AUTHOR: twinkle 039. State v. Standard Oil An agreement that would have created a monopoly, even if 49 Ohio St.

137; 30 N.E. 279; 1892 Ohio LEXIS 127 it reduced prices, is still against public policy because they March 2, 1892 TOPIC: Contrary to Law/ Public Policy can raise the prices at exceedingly high rates. PONTENTE: Minshall, J. in fictione juris subsistit aequitas - With legal fictions, equity always exists. FACTS 1. Standard Oil desired to enter into an elaborate agreement that would have consolidated several corporations and partnerships into one corporation operated as a trust. 2. All of the owners and holders of its capital stock, including all the officers and directors of said defendant company, signed said agreements, without attaching the corporate name and seal of said defendant company thereto, and the official designations of its officers. 3. Since the signing of the agreement, the nine trustees have been and still are able to choose and have chosen annually such boards of directors of defendant company as they (nine trustees) have seen fit and control the action of Standard Oil in the conduct and management of its business. 3. Plaintiff attorney general brought an action in quo warranto to preclude the furtherance of the transaction. 4. Standard Oil contends that all of the shares of stock of defendant except seven were transferred to the nine trustees, and these seven were retained only for the qualification of the directory, which the trustees might from time to time select, either from their own numbers or from others of their choice and the transfers were made by defendant's transferring officers upon its stock books. And dividends of the company are paid to the holders of its stock as also appearing in its books. 5. Also, Standard Oil further contends that the nine trustees individually owned majority interests in the stocks of the various corporations, and that they could exercise the same voting power by virtue of their own stocks. ISSUE/s: 1.Major: IS the agreement against public policy/ contrary to law? Sub issues: 2. WON The Standard Oil Company of Ohio acted in their corporate capacity. 3. WON section 6789, Revised Statues which provides: "Nothing in this chapter contained shall authorize an action against a corporation for forfeiture of charter, unless the same be commenced within five years after the act complained of was done or committed." Bars this action? HELD: 1. YES. The agreement creates monopoly which would have been against the public policy of the state. The court ousted the oil company from the right to make the agreement and of the power to perform it. 2. YES. The property and assets of the corporation could only be transferred by a corporate act, and the agreement could not in this respect, be carried into effect, other than by such corporate act. 3. NO. The whole of Sec 6789, Revised Statutes, is not quoted by the defendant; it further proceeds: "Nor shall an action be brought against a corporation for the exercise of a power or franchise under its charter which it has used and exercised for a term of twenty years." RATIO: 1.The law requires that a corporation should be controlled and managed by its directors in the interest of its own stockholders, and conformable to the purpose for which it was created by the laws of its state. By this agreement, indirectly it is true, but none the less effectually, the defendant is controlled and managed by the Standard Oil Trust, an association with its principal place of business in New York City, and organized for a purpose contrary to the policy of our laws. Its object was to establish a virtual monopoly of the business of producing petroleum, and of manufacturing, refining and dealing in it and all its products, throughout the entire country, and by which it might not merely control the production, but the price at its pleasure. All such associations are contrary to the policy of our state and void. Monpolies have always been regarded as contrary to the spirit and policy of the common law because: 1. "the price of the same commodity will be raised, for he who has the sole selling of any commodity, may well make the price as he pleases." 2. "The incident to a monopoly is, that after the monopoly is granted, the commodity is not so good and merchantable as it was before; for the patentee having the sole trade, regards only his private benefit, and not the commonwealth. 3. "It tends to the impoverishment of divers artificers and others, who before, by the labor of their hands in their art or

trade, had mantained themselves and their families, who will now of necessity be constrained to live in idleness and beggary." The third objection, though frequently overlooked, is none the less important. 2. The general proposition that a corporation is to be regarded as a legal entity, existing separate and apart from the nat-ural persons composing it, is not disputed; but that the statement is a mere fiction, existing only in idea, is well under-stood, and not controverted by anyone who pretends to accurate knowledge on the subject. So long as a proper use is made of the fiction, that a corporation is an entity apart from its shareholders, it is harmless, and, because convenient, should not be called in question; but where it is urged to an end subversive of its policy, or such is the issue, the fiction must be ignored, and the question determined, whether the act in question, though done by shareholders, that is to say, by the persons united in one body, was done simply as individuals and with respect to their individual interests as shareholders, or was done ostensibly as such, but, as a matter of fact, to control the corporation and affect the transaction of its business, in the same manner as if the act had been clothed with all the formalities of a corporate act. The property and assets of the corporation could only be transferred by a corporate act, and the agreement could not in this respect, be carried into effect, other than by such corporate act; and clearly indicates that the purpose of the stockholders of the defendant, in becoming a party to it, was to affect their property and business as a corporation; in other words, was to act in their corporate, and not in their individual, capacity. The agreement, as performed by the members of the defendant, as effectually places the property and business of the defendant under the control and management of the Standard Oil Trust, as if the same had been transferred as provided in the original agreement. 3. Plaintiff avers that the first part does not apply to proceedings instituted on behalf of the state to forfeit charter of a corporation. Court says the statute gives no exemption and it still applies. However, the next part which provides Nor shall an action be brought against a corporation for the exercise of a power or franchise under its charter which it has used and exercised for a term of twenty years" applies. Therefore within that time such a proceeding may be brought. CASE LAW/ DOCTRINE: a corporation is an artificial person, or entity, apart from its members, is merely a description, in figurative language, of a corporation viewed as a collective body; a corporation is really an association of persons, and no judicial dictum or legislative enactment can alter this fact EXCEPT when there is an urge to an end subversive of its policy, or such is the issue, then the fiction must be ignored. DISSENTING/CONCURRING OPINION: none.

040 Laguna Trans. v. SSS AUTHOR: N. Manalo (April 28, 1960, G.R. No. L-14606) TOPIC: Contrary to Law/Public Policy; Evasion of Liability to Government PONTENTE: Barrera J., FACTS 1. That sometime in 1949, the Bian Transportation Co., a corporation duly registered with the Securities and Exchange Commission, sold part of the lines and equipment it operates to Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador Vera Cruz; 2. That after the sale, the said vendees formed an unregistered partnership under the name of Laguna Transportation Company which continued to operate the lines and equipment bought from the Bian Transportation Company, in addition to new lines which it was able to secure from the Public Service Commission 3. That the original partners forming the Laguna Transportation Company, with the addition of two new members, organized a corporation known as the Laguna Transportation Company, Inc., which was registered with the Securities and Exchange Commission on June 20, 1956, and which corporation is the plaintiff now in this case 4. That the corporation continued the same transportation business of the unregistered partnership 5. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on the ground that it started operation only on June 20, 1956, when it was registered with the Securities and Exchange Commission but on November 11, 1957, the Social Security System notified plaintiff that it was covered; 6. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security System contesting the claim of the System that plaintiff was covered, 7. the trial court rendered a decision declaring the petitioner was an employer engaged in business as common carrier which had been in operation for at least two years prior to the enactment of Republic Act No. 1161, as amended by Republic Act 1792 and by virtue thereof, it was subject to compulsory coverage under said law. 8. the petitioner directly appealed to the SC Petitioners contention: lower court erred in holding that it is an employer engaged in business as a common carrier which had been in operation for at least 2 years prior to the enactment of the Social Security Act and, therefore, subject to compulsory coverage thereunder. Section 9, provides: SEC. 9 Compulsory Coverage. .That the Commission may not compel any employer to become a member of the System unless he shall have been in operation for at least two years . . . . **(SSS enactment: June 18, 1954; Petitioners incorporation: June 20, 1956) ISSUE: WON petitioner is exempted from the coverage HELD: No Petitioner's argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a period of at least 2 years. the door to fraudulent circumvention of the statute would, thereby, be opened.

RATIO: The firm name "Laguna Transportation Company" was not altered, except with the addition of the word "Inc." to indicate that petitioner was duly incorporated under existing laws. The corporation continued the same transportation business of the unregistered partnership, using the same lines and equipment. There was, in effect, only a change in the form of the organization of the entity engaged in the business of transportation of passengers. Hence, said entity as an employer engaged in business, was already in operation for at least 3 years prior to the enactment of the Social Security Act on June 18, 1954 and for at least two years prior to the passage of the amendatory act on June 21, 1957. Petitioner argues that, since it was registered as a corporation with the Securities and Exchange Commission only on June 20, 1956, it must be considered to have been in operation only on said date. While it is true that a corporation once formed is conferred a juridical personality separate and district from the persons composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts. CASE LAW/ DOCTRINE: General rule: it is that a corporation will be looked upon as a legal entity, and until sufficient reason to the contrary appears Exception: When the motion 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. Where a corporation was formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefor. The reason for the rule is that the members of the partnership may be said to have simply put on a new coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. DISSENTING/CONCURRING OPINION:

Author: Sarah Calica 041 Marvel Bldg. Corp. v. David Note: The corporate fiction has been disregarded because the 24 February 1945 G.R. No. L-5081 Topic: Piercing the Corporate Veil; Contrary to corporation was used to evade taxes. Hence, the effect is personal Law/Public Policy: Evasion of Liability to liability on the part of stockholders. Government Ponente: Labrador Facts: 1. Plaintiffs, stockholders of Marvel Building Corporation, brought an action to enjoin defendant Collector of Internal Revenue from selling at public auction properties. It includes three parcels of land, with the buildings situated thereon: Aguinaldo Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion, all registered in the name of the said corporation. 2. Plaintiffs alleged that the properties belong to the Marvel Building Corporation. 3. Defendant alleged that the properties belong to Maria B. Castro -evidenced by endorsement in blank of the shares of stock issued in the name of the other incorporators, and the possession thereof by Maria B. Castro 4. The Articles of Incorporation dated 12 February 1947 and according to it the capital stock is P2,000,000, of which P1,025,000 was (at the time of incorporation) subscribed and paid for by incorporators which includes Maria B. Castro (with 250 shares). 5. Maria B. Castro was elected as President and Maximo Cristobal as Secretary Treasurer. 6. On 15 September 1950, the Secretary of Finance, upon consideration of the report of a special committee assigned to study the war profits tax case of Mrs. Maria B. Castro, recommended the collection of P3,593,950.78 as war profits taxes for the latter, and on September 22, 1953 the President instructed the Collector that steps be taken to collect the same. 7. Pursuant thereto, properties were seized by the Collector of Internal Revenue on 31 October 1950. 8. The by-laws of the corporation was not presented nor any of its transactions or accounts. 9. CFI of Manila ordered the release of the properties for failure to prove that Maria B. Castro is the true owner of all the stock certificates of the corporation 10. Hence the appeal of defendant. Issues: Whether or not Maria B. Castro is the owner of shares of stock of Marvel Building Corporation Held: Yes. Shareholders are dummies of Maria B. Castro Ratio: The fact that certificates in possession of Castro were indorsed in blank, Castro had enormous profits and had motive to hide them, other subscribers had no incomes, and directors never met shows that other shareholders may be considered as dummies of Castro. Hence, corporate veil may be pierced. The most important evidence presented by the CIR to prove his claim that Maria B. Castro is the sole and exclusive owner of the shares of stock of the Marvel Building Corporation is supposed endorsement in blank of the shares of stock issued in the name of the other incorporators and the possession thereof by Maria B. Castro. The second most important evidence presented by the CIR is the fact that the other stockholders did not have incomes in such amounts, during the time of the organization of the corporation in 1947, or immediately thereto, as to enable them to pay in full for their supposed subscriptions. Moreover, the failure on the part of the plaintiffs to prove that the shareholders are not dummies of Maria B. Castro is significant. -The non-production of evidence that would naturally have been produced by an honest and therefore fearless claimant permits the inference that its tenor is unfavorable to the party's cause. Case Law/Doctrine: 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 law that created it or to defeat public convenience, justify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders.

042. Tan Boon Bee v. Jarencio June 30, 1988, G.R. No. L-41337 TOPIC: Evasion of Liability to Creditors PONENTE: Paras, J;

AUTHOR: De Guzman, Bien Respondent GRAPHIC and PADCO (same BOD and officers) wanted to evade of liability by claiming that the printing machine was PADCOs property and not GRAPHIC

FACTS 1. Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein private respondent Graphic Publishing, Inc. (GRAPHIC for short) paper products amounting to P55,214.73. 2. On December 20, 1972, GRAPHIC made partial payment by check to petitioner in the total amount of P24,848.74; and on December 21, 1972, a promissory note was executed to cover the balance of P30,365.99. 3. In the said promissory note, it was stipulated that the amount will be paid on monthly installments and that failure to pay any installment would make the amount immediately demandable with an interest of 12% per annum. 4. On September 6, 1973, for failure of GRAPHIC to pay any installment, petitioner filed with the then Court of First Instance of Manila, presided over by herein respondent judge for a Sum of Money. 5. Respondent judge declared GRAPHIC in default for failure to file its answer within the reglementary period and plaintiff (petitioner herein) was allowed to present its evidence ex parte. 6. In a Decision dated January 18, 1974, the trial court ordered GRAPHIC to pay the petitioner the sum of P30,365.99 with 12% interest from March 30, 1973 until fully paid, plus the costs of suit. On motion of petitioner, a writ of execution was issued by respondent judge; but the aforestated writ having expired without the sheriff finding any property of GRAPHIC, an alias writ of execution was issued on July 2, 1974. 7. The executing sheriff levied upon one (1) unit printing machine Identified as "Original Heidelberg Cylinder Press In a Notice of Sale of Execution of Personal Property dated July 29, 1974, said printing machine was scheduled for auction sale; but in a letter dated July 19, 1974, herein private respondent , Philippine American Drug Company (PADCO for short) had informed the sheriff that the printing machine is its property and not that of GRAPHIC, and accordingly, advised the sheriff to cease and desist from carrying out the scheduled auction sale. 8. Notwithstanding the said letter, the sheriff proceeded with the scheduled auction sale, sold the property to the petitioner, it being the highest bidder, and issued a Certificate of Sale in favor of petitioner . More than five (5) hours after the auction sale and the issuance of the certificate of sale, PADCO filed an "Affidavit of Third Party Claim" with the Office of the City Sheriff . 9. On July 30,1974, PADCO filed with the Court of First Instance of Manila, a Motion to Nullify Sale on Execution which was opposed by the petitioner. 10. Respondent judge, in an Order dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The Sheriff is ordered to return the said machinery to its owner, the Philippine American Drug Co. 11. Petitioner filed a Motion For Reconsideration and an Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but in an Order dated August 13, 1975, the same was denied for lack of merit. Hence, the instant petition. ISSUE: Whether or not the veil of corporate fiction should be pierced? HELD: Yes. PADCO, as its name suggests, is a drug company not engaged in the printing business. So it is dubious that it really owns the said printing machine regardless of PADCOs title over it. Further, the printing machine, as shown by evidence, has been in GPIs premises even before the date when PADCO alleged that it acquired ownership thereof. RATIO: 1. It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from that of the persons composing it as well as from any other legal entity to which it may be related. 2. As a matter of fact, the doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. 3. However, this separate and distinct 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 fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors. 4. 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. Likewise, this is true when the corporation is merely an adjunct, business conduit or alter ego of another corporation. In such case, the fiction of separate and distinct corporation entities should be disregarded. 5. In the instant case, petitioner's evidence established that PADCO was never engaged in the printing business; that the board of directors and the officers of GRAPHIC and PADCO were the same; and that PADCO holds 50% share of stock of GRAPHIC. Petitioner likewise stressed that PADCO's own evidence shows that the printing machine

in question had been in the premises of GRAPHIC since May, 1965, long before PADCO even acquired its alleged title on July 11, 1966 from Capitol Publishing. That the said machine was allegedly leased by PADCO to GRAPHIC on January 24, 1966, even before PADCO purchased it from Capital Publishing on July 11, 1966, only serves to show that PADCO's claim of ownership over the printing machine is not only farce and sham but also unbelievable. 6. Considering the aforestated principles and the circumstances established in this case, respondent judge should have pierced PADCO's veil of corporate Identity. CASE LAW/ DOCTRINE: Separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors. DISSENTING/CONCURRING OPINION:

