1. G.R. No. 108670 September 21, 1994 LBC EXPRESS, INC., petitioner, vs.

THE COURT OF APPEALS, ADOLFO M. CARLOTO, and RURAL BANK OF LABASON, INC., respondents. PUNO, J.: In this Petition for Review on Certiorari, petitioner LBC questions the 1 decision of respondent Court of Appeals affirming the judgment of the Regional Trial Court of Dipolog City, Branch 8, awarding moral and exemplary damages, reimbursement of P32,000.00, and costs of suit; but deleting the amount of attorney's fees. Private respondent Adolfo Carloto, incumbent President-Manager of private respondent Rural Bank of Labason, alleged that on November 12, 1984, he was in Cebu City transacting business with the Central Bank Regional Office. He was instructed to proceed to Manila on or before November 21, 1984 to follow-up the Rural Bank's plan of payment of rediscounting obligations with Central Bank's main office in 2 Manila. He then purchased a round trip plane ticket to Manila. He also phoned his sister Elsie Carloto-Concha to send him ONE THOUSAND PESOS (P1,000.00) for his pocket money in going to Manila and some 3 rediscounting papers thru petitioner's LBC Office at Dipolog City. On November 16, 1984, Mrs. Concha thru her clerk, Adelina Antigo consigned thru LBC Dipolog Branch the pertinent documents and the sum of ONE THOUSAND PESOS (P1,000.00) to respondent Carloto at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. This was evidenced by LBC Air Cargo, Inc., Cashpack Delivery Receipt No. 34805. On November 17, 1984, the documents arrived without the cashpack. Respondent Carloto made personal follow-ups on that same day, and also on November 19 and 20, 1984 at LBC's office in Cebu but petitioner failed to deliver to him the cashpack. Consequently, respondent Carloto said he was compelled to go to Dipolog City on November 24, 1984 to claim the money at LBC's office. His effort was once more in vain. On November 27, 1984, he went back to Cebu City at LBC's office. He was, however, advised that the money has been returned to LBC's office in Dipolog City upon shipper's request. Again, he demanded for the ONE THOUSAND PESOS (P1,000.00) and refund of FORTY-NINE PESOS (P49.00) LBC revenue charges. He received the money only on December 15, 1984 less the revenue charges. Respondent Carloto claimed that because of the delay in the transmittal of the cashpack, he failed to submit the rediscounting documents to Central Bank on time. As a consequence, his rural bank was made to pay the Central Bank THIRTY-TWO THOUSAND PESOS 4 (P32,000.00) as penalty interest. He allegedly suffered embarrassment and humiliation. Petitioner LBC, on the other hand, alleged that the cashpack was 5 forwarded via PAL to LBC Cebu City branch on November 22, 1984. On the same day, it was delivered at respondent Carloto's residence at No. 2 Greyhound Subdivision, Kinasangan, Pardo, Cebu City. However, he was not around to receive it. The delivery man served instead a claim

notice to insure he would personally receive the money. This was annotated on Cashpack Delivery Receipt No. 342805. Notwithstanding the said notice, respondent Carloto did not claim the cashpack at LBC Cebu. On November 23, 1984, it was returned to the shipper, Elsie Carloto-Concha at Dipolog City. Claiming that petitioner LBC wantonly and recklessly disregarded its obligation, respondent Carloto instituted an action for Damages Arising from Non-performance of Obligation docketed as Civil Case No. 3679 before the Regional Trial Court of Dipolog City on January 4, 1985. On June 25, 1988, an amended complaint was filed where respondent rural bank joined as one of the plaintiffs and prayed for the reimbursement of THIRTY-TWO THOUSAND PESOS (P32,000.00). After hearing, the trial court rendered its decision, the dispositive portion of which reads: WHEREFORE, judgment is hereby rendered: 1. Ordering the defendant LBC Air Cargo, Inc. to pay unto plaintiff Adolfo M. Carloto and Rural Bank of Labason, Inc., moral damages in the amount of P10,000.00; exemplary damages in the amount of P5,000.00; attorney's fees in the amount of P3,000.00 and litigation expenses of P1,000.00; 2. Sentencing defendant LBC Air Cargo, Inc., to reimburse plaintiff Rural Bank of Labason, Inc. the sum of P32,000.00 which the latter paid as penalty interest to the Central Bank of the Philippines as penalty interest for failure to rediscount its due bills on time arising from the defendant's failure to deliver the cashpack, with legal interest computed from the date of filing of this case; and 3. Ordering defendant to pay the costs of these proceedings. SO ORDERED.
6

On appeal, respondent court modified the judgment by deleting the award of attorney's fees. Petitioner's Motion for Reconsideration was denied in a Resolution dated January 11, 1993. Hence, this petition raising the following questions, to wit: 1. Whether or not respondent Rural Bank of Labason Inc., being an artificial person should be awarded moral damages. 2. Whether or not the award of THIRTY-TWO THOUSAND PESOS (P32,000.00) was made with grave abuse of discretion. 3. Whether or not the respondent Court of Appeals gravely abused its discretion in affirming the trial court's decision ordering petitioner LBC to pay moral and exemplary damages despite performance of its obligation. We find merit in the petition.

The respondent court erred in awarding moral damages to the Rural Bank of Labason, Inc., an artificial person. Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar 7 injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental 8 anguish. Mental suffering can be experienced only by one having a 9 nervous system and it flows from real ills, sorrows, and griefs of life all of which cannot be suffered by respondent bank as an artificial person. We can neither sustain the award of moral damages in favor of the private respondents. The right to recover moral damages is based on equity. Moral damages are recoverable only if the case falls under 10 Article 2219 of the Civil Code in relation to Article 21. Part of conventional wisdom is that he who comes to court to demand equity, must come with clean hands. In the case at bench, respondent Carloto is not without fault. He was fully aware that his rural bank's obligation would mature on November 11 21, 1984 and his bank has set aside cash for these bills payable. He was all set to go to Manila to settle this obligation. He has received the documents necessary for the approval of their rediscounting application with the Central Bank. He has also received the plane ticket to go to Manila. Nevertheless, he did not immediately proceed to Manila but instead tarried for days allegedly claiming his ONE THOUSAND PESOS (P1,000.00) pocket money. Due to his delayed trip, he failed to submit the rediscounting papers to the Central Bank on time and his bank was penalized THIRTY-TWO THOUSAND PESOS (P32,000.00) for failure to pay its obligation on its due date. The undue importance given by respondent Carloto to his ONE THOUSAND PESOS (P1,000.00) pocket money is inexplicable for it was not indispensable for him to follow up his bank's rediscounting application with Central Bank. According to said respondent, he needed the money to "invite 12 people for a snack or dinner." The attitude of said respondent speaks ill of his ways of business dealings and cannot be countenanced by this Court. Verily, it will be revolting to our sense of ethics to use it as basis for awarding damages in favor of private respondent Carloto and the Rural Bank of Labason, Inc. We also hold that respondents failed to show that petitioner LBC's late delivery of the cashpack was motivated by personal malice or bad faith, whether intentional or thru gross negligence. In fact, it was proved during the trial that the cashpack was consigned on November 16, 1984, a Friday. It was sent to Cebu on November 19, 1984, the next business day. Considering this circumstance, petitioner cannot be charged with gross neglect of duty. Bad faith under the law can not be presumed; it must be established by clearer and convincing 13 evidence. Again, the unbroken jurisprudence is that in breach of contract cases where the defendant is not shown to have acted fraudulently or in bad faith, liability for damages is limited to the natural and probable consequences of the branch of the obligation which the parties had foreseen or could reasonable have foreseen. The 14 damages, however, will not include liability for moral damages. Prescinding from these premises, the award of exemplary damages made by the respondent court would have no legal leg to support itself.

Under Article 2232 of the Civil Code, in a contractual or quasicontractual relationship, exemplary damages may be awarded only if the defendant had acted in "a wanton, fraudulent, reckless, oppressive, or malevolent manner." The established facts of not so warrant the characterization of the action of petitioner LBC. IN VIEW WHEREOF, the Decision of the respondent court dated September 30, 1992 is REVERSED and SET ASIDE; and the Complaint in Civil Case No. 3679 is ordered DISMISSED. No costs. SO ORDERED. 2. 3. G.R. No. L-22973 January 30, 1968

MAMBULAO LUMBER COMPANY, plaintiff-appellant, vs. PHILIPPINE NATIONAL BANK and ANACLETO HERALDO Deputy Provincial Sheriff of Camarines Norte,defendants-appellees. Ernesto P. Vilar and Arthur Tordesillas for plaintiff-appellant. Tomas Besa and Jose B. Galang for defendants-appellees. ANGELES, J.: An appeal from a decision, dated April 2, 1964, of the Court of First Instance of Manila in Civil Case No. 52089, entitled "Mambulao Lumber Company, plaintiff, versus Philippine National Bank and Anacleto Heraldo, defendants", dismissing the complaint against both defendants and sentencing the plaintiff to pay to defendant Philippine National Bank (PNB for short) the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 until fully paid, and the costs of suit. In seeking the reversal of the decision, the plaintiff advances several propositions in its brief which may be restated as follows: 1. That its total indebtedness to the PNB as of November 21, 1961, was only P56,485.87 and not P58,213.51 as concluded by the court a quo; hence, the proceeds of the foreclosure sale of its real property alone in the amount of P56,908.00 on that date, added to the sum of P738.59 it remitted to the PNB thereafter was more than sufficient to liquidate its obligation, thereby rendering the subsequent foreclosure sale of its chattels unlawful; 2. That it is not liable to pay PNB the amount of P5,821.35 for attorney's fees and the additional sum of P298.54 as expenses of the foreclosure sale; 3. That the subsequent foreclosure sale of its chattels is null and void, not only because it had already settled its indebtedness to the PNB at the time the sale was effected, but also for the reason that the said sale was not conducted in accordance with the provisions of the Chattel Mortgage Law and the venue agreed upon by the parties in the mortgage contract;

4. That the PNB, having illegally sold the chattels, is liable to the plaintiff for its value; and 5. That for the acts of the PNB in proceeding with the sale of the chattels, in utter disregard of plaintiff's vigorous opposition thereto, and in taking possession thereof after the sale thru force, intimidation, coercion, and by detaining its "man-in-charge" of said properties, the PNB is liable to plaintiff for damages and attorney's fees. The antecedent facts of the case, as found by the trial court, are as follows: On May 5, 1956 the plaintiff applied for an industrial loan of P155,000 with the Naga Branch of defendant PNB and the former offered real estate, machinery, logging and transportation equipments as collaterals. The application, however, was approved for a loan of P100,000 only. To secure the payment of the loan, the plaintiff mortgaged to defendant PNB a parcel of land, together with the buildings and improvements existing thereon, situated in the poblacion of Jose Panganiban (formerly Mambulao), province of Camarines Norte, and covered by Transfer Certificate of Title No. 381 of the land records of said province, as well as various sawmill equipment, rolling unit and other fixed assets of the plaintiff, all situated in its compound in the aforementioned municipality. On August 2, 1956, the PNB released from the approved loan the sum of P27,500, for which the plaintiff signed a promissory note wherein it promised to pay to the PNB the said sum in five equal yearly installments at the rate of P6,528.40 beginning July 31, 1957, and every year thereafter, the last of which would be on July 31, 1961. On October 19, 1956, the PNB made another release of P15,500 as part of the approved loan granted to the plaintiff and so on the said date, the latter executed another promissory note wherein it agreed to pay to the former the said sum in five equal yearly installments at the rate of P3,679.64 beginning July 31, 1957, and ending on July 31, 1961. The plaintiff failed to pay the amortization on the amounts released to and received by it. Repeated demands were made upon the plaintiff to pay its obligation but it failed or otherwise refused to do so. Upon inspection and verification made by employees of the PNB, it was found that the plaintiff had already stopped operation about the end of 1957 or early part of 1958. On September 27, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to take possession of the parcel of land, together with the improvements existing thereon, covered by Transfer Certificate of Title No. 381 of the land records of Camarines Norte, and to sell it at public auction in accordance with the provisions of Act No. 3135, as amended, for the satisfaction of the unpaid obligation of the plaintiff, which as of September 22, 1961, amounted to P57,646.59, excluding

attorney's fees. In compliance with the request, on October 16, 1961, the Provincial Sheriff of Camarines Norte issued the corresponding notice of extra-judicial sale and sent a copy thereof to the plaintiff. According to the notice, the mortgaged property would be sold at public auction at 10:00 a.m. on November 21, 1961, at the ground floor of the Court House in Daet, Camarines Norte. On November 6, 1961, the PNB sent a letter to the Provincial Sheriff of Camarines Norte requesting him to take possession of the chattels mortgaged to it by the plaintiff and sell them at public auction also on November 21, 1961, for the satisfaction of the sum of P57,646.59, plus 6% annual interest therefore from September 23, 1961, attorney's fees equivalent to 10% of the amount due and the costs and expenses of the sale. On the same day, the PNB sent notice to the plaintiff that the former was foreclosing extrajudicially the chattels mortgaged by the latter and that the auction sale thereof would be held on November 21, 1961, between 9:00 and 12:00 a.m., in Mambulao, Camarines Norte, where the mortgaged chattels were situated. On November 8, 1961, Deputy Provincial Sheriff Anacleto Heraldo took possession of the chattels mortgaged by the plaintiff and made an inventory thereof in the presence of a PC Sergeant and a policeman of the municipality of Jose Panganiban. On November 9, 1961, the said Deputy Sheriff issued the corresponding notice of public auction sale of the mortgaged chattels to be held on November 21, 1961, at 10:00 a.m., at the plaintiff's compound situated in the municipality of Jose Panganiban, Province of Camarines Norte. On November 19, 1961, the plaintiff sent separate letters, posted as registered air mail matter, one to the Naga Branch of the PNB and another to the Provincial Sheriff of Camarines Norte, protesting against the foreclosure of the real estate and chattel mortgages on the grounds that they could not be effected unless a Court's order was issued against it (plaintiff) for said purpose and that the foreclosure proceedings, according to the terms of the mortgage contracts, should be made in Manila. In said letter to the Naga Branch of the PNB, it was intimated that if the public auction sale would be suspended and the plaintiff would be given an extension of ninety (90) days, its obligation would be settled satisfactorily because an important negotiation was then going on for the sale of its "whole interest" for an amount more than sufficient to liquidate said obligation. The letter of the plaintiff to the Naga Branch of the PNB was construed by the latter as a request for extension of the foreclosure sale of the mortgaged chattels and so it advised the Sheriff of Camarines Norte to defer it to December 21, 1961, at the same time and place. A copy of said advice was sent to the plaintiff for its information and guidance. The foreclosure sale of the parcel of land, together with the buildings and improvements thereon, covered by Transfer Certificate of Title No. 381, was, however, held on November 21, 1961, and the said property was sold to the PNB for the

sum of P56,908.00, subject to the right of the plaintiff to redeem the same within a period of one year. On the same date, Deputy Provincial Sheriff Heraldo executed a certificate of sale in favor of the PNB and a copy thereof was sent to the plaintiff. In a letter dated December 14, 1961 (but apparently posted several days later), the plaintiff sent a bank draft for P738.59 to the Naga Branch of the PNB, allegedly in full settlement of the balance of the obligation of the plaintiff after the application thereto of the sum of P56,908.00 representing the proceeds of the foreclosure sale of parcel of land described in Transfer Certificate of Title No. 381. In the said letter, the plaintiff reiterated its request that the foreclosure sale of the mortgaged chattels be discontinued on the grounds that the mortgaged indebtedness had been fully paid and that it could not be legally effected at a place other than the City of Manila. In a letter dated December 16, 1961, the plaintiff advised the Provincial Sheriff of Camarines Norte that it had fully paid its obligation to the PNB, and enclosed therewith a copy of its letter to the latter dated December 14, 1961. On December 18, 1961, the Attorney of the Naga Branch of the PNB, wrote to the plaintiff acknowledging the remittance of P738.59 with the advice, however, that as of that date the balance of the account of the plaintiff was P9,161.76, to which should be added the expenses of guarding the mortgaged chattels at the rate of P4.00 a day beginning December 19, 1961. It was further explained in said letter that the sum of P57,646.59, which was stated in the request for the foreclosure of the real estate mortgage, did not include the 10% attorney's fees and expenses of the sale. Accordingly, the plaintiff was advised that the foreclosure sale scheduled on the 21st of said month would be stopped if a remittance of P9,161.76, plus interest thereon and guarding fees, would be made. On December 21, 1961, the foreclosure sale of the mortgaged chattels was held at 10:00 a.m. and they were awarded to the PNB for the sum of P4,200 and the corresponding bill of sale was issued in its favor by Deputy Provincial Sheriff Heraldo. In a letter dated December 26, 1961, the Manager of the Naga Branch of the PNB advised the plaintiff giving it priority to repurchase the chattels acquired by the former at public auction. This offer was reiterated in a letter dated January 3, 1962, of the Attorney of the Naga Branch of the PNB to the plaintiff, with the suggestion that it exercise its right of redemption and that it apply for the condonation of the attorney's fees. The plaintiff did not follow the advice but on the contrary it made known of its intention to file appropriate action or actions for the protection of its interests. On May 24, 1962, several employees of the PNB arrived in the compound of the plaintiff in Jose Panganiban, Camarines Norte, and they informed Luis Salgado, Chief

Security Guard of the premises, that the properties therein had been auctioned and bought by the PNB, which in turn sold them to Mariano Bundok. Upon being advised that the purchaser would take delivery of the things he bought, Salgado was at first reluctant to allow any piece of property to be taken out of the compound of the plaintiff. The employees of the PNB explained that should Salgado refuse, he would be exposing himself to a litigation wherein he could be held liable to pay big sum of money by way of damages. Apprehensive of the risk that he would take, Salgado immediately sent a wire to the President of the plaintiff in Manila, asking advice as to what he should do. In the meantime, Mariano Bundok was able to take out from the plaintiff's compound two truckloads of equipment. In the afternoon of the same day, Salgado received a telegram from plaintiff's President directing him not to deliver the "chattels" without court order, with the information that the company was then filing an action for damages against the PNB. On the following day, May 25, 1962, two trucks and men of Mariano Bundok arrived but Salgado did not permit them to take out any equipment from inside the compound of the plaintiff. Thru the intervention, however, of the local police and PC soldiers, the trucks of Mariano Bundok were able finally to haul the properties originally mortgaged by the plaintiff to the PNB, which were bought by it at the foreclosure sale and subsequently sold to Mariano Bundok. Upon the foregoing facts, the trial court rendered the decision appealed from which, as stated in the first paragraph of this opinion, sentenced the Mambulao Lumber Company to pay to the defendant PNB the sum of P3,582.52 with interest thereon at the rate of 6% per annum from December 22, 1961 (day following the date of the questioned foreclosure of plaintiff's chattels) until fully paid, and the costs. Mambulao Lumber Company interposed the instant appeal. We shall discuss the various points raised in appellant's brief in seriatim. The first question Mambulao Lumber Company poses is that which relates to the amount of its indebtedness to the PNB arising out of the principal loans and the accrued interest thereon. It is contended that its obligation under the terms of the two promissory notes it had executed in favor of the PNB amounts only to P56,485.87 as of November 21, 1961, when the sale of real property was effected, and not P58,213.51 as found by the trial court. There is merit to this claim. Examining the terms of the promissory note executed by the appellant in favor of the PNB, we find that the agreed interest on the loan of P43,000.00 P27,500.00 released on August 2, 1956 as per promissory note of even date (Exhibit C-3), and P15,500.00 released on October 19, 1956, as per promissory note of the same date (Exhibit C-4) was six per cent (6%) per annum from the respective date of said notes "until paid". In the statement of account of the appellant as of September 22, 1961, submitted by the PNB, it appears that in arriving at the total indebtedness of P57,646.59 as of that date, the PNB had compounded the principal of the loan and the accrued 6% interest thereon each time the yearly amortizations became due, and on the basis of these

compounded amounts charged additional delinquency interest on them up to September 22, 1961; and to this erroneously computed total of P57,646.59, the trial court added 6% interest per annum from September 23, 1961 to November 21 of the same year. In effect, the PNB has claimed, and the trial court has adjudicated to it, interest on accrued interests from the time the various amortizations of the loan became due until the real estate mortgage executed to secure the loan was extra-judicially foreclosed on November 21, 1961. This is an error. Section 5 of Act No. 2655 expressly provides that in computing the interest on any obligation, promissory note or other instrument or contract, compound interest shall not be reckoned, except by agreement, or in default thereof, whenever the debt is judicially claimed. This is also the clear mandate of Article 2212 of the new Civil Code which provides that interest due shall earn legal interest only from the time it is judicially demanded, and of Article 1959 of the same code which ordains that interest due and unpaid shall not earn interest. Of course, the parties may, by stipulation, capitalize the interest due and unpaid, which as added principal shall earn new interest; but such stipulation is nowhere to be found in the terms of the promissory notes involved in this case. Clearly therefore, the trial court fell into error when it awarded interest on accrued interests, without any agreement to that effect and before they had been judicially demanded. Appellant next assails the award of attorney's fees and the expenses of the foreclosure sale in favor of the PNB. With respect to the amount of P298.54 allowed as expenses of the extra-judicial sale of the real property, appellant maintains that the same has no basis, factual or legal, and should not have been awarded. It likewise decries the award of attorney's fees which, according to the appellant, should not be deducted from the proceeds of the sale of the real property, not only because there is no express agreement in the real estate mortgage contract to pay attorney's fees in case the same is extra-judicially foreclosed, but also for the reason that the PNB neither spent nor incurred any obligation to pay attorney's fees in connection with the said extra-judicial foreclosure under consideration. There is reason for the appellant to assail the award of P298.54 as expenses of the sale. In this respect, the trial court said: The parcel of land, together with the buildings and improvements existing thereon covered by Transfer Certificate of Title No. 381, was sold for P56,908. There was, however, no evidence how much was the expenses of the foreclosure sale although from the pertinent provisions of the Rules of Court, the Sheriff's fees would be P1 for advertising the sale (par. k, Sec. 7, Rule 130 of the Old Rules) and P297.54 as his commission for the sale (par. n, Sec. 7, Rule 130 of the Old Rules) or a total of P298.54. There is really no evidence of record to support the conclusion that the PNB is entitled to the amount awarded as expenses of the extra-judicial foreclosure sale. The court below committed error in applying the provisions of the Rules of Court for purposes of arriving at the amount awarded. It is to be borne in mind that the fees enumerated under paragraphs k and n, Section 7, of Rule 130 (now Rule 141) are demandable, only by a sheriff serving processes of the court in connection with judicial foreclosure of mortgages under Rule 68 of the new Rules, and not in cases of extra-judicial foreclosure of mortgages under Act 3135. The law applicable is Section 4 of Act 3135 which provides that the officer conducting the sale is entitled to collect a fee of P5.00 for each day of actual work performed in addition to his

expenses in connection with the foreclosure sale. Admittedly, the PNB failed to prove during the trial of the case, that it actually spent any amount in connection with the said foreclosure sale. Neither may expenses for publication of the notice be legally allowed in the absence 1 of evidence on record to support it. It is true, as pointed out by the appellee bank, that courts should take judicial notice of the fees provided for by law which need not be proved; but in the absence of evidence to show at least the number of working days the sheriff concerned actually spent in connection with the extra-judicial foreclosure sale, the most that he may be entitled to, would be the amount of P10.00 as a reasonable allowance for two day's work one for the preparation of the necessary notices of sale, and the other for conducting the auction sale and issuance of the corresponding certificate of sale in favor of the buyer. Obviously, therefore, the award of P298.54 as expenses of the sale should be set aside. But the claim of the appellant that the real estate mortgage does not provide for attorney's fees in case the same is extra-judicially foreclosed, cannot be favorably considered, as would readily be revealed by an examination of the pertinent provision of the mortgage contract. The parties to the mortgage appear to have stipulated under paragraph (c) thereof, inter alia: . . . For the purpose of extra-judicial foreclosure, the Mortgagor hereby appoints the Mortgagee his attorney-infact to sell the property mortgaged under Act 3135, as amended, to sign all documents and to perform all acts requisite and necessary to accomplish said purpose and to appoint its substitute as such attorney-in-fact with the same powers as above specified. In case of judicial foreclosure, the Mortgagor hereby consents to the appointment of the Mortgagee or any of its employees as receiver, without any bond, to take charge of the mortgaged property at once, and to hold possession of the same and the rents, benefits and profits derived from the mortgaged property before the sale, less the costs and expenses of the receivership; the Mortgagor hereby agrees further that in all cases, attorney's fees hereby fixed at Ten Per cent (10%) of the total indebtedness then unpaid which in no case shall be less than P100.00 exclusive of all fees allowed by law, and the expenses of collection shall be the obligation of the Mortgagor and shall with priority, be paid to the Mortgagee out of any sums realized as rents and profits derived from the mortgaged property or from the proceeds realized from the sale of the said property and this mortgage shall likewise stand as security therefor. . . . We find the above stipulation to pay attorney's fees clear enough to cover both cases of foreclosure sale mentioned thereunder, i.e., judicially or extra-judicially. While the phrase "in all cases" appears to be part of the second sentence, a reading of the whole context of the stipulation would readily show that it logically refers to extra-judicial foreclosure found in the first sentence and to judicial foreclosure mentioned in the next sentence. And the ambiguity in the stipulation suggested and pointed out by the appellant by reason of the faulty sentence construction should not be made to defeat the otherwise clear intention of the parties in the agreement. It is suggested by the appellant, however, that even if the above stipulation to pay attorney's fees were applicable to the extra-judicial foreclosure sale of its real properties, still, the award of P5,821.35 for

attorney's fees has no legal justification, considering the circumstance that the PNB did not actually spend anything by way of attorney's fees in connection with the sale. In support of this proposition, appellant cites authorities to the effect: (1) that when the mortgagee has neither paid nor incurred any obligation to pay an attorney in connection with 2 the foreclosure sale, the claim for such fees should be denied; and (2) that attorney's fees will not be allowed when the attorney conducting the foreclosure proceedings is an officer of the corporation (mortgagee) who receives a salary for all the legal services performed 3 by him for the corporation. These authorities are indeed enlightening; but they should not be applied in this case. The very same authority first cited suggests that said principle is not absolute, for there is authority to the contrary. As to the fact that the foreclosure proceeding's were handled by an attorney of the legal staff of the PNB, we are reluctant to exonerate herein appellant from the payment of the stipulated attorney's fees on this ground alone, considering the express agreement between the parties in the mortgage contract under which appellant became liable to pay the same. At any rate, we find merit in the contention of the appellant that the award of P5,821.35 in favor of the PNB as attorney's fees is unconscionable and unreasonable, considering that all that the branch attorney of the said bank did in connection with the foreclosure sale of the real property was to file a petition with the provincial sheriff of Camarines Norte requesting the latter to sell the same in accordance with the provisions of Act 3135. The principle that courts should reduce stipulated attorney's fees whenever it is found under the circumstances of the case that the same is unreasonable, is now deeply rooted in this jurisdiction to entertain any serious objection to it. Thus, this Court has explained: But the principle that it may be lawfully stipulated that the legal expenses involved in the collection of a debt shall be defrayed by the debtor does not imply that such stipulations must be enforced in accordance with the terms, no matter how injurious or oppressive they may be. The lawful purpose to be accomplished by such a stipulation is to permit the creditor to receive the amount due him under his contract without a deduction of the expenses caused by the delinquency of the debtor. It should not be permitted for him to convert such a stipulation into a source of speculative profit at the expense of the debtor. Contracts for attorney's services in this jurisdiction stands upon an entirely different footing from contracts for the payment of compensation for any other services. By express provision of section 29 of the Code of Civil Procedure, an attorney is not entitled in the absence of express contract to recover more than a reasonable compensation for his services; and even when an express contract is made the court can ignore it and limit the recovery to reasonable compensation if the amount of the stipulated fee is found by the court to be unreasonable. This is a very different rule from that announced in section 1091 of the Civil Code with reference to the obligation of contracts in general, where it is said that such obligation has the force of law between the contracting parties. Had the plaintiff herein made an express contract to pay his attorney an uncontingent fee of P2,115.25 for the services to be rendered in reducing the note here in suit to judgment, it would not have been enforced against him had he seen fit to oppose it, as such a fee is obviously far

greater than is necessary to remunerate the attorney for the work involved and is therefore unreasonable. In order to enable the court to ignore an express contract for an attorney's fees, it is not necessary to show, as in other contracts, that it is contrary to morality or public policy (Art. 1255, Civil Code). It is enough that it is unreasonable or 4 unconscionable. Since then this Court has invariably fixed counsel fees on a quantum meruit basis whenever the fees stipulated appear excessive, unconscionable, or unreasonable, because a lawyer is primarily a court officer charged with the duty of assisting the court in administering impartial justice between the parties, and hence, the fees should be subject to judicial control. Nor should it be ignored that sound public policy demands that courts disregard stipulations for counsel fees, whenever they appear to be a source of speculative profit at the 5 expense of the debtor or mortgagor. And it is not material that the present action is between the debtor and the creditor, and not between attorney and client. As court have power to fix the fee as between attorney and client, it must necessarily have the right to say whether a stipulation like this, inserted in a mortgage contract, is 6 valid. In determining the compensation of an attorney, the following circumstances should be considered: the amount and character of the services rendered; the responsibility imposed; the amount of money or the value of the property affected by the controversy, or involved in the employment; the skill and experience called for in the performance of the service; the professional standing of the attorney; the results secured; and whether or not the fee is contingent or absolute, it being a recognized rule that an attorney may properly charge a much larger 7 fee when it is to be contingent than when it is not. From the stipulation in the mortgage contract earlier quoted, it appears that the agreed fee is 10% of the total indebtedness, irrespective of the manner the foreclosure of the mortgage is to be effected. The agreement is perhaps fair enough in case the foreclosure proceedings is prosecuted judicially but, surely, it is unreasonable when, as in this case, the mortgage was foreclosed extra-judicially, and all that the attorney did was to file a petition for foreclosure with the sheriff concerned. It is to be assumed though, that the said branch attorney of the PNB made a study of the case before deciding to file the petition for foreclosure; but even with this in mind, we believe the amount of P5,821.35 is far too excessive a fee for such services. Considering the above circumstances mentioned, it is our considered opinion that the amount of P1,000.00 would be more than sufficient to compensate the work aforementioned. The next issue raised deals with the claim that the proceeds of the sale of the real properties alone together with the amount it remitted to the PNB later was more than sufficient to liquidate its total obligation to herein appellee bank. Again, we find merit in this claim. From the foregoing discussion of the first two errors assigned, and for purposes of determining the total obligation of herein appellant to the PNB as of November 21, 1961 when the real estate mortgage was foreclosed, we have the following illustration in support of this conclusion:1wph1.t A. I. Principal Loan

(a) Promissory note dated August 2, 1956 (1) Interest at 6% per annum from Aug. 2, 1956 to Nov. 21, 1961 (b) Promissory note dated October 19, 1956

P27,500.00 8,751.78 P15,500.00

their agreement embodied under paragraph (i) in the Chattel Mortgage which provides as follows: (i) In case of both judicial and extra-judicial foreclosure under Act 1508, as amended, the parties hereto agree that the corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the sheriff of the City of Manila, as the case may be; and that the Mortgagor shall pay attorney's fees hereby fixed at ten per cent (10%) of the total indebtedness then unpaid but in no case shall it be less than P100.00, exclusive of all costs and fees allowed by law and of other expenses incurred in connection with the said foreclosure. [Emphasis supplied] Notwithstanding the abovequoted agreement in the chattel mortgage contract, and in utter disregard of the objection of herein appellant to the sale of its chattels at Jose Panganiban, Camarines Norte and not in the City of Manila as agreed upon, the PNB proceeded with the foreclosure sale of said chattels. The trial court, however, justified said action of the PNB in the decision appealed from in the following rationale: While it is true that it was stipulated in the chattel mortgage contract that a petition for the extra-judicial foreclosure thereof should be filed with the Sheriff of the City of Manila, nevertheless, the effect thereof was merely to provide another place where the mortgage chattel could be sold in addition to those specified in the Chattel Mortgage Law. Indeed, a stipulation in a contract cannot abrogate much less impliedly repeal a specific provision of the statute. Considering that Section 14 of Act No. 1508 vests in the mortgagee the choice where the foreclosure sale should be held, hence, in the case under consideration, the PNB had three places from which to select, namely: (1) the place of residence of the mortgagor; (2) the place of the mortgaged chattels were situated; and (3) the place stipulated in the contract. The PNB selected the second and, accordingly, the foreclosure sale held in Jose Panganiban, Camarines Norte, was legal and valid. To the foregoing conclusion, We disagree. While the law grants power and authority to the mortgagee to sell the mortgaged property at a public place in the municipality where the mortgagor resides or 8 where the property is situated, this Court has held that the sale of a mortgaged chattel may be made in a place other than that where it is found, provided that the owner thereof consents thereto; or that there is an agreement to this effect between the mortgagor and the 9 mortgagee. But when, as in this case, the parties agreed to have the sale of the mortgaged chattels in the City of Manila, which, any way, is the residence of the mortgagor, it cannot be rightly said that mortgagee still retained the power and authority to select from among the places provided for in the law and the place designated in their agreement over the objection of the mortgagor. In providing that the mortgaged chattel may be sold at the place of residence of the mortgagor or the place where it is situated, at the option of the mortgagee, the law clearly contemplated benefits not only to the mortgagor but to the mortgagee as well. Their right arising thereunder, however, are personal to them; they do not affect either public policy or the rights of third persons. They may validly be waived. So, when herein mortgagor and mortgagee agreed in the mortgage contract that in cases of both judicial and extra-judicial foreclosure under Act

(1) Interest at 6% per annum from Oct.19, 1956 to 4,734.08 Nov. 21, 1961 II. III. Sheriff's fees [for two (2) day's work] Attorney's fee 10.00 1,000.00 P57,495.86

Total obligation as of Nov. 21, 1961 B. I. II.

Proceeds of the foreclosure sale of the real estate P56,908.00 mortgage on Nov. 21, 1961 Additional amount remitted to the PNB on Dec. 18, 1961 Total amount of Payment made to PNB as of Dec. 18, 1961 Deduct: Total obligation to the PNB Excess Payment to the PNB 738.59

P57,646.59

P57,495.86 P 150.73 ========

From the foregoing illustration or computation, it is clear that there was no further necessity to foreclose the mortgage of herein appellant's chattels on December 21, 1961; and on this ground alone, we may declare the sale of appellant's chattels on the said date, illegal and void. But we take into consideration the fact that the PNB must have been led to believe that the stipulated 10% of the unpaid loan for attorney's fees in the real estate mortgage was legally maintainable, and in accordance with such belief, herein appellee bank insisted that the proceeds of the sale of appellant's real property was deficient to liquidate the latter's total indebtedness. Be that as it may, however, we still find the subsequent sale of herein appellant's chattels illegal and objectionable on other grounds. That appellant vigorously objected to the foreclosure of its chattel mortgage after the foreclosure of its real estate mortgage on November 21, 1961, can not be doubted, as shown not only by its letter to the PNB on November 19, 1961, but also in its letter to the provincial sheriff of Camarines Norte on the same date. These letters were followed by another letter to the appellee bank on December 14, 1961, wherein herein appellant, in no uncertain terms, reiterated its objection to the scheduled sale of its chattels on December 21, 1961 at Jose Panganiban, Camarines Norte for the reasons therein stated that: (1) it had settled in full its total obligation to the PNB by the sale of the real estate and its subsequent remittance of the amount of P738.59; and (2) that the contemplated sale at Jose Panganiban would violate

1508, as amended, the corresponding complaint for foreclosure or the petition for sale should be filed with the courts or the Sheriff of Manila, as the case may be, they waived their corresponding rights under the law. The correlative obligation arising from that agreement have the force of law between them and should be complied with in good 10 faith. By said agreement the parties waived the legal venue, and such waiver is valid and legally effective, because it, was merely a personal privilege they waived, which is not contrary, to public policy or to the prejudice of third persons. It is a general principle that a person may renounce any right which the law gives unless such renunciation is expressly prohibited or the right conferred is of such nature that its 11 renunciation would be against public policy. On the other hand, if a place of sale is specified in the mortgage and statutory requirements in regard thereto are complied with, a sale is properly conducted in that place. Indeed, in the absence of a statute to the contrary, a sale conducted at a place other than that stipulated for in the mortgage is invalid, unless the mortgagor consents to such 12 sale. Moreover, Section 14 of Act 1508, as amended, provides that the officer making the sale should make a return of his doings which shall particularly describe the articles sold and the amount received from each article. From this, it is clear that the law requires that sale be made article by article, otherwise, it would be impossible for him to state the amount received for each item. This requirement was totally disregarded by the Deputy Sheriff of Camarines Norte when he sold the chattels in question in bulk, notwithstanding the fact that the said chattels consisted of no less than twenty different items as shown in 13 the bill of sale. This makes the sale of the chattels manifestly objectionable. And in the absence of any evidence to show that the mortgagor had agreed or consented to such sale in gross, the same should be set aside. It is said that the mortgagee is guilty of conversion when he sells under the mortgage but not in accordance with its terms, or where the proceedings as to the sale of foreclosure do not comply with the 14 statute. This rule applies squarely to the facts of this case where, as earlier shown, herein appellee bank insisted, and the appellee deputy sheriff of Camarines Norte proceeded with the sale of the mortgaged chattels at Jose Panganiban, Camarines Norte, in utter disregard of the valid objection of the mortgagor thereto for the reason that it is not the place of sale agreed upon in the mortgage contract; and the said deputy sheriff sold all the chattels (among which were a skagit with caterpillar engine, three GMC 6 x 6 trucks, a Herring Hall Safe, and Sawmill equipment consisting of a 150 HP Murphy Engine, plainer, large circular saws etc.) as a single lot in violation of the requirement of the law to sell the same article by article. The PNB has resold the chattels to another buyer with whom it appears to have actively cooperated in subsequently taking possession of and removing the chattels from appellant compound by force, as shown by the circumstance that they had to take along PC soldiers and municipal policemen of Jose Panganiban who placed the chief security officer of the premises in jail to deprive herein appellant of its possession thereof. To exonerate itself of any liability for the breach of peace thus committed, the PNB would want us to believe that it was the subsequent buyer alone, who is not a party to this case, that was

responsible for the forcible taking of the property; but assuming this to be so, still the PNB cannot escape liability for the conversion of the mortgaged chattels by parting with its interest in the property. Neither would its claim that it afterwards gave a chance to herein appellant to repurchase or redeem the chattels, improve its position, for the mortgagor is not under obligation to take affirmative steps to repossess 15 the chattels that were converted by the mortgagee. As a consequence of the said wrongful acts of the PNB and the Deputy Sheriff of Camarines Norte, therefore, We have to declare that herein appellant is entitled to collect from them, jointly and severally, the full value of the chattels in question at the time they were illegally sold by them. To this effect was the holding of this Court in a similar 16 situation. The effect of this irregularity was, in our opinion to make the plaintiff liable to the defendant for the full value of the truck at the time the plaintiff thus carried it off to be sold; and of course, the burden is on the defendant to prove the damage to which he was thus subjected. . . . This brings us to the problem of determining the value of the mortgaged chattels at the time of their sale in 1961. The trial court did not make any finding on the value of the chattels in the decision appealed from and denied altogether the right of the appellant to recover the same. We find enough evidence of record, however, which may be used as a guide to ascertain their value. The record shows that at the time herein appellant applied for its loan with the PNB in 1956, for which the chattels in question were mortgaged as part of the security therefore, herein appellant submitted a list of the chattels together with its application for the loan with a stated value of P107,115.85. An official of the PNB made an inspection of the chattels in the same year giving it an appraised value of P42,850.00 and a 17 market value of P85,700.00. The same chattels with some additional equipment acquired by herein appellant with part of the proceeds of the loan were reappraised in a re-inspection conducted by the same official in 1958, in the report of which he gave all the chattels an appraised value of P26,850.00 and a market value of 18 P48,200.00. Another re-inspection report in 1959 gave the appraised 19 value as P19,400.00 and the market value at P25,600.00. The said official of the PNB who made the foregoing reports of inspection and re-inspections testified in court that in giving the values appearing in the reports, he used a conservative method of appraisal which, of course, is to be expected of an official of the appellee bank. And it appears that the values were considerably reduced in all the reinspection reports for the reason that when he went to herein appellant's premises at the time, he found the chattels no longer in use with some of the heavier equipments dismantled with parts thereof kept in the bodega; and finding it difficult to ascertain the value of the dismantled chattels in such condition, he did not give them anymore any value in his reports. Noteworthy is the fact, however, that in the last re-inspection report he made of the chattels in 1961, just a few months before the foreclosure sale, the same inspector of the PNB reported that the heavy equipment of herein appellant were "lying idle 20 and rusty" but were "with a shed free from rains" showing that although they were no longer in use at the time, they were kept in a proper place and not exposed to the elements. The President of the appellant company, on the other hand, testified that its caterpillar (tractor) alone is worth P35,000.00 in the market, and that the value of its two trucks acquired by it with part of the proceeds of the loan and included as additional items in the mortgaged chattels were worth no less than P14,000.00. He likewise appraised the worth of its Murphy

engine at P16,000.00 which, according to him, when taken together with the heavy equipments he mentioned, the sawmill itself and all other equipment forming part of the chattels under consideration, and bearing in mind the current cost of equipments these days which he alleged to have increased by about five (5) times, could safely be estimated at P120,000.00. This testimony, except for the appraised and market values appearing in the inspection and re-inspection reports of the PNB official earlier mentioned, stand uncontroverted in the record; but We are not inclined to accept such testimony at its par value, knowing that the equipments of herein appellant had been idle and unused since it stopped operating its sawmill in 1958 up to the time of the sale of the chattels in 1961. We have no doubt that the value of chattels was depreciated after all those years of inoperation, although from the evidence aforementioned, We may also safely conclude that the amount of P4,200.00 for which the chattels were sold in the foreclosure sale in question was grossly unfair to the mortgagor. Considering, however, the facts that the appraised value of P42,850.00 and the market value of P85,700.00 originally given by the PNB official were admittedly conservative; that two 6 x 6 trucks subsequently bought by the appellant company had thereafter been added to the chattels; and that the real value thereof, although depreciated after several years of inoperation, was in a way maintained because the depreciation is off-set by the marked increase in the cost of heavy equipment in the market, it is our opinion that the market value of the chattels at the time of the sale should be fixed at the original appraised value of P42,850.00. Herein appellant's claim for moral damages, however, seems to have no legal or factual basis. Obviously, an artificial person like herein appellant corporation cannot experience physical sufferings, mental anguish, fright, serious anxiety, wounded feelings, moral shock or social 21 humiliation which are basis of moral damages. A corporation may have a good reputation which, if besmirched, may also be a ground for the award of moral damages. The same cannot be considered under the facts of this case, however, not only because it is admitted that herein appellant had already ceased in its business operation at the time of the foreclosure sale of the chattels, but also for the reason that whatever adverse effects of the foreclosure sale of the chattels could have upon its reputation or business standing would undoubtedly be the same whether the sale was conducted at Jose Panganiban, Camarines Norte, or in Manila which is the place agreed upon by the parties in the mortgage contract. But for the wrongful acts of herein appellee bank and the deputy sheriff of Camarines Norte in proceeding with the sale in utter disregard of the agreement to have the chattels sold in Manila as provided for in the mortgage contract, to which their attentions were timely called by herein appellant, and in disposing of the chattels in gross for the miserable amount of P4,200.00, herein appellant should be awarded exemplary damages in the sum of P10,000.00. The circumstances of the case also warrant the award of P3,000.00 as attorney's fees for herein appellant. WHEREFORE AND CONSIDERING ALL THE FOREGOING, the decision appealed from should be, as hereby, it is set aside. The Philippine National Bank and the Deputy Sheriff of the province of Camarines Norte are ordered to pay, jointly and severally, to Mambulao Lumber Company the total amount of P56,000.73, broken as follows: P150.73 overpaid by the latter to the PNB, P42,850.00 the value of the chattels at the time of the sale with interest at the rate of 6% per annum from December 21, 1961, until fully paid, P10,000.00 in

exemplary damages, and P3,000.00 as attorney's fees. Costs against both appellees. 4. G.R. No. 88013 March 19, 1990 SIMEX INTERNATIONAL (MANILA), INCORPORATED, petitioner, vs. THE HONORABLE COURT OF APPEALS and TRADERS ROYAL BANK, respondents. CRUZ, J.: We are concerned in this case with the question of damages, specifically moral and exemplary damages. The negligence of the private respondent has already been established. All we have to ascertain is whether the petitioner is entitled to the said damages and, if so, in what amounts. The parties agree on the basic facts. The petitioner is a private corporation engaged in the exportation of food products. It buys these products from various local suppliers and then sells them abroad, particularly in the United States, Canada and the Middle East. Most of its exports are purchased by the petitioner on credit. The petitioner was a depositor of the respondent bank and maintained a checking account in its branch at Romulo Avenue, Cubao, Quezon City. On May 25, 1981, the petitioner deposited to its account in the said bank the amount of P100,000.00, thus increasing its balance as of 1 that date to P190,380.74. Subsequently, the petitioner issued several checks against its deposit but was suprised to learn later that they had been dishonored for insufficient funds. The dishonored checks are the following: 1. Check No. 215391 dated May 29, 1981, in favor of California Manufacturing Company, Inc. for P16,480.00: 2. Check No. 215426 dated May 28, 1981, in favor of the Bureau of Internal Revenue in the amount of P3,386.73: 3. Check No. 215451 dated June 4, 1981, in favor of Mr. Greg Pedreo in the amount of P7,080.00; 4. Check No. 215441 dated June 5, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P42,906.00: 5. Check No. 215474 dated June 10, 1981, in favor of Malabon Longlife Trading Corporation in the amount of P12,953.00: 6. Check No. 215477 dated June 9, 1981, in favor of Sea-Land Services, Inc. in the amount of P27,024.45:

7. Check No. 215412 dated June 10, 1981, in favor of Baguio Country Club Corporation in the amount of P4,385.02: and 8. Check No. 215480 dated June 9, 1981, in favor of 2 Enriqueta Bayla in the amount of P6,275.00. As a consequence, the California Manufacturing Corporation sent on June 9, 1981, a letter of demand to the petitioner, threatening prosecution if the dishonored check issued to it was not made good. It also withheld delivery of the order made by the petitioner. Similar letters were sent to the petitioner by the Malabon Long Life Trading, on June 15, 1981, and by the G. and U. Enterprises, on June 10, 1981. Malabon also canceled the petitioner's credit line and demanded that future payments be made by it in cash or certified check. Meantime, action on the pending orders of the petitioner with the other suppliers whose checks were dishonored was also deferred. The petitioner complained to the respondent bank on June 10, 3 1981. Investigation disclosed that the sum of P100,000.00 deposited by the petitioner on May 25, 1981, had not been credited to it. The error was rectified on June 17, 1981, and the dishonored checks were 4 paid after they were re-deposited. In its letter dated June 20, 1981, the petitioner demanded reparation from the respondent bank for its "gross and wanton negligence." This demand was not met. The petitioner then filed a complaint in the then Court of First Instance of Rizal claiming from the private respondent moral damages in the sum of P1,000,000.00 and exemplary damages in the sum of P500,000.00, plus 25% attorney's fees, and costs. After trial, Judge Johnico G. Serquinia rendered judgment holding that moral and exemplary damages were not called for under the circumstances. However, observing that the plaintiff's right had been violated, he ordered the defendant to pay nominal damages in the 5 amount of P20,000.00 plus P5,000.00 attorney's fees and costs. This 6 decision was affirmed in toto by the respondent court. The respondent court found with the trial court that the private respondent was guilty of negligence but agreed that the petitioner was nevertheless not entitled to moral damages. It said: The essential ingredient of moral damages is proof of bad faith (De Aparicio vs. Parogurga, 150 SCRA 280). Indeed, there was the omission by the defendant-appellee bank to credit appellant's deposit of P100,000.00 on May 25, 1981. But the bank rectified its records. It credited the said amount in favor of plaintiff-appellant in less than a month. The dishonored checks were eventually paid. These circumstances negate any imputation or insinuation of malicious, fraudulent, wanton and gross bad faith and negligence on the part of the defendant-appellant. It is this ruling that is faulted in the petition now before us. This Court has carefully examined the facts of this case and finds that it cannot share some of the conclusions of the lower courts. It seems to

us that the negligence of the private respondent had been brushed off rather lightly as if it were a minor infraction requiring no more than a slap on the wrist. We feel it is not enough to say that the private respondent rectified its records and credited the deposit in less than a month as if this were sufficient repentance. The error should not have been committed in the first place. The respondent bank has not even explained why it was committed at all. It is true that the dishonored checks were, as the Court of Appeals put it, "eventually" paid. However, this took almost a month when, properly, the checks should have been paid immediately upon presentment. As the Court sees it, the initial carelessness of the respondent bank, aggravated by the lack of promptitude in repairing its error, justifies the grant of moral damages. This rather lackadaisical attitude toward the complaining depositor constituted the gross negligence, if not wanton bad faith, that the respondent court said had not been established by the petitioner. We also note that while stressing the rectification made by the respondent bank, the decision practically ignored the prejudice suffered by the petitioner. This was simply glossed over if not, indeed, disbelieved. The fact is that the petitioner's credit line was canceled and its orders were not acted upon pending receipt of actual payment by the suppliers. Its business declined. Its reputation was tarnished. Its standing was reduced in the business community. All this was due to the fault of the respondent bank which was undeniably remiss in its duty to the petitioner. Article 2205 of the Civil Code provides that actual or compensatory damages may be received "(2) for injury to the plaintiff s business standing or commercial credit." There is no question that the petitioner did sustain actual injury as a result of the dishonored checks and that the existence of the loss having been established "absolute certainty as 7 to its amount is not required." Such injury should bolster all the more the demand of the petitioner for moral damages and justifies the examination by this Court of the validity and reasonableness of the said claim. We agree that moral damages are not awarded to penalize the defendant but to compensate the plaintiff for the injuries he may have 8 suffered. In the case at bar, the petitioner is seeking such damages for the prejudice sustained by it as a result of the private respondent's fault. The respondent court said that the claimed losses are purely speculative and are not supported by substantial evidence, but if failed to consider that the amount of such losses need not be established with exactitude precisely because of their nature. Moral damages are not susceptible of pecuniary estimation. Article 2216 of the Civil Code specifically provides that "no proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be adjudicated." That is why the determination of the amount to be awarded (except liquidated damages) is left to the sound discretion of the court, according to "the circumstances of each case." From every viewpoint except that of the petitioner's, its claim of moral damages in the amount of P1,000,000.00 is nothing short of preposterous. Its business certainly is not that big, or its name that prestigious, to sustain such an extravagant pretense. Moreover, a corporation is not as a rule entitled to moral damages because, not being a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish and

moral shock. The only exception to this rule is where the corporation has a good reputation that is debased, resulting in its social 9 humiliation. We shall recognize that the petitioner did suffer injury because of the private respondent's negligence that caused the dishonor of the checks issued by it. The immediate consequence was that its prestige was impaired because of the bouncing checks and confidence in it as a reliable debtor was diminished. The private respondent makes much of the one instance when the petitioner was sued in a collection case, but that did not prove that it did not have a good reputation that could not 10 be marred, more so since that case was ultimately settled. It does not appear that, as the private respondent would portray it, the petitioner is an unsavory and disreputable entity that has no good name to protect. Considering all this, we feel that the award of nominal damages in the sum of P20,000.00 was not the proper relief to which the petitioner was entitled. Under Article 2221 of the Civil Code, "nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him." As we have found that the petitioner has indeed incurred loss through the fault of the private respondent, the proper remedy is the award to it of moral damages, which we impose, in our discretion, in the same amount of P20,000.00. Now for the exemplary damages. The pertinent provisions of the Civil Code are the following: Art. 2229. Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. Art. 2232. In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The banking system is an indispensable institution in the modern world and plays a vital role in the economic life of every civilized nation. Whether as mere passive entities for the safekeeping and saving of money or as active instruments of business and commerce, banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude and, most of all, confidence. Thus, even the humble wage-earner has not hesitated to entrust his life's savings to the bank of his choice, knowing that they will be safe in its custody and will even earn some interest for him. The ordinary person, with equal faith, usually maintains a modest checking account for security and convenience in the settling of his monthly bills and the payment of ordinary expenses. As for business entities like the petitioner, the bank is a trusted and active associate that can help in the running of their affairs, not only in the form of loans when needed but more often in the conduct of their day-to-day transactions like the issuance or encashment of checks. In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few

hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can dispose of as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the dishonor of a check without good reason, can cause the depositor not a little embarrassment if not also financial loss and perhaps even civil and criminal litigation. The point is that as a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. In the case at bar, it is obvious that the respondent bank was remiss in that duty and violated that relationship. What is especially deplorable is that, having been informed of its error in not crediting the deposit in question to the petitioner, the respondent bank did not immediately correct it but did so only one week later or twenty-three days after the deposit was made. It bears repeating that the record does not contain any satisfactory explanation of why the error was made in the first place and why it was not corrected immediately after its discovery. Such ineptness comes under the concept of the wanton manner contemplated in the Civil Code that calls for the imposition of exemplary damages. After deliberating on this particular matter, the Court, in the exercise of its discretion, hereby imposes upon the respondent bank exemplary damages in the amount of P50,000.00, "by way of example or correction for the public good," in the words of the law. It is expected that this ruling will serve as a warning and deterrent against the repetition of the ineptness and indefference that has been displayed here, lest the confidence of the public in the banking system be further impaired. ACCORDINGLY, the appealed judgment is hereby MODIFIED and the private respondent is ordered to pay the petitioner, in lieu of nominal damages, moral damages in the amount of P20,000.00, and exemplary damages in the amount of P50,000.00 plus the original award of attorney's fees in the amount of P5,000.00, and costs. SO ORDERED.

5. [G.R. No. 103576. August 22, 1996]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN CITY, respondents. DECISION VITUG, J.: Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its coverage to obligations

yet to be contracted or incurred? This question is the core issue in the instant petition for review on certiorari. Petitioner Chua Pac, the president and general manager of copetitioner "Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of private respondent Producers Bank of the Philippines. The mortgage stood by way of security for petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement was to this effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and void. x x x. "In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or notes and/or accommodations without the necessity of executing a new contract and this mortgage shall have the same force and effect as if the said promissory note or notes and/or accommodations were existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such obligations have been contracted before, during or after [1] the constitution of this mortgage." In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it obtained from respondent bank [2] additional financial accommodations totalling P2,700,000.00. These borrowings were on due date also fully paid. On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints, the loan was not settled at [3] maturity. Respondent bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound by the stipulations, aforequoted, of the chattel mortgage. Petitioner corporation appealed to the Court of Appeals which, on 14 August 1991, affirmed, "in all respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992. The instant petition interposed by petitioner corporation was initially denied on 04 March 1992 by this Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the petition while petitioner corporation filed a compliance and an opposition to private respondent's motion to dismiss. The Court denied petitioner's first motion for reconsideration but granted a
[4]

second motion for reconsideration, thereby reinstating the petition and [5] requiring private respondent to comment thereon. Except in criminal cases where the penalty of reclusion [6] perpetua or death is imposed which the Court so reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of sound judicial discretion. The circulars of the Court prescribing technical and other procedural requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and needlessly consume the time of the Court. These technical and procedural rules, however, are intended to help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give way to and uphold the paramount and overriding interest of justice. Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a suretyship, the faithful performance of the obligation by the principal debtor is secured by the personal commitment of another (the guarantor or surety). In contracts of real security, such as a pledge, a mortgage or an antichresis, that fulfillment is secured by anencumbrance of property in pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage, by the execution of a public instrument encumbering the real property covered thereby; and in antichresis, by a written instrument granting to the creditor the right to receive the fruits of an immovable property with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal of his credit - upon the essential condition that if the principal obligation becomes due and the debtor defaults, then the property encumbered [7] can be alienated for the payment of the obligation, but that should the obligation be duly paid, then the contract is automatically [8] extinguished proceeding from the accessory character of the agreement. As the law so puts it, once the obligation is complied with, [9] then the contract of security becomes, ipso facto, null and void. While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so long as these future [10] debts are accurately described, a chattel mortgage, however, can only cover obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself, however, does not come into existence or arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage [11] Law. Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred obligation can constitute an act of default on the part of the borrower of the financing agreement whereon the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time of constitution and during the life of the chattel mortgage sought to be foreclosed. A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith. While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage would still be valid

between the parties (not against third persons acting in good faith ), the fact, however, that the statute has provided that the parties to the contract must execute an oath that "x x x (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof, and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the [13] purpose of fraud." makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs. [14] Magallanes Press, Inc., et al., the Court said "x x x A mortgage that contains a stipulation in regard to future advances in the credit will take effect only from the date the same are [15] made and not from the date of the mortgage." The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had ceased to exist coincidentally with [16] the full payment of the P3,000,000.00 loan, there no longer was any chattel mortgage that could cover the new loans that were concluded thereafter. We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action [17] taken by respondent bank against it." This prayer is not reflected in its complaint which has merely asked for the amount of P3,000,000.00 [18] by way of moral damages. In LBC Express, Inc. vs. Court of [19] Appeals, we have said: "Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and griefs of life - all of which cannot be [20] suffered by respondent bank as an artificial person." While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so named as a party in representation of petitioner corporation. Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private respondent's comment on the petition his so-called "One Final Word;" viz: "In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals should be required to justify its decision which completely disregarded the basic laws on obligations and contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this Honorable Court; that in the

[12]

event that its explanation is wholly unacceptable, this Honorable Court should impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of incompetent and dishonest magistrates especially members of a superior court of appellate [21] jurisdiction." (Italics supplied.) The statement is not called for. The Court invites counsel's attention to [22] the admonition in Guerrero vs. Villamor; thus: "(L)awyers x x x should bear in mind their basic duty `to observe and maintain the respect due to the courts of justice and judicial officers and x x x (to) insist on similar conduct by others.' This respectful attitude towards the court is to be observed, `not for the sake of the temporary incumbent of the judicial office, but for the maintenance of its supreme importance.' And it is `through a scrupulous preference for respectful language that a lawyer best demonstrates his observance of [23] the respect due to the courts and judicial officers x x x.'" The virtues of humility and of respect and concern for others must still live on even in an age of materialism. WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without prejudice to the appropriate legal recourse by private respondent as may still be warranted as an unsecured creditor. No costs. Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the courts. SO ORDERED. 6. G.R. No. L-56076 September 21, 1983 PALAY, INC. and ALBERT ONSTOTT, petitioner, vs. JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING AUTHORITY and NAZARIO DUMPIT respondents. MELENCIO-HERRERA, J.: The Resolution, dated May 2, 1980, issued by Presidential Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing petitioners Palay, Inc. and Alberto Onstott jointly and severally, to refund to private respondent, Nazario Dumpit, the amount of P13,722.50 with 12% interest per annum, as resolved by the National Housing Authority in its Resolution of July 10, 1979 in Case No. 2167, as well as the Resolution of October 28, 1980 denying petitioners' Motion for Reconsideration of said Resolution of May 2, 1980, are being assailed in this petition. On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott executed in favor of private respondent, Nazario Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of the Crestview Heights Subdivision in Antipolo, Rizal, with an area of 1,165 square meters, - covered by TCT No. 90454, and owned by said corporation. The sale price was P23,300.00 with 9% interest per annum, payable with a downpayment of P4,660.00 and monthly installments of P246.42 until fully paid. Paragraph 6 of the contract provided for automatic extrajudicial rescission upon default in payment of any monthly installment after the lapse of 90 days from the expiration of the grace

period of one month, without need of notice and with forfeiture of all installments paid. Respondent Dumpit paid the downpayment and several installments amounting to P13,722.50. The last payment was made on December 5, 1967 for installments up to September 1967. On May 10, 1973, or almost six (6) years later, private respondent wrote petitioner offering to update all his overdue accounts with interest, and seeking its written consent to the assignment of his rights to a certain Lourdes Dizon. He followed this up with another letter dated June 20, 1973 reiterating the same request. Replying petitioners informed respondent that his Contract to Sell had long been rescinded pursuant to paragraph 6 of the contract, and that the lot had already been resold. Questioning the validity of the rescission of the contract, respondent filed a letter complaint with the National Housing Authority (NHA) for reconveyance with an altenative prayer for refund (Case No. 2167). In a Resolution, dated July 10, 1979, the NHA, finding the rescission void in the absence of either judicial or notarial demand, ordered Palay, Inc. and Alberto Onstott in his capacity as President of the corporation, jointly and severally, to refund immediately to Nazario Dumpit the amount of P13,722.50 with 12% interest from the filing of the complaint on November 8, 1974. Petitioners' Motion for Reconsideration of said Resolution was denied by the NHA in its Order 1 dated October 23, 1979. On appeal to the Office of the President, upon the allegation that the NHA Resolution was contrary to law (O.P. Case No. 1459), respondent Presidential Executive Assistant, on May 2, 1980, affirmed the Resolution of the NHA. Reconsideration sought by petitioners was denied for lack of merit. Thus, the present petition wherein the following issues are raised: I Whether notice or demand is not mandatory under the circumstances and, therefore, may be dispensed with by stipulation in a contract to sell. II Whether petitioners may be held liable for the refund of the installment payments made by respondent Nazario M. Dumpit. III Whether the doctrine of piercing the veil of corporate fiction has application to the case at bar. IV Whether respondent Presidential Executive Assistant committed grave abuse of discretion in upholding the decision of respondent NHA holding petitioners solidarily liable for the refund of the

installment payments made by respondent Nazario M. Dumpit thereby denying substantial justice to the petitioners, particularly petitioner Onstott We issued a Temporary Restraining Order on Feb 11, 1981 enjoining the enforcement of the questioned Resolutions and of the Writ of Execution that had been issued on December 2, 1980. On October 28, 1981, we dismissed the petition but upon petitioners' motion, reconsidered the dismissal and gave due course to the petition on March 15, 1982. On the first issue, petitioners maintain that it was justified in cancelling the contract to sell without prior notice or demand upon respondent in view of paragraph 6 thereof which provides6. That in case the BUYER falls to satisfy any monthly installment or any other payments herein agreed upon, the BUYER shall be granted a month of grace within which to make the payment of the t in arrears together with the one corresponding to the said month of grace. -It shall be understood, however, that should the month of grace herein granted to the BUYER expire, without the payment & corresponding to both months having been satisfied, an interest of ten (10%) per cent per annum shall be charged on the amounts the BUYER should have paid; it is understood further, that should a period of NINETY (90) DAYS elapse to begin from the expiration of the month of grace hereinbefore mentioned, and the BUYER shall not have paid all the amounts that the BUYER should have paid with the corresponding interest up to the date, the SELLER shall have the right to declare this contract cancelled and of no effect without notice, and as a consequence thereof, the SELLER may dispose of the lot/lots covered by this Contract in favor of other persons, as if this contract had never been entered into. In case of such cancellation of this Contract, all the amounts which may have been paid by the BUYER in accordance with the agreement, together with all the improvements made on the premises, shall be considered as rents paid for the use and occupation of the above mentioned premises and for liquidated damages suffered by virtue of the failure of the BUYER to fulfill his part of this agreement : and the BUYER hereby renounces his right to demand or reclaim the return of the same and further obligates peacefully to vacate the premises and deliver the same to the SELLER. Well settled is the rule, as held in previous jurisprudence, that judicial action for the rescission of a contract is not necessary where the contract provides that it may be revoked and cancelled for violation of any of its terms and conditions. However, even in the cited cases, there was at least a written notice sent to the defaulter informing him of the rescission. As stressed in University of the Philippines vs. Walfrido de los 3 Angeles the act of a party in treating a contract as cancelled should be made known to the other. We quote the pertinent excerpt:
2

Of course, it must be understood that the act of a party in treating a contract as cancelled or resolved in account of infractions by the other contracting party must be made known to the other and is always provisional being ever subject to scrutiny and review by the proper court. If the other party denies that rescission is justified it is free to resort to judicial action in its own behalf, and bring the matter to court. Then, should the court, after due hearing, decide that the resolution of the contract was not warranted, the responsible party will be sentenced to damages; in the contrary case, the resolution will be affirmed, and the consequent indemnity awarded to the party prejudiced. In other words, the party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law. But the law definitely does not require that the contracting party who believes itself injured must first file suit and wait for a judgment before taking extrajudicial steps to protect its interest. Otherwise, the party injured by the other's breach will have to passively sit and watch its damages accumulate during the pendency of the suit until the final judgment of rescission is rendered when the law itself requires that he should exercise due diligence to minimize its own damages (Civil Code, Article 2203). We see no conflict between this ruling and the previous jurisprudence of this Court invoked by respondent declaring that judicial action is necessary for the resolution of a reciprocal obligation (Ocejo Perez & Co., vs. International Banking Corp., 37 Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil 820) since in every case where the extrajudicial resolution is contested only the final award of the court of competent jurisdiction can conclusively settle whether the resolution was proper or not. It is in this sense that judicial action win be necessary, as without it, the extrajudicial resolution will remain contestable and subject to judicial invalidation unless attack thereon should become barred by acquiescense, estoppel or prescription. Fears have been expressed that a stipulation providing for a unilateral rescission in case of breach of contract may render nugatory the general rule requiring judicial action (v. Footnote, Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, as already observed, in case of abuse or error by the rescinder the other party is not barred from questioning in court such abuse or error, the practical effect of the stipulation being merely to transfer to the defaulter the initiative of instituting suit, instead of the rescinder (Emphasis supplied).

Of similar import is the ruling in Nera vs. Vacante , reading: A stipulation entitling one party to take possession of the land and building if the other party violates the contract does not ex propio vigore confer upon the former the right to take possession thereof if objected to without judicial intervention and determination. This was reiterated in Zulueta vs. Mariano where we held that extrajudicial rescission has legal effect where the other party does not 6 oppose it. Where it is objected to, a judicial determination of the issue is still necessary. In other words, resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in Court. If the debtor 7 impugns the declaration, it shall be subject to judicial determination. In this case, private respondent has denied that rescission is justified and has resorted to judicial action. It is now for the Court to determine whether resolution of the contract by petitioners was warranted. We hold that resolution by petitioners of the contract was ineffective and inoperative against private respondent for lack of notice of resolution, as held in the U.P. vs. Angeles case, supra Petitioner relies on Torralba vs. De los Angeles where it was held that "there was no contract to rescind in court because from the moment the petitioner defaulted in the timely payment of the installments, the contract between the parties was deemed ipso facto rescinded." However, it should be noted that even in that case notice in writing was made to the vendee of the cancellation and annulment of the contract although the contract entitled the seller to immediate repossessing of the land upon default by the buyer. The indispensability of notice of cancellation to the buyer was to be later underscored in Republic Act No. 6551 entitled "An Act to Provide Protection to Buyers of Real Estate on Installment Payments." which took effect on September 14, 1972, when it specifically provided: Sec. 3(b) ... the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer. (Emphasis supplied). The contention that private respondent had waived his right to be notified under paragraph 6 of the contract is neither meritorious because it was a contract of adhesion, a standard form of petitioner corporation, and private respondent had no freedom to stipulate. A waiver must be certain and unequivocal, and intelligently made; such waiver follows only where liberty of choice has been fully 9 accorded. Moreover, it is a matter of public policy to protect buyers of real estate on installment payments against onerous and oppressive conditions. Waiver of notice is one such onerous and oppressive condition to buyers of real estate on installment payments.
8 5

Regarding the second issue on refund of the installment payments made by private respondent. Article 1385 of the Civil Code provides: ART. 1385. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore. Neither sham rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith. In this case, indemnity for damages may be demanded from the person causing the loss. As a consequence of the resolution by petitioners, rights to the lot should be restored to private respondent or the same should be replaced by another acceptable lot. However, considering that the property had already been sold to a third person and there is no evidence on record that other lots are still available, private respondent is entitled to the refund of installments paid plus interest at the legal rate of 12% computed from the date of the institution of the 10 action. It would be most inequitable if petitioners were to be allowed to retain private respondent's payments and at the same time appropriate the proceeds of the second sale to another. We come now to the third and fourth issues regarding the personal liability of petitioner Onstott who was made jointly and severally liable with petitioner corporation for refund to private respondent of the total amount the latter had paid to petitioner company. It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as wen as from that of any 11 other legal entity to which it may be related. As a general rule, a corporation may not be made to answer for acts or liabilities of its stockholders or those of the legal entities to which it may be connected and vice versa. However, the veil of corporate fiction may be pierced 12 when it is used as a shield to further an end subversive of justice ; or for purposes that could not have been intended by the law that created 13 it ; or to defeat public convenience, justify wrong, protect fraud, or 14 defend crime. ; or to perpetuate fraud or confuse legitimate 15 16 issues ; or to circumvent the law or perpetuate deception ; or as an alter ego, adjunct or business conduit for the sole benefit of the 17 stockholders. We find no badges of fraud on petitioners' part. They had literally relied, albeit mistakenly, on paragraph 6 (supra) of its contract with private respondent when it rescinded the contract to sell extrajudicially and had sold it to a third person. In this case, petitioner Onstott was made liable because he was then the President of the corporation and he a to be the controlling stockholder. No sufficient proof exists on record that said petitioner used the corporation to defraud private respondent. He cannot, therefore, be made personally liable just because he "appears to be the controlling stockholder". Mere ownership by a single stockholder or by another corporation is not of itself sufficient ground for disregarding

the separate corporate personality. In this respect then, a modification of the Resolution under review is called for. WHEREFORE, the questioned Resolution of respondent public official, dated May 2, 1980, is hereby modified. Petitioner Palay, Inc. is directed to refund to respondent Nazario M. Dumpit the amount of P13,722.50, with interest at twelve (12%) percent per annum from November 8, 1974, the date of the filing of the Complaint. The temporary Restraining Order heretofore issued is hereby lifted. No costs. SO ORDERED. 7. [G.R. No. 128066. June 19, 2000] JARDINE DAVIES INC., petitioner, vs. COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents. [G.R. No. 128069 June 19, 2000] PURE FOODS CORPORATION, petitioner, vs. COURT OF APPEALS and FAR EAST MILLS SUPPLY CORPORATION, respondents. DECISION BELLOSILLO, J.: This is rather a simple case for specific performance with damages which could have been resolved through mediation and conciliation during its infancy stage had the parties been earnest in expediting the disposal of this case. They opted however to resort to full court proceedings and denied themselves the benefits of alternative dispute resolution, thus making the process more arduous and long-drawn. The controversy started in 1992 at the height of the power crisis which the country was then experiencing. To remedy and curtail further losses due to the series of power failures, petitioner PURE FOODS CORPORATION (hereafter PUREFOODS) decided to install two (2) 1500 KW generators in its food processing plant in San Roque, Marikina City. Sometime in November 1992 a bidding for the supply and installation of the generators was held. Several suppliers and dealers were invited to attend a pre-bidding conference to discuss the conditions, propose scheme and specifications that would best suit the needs of PUREFOODS. Out of the eight (8) prospective bidders who attended the pre-bidding conference, only three (3) bidders, namely, respondent FAR EAST MILLS SUPPLY CORPORATION (hereafter FEMSCO), MONARK and ADVANCE POWER submitted bid proposals and gave bid bonds equivalent to 5% of their respective bids, as required. Thereafter, in a letter dated 12 December 1992 addressed to FEMSCO President Alfonso Po, PUREFOODS confirmed the award of the contract to FEMSCO Gentlemen:

18

This will confirm that Pure Foods Corporation has awarded to your firm the project: Supply and Installation of two (2) units of 1500 KW/unit Generator Sets at the Processed Meats Plant, Bo. San Roque, Marikina, based on your proposal number PC 28-92 dated November 20, 1992, subject to the following basic terms and conditions: 1. Lump sum contract of P6,137,293.00 (VAT included), for the supply of materials and labor for the local portion and the labor for the imported materials, payable by progress billing twice a month, with ten percent (10%) retention. The retained amount shall be released thirty (30) days after acceptance of the completed project and upon posting of Guarantee Bond in an amount equivalent to twenty percent (20%) of the contract price. The Guarantee Bond shall be valid for one (1) year from completion and acceptance of project. The contract price includes future increase/s in costs of materials and labor; 2. The project shall be undertaken pursuant to the attached specifications. It is understood that any item required to complete the project, and those not included in the list of items shall be deemed included and covered and shall be performed; 3. All materials shall be brand new; 4. The project shall commence immediately and must be completed within twenty (20) working days after the delivery of Generator Set to Marikina Plant, penalty equivalent to 1/10 of 1% of the purchase price for every day of delay; 5. The Contractor shall put up Performance Bond equivalent to thirty (30%) of the contract price, and shall procure All Risk Insurance equivalent to the contract price upon commencement of the project. The All Risk Insurance Policy shall be endorsed in favor of and shall be delivered to Pure Foods Corporation; 6. Warranty of one (1) year against defective material and/or workmanship. Once finalized, we shall ask you to sign the formal contract embodying the foregoing terms and conditions. Immediately, FEMSCO submitted the required performance bond in the amount of P1,841,187.90 and contractors all-risk insurance policy in the amount of P6,137,293.00 which PUREFOODS through its Vice President Benedicto G. Tope acknowledged in a letter dated 18 December 1992. FEMSCO also made arrangements with its principal and started the PUREFOODS project by purchasing the necessary materials. PUREFOODS on the other hand returned FEMSCOs Bidders Bond in the amount of P1,000,000.00, as requested.

Later, however, in a letter dated 22 December 1992, PUREFOODS through its Senior Vice President Teodoro L. Dimayuga unilaterally canceled the award as "significant factors were uncovered and brought to (their) attention which dictate (the) cancellation and warrant a total review and re-bid of (the) project." Consequently, FEMSCO protested the cancellation of the award and sought a meeting with PUREFOODS. However, on 26 March 1993, before the matter could be resolved, PUREFOODS already awarded the project and entered into a contract with JARDINE NELL, a division of Jardine Davies, Inc. (hereafter JARDINE), which incidentally was not one of the bidders. FEMSCO thus wrote PUREFOODS to honor its contract with the former, and to JARDINE to cease and desist from delivering and installing the two (2) generators at PUREFOODS. Its demand letters unheeded, FEMSCO sued both PUREFOODS and JARDINE: PUREFOODS for reneging on its contract, and JARDINE for its unwarranted interference and inducement. Trial ensued. After FEMSCO presented its evidence, JARDINE filed a Demurrer to Evidence. On 27 June 1994 the Regional Trial Court of Pasig, Br. 68, granted JARDINEs Demurrer to Evidence. The trial court concluded that "[w]hile it may seem to the plaintiff that by the actions of the two defendants there is something underhanded going on, this is all a matter of perception, and unsupported by hard evidence, mere suspicions and suppositions would not stand up very well in a court of [2] law." Meanwhile trial proceeded as regards the case against PUREFOODS. On 28 July 1994 the trial court rendered a decision ordering PUREFOODS: (a) to indemnify FEMSCO the sum of P2,300,000.00 representing the value of engineering services it rendered; (b) to pay FEMSCO the sum of US$14,000.00 or its peso equivalent, and P900,000.00 representing contractor's mark-up on installation work, considering that it would be impossible to compel PUREFOODS to honor, perform and fulfill its contractual obligations in view of PUREFOOD's contract with JARDINE and noting that construction had already started thereon; (c) to pay attorneys fees in an amount equivalent to 20% of the total amount due; and, (d) to pay the costs. The trial court dismissed the counterclaim filed by PUREFOODS for lack of factual and legal basis. Both FEMSCO and PUREFOODS appealed to the Court of Appeals. FEMSCO appealed the 27 June 1994 Resolution of the trial court which granted the Demurrer to Evidence filed by JARDINE resulting in the dismissal of the complaint against it, while PUREFOODS appealed the 28 July 1994 Decision of the same court which ordered it to pay FEMSCO. On 14 August 1996 the Court of Appeals affirmed in toto the 28 July [3] 1994 Decision of the trial court. It also reversed the 27 June 1994 Resolution of the lower court and ordered JARDINE to pay FEMSCO damages for inducing PUREFOODS to violate the latters contract with FEMSCO. As such, JARDINE was ordered to pay FEMSCO P2,000,000.00 for moral damages. In addition, PUREFOODS was also directed to pay FEMSCO P2,000,000.00 as moral damages and P1,000,000.00 as exemplary damages as well as 20% of the total amount due as attorney's fees. On 31 January 1997 the Court of Appeals denied for lack of merit the separate motions for reconsideration filed by PUREFOODS and
[1]

JARDINE. Hence, these two (2) petitions for review filed by PUREFOODS and JARDINE which were subsequently consolidated. PUREFOODS maintains that the conclusions of both the trial court and the appellate court are premised on a misapprehension of facts. It argues that its 12 December 1992 letter to FEMSCO was not an acceptance of the latter's bid proposal and award of the project but more of a qualified acceptance constituting a counter-offer which required FEMSCO's express conforme. Since PUREFOODS never received FEMSCOs conforme, PUREFOODS was very well within reason to revoke its qualified acceptance or counter-offer. Hence, no contract was perfected between PUREFOODS and FEMSCO. PUREFOODS also contends that it was never in bad faith when it dealt with FEMSCO. Hence moral and exemplary damages should not have been awarded. Corollarily, JARDINE asserts that the records are bereft of any showing that it had prior knowledge of the supposed contract between PUREFOODS and FEMSCO, and that it induced PUREFOODS to violate the latters alleged contract with FEMSCO. Moreover, JARDINE reasons that FEMSCO, an artificial person, is not entitled to moral damages. But granting arguendo that the award of moral damages is proper, P2,000,000.00 is extremely excessive. In the main, these consolidated cases present two (2) issues: first, whether there existed a perfected contract between PUREFOODS and FEMSCO; and second, granting there existed a perfected contract, whether there is any showing that JARDINE induced or connived with PUREFOODS to violate the latter's contract with FEMSCO. A contract is defined as "a juridical convention manifested in legal form, by virtue of which one or more persons bind themselves in favor of another or others, or reciprocally, to the fulfillment of a prestation to [4] give, to do, or not to do." There can be no contract unless the following requisites concur: (a) consent of the contracting parties; (b) object certain which is the subject matter of the contract; and, (c) [5] cause of the obligation which is established. A contract binds both contracting parties and has the force of law between them. Contracts are perfected by mere consent, upon the acceptance by the offeree of the offer made by the offeror. From that moment, the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their [6] nature, may be in keeping with good faith, usage and law. To produce a contract, the acceptance must not qualify the terms of the offer. [7] However, the acceptance may be express or implied. For a contract to arise, the acceptance must be made known to the offeror. Accordingly, the acceptance can be withdrawn or revoked before it is made known to the offeror. In the instant case, there is no issue as regards the subject matter of the contract and the cause of the obligation. The controversy lies in the consent - whether there was an acceptance of the offer, and if so, if it was communicated, thereby perfecting the contract. To resolve the dispute, there is a need to determine what constituted the offer and the acceptance. Since petitioner PUREFOODS started the process of entering into the contract by conducting a bidding, Art. 1326 of the Civil Code, which provides that "[a]dvertisements for bidders are simply invitations to make proposals," applies. Accordingly, the Terms and Conditions of the Biddingdisseminated by petitioner PUREFOODS

constitutes the "advertisement" to bid on the project. The bid proposals or quotations submitted by the prospective suppliers including respondent FEMSCO, are the offers. And, the reply of petitioner PUREFOODS, the acceptance or rejection of the respective offers. Quite obviously, the 12 December 1992 letter of petitioner PUREFOODS to FEMSCO constituted acceptance of respondent FEMSCOs offer as contemplated by law. The tenor of the letter, i.e.,"This will confirm that Pure Foods has awarded to your firm (FEMSCO) the project," could not be more categorical. While the same letter enumerated certain "basic terms and conditions," these conditions were imposed on the performance of the obligation rather than on the perfection of the contract. Thus, the first "condition" was merely a reiteration of the contract price and billing scheme based on the Terms and Conditions of Bidding and the bid or previous offer of respondent FEMSCO. The second and third "conditions" were nothing more than general statements that all items and materials including those excluded in the list but necessary to complete the project shall be deemed included and should be brand new. The fourth "condition" concerned the completion of the work to be done, i.e., within twenty (20) days from the delivery of the generator set, the purchase of which was part of the contract. The fifth "condition" had to do with the putting up of a performance bond and an all-risk insurance, both of which should be given upon commencement of the project. The sixth "condition" related to the standard warranty of one (1) year. In fine, the enumerated "basic terms and conditions" were prescriptions on how the obligation was to be performed and implemented. They were far from being conditions imposed on the perfection of the contract. In Babasa v. Court of Appeals we distinguished between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. While failure to comply with the first condition results in the failure of a contract, failure to comply with the second merely gives the other party options and/or remedies to protect his interests. We thus agree with the conclusion of respondent appellate court which affirmed the trial court As can be inferred from the actual phrase used in the first portion of the letter, the decision to award the contract has already been made. The letter only serves as a confirmation of such decision. Hence, to the Courts mind, there is already an acceptance made of the offer received by Purefoods. Notwithstanding the terms and conditions enumerated therein, the offer has been accepted and/or amplified the details of the terms and conditions contained in the Terms and Conditions of Bidding given out by Purefoods to prospective [9] bidders. But even granting arguendo that the 12 December 1992 letter of petitioner PUREFOODS constituted a "conditional counter-offer," respondent FEMCO's submission of the performance bond and contractor's all-risk insurance was an implied acceptance, if not a clear indication of its acquiescence to, the "conditional counter-offer," which expressly stated that the performance bond and the contractor's allrisk insurance should be given upon the commencement of the
[8]

contract. Corollarily, the acknowledgment thereof by petitioner PUREFOODS, not to mention its return of FEMSCO's bidder's bond, was a concrete manifestation of its knowledge that respondent FEMSCO indeed consented to the "conditional counter-offer." After all, as earlier [10] adverted to, an acceptance may either be express or implied, and this can be inferred from the contemporaneous and subsequent acts of the contracting parties. Accordingly, for all intents and purposes, the contract at that point has been perfected, and respondent FEMSCO's conforme would only be a mere surplusage. The discussion of the price of the project two (2) months after the 12 December 1992 letter can be deemed as nothing more than a pressure being exerted by petitioner PUREFOODS on respondent FEMSCO to lower the price even after the contract had been perfected. Indeed from the facts, it can easily be surmised that petitioner PUREFOODS was haggling for a lower price even after agreeing to the earlier quotation, and was threatening to unilaterally cancel the contract, which it eventually did. Petitioner PUREFOODS also makes an issue out of the absence of a purchase order (PO). Suffice it to say that purchase orders or POs do not make or break a contract. Thus, even the tenor of the subsequent letter of petitioner PUREFOODS, i.e., "Pure Foods Corporation is hereby canceling the award to your company of the project," presupposes that the contract has been perfected. For, there can be no cancellation if the contract was not perfected in the first place. Petitioner PUREFOODS also argues that it was never in bad faith. On the contrary, it believed in good faith that no such contract was perfected. We are not convinced. We subscribe to the factual findings and conclusions of the trial court which were affirmed by the appellate court Hence, by the unilateral cancellation of the contract, the defendant (petitioner PURE FOODS) has acted with bad faith and this was further aggravated by the subsequent inking of a contract between defendant Purefoods and erstwhile codefendant Jardine. It is very evident that Purefoods thought that by the expedient means of merely writing a letter would automatically cancel or nullify the existing contract entered into by both parties after a process of bidding. This, to the Courts mind, is a flagrant violation of the express provisions of the law and is contrary to fair and just dealings to [11] which every man is due. This Court has awarded in the past moral damages to a corporation [12] whose reputation has been besmirched. In the instant case, respondent FEMSCO has sufficiently shown that its reputation was tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the project, only to be canceled later. We thus sustain respondent appellate court's award of moral damages. We however reduce the award from P2,000,000.00 to P1,000,000.00, as moral damages are never intended to enrich the recipient. Likewise, the award of exemplary damages by way of example for the public good is excessive and should be reduced to P100,000.00. Petitioner JARDINE maintains on the other hand that respondent appellate court erred in ordering it to pay moral damages to respondent FEMSCO as it supposedly induced PUREFOODS to violate

the contract with FEMSCO. We agree. While it may seem that petitioners PUREFOODS and JARDINE connived to deceive respondent FEMSCO, we find no specific evidence on record to support such perception. Likewise, there is no showing whatsoever that petitioner JARDINE induced petitioner PUREFOODS. The similarity in the design submitted to petitioner PUREFOODS by both petitioner JARDINE and respondent FEMSCO, and the tender of a lower quotation by petitioner JARDINE are insufficient to show that petitioner JARDINE indeed induced petitioner PUREFOODS to violate its contract with respondent FEMSCO. WHEREFORE, judgment is hereby rendered as follows: (a) The petition in G.R. No. 128066 is GRANTED. The assailed Decision of the Court of Appeals reversing the 27 June 1994 resolution of the trial court and ordering petitioner JARDINE DAVIES, INC., to pay private respondent FAR EAST MILLS SUPPLY CORPORATION P2,000,000.00 as moral damages is REVERSED and SET ASIDE for insufficiency of evidence; and (b) The petition in G.R. No. 128069 is DENIED. The assailed Decision of the Court of Appeals ordering petitioner PURE FOODS CORPORATION to pay private respondent FAR EAST MILLS SUPPLY CORPORATION the sum of P2,300,000.00 representing the value of engineering services it rendered, US$14,000.00 or its peso equivalent, and P900,000.00 representing the contractor's mark-up on installation work, as well as attorney's fees equivalent to twenty percent (20%) of the total amount due, is AFFIRMED. In addtion, petitioner PURE FOODS CORPORATION is ordered to pay private respondent FAR EAST MILLS SUPPLY CORPORATION moral damages in the amount of P1,000,000.00 and exemplary damages in the amount ofP1,000,000.00. Costs against petitioner. SO ORDERED.

8. [G.R. No. 141994. January 17, 2005]

FILIPINAS

BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and ANGELITA F. AGO, respondents.

DECISION CARPIO, J.: The Case This petition for review assails the 4 January 1999 [2] Decision and 26 January 2000 Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification [3] the 14 December 1992 Decision of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and ordered them to solidarily
[1]

pay Ago Medical and Educational Center-Bicol Christian College of Medicine moral damages, attorneys fees and costs of suit.

purpose of the institution (AMEC) is to deceive students at cross purpose with its reason for being it is possible for these foreign [8] foundations to lift or suspend their donations temporarily. xxx

The Antecedents
[4]

Expos is a radio documentary program hosted by Carmelo [5] Mel Rima (Rima) and Hermogenes Jun Alegre (Alegre). Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi [6] City, the Albay municipalities and other Bicol areas. In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from students, teachers and parents against Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC) and its administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean [7] of AMECs College of Medicine, filed a complaint for damages against FBNI, Rima and Alegre on 27 February 1990. Quoted are portions of the allegedly libelous broadcasts: JUN ALEGRE: Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise them to pass all subjects because if they fail in any subject they will repeat their year level, taking up all subjects including those they have passed already. Several students had approached me stating that they had consulted with the DECS which told them that there is no such regulation. If [there] is no such regulation why is AMEC doing the same? xxx Second: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by DECS. xxx Third: Students are required to take and pay for the subject even if the subject does not have an instructor - such greed for money on the part of AMECs administration. Take the subject Anatomy: students would pay for the subject upon enrolment because it is offered by the school. However there would be no instructor for such subject. Students would be informed that course would be moved to a later date because the school is still searching for the appropriate instructor. xxx It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for the past few years since its inception because of funds support from foreign foundations. If you will take a look at the AMEC premises youll find out that the names of the buildings there are foreign soundings. There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign foundations for AMEC is substantial, isnt it? With the report which is the basis of the expose in DZRC today, it would be very easy for detractors and enemies of the Ago family to stop the flow of support of foreign foundations who assist the medical school on the basis of the latters purpose. But if the

On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the AMEC-Institute of Mass Communication in their effort to minimize expenses in terms of salary are absorbing or continues to accept rejects. For example how many teachers in AMEC are former teachers of Aquinas University but were removed because of immorality? Does it mean that the present administration of AMEC have the total definite moral foundation from catholic administrator of Aquinas University. I will prove to you my friends, that AMEC is a dumping ground, garbage, not merely of moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of Student Affairs of AMEC is Justita Lola, as the family name implies. She is too old to work, being an old woman. Is the AMEC administration exploiting the very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just patiently making use of Dean Justita Lola were if she is very old. As in atmospheric situation zero visibility the plane cannot land, meaning she is very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the committee on scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently made use of her. xxx MEL RIMA: xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What does this mean? Immoral and physically misfits as teachers. May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to teach. You are too old. As an aviation, your case is zero visibility. Dont insist. xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at that. The reason is practical cost saving in salaries, because an old person is not fastidious, so long as she has money to buy the ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken in as Dean. xxx xxx On our end our task is to attend to the interests of students. It is likely that the students would be influenced by evil. When they become members of society outside of campus will be liabilities rather than assets. What do you expect from a doctor who while studying at AMEC is so much burdened with unreasonable imposition? What do you expect from a student who aside from peculiar problems because not all students are rich in their struggle to improve their social status are even more burdened with false [9] regulations. xxx (Emphasis supplied) The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations, and as such, destroyed plaintiffs

(AMEC and Ago) reputation. AMEC and Ago included FBNI as defendant for allegedly failing to exercise due diligence in the selection and supervision of its employees, particularly Rima and Alegre. On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil [10] Lozares, filed an Answer alleging that the broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly impelled by a sense of public duty to report the goings-on in AMEC, *which is+ an institution imbued with public interest. Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea, collaborating counsel of Atty. [11] Lozares, filed a Motion to Dismiss on FBNIs behalf. The trial court denied the motion to dismiss. Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in the selection and supervision of Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2) be interviewed; and (3) undergo an apprenticeship and training program after passing the interview. FBNI likewise claimed that it always reminds its broadcasters to observe truth, fairness and objectivity in their broadcasts and to refrain from using libelous and indecent language. Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP) accreditation test and to secure a KBP permit. On 14 December 1992, the trial court rendered a [12] Decision finding FBNI and Alegre liable for libel except Rima. The trial court held that the broadcasts are libelous per se. The trial court rejected the broadcasters claim that their utterances were the result of straight reporting because it had no factual basis. The broadcasters did not even verify their reports before airing them to show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to exercise diligence in the selection and supervision of its employees. In absolving Rima from the charge, the trial court ruled that Rimas only participation was when he agreed with Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech, expression, and of the press. The dispositive portion of the decision reads: WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages caused by the controversial utterances, which are not found by this court to be really very serious and damaging, and there being no showing that indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly and severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit. SO ORDERED.
[13]

and not against her. The dispositive portion of the Court of Appeals decision reads: WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre. SO ORDERED.
[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26 January 2000 Resolution. Hence, FBNI filed this petition.
[15]

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found Rima and Alegres claim that they were actuated by their moral and social duty to inform the public of the students gripes as insufficient to justify the utterance of the defamatory remarks. Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled that the broadcasts were made with reckless disregard as to whether they were true or false. The appellate court pointed out that FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained against AMEC. Rima and Alegre merely gave a single name when asked to identify the students. According to the Court of Appeals, these circumstances cast doubt on the veracity of the broadcasters claim that they were impelled by their moral and social duty to inform the public about the students gripes. The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to minimize expenses on its employees salaries; and (3) AMEC burdened the students with unreasonable imposition and false [16] regulations. The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP accreditation. The Court of Appeals denied Agos claim for damages and attorneys fees because the libelous remarks were directed against AMEC, and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral damages, attorneys fees and costs of suit.

(Emphasis supplied)

Issues

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed the decision to the Court of Appeals. The Court of Appeals affirmed the trial courts judgment with modification. The appellate court made Rima solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for damages and attorneys fees because the broadcasts were directed against AMEC,

FBNI raises the following issues for resolution: I. II. WHETHER THE BROADCASTS ARE LIBELOUS; WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III.

WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

IV.

The Courts Ruling

information. Hearing the students alleged complaints a month [27] before the expos, they had sufficient time to verify their sources and information. However, Rima and Alegre hardly made a thorough investigation of the students alleged gripes. Neither did they inquire about nor confirm the purported irregularities in AMEC from the Department of Education, Culture and Sports. Alegre testified that he merely went to AMEC to verify his report from an alleged AMEC official who refused to disclose any information. Alegre simply relied on the words of the students because they were many and not because there [28] is proof that what they are saying is true. This plainly shows Rima and Alegres reckless disregard of whether their report was true or not. Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some courts in the United States apply the privilege of neutral reportage in libel cases involving matters of public interest or public figures. Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory statements made against public figures is shielded from liability, regardless of the republishers subjectiv e awareness of the truth or [29] falsity of the accusation. Rima and Alegre cannot invoke the privilege of neutral reportage because unfounded comments abound in the broadcasts. Moreover, there is no existing controversy involving AMEC when the broadcasts were made. The privilege of neutral reportage applies where the defamed person is a public figure who is involved in an existing controversy, and a party to that controversy makes the [30] defamatory statement. However, FBNI argues vigorously that malice in law does not [31] apply to this case. Citing Borjal v. Court of Appeals, FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged communications for being commentaries on matters of public interest. Such being the case, AMEC should prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual malice, there is no libel. FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment, thus: [F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for libel or slander. The doctrine of fair comment means that while in general every discreditable imputation publicly made is deemed false, because every man is presumed innocent until his guilt is judicially proved, and every false imputation is deemed malicious, nevertheless, when the discreditable imputation is directed against a public person in his public capacity, it is not necessarily actionable. In order that such discreditable imputation to a public official may be actionable, it must either be a false allegation of fact or a comment based on a false supposition. If the comment is an expression of opinion, based on established facts, then it is immaterial that the opinion happens to be mistaken, as long as it [32] might reasonably be inferred from the facts. (Emphasis supplied) True, AMEC is a private learning institution whose business of educating students is genuinely imbued with public interest. The welfare of the youth in general and AMECs students in particular is a matter which the public has the right to know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with matters of public interest. However, unlike inBorjal, the questioned broadcasts are not based on established facts. The record supports the following findings of the trial court:

[26]

We deny the petition. This is a civil action for damages as a result of the allegedly [17] defamatory remarks of Rima and Alegre against AMEC. While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint reveals that AMECs cause of action is based on A rticles [18] 30 and 33 of the Civil Code. Article 30 authorizes a separate civil action to recover civil liability arising from a criminal offense. On the [19] other hand, Article 33 particularly provides that the injured party may bring a separate civil action for damages in cases of defamation, [20] fraud, and physical injuries. AMEC also invokes Article 19 of the Civil [21] Code to justify its claim for damages. AMEC cites Articles 2176 and [22] 2180 of the Civil Code to hold FBNI solidarily liable with Rima and Alegre.

I. Whether the broadcasts are libelous

[23]

A libel is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act or omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural or juridical person, or to blacken the memory of [24] one who is dead. There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances tending to cause it dishonor, discredit and contempt. Rima and Alegres remarks such as greed for money on the part of AMECs administrators; AMEC is a dumping ground, garbage of xxx moral and physical misfits; and AMEC students who graduate will be liabilities rather than assets of the society are libelous per se. Taken as a whole, the broadcasts suggest that AMEC is a money-making institution where physically and morally unfit teachers abound. However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were plainly impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence that ill will or spite motivated Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs side and gave Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since there is no malice, there is no libel. FBNIs contentions are untenable. Every defamatory imputation is presumed malicious. Rima and Alegre failed to show adequately their good intention and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or public affairs program, Rima and Alegre should have presented the public issues free from inaccurate and misleading
[25]

xxx Although defendants claim that they were motivated by consistent reports of students and parents against plaintiff, yet, defendants have not presented in court, nor even gave name of a single student who made the complaint to them, much less present written complaint or petition to that effect. To accept this defense of defendants is too dangerous because it could easily give license to the media to malign people and establishments based on flimsy excuses that there were reports to them although they could not satisfactorily establish it. Such laxity would encourage careless and irresponsible broadcasting which is inimical to public interests. Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their duties, did not verify and analyze the truth of the reports before they aired it, in order to prove that they are in good faith. Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years before the controversial broadcast, accreditation to offer Physical Therapy course had already been given the plaintiff, which certificate is signed by no less than the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could have easily known this were they careful enough to verify. And yet, defendants were very categorical and sounded too positive when they made the erroneous report that plaintiff had no permit to offer Physical Therapy courses which they were offering. The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation prove not to be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of plaintiff school was given the name Mcdonald building, that was only in order to honor the first missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a single centavo appears to be received by plaintiff school from the aforementioned McDonald Foundation which does not exist. Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical students fail in one subject, they are made to repeat all the other subject[s], even those they have already passed, nor their claim that the school charges laboratory fees even if there are no laboratories in the school. No evidence was presented to prove the bases for these claims, at least in order to give semblance of good faith. As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was found to be 75 years old. xxx Even older people prove to be effective teachers like Supreme Court Justices who are still very much in demand as law professors in their late years. Counsel for defendants is past 75 but is found by this court to be still very sharp and effective. So is plaintiffs counsel. Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and docile. The contention that plaintiffs graduates become liabilities rather than assets of our society is a mere conclusion. Being from the place

himself, this court is aware that majority of the medical graduates of plaintiffs pass the board examination easily and become prosperous [33] and responsible professionals. Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion happens to be mistaken, as long as it might reasonably be inferred from the [34] facts. However, the comments of Rima and Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and remain libelous per se. The broadcasts also violate the Radio Code of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides: B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES 1. 4. xxx Public affairs program shall present public issues free from personal bias, prejudice and inaccurate and misleading information. x x x Furthermore, the station shall strive to present balanced discussion of issues. x x x.
[35]

xxx 7. The station shall be responsible at all times in the supervision of public affairs, public issues and commentary programs so that they conform to the provisions and standards of this code. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public interest, general welfare and good order in the presentation of public affairs and public [36] issues. (Emphasis supplied)

8.

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of ethical conduct governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of conduct imposed by the radio broadcast industry on its own members. The Radio Code is a public warranty by the radio broadcast industry that radio broadcast practitioners are subject to a code by which their conduct are measured for lapses, liability and sanctions. The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct of their profession, just like other professionals. A professional code of conduct provides the standards for determining whether a person has acted justly, honestly and with good faith in the exercise of his rights and performance of his [37] duties as required by Article 19 of the Civil Code. A professional code of conduct also provides the standards for determining whether a person who willfully causes loss or injury to another has acted in a [38] manner contrary to morals or good customs under Article 21 of the Civil Code. II. Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages [39] because it is a corporation. A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience physical suffering or such sentiments as wounded feelings, serious anxiety, [40] mental anguish or moral shock. The Court of Appeals [41] cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral damages. However, the Courts statement in Mambulaothat a corporation may have a good reputation which, if besmirched, may also [42] be a ground for the award of moral damages is an obiter dictum. Nevertheless, AMECs claim for moral damages falls under item 7 [43] of Article 2219 of the Civil Code. This provision expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a corporation can validly complain for libel or any other form of [44] defamation and claim for moral damages. Moreover, where the broadcast is libelous per se, the law implies [45] damages. In such a case, evidence of an honest mistake or the want of character or reputation of the party libeled goes only in mitigation of [46] damages. Neither in such a case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of [47] some damages. In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages. However, we find the award of P300,000 moral damages unreasonable. The record shows that even though the broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to its reputation. Therefore, we reduce the award of moral damages from P300,000 to P150,000.

While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the court and depends upon the circumstances of each case, the Court of Appeals failed to point out any circumstance to justify the award. IV. Whether FBNI is solidarily liable with Rima and Alegre for moral damages, attorneys fees and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorneys fees because it exercised due diligence in the selection and supervision of its employees, particularly Rima and Alegre. FBNI maintains that its broadcasters, including Rima and Alegre, undergo a very regimented process before they are allowed to go on air. Those who apply for broadcaster are subjected to interviews, examinations and an apprenticeship program. FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a broadcaster. FBNI points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do not in any way prove that FBNI did not exercise the diligence of a good father of a family in selecting and supervising them. Rimas accreditation lapsed due to his non-payment of the KBP annual fees while Alegres accreditation card was delayed allegedly for reasons attributable to the KBP Manila Office. FBNI claims that membership in the KBP is merely voluntary and not required by any law or government regulation. FBNIs arguments do not persuade us. The basis of the present action is a tort. Joint tort feasors are [52] jointly and severally liable for the tort which they commit. Joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance, cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for [53] their benefit. Thus, AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of the Civil Code. As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages arising from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory statements published by radio or television may be had from the owner of the station, a licensee, the operator of the station, or a person who procures, or participates in, the making of the [54] defamatory statements. An employer and employee are solidarily liable for a defamatory statement by the employee within the course and scope of his or her employment, at least when the employer [55] authorizes or ratifies the defamation. In this case, Rima and Alegre were clearly performing their official duties as hosts of FBNIs radio program Expos when they aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond the scope of their work at that time. There was likewise no showing that FBNI did not authorize and ratify the defamatory broadcasts. Moreover, there is insufficient evidence on record that FBNI exercised due diligence in the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised diligence in the selection of its broadcasters without introducing any evidence to prove that it observed the same diligence in the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in supervising its broadcasters. FBNIs alleged constant reminder to its broadcasters to observe truth, fairness and

III. Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorneys fees. FBNI adds that the [48] instant case does not fall under the enumeration in Article 2208 of the Civil Code. The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the trial and appellate courts failed to explicitly state in their respective decisions the rationale for the award of attorneys [49] fees. In Inter-Asia Investment Industries, Inc. v. Court of [50] Appeals, we held that: [I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsels fees are not to be awarded every time a party wins a suit. The power of the court to award attorneys fees under Article 2208 of the Civil Code demands factual, legal and equitable justification, without which the award is a conclusion without a premise, its basis being improperly left to speculation and conjecture. In all events, the court must explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal reason for the award of attorneys [51] fees. (Emphasis supplied)

objectivity and to refrain from using libelous and indecent language is not enough to prove due diligence in the supervision of its broadcasters. Adequate training of the broadcasters on the industrys code of conduct, sufficient information on libel laws, and continuous evaluation of the broadcasters performance are but a few of the many ways of showing diligence in the supervision of broadcasters. FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as broadcasters, bearing in mind their qualifications. However, no clear and convincing evidence shows that Rima and Alegre underwent FBNIs regimented process of application. Furthermore, FBNI admits that Rima and Alegre had [56] deficiencies in their KBP accreditation, which is one of FBNIs requirements before it hires a broadcaster. Significantly, membership in the KBP, while voluntary, indicates the broadcasters strong commitment to observe the broadcast industrys rules and regulations. Clearly, these circumstances show FBNIs lack of diligence in selecting and supervising Rima and Alegre. Hence, FBNI is solidarily liable to pay damages together with Rima and Alegre. WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award of moral damages is reduced from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against petitioner. SO ORDERED.

the ground that it was served on Aerocom beyond the eighteen (18)month period from the ratification of the 1987 Constitution as provided for in Section 26, Article XVIII thereof which reads: Sec. 26. The authority to issue sequestration or freeze orders under Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shall remain operative for not more than eighteen months after the ratification of this Constitution. However, in the national interest, as certified by the President, the Congress may extend said period. A sequestration or freeze order shall be issued only upon showing of a prima facie case. The order and the list of the sequestered or frozen properties shall forthwith be registered with the proper court. For orders issued before the ratification of this Constitution, the corresponding judicial action or proceeding shall be filed within six months from its ratification. For those issued after such ratification, the judicial action or proceeding shall be commenced within six months from the issuance thereof. The sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as herein provided. In its amended answer dated May 19, 1992, the PCGG specifically alleged that Aerocom has no cause of action against it since the issuance of the writ of sequestration on June 15, 1988 was wellwithin the 18-month constitutional deadline counted from February 2, 1987, the date when the people, in a plebiscite, overwhelmingly ratified the 1987 Constitution. During the pendency of Civil Case No. 0044, Aerocom filed on July [6] 5, 1995 a Manifestation and Motion praying that the Sandiganbayan direct the PCGG to release and distribute the dividends pertaining to the shares of Aerocom in all corporations where it owns shares of [7] stock. Commenting thereon, the PCGG opposed the release of the dividends on the argument that the fact that plaintiff (Aerocom) is mentioned in Annex A of the complaint filed in Civil Case No. 0009 is a clear indication that the shares thereof are likewise sequestered. The Sandiganbayan in its Resolution promulgated on January 31, [8] 1996 acted favorably on Aerocoms Manifestation and Motion and thus ordered the PCGG to release the dividends pertaining to Aerocom except the dividends on the sequestered shares of stock registered in the names of Manuel Nieto and Jose Africa in POTC, ETPI and Aerocom, on the following findings: A close scrutiny of Annex `A of the complaint in Civil Case No. 0009, entitled `Republic of the Philippines vs. Jose L. Africa, Manuel H. Nieto, Jr., and Roberto S. Benedicto, does not show, that herein plaintiff Aerocom Investors & Managers, Inc., as a corporation, was itself sequestered. What was sequestered are the shares of stock of Manuel H. Nieto, Jr. and Jose L. Africa in Aerocom Investors & Managers, Inc. Defendant PCGG is under estoppel from denying that it has in fact recognized and confirmed the non-sequestration status of herein plaintiff, as a corporation, by releasing the cash dividends due to the plaintiff from Philippine Overseas Telecommunications Corporation (POTC for short) per its Resolutions dated June 29, 1993 and May 6, 1994. The said PCGG Resolution, dated June 29, 1993 (Annex A, Manifestation and Motion, p. 330, record) refers to its approval to release the POTC cash dividends declared in 1989 and 1991 pertaining
[5]

9. [G.R. No. 125788. June 5, 1998]

THE

PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG), petitioner, vs. HON. SANDIGANBAYAN and AEROCOM INVESTORS & MANAGERS, INC., respondents.

DECISION MARTINEZ, J.: In its continuing search for ill-gotten wealth, herein petitioner Presidential Commission on Good Government (PCGG) filed in the Sandiganbayan on July 22, 1987 a case (Civil Case No. 0009) for reconveyance, reversion, accounting, restitution and damages against Manuel H. Nieto, Jose L. Africa, Roberto S. Benedicto, Potenciano Ilusorio, Juan Ponce Enrile and Ferdinand Marcos, Jr. alleging, in substance, that said defendants acted as dummies of the late strongman and devised schemes and strategems to monopolize the telecommunications industry. Annexed to the complaint is a listing of the assets of defendants Nieto and Africa, among which are their shares of stock in [1] private respondent Aerocom Investors and Managers, Inc. (Aerocom). Almost a year later, the PCGG sought to sequester Aerocom [2] under a writ of sequestration dated June 15, 1988, which was served on and received under protest by Aerocoms president on August 3, [3] 1988. Seven (7) days after receipt of the sequestration order, Aerocom on August 10, 1988 filed a complaint against the PCGG (docketed as [4] Civil Case No. 0044) urging the Sandiganbayan to nullify the same on

to the shares of herein plaintiff Aerocom Investors & Managers, Inc. in Philippine Overseas Telecommunications Corporation. On the other hand, PCGG Resolution No. 94-066 dated May 6, 1994 refers to its approval releasing the POTC cash dividends declared in 1993 and `accruing to the shares of stocks in POTC, registered under the name of Aerocom Investors & Managers, Inc., except cash dividends pertaining to the personal shares of Mr. Manuel H. Nieto, Jr. in POTC and likewise his shares of stocks in Aerocom Investors & Managers, Inc. (Annex `B, Manifestation and Motion, p. 331, record). There is no dispute that herein plaintiff, as a corporation, has a juridical personality separate and distinct from its stockholders. After a motion for reconsideration thereof was denied by the [9] Sandiganbayan per Resolution promulgated on May 7, 1996, the PCGG filed the present petition for certiorari on August 16, 1996 assailing the Sandiganbayan order for the release of the dividends as having been issued with grave abuse of discretion. In compliance with [10] the Resolution of this Court dated September 2, 1996 which also granted the temporary restraining order prayed for by the PCGG, Aerocom filed its comment on the petition on September 11, [11] [12] 1996 to which, the PCGG on November 21, 1996 filed a reply. The petition must fail. There is merit in the initial point amplified by Aerocom in its comment that the instant certiorari proceedings brought by the PCGG is an improper remedy under the circumstances. From a reading of its January 31, 1996 Resolution granting Aerocoms Manifestation and Motion, (as heretofore quoted), as well as the May 7, 1996 Resolution denying the motion for reconsideration, the Sandiganbayan has virtually passed upon the pivotal issue involved in Aerocoms complaint for the declaration of nullity of the writ of sequestration (Civil Case No. 0044) - i.e., whether or not Aerocoms sequestration was in order. That courts finding to the effect that Aerocom was not validly sequestered, clearly, was a final adjudication on the merits which is reviewable by the appellate court only through an appeal under Rule 45 of the Rules of Court. The PCGG should have availed of the remedy of appeal filed within the statutory fifteen (15)-day period and not a petition for certiorari, as the arguments the PCGG propounds in support of its challenge on the Sandiganbayan Resolutions would amount to a digging into the merits [13] and unearthing errors of judgment. At this juncture, [i]t must emphatically be reiterated, to borrow the words of Mr. Justice [14] Regalado in Purefoods Corp. vs. NLRC, since so often is it overlooked, that the special civil action for certiorari is a remedy designed for the correction of errors of jurisdiction and not errors of judgment. The reason for the rule is simple. When a court exercises its jurisdiction, an error committed while so engaged does not deprive it of the jurisdiction being exercised when the error is committed. If it did, every error committed by a court would deprive it of its jurisdiction and every erroneous judgment would be a void judgment. This cannot be allowed. The administration of justice would not survive such a rule. Consequently, an error of judgment that the court may commit in the exercise of its jurisdiction is not correctable through the original civil action of certiorari. Equally worth recalling is that certiorari is not and cannot be made a substitute for an appeal where the latter remedy is [15] [16] available but was lost thru the fault or negligence of petitioner, as in this case.

Even if we disregard such procedural flaw, the substantial contentions of the PCGG fail to invite judgment in its favor. First. We cannot subscribe to the PCGGs theory that, as the first paragraph of Section 26, Article XVIII of the Constitution speaks only of The authority to issue . . ., then there is faithful compliance with the 18-month constitutional deadline by the mere issuance of the writ of sequestration within that time-frame (June 15, 1988) even if service thereof on Aerocom was effected thereafter (August 3, 1988). The obvious intendment behind the 18-month period, as well as the six (6)-month time-limit for the filing of the corresponding judicial action, is to ensure the protection of property rights and to serve as a necessary safeguard against an overzealous exercise by the State, acting as bounty-hunters so to speak, of its power of sequestration which, as described by Justice Ameurfina Melencio-Herrera in her [17] concurring opinion in BASECO v. PCGG, is an extra-ordinary, harsh and severe remedy. For this reason, (I)t should be confined, J. Herrera continues, to its lawful parameters and exercised, with due regard, in the words of its enabling laws, to the requirements of fairness, due process, and Justice. The probable evil of governmental abuse is best avoided and the dictates of fairness, due process and Justice are truly heeded under an interpretation of Section 26, Article XVIII as requiring both the issuance of the writ and notification to, or more precisely, the acquisition of jurisdiction over the entity/entities to be sequestered via valid service thereof, to be effected within the 18month period. A writ of sequestration, therefore, runs the risk of being struck down as invalid if and when the twin requirements of issuance and service are not satisfied within the deadline. Such is the fate of the subject writ of sequestration, unfortunately. Whether the 18-month period expired on July 26, 1988 (as claimed by Aerocom, in line with the computation of time under Article 13 of the Civil Code and the ruling in National Marketing Corp. v. Tecson, 29 SCRA 70) or on August 2, 1988 (the PCGGs position), the fact remains that service of the writ on Aerocom on August 3, 1988 was made beyond these dates. The PCGGs theory that the mere issuance of the writ within the 18-month deadline will suffice, is just too dangerous to accept. Imagine a scenario where the PCGG may have actually tarried in the issuance of the sequestration order to the prejudice of the would-be sequestered entity, and all that the PCGG has to do to cover its mistake is to conveniently ante-date the writ so as to feign timely compliance. That would, in effect, be allowing the PCGG to employ a subterfuge to validate what may in fact be a purely whimsical, unfounded and an afterthought takeover of corporate property. The Constitution does not and can never tolerate such a deceptive maneuver. Service of the writ of sequestration within the 18-month period, then, is an imperative measure to guard against this kind of mischief, for it will certainly give the assurance that the writ was genuinely issued within that constitutional deadline. Second. The PCGG cannot justify its failure, as found by the [18] Sandiganbayan, to file the corresponding judicial action against Aerocom within the six (6)-month period as provided for under the same constitutional provision in focus (Section 26, Article XVIII, second paragraph) by the fact that Aerocom was mentioned in the complaint of the PCGG in Civil Case No. 0009 (the Nieto, Africa, et al. case) and in Annex A thereof notwithstanding that Aerocom was not impleaded as party-defendant, and on the argument that the filing of Civil Case No. 0009 against the Nieto, Africa, et al. group is enough compliance with the judicial action requirement. The case of Republic v. Sandiganbayan, 240 SCRA 376, January 23, 1995, relied upon by the

PCGG, has no rightful application, inasmuch as this Courts pronouncements therein, in answer to this crucial question: DOES INCLUSION IN THE COMPLAINTS FILED BY THE PCGG BEFORE THE SANDIGANBAYAN OF SPECIFIC ALLEGATIONS OF CORPORATIONS BEING `DUMMIES OR UNDER THE CONTROL OF ONE OR ANOTHER OF THE DEFENDANTS NAMED THEREIN AND USED AS INSTRUMENTS FOR ACQUISITION, OR AS BEING DEPOSITARIES OR PRODUCTS, OF ILLGOTTEN WEALTH; OR THE ANNEXING TO SAID COMPLAINTS OF A LIST OF SAID FIRMS, BUT WITHOUT ACTUALLY IMPLEADING THEM AS DEFENDANTS, SATISFY THE CONSTITUTIONAL REQUIREMENT THAT IN ORDER TO MAINTAIN A SEIZURE EFFECTED IN ACCORDