rules of Court,5 such a party can appeal from
a final order, ruling or decision of the Securities and Exchange
Commission. This new Rule eliminating the word "aggrieved"
appearing in the old Rule, being procedural in nature,6 and in
view of the express provision of Rule 144 that the new rules
made effective on January 1, 1964 shall govern not only
cases brought after they took effect but all further proceedings
in cases then pending, except to the extent that in the opinion
of the Court their application would not be feasible or would
work injustice, in which event the former procedure shall
apply, we hold that the present appeal is properly within the
appellate jurisdiction of this Court.
The order allowing the registration and sale of respondent's
securities is clearly a final order that is appealable. The mere
fact that such authority may be later suspended or revoked,
depending on future developments, does not give it the
character of an interlocutory or provisional ruling. And the fact
that seven days after the publication of the order, the
securities are deemed registered (Sec. 7, Com. Act 83, as
amended), points to the finality of the order. Rights and
obligations necessarily arise therefrom if not reviewed on
appeal.
Our position on this procedural matter — that the order is
appealable and the appeal taken here is proper — is
strengthened by the intervention of the Solicitor General,
under Section 23 of Rule 3 of the Rules of Court, as the
constitutional issues herein presented affect the validity of
Section 13 of the Corporation Law, which, according to the
respondent, conflicts with the Parity Ordinance and the
Laurel-Langley Agreement recognizing, it is claimed, its right
to exploit our petroleum resources notwithstanding said
provisions of the Corporation Law.
2. Respondent likewise contends that since the order of
Registration/Licensing dated September 9, 1958 took effect
30 days from September 3, 1958, and since no stay order has
been issued by the Supreme Court, respondent's shares
became registered and licensed under the law as of October
3, 1958. Consequently, it is asserted, the present appeal has
become academic. Frankly we are unable to follow
respondent's argumentation. First it claims that the order of
August 29 and that of September 9, 1958 are not final orders
and therefor are not appealable. Then when these orders,
according to its theory became final and were implemented, it
argues that the orders can no longer be appealed as the
question of registration and licensing became moot and
academic.
But the fact is that because of the authority to sell, the
securities are, in all probabilities, still being traded in the open
market. Consequently the issue is much alive as to whether
respondent's securities should continue to be the subject of
sale. The purpose of the inquiry on this matter is not fully
served just because the securities had passed out of the
hands of the issuer and its dealers. Obviously, so long as the
securities are outstanding and are placed in the channels of
trade and commerce, members of the investing public are
entitled to have the question of the worth or legality of the
securities resolved one way or another.
But more fundamental than this consideration, we agree with
the late Senator Claro M. Recto, who appeared as amicus
curiae in this case, that while apparently the immediate issue
in this appeal is the right of respondent SAN JOSE
PETROLEUM to dispose of and sell its securities to the
Filipino public, the real and ultimate controversy here would
actually call for the construction of the constitutional
provisions governing the disposition, utilization, exploitation
and development of our natural resources. And certainly this
is neither moot nor academic.
3. We now come to the meat of the controversy — the "tie-up"
between SAN JOSE OIL on the one hand, and the
respondent SAN JOSE PETROLEUM and its associates, on
the other. The relationship of these corporations involved or
affected in this case is admitted and established through the
papers and documents which are parts of the records: SAN
JOSE OIL, is a domestic mining corporation, 90% of the
outstanding capital stock of which is owned by respondent
SAN JOSE PETROLEUM, a foreign (Panamanian)
corporation, the majority interest of which is owned by OIL
INVESTMENTS, Inc., another foreign (Panamanian)
company. This latter corporation in turn is wholly (100%)
owned by PANTEPEC OIL COMPANY, C.A., and
PANCOASTAL PETROLEUM COMPANY, C.A., both
organized and existing under the laws of Venezuela. As of
September 30, 1956, there were 9,976 stockholders of
PANCOASTAL PETROLEUM found in 49 American states
and U.S. territories, holding 3,476,988 shares of stock;
whereas, as of November 30, 1956, PANTEPEC OIL
COMPANY was said to have 3,077,916 shares held by
12,373 stockholders scattered in 49 American state. In the
two lists of stockholders, there is no indication of the
citizenship of these stockholders,7 or of the total number of
authorized stocks of each corporation, for the purpose of
determining the corresponding percentage of these listed
stockholders in relation to the respective capital stock of said
corporation.
Petitioner, as well as the amicus curiae and the Solicitor
General8 contend that the relationship between herein
respondent SAN JOSE PETROLEUM and its subsidiary, SAN
JOSE OIL, violates the Petroleum Law of 1949, the Philippine
Constitution, and Section 13 of the Corporation Law, which
inhibits a mining corporation from acquiring an interest in
another mining corporation. It is respondent's theory, on the
other hand, that far from violating the Constitution; such
relationship between the two corporations is in accordance
with the Laurel-Langley Agreement which implemented the
Ordinance Appended to the Constitution, and that Section 13
of the Corporation Law is not applicable because respondent
is not licensed to do business, as it is not doing business, in
the Philippines.
Article XIII, Section 1 of the Philippine Constitution provides:
SEC. 1. All agricultural, timber, and mineral lands of the
public domain, waters, minerals, coal, petroleum, and
other mineral oils, all forces of potential energy, and
other natural resources of the Philippines belong to the
State, and their disposition, exploitation, development, or
utilization shall be limited to citizens of the Philippines, or
to corporations or associations at least sixty per centum
of the capital of which is owned by such citizens, subject
to any existing right, grant, lease or concession at the
time of the inauguration of this Government established
under this Constitution. . . . (Emphasis supplied)
In the 1946 Ordinance Appended to the Constitution, this right
(to utilize and exploit our natural resources) was extended to
citizens of the United States, thus:
Notwithstanding the provisions of section one, Article
Thirteen, and section eight, Article Fourteen, of the
foregoing Constitution, during the effectivity of the
Executive Agreement entered into by the President of the
Philippines with the President of the United States on the
fourth of July, nineteen hundred and forty-six, pursuant to
the provisions of Commonwealth Act Numbered Seven
hundred and thirty-three, but in no case to extend beyond
the third of July, nineteen hundred and seventy-four, the
disposition, exploitation, development, and utilization of
all agricultural, timber, and mineral lands of the public
domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, and other
natural resources of the Philippines, and the operation of
public utilities shall, if open to any person, be open to
citizens of the United States, and to all forms of business
enterprises owned or controlled, directly or indirectly, by
citizens of the United States in the same manner as to,
and under the same conditions imposed upon, citizens of
the Philippines or corporations or associations owned or
controlled by citizens of the Philippines (Emphasis
supplied.)
In the 1954 Revised Trade Agreement concluded between the
United States and the Philippines, also known as the Laurel-
Langley Agreement, embodied in Republic Act 1355, the
following provisions appear:
ARTICLE VI
1. The disposition, exploitation, development and
utilization of all agricultural, timber, and mineral lands of
the public domain, waters, minerals, coal, petroleum and
other mineral oils, all forces and sources of potential
energy, and other natural resources of either Party, and
the operation of public utilities, shall, if open to any
person, be open to citizens of the other Party and to all
forms of business enterprise owned or controlled, directly
or indirectly, by citizens of such other Party in the same
manner as to and under the same conditions imposed
upon citizens or corporations or associations owned or
controlled by citizens of the Party granting the right.
2. The rights provided for in Paragraph 1 may be
exercised, . . . in the case of citizens of the United States,
with respect to natural resources in the public domain in
the Philippines, only through the medium of a corporation
organized under the laws of the Philippines and at least
60% of the capital stock of which is owned or controlled
by citizens of the United States. . . .
3. The United States of America reserves the rights of
the several States of the United States to limit the extent
to which citizens or corporations or associations owned
or controlled by citizens of the Philippines may engage in
the activities specified in this Article. The Republic of the
Philippines reserves the power to deny any of the rights
specified in this Article to citizens of the United States
who are citizens of States, or to corporations or
associations at least 60% of whose capital stock or
capital is owned or controlled by citizens of States, which
deny like rights to citizens of the Philippines, or to
corporations or associations which are owned or
 controlled by citizens of the Philippines. . . . (Emphasis
supplied.)
Re-stated, the privilege to utilize, exploit, and develop the
natural resources of this country was granted, by Article XIII of
the Constitution, to Filipino citizens or to corporations or
associations 60% of the capital of which is owned by such
citizens. With the Parity Amendment to the Constitution, the
same right was extended to citizens of the United States and
business enterprises owned or controlled directly or indirectly,
by citizens of the United States.
There could be no serious doubt as to the meaning of the
word "citizens" used in the aforementioned provisions of the
Constitution. The right was granted to 2 types of persons:
natural persons (Filipino or American citizens) and juridical
persons (corporations 60% of which capital is owned by
Filipinos and business enterprises owned or controlled directly
or indirectly, by citizens of the United States). In American
law, "citizen" has been defined as "one who, under the
constitution and laws of the United States, has a right to vote
for representatives in congress and other public officers, and
who is qualified to fill offices in the gift of the people. (1
Bouvier's Law Dictionary, p. 490.) A citizen is —
One of the sovereign people. A constituent member of
the sovereignty, synonymous with the people." (Scott v.
Sandford, 19 Ho. [U.S.] 404, 15 L. Ed. 691.)
A member of the civil state entitled to all its privileges.
(Cooley, Const. Lim. 77. See U.S. v. Cruikshank 92 U.S.
542, 23 L. Ed. 588; Minor v. Happersett 21 Wall. [U.S.]
162, 22 L. Ed. 627.)
These concepts clarified, is herein respondent SAN JOSE
PETROLEUM an American business enterprise entitled to
parity rights in the Philippines? The answer must be in the
negative, for the following reasons:
Firstly — It is not owned or controlled directly by citizens of
the United States, because it is owned and controlled by a
corporation, the OIL INVESTMENTS, another foreign
(Panamanian) corporation.
Secondly — Neither can it be said that it is indirectly owned
and controlled by American citizens through the OIL
INVESTMENTS, for this latter corporation is in turn owned
and controlled, not by citizens of the United States, but still by
two foreign (Venezuelan) corporations, the PANTEPEC OIL
COMPANY and PANCOASTAL PETROLEUM.
Thirdly — Although it is claimed that these two last
corporations are owned and controlled respectively by 12,373
and 9,979 stockholders residing in the different American
states, there is no showing in the certification furnished by
respondent that the stockholders of PANCOASTAL or those
of them holding the controlling stock, are citizens of the United
States.
Fourthly — Granting that these individual stockholders are
American citizens, it is yet necessary to establish that the
different states of which they are citizens, allow Filipino
citizens or corporations or associations owned or controlled
by Filipino citizens, to engage in the exploitation, etc. of the
natural resources of these states (see paragraph 3, Article VI
of the Laurel-Langley Agreement, supra). Respondent has
presented no proof to this effect.
Fifthly — But even if the requirements mentioned in the two
immediately preceding paragraphs are satisfied, nevertheless
to hold that the set-up disclosed in this case, with a long chain
of intervening foreign corporations, comes within the purview
of the Parity Amendment regarding business enterprises
indirectly owned or controlled by citizens of the United States,
is to unduly stretch and strain the language and intent of the
law. For, to what extent must the word "indirectly" be carried?
Must we trace the ownership or control of these various
corporations ad infinitum for the purpose of determining
whether the American ownership-control-requirement is
satisfied? Add to this the admitted fact that the shares of stock
of the PANTEPEC and PANCOASTAL which are allegedly
owned or controlled directly by citizens of the United States,
are traded in the stock exchange in New York, and you have
a situation where it becomes a practical impossibility to
determine at any given time, the citizenship of the controlling
stock required by the law. In the circumstances, we have to
hold that the respondent SAN JOSE PETROLEUM, as
presently constituted, is not a business enterprise that is
authorized to exercise the parity privileges under the Parity
Ordinance, the Laurel-Langley Agreement and the Petroleum
Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.
What, then, would be the Status of SAN JOSE OIL, about
90% of whose stock is owned by SAN JOSE PETROLEUM?
This is a query which we need not resolve in this case as SAN
JOSE OIL is not a party and it is not necessary to do so to
dispose of the present controversy. But it is a matter that
probably the Solicitor General would want to look into.
There is another issue which has been discussed extensively
by the parties. This is whether or not an American mining
corporation may lawfully "be in anywise interested in any
other corporation (domestic or foreign) organized for the
purpose of engaging in agriculture or in mining," in the
Philippines or whether an American citizen owning stock in
more than one corporation organized for the purpose of
engaging in agriculture or in mining, may own more than 15%
of the capital stock then outstanding and entitled to vote, of
each of such corporations, in view of the express prohibition
contained in Section 13 of the Philippine Corporation Law.
The petitioner in this case contends that the provisions of the
Corporation Law must be applied to American citizens and
business enterprise otherwise entitled to exercise the parity
privileges, because both the Laurel-Langley Agreement (Art.
VI, par. 1) and the Petroleum Act of 1948 (Art. 31), specifically
provide that the enjoyment by them of the same rights and
obligations granted under the provisions of both laws shall be
"in the same manner as to, and under the same conditions
imposed upon, citizens of the Philippines or corporations or
associations owned or controlled by citizens of the
Philippines." The petitioner further contends that, as the
enjoyment of the privilege of exploiting mineral resources in
the Philippines by Filipino citizens or corporations owned or
controlled by citizens of the Philippines (which corporation
must necessarily be organized under the Corporation Law), is
made subject to the limitations provided in Section 13 of the
Corporation Law, so necessarily the exercise of the parity
rights by citizens of the United States or business enterprise
owned or controlled, directly or indirectly, by citizens of the
United States, must equally be subject to the same limitations
contained in the aforesaid Section 13 of the Corporation Law.
In view of the conclusions we have already arrived at, we
deem it not indispensable for us to pass upon this legal
question, especially taking into account the statement of the
respondent (SAN JOSE PETROLEUM) that it is essentially a
holding company, and as found by the Securities and
Exchange Commissioner, its principal activity is limited to the
financing and giving technical assistance to SAN JOSE OIL.
4. Respondent SAN JOSE PETROLEUM, whose shares of
stock were allowed registration for sale in the Philippines, was
incorporated under the laws of Panama in April, 1956 with an
authorized capital stock of $500,000.00, American currency,
divided into 50,000,000 shares at par value of $0.01 per
share. By virtue of a 3-party Agreement of June 14, 1956,
respondent was supposed to have received from OIL
INVESTMENTS 8,000,000 shares of the capital stock of SAN
JOSE OIL (at par value of $0.01 per share), plus a note for
$250,000.00 due in 6 months, for which respondent issued in
favor of OIL INVESTMENTS 16,000,000 shares of its capital
stock, at $0.01 per share or with a value of $160,000.00, plus
a note for $230,297.97 maturing in 2 years at 6% per annum
interest,9 and the assumption of payment of the unpaid price
of 7,500,000 (of the 8,000,000 shares of SAN JOSE OIL).
On June 27, 1956, the capitalization of SAN JOSE
PETROLEUM was increased from $500,000.00 to
$17,500,000.00 by increasing the par value of the same
50,000,000 shares, from $0.01 to $0.35. Without any
additional consideration, the 16,000,000 shares of $0.01
previously issued to OIL INVESTMENTS with a total value of
$160,000.00 were changed with 16,000,000 shares of the
recapitalized stock at $0.35 per share, or valued at
$5,600,000.00. And, to make it appear that cash was received
for these re-issued 16,000,000 shares, the board of directors
of respondent corporation placed a valuation of $5,900,000.00
on the 8,000,000 shares of SAN JOSE OIL (still having par
value of $0.10 per share) which were received from OIL
INVESTMENTS as part-consideration for the 16,000,000
shares at $0.01 per share.
In the Balance Sheet of respondent, dated July 12, 1956, from
the $5,900,000.00, supposedly the value of the 8,000,000
shares of SAN JOSE OIL, the sum of $5,100,000.00 was
deducted, corresponding to the alleged difference between
the "value" of the said shares and the subscription price
thereof which is $800,000.00 (at $0.10 per share). From this
$800,000.00, the subscription price of the SAN JOSE OIL
shares, the amount of $319,702.03 was deducted, as
allegedly unpaid subscription price, thereby giving a
difference of $480,297.97, which was placed as the amount
allegedly paid in on the subscription price of the 8,000,000
SAN JOSE OIL shares. Then, by adding thereto the note
receivable from OIL INVESTMENTS, for $250,000.00 (part-
consideration for the 16,000,000 SAN JOSE PETROLEUM
shares), and the sum of $6,516.21, as deferred expenses,
SAN JOSE PETROLEUM appeared to have assets in the
sum of $736,814.18.
These figures are highly questionable. Take the item
$5,900,000.00 the valuation placed on the 8,000,000 shares
of SAN JOSE OIL. There appears no basis for such valuation
other than belief by the board of directors of respondent that
"should San Jose Oil Company be granted the bulk of the
concessions applied for upon reasonable terms, that it would
have a reasonable value of approximately
$10,000,000." 10 Then, of this amount, the subscription price
of $800,000.00 was deducted and called it "difference
between the (above) valuation and the subscription price for
the 8,000,000 shares." Of this $800,000.00 subscription price,
they deducted the sum of $480,297.97 and the difference was
placed as the unpaid portion of the subscription price. In other
words, it was made to appear that they paid in $480,297.97
for the 8,000,000 shares of SAN JOSE OIL. This amount
($480,297.97) was supposedly that $250,000.00 paid by OIL
INVESMENTS for 7,500,000 shares of SAN JOSE OIL,
embodied in the June 14 Agreement, and a sum of
$230,297.97 the amount expended or advanced by OIL
INVESTMENTS to SAN JOSE OIL. And yet, there is still an
item among respondent's liabilities, for $230,297.97
appearing as note payable to Oil Investments, maturing in two
(2) years at six percent (6%) per annum. 11 As far as it
appears from the records, for the 16,000,000 shares at $0.35
per share issued to OIL INVESTMENTS, respondent SAN
JOSE PETROLEUM received from OIL INVESTMENTS only
the note for $250,000.00 plus the 8,000,000 shares of SAN
JOSE OIL, with par value of $0.10 per share or a total of
$1,050,000.00 — the only assets of the corporation. In other
words, respondent actually lost $4,550,000.00, which was
received by OIL INVESTMENTS.
But this is not all. Some of the provisions of the Articles of
Incorporation of respondent SAN JOSE PETROLEUM are
noteworthy; viz:
(1) the directors of the Company need not be
shareholders;
(2) that in the meetings of the board of directors, any
director may be represented and may vote through a
proxy who also need not be a director or stockholder;
and
 (3) that no contract or transaction between the
corporation and any other association or partnership will
be affected, except in case of fraud, by the fact that any
of the directors or officers of the corporation is interested
in, or is a director or officer of, such other association or
partnership, and that no such contract or transaction of
the corporation with any other person or persons, firm,
association or partnership shall be affected by the fact
that any director or officer of the corporation is a party to
or has an interest in, such contract or transaction, or has
in anyway connected with such other person or persons,
firm, association or partnership; and finally, that all and
any of the persons who may become director or officer of
the corporation shall be relieved from all responsibility for
which they may otherwise be liable by reason of any
contract entered into with the corporation, whether it be
for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested.
These provisions are in direct opposition to our corporation
law and corporate practices in this country. These provisions
alone would outlaw any corporation locally organized or doing
business in this jurisdiction. Consider the unique and unusual
provision that no contract or transaction between the
company and any other association or corporation shall be
affected except in case of fraud, by the fact that any of the
directors or officers of the company may be interested in or
are directors or officers of such other association or
corporation; and that none of such contracts or transactions of
this company with any person or persons, firms, associations
or corporations shall be affected by the fact that any director
or officer of this company is a party to or has an interest in
such contract or transaction or has any connection with such
person or persons, firms associations or corporations; and
that any and all persons who may become directors or officers
of this company are hereby relieved of all responsibility which
they would otherwise incur by reason of any contract entered
into which this company either for their own benefit, or for the
benefit of any person, firm, association or corporation in which
they may be interested.
The impact of these provisions upon the traditional judiciary
relationship between the directors and the stockholders of a
corporation is too obvious to escape notice by those who are
called upon to protect the interest of investors. The directors
and officers of the company can do anything, short of actual
fraud, with the affairs of the corporation even to benefit
themselves directly or other persons or entities in which they
are interested, and with immunity because of the advance
condonation or relief from responsibility by reason of such
acts. This and the other provision which authorizes the
election of non-stockholders as directors, completely
disassociate the stockholders from the government and
management of the business in which they have invested.
To cap it all on April 17, 1957, admittedly to assure continuity
of the management and stability of SAN JOSE PETROLEUM,
OIL INVESTMENTS, as holder of the only subscribed stock of
the former corporation and acting "on behalf of all
future holders of voting trust certificates," entered into a voting
trust agreement12 with James L. Buckley and Austin E. Taylor,
whereby said Trustees were given authority to vote the shares
represented by the outstanding trust certificates (including
those that may henceforth be issued) in the following manner:
(a) At all elections of directors, the Trustees will
designate a suitable proxy or proxies to vote for the
 election of directors designated by the Trustees in their
own discretion, having in mind the best interests of the
holders of the voting trust certificates, it being understood
that any and all of the Trustees shall be eligible for
election as directors;
(b) On any proposition for removal of a director, the
Trustees shall designate a suitable proxy or proxies to
vote for or against such proposition as the Trustees in
their own discretion may determine, having in mind the
best interest of the holders of the voting trust certificates;
(c) With respect to all other matters arising at any
meeting of stockholders, the Trustees will instruct such
proxy or proxies attending such meetings to vote the
shares of stock held by the Trustees in accordance with
the written instructions of each holder of voting trust
certificates. (Emphasis supplied.)
It was also therein provided that the said Agreement shall be
binding upon the parties thereto, their successors, and upon
all holders of voting trust certificates.
And these are the voting trust certificates that are offered to
investors as authorized by Security and Exchange
Commissioner. It can not be doubted that the sale of
respondent's securities would, to say the least, work or tend
to work fraud to Philippine investors.
FOR ALL THE FOREGOING CONSIDERATIONS, the motion
of respondent to dismiss this appeal, is denied and the orders
of the Securities and Exchange Commissioner, allowing the
registration of Respondent's securities and licensing their sale
in the Philippines are hereby set aside. The case is remanded
to the Securities and Exchange Commission for appropriate
action in consonance with this decision. With costs. Let a
copy of this decision be furnished the Solicitor General for
whatever action he may deem advisable to take in the
premises. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Regala, Makalintal,
Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.
Castro, J., took no part.
 [G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES,

INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN,
PHILIPPINE FOOTBALL FEDERATION, respondents.

DECISION
KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,
through its managing director, wrote a letter to the Philippine Football Federation
(Federation), through its president private respondent Henri Kahn, wherein the former
offered its services as a travel agency to the latter.[1] The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the
Federation to the South East Asian Games in Kuala Lumpur as well as various other
trips to the People's Republic of China and Brisbane. The total cost of the tickets
amounted to P449,654.83. For the tickets received, the Federation made two partial
payments, both in September of 1989, in the total amount of P176,467.50. [2]
On 4 October 1989, petitioner wrote the Federation, through the private respondent
a demand letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the
Federation, through the Project Gintong Alay, paid the amount of P31,603.00. [4]
On 27 December 1989, Henri Kahn issued a personal check in the amount of
P50,000 as partial payment for the outstanding balance of the Federation. [5]Thereafter,
no further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of
Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the
Federation and impleaded the Federation as an alternative defendant. Petitioner sought
to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the
Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.[6]
Henri Kahn filed his answer with counterclaim. While not denying the allegation that
the Federation owed the amount P207,524.20, representing the unpaid balance for the
plane tickets, he averred that the petitioner has no cause of action against him either in
his personal capacity or in his official capacity as president of the Federation. He
maintained that he did not guarantee payment but merely acted as an agent of the
Federation which has a separate and distinct juridical personality.[7]
On the other hand, the Federation failed to file its answer, hence, was declared in
default by the trial court.[8]
In due course, the trial court rendered judgment and ruled in favor of the petitioner
and declared Henri Kahn personally liable for the unpaid obligation of the Federation. In
arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly
established that defendant Federation is a corporation.The trouble, however, is that
neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving
the corporate existence of the defendant Federation. In paragraph 2 of its complaint,
plaintiff asserted that "Defendant Philippine Football Federation is a sports
association xxx." This has not been denied by defendant Henri Kahn in his Answer.
Being the President of defendant Federation, its corporate existence is within the
personal knowledge of defendant Henri Kahn. He could have easily denied
specifically the assertion of the plaintiff that it is a mere sports association, if it were a
domestic corporation. But he did not.

xxx

A voluntary unincorporated association, like defendant Federation has no power to

enter into, or to ratify, a contract. The contract entered into by its officers or agents on
behalf of such association is not binding on, or enforceable against it. The officers or
agents are themselves personally liable.

x x x[9]
The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the

plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate
computed from July 5, 1990, the date the complaint was filed, until the principal
obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the
counterclaims of the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.[10]

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21
December 1994, the respondent court rendered a decision reversing the trial court, the
decretal portion of said decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby

REVERSED and SET ASIDE and another one is rendered dismissing the complaint
against defendant Henri S. Kahn.[11]

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of
the Federation. It rationalized that since petitioner failed to prove that Henri Kahn
guaranteed the obligation of the Federation, he should not be held liable for the same
as said entity has a separate and distinct personality from its officers.
 Petitioner filed a motion for reconsideration and as an alternative prayer pleaded
that the Federation be held liable for the unpaid obligation. The same was denied by the
appellate court in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly

declaring in the dispositive portion thereof the Philippine Football Federation (PFF) as
liable for the unpaid obligation, it should be remembered that the trial court dismissed
the complaint against the Philippine Football Federation, and the plaintiff did not
appeal from this decision. Hence, the Philippine Football Federation is not a party to
this appeal and consequently, no judgment may be pronounced by this Court against
the PFF without violating the due process clause, let alone the fact that the judgment
dismissing the complaint against it, had already become final by virtue of the
plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly
DENIED.[12]

Petitioner now seeks recourse to this Court and alleges that the respondent court
committed the following assigned errors:[13]
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION
(PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS
HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE
RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF
THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND
CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL
PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE
OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT
PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT
EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE
FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of the
Philippine Football Federation as a juridical person. In the assailed decision, the
appellate court recognized the existence of the Federation. In support of this, the CA
cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine
Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which
said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
recognized the juridical existence of national sports associations. This may be gleaned
from the powers and functions granted to these associations. Section 14 of R.A. 3135
provides:
SEC. 14. Functions, powers and duties of Associations. - The National Sports'
Association shall have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for
the accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation

with the executive committee;

xxx

13. To perform such other acts as may be necessary for the proper accomplishment of
their purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National
sports associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government
which shall be submitted to the Department and any amendment thereto shall take
effect upon approval by the Department: Provided, however, That no team, school,
club, organization, or entity shall be admitted as a voting member of an association
unless 60 per cent of the athletes composing said team, school, club, organization, or
entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the
approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for
the accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and
Asian Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation

with the Department;

xxx
13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly
indicate that these entities may acquire a juridical personality. The power to purchase,
sell, lease and encumber property are acts which may only be done by persons,
whether natural or artificial, with juridical capacity. However, while we agree with the
appellate court that national sports associations may be accorded corporate status,
such does not automatically take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the
State must give its consent either in the form of a special law or a general enabling
act. We cannot agree with the view of the appellate court and the private respondent
that the Philippine Football Federation came into existence upon the passage of these
laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the
Philippine Football Federation. These laws merely recognized the existence of national
sports associations and provided the manner by which these entities may acquire
juridical personality.Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National

Association shall be organized for each individual sports in the Philippines in the
manner hereinafter provided to constitute the Philippine Amateur Athletic Federation.
Applications for recognition as a National Sports' Association shall be filed with the
executive committee together with, among others, a copy of the constitution and by-
laws and a list of the members of the proposed association, and a filing fee of ten
pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that
said association will promote the purposes of this Act and particularly section three
thereof. No application shall be held pending for more than three months after the
filing thereof without any action having been taken thereon by the executive
committee. Should the application be rejected, the reasons for such rejection shall be
clearly stated in a written communication to the applicant. Failure to specify the
reasons for the rejection shall not affect the application which shall be considered as
unacted upon: Provided, however, That until the executive committee herein provided
shall have been formed, applications for recognition shall be passed upon by the duly
elected members of the present executive committee of the Philippine Amateur
Athletic Federation. The said executive committee shall be dissolved upon the
organization of the executive committee herein provided: Provided, further, That the
functioning executive committee is charged with the responsibility of seeing to it that
the National Sports' Associations are formed and organized within six months from
and after the passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as
a national sports association for each individual sport in the Philippines shall be filed
with the Department together with, among others, a copy of the Constitution and By-
Laws and a list of the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national
sports association to be organized will promote the objectives of this Decree and has
substantially complied with the rules and regulations of the
Department: Provided, That the Department may withdraw accreditation or
recognition for violation of this Decree and such rules and regulations formulated by
it.

The Department shall supervise the national sports association: Provided, That the
latter shall have exclusive technical control over the development and promotion of
the particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered
as a national sports association, such entity must be recognized by the accrediting
organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the
Department of Youth and Sports Development under P.D. 604.This fact of recognition,
however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence
of the Federation, Henri Kahn attached to his motion for reconsideration before the trial
court a copy of the constitution and by-laws of the Philippine Football
Federation. Unfortunately, the same does not prove that said Federation has indeed
been recognized and accredited by either the Philippine Amateur Athletic Federation or
the Department of Youth and Sports Development. Accordingly, we rule that the
Philippine Football Federation is not a national sports association within the purview of
the aforementioned laws and does not have corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn should be held liable
for the unpaid obligations of the unincorporated Philippine Football Federation. It is a
settled principal in corporation law that 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.[14] As president of the Federation, Henri Kahn is presumed to have known about
the corporate existence or non-existence of the Federation. We cannot subscribe to the
position taken by the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in such a manner as
to recognize and in effect admit its existence.[15] The doctrine of corporation by estoppel
is mistakenly applied by the respondent court to the petitioner. The application of the
doctrine 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.[16] In the case
at bar, the petitioner is not trying to escape liability from the contract but rather is the
one claiming from the contract.
 WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The
decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is
hereby REINSTATED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.
 [G.R. No. 108576. January 20, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE COURT

OF APPEALS, COURT OF TAX APPEALS and A. SORIANO
CORP., respondents.

DECISION
MARTINEZ, J.:

Petitioner Commissioner of Internal Revenue (CIR) seeks the reversal of the decision of the
Court of Appeals (CA)[1] which affirmed the ruling of the Court of Tax Appeals (CTA)[2] that
private respondent A. Soriano Corporations (hereinafter ANSCOR) redemption and exchange of
the stocks of its foreign stockholders cannot be considered as essentially equivalent to a
distribution of taxable dividends under Section 83(b) of the 1939 Internal Revenue Act[3]
The undisputed facts are as follows:
Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United States,
formed the corporation A. Soriano Y Cia, predecessor of ANSCOR, with a P1,000,000.00
capitalization divided into 10,000 common shares at a par value of P100/share. ANSCOR is
wholly owned and controlled by the family of Don Andres, who are all non-resident aliens.[4] In
1937, Don Andres subscribed to 4,963 shares of the 5,000 shares originally issued.[5]
On September 12, 1945, ANSCORs authorized capital stock was increased to P2,500,000.00
divided into 25,000 common shares with the same par value. Of the additional 15,000 shares,
only 10,000 was issued which were all subscribed by Don Andres, after the other stockholders
waived in favor of the former their pre-emptive rights to subscribe to the new issues.[6] This
increased his subscription to 14,963 common shares.[7] A month later,[8] Don Andres transferred
1,250 shares each to his two sons, Jose and Andres, Jr., as their initial investments in
ANSCOR.[9] Both sons are foreigners.[10]
By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were made
between 1949 and December 20, 1963.[11] On December 30, 1964 Don Andres died. As of that
date, the records revealed that he has a total shareholdings of 185,154 shares[12] - 50,495 of which
are original issues and the balance of 134,659 shares as stock dividend
declarations.[13] Correspondingly, one-half of that shareholdings or 92,577[14] shares were
transferred to his wife, Doa Carmen Soriano, as her conjugal share. The other half formed part of
his estate.[15]
A day after Don Andres died, ANSCOR increased its capital stock to P20M[16] and in 1966
further increased it to P30M.[17] In the same year (December 1966), stock dividends worth 46,290
and 46,287 shares were respectively received by the Don Andres estate[18] and Doa Carmen from
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 and
138,864[19] common shares each.[20]
 On December 28, 1967, Doa Carmen requested a ruling from the United States Internal
Revenue Service (IRS), inquiring if an exchange of common with preferred shares may be
considered as a tax avoidance scheme[21] under Section 367 of the 1954 U.S. Revenue Act.[22] By
January 2, 1968, ANSCOR reclassified its existing 300,000 common shares into 150,000
common and 150,000 preferred shares.[23]
In a letter-reply dated February 1968, the IRS opined that the exchange is only a
recapitalization scheme and not tax avoidance.[24] Consequently,[25] on March 31, 1968 Doa
Carmen exchanged her whole 138,864 common shares for 138,860 of the newly reclassified
preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its common shares for
the remaining 11,140 preferred shares, thus reducing its (the estate) common shares to
127,727.[26]
On June 30, 1968, pursuant to a Board Resolution, ANSCOR redeemed 28,000 common
shares from the Don Andres estate. By November 1968, the Board further increased ANSCORs
capital stock to P75M divided into 150,000 preferred shares and 600,000 common
shares.[27] About a year later, ANSCOR again redeemed 80,000 common shares from the Don
Andres estate,[28] further reducing the latters common shareholdings to 19,727. As stated in the
board Resolutions, ANSCORs business purpose for both redemptions of stocks is to partially
retire said stocks as treasury shares in order to reduce the companys foreign exchange
remittances in case cash dividends are declared.[29]
In 1973, after examining ANSCORs books of account and records, Revenue examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-source,
pursuant to Sections 53 and 54 of the 1939 Revenue Code,[30] for the year 1968 and the second
quarter of 1969 based on the transactions of exchange and redemption of stocks.[31] The Bureau
of Internal Revenue (BIR) made the corresponding assessments despite the claim of ANSCOR
that it availed of the tax amnesty under Presidential Decree (P.D.) 23[32] which were amended by
P.D.s 67 and 157.[33] However, petitioner ruled that the invoked decrees do not cover Sections 53
and 54 in relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was
assessed.[34] ANSCORs subsequent protest on the assessments was denied in 1983 by
petitioner.[35]
Subsequently, ANSCOR filed a petition for review with the CTA assailing the tax
assessments on the redemptions and exchange of stocks. In its decision, the Tax Court reversed
petitioners ruling, after finding sufficient evidence to overcome the prima facie correctness of the
questioned assessments.[36] In a petition for review, the CA, as mentioned, affirmed the ruling of
the CTA.[37] Hence, this petition.
The bone of contention is the interpretation and application of Section 83(b) of the 1939
Revenue Act[38] which provides:

Sec. 83. Distribution of dividends or assets by corporations.

(b) Stock dividends A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. However, if a corporation cancels or redeems stock
issued as a dividend at such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it
represents a distribution of earnings or profits accumulated after March first, nineteen
hundred and thirteen. (Italics supplied).

Specifically, the issue is whether ANSCORs redemption of stocks from its stockholder as well as
the exchange of common with preferred shares can be considered as essentially equivalent to the
distribution of taxable dividend, making the proceeds thereof taxable under the provisions of the
above-quoted law.
Petitioner contends that the exchange transaction is tantamount to cancellation under Section
83(b) making the proceeds thereof taxable. It also argues that the said Section applies to stock
dividends which is the bulk of stocks that ANSCOR redeemed. Further, petitioner claims that
under the net effect test, the estate of Don Andres gained from the redemption. Accordingly, it
was the duty of ANSCOR to withhold the tax-at-source arising from the two transactions,
pursuant to Section 53 and 54 of the 1939 Revenue Act.[39]
ANSCOR, however, avers that it has no duty to withhold any tax either from the Don
Andres estate or from Doa Carmen based on the two transactions, because the same were done
for legitimate business purposes which are (a) to reduce its foreign exchange remittances in the
event the company would declare cash dividends,[40] and to (b) subsequently filipinized
ownership of ANSCOR, as allegedly envisioned by Don Andres.[41] It likewise invoked the
amnesty provisions of P.D. 67.
We must emphasize that the application of Sec. 83(b) depends on the special factual
circumstances of each case.[42] The findings of facts of a special court (CTA) exercising particular
expertise on the subject of tax, generally binds this Court,[43] considering that it is substantially
similar to the findings of the CA which is the final arbiter of questions of facts. [44] The issue in
this case does not only deal with facts but whether the law applies to a particular set of facts.
Moreover, this Court is not necessarily bound by the lower courts conclusions of law drawn from
such facts.[45]
AMNESTY:
We will deal first with the issue of tax amnesty. Section 1 of P.D. 67[46] provides:
I. In all cases of voluntary disclosures of previously untaxed income and/or
wealth such as earnings, receipts, gifts, bequests or any other acquisitions from
any source whatsoever which are taxable under the National Internal Revenue
Code, as amended, realized here or abroad by any taxpayer, natural or juridical;
the collection of all internal revenue taxes including the increments or penalties
or account of non-payment as well as all civil, criminal or administrative
liabilities arising from or incident to such disclosures under the National
Internal Revenue Code, the Revised Penal Code, the Anti-Graft and Corrupt
Practices Act, the Revised Administrative Code, the Civil Service laws and
regulations, laws and regulations on Immigration and Deportation, or any other
applicable law or proclamation, are hereby condoned and, in lieu thereof, a tax
 of ten (10%) per centum on such previously untaxed income or wealthis hereby
imposed, subject to the following conditions: (conditions omitted) [Emphasis
supplied].
The decree condones the collection of all internal revenue taxes including the increments or
penalties or account of non-payment as well as all civil, criminal or administrative liabilities
arising from or incident to (voluntary) disclosures under the NIRC of previously untaxed income
and/or wealth realized here or abroad by any taxpayer, natural or juridical.
May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the
amnesty? An income taxpayer covers all persons who derive taxable income.[47]ANSCOR was
assessed by petitioner for deficiency withholding tax under Section 53 and 54 of the 1939 Code.
As such, it is being held liable in its capacity as a withholding agent and not in its personality as
a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate
entity acting no more than an agent of the government for the collection of the tax [48] in order to
ensure its payments;[49] the payer is the taxpayer he is the person subject to tax impose by
law;[50] and the payee is the taxing authority.[51] In other words, the withholding agent is merely a
tax collector, not a taxpayer. Under the withholding system, however, the agent-payor becomes a
payee by fiction of law. His (agent) liability is direct and independent from the
taxpayer,[52] because the income tax is still impose on and due from the latter. The agent is not
liable for the tax as no wealth flowed into him he earned no income. The Tax Code only makes
the agent personally liable for the tax[53] (c) 1939 Tax Code, as amended by R.A. No. 2343 which
provides in part that xxx Every such person is made personally liable for such tax xxx.53 arising
from the breach of its legal duty to withhold as distinguish from its duty to pay tax since:
the governments cause of action against the withholding agent is not for the
collection of income tax, but for the enforcement of the withholding provision
of Section 53 of the Tax Code, compliance with which is imposed on the
withholding agent and not upon the taxpayer.[54]
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction, is not protected by
the amnesty under the decree.

Codal provisions on withholding tax are mandatory and must be complied with by the
withholding agent.[55] The taxpayer should not answer for the non-performance by the
withholding agent of its legal duty to withhold unless there is collusion or bad faith. The former
could not be deemed to have evaded the tax had the withholding agent performed its duty. This
could be the situation for which the amnesty decree was intended. Thus, to curtail tax evasion
and give tax evaders a chance to reform,[56] it was deemed administratively feasible to grant tax
amnesty in certain instances. In addition, a tax amnesty, much like a tax exemption, is never
favored nor presumed in law and if granted by a statute, the terms of the amnesty like that of a
tax exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority.[57] The rule on strictissimi juris equally applies.[58] So that, any doubt in the application
of an amnesty law/decree should be resolved in favor of the taxing authority.
 Furthermore, ANSCORs claim of amnesty cannot prosper. The implementing rules of P.D.
370 which expanded amnesty on previously untaxed income under P.D. 23 is very explicit, to
wit:

Section 4. Cases not covered by amnesty. The following cases are not covered by the
amnesty subject of these regulations:

xxx xxx xxx

(2) Tax liabilities with or without assessments, on withholding tax at source provided
under Sections 53 and 54 of the National Internal Revenue Code, as amended;[59]

ANSCOR was assessed under Sections 53 and 54 of the 1939 Tax Code. Thus, by specific
provision of law, it is not covered by the amnesty.

TAX ON STOCK DIVIDENDS

General Rule

Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue
Code of 1928.[60] It laid down the general rule known as the proportionate test[61]wherein stock
dividends once issued form part of the capital and, thus, subject to income tax.[62] Specifically,
the general rule states that:

A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.

Having been derived from a foreign law, resort to the jurisprudence of its origin may shed
light. Under the US Revenue Code, this provision originally referred to stock dividends only,
without any exception. Stock dividends, strictly speaking, represent capital and do not constitute
income to its recipient.[63] So that the mere issuance thereofis not yet subject to income tax [64] as
they are nothing but an enrichment through increase in value of capital investment. [65] As capital,
the stock dividends postpone the realization of profits because the fund represented by the new
stock has been transferred from surplus to capital and no longer available for actual
distribution.[66] Income in tax law is an amount of money coming to a person within a specified
time, whether as payment for services, interest, or profit from investment.[67] It means cash or its
equivalent.[68] It is gain derived and severed from capital,[69] from labor or from both
combined[70] - so that to tax a stock dividend would be to tax a capital increase rather than the
income.[71] In a loose sense, stock dividends issued by the corporation, are considered unrealized
gain, and cannot be subjected to income tax until that gain has been realized. Before the
realization, stock dividends are nothing but a representation of an interest in the corporate
properties.[72] As capital, it is not yet subject to income tax. It should be noted that capital and
income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of
wealth.[73] The determining factor for the imposition of income tax is whether any gain or profit
was derived from a transaction.[74]
 The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time

and in such manner as to make the distribution and cancellation or redemption, in
whole or in part, essentially equivalent to the distribution of a taxable dividend, the
amount so distributed in redemption or cancellation of the stock shall be considered
as taxable income to the extent it represents a distribution of earnings or
profitsaccumulated after March first, nineteen hundred and thirteen. (Emphasis
supplied).

In a response to the ruling of the American Supreme Court in the case of Eisner v.
Macomber[75] (that pro rata stock dividends are not taxable income), the exempting clause above
quoted was added because corporations found a loophole in the original provision. They resorted
to devious means to circumvent the law and evade the tax. Corporate earnings would be
distributed under the guise of its initial capitalization by declaring the stock dividends previously
issued and later redeem said dividends by paying cash to the stockholder. This process of
issuance-redemption amounts to a distribution of taxable cash dividends which was just delayed
so as to escape the tax. It becomes a convenient technical strategy to avoid the effects of
taxation.

Thus, to plug the loophole the exempting clause was added. It provides that the redemption or
cancellation of stock dividends, depending on the time and manner it was made is essentially
equivalent to a distribution of taxable dividends, making the proceeds thereof taxable income to
the extent it represents profits. The exception was designed to prevent the issuance and
cancellation or redemption of stock dividends, which is fundamentally not taxable, from being
made use of as a device for the actual distribution of cash dividends, which is taxable.[76] Thus,

the provision had the obvious purpose of preventing a corporation from

avoiding dividend tax treatment by distributing earnings to its shareholders in
two transactions a pro rata stock dividend followed by a pro rata redemption
that would have the same economic consequences as a simple dividend.[77]
Although redemption and cancellation are generally considered capital transactions, as such, they
are not subject to tax. However, it does not necessarily mean that a shareholder may not realize a
taxable gain from such transactions.[78] Simply put, depending on the circumstances, the proceeds
of redemption of stock dividends are essentially distribution of cash dividends, which when paid
becomes the absolute property of the stockholder. Thereafter, the latter becomes the exclusive
owner thereof and can exercise the freedom of choice[79] Having realized gain from that
redemption, the income earner cannot escape income tax.[80]
As qualified by the phrase such time and in such manner, the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of
stock dividends.[81] So that, whether the amount distributed in the redemption should be treated as
the equivalent of a taxable dividend is a question of fact,[82] which is determinable on the basis of
the particular facts of the transaction in question.[83] No decisive test can be used to determine the
application of the exemption under Section 83(b) The use of the words such manner and
essentially equivalent negative any idea that a weighted formula can resolve a crucial issue
Should the distribution be treated as taxable dividend.[84] On this aspect, American courts
developed certain recognized criteria, which includes the following:[85]
1) the presence or absence of real business purpose,
2) the amount of earnings and profits available for the declaration of a regular dividend and the
corporations past record with respect to the declaration of dividends,
3) the effect of the distribution as compared with the declaration of regular dividend,
4) the lapse of time between issuance and redemption,[86]
5) the presence of a substantial surplus[87] and a generous supply of cash which invites suspicion
as does a meager policy in relation both to current earnings and accumulated surplus.[88]

REDEMPTION AND CANCELLATION

For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is
redemption or cancellation; (b) the transaction involves stock dividends and (c) the time and
manner of the transaction makes it essentially equivalent to a distribution of taxable dividends.
Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the
stock[89] in exchange for property, whether or not the acquired stock is cancelled, retired or held
in the treasury.[90] Essentially, the corporation gets back some of its stock, distributes cash or
property to the shareholder in payment for the stock, and continues in business as before. The
redemption of stock dividends previously issued is used as a veil for the constructive distribution
of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of
stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where
did the shares redeemed come from? If its source is the original capital subscriptions upon
establishment of the corporation or from initial capital investment in an existing enterprise, its
redemption to the concurrent value of acquisition may not invite the application of Sec. 83(b)
under the 1939 Tax Code, as it is not income but a mere return of capital. On the contrary, if the
redeemed shares are from stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain
thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as
taxable dividends. Here, it is undisputed that at the time of the last redemption, the original
common shares owned by the estate were only 25,247.5.[91] This means that from the total of
108,000 shares redeemed from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must
have come from stock dividends. Besides, in the absence of evidence to the contrary, the Tax
Code presumes that every distribution of corporate property, in whole or in part, is made out of
corporate profits,[92] such as stock dividends. The capital cannot be distributed in the form
of redemption of stock dividends without violating the trust fund doctrine wherein the capital
stock, property and other assets of the corporation are regarded as equity in trust for the payment
of the corporate creditors.[93] Once capital, it is always capital.[94] That doctrine was intended for
the protection of corporate creditors.[95]
 With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3
years earlier. The time alone that lapsed from the issuance to the redemption is not a sufficient
indicator to determine taxability. It is a must to consider the factual circumstances as to the
manner of both the issuance and the redemption. The time element is a factor to show a device to
evade tax and the scheme of cancelling or redeeming the same shares is a method usually
adopted to accomplish the end sought.[96] Was this transaction used as a continuing plan, device
or artifice to evade payment of tax? It is necessary to determine the net effect of the transaction
between the shareholder-income taxpayer and the acquiring (redeeming) corporation.[97] The net
effect test is not evidence or testimony to be considered; it is rather an inference to be drawn or a
conclusion to be reached.[98] It is also important to know whether the issuance of stock dividends
was dictated by legitimate business reasons, the presence of which might negate a tax evasion
plan.[99]
The issuance of stock dividends and its subsequent redemption must be separate, distinct,
and not related, for the redemption to be considered a legitimate tax scheme.[100] Redemption
cannot be used as a cloak to distribute corporate earnings.[101] Otherwise, the apparent intention to
avoid tax becomes doubtful as the intention to evade becomes manifest. It has been ruled that:

[A]n operation with no business or corporate purpose is a mere devise which put on
the form of a corporate reorganization as a disguise for concealing its real character,
and the sole object and accomplishment of which was the consummation of a
preconceived plan, not to reorganize a business or any part of a business, but to
transfer a parcel of corporate shares to a stockholder.[102]

Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not be
applicable if the redeemed shares were issued with bona fide business purpose,[103] which is
judged after each and every step of the transaction have been considered and the whole
transaction does not amount to a tax evasion scheme.

ANSCOR invoked two reasons to justify the redemptions (1) the alleged filipinization
program and (2) the reduction of foreign exchange remittances in case cash dividends are
declared. The Court is not concerned with the wisdom of these purposes but on their relevance to
the whole transaction which can be inferred from the outcome thereof. Again, it is the net
effect rather than the motives and plans of the taxpayer or his corporation[104] that is the
fundamental guide in administering Sec. 83(b). This tax provision is aimed at the result.[105] It
also applies even if at the time of the issuance of the stock dividend, there was no intention to
redeem it as a means of distributing profit or avoiding tax on dividends.[106] The existence of
legitimate business purposes in support of the redemption of stock dividends is immaterial in
income taxation. It has no relevance in determining dividend equivalence. [107] Such purposes may
be material only upon the issuance of the stock dividends. The test of taxability under the
exempting clause, when it provides such time and manner as would make the redemption
essentially equivalent to the distribution of a taxable dividend, is whether the
redemption resulted into a flow of wealth. If no wealth is realized from the redemption, there
may not be a dividend equivalence treatment. In the metaphor of Eisner v. Macomber, income is
not deemed realize until the fruit has fallen or been plucked from the tree.
 The three elements in the imposition of income tax are: (1) there must be gain or profit, (2)
that the gain or profit is realized or received, actually or constructively, [108]and (3) it is not
exempted by law or treaty from income tax. Any business purpose as to why or how the income
was earned by the taxpayer is not a requirement. Income tax is assessed on income received from
any property, activity or service that produces the income because the Tax Code stands as an
indifferent neutral party on the matter ofwhere income comes from.[109]
As stated above, the test of taxability under the exempting clause of Section 83(b) is,
whether income was realized through the redemption of stock dividends. The redemption
converts into money the stock dividends which become a realized profit or gain and
consequently, the stockholders separate property.[110] Profits derived from the capital invested
cannot escape income tax. As realized income, the proceeds of the redeemed stock dividends can
be reached by income taxation regardless of the existence of any business purpose for the
redemption. Otherwise, to rule that the said proceeds are exempt from income tax when the
redemption is supported by legitimate business reasons would defeat the very purpose of
imposing tax on income. Such argument would open the door for income earners not to pay tax
so long as the person from whom the income was derived has legitimate business reasons. In
other words, the payment of tax under the exempting clause of Section 83(b) would be made to
depend not on the income of the taxpayer but on the business purposes of a third party (the
corporation herein) from whom the income was earned. This is absurd, illogical and impractical
considering that the Bureau of Internal Revenue (BIR) would be pestered with instances in
determining the legitimacy of business reasons that every income earner may interposed. It is not
administratively feasible and cannot therefore be allowed.
The ruling in the American cases cited and relied upon by ANSCOR that the redeemed
shares are the equivalent of dividend only if the shares were not issued for genuine business
purposes[111] or the redeemed shares have been issued by a corporation bona fide[112] bears no
relevance in determining the non-taxability of the proceeds of redemption. ANSCOR, relying
heavily and applying said cases, argued that so long as the redemption is supported by valid
corporate purposes the proceeds are not subject to tax.[113] The adoption by the courts
below [114] of such argument is misleading if not misplaced. A review of the cited American cases
shows that the presence or absence of genuine business purposes may be material with respect to
the issuance or declaration of stock dividends but not on its subsequent redemption. The issuance
and the redemption of stocks are two different transactions. Although the existence of legitimate
corporate purposes may justify a corporations acquisition of its own shares under Section 41 of
the Corporation Code,[115] such purposes cannot excuse the stockholder from the effects of
taxation arising from the redemption. If the issuance of stock dividends is part of a tax evasion
plan and thus, without legitimate business reasons the redemption becomes suspicious which
may call for the application of the exempting clause. The substance of the whole transaction, not
its form, usually controls the tax consequences.[116]
The two purposes invoked by ANSCOR under the facts of this case are no excuse for its tax
liability. First, the alleged filipinization plan cannot be considered legitimate as it was not
implemented until the BIR started making assessments on the proceeds of the redemption. Such
corporate plan was not stated in nor supported by any Board Resolution but a mere afterthought
interposed by the counsel of ANSCOR. Being a separate entity, the corporation can act only
through its Board of Directors.[117] The Board Resolutions authorizing the redemptions state only
one purpose reduction of foreign exchange remittances in case cash dividends are declared. Not
even this purpose can be given credence. Records show that despite the existence of enormous
corporate profits no cash dividend was ever declared by ANSCOR from 1945 until the BIR
started making assessments in the early 1970s. Although a corporation under certain exceptions,
has the prerogative when to issue dividends, yet when no cash dividends was issued for about
three decades, this circumstance negates the legitimacy of ANSCORs alleged purposes.
Moreover, to issue stock dividends is to increase the shareholdings of ANSCORs foreign
stockholders contrary to its filipinization plan. This would also increase rather than reduce their
need for foreign exchange remittances in case of cash dividend declaration, considering that
ANSCOR is a family corporation where the majority shares at the time of redemptions were held
by Don Andres foreign heirs.
Secondly, assuming arguendo, that those business purposes are legitimate, the same cannot
be a valid excuse for the imposition of tax. Otherwise, the taxpayers liability to pay income tax
would be made to depend upon a third person who did not earn the income being taxed.
Furthermore, even if the said purposes support the redemption and justify the issuance of stock
dividends, the same has no bearing whatsoever on the imposition of the tax herein assessed
because the proceeds of the redemption are deemed taxable dividends since it was shown that
income was generated therefrom.
Thirdly, ANSCOR argued that to treat as taxable dividend the proceeds of the redeemed
stock dividends would be to impose on such stock an undisclosed lien and would be extremely
unfair to intervening purchasers, i.e. those who buys the stock dividends after their
issuance.[118] Such argument, however, bears no relevance in this case as no intervening buyer is
involved. And even if there is an intervening buyer, it is necessary to look into the factual milieu
of the case if income was realized from the transaction. Again, we reiterate that the dividend
equivalence test depends on such time and manner of the transaction and its net effect. The
undisclosed lien[119] may be unfair to a subsequent stock buyer who has no capital interest in the
company. But the unfairness may not be true to an original subscriber like Don Andres, who
holds stock dividends as gains from his investments. The subsequent buyer who buys stock
dividends is investing capital. It just so happen that what he bought is stock dividends. The effect
of its (stock dividends) redemption from that subsequent buyer is merely to return his capital
subscription, which is income if redeemed from the original subscriber.
After considering the manner and the circumstances by which the issuance and redemption
of stock dividends were made, there is no other conclusion but that the proceeds thereof are
essentially considered equivalent to a distribution of taxable dividends. As taxable dividend
under Section 83(b), it is part of the entire income subject to tax under Section 22 in relation to
Section 21[120] of the 1939 Code. Moreover, under Section 29(a) of said Code, dividends are
included in gross income. As income, it is subject to income tax which is required to be withheld
at source. The 1997 Tax Code may have altered the situation but it does not change this
disposition.

EXCHANGE OF COMMON WITH PREFERRED SHARES[121]

Exchange is an act of taking or giving one thing for another[122] involving reciprocal
transfer[123] and is generally considered as a taxable transaction. The exchange of common stocks
with preferred stocks, or preferred for common or a combination of either for both, may not
produce a recognized gain or loss, so long as the provisions of Section 83(b) is not applicable.
This is true in a trade between two (2) persons as well as a trade between a stockholder and a
corporation. In general, this trade must be parts of merger, transfer to controlled corporation,
corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized
on exchange of property, stock or securities related to reorganizations.[124]
Both the Tax Court and the Court of Appeals found that ANSCOR reclassified its shares
into common and preferred, and that parts of the common shares of the Don Andres estate and all
of Doa Carmens shares were exchanged for the whole 150, 000 preferred shares. Thereafter, both
the Don Andres estate and Doa Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares. There was no change in their proportional interest
after the exchange. There was no cash flow. Both stocks had the same par value. Under the facts
herein, any difference in their market value would be immaterial at the time of exchange because
no income is yet realized it was a mere corporate paper transaction. It would have been different,
if the exchange transaction resulted into a flow of wealth, in which case income tax may be
imposed.[125]
Reclassification of shares does not always bring any substantial alteration in the subscribers
proportional interest. But the exchange is different there would be a shifting of the balance of
stock features, like priority in dividend declarations or absence of voting rights. Yet neither the
reclassification nor exchange per se, yields realize income for tax purposes. A common stock
represents the residual ownership interest in the corporation. It is a basic class of stock ordinarily
and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro
rata division of profits.[126] Preferred stocks are those which entitle the shareholder to some
priority on dividends and asset distribution.[127]
Both shares are part of the corporations capital stock. Both stockholders are no different
from ordinary investors who take on the same investment risks. Preferred and common
shareholders participate in the same venture, willing to share in the profits and losses of the
enterprise.[128] Moreover, under the doctrine of equality of shares all stocks issued by the
corporation are presumed equal with the same privileges and liabilities, provided that the Articles
of Incorporation is silent on such differences.[129] In this case, the exchange of shares, without
more, produces no realized income to the subscriber. There is only a modification of the
subscribers rights and privileges - which is not a flow of wealth for tax purposes. The issue of
taxable dividend may arise only once a subscriber disposes of his entire interest and not when
there is still maintenance of proprietary interest.[130]
WHEREFORE, premises considered, the decision of the Court of Appeals is MODIFIED
in that ANSCORs redemption of 82,752.5 stock dividends is hereinconsidered as essentially
equivalent to a distribution of taxable dividends for which it is LIABLE for the withholding tax-
at-source. The decision is AFFIRMED in all other respects.
SO ORDERED.
 [G.R. No. 127937. July 28, 1999]

NATIONAL TELECOMMUNICATIONS COMMISSION, petitioner,

vs. HONORABLE COURT OF APPEALS and PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY, respondents.

DECISION
PURISIMA, J.:

At bar is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court
seeking to modify the October 30, 1996 Decision[1] and the January 27, 1997 Resolution[2] of the
Court of Appeals[3] in CA-G.R. SP No. 34063.
The antecedent facts that matter can be culled as follows:
Sometime in 1988, the National Telecommunications Commission (NTC) served on the
Philippine Long Distance Telephone Company (PLDT) the following assessment notices and
demands for payment:

1. the amount of P7,495,161.00 as supervision and regulation fee under Section 40 (e)
of the PSA for the said year, 1988, computed at P0.50 per P100.00 of the Protestants
(PLDT) outstanding capital stock as at December 31, 1987 which then consisted of
Serial Preferred Stock amounting to P1,277,934,390.00 (Billion) and Common Stock
of P221,097,785 (Million) or a total of P1,499,032,175.00 (Billion).

2. the amount of P9.0 Million as permit fee under Section 40 (f) of the PSA for the
approval of the protestants increase of its authorized capital stock from P2.7 Billion to
P4.5 Billion; and

3. the amounts of P12,261,600.00 and P33,472,030.00 as permit fees under Section 40

(g) of the PSA in connection with the Commissions decisions in NTC Cases Nos. 86-
13 and 87-008 respectively, approving the Protestants equity participation in the Fiber
Optic Interpacific Cable systems and X-5 Service Improvement and Expansion
Program.[4]

In its two letter-protests[5] dated February 23, 1988 and July 14, 1988, and position
papers[6] dated November 8, 1990 and March 12, 1991, respectively, the PLDT challenged the
aforesaid assessments, theorizing inter alia that:

(a) The assessments were being made to raise revenues and not as mere
reimbursements for ctual regulatory expenses in violation of the doctrine in PLDT vs.
PSC, 66 SCRA 341 [1975];
(b) The assessment under Section 40 (e) should only have been on the basis of the par
values of private respondents outstanding capital stock;

(c) Petitioner has no authority to compel private respondents payment of the assessed
fees under Section 40 (f) for the increase of its authorized capital stock since
petitioner did not render any supervisory or regulatory activity and incurred no
expenses in relation thereto.

x x x[7]
On September 29, 1993, the NTC rendered a Decision[8] in NTC Case No. 90-223, denying the
protest of PLDT and disposing thus:

FOR ALL THE FOREGOING, finding PLDTs protest to be without merit, the
Commission has no alternative but to uphold the law and DENIES the protest of
PLDT. Unless otherwise restrained by a competent court of law, the Common Carrier
Authorization Department (CCAD) is hereby directed to update its assessments and
collections on PLDT and all public telecommunications carriers for the payment of
the fees in accordance with the provisions of Section 40 (e) (f) and (g) of the Revised
NTC Schedule of Fees and Charges.

This decision takes effect immediately.

SO ORDERED.

On October 22, 1993, PLDT interposed a Motion for Reconsideration,[9] which was denied
by NTC in an Order[10] issued on May 3, 1994.
On May 12, 1994, PLDT appealed the aforesaid Decision to the Court of Appeals, which
came out with its questioned Decision of October 30, 1996, modifying the disposition of NTC as
follows:

"WHEREFORE, the assailed decision and order of the respondent Commission dated
September 29, 1993 and May 03, 1994, respectively, in NTC Case No. 90-223 are
hereby MODIFIED. The Commission is ordered to recompute its assessments and
demands for payment from petitioner PLDT as follows:

A. For annual supervision and regulation fees (SRF) under Section 40 (e) of the
Public Service Act, as amended, they should be computed at fifty centavos for each
one hundred pesos or fraction thereof of the par value of the capital stock subscribed
or paid excluding stock dividends, premiums or capital in excess of par.

B. For permit fees for the approval of petitioners increase of authorized capital stock
under Section 40 (f) of the same Act, they should be computed at fifty for each one
hundred pesos or fraction thereof, regardless of any regulatory service or expense
incurred by respondent.

On November 20, 1996, NTC moved for partial reconsideration of the abovementioned
Decision, with respect to the basis of the assessment under Section 40(e), i.e., par value of the
subscribed capital stock. It also sought a partial reconsideration of the fee of fifty (P0.50)
centavos for the issuance or increasing of the capital stock under Section 40 (f).[11]
With the denial of its motions for reconsideration by the Resolution of the Court of Appeals
dated January 27, 1997, petitioner found its way to this Court via the present Petition; posing as
sole issue:

WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE

COMPUTATION OF SUPERVISION AND REGULATION FEES UNDER
SECTION 40 (F) OF THE PUBLIC SERVICE ACT SHOULD BE BASED ON
THE PAR VALUE OF THE SUBSCRIBED CAPITAL STOCK.

Simply put, the submission of NTC is that the fee under Section 40 (e) should be based on
the market value of PLDTs outstanding capital stock inclusive of stock dividends and premium,
and not on the par value of PLDTs capital stock excluding stock dividends and premium, as
contended by PLDT.
Succinct and clear is the ruling of this Court in the case of Philippine Long Distance
Telephone Company vs. Public Service Commission, 66 SCRA 341, that the basis for
computation of the fee to be charged by NTC on PLDT, is the capital stock subscribed or
paid and not, alternatively, the property and equipment.
The law in point is clear and categorical. There is no room for construction. It simply calls
for application. To repeat, the fee in question is based on the capital stock subscribed or paid,
nothing less nothing more.
It bears stressing that it is not the NTC that imposed such a fee. It is the legislature
itself. Since Congress has the power to exercise the State inherent powers of Police Power,
Eminent Domain and Taxation, the distinction between police power and the power to tax, which
could be significant if the exercising authority were mere political subdivisions (since delegation
by it to such political subdivisions of one power does not necessarily include the other), would
not be of any moment when, as in the case under consideration, Congress itself exercises the
power. All that is to be done would be to apply and enforce the law when sufficiently definitive
and not constitutional infirm.
The term capital and other terms used to describe the capital structure of a corporation are of
universal acceptance, and their usages have long been established in jurisprudence. Briefly,
capital refers to the value of the property or assets of a corporation. The capital subscribed is the
total amount of the capital that persons (subscribers or shareholders) have agreed to take and pay
for, which need not necessarily be, and can be more than, the par value of the shares. In fine, it is
the amount that the corporation receives, inclusive of the premiums if any, in consideration of
the original issuance of the shares. In the case of stock dividends, it is the amount that the
corporation transfers from its surplus profit account to its capital account. It is the same amount
that can loosely be termed as the trust fund of the corporation. The Trust Fund doctrine considers
this subscribed capital as a trust fund for the payment of the debts of the corporation, to which
the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the
subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the
subscribed capital; subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the consideration therefor.[12]
In the same way that the Court in PLDT vs. PSC has rejected the value of the property and
equipment as being the proper basis for the fee imposed by Section 40(e) of the Public Service
Act, as amended by Republic Act No. 3792, so also must the Court disallow the idea of
computing the fee on the par value of [PLDTs] capital stock subscribed or paid excluding stock
dividends, premiums, or capital in excess of par. Neither, however, is the assessment made by
the National Telecommunications Commission on the basis of the market value of the
subscribed or paid-in capital stock acceptable since it is itself a deviation from the explicit
language of the law.
From the pleadings on hand, it can be gleaned that the assessment for supervision and
regulation fee under Section 40(e) made by NTC for 1988, computed at P0.50 per 100 of
PLDTs outstanding capital stock as of December 31, 1987, amounted to P7,495,161.00. The
same was based on the amount of P1,277,934,390.00 of serial preferred stocks and
P221,097,785.00 of common stocks or a total of P1,499,032,175.00. The assessment was
reported to include stock dividends, premium on issued common shares and premium on
preferred shares converted into common stock.[13] The actual capital paid or the amount of capital
stock paid and for which PLDT received actual payments were not disclosed or extant in the
records before the Court. The only other item available is the amount assessed by petitioner from
PLDT, which had been based on market value of the outstanding capital stock on given dates.[14]
All things studiedly considered, and mindful of the aforesaid ruling of this Court in the case
of Philippine Long Distance Telephone Company vs. Public Service Commission, it should be
reiterated that the proper basis for the computation of subject fee under Section 40(e) of the
Public Service Act, as amended by Republic Act No. 3792, is the capital stock subscribed or
paid and not, alternatively, the property and equipment.
WHEREFORE, the decision of the Court of Appeals, dated October 30, 1996, and its
Resolution, dated January 27, 1997, in CA G.R. SP No. 34063, as well as the decision of the
National Telecommunication Commission, dated September 29, 1993, and Order, dated May 3,
1994, in NTC case No. 90-223, are hereby SET ASIDE and the National Telecommunication
Commission is hereby ordered to make a re-computation of the fee to be imposed on Philippine
Long Distance Telephone Company on the basis of the latters capital stock subscribed or paid
and strictly in accordance with the foregoing disquisition and conclusion.
No pronouncement as to costs.
SO ORDERED.
Romero, (Chairman), Vitug, and Gonzaga-Reyes, JJ., concur.
G.R. No. L-28351 July 28, 1977
UNIVERSAL MILLS CORPORATION, petitioner,
vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.
Emigdio G. Tanjuatco for petitioner.
Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.

BARREDO, J.:
Appeal from the order of the Securities and Exchange
Commission in S.E.C. Case No. 1079, entitled In the Matter of
the Universal Textile Mills, Inc. vs. Universal Mills
Corporation, a petition to have appellant change its corporate
name on the ground that such name is "confusingly and
deceptively similar" to that of appellee, which petition the
Commission granted.
According to the order, "the Universal Textile Mills, Inc. was
organ on December 29, 1953, as a textile manufacturing firm
for which it was issued a certificate of registration on January
8, 1954. The Universal Mills Corporation, on the other hand,
was registered in this Commission on October 27, 1954,
under its original name, Universal Hosiery Mills Corporation,
having as its primary purpose the "manufacture and
production of hosieries and wearing apparel of all kinds." On
May 24, 1963, it filed an amendment to its articles of
incorporation changing its name to Universal Mills
Corporation, its present name, for which this Commission
issued the certificate of approval on June 10, 1963.
The immediate cause of this present complaint, however, was
the occurrence of a fire which gutted respondent's spinning
mills in Pasig, Rizal. Petitioner alleged that as a result of this
fire and because of the similarity of respondent's name to that
of herein complainant, the news items appearing in the
various metropolitan newspapers carrying reports on the fire
created uncertainty and confusion among its bankers, friends,
stockholders and customers prompting petitioner to make
announcements, clarifying the real Identity of the corporation
whose property was burned. Petitioner presented
documentary and testimonial evidence in support of this
allegation.
On the other hand, respondent's position is that the
names of the two corporations are not similar and
even if there be some similarity, it is not confusing or
deceptive; that the only reason that respondent
changed its name was because it expanded its
business to include the manufacture of fabrics of all
kinds; and that the word 'textile' in petitioner's name
is dominant and prominent enough to distinguish the
two. It further argues that petitioner failed to present
evidence of confusion or deception in the ordinary
course of business; that the only supposed
confusion proved by complainant arose out of an
extraordinary occurrence — a disastrous fire. (pp.
16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the jurisprudence on the
matter, it appears necessary under the
circumstances to enjoin the respondent Universal
Mills Corporation from further using its present
corporate name. Judging from what has already
happened, confusion is not only apparent, but
possible. It does not matter that the instance of
confusion between the two corporate names was
occasioned only by a fire or an extraordinary
occurrence. It is precisely the duty of this
Commission to prevent such confusion at all times
and under all circumstances not only for the purpose
of protecting the corporations involved but more so
for the protection of the public.
In today's modern business life where people go by
tradenames and corporate images, the corporate
name becomes the more important. This
Commission cannot close its eyes to the fact that
usually it is the sound of all the other words
composing the names of business corporations that
sticks to the mind of those who deal with them. The
word "textile" in Universal Textile Mills, Inc.' can not
possibly assure the exclusion of all other entities
with similar names from the mind of the public
especially so, if the business they are engaged in
are the same, like in the instant case.
This Commission further takes cognizance of the
fact that when respondent filed the amendment
changing its name to Universal Mills Corporation, it
correspondingly filed a written undertaking dated
June 5, 1963 and signed by its President, Mr.
Mariano Cokiat, promising to change its name in the
event that there is another person, firm or entity who
has obtained a prior right to the use of such name or
one similar to it. That promise is still binding upon
 the corporation and its responsible officers. (pp. 17-
18, Record.)
It is obvious that the matter at issue is within the competence
of the Securities and Exchange Commission to resolve in the
first instance in the exercise of the jurisdiction it used to
possess under Commonwealth Act 287 as amended by
Republic Act 1055 to administer the application and
enforcement of all laws affecting domestic corporations and
associations, reserving to the courts only conflicts of judicial
nature, and, of course, the Supreme Court's authority to
review the Commissions actuations in appropriate instances
involving possible denial of due process and grave abuse of
discretion. Thus, in the case at bar, there being no claim of
denial of any constitutional right, all that We are called upon to
determine is whether or not the order of the Commission
enjoining petitioner to its corporate name constitutes, in the
light of the circumstances found by the Commission, a grave
abuse of discretion.
We believe it is not. Indeed, it cannot be said that the
impugned order is arbitrary and capricious. Clearly, it has
rational basis. The corporate names in question are not
Identical, but they are indisputably so similar that even under
the test of "reasonable care and observation as the public
generally are capable of using and may be expected to
exercise" invoked by appellant, We are apprehensive
confusion will usually arise, considering that under the second
amendment of its articles of incorporation on August 14, 1964,
appellant included among its primary purposes the
"manufacturing, dyeing, finishing and selling of fabrics of all
kinds" in which respondent had been engaged for more than
a decade ahead of petitioner. Factually, the Commission
found existence of such confusion, and there is evidence to
support its conclusion. Since respondent is not claiming
damages in this proceeding, it is, of course, immaterial
whether or not appellant has acted in good faith, but We
cannot perceive why of all names, it had to choose a name
already being used by another firm engaged in practically the
same business for more than a decade enjoying well earned
patronage and goodwill, when there are so many other
appropriate names it could possibly adopt without arousing
any suspicion as to its motive and, more importantly, any
degree of confusion in the mind of the public which could
mislead even its own customers, existing or prospective.
Premises considered, there is no warrant for our interference.
As this is purely a case of injunction, and considering the time
that has elapsed since the facts complained of took place, this
decision should not be deemed as foreclosing any further
remedy which appellee may have for the protection of its
interests.
WHEREFORE, with the reservation already mentioned, the
appealed decision is affirmed. Costs against petitioners.
 2. BSP CIRCULAR NO. 854 Series of 2014 29 October 2014 REPUBLIC ACT NO. 7798

SEC MC NO. 16 Series of 2014 August 13, 2014