043 NATIONAL MARKETING CORPORATION AUTHOR: Danna Laura Zerrudo (NAMARCO) v. ASSOCIATED FINANCE Piercing the veil of corporate fiction is allowed when a COMPANY, INC. & FRANCISCO SYCIP 27 April 1967, G.R. No. L-20886 corporation is a mere alter ego of a person, and such person TOPIC: Piercing the Corporate Veil - Evasion of Liability hides behind the principle that a corporation has a to Creditors personality distinct and separate from its stockholders, in PONENTE: Dizon, J. order to commit acts of fraud against others. FACTS 1. March 25, 1958 - Associated Finance Company, Inc. (ASSOCIATED), through its President, Francisco Sycip, entered into an agreement to exchange sugar with National Marketing Corporation (NAMARCO) (represented by its then General Manager, Benjamin Estrella). ASSOCIATED would deliver to NAMARCO 100 pounds of Victorias and/or National refined sugar in exchange for 7,732.71 bags of Busilak and 17, 285.08 piculs of Pasumil raw sugar belonging to NAMARCO. 2. May 19, 1958 In compliance with the agreement, NAMARCO delivered to ASSOCIATED 7,732.71 bags of Busilak and 17,285.08 piculs of Pasumil domestic raw sugar. 3. January 12, 1959 Because ASSOCIATED failed to deliver to NAMARCO the agreed 100 pounds of Victoria and/or National refined sugar, NAMARCO demanded in writing from ASSOCIATED to either: (a) immediately deliver the refined sugar before January 20, or (b) pay its equivalent cash value amounting to P372,639.80. 4. Since ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar NAMARCO delivered to it, NAMARCO instituted the present action in the lower court to recover the sum of P403,514.28 in payment of the raw sugar received by defendants. 5. Sycips defense: He cannot be held liable because it is a known pr inciple that a corporation has a personality distinct and separate from that of its stockholders and that the latter are not personally liable for the corporate obligations. ISSUE: Whether or not Francisco Sycip may be held liable, jointly and severally liable with co-defendant corporation, for the sums of money adjudged in favor of NAMARCO HELD: Yes, because when the corporation is the mere alter ego of a person, the principle of corporate fiction may be disregarded, especially when the person hides behind the said principle in order to commit acts of fraud against others. RATIO: 1. Sycip was guilty of fraud because through false representations, he succeeded in inducing NAMARCO to enter into the exchange agreement, with full knowledge, on his part, that ASSOCIATED was in no position to comply with the obligation. 2. Sycip cannot seek refuge behind the general principle that a corporation has a personality distinct and separate from that of its stockholders and that the latter are not personally liable for the corporate obligations. 3. The Court felt justified in "piercing the veil of corporate fiction" and holding Sycip personally liable, jointly and severally with ASSOCIATED, for the sums of money adjudged in favor of appellant since, when the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is controlled, and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another. Why Sycip should be liable: 1. Sycip owned P60,000 worth of shares in the defendant corporation, while his wife owned P20,000. The par value of the subscribed capital stock of ASSOCIATED was only P105,000.00 2. Negotiations related to the subject exchange agreement were EXCLUSIVELY conducted by Sycip in behalf of ASSOCIATED. 3. At the time of the negotiations, ASSOCIATED was already insolvent. 4. When NAMARCO asked Defendants to comply with the exchange agreement, instead of making delivery of the sugar, Defendants offered to pay its value (at the rate of P15.30 per bag) instead - a clear indication that they did not have the sugar contracted for. CASE LAW/ DOCTRINE: When the corporation is the mere alter ego of a person, the corporate fiction may be disregarded; the same being true when the corporation is controlled and its affairs are so conducted as to make it merely an instrumentality, agency or conduit of another.

044 JACINTO v. HONORABLE APPEALS and METROPOLITAN TRUST COMPANY G.R. No. 80043 June 6, 1991 TOPIC: Evasion of Liability to Creditors PONENTE: DAVIDE, JR., J. FACTS

COURT OF AUTHOR: Ernesto C. Palomique III BANK AND Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money, signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or confuse legitimate issues. There was no clear cut delimitation between the personality of Jacinto and the corporation.

1. Jacinto (petitioner) is the President and General Manager of Inland Industries, Inc. where he owned 52% of the shares. 2. Jacinto owes MetroBank a sum of money and in order to secure the debt, signs trust receipts therefor. 3. Jacinto, tried to escape liability and shift the entire blame under the trust receipts solely and exclusively on the corporation. He asserted that he cannot be held solidarily liable with the latter because he just signed said instruments in his official capacity as president of Inland Industries, Inc. and the latter has a juridical personality distinct and separate from its officers and stockholders. 4. The Court of Appeals, affirming the decision of the Regional Trial Court, ordered Jacinto to jointly and severally pay MetroBank. 5. Jacinto appealed, questioning the decision of the Court of Appeals whether it can validly pierce the fiction of corporate identity of Inland Industries, Inc. even if absolutely no proof was presented in court to serve as legal justification for it. ISSUE: Whether or not Jacinto is solidarily liable to MetroBank for the trust receipts. HELD: Yes, corporate veil should be pierced because there was no clear cut delimitation between the personality of Jacinto and the corporation. Decision affirmed. RATIO: 1. As to the liability of Roberto A. Jacinto, it would appear that he is in in fact, the corporation itself known as Inland Industries, Inc. Aside from the fact that he is admittedly the President and General Manager of the corporation and a substantial stockholder thereof, it was defendant Roberto A. Jacinto who dealt entirely with MetroBnak in those transactions. In the Trust Receipts that he signed supposedly in behalf of Inland Industries, Inc., it is not even mentioned that he did so in this official capacity. Roberto A. Jacinto was practically the corporation itself, the Inland industries, Inc. 2. It is undisputed that Roberto Jacinto even admitted that he and his wife own 52% of the stocks of the corporation. Evidence shows that Jacinto in fact acted in his capacity as President/General Manager of the corporation and that "all the goods covered by the three (3) Letters of Credit and paid for under the Bills of Exchange were delivered to and received Inland Industries, Inc. through Roberto A. Jacinto, its President and General Manager, who signed for and in behalf of defendant Inland and agreed to the terms and conditions of three (3) separate trust receipts covering the same. 3. Supreme Court: the same is just a clever ruse and a convenient ploy to thwart his personal liability therefo r by taking refuge under the protective mantle of the separate corporate personality of the defendant corporation. CASE DOCTRINES: 1. "When the veil of corporate fiction is made as a shield to perpetuate fraud and/or confuse legitimate issues, the same should be pierced." 2. While on the face of the complaint there is no specific allegation that the corporation is a mere alter ego of petitioner, subsequent developments, from the stipulation of facts up to the presentation of evidence and the examination of witnesses, unequivocally show that respondent Metropolitan Bank and Trust Company sought to prove that petitioner and the corporation are one or that he is the corporation. No serious objection was heard from petitioner.

045 CLAPAROLS STEEL AND NAIL PLANT V CIR, ALLIED WORKERS ASSOCIATION, DEMETRIO GARLITOS, and 9 other workers July 31, 1975, GR No. L-30822 TOPIC: Piercing the Corporate Veil; Evasion of Liability/ Obligation to Employees PONTENTE: MAKASIAR, J.

AUTHOR: (Keith Meridores) Claparols Steel and Nail Plant was dissolved and subsequently, Claparols Steel Corporation was formed. Eduardo Claparol thought that by dissolving the old corporation, its liabilities in paying back wages would also be gone. Note: theres a separate issue on computation of back wages in the case, but well not touch on that here.

FACTS 1. On Aug. 6, 1957, a complaint for unfair labor practice was filed by the Allied Workers Association and Demetrio Garlitos, et. Al against Claparols Steel and Nail Plant (Claparols) 2. The Court of Industrial Relations (CIR) ruled in respondents favor; it declared Claparols guilty of union busting and illegal dismissal due to participation of respondents in union activities. The CIR ordered the reinstatement and payment of back wages. 3. The respondents filed a motion for execution of the decision. The CIR granted the motion for execution of the order. 4. Several attempts were made by the respondents (accompanied by the Chief of Police of Talisay, Negros Occ) to be reinstated to their work but Claparols (through its accountant, Francisco Cusi) refused alleging that there was no order from Eduardo Claparols. 5. Records show that Claparols was already dissolved on June 30, 1957; and Claparols Steel Corporation succeeded it on July 1, 1957. The latter also eventually stopped operation on Dec. 7, 1962. 6. Petitioners filed an opposition contending that it could not personally reinstate respondent workers alleging that under the circumstances presently engulfing the company, and assuming the workers are entitled to back wages, it was only limited to 3 months since Claparols stopped operations in 1962. ISSUE: Whether or not Claparols Steel and Nail Plant was one the same with Claparols Steel Corporation? HELD: Yes. The latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor. RATIO: 1. 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 petitioners. 2. It is very clear that the latter corporation was a continuation and successor of the first entity, and its emergence was skillfully timed to avoid the financial liability that already attached to its predecessor, the Claparols Steel and Nail Plant. Both predecessors and successor were owned and controlled by the petitioner Eduardo Claparols and there was no break in the succession and continuity of the same business. 3. This "avoiding-the-liability" scheme is very patent, considering that 90% of the subscribed shares of stocks of the Claparols Steel Corporation (the second corporation) was owned by respondent (herein petitioner) Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation. 4. 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. CASE LAW/ DOCTRINE: The case cited several past cases of the SC conveying the message: 1. 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 or persons, or, in the case of two corporations, will merge them into one. (Yutivo and Sons Hardware Co. v Court of Tax Appeals) 1961. 2. Where a corporation is a dummy and serves no business purpose and is intended only as a blind, the corporate fiction may be ignored. (Liddel and Co, Inc. v Collector of Internal Revenue) 1961. 3. where a corporation is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporate entities should be disregarded. (Commissioner of Internal Revenue v Norton and Harrison Co.) 1964.

AUTHOR: Marvin 046. Indophil Textile Mill Workers Union-PTGWO v. Piercing is not allowed unless the remedy sought is to make Calica 1992-02-03 | G.R. No. 96490 the officer or another corporation pecuniarily liable for TOPIC: Evasion of Liability / Obligation to Employees corporate debts PONENTE: MEDIALDEA, J. FACTS 1. Indophil Union is a legitimate labor organization duly registered with the DOLE and the exclusive bargaining unit of all rank and file employees of Indophil Textile Mills. 2. On April 1987, the Union and Indophil executed a CBA effective April 1, 1987 to March 31, 1990. On November 1987, Indophil Acrylic was formed and registered with the SEC. In 1998, Acrylic became international and hired workers according to its criteria and standards. 3. Sometime in July 1989, the workers of Acrylic unionize and a duly certified CBA was executed. In 1990, the Union claimed that the plant facilities built and set up by Acyrlic should be considered as an extension or expansion of Indophil pursuant to Sec. 1(c) of Art.1 of the CBA to wit: This agreement shall apply to all companies, facilities, and installations and to any extension and expansion thereat. 4. The union sough that Acrylic be considered part of the bargaining unit. Their contention is that the articles of incorporation of the two corporation establish that the two entities are engaged in the same kind of business, which is the manufacture and sale of yarns of various counts and kinds and of other materials of kindred character or nature. Furthermore, they emphasize that the two corporations have practically the same incorporators, directors and officers. Also the two corporation have their facilities in the same compound. That many of Indophils own machineries such as dyeing machines, reeler, broiler, were transferred to and are now being used by the Acrylic plant. That services of a number of units, departments or sections of private respondents are provided by Acrylic and that the employees of Indophil are the same persons manning and servicing the units of Acrylic. 5. Both parties submitted the issue to Labor Arbiter Calica. Calica ruled in favor of Indophil and stated that Acrylic is not extension of Indophil, hence their CBA does not extend to the employees of Acrylic. 6. Union sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the CBA Indophil had with them (or it sought to include the other union in its bargaining leverage). ISSUE: Whether or not The doctrine of piercing the veil of corporate entity applies. HELD: No. Legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Union does not seek to impose such claim against Acrylic. Mere fact that businesses were related, that some of the employees of Indophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound - not sufficient to apply doctrine. RATIO: Acrylic is not an alter ego or an adjunct or a business conduit of Indophil because it has a separate legitimate business purpose. Indophil engages in the manufacture of yarns while Acrylic is to manufacture, buy, and sell at wholesale basis, barter, import, export and otherwise deal in various kinds of yarns. Two corporations cannot be treated as single bargaining unit just because they have related businesses. The Union seeks to pierce the veil of Acrylic alleging that the corporation is a device to evade the application of the CBA. However the CA held that said doctrine is only used on the existence of valid grounds. In the case at bar, the fact that the business of Indophil and Acrylic are related that sometimes the employees of Indophil are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices, and facilities are situated in the same compound. It is the SCs considered opinion that these facts are not sufficient to justify the piercing of the corporation veil of Acrylic. Furthermore, the legal entity is disregarded only if sought to hold the officers and stockholders liable. In the instant case, the Union does not seek relief from Indophil. CASE LAW/ DOCTRINE: The doctrine of piercing the veil of corporate entity applies when 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.

AUTHOR: Pat 047 NAFLU v. Ople July 22, 1986, G.R. No. L-68661 TOPIC: Evasion of Liability/Obligation to Employees PONENTE: Gutierrez, Jr., J. FACTS: 1. September 8, 1982: the National Federation of Labor Union (NAFLU) filed a request for conciliation before the Bureau of Labor Relations (BLR) requesting for the intervention in its dispute with management involving: - Money claims - Refusal to conclude a collective agreement after such has been negotiated - Run-away shop undertaken by management to bust the union 2. September 15, 1982: Management unilaterally declared a temporary shutdown. 3. September 23, 1982: management of Lawman Industrial promised the union that it will start the normalization of operations at Lawman effective January 1983 4. October 11, 1982: the union filed its notice of strike 5. January 6, 1983: Lawman failed to resume operations alleging poor business conditions 6. NAFLU filed a complaint for unfair labor practice against the management of Lawman sometime December 1982 (NAFLU vs. Lawman) pending before the Metro Manila Branch of the NLRC. 7. March 17, 1983: the Minister of Labor and Employment issued the Order: - All employees affected by the extended shutdown which is highly irregular, are ordered to return to work and management is directed to accept all returning workers under the same terms and conditions prevailing previous to the illegal shutdown. - Management is further directed to pay severance compensation including all unpaid wages previous to the shutdown and after March 15, 1983 in the event that the company cannot resume operations. - Pending the determination of the charges on illegal lockout runaway-shop and the pending money claims against the company, Lawman Industrial is hereby enjoined from transferring ownership or otherwise effecting any encumbrance or any of its existing assets in favor of any third party without a prior clearance from this Office and timely notice to the union. - The company is likewise prohibited from terminating the employment of any of its employees pending the outcome of this dispute. This order automatically enjoins a strike or lockout. 8. May 20, 1983: respondent filed a motion for reconsideration alleging that it had suffered losses shown by its FS, and informed the Ministry to effect a shutdown effective on September 8, 1982 and to circularize a memorandum on November 2, 1982 announcing the cessation of operations - The company alleged further that it had no more plant and building because they were allegedly repossessed by the Pioneer Texturizing Corporation for the failure of respondent to pay rentals as evidenced by the letter of Mr. Eugenio Tan dated August 10, 1982 stating that respondent is given fifteen (15) days to settle its accounts, otherwise an action for repossession and ejectment would be instituted against it. 9. But the actual partial shutdown began in August 1982. It appears moreover that at night, machines were dismantled, hauled out and then installed at No. 43 Engineering Road, Araneta University compound, Malabon and the name of Lawman was changed to LIBRA GARMENTS. Under that name, new applicants for employment were called even as the company continued to manufacture the same products but under the name of LIBRA GARMENTS. When this was discovered by the workers, LIBRA GARMENTS was changed to DOLPHIN GARMENTS. 10. June 6, 1983: NAFLU submitted a position paper alleging that it was certified by the BLR as the sole and exclusive bargaining agent of all the rank and file employees of the said factory. The management agreed as follows: Wage increase, P1.00 for the first year; P1.00 for the second year and P1.00 for the third year of the contract. Vacation and sick leaves were also granted and other fringe benefits. The collective bargaining agreement was supposed to be effective September 1982. 11. July 31, 1984: the public respondent modified its earlier order and despite a finding that the private respondent company was guilty of unfair labor practice, the public respondent did not order the reinstatement of the employees concerned because the company has declared that it had already ceased its operations completely. It is this order for non-reinstatement which is now before us. ISSUE: 1. Whether or not the employees should be reinstated. HELD: 1. Yes, because after finding that Lawman Industrial Corporation had transferred its business operations to Libra

Garments Enterprises, which later changed its name to Dolphin Garments Enterprises, the public respondent cannot deny reinstatement to the petitioners simply because Lawman Industrial Corporation has ceased its operations. RATIO: 1. It is clear from the records of this case that the company bargained in bad faith with the union when pending the negotiation of their collective agreement, the company declared a temporary cessation of its operations which in reality was an illegal lockout. Evidently, the company also maintained run-away shop when it started transferring its machine first to Libra and then to Dolphin Garments. Failure on the part of the company to comply with the requirements of notice and due process to the employees and the Labor Ministry one month before the intended closure of the firm is clearly against the law. There is also evidence on the record that even after the alleged shutdown the company was still operating in the name of Lawman Industrial although production was being carried out by another firm called Libra Garments (later Dolphin Garments). The evident bad faith, fraud and deceit committed by the company to the prejudice of both the union and the employees who have existing wage claims leads us to affirm the unions position that the veil of corporate fiction should be pierced in order to safeguard the right to self-organization and certain vested rights which had accrued in favor of the union. CASE LAW/ DOCTRINE: It is very obvious from the above findings that the second corporation seeks the protective shield of a corporate fiction to achieve an illegal purpose. As enunciated in the case of Claparols vs. Court of Industrial Relations its veil in the present case should, therefore, be pierced as it was deliberately and maliciously designed to evade its financial obligations to its employees. It is an established principle that when the veil of corporate fiction is made as a shield to perpetrate a fraud or to confuse legitimate issues (here, the relation of employer-employee), the same should be pierced.

048 VILLA-REY TRANSIT v. FERRER October 29, 1968 G.R. No. L-23893 TOPIC: Evasion of Liability on Contract PONENTE:Angeles, J.

AUTHOR: Yayie Lanting A seller may not make use of a corporate entity as a means of evading the obligation of his covenant. Where the Corporation is substantially the alter ego of one of the parties to the covenant or the restrictive agreement, it can be enjoined from competing with the covenantee.

FACTS 1. Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to certificates of public convenience (CPC) granted him by the Public Service Commission (PSC). 2. On January 8, 1959: he sold the two certificates of public convenience to the Pangasinan Transportation Company, Inc. (Pantranco) with the condition: that Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer." 3. March 6, 1959(3 months after the sale): a corporation called Villa Rey Transit, Inc. was organized, with the wife of Jose M. Villarama as one of the incorporators and who was subsequently elected as treasurer of the Corporation. 4. A month after its registration with the SEC, Villa Rey Transit, Inc. bought 5 CPCs and 49 buses from Valentin Fernando, for P249, 000.00, of which P100, 000.00 was paid upon the signing of the contract; P50, 000.00 was payable upon the final approval of the sale by the PSC; P49, 500.00 one year after the final approval of the sale; and the balance of P50, 000.00 "shall be paid by the BUYER to the different suppliers of the SELLER.". The parties immediately applied with the PSC for its approval 5. Before the PSC could take final action on the said application, 2 of the 5 CPCs were levied upon pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment creditor, against Valentin Fernando, judgment debtor. During the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. 6. Ferrer then sold the said CPCs to Pantranco, and they jointly submitted their contract of sale to the PSC for approval. 7. The PSC issued an order that pending resolution of the applications, Pantranco shall have the authority to provisionally operate the service under the 2 CPCS that were the subject of the contract between Ferrer and Pantranco. 8. Villa Rey Transit, Inc. took issue with the ruling of the PSC and elevated the matter to the Supreme Court. The Court decreed that until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court, the Villa Rey Transit, Inc. should be the one to operate the lines provisionally. 9. November 4, 1959: Villa Rey Transit filed a complaint for annulment of the sheriff's sale of the 2 CPCs to Ferrer and the subsequent sale to Pantranco. It prayed that all the orders of the PSC relative to the dispute over the CPCs in question be annulled. 10. Pantranco filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa Rey Transit are one and the same, and that Villarama and/or the Villa Rey Transit, Inc. is qualified from operating the CPCs by virtue of the agreement entered into between Villarama and Pantranco. ISSUE: Does the stipulation between Villarama and Pantranco, as contained in the deed of sale, that the former " shall not for a period of 10 years from the date of this sale, apply for any TPU service identical or competing with the buyer." bind Villa Rey Transit, Inc.? HELD: Yes. Court found that the finances of Villa-Rey, Inc. were managed as if they were the private funds of Villarama and in such a way and extent that Villarama appeared to be the actual owner of the business without regard to the rights of the stockholders. Villarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Villarama's claim that he was only a part-time General Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with Pantranco applies.

RATIO: Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also enforceable and binding against the said Corporation. Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10 years to "apply" for TPU service along the lines covered by the certificates of public convenience sold by him to Pantranco is valid and reasonable. Having arrived at this conclusion, and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint, that the said Corporation should, until the expiration of the 1-year period abovementioned, be enjoined from operating the line subject of the prohibition. CASE LAW/ DOCTRINE: The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. 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. The rule is that a seller or promisor may not make use of a corporate entity as a means of evading the obligation of his covenant.

049 CEASE v COURT OF APPEALS October 18, 1979, GR # L-33172 TOPIC: Closed Corporations PONTENTE: Guerrero, J. FACTS

AUTHOR: Jade Corporations separate and distinct identity Piercing the veil of corporate identity

1. Sometime in June 1908, Forrest L. Cease and 5 other American citizens organized the Tiaong Milling and Plantation Company. The company acquired various properties but were bought out by Forrest L. Cease together with his children Ernesto, Cecilia, Teresita, Benjamin, Florence and another family member named Bonifacia Tirante. 2. The charter of the company lapsed in June 1958 but there were no records of its liquidation. On 13 August 1958, Forrest L. Cease died. 3. His 2 children, Benjamin and Florence wanted an actual division of the shares among the children while the others wanted reincorporation. Ernesto, Teresita, Cecila and stockholder Bonifacia Tirante proceeded to incorporate themselves into the F.L. Cease Plantation Company and registered it with the Securities and Exchange Commission on 9 December 1959. 4. Benjamin and Florence initiated Special Proceeding # 3893 in the Court of First Instance of Tayabas for the settlement of the estate of Forrest L. Cease on 21 April 1960. On 19 May 1960, they filed Civil Case # 6326 against Ernesto, Teresita, Cecilia together with stockholder Bonifacia asking that the Tiaong Milling be declared identical to the F. L. Cease Plantation and that its properties be divided among its children as his intestate heirs. 5. The Civil Case was resisted by Ernesto, Teresita, Cecilia and Bonifacia by filing a bond to remain in possession of the company. 6. On 21 May 1961, on the eve of the expiry of the 3-year liquidation period, the board of liquidators of the Tiaong Milling ex ecuted an assignment and conveyance of properties and trust agreement in favor of F.L. Cease Plantation as trustee of the Tiaong Milling. Upon motion of Benjamin and Florence, Judge Manolo Maddela rendered his judgment in favor of Benjamin and Florence and declared that: The assets and properties of Tiaong Milling, now appearing under the name of F.L. Cease Plantation is the es tate also of the deceased Forrest L. Cease, and should be divided share and share alike to his 6 children in accordance with Rule 69 of the Rules of Court. The Resolution to sell dated 12 October 1959 and the Transfer of Conveyance with Trust Agreement is set as ide for it is improper, illegal and therefore, null and void. F.L. Cease Plantation is removed as trustee of the Tiaong Milling and ordered to deliver and convey all properties and assets of Tiaong Milling to whomsoever be appointed as Receiver. Special Proceedings # 3893 is terminated and dismissed. 7. Ernesto, Teresita, Cecilia and Bonifacia appealed the decision. Benjamin and Florence moved to dismiss the appeal on the ground that judgment was interlocutory and not appealable. The judge dismissed the appeal. 8. Ernesto, Teresita, Cecilia and Bonifacia brought the case to the Supreme Court but the case was remanded to the Court of Appeals. The Court of Appeals dismissed the appeal on 9 December 1970. 9. Ernesto, Teresita, Cecilia and Bonifacia appealed to the Supreme Court because, according to them, the Court of Appealerr ed in: Hearing and deciding over Special Proceeding # 3893 and Civil Case # 6326 Affirming that the Tiaong Milling is also the property of the estate of Forrest L. Cease Affirming that the decision of the CFI on 27 December 1969 is interlocutory and non-appealable. ISSUE: Where or not the Tiaong Milling and its properties are also the properties of the estate of Forrest L. Cease HELD: The petition was dismissed. Tiaong Milling and its properties are also the properties of the deceased Forrest L. Cease.

RATIO: Records showed that although the original incorporators of the Tiaong Milling were aliens, friends and third-parties, it developed into a close family corporation. The Board of Directors and Stockholders belong to one family headed by Forrest L. Cease. Only members of his family benefited from the corporation. The corporation never had any account with any banking institution, or of any account was carried in a bank on its behalf, it was in the name of Forrest L. Cease. The operation of the corporation is merged with those of the majority stockholders. Fo rrest L. Cease used Tiaong Milling as his instrumentality and for the exclusive benefits of his family. The corporation is only a business conduit and an extension of his personality this one and the same thing this the assets of the corporation are also the estate of Forrest L. Cease. The business of the corporation is largely, if not wholly, the personal venture of Forrest L. Cease. There was no proof Showing that his children were subscribers or purchases of the stocks they own. Their participation as nominal shareholders came about from Forrest L. Ceases gratuitous dole out of his own shares to the benefit of his children and his family.

CASE LAW/ DOCTRINE: The doctrine of disregarding or piercing the veil of corporate fiction Generally, a corporation is invested by law with personality separate and distinct from that of the persons composing it. Due to this attribute, a corporation may not be made to answer for acts or liabilities of its stockholders or vice versa. This Separate and distinct personality is merely a fiction created by law for convenience and to promote the ends of justice. The veil of corporate entity may be pierced when it is used as to shield a public convenience, to justify a wrong, to defend a crime, to protect or perpetuate a fraud, to confuse legitimate issues, to circumvent the law, or to perpetuate deception or as an alter ego, adjunct or business conduit for the sole benefit of the stockholders. DISSENTING/CONCURRING OPINION: N/A

050 DELPHER TRADES v CA January 26, 1988; G.R. No. L-69259 Topic: Close Corporations Ponente: Justice Gutierrez, Jr.

AUTHOR: Krystelle The Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.

FACTS

1. In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Bulacan land registry. 2. On April 3, 1974, the said co-owners leased to Construction Components International Inc. the same property and providing that during the existence or after the term of this lease the lessor should he decide to sell the property leased shall first offer the same to the lessee and the letter has the priority to buy under similar conditions. 3. On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco. The contract of lease, as well as the assignment of lease were annotated at the back of the title, as per stipulation of the parties. 4. On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the leased property (TCT No.T-4240) together with another parcel of land also located in Malinta Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with a total value of P1,500,000.00. 5. A certain Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate were transferred to the corporation; that the leased property was transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in the corporation because the other owners only owned 2,000 sharesThe petitioners contend that there was actually no transfer of ownership of the subject parcel of land since the Pachecos remained in control of the property. The transfer of ownership, if anything, was merely in form but not in substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity of interest." 6. The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent (Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing (Art. 1638, Civil Code)." 7. On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and distinct from the Pachecos; hat petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock. 8. On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095 in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia Pacheco and Delphin Pacheco. 9. RTC: ruled in favour of the plaintiff (Hydro Pipe Phils. Inc.) 10. CA: affirmed the RTCs decision. 11. Hence, this present action.

ISSUE: Whether or not the "Deed of Exchange" of the properties executed by the Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale which, in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed of exchange."

HELD:NO. The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract. RATIO: After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from the corporation or from individual owners thereof. In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and pay for original unissued shares of a corporation, formed or to be formed." It is significant that the Pachecos took no par value shares in exchange for their properties. It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family group. In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organizing Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes. The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether avoid them, by means which the law permits, cannot be doubted." The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco family merely changed their ownership from one form to another. The ownership remained in the same hands. Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.

CASE LAW/ DOCTRINE: A no-par value share does not purport to represent any stated proportionate interest in the capital stock measured by value, but only an aliquot part of the whole number of such shares of the issuing corporation. The holder of no-par shares may see from the certificate itself that he is only an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not hidden beneath a false appearance of a given sum in money, as in the case of par value shares. The capital stock of a corporation issuing only no-par value shares is not set forth by a stated amount of money, but instead is expressed to be divided into a stated number of shares, such as, 1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention of persons interested in the financial condition of a corporation is focused upon the value of assets and the amount of its debts. DISSENTING/CONCURRING OPINION: N/A

AUTHOR: Revy Medrick dR. Neri 051 PHILIPPINE NATIONAL BANK, petitioner, PNB-IFL subsidiary company of PNB vs. RITRATTO GROUP INC., RIATTO PNB attorney in fact of PNB-IFL INTERNATIONAL, INC., and DADASAN GENERAL MERCHANDISE, respondents. G.R. No. 142616 - July 31, 2001 TOPIC: Piercing the Corporate Veil as a Remedy PONENTE: Kapunan, J. Facts: 1. On May 29, 1996 PNB-IFL, a subsidiary company of PNB, organized and doing business in Hongkong, extended a letter of credit in favor of the respondents in the amount of US $ 300,000.00 secured by real estate mortgages constituted over 4 parcel of land in Makati City and was later on increased and decreased to US $ 1,421,316.18. 2. Respondents made repayments of the loan incurred by remitting those amounts to their loan account with PNB-IFL in Hongkong. 3. As of April 30, 1998, their outstanding obligations stood at US $1,497,274.70. 4. PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real estate mortgages. 5. The subject properties were sold at public auction on May 27, 1999 at the Makati City Hall. 6. On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary injunction and/or temporary restraining order before the the RTC of Makati. 7. RTC of Makati issued a 72hour temporary restraining order. ISSUE: Whether or not PNB is privy to the contract of loan entered between PNB-IFL and private respondent, being that PNB-IFL is a subsidiary company of PNB. HELD: No. The contract questioned is one entered into between respondent and PNB-IFL, not PNB. Petitioner is an agent with limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not privy to the loan contracts entered into by respondents and PNB-IFL. RATIO: 1. A corporation as a personality distinct and separate from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. 2. 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. 3. A subsidiary's separate existence may be respected, and the liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business if used to perform legitimate functions. CASE LAW/ DOCTRINE: The doctrine of piercing the corporate veil is an equitable doctrine developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful purpose.

052 UMALI v. CA G.R. No. 89561; September 13, 1990 TOPIC: Piercing the corporate veil PONENTE: REGALADO, J.

AUTHOR: Rosa Cecilia K. Alfafara Piercing the veil of corporate entity is not the proper remedy in order that the foreclosure proceeding may be declared a nullity under the circumstances obtaining in the case.

FACTS 1. Mauricia Castillo was the administratrix over a parcel of land (in Lucena) left by Felipe Castillo. The land was mortgaged to the DBP and was about to be foreclosed. Thereafter, Santiago Rivera (her nephew) proposed to them the conversion into subdivision the 4 parcels of land adjacent to the mortgaged property to raise the necessary fund. 2. The proposal was accepted by the Castillos. Thus, a Memorandum of Agreement was executed between Slobec Realty and Development, Inc., (Slobec) represented by its president (Rivera) and the Castillos. In this agreement, Rivera obliged himself to pay the Castillos the sum of P70K immediately after the execution of the agreement and to pay the additional amount of P40OK after the property has been converted into a subdivision. Rivera, armed with the agreement, approached Mr. Cervantes, President of defendant Bormaheco, and proposed to purchase from Bormaheco 2 tractors. 3. Bormaheco and Slobec executed a Sales Agreement over 1 unit of Caterpillar Tractor, on an installment basis. 4. As security of the unpaid balance, Slobec obtained from Insurance Corporation of the Phil. (ICP) a surety bond, with ICP as surety and Slobec as principal, in favor of Bormaheco. 5. It was in turn secured by an Agreement of Counter-Guaranty with Real Estate Mortgage executed by Rivera as president of Slobec and the Castillos, and ICP as mortgagee. (ICP required that the Castillos mortgage to them the 4 parcels of land) 6. Due to violation of the terms and conditions of the Counter-Guaranty Agreement, the properties of the Castillos were foreclosed by ICP. ICP was also the highest bidder and a Certificate of Sale and TCTs over the properties were issued. 7. Said properties were not redeemed. 8. On April 10, 1975, ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the 4 parcels of land. 9. PM Parts, through its President, Mr. Cervantes, sent a letter to the plaintiff Mauricia Castillo requesting her and her children to vacate the property. Mrs. Castillo refused to vacate. 10. On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the appointed administratrix (Mauricia already died) filed an action for annulment of title before the C.F.I. of Quezon. 11. Petitioners seek to pierce the veil of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners. 12. TC: In favor of plaintiffs, transactions were null & void for being fictitious, spurious, & without consideration. 13. CA: Reversed the TCs ruling. ISSUE: Whether or not there was a valid foreclosure of the mortgaged properties. Whether or not there was necessity to pierce the veil of corporate existence. HELD: Both no, the doctrine of piercing the veil of corporate fiction is not applicable in the case. RATIO: 1. The surety bond expressly provides that ICP shall not be liable for any claim not filed in writing within 30 days from the expiration of the bond. The court categorically stated that: no evidence was presented to show that Bormaheco demanded payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to guarantee the payment of plaintiffs obligation. The failure of Bormaheco to notify ICP in writing about Slobec's supposed default released ICP from liability under its surety bond. 2. ICP could not validly foreclose the real estate mortgage executed by petitioners since it never incurred any liability under the surety bond. (Payment by ICP was not established.) 3. Under the doctrine of piercing the veil of corporate entity, when valid grounds exist, the legal fiction that a corporation is an entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation, that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime , or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. 4. The doctrine of piercing the veil of corporate fiction is not applicable in this case. 5. The mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud

creditors and third persons of their rights. 6. In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a corporate debt or obligation. Assuming that petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly, petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and thereafter transacted with petitioners, with the sole intention of defrauding the latter. 7. It must be noted that Modesto N. Cervantes served as Vice-President of Bormaheco and, later, as President of PM Parts. It cannot be said that PM Parts had no knowledge of the several transactions executed between Bormaheco and petitioners. In addition, Atty. de Guzman, who is the Exec. VP of Bormaheco, was also the legal counsel of ICP and PM Parts. Hence, the defense of good faith may not be resorted to by PM Parts which is charged with knowledge of the true relations existing between the parties. Accordingly, the TCTs issued in its name, as well as the certificate of sale, must be declared null and void since they cannot be considered free of the taint of bad faith. CASE LAW/ DOCTRINE: Under the doctrine of piercing the veil of corporate entity, when valid grounds 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.

053 DBP vs. CA August 16, 2001 G.R. No. 126200 TOPIC: Piercing the Corporate veil; remedy PONTENTE: Kapunan, J.

AUTHOR: Arthur Archie Tiu Corporation Law; Piercing the Veil of Corporate Fiction Doctrine; When the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons or in case of two corporations, merge them into one

FACTS 1. Marinduque Mining obtained from the Philippine National Bank (PNB) various loan accommodations. To secure the loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. 2. covered all the minings real properties 3. As of November 1980, Loans extended by PNB amounted to P 4 billion 4. in 1981, Marinudque Mining executed a second mortage in favor of DBP and PNB 5. The mortgage also covered all of Marinduque Mining's chattels, as well as assets of whatever kind, nature and description which Marinduque Mining may subsequently acquire in substitution or replenishment or in addition to the properties covered by the previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also obtained loans totaling P2 Billion from DBP, exclusive of interest and charges. 6. between 1982 to 1983, Marinduque Mining purchased and caused to be delivered construction materials and other merchandise from Remington Industrial Sales Corporation (Remington) worth P921,755.95. 7. in 1984, Marinduque mining executed in favor of PNB and DBP an Amendment to Mortgage Trust Agreement, they included all other real and personal properties acquired by the company 8. Mariunduque mining failed to settle the loans and obigations, PNB and DBP foreclosed the properties and declared as highest bidders. Pursuant to Proclamation 50, they transferred all their rights and interests over Marinduque mining to the government. 9. The purchases from Remington remained unpaid as of August 1, 1984 thus Remington filed a complaint for the sum of money against Marinduque Mining. 10. Remington's original complaint was amended to include PNB and DBP as co-defendants in view of the foreclosure, they later included Nonoc mining as it is the assignee to all the properties of Marinuque mining 11. 1986, Remington filed a third amended complaint including the Maricalum Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island Cement must be treated in law as one and the same entity by disregarding the veil of corporate fiction: Codefendants are owned by DBP and PNB. (1) They hurried the foreclosure as to make it suspicious. (2) The personnel, key officers and rank-and-file workers and employees of co-defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB and DBP were the personnel of co-defendant MMIC such that . . . practically there has only been a change of name for all legal purpose and intents (3) The places of business not to mention the mining claims and project premises of co-defendants NMIC, Maricalum and Island Cement likewise used to be the places of business, mining claims and project premises of co-defendant MMIC 12. RTC: rendered decision in favor of Plaintiff, CA affirmed the decision

ISSUE: Whether or not Remington has a cause of action against DBP or PNB nor against all co-defendants HELD: No.

RATIO: - This Court has disregarded the separate personality of the corporation where the corporate entity was used to escape liability to third parties. In this case, however, we do not find any fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the corporate veil. - PNB and DBP are mandated to foreclose on the mortgage when the past due account had incurred arrearages of more than 20% of the total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) - PNB and DBP did not only have a right, but the duty under said law, - Court of Appeals made reference to two principles in corporation law. The first pertains to transactions between corporations with interlocking directors resulting in the prejudice to one of the corporations. This rule does not apply in this case, however, since the corporation allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking directors (Marinduque Mining and DBP) - The second principle invoked by respondent court involves "directors x x x who are creditors" which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the directors of Marinduque Mining. - Neither is there bad faith in any of the Co-defendants - the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this case, the Court finds that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject properties to justify the piercing of the corporate veil. CASE LAW/ DOCTRINE: the doctrine of piercing the veil of corporate fiction applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established DISSENTING/CONCURRING OPINION:

054 GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE CORPORATION), petitioner, vs. ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC EQUITY CORPORATION, respondents. G.R. No. 154975. January 29, 2007 TOPIC: piercing the veil of corporate fiction PONENTE: Garcia

AUTHOR: Chedelle Florido A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons composing it as well as from that of any other entity to which it may be related. The first consequence of the doctrine of legal entity of the separate personality of the corporation is that a corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it may be connected or vice versa. The notion of separate personality may be disregarded under the doctrinepiercing the veil of corporate fictionas in fact the court will often look 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 (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.

FACTS 1. After its incorporation in 1957 as a finance and investment company, petitioner General Credit Corporation (GCC), then known as Commercial Credit Corporation (CCC), established CCC franchise companies in different urban centers of the country. 2. As early as 1974, GCC had applied for and was able to secure license from the then Central Bank (CB) of the Philippines and the Securities and Exchange Commission (SEC) to engage in quasi-banking activities. 3. Respondent CCC Equity Corporation (EQUITY), organized (in November 1994) by GCC for the purpose of taking over the operations and management of the various franchise companies. 4. Respondent Alsons Development and Investment Corporation (ALSONS) and Conrado, Nicasio, Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja (ALCANTARAS), each owned shares in the GCC franchise companies (CCC Davao and CCC Cebu). 5. In December 1980, ALSONS and the ALCANTARAS, for a consideration of Two Million (P2,000,000.00) Pesos, sold their shareholdingsa total of 101,953 shares, more or lessin the CCC franchise companies to EQUITY. 6. On January 2, 1981, EQUITY issued ALSONS et al., a bearer promissory note for P2,000,000.00 with a one -year maturity date (18% interest per annum, with provisions for damages and litigation costs in case of default). 7. 4 years later, the ALCANTARAS assigned its rights and interests over the bearer note to ALSONS which became the holder thereof (but even before the execution of the assignment deal, letters of demand for interest payment were already sent to EQUITY, through its President Wilfredo Labayen who pleaded inability to pay the stipulated interest, EQUITY no longer then having assets or property to settle its obligation nor being extended financial support by GCC). 8. On January 14, 1986, ALSONS (upon failing to collect from EQUITY and GCC) filed a complaint for a sum of money against EQUITY and GCC. 9. 2. Answering with a cross-claim against GCC, EQUITY stated by way of special and affirmative defenses that it (EQUITY): a) was purposely organized by GCC for the latter to avoid CB Rules and Regulations on DOSRI (Directors, Officers, Stockholders and Related Interest) limitations, and that it acted merely as intermediary or bridge for loan transactions and other dealings of GCC to its franchises and the investing public; and b) is solely dependent upon GCC for its funding requirements, to settle, among others, equity purchases made by investors on the franchises; hence, GCC is solely and directly liable to ALSONS, GCC having failed to provide EQUITY the necessary funds to meet its obligations to ALSONS. 10. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from EQUITY and alleging, in essence that the business relationships with each other were always at arms length. 11. ALSONS evidences: a) EQUITY-issued bearer PN and over 60 other documents b) letter-reply of then GCC Pres. G. Villanueva to EQUITY Pres. Wilfredo Labayen (in said letter, Mr. Villanueva explained that the GCC Board denied the Alcantaras request to be paid out of such proceeds, but nonetheless authorized

EQUITY to pay them interest out of EQUITYs operation income, in preference over what was due GCC). 12. EQUITY presented its President and adopted the testimony of ALSONS witnesses and the documentary exhibits testified by each of them. 13. GCC called only Wilfredo Labayen to testify. It stuck to its underlying defense of separateness and presented documentary evidence detailing the organizational structures of both GCC and EQUITY. And in a bid to negate the notion that it was conducting its business illegally, GCC presented CB and SEC-issued licenses authoring it to engage in financing and quasi-banking activities. It also adduced evidence to prove that it was never a party to any of the actionable documents ALSONS and its predecessors-in-interest had in their possession and that the November 27, 1985 deed of assignment of rights over the promissory note was unenforceable. RTC EQUITY was only an instrumentality of GCC. Judgment in favor of ALSONS (EQUITY and GCC ordered to jointly and severally pay ALSONS 2 Million pesos plus interests). CA affirmed RTC. ISSUE: Whether or not the piercing of the veil of corporate fiction has basis and was proper. HELD: Yes. RATIO: 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. The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being justifiable basis for such action. When the appellate court spoke of a justifying factor, the reference was to what the trial court said in its decision, namely: the existence of certain circumstances [which], taken together, gave rise to the ineluctable conclusion that [respondent] EQUITY is but an instrumentality or adjunct of [petitioner] GCC. Per the Courts count, the trial court enumerated no less than 20 documented circumstances and transactions, which, taken as a package, indeed strongly supported the conclusion that respondent EQUITY was but an adjunct, an instrumentality or business conduit of petitioner GCC. Foremost of what the trial court referred to as certain circumstances are the commonality of directors, officers and stockholders and even sharing of office between petitioner GCC and respondent EQUITY; certain financing and management arrangements between the two, allowing the petitioner to handle the funds of the latter; the virtual domination if not control wielded by the petitioner over the finances, business policies and practices of respondent EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB rules. Thru the testimony of EQUITYs own President that more than 90% of the stockholders of EQUITY were also stockholders of GCC .. Disclosed likewise is the fact that when [EQUITYs President] Labayen sold the shareholdings of EQUITY in said franchise companies, practically the entire proceeds thereof were surrendered to GCC, and not received by EQUITY. As affirmed by EQUITYs President, the funds invested by EQUITY in the CCC franchise companies actually came from CCC Phils. or GCC (Exhibit Y-5). that, as disclosed by the Auditors report for 1982, past due receivables alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates especially CCC EQUITY. ; that [CBs] Report of Examination dated July 14, 1977 shows that EQUITY which has a paid-up capital of only P500,000.00 was the biggest borrower of GCC with a total loan of P6.70 Million. Not only did GCC cause the incorporation of EQUITY, but, the latter had grossly inadequate capital for the pursuit of its line of business to the extent that its business affairs were considered as GCCs own business endeavors. ALSONS has likewise shown that the bonuses of the officers and directors of EQUITY was based on its total financial performance together with a ll its affiliates both firms were sharing one and the same office when both were still operational and that the directors and executives of EQUITY never acted independently but took their orders from GCC. The evidence has also indubitably established that EQUITY was organized by GCC for the purpose of circumventing [CB] rules and regulations and the Anti-Usury Law (as of March 31, 1977, GCC latter violated [CB] rules and regulations by: (a) using as a conduit its non-quasi bank affiliates . (b) issuing without recourse facilities to enable GCC to extend credit to affiliates like EQUITY which go beyond the single borrowers limit without the need of showing outstanding balance in the book of accounts). GCC did not adduce any evidence, let alone rebut the testimonies and documents presented by ALSONS, to

establish the prevailing circumstances adverted to that provided the justifying occasion to pierce the veil of corporate fiction between GCC and EQUITY. As the relationships binding herein [respondent EQUITY and petitioner GCC] have been that of parentsubsidiary corporations the foregoing principles and doctrines find suitable applicability in the case at bar; and, it having been satisfactorily and indubitably shown that the said relationships had been used to perform certain functions not characterized with legitimacy, this Court feels amply justified to pierce the veil of corporate entity and disregard the separate existence of the percent (sic) and subsidiary the latter having been so controlled by the parent that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of the former. GCC was the entity which initiated and benefited immensely from the fraudulent scheme perpetrated in violation of the law. CASE LAW/ DOCTRINE: Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the corporate fiction is used as 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.

055 - Garrett v. Southern Railway (May 8, 1959, 173 F.Supp E.d. Tenn) TOPIC: Parent Subsidiary Relationship PONENTE: Robert L. Taylor, District Judge

AUTHOR: De Silva, Denison Note: Lenoir Car Works employed Garrett. The latter was injured. Meanwhile, Southern Railway acquired the entire capital stock of Lenoir. Garrett now claims compensation under the Federal Employers Liability Act against Southern Railway.

FACTS: 1. W.H. Garrett (plaintiff) was employed as a wheel moulder by Lenoir Car Works, a Tennessee corporation. 2. Plaintiff Garrett claims injuries from silicosis (pneumoconiosis characterized by massive fibrosis of the lungs resulting in shortness of breath) contracted from silica dust permeating the foundry. 3. Plaintiff contends that all directors and officers of Lenoir are employees of Southern Railway and that defendant owns all the stock of Lenoir except five qualifying shares. Furthermore, plaintiff contends that all the profits of Lenoir went to Southern. 4. Defendant Southern Railway contends that although Lenoir sells the majority of its products to Southern or its affiliates, it does not sell to them exclusively; that Lenoir maintains its offices and business in Lenoir City; that the management of Lenoir is vested in a manager; that Lenoir makes separate collective bargaining agreements with its employees and there is no interchange of seniority between operations of Lenoir and the railroad, or vice versa. ISSUE: Whether Lenoir Car Works is operated as a sham for Southern, or as the instrumentality, or as an adjunct of its operation, rendering Southern liable to the plaintiff. HELD: No, the control of Southern Railway over Lenoir Car Works was not such as to constitute the latter an adjunct of Southern. RATIO: 1. The Court held that the facts set forth provided the relation between the two companies. The Court finds the existence of two distinct operations. There is no evidence that Southern dictated the management of Lenoir. In fact, the evidence indicates that Henry Marius (manager of Lenoir) was in full control of the operation. He established prices. He handled all negotiations in collective bargaining agreements. 2. Lenoir paid local taxes, had local counsel, maintained Workmen's Compensation. There is no evidence that Lenoir was run solely for the benefit of Southern. In fact a substantial part of its requirements in the field of operation of Lenoir were bought elsewhere. Lenoir sold substantial quantities to other companies. It operated no rolling stock and had nothing to do with the transportation business. 3. Lenoir Car Works was not performing what have been called non-delegable duties of the railroad. It was not an operator of a terminal, performed no switching or transportation functions at all. It was a manufacturer and plaintiff was one of its employees. It was hence not an "agent" of Southern in the sense used in some of the cases cited by the plaintiff, since it performed no common carrier operations. 4. The Court further held that under the indicia of control, only two concur in the case at bar, namely, the ownership of most of the capital stock of Lenoir by Southern, and possibly subscription by Southern to the capital stock of Lenoir. 5. Complaint: DISMISSED. CASE LAW/ DOCTRINE: The general rule is that stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. DISSENTING/CONCURRING OPINION:

056 KOPPEL (PHILS) V. YATCO October 10, 1946, G.R. No. L-47673 TOPIC:PARENT-SUBSIDIARY RELATIONSHIP PONTENTE: HILADO, J. FACTS

AUTHOR: Gelene Guevara

1. Plaintiff is a corporation duly is duly licensed to engage in business as a merchant and commercial broker in the Philippines, the capital stock of which is divided into 1,000 shares of P100 each. The Koppel Industrial Car and Equipment company, a corporation organized and existing under the laws of the State of Pennsylvania, United States of America, and not licensed to do business in the Philippines, owned 995 shares out of the total capital stock of the plaintiff and the remaining 5 shares are owned by each officer of the plaintiff corporation. 2. Plaintiff transacted business in the Philippines in the following manner: When a local buyer was interested in the purchase of railway materials, machinery, and supplies, it asked for price quotations from plaintiff. Plaintiff then cabled for the quotation desired for Koppel Industrial Car and Equipment Company Koppel Industrial Car and Equipment Company answered by cable quoting its cost price, which was later followed by a letter of confirmation. On the basis of these quotations, orders were placed by the local purchasers. A cable was then sent to Koppel Industrial Car and Equipment company giving instructions to ship the merchandise to Manila forwarding the customer's order. The bills of lading were usually made to "order" and indorsed in blank with notation to the effect that the buyer be notified of the shipment of the goods covered in the bills of lading; commercial invoices were issued by Koppel Industrial Car and Equipment Company in the names of the purchasers and certificates of insurance were likewise issued in their names, or in the name of Koppel Industrial Car and Equipment Company but indorsed in blank and attached to drafts drawn by Koppel Industrial Car and Equipment Company on the purchasers, which were forwarded through foreign banks to local banks. he purchasers secured the shipping papers by arrangement with the banks, and thereupon received and cleared the shipments. If the merchandise were of European origin, and if there was not sufficient time to forward the documents necessary for clearance, through foreign banks to local banks, to the purchasers, the Koppel Industrial Car and Equipment company did, in many cases, send the documents directly from Europe to plaintiff with instructions to turn these documents over to the purchasers. In many cases, where sales was effected on Manila, duty paid, plaintiff advanced the sums required for the payment of the duty, and these sums were in every case reimbursed to plaintiff by Koppel Industrial Car and Equipment Company. The price were payable by drafts agreed upon in each case and drawn by Koppel Industrial Car and Equipment Company on respective purchasers through local banks, and payments were made to the banks by the purchasers on presentation and delivery to them of the abovementioned shipping documents or copies thereof. Plaintiff received by way of compensation a percentage of the profits on the above transactions as in the plaintiff's contract with Koppel Industrial Car and Equipment Company and suffered its corresponding share in the losses resulting from some of the transactions. 3. Plaintiff's share in the profits of the transactions is only to P132, 201.30 out of the P3, 772,403.82. The plaintiff paid the sum of P5, 288.05 as commercial brokers 4 % tax for the P132, 201.30 it obtained. 4. The defendant Collector of Internal Revenue, represented by Yatco, demanded the sum of P64, 122.51 as the merchants' sales tax of 1% per cent on the amount of P3, 772,403.82, representing the total gross value of the sales. 5. The plaintiff paid under protest said sum of P64, 122.51. The defendant refused to return to the sum of P64, 122.51 or any part thereof notwithstanding demands by plaintiff. ISSUE: Whether Koppel (Phils) is a domestic corporation distinct and separate from Koppel Industrial Car and Equipment company HELD: NO. Koppel (Phils) is a mere branch or subsidiary of Koppel Industrial Car and Equipment company. RATIO: 1.We find that, in so far as the sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel Industrial Car and Equipment company are to all intents and purposes one and the same; or, to use another mode of expression, that, as

regards those transactions, the former corporation is a mere branch, subsidiary or agency of the latter. To our mind, this is conclusively borne out by the fact, among others, that: The amount of the so-called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car and Equipment Company . No group of businessmen could be expected to organize a mercantile corporation - the ultimate end of which could only be profit - if the amount of that profit were to be subjected to such a unilateral control of another corporation, unless indeed the former has previously been designed by the incorporators to serve as a mere subsidiary, branch or agency of the latter. Koppel Industrial Car and Equipment Company made use of its ownership of the overwhelming majority 99.5% - of the capital stock of the local corporation to control the operations of Koppel (Phils) to such an extent that it had the final say even as to how much should be allotted to said local entity in the so-called sharing in the profits. We can not overlook the fact that in the practical working of corporate organizations of the class to which these two entities belong, the holder or holders of the controlling part of the capital stock of the corporation, particularly where the control is determined by the virtual ownership of the totality of the shares, dominate not only the selection of the Board of Directors but, more often than not, also the action of that Board. Applying this to the instant case, we can not conceive how the Philippine corporation could effectively go against the policies, decisions, and desires of the American corporation with regards to the scheme which was devised through the instrumentality of the petitioners contract with Koppel Industrial Car and Equipmen t company, as well as all the other details of the system which was adopted in order to avoid paying the 1 per cent merchants sales tax. Neither can we conceive how the Philippine corporation could avoid following the directions of the American corporation held 99.5 per cent of the capital stock of the Philippine corporation. In the present instance, we note that Koppel (Philippines), Inc., was represented in the Philippines by its "resident Vice-President." This fact necessarily leads to the inference that the corporation had at least a VicePresident, and presumably also a President, who were not resident in the Philippines but in America, where the parent corporation is domiciled. If Koppel (Philippines), Inc., had been intended to operate as a regular domestic corporation in the Philippines, where it was formed, the record and the evidence do not disclose any reason why all its officers should not reside and perform their functions in the Philippines. Plaintiff was charged by the American corporation with the cost even of the latter's cable quotations - from ought that appears from the evidence, this can only be comprehended by considering plaintiff as such a subsidiary, branch or agency of the parent entity, in which case it would be perfectly understandable that for convenient accounting purposes and the easy determination of the profits or losses of the parent corporation's Philippines should be charged against the Philippine office and set off against its receipts, thus separating the accounts of said branch from those which the central organization might have in other countries. The reference to plaintiff by local banks, under a standing instruction of the parent corporation, of unpaid drafts drawn on Philippine customers by said parent corporation, whenever said customers dishonored the drafts, and the fact that the American corporation had previously advised said banks that plaintiff in those cases was "fully empowered to instruct (the banks) with regard to the disposition of the drafts and documents" in the absence of any other satisfactory explanation naturally give rise to the inference that plaintiff was a subsidiary, branch or agency of the American concern, rather than an independent corporation acting as a broker. For, without such positive explanation, this delegation of power is indicative of the relations between central and branch offices of the same business enterprise, with the latter acting under instructions already given by the former. Far from disclosing a real separation between the two entities, particularly in regard to the transactions in question, the evidence reveals such commingling and interlacing of their activities as to render even incomprehensible certain accounting operations between them, except upon the basis that the Philippine corporation was to all intents and purposes a mere subsidiary, branch, or agency of the American parent entity. 2. K-Phil was a mere branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the consequent commission of a grave injustice to the Government. Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly.

AUTHOR: Myk 057 Liddell & Co., Inc. v. The Collector of Internal Liddell & Co., Inc. was engaged in importing and retailing Revenue 30 June 1961 G.R. No. L-9687 Oldsmobile and Chevrolet cars and GMC and Chevrolet TOPIC: The Corporate Entity: Parent-Subsidiary trucks. Relationship PONENTE: Bengzon, C.J. FACTS 1. NATURE OF THE CASE: Appeal from the decision of the Court of Tax Appeals imposing tax deficiency liability on Liddell & Co., Inc. 2. 1 February 1946 a. Liddell & Co., Inc. was established in the Philippines. b. Authorized capital = P100,000 / 1,000 shares = P100 each i. Frank Liddell subscribed and paid = 196 shares at P19,600 ii. Kurz, Darras, Manzano, and Serrano = 1 share EACH. iii. TOTAL PAID IN CAPITAL: 200 shares = P20,000 3. 31 January 1947 a. Declared 90% stock dividend. i. Frank Liddells holding = increased to 1,960 shares ii. Kurz, Darras, Manzano, and Serrano = increased to 10 shares EACH. b. A resolution was passed increasing the authorized capital to P1,000,000 which was later on approved by the SEC. i. Frank Liddells holding = increased to 4,960 shares (paid P300,000 for his 3, 000 share increase) 4. 24 May 1947 (AGREEMENT was referred to in the case as EXHIBIT A) a. Liddell, Kurz, Darras, Manzano, and Serrano executed an agreement wherein Liddell transferred shares of stocks to various employees of Liddell & Co., Inc. b. 40% of the earnings available for dividends accrued to Frank Liddell although at the time of the execution of aid instrument, Frank Liddell owned all of the shares in said corporation. c. 45% accrued to the employees, parties thereto; Kurz 12-1/2%; Darras 12-1/2%; A. Manzano 12-1/2% and Julian Serrano 7-1/2%. d. The agreement was also made retroactive to 1946. e. Frank Liddell reserved the right to reapportion the 45% dividends pertaining to the employees in the future for the purpose of including such other faithful and efficient employees as he may subsequently designate. 5. 2 agreements were forged between them supplementing the previous agreement. a. EXHIBIT B - contains the employees' definition in detail of the manner by which they sought to prevent their share-holdings from being transferred to others who may be complete strangers to the business on Liddell & Co. b. EXHIBIT C - dated May 13, 1948, the 45% given by Frank Liddell to his employees was reapportioned as follows: C. Kurz 12,%; E. J. Darras 12%; A. Manzano l2%; J. Serrano 3-1/2%; G. W. Kernot 2%. 6. 9 March 1948 a. Annual meeting of stockholders b. Declared 100% stock dividend c. A resolution was passed increasing the authorized capital to P3,000,000 which was later on approved by the SEC. d. Frank Liddell subscribed to and paid 20% of the increase of P400,000 e. He paid 25% thereof in the amount of P100,000. f. The balance of the P3,000,000 was debited to his account and credited to Subscribed Capital Stock on 11 December 1948. 7. 8 March 1949 a. Stock dividends were issued by the company in accordance with the agreements made on May 1947 and June 1948. The stocks of the company stood as follows: Name Frank Liddell No. of Shares Amount Per Cent 72.00%

13,688 P1,368,800

Irene Liddell Mercedes Vecin Charles Kurz E.J. Darras Angel Manzano Julian Serrano E. Hasim G. W. Kernot

1 1 1,225 1,225 1,150 710 500 500

100 100 122,500 122,500 115,000 71,000 50,000 50,000

.01% .01% 6.45% 6.45% 6.06% 3.74% 2.64% 2.64% 100.00%

19,000 P1,900,000

8. 15 November 1949 a. Based on a resolution of a special meeting of the BOD of the company stock dividends were reapportioned in this manner: No. of Name Amount Per Cent Shares Frank Liddell Irene Liddell Mercedes Vecin Charles Kurz E.J. Darras Angel Manzano Julian Serrano E. Hasim G. W. Kernot 19,738 P1,973,800 1 1 2,215 2,215 1,810 1,700 830 1,490 100 100 221,500 221,500 181,000 170,000 83,000 149,000 65.791% .003% .003% 7.381% 7.381% 6.031% 5.670% 2.770% 4.970%

30,000 P3,000,000 100.000% 9. 22 November 1948 amended the purpose clause of its Articles of Incorporation limiting its business activities to importation of automobiles and trucks. 10. 20 December 1948 a. Liddell Motors, Inc. was organized and registered with the SEC. b. Authorized stock capital = P100,000 c. P20,000 was subscribed and paid for as follows: i. Irene Liddell (wife of Frank) = 19,996 shares ii. Marcial P. Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva = 1 share EACH. 11. By the end of 1948, Kurz, Manzano, and Kernot resigned from Liddell & Co. and were employed by Liddell Motors, Inc. as Treasurer, General Sales Manager for cars, and General Sales Manager for Trucks, respectively. 12. January 1949 a. Liddell & Co., Inc. stopped retailing cars and trucks and conveyed them to Liddell Motors, Inc. which in turn sold the vehicles to the public with a steep mark-up. b. Liddell & Co. Inc. paid taxes on the basis of its sales to Liddell Motors, Inc. considering said sales as its original sales. 13. The Collector of Internal Revenue (CIR) reviewed the transactions made between the 2 companies and determined that Liddell Motors was actually the alter ego of Liddell & Co., Inc. 14. The CIR imposed sales tax deficiency amounting to P1,317,629.61. a. This is based on the gross selling price of Liddell Motors, Inc. to the general public from January 1, 1949 to September 15, 1950, without deducting from the selling price, the taxes already paid by Liddell & Co. in its sales to the Liddell Motors Inc. 15. The Court of Tax Appeals upheld the decision of the CIR. 16. TAKE NOTE: The law in force at the time of its incorporation the sales tax on original sales of cars progressive.

i.e. 10% of the selling price of the car if it did not exceed P5000, and 15% of the price if more than P5000 but not more than P7000, etc. ISSUE: Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are (practically) identical corporations, the latter being merely the alter ego of the former. HELD: Yes. RATIO: 1. Frank Liddell complete control over Liddell & Co., Inc. based on the following facts: a. From the time of its organization 98% of the capital stock belonged to him. b. The 20% paid-up subscription with which the company began its business was paid by him. c. The subsequent subscriptions to the capital stock were made by him and paid with his own money. d. Stipulations and conditions appear in the first agreement: i. (1) that Frank Liddell had the authority to designate in the future the employee who could receive earnings of the corporation; to apportion among the stock holders the share in the profits; ii. (2) that all certificates of stock in the names of the employees should be deposited with Frank Liddell duly indorsed in blank by the employees concerned; iii. (3) that each employee was required to sign an agreement with the corporation to the effect that, upon his death or upon his retirement or separation for any cause whatsoever from the corporation, the said corporation should, within a period of sixty days therefor, have the absolute and exclusive option to purchase and acquire the whole of the stock interest of the employees so dying, resigning, retiring or separating. 2. Frank Liddell as owned Liddell Motors, Inc. based on the following facts: a. He supplied the original capital funds. i. His wife failed to sufficiently prove that she had the capacity to be the sole incorporator of Liddell Motors, Inc. 1. Her income in the US and savings could not be enough to cover the amount of subscription and operate the business. 2. The alleged sale of her property in Oregon was never shown to have been saved or deposited so as to be still available at the time of the organization of the Liddell Motors, Inc. 3. Income tax records showed that she had to independent income of her own. Her salary and bonuses from the company ended up in the account of Frank Liddell. ii. Evidence also showed that she did not participate in the operations of the company. 3. Liddell Motors, Inc. and Liddell & Co., Inc. are one and the same. a. Most of the business transactions of Liddell & Co. were made through Liddell Motors, Inc. Liddell Motors secured the cars, trucks, spare parts from Liddell & Co. Inc. and then sold them to the public. b. The movement of sales from the two companies to the public would take place on the same day. c. The SC said that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality. d. During the first half of 1949: i. Liddell & Co. issued ten (10) checks payable to Frank Liddell which were deposited by Frank Liddell in his personal account with the Philippine National Bank. ii. He issued in favor of Liddell Motors, Inc. six (6) checks drawn against his personal account with the same bank. iii. The SC concluded that the checks issued by Frank Liddell to the Liddell Motors, Inc. were significantly for the most part issued on the same day when Liddell & Co. Inc. issued the checks for Frank Liddell and for the same amounts. 4. The court recognized the fact that one or more corporations are owned and controlled by a single stockholder is not of itself sufficient ground for disregarding separate corporate entities. 5. It is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected. 6. The activities and engagements of the companies were the medium to reduce the price and tax liability. 7. Let us illustrate: a car with engine motor no. 212381 a. Sold by Liddell & Co. Inc. to Liddell Motors, Inc. on January 17, 1948 for P4,546,000.00 including tax. b. the price of the car was P4,133,000.23

c. the tax paid being P413.22 at 10%. d. The car was sold (on the same day) by Liddell Motors, Inc. to P.V. Luistro for P5500, no more sales tax was paid. e. In this price of P5500 was included the P413.32 representing taxes paid by Liddell & Co. Inc. in the sale to Liddell Motors, Inc. f. Deducting P413.32 representing taxes paid by Liddell & Co., Inc. the price of P5500, the balance of P5,087.68 would have been the net selling price of Liddell & Co., Inc. to the general public (had Liddell Motors, Inc. not participated and intervened in the sale), and 15% sales tax would have been due. g. In this transaction, P349.68 in the form of taxes was evaded. 8. To allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws. CASE LAW/ DOCTRINE: It is of course accepted that the mere fact that one or more corporations are owned and controlled by a single stockholder is not of itself sufficient ground for disregarding separate corporate entities. Authorities 10 support the rule that it is lawful to obtain a corporation charter, even with a single substantial stockholder, to engage in a specific activity, and such activity may co-exist with other private activities of the stockholder. If the corporation is a substantial one, conducted lawfully and without fraud on another, its separate identity is to be respected.

058 YUTIVO v. COURT OF TAX APPEALS January 28, 1961, G.R. No. L-13203 TOPIC: Parent-Subsidiary Relationship PONENTE: GUTIERREZ DAVID, J.

AUTHOR: Jelena SM-not the mall. Tax Court decided that SM was organized to evade taxes, SC found no taxed to be evaded, so the 50% surcharge is improper. SM and Yutivo may be treated as one entity to pay for taxes.

FACTS 1.Yutivo Sons Hardware Co. (Yutivo), a domestic corporation incorporated under Philippine laws in 1916, was engaged in the importation and sale of hardware supplies and equipment. 2. After the first world war, it resumed its business and bought a number of cars and trucks from General Motors Corporation (GM), an American Corporation licensed to do business in the Philippines. 3. GM paid sales tax prescribed by the Tax Code on the basis of its selling price to Yutivo but Yutivo paid no further sales tax on its sales to the public. 4. On June 13, 1946, the Southern Motors Inc, (SM) was organized to engage in the business of selling cars, trucks and spare parts. One of the subscribers of stocks during its incorporation was Yu Khe Thai, Yu Khe Siong and Hu Kho Jin, (sons of Yu Tiong Yee, one of Yutivos founders) as well as Yu Eng Poh, and Washington Sycip (sons of Yu Tiong Sin and Albino Sycip, respectively, also founders of Yutivo). 5. After SMs incorporation and until the withdrawal of GM from the Philippines, the cars and trucks purchased by Yutivo from GM were sold by Yutivo to SM which the latter sold to the public. 6. Yutivo was appointed importer for Visayas and Mindanao by the US manufacturer of cars and trucks sold by GM. Yutivo paid the sales tax prescribed on the basis of selling price to SM. SM paid no sales tax on its sales to the public. 7. An assessment was made upon Yutivo for deficiency sales tax. The Collector of Internal Revenue, contends that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being a subsidiary of the latter . 8. The assessment was disputed by petitioner. After reinvestigation, a second assessment was made, sustaining the validity of the first assessment. Yutivo contested the second assessment, alleging that: (1) there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner; (2) assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) the surcharge has been erroneously imposed by respondent.

ISSUE: Could the separate corporate personality of SM and Yutivo be disregarded? HELD: YES, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo. RATIO: 1. The CTA was not justified in finding that SM was organized to defraud the Government. SM was organized in June 1946, from that date until June 30, 1947, GM was the importer of the cars and trucks sold to Yutivo, which in turn was sold to SM. GM, as importer was the one solely liable for sales taxes. Neither Yutivo nor SM was subject to the sales taxes. Yutivos liability arose only until July 1, 1947 when it became the importer. Hence, there was no tax to evade. 2. The intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. 3. Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return. 4. However, the respondent court is correct that SM was actually owned and controlled by petitioner. Consideration of various circumstances indicate that Yutivo treated SM merely as its department or adjunct: a. The founders of the corporation are closely related to each other by blood and affinity. b. The object and purpose of the business is the same; both are engaged in sale of vehicles, spare parts, hardware supplies and equipment. c. The accounting system maintained by Yutivo shows that it maintained high degree of control over SM accounts. d. Several correspondences have reference to Yutivo as the head office of SM. SM may even freely use forms or

stationery of Yutivo. e. All cash collections of SMs branches are remitted directly to Yutivo. f. The controlling majority of the Board of Directors of Yutivo is also the controlling majority of SM. g. The principal officers of both corporations are identical. Both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivos president, Yu Khe Thai. h. Yutivo, financed principally the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM. CASE LAW/ DOCTRINE: It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of persons, or in the case of two corporations merge them into one.

AUTHOR: Dolina, Chad 059 Phividec v CA and Violeta Borres G.R. No. 85266 January 30, 1990 TOPIC: Parent-Subsidiary Relationship PONENTE: Cruz, J. FACTS 1. Violeta M. Borres, private respondent herein, was injured in an accident that was later held by the trial and respondent courts to be due to the negligence of Phividec Railways, Inc. (PRI). 2. On May 25, 1979, petitioner Philippine Veterans Investment Development Corporation (PHIVIDEC) sold all its rights and interests in the PRI to the Philippine Sugar Commission (PHILSUCOM). Two days later, PHILSUCOM caused the creation of a wholly-owned subsidiary, the Panay Railways, Inc., to operate the railway assets acquired from PHIVIDEC. 3. Borres filed a complaint for damages against Phividec Railways Inc. and Panay Railways Inc. Panay disclaimed liability on the ground that in the Agreement concluded between PHIVIDEC and PHILSUCOM, it was provided that: D. With the exception of the Liabilities and Contracts specified in Annexes 4 and 5 of the preceding paragraph, PHIVIDEC hereby holds PHILSUCOM harmless from and against any action, claim or liability that may arise out of or result from acts or omissions, contracts or transactions prior to the turn-over. 4. RTC of Iloilo held that Phividec Railways Inc. is negligent and liable to the private respondent for damages. 5. CA affirmed decision of RTC. 6. Petitioner argues that PHIVIDEC and Phividec Railways Inc. are entirely distinct and separate corporations although the latter is its subsidiary. The transfer of the shares of stock of PRI to PHILSUCOM did not divest PRI of its juridical personality or of its capacity to direct its own affairs and conduct its own business under the control of its own board of directors. ISSUE: Whether or not PHIVIDEC can be held liable to the plaintiff for damages? HELD: Yes. PHIVIDEC and PRI regarded as one and the same entity. RATIO: 1. It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and PHILSUCOM, particularly the stipulation exempting the latter from any "claim or liability arising out of any act or transaction" prior to the turn-over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since the accident happened before that agreement and PRI ceased to exist after the turn-over, it should follow that PHIVIDEC cannot evade its liability for the injuries sustained by the private respondent. 2. Besides, PHIVIDEC'S act of selling PRI to PHILSUCOM shows that PHVIDEC had complete control of PRI's business. This circumstance renders applicable the rule cited by third-party plaintiff-appellee (Costan v. Manila Electric, 24 F 2nd 383) that if a parent- holding company (PHIVIDEC in the present case) assumes complete control of the operations of its subsidiary's business, the separate corporate existence of the subsidiary must be disregarded, such that the holding company will be responsible for the negligence of the employees of the subsidiary as if it were the holding company's own employees.

CASE LAW/ DOCTRINE: A corporation which is merely an adjunct, business conduit or alter ego of another corporation, the fiction of separate and distinct corporate entities should be disregarded.

DISSENTING/CONCURRING OPINION:

060 LA CAMPANA COFFEE FACTORY, INC., v. KAISAHAN May 25, 1953, G.R. No. L-5677 TOPIC: Parent-Subsidiary Relationship PONENTE: Reyes, J.

AUTHOR: Rhona Burce Disregarding corporate entity; industrial disputes; factories operating under one management; effect of one of them being a registered corporation

FACTS 1. Petitioner Tan Tong was engaged in the business of buying and selling gaugau under the trade name La Campana Gaugau Packing. (since 1932) 2. Later on, Tan Tong and his family members, as sole incorporators and stockholders, organized a family corporation known as La Campana Coffee Factory Co., Inc. (1950) 3. Prior to this or on July 11, 1949, Tan Tong had entered into a collective bargaining agreement with the Philippine Legion of Organized Workers, known as PLOW for short, to which the union of Tan Tong's employees was then affiliated. 4. Tan Tong's employees later formed their own organization known as Kaisahan Ng Mga Manggagawa Sa La Campana (KKM), one of the herein respondents, and applied for registration in the Department of Labor as an independent entity. Pending consideration of this application, the Department gave the new organization legal standing by issuing it a permit as an affiliate to the Kalipunan Ng Mga Manggagawa. 5. On July 19, 1951, respondent Kaisahan presented a demand for higher wages and more privileges, the demand being addressed to La Campana Gaugau and the Coffee Factory. Note: The Kaisahan has 66 members, which are workers from both La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc 6. The demand was not granted; Settlement through the mediation of the Conciliation Service of the Department of Labor gave no result; The said Department then certified the dispute to the Court of Industrial Relations. 7. While the case was pending in the industrial court, the Secretary of Labor revoked the permit of the Kalipunan Ng Mga Kaisahang Manggagawa as a labor union; The permit of its affiliate, respondent Kaisahan, was also suspended. 8. Following the revocation of the Kaisahan's permit, "La Campana Gaugau and Coffee Factory" (obviously the combined name of La Campana Gaugau Packing and La Campana Coffee Factory Co., Inc,) and the PLOW, filed separate motions for the dismissal of the case on several grounds. One of which states that the action is directed against two different entities with distinct personalities, with "La Campana Starch Factory" and the "La Campana Coffee Factory, Inc." 9. The Court of Industrial Relations denied the said motions and held that there is only one management for the business of gaugau and coffee with whom the laborers are dealing regarding their work. 10. Contention of Tan Tong and La Campana Coffee Factory, Inc: The Court of Industrial Relations has no jurisdiction to take cognizance of the case, because,"(1) that the petitioner La Campana Coffee Factory, Inc. has only 14 employees, only 5 of whom are members of the respondent union and therefore the absence of the jurisdictional number (30) as provided by sections 1 and 4 of Commonwealth Act No. 103; and, (2) that the suspension of respondent union's permit by the Secretary of Labor has the effect of taking away the union's right to collective bargaining under section 2 of Commonwealth Act No. 213 and consequently, its personality to sue for and in behalf of its members." ISSUE: Whether or not the industrial court has jurisdiction to try the case against La Campana Coffee Factory, Inc. as the latter has only 14 employees, only 5 of whom are members of the respondent union Note: Jurisdictional number of laborers required for a union to sue in their behalf HELD: Yes. Although the coffee factory has only 14 laborers and only five of these are members of the labor union, yet as the gaugau factory has more than the jurisdiction number (31) required by law and the two factories are operating under one single management, the industrial court has jurisdiction to try the case as against the La Campana Coffee Factory, Inc.

RATIO: 1. The contention of petitioners that there is absence of jurisdictional number loses force when it is noted that, as found by the industrial court, La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are operating under one single management, that is, as one business though with two trade names. True, the coffee factory is a corporation and, by legal fiction, an entity existing separate and apart from the persons composing it, that is, Tan Tong and his family. But it is settled that this fiction of law, which has been introduced as a matter of convenience and to subserve the ends of justice cannot be invoked to further an end subversive of that purpose. 2. Tan Tong appears to be the owner of the gaugau factory. And the coffee factory, though an incorporated business, is in reality owned exclusively by Tan Tong and his family. As found by the Court of industrial Relations, the two factories have but one office, one management and one payroll, except after July 17, the day the case was certified to the Court of Industrial Relations, when the person who was discharging the office of cashier for both branches of the business began preparing separate payrolls for the two. 3. And above all, it should not be overlooked that, as also found by the industrial court, the laborers of the gaugau factory and the coffee factory were interchangeable, that is, the laborers from the gaugau factory were sometimes transferred to the coffee factory and vice-versa. In view of all these, the attempt to make the two factories appears as two separate businesses, when in reality they are but one, is but a device to defeat the ends of the law and should not be permitted to prevail. CASE LAW/ DOCTRINE: Disregarding Corporate Entity. The doctrine that a corporation is a legal entity existing separate and apart from the person composing it is a legal theory introduced for purposes of convenience and to subserve the ends of justice. The concept cannot, therefore, be extended to a point beyond its reason and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts. Thus, in an appropriate case and in furtherance of the ends of justice, a corporation and the individual or individuals owning all its stocks and assets will be treated as identical, the corporate entity being disregarded where used as a cloak or cover for fraud or illegality . (13 Am. Jur., 160-161.) A subsidiary or auxiliary corporation which is created by a parent corporation merely as an agency for the latter may sometimes be regarded as identical with the parent corporation, especially if the stockholders or officers of the two corporations are substantially the same or their system of operation unified.

061 McArthur v. Times Printing Co. 51 N.W. 216/ February 05, 1892 TOPIC: Liability of Corporation for Promoters Contracts PONENTE: Mitchell, J.

AUTHOR: Bea Mationg While a corporation is not bound by engagements made on its behalf by its promoters before its organization, it may, after it is organized, make such engagements its contracts by adopting them as its own; and this it may do in the same manner as it might make similar original contracts.

FACTS 1. The complaint alleges that on 1889, the defendant contracted with plaintiff for his services as advertising solicitor for one year; that in April, 1890, it discharged him, in violation of the contract. The action is to recover damages for the breach of the contract. 2. The answer sets up two defenses: (1) That plaintiff's employment was not for any stated time, but only from week to week; (2) that he was discharged for good cause. 3. Upon the trial there was evidence reasonably tending to prove that in September, 1889, one C.A. Nimocks and others were engaged as promoters in procuring the organization of the defendant company to publish a newspaper; 4. On about September 12th, Nimocks, as such promoter, made a contract with plaintiff, in behalf of the contemplated company, for his services as advertising solicitor for the period of one year from and after October 1st,-the date at which it was expected that the company would be organized; 5. That the corporation was not, in fact, organized until October 16th, but that the publication of the paper was commenced by the promoters October 1st, at which date plaintiff, in pursuance of his arrangement with Nimocks, entered upon the discharge of his duties as advertising solicitor for the paper; that after the organization of the company he continued in its employment in the same capacity until discharged, the following April; 6. That defendant's board of directors never took any formal action with reference to the contract made in its behalf by Nimocks, but all of the stockholders, directors, and officers of the corporation knew of this contract at the time of its organization, or were informed of it soon afterwards; 7. And none of them objected to or repudiated it, but, on the contrary, retained plaintiff in the employment of the company without any other or new contract as to his services. ISSUE: Whether or not the liability of the corporation, in such cases, is to be placed on the grounds of its adoption of the contract of its promoters, or upon some other ground, such as equitable estoppel. HELD: NOT NECESSARILY, but it has been held that, while a corporation is not bound by engagements made on its behalf by its promoters before its organization, it may, after its organization, make such engagements its own contracts. And this it may do precisely as it might make similar original contracts; RATIO: It is not requisite that such adoption or acceptance be express, but it may be inferred from acts or acquiescence on part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of the corporate agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. Of course, the agreement must be one which the corporation itself could make, and one which the usual agents of the company have express or implied authority to make. That the contract in this case was of that kind is very clear; and the acts and acquiescence of the corporate officers, after the organization of the company, fully justified the jury in finding that it had adopted it as its own. CASE LAW/ DOCTRINE: The act of the corporation in adopting such engagements is not a ratification, which relates back to the date of the making of the contract by the promoter, but is, in legal effect, the making of a contract as of the date of the adoption. Hence, although the contract made in behalf of the contemplated corporation was, by its terms, not to be performed within one year from the date of the making thereof by the promoter, it is not within the statute of frauds if it be performed within one year from the date of its adoption by the corporation after its organization.

While a corporation is not bound by engagements made on its behalf by its promoters before its organization, it may, after it is organized, make such engagements its contracts by adopting them as its own; and this it may do in the same manner as it might make similar original contracts. DISSENTING/CONCURRING OPINION: N/A

AUTHOR: Mercado, Christopher Dann C. 062 Clifton et, al, vs, Tomb TOPIC: Liability of Corporation for Promoters Contract FACTS 1. Tomb had an option to buy all shares of a certain corporation, Virginia Corporation. 2. However, the sold this option to Clifton for a sum of $20,000. 3. But later Tomb and Clifton have later agreed that in lieu of the payment of $20,000, Tomb should receive $20,000 in stock of the West Virginia corporation which is not yet formed, and is still to be incorporated by its promoters and incorporators, amongst which is Clifton. 4. With that, Tomb issued promissory notes to Clifton to cover the value of the shares which he would get from the West Virginia Corporation, but with the understanding that he would not be liable on them. 5. Other incorporators and promoters of the West Virginia Corporation did not know of this agreement between Clifton and Tomb. 6. The West Virginia Corporation was organized as agreed and took over the shares of the Virginia Corporation, but Tomb did not get the agreed shares in the former corporation. 7. Thus, Tomb brought this action for specific performance against CLIFTON and the WEST VIRGINIA CORPORATION. 8. The West Virginia Corporation counterclaimed for the value of the notes, which the District Court granted. 9. Thus, this case at bar. 10. The plaintiff contends the corporation should be bound by its contract, as entered into by one of its promoters, that is, Clifton. 11. He further argued that the knowledge of Clifton of the agreement should be imputed to the corporation. ISSUE: Whether or not the West Virginia Corporation should be bound by the contract entered into by one of its promoters HELD: No. The agreement was a fraud upon the corporation and the other stockholders, and should not be enforced. The fraudulent taint attending the transaction prevents the plaintiff from enforcing the alleged contract for the payment to him of the stock of the corporation, and prevents him also from denying his liability upon the notes. Any contract having for its object or which in effect perpetrates a fraud upon third person is illegal and void, and therefore unenforceable, either in equity or at law. RATIO: In order for the corporation to be bound by the contract of their promoters, it is necessary in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts. If corporations could be held bound by all the secret undisclosed contracts of their promoters, few men would care to risk subscribing to their capital stock. As a general rule, the knowledge of a mere promoter is not be imputed to the corporation. The only theory upon which the Cliftons knowledge could be imputed to the West Virginia Corporation would be upon the assumption that he was an agent of the corporation. However, he cannot be an agent of the corporation at that time when it had not been formed. But even if was assumed that he was an agent thereof, his knowledge could not be imputed to the corporation, because of his personal interest in the transaction. Where the agent contract with his principal and has a personal interest in the matter antagonistic to the interest of the principal, the rule does not apply, because in such case there is no reason to presume that the agent will impart information which it is to his interest to suppress. There was nothing in the option itself which gave any notice that the original holder, Tomb, was to be paid anything for it. Cliftons agreement to pay $20,000 for it was a personal obligation of his own. When he transferred the option to the corporation, ti would have been against his interest to have disclosed that there was an obligation on his part to pay for it the sum that had been promised to Tomb. It cannot be presumed, therefore, that he would have disclosed this fact to the corporation, and certainly cannot be presumed that he would have disclosed to it the secret arrangement which the plaintiff alleges was had between them whereby Tomb was to receive stock of the corporation in payment for his interest in the option. CASE LAW/ DOCTRINE: In order for the corporation to be bound by the contract of their promoters, it is necessary in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts. If corporations could be held bound by all the secret undisclosed contracts of their promoters, few men would care to risk subscribing to their capital stock. As a general rule, the knowledge of a mere promoter is not be imputed to the corporation.

063. Cagayan Fishing Co. v. Sandiko, 65 Phil 223 (December 23, 1937, G.R. No. L-43350) TOPIC: Promoters Contracts Prior to Incorporation :
Liability of Corporation for Promoters Contracts

AUTHOR: the murderer The transfer was made almost five months before the incorporation of the company.

PONTENTE: LAUREL, J. FACTS 1. Manuel Tabora is the registered owner of four parcels of land in Cagayan. 2. To guarantee the payment of a loan in the sum of P8, 000, Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National Bank a first mortgage on the four parcels of land above-mentioned. A second mortgage in favor of the same bank was in April of 1930 executed by Tabora over the same lands to guarantee the payment of another loan amounting to P7, 000. A third mortgage on the same lands was executed on April 16, 1930 in favor of Severina Buzon to whom Tabora was indebted in the sum of P2, 9000. These mortgages were registered and annotations thereof appear at the back of transfer certificate of title No. 217. 3. On May 31, 1930, Tabora executed a public document entitled "Escritura de Transpaso de Propiedad Inmueble. (Exhibit A) The four parcels of land owned by him was sold to the plaintiff company, said to under process of incorporation, in consideration of one peso (P1) subject to the mortgages in favor of the Philippine National Bank and Severina Buzon and, to the condition that the certificate of title to said lands shall not be transferred to the name of the plaintiff company until the latter has fully and completely paid Tabora's indebtedness to the Philippine National Bank. 4. The plaintiff company filed its article incorporation with the Bureau of Commerce and Industry on October 22, 1930. A year later, on October 28, 1931, the board of directors of said company adopted a resolution authorizing its president, Jose Ventura, to sell the four parcels of lands in question to Teodoro Sandiko for P42,000. 5. Exhibit B is a deed of sale executed before a notary public by the terms of which the plaintiff sold ceded and transferred to the defendant all its right, titles, and interest in and to the four parcels of land described in transfer certificate in turn obligated himself to shoulder the three mortgages hereinbefore referred to. 6. Exhibit C is a promisory note for P25,300. drawn by the defendant in favor of the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage executed before a notary public in accordance with which the four parcels of land were given a security for the payment of the promissory note, Exhibit C. All these three instrument were dated February 15, 1932. 7. The defendant having failed to pay the sum stated in the promissory note, plaintiff, on January 25, 1934, brought this action in the Court of First Instance of Manila. Ruled in favor of defendant. ISSUE: 1) WON the contract herein can be enforced. 2) WON promoters could have acted as agent for a projected corporation HELD: 1) NO. The plaintiff was not yet incorporated when it entered into a contract of sale, Exhibit A. The contract itself referred to the plaintiff as una sociedad en vias de incorporacion. It was not even a de facto corporation at the time. Not being in legal existence then, it did not possess juridical capacity to enter into the contract. 2) NO. That which no legal existence could have no agent. RATIO: The contract here (Exhibit A) was entered into not between Manuel Tabora and a non-existent corporation but between the Manuel Tabora as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his wife and others, as mere promoters of a corporations on the other hand. For reasons that are self-evident, these promoters could not have acted as agent for a projected corporation since that which no legal existence could have no agent. He succeeded in mortgaging to the Philippine National Bank the land herein. He appeared to have met with financial reverses. He formed a corporation composed of himself, his wife, and a few others. From the articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself and P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife. The defendant always regarded Tabora as the owner of the lands. He dealt with Tabora directly. Jose Ventura, president of the plaintiff corporation, intervened only to sign the contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank, mortgagee of the four parcels of land, always treated Tabora as the owner of the same. ( See Exhibits E and F.)

A corporation should have a full and complete organization and existence as an entity before it can enter into any kind of a contract or transact any business, would seem to be self evident. . . . A corporation, until organized, has no being, franchises or faculties. Nor do those engaged in bringing it into being have any power to bind it by contract, unless so authorized by the charter there is not a corporation nor does it possess franchise or faculties for it or others to exercise, until it acquires a complete existence. (Gent vs. Manufacturers and Merchant's Mutual Insurance Company, 107 Ill., 652, 658.) If the plaintiff corporation could not and did not acquire the four parcels of land here involved, it follows that it did not possess any resultant right to dispose of them by sale to the defendant, Teodoro Sandiko.

CASE LAW/ DOCTRINE: A corporation, until organized, has no life and therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying that under no circumstances may the acts of promoters of a corporation be ratified by the corporation if and when subsequently organized. There are, of course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. 207 et seq.) DISSENTING/CONCURRING OPINION:

064 BUILDERS DUNTILLE v. DUNN AUTHOR: JANNA May 21, 1929, 229 K.Y. 569 TOPIC: Corporate Rights under Promoters Contracts Petitioner has a right to sue on contract entered into by one PONENTE: HOBSON of its promoters. FACTS 1. W.E. Dunn Manufacturing Company (DUNN Co.) manufactures machinery for making duntile -- a hollow building tile. 2. B.H. Samuels of Paducah received advertisements that duntiles were fireproof, moisture proof, and cheaper than other construction materials of equal quality. 3. After some correspondece with DUNN Co., Mr. Gaston was sent to Paducah in April 1925. 4. Samuels told Gaston he was organizing a company to manufacture Duntiles. They visited other promoters of the proposed corporation and a banker whom they expected to get money from. 5. Samuels wanted to organize the corportion first, but Gaston wanted him o order the machinery first. 6. On April 23, after talking it over with other promoters in the city, Samuels signed a contract which contained the ff. provision: "W. E. Dunn Manufacturing Company agrees to furnish, free of charge, an experienced service man for a period of five days to insure proper installation and instruct your force." 7. The order, signed by Samuel was accepted by the company. The machinery was delivered on June 6. 8. On June 16, Mr. Aaron was sent to Paducah to work on the machinery and trained workers on how to operate it. He stayed there 5 days to get it going, and then left. 9. Meanwhile, On June 20, the articles of incorporation of the Builders' Duntile Company (BDC) were filed by Samuels and
his associates.

10. It turns out that the blocks made were inferior in quality and practically valueless for building purposes. 11. BDC wrote to DUNN Co., and 2 months later, another man by the name of Mr. Terrel was sent. 12. Mr. Terrell found that the machinery was not put up right by Aaron, and that the latter gave the wrong formula as to the mixing of ingredients. After Terrell set up the machine and properly mixed material, the machinery produced good results. 13. Action was brought by BDC against DUNN Co. to recover on the written contract made on April 23 by Samuels. 14. Trial court ruled in favor of manufacturer DUNN Co. BDC appealed. ISSUE: Whether the corporation (BDC) has a right to sue upon a contract made on its behalf by one of its promoters (Samuel)
before it was organized.

HELD: Yes, the Corporation is held entitled to maintain suit on contract entered into by one of its promotors for purchase and
installation of machinery for its benefit.

RATIO: 1. It was clearly understood between Samuels and the other promoters and Gaston (as agent of DUNN), that the contract was
made on behalf of the corporation which Samuels proposed to form.

2. When the corporation was formed the incorporators took over the whole thing, and ratified all that had been done on its
behalf.

3. The corporation was the real party in interest, and the action was properly brought in its name. 4. Samuels did not make the contract for himself, and he personally did not sustain the damages. 5. To deny the corporation the right to sue for damages for the breach of contract and the loss it sustained by reason of the first
agent's negligence and improper acts would be to deny it all remedy for the breach of the contract.

6. The corporation only sustained the damages resulting from the breach of the contract. 7. The form of the transaction was due to the fact that the manufacturer's agent asked that the contract be put in this form.
Gaston insisted that it would take time for the machinery to get there, and it is better to order it and then organize the corporation.

CASE LAW/ DOCTRINE:

Corporation has power to adopt contract of its promoters, and after such adoption may maintain suit on the contract. Where corporation adopted promoter's contract for purchase of machinery, by taking over plant and issuing promoter stock in payment, corporation was real party in interest in suit against manufacturer on contract

065. Rizal Light & Ice Co. vs PSC 1968-09-28 | G.R. No. L-20993 TOPIC: Corporate Rights under Promoters Contracts PONTENTE: Zaldivar, J.

AUTHOR: twinkle A franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized. A grant of a franchise is valid although the corporation is not created until afterwards. The subsequent issuance of a certificate of incorporation, cures the deficiency.

FACTS 1. These two cases, being interrelated, are decided together: Case G.R. No. L - 20993 petition to revoke Public Service Commissions (Commission) cancelling and revoking the certificate of public convenience and necessity and forfeiting the franchise of said petitioner. Case G.R. No. L-21221 petition to review Commissions granting of certificate of public convenience and necessity to respondent Morong Electric Co., Inc. 2 to operate an electric light, heat and power service in the municipality of Morong, Rizal. 2. Petitioner Rizal Light & Ice Co., Inc. (RLIC) is a domestic corporation with business address at Morong, Rizal, granted by the Commission a certificate of public convenience and necessity for the installation, operation and maintenance of an electric light, heat and power service in the municipality of Morong, Rizal. 3. December 19, 1956, the Commission required the petitioner to appear before it on February 18, 1957 to show cause why it should not be penalized for violation of the conditions of its certificate of public convenience and the regulations of the Commission, and for failure to comply with the directives to raise its service voltage. 4. But RLIC failed to appear before the Commission. Hence, the Commission c ancelled RLICs certification. 5. RLIC moved to reopen the case on the ground that the manager was unaware of the hearing. And true enough, it was because Francisco (the mngr) was ill. The Commission granted the motion. 6. Meanwhile, inspections had been made of petitioner's electric plant and installations by the engineers of the Commission for 4 times (1958, 1959, 1960, and 1961) The inspection on 1961 was made upon the request of the petitioner who manifested during the hearing on December 15, 1960 that improvements have been made on its service since the inspection on July 12-13, 1960, and that, on the basis of the inspection report to be submitted, it would agree to the submission of the case for decision without further hearing. 7. When the case was called for hearing on July 5, 1961, petitioner failed to appear. Respondent municipality was then allowed to present its documentary evidence, and thereafter the case was submitted for decision. But RLIC filed a motion to reopen on the ground that they were not furnished a copy of the report of which they will base their answer. The Commission gave the, 10 days to answer but to no avail. 8. The Commission ordered the cancellation and revocation of petitioner's certificate of public convenience and the forfeiture of its franchise on the ground that RLIC had violated the conditions of its certificate of public convenience as well as the rules and regulations of the Commission and concluded that it cannot render the efficient, adequate and satisfactory electric service required by its certificate and that it is against public interest to allow it to continue its operation." 9. RLIC electric plant burned. They moved for reconsideration on the contention that it had improvements in the plant prior to the burning of the plant. But was dismissed by the Commission. (1st case) 10. RLIC opposed the application for certificate of public convenience of Morong Electric Co., Inc. because it has no legal capacity on May 6 1962 when the municipal franchise was granted and it was not financially capable. On the basis of the evidence adduced, the Commission, in its decision dated March 13, 1963, found that there was absence of electric service in the municipality of Morong and that applicant Morong Electric, a Filipino-owned corporation duly organized and existing under the laws of the Philippines, has the financial capacity to maintain said service. These circumstances, considered together with the denial of the motion for reconsideration filed by petitioner, the Commission approved the application of Morong Electric and ordered the issuance in its favor of the corresponding certificate of public convenience and necessity. (2nd case) Hence this petition for review. MAIN ISSUE/ CORP RELATED: (found in case #2) WON MORONG had juridical personality and legal existence when the municipal franchise was granted? HELD: NO. Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation, was issued by the SEC. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. It cured the flaw.

RATIO: Case #2 (more important case because it is more corp related) 1. Petitioner's contention that Morong Electric did not yet have a legal personality on May 6, 1962 when a municipal franchise was granted to it is correct. The juridical personality and legal existence of Morong Electric began only on October 17, 1962 when its certificate of incorporation, was issued by the SEC. But the fact that Morong Electric had no corporate existence on the day the franchise was granted in its name does not render the franchise invalid, because later Morong Electric obtained its certificate of incorporation and then accepted the franchise in accordance with the terms and conditions thereof. "While a franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized. A grant of a street franchise is valid although the corporation is not created until afterwards because a privilege of this character is a mere license to the corporation until it accepts the grant and complies with its terms and conditions. The incorporation of Morong Electric on October 17, 1962 and its acceptance of the franchise as shown by its action in prosecuting the application filed with the Commission for the approval of said franchise, not only perfected a contract between the respondent municipality and Morong Electric but also cured the deficiency pointed out by the petitioner in the application of Morong Electric. Thus, the Commission did not err in denying petitioner's motion to dismiss said application and in proceeding to hear the same. 2. Petitioner challenges the financial capability of Morong Electric: In this connection it should be stated that on the basis of the evidence presented on the matter, the Commission has found the Morong Electric to be "financially qualified to install, maintain and operate the proposed electric light, heat and power service." This is essentially a factual determination which, in a number of cases, this Court has said it will not disturb unless patently unsupported by evidence. It may be worthwhile to mention that it was recommended that the requests of Morong Electric (1) for the withdrawal of its deposit in the amount of P1,000.00 with the Treasurer of the Philippines, and (2) for the approval of Resolution No. 160 of the Municipal Council of Morong, Rizal, exempting the operator from making the additional P9,000.00 deposit mentioned in its petition and was granted. This report removes any doubt as to the financial capability of Morong Electric to operate and maintain an electric light, heat and power service. 3. Naturally, whatever conclusion or finding of fact that the Commission arrived at regarding the quality of petitioner's service are not borne out by the evidence presented in this case but by evidence in the previous case. , the conclusion, arrived at by the Commission after weighing the conflicting evidence in the two related cases, is a conclusion of fact which this Court will not disturb. And it has been held time and again that where the Commission has reached a conclusion of fact after weighing the conflicting evidence, that conclusion must be respected, and the Supreme Court will not interfere unless it clearly appears that there is no evidence to support the decision of the Commission." CASE LAW/ DOCTRINE: a franchise is a contract, at least two competent parties are necessary to the execution thereof, and parties are not competent except they are in being. Until a corporation has come into being, in this jurisdiction, by the issuance of a certificate of incorporation by the Securities and Exchange Commission (SEC) it cannot enter into any contract as a corporation. A franchise cannot take effect until the grantee corporation is organized, the franchise may, nevertheless, be applied for before the company is fully organized. A grant of a franchise is valid although the corporation is not created until afterwards. The subsequent issuance of a certificate of incorporation, cures the deficiency. Not so important part case #1: 1. The Commission can only authorize a division chief to hear and investigate a case filed before it if he is a lawyer. The hearing officer is not a lawyer, but was not objected on time, (it is a procedural matter, therefore it was waived, and the decision rendered by him is valid). 2. The Commission based its decision on the inspection reports submitted by its engineers who conducted the inspection of petitioner's electric service upon orders of the Commission. And counsel of RLIC manifested its waiver and decision to abide by the last inspection which found that RLIC had deficiencies and violations resulting to in inadequacy in service. 3. Petitioner invokes the "protection-of-investment rule" is untenable. The duty of the Commission to protect the investment of a public utility operator refers only to operators of good standing - those who comply with the laws, rules and regulations - and not to operators who are unconcerned with the public interest and whose investments have failed or deteriorated because of their own fault. 4. Petitioner contends that the imposition of a fine would have been sufficient. Section 16 (n) of Commonwealth Act No. 146, as amended, confers upon the Commission ample power and discretion to order the cancellation and revocation of any certificate of public convenience issued to an operator who has violated, or has willfully and contumaciously refused to comply with, any order, rule or regulation of the Commission or any provision of law. It is the discretion of the Commission as long as there are evidence to support its action.

AUTHOR: N. Manalo 066 Pioneer Insurance v CA, SUPRA (July 28, 1989 G.R. 84197; G.R. 84157) The facts was copied from digest #2. With all due respect to TOPIC: Corporate Rights under Promoters Contracts digest #11 PONTENTE: GUTIERREZ JR., J., FACTS 1. Jacob S. Lim owned (single proprietorship) Southern Air Lines (SAL). 2. On May 17, 1965, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract for the sale and purchase of 2 DC-3A Type aircrafts and 1 set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in installments. Both aircrafts came in June and July 1965. 3. On May 22, 1965, Pioneer Insurance and Surety Corporation as surety executed and issued its Surety Bond No. 6639 in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts. 4. It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and ConstancioMaglana 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. 5. They executed 2 separate indemnity agreements in favor of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses (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). 6. On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer a deed of chattel mortgage as security for the suretyship (stipulated therein that Lim transfer and convey to the surety the two aircrafts). The deed 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. 7. Lim defaulted on his subsequent installment payments. JDA requested payments from the surety. Pioneer paid a total sum of P298,626.12. 8. 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. 9. 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. CFI - decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other defendants. CA - modified the trial court's decision in that the plaintiffs complaint against all the defendants was dismissed. I n all other respects the trial court's decision was affirmed. ISSUE: WON subscription for stock in a proposed corporation results in a partnership with the other subscriber HELD: NO 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 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. 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.

RATIO: 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. 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. CASE LAW/ DOCTRINE: 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 DISSENTING/CONCURRING OPINION:

Author: Sarah 067 Wells v. Fay &Egan 17July1915, 143 GA 732 Note: Topic: Personal liability of promoter on preincorporation contracts Ponente: Evans Facts: 1. Fay & Egan Company (vendee) filed a suit against L.M. Wells et al.,(vendor) alleging that defendants bought from plaintiff machinery under the partnership name Ficklen Spoke and Handle Company 2. On 23 March 1909, defendants promoted the organization and authorized the purchase of machinery from plaintiff. 3. The contract of purchase was signed "Ficklen Spoke & Handle Company, by L. M. Wells." 4. Defendants received the machinery and on 22 June 1909, defendants executed notes signed "Ficklen Spoke & Handle Co., per R. K. Carruth, Sec.& Treas." 5. On 26 August 1909, defendants application was granted a charter and later perfected an organization of corporation. 6. Plaintiff sued for the amount due on the notes; charging defendants with liability on the notes. 7. It was disclosed at the trial that the machinery was destroyed by fire. 8. Defendants alleged that it has no debt to plaintiff invoking that the Ficklen Spoke & Handle Company was a corporation. Issue: Whether or not defendant is personally liable on the contract of purchase made on behalf of a corporation to be formed. Held: No. Plaintiff is estop from asserting a personal liability against the defendants Ratio: GENERAL RRULE: Promoters are personally liable on their contracts made on behalf of a corporation to be formed. EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended. Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize one member to issue a note, in contemplation of organizing a corporation which was not formed. The agent is personally liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no adoption or ratification. Case Law/ Doctrine: A promoter, though he may assume to act on behalf of the projected corporation and not for himself, cannot be treated as an agent of the corporation, for it is not yet in existence; and he will be personally liable on his contract, unless the other party agreed to look to some other person or fund for payment.

068. How & Associates, Inc. v. Boss AUTHOR: De Guzman, Bien Oct. 31 1963, 222 F. Supp 939 Defendant erased the words "Boss Hotels Co., Inc." from TOPIC: Personal Liability of Promoter on Prethe place for signature and below the line typed the words Incorporation Contracts "By: Edwin A. Boss, Agent for a Minnesota Corporation PONENTE: Hanson, J; FACTS 1. Early in the year 1960 the defendant and certain business associates, including Edwin R. Hunter, Jr. of Des Moines, Iowa, became interested in operating a motor hotel to be built at the Southdale Shopping Center in Edina, Minnesota, a suburb of Minneapolis. Motor Court Systems, Inc., a Minnesota corporation, which had a lease on this land with the Southdale Holding Company, was to build and construct a motor hotel. 2. In approximately May of 1960, the plaintiff was engaged and employed by Motor Court Systems, Inc. to prepare the plans, drawings and specifications for said motel. In approximately June of 1960, an agreement was entered into between Motor Court Systems, Inc. and Edwin R. Hunter, on behalf of a corporation to be formed which would operate the new motor hotel. These plans were never realized. 3. In the early part of 1961, the lease held by Motor Court Systems, Inc. was terminated. On or about April 20, 1961, the defendant together with Mr. Hunter and representatives of the owners of Southdale Shopping Center met in the offices of Southdale at Edina for the purpose of entering into a lease between the promoters of a new corporation to be formed by the defendant and his associates and owners of Southdale Shopping Center. The plaintiff was also present at that meeting and the architectural agreement now being sued on was signed during that meeting. 4. At said meeting on April 20, 1961, a lease between Boss Hotel Co., Inc. and Southdale Holding Company was negotiated and executed. Boss Hotel Co., Inc. was the obligor on that lease. This lease provided that a corporation would be organized and that the lease would then be assigned to this new corporation. 5. The first page of such contract stated that it was between Boss Hotels Co., Inc. and Stanley J. How & Associates, Inc., and places for signature in this manner. 6. After completion of the signing of the lease the defendant, Mr. Boss, and his associate, Mr. Hunter, took the prepared contract to a back room out of the hearing of the plaintiff and discussed it between themselves. At that time the defendant erased the words "Boss Hotels Co., Inc." from the place for signature and below the line typed the words "By: Edwin A. Boss, Agent for a Minnesota Corporation to be formed, who will be the Obligor." 7. The defendant and Edwin R. Hunter then took the contract back to Stanley J. How and showed it to him. Mr. Boss then said, "Is this all right?" or "Is this acceptable, this manner of signing?" or words to that effect. Stanley How said "Yes," and the contracts were then signed by the defendant and Stanley J. How. 8. Plaintiff returned to Omaha and complete plans, working drawings, and specifications for the construction of the motel were prepared by his offices, and sums were expended by the plaintiff for engineering and consultation services. 9. The defendant and his associates caused an Iowa corporation to be formed by the name of Minneapolis-Hunter Hotel Co. Fifteen Thousand Dollars ($15,000.00) of stock was issued with Edwin R. Hunter receiving ten percent (10%), John C. Hunter receiving ten percent (10%), Elizabeth T. Woodward receiving five percent (5%) and Boss Hotels Company receiving the remaining seventy-five percent (75%). 10. In October of 1961 the plans were forwarded to Preston Haglin, a Minneapolis contractor, whom the parties had agreed to be general contractor so long as his bid was competitive with other general contractors. Haglin gave a preliminary estimate of Nine Hundred Sixty-five Thousand Dollars ($965,000.00) which exceeded the planned budget; thus, further attempts were made to reduce the cost of the construction. 11. In November of 1961, Preston Haglin proposed to construct the building, with certain modifications, for Eight Hundred and Fifty Thousand Dollars ($850,000.00).The plans for the motel were finally completely abandoned by the promoters. 12. The plaintiff performed said contract and prepared detailed plans and specifications which were completed on or about October 20, 1961, for a motor hotel and restaurant at 66th and France Streets, Edina, Minnesota; that the estimated cost of the said motor hotel and restaurant was $850,000.00 and that a firm bid from a general contractor for construction of said project was received in the sum of $850,000.00; that thereafter, and for reasons unknown to the plaintiff the defendant proceeded no further with the project; that pursuant to the provisions of said contract plaintiff is entitled to payment of a fee of 4% of the said $850,000.00 for performance of architectural services for preparation and completion of specifications and general working drawings, which amounts to $38,250.00, of which plaintiff has received from defendant the sum of $14,500.00 on account, leaving a balance of $23,750.00, which remains due and unpaid.

ISSUE: Whether the contract was an agreement that Defendant was a present obligor. HELD: Yes, The defendant was the key promoter and as such would be a primary factor in abandoning the project. This would make the defendant liable. RATIO: The words who will be the obligor, are not enough to offset the rule that the person signing for t he nonexistent corporation is normally to be personally liable. In this case, Defendant was the principal promoter, acting for himself personally and as President of Boss Hotels, Inc. The promoters abandoned their purpose of forming the corporation. This would make the promoter liable to the plaintiff unless the contract be construed to mean: 1) that the plaintiff agreed to look solely to the new corporation for payment, and 2) that the promoter did not have any duty toward the plaintiff to form the corporation and give the corporation the opportunity to assume and pay the liability. In all situations wherein the promoter is not personally bound, the contracting party is agreeing that the new corporation should assume the liability. The phrase "content to take the risk of the ultimate incorporation and assumption of his claim" is the key to the distinction. In some cases, the promoters do not agree that this assumption will take place. Applying this law to the present case, the court would have to hold that even if the plaintiff had agreed to look to the credit of the new corporation, the defendant would be liable. The defendant was the key promoter and as such would be a primary factor in abandoning the project. This would make the defendant liable. CASE LAW/ DOCTRINE: The promoter though he may assume to act on behalf of the projected corporation and not for himself, will be personally liable on his contract unless the other party agreed to look to some other person or fund for payment. DISSENTING/CONCURRING OPINION:

069 QUAKER HILL v. PARR 25 September 1961, 364 P.2d 1056 TOPIC: Promoters Contracts Prior to Incorporation Personal Liability of Promoter on Pre-Incorporation Contracts PONENTE: Doyle

AUTHOR: Danna Gen. Rule: Promoters are personally liable on their contracts Exception: Contracting party looks solely to the corporation for payment (non-intention to make the promoters liable)

FACTS 1. Parr et al, while in the course of negotiations with Quaker Hill Inc. (whose office is situated in New York) for the former to purchase nursery stock, undertook to organize a separate corporation to be known as the Denver Memorial Nursery Inc. Thus, Denver Memorial Nursery Inc. was named as the contracting party in the sales contract and as the maker of the promissory note. 2. Two orders for nursery stock were signed by Parr in behalf of Denver Memorial Nursery, Inc. which, to the knowledge of Quaker Hill, was not yet formed. 3. The nursery stock was delivered to Parr and was planted with the help of Quaker Hill. 4. A substitute order was sent to Quaker Hill. It was similar to the previous order, except that it contained the name Mountain View Nurseries, instead of "Denver Memorial Nursery, Inc." which never actually came into being. 5. Because of name confusion, the corporation was subsequently called Mountain View Nurseries, Inc. Its articles were executed and subsequently filed with the Secretary of State. However, neither the Denver Memorial Nursery, Inc. nor the Mountain View Nurseries, Inc. ever functioned as going concerns. 6. After Mountain View Nurseries, Inc. was formed, a new note and contract was submitted to Parr et al, containing the name Mountain View Nurseries, Inc. as contracting party. Quaker Hill thereafter used the designation "Mountain View Nurseries in its transactions. 7. Because of Mountain View Nurseries, Inc.s defunct financial condition, Quaker Hill now seeks to subject Defendants to personal liability because the corporation was not formed at the time the contract was made and Defendants, as promoters, were individually liable. Thus, it is Quaker Hills contention that the general rule be applied here. The general rule is that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed. ISSUE: Whether or not personal liability can be imposed HELD: No, there was no intent by Quaker Hill to look to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed. RATIO: 1. A well recognized exception to the general rule urged by Quaker Hill is that if the contract is made on behalf of the corporation and the other party agrees to look to the corporation and not to the promoters for payment, the promoters incur no personal liability. 2. Quaker Hill, acting through its agent, was well aware of the fact that the corporation was not formed and nevertheless urged that the contract be made in the name of the proposed corporation. There is but little evidence indicating intent on the part of Quaker Hill to look to the defendants for performance or payment. 3. The single fact supporting plaintiff's theory is the obtaining of an individual balance sheet. On the contrary, the entire transaction contemplated the corporation as the contracting party. Personal liability does not arise under such circumstances. 4. The curious form of this transaction is undoubtedly explainable on the basis of the long distance dealing, the great rush to complete it, the heavy emphasis on completion of the sale rather than on securing payment or a means of payment. No effort was made to expressly obligate the defendants and this present effort must be regarded as pure afterthought. CASE LAW/ DOCTRINE: Personal liability does not attach where the contracting party is shown to be looking solely to the corporation for payment, and not to the promoters or officers.

070 OLD DOMINION COPPER MINING AND SMELTING COMPANY v. ALBERT S. BIGELOW 203 Mass 159 (1909) TOPIC: Fiduciary Relationship between Corporation and Promoter PONENTE: Rugg, J. FACTS

AUTHOR: Palomique, Ernesto III C. The corporation brought a suit in equity seeking to recover secret profits made by the promoter, who had sold certain mining properties belonging to him and an associate to the corporation.

1. Bigelow and Lewisohn were the promoters of Old Dominion Copper. 2. Bigelow and Lewisohn framed a scheme for the capitalization of Old Dominion for $3,750,000. 3. They would sell to the corporation their property worth $1M but having a market value of not over $2M for $3,250,000 4. After that, they would sell to the general public the remaining $500,000 stocks at par value for cash, and all this without providing Old Dominion with any independent board of officers while making a huge secret profit. 5. The transactions occurred while the corporation was under the absolute control and management of the promoter and his associate. 6. The corporation seeks to recover a secret profit made by the promoters in the sale of their own property to the corporation, basing its claim on the general rule that a promoter cannot lawfully take a secret profit and will be held to account for it if he does. 7. The lower court has decided in favor of the corporation stating that such transaction creates a liability on the part of the promoters to account for the secret profits to Old Dominion. The promoter appealed, raising a number of errors. The court affirmed, holding that as a fiduciary, the promoter owed certain duties regarding business transactions between himself and the corporation, and that under the circumstances the receipt of profits by the promoter constituted a breach of those duties. 8. Fundamentally the action is to recover profits obtained by a breach of trust, as promoters have duties as fiduciaries to the company. A promoter includes those who undertake to form a corporation and to procure for it the rights, instrumentalities and capital by which it is to carry out the purposes set forth in its charter and to establish it as fully able to do its business. ISSUE: WON the corporation is in a position to assert its claim for the secret profits. HELD: Yes, a promoter stands in a fiduciary relation to the corporation in which he is interested, and that he is charged with all the duties of good faith which attach to other trusts. RATIO: 1. In this case, Bigelow and Lewisohn subscribed for only 130K out of 150K shares. They held all the shares issued at the time of ratification, but not all which it was proposed to issue as part of their promotion scheme. 2. There is a liability of the promoter to the corporation when further original subscribers to capital stock contemplated as an essential part of the scheme of promotion came in after the transaction complained of, even though that transaction is known to all the then stockholders at the timewhich are the promoters themselves and their representatives. 3. In the present case, the whole purchase price was paid in stock, issued before any stock was issued to the public although after a substantial public subscription. In other words, it is the order in which the transaction is carried out, and not its substantial nature, which makes the difference between liability and immunity of the promoter. 4. It is of no consequence whether in fact the dummy directors know of the terms of sale and the breach of trust of the promoters. The point is that the directors were selected with the purpose that they should be the mere instruments of the promoter and they carried out the will of their masters. If the assent of all stockholders is good in one case, by the same token it should be equally good in the other, and the breach of trust in one is equally a breach of trust in the other. 5. The starting point is that promoters stand in a fiduciary position toward the corporation, as well as when as part of the scheme of promotion, uninformed stockholders are expected to come in after the wrong has been perpetrated, as when at the time there are stockholders to whom no disclosure was made. 6. Promoters have in their hands the creation and molding of the company, like clay in the hands of a potter. It is not necessary to inquire how far he may be trustee also for shareholders and associates. 7. In the present case the inquiry relates wholly to his obligation to the corporation. The fiduciary relation must continue until the promoter has completely established according to his plan the being which he has undertaken to

create. The principle that one cannot rightfully sell property, belonging to him in his private capacity, to himself in a trust capacity is universal. CASE LAW/ DOCTRINE: Notwithstanding this fiduciary relation, the promoter may sell property to the company which he is promoting. In order that the contract may be absolutely binding, the promoter must pursue one of 4 courses of action: (1) provide an independent board of officers and make a full disclosure to the corporation through the board; (2) make a full disclosure of all material facts to each original subscriber of shares (3) procure a ratification of the contract by vote of the SHs of the established corporation (4) subscribe himself in all the shares of the capital stock contemplated as part of the promotion scheme

DISSENTING/CONCURRING OPINION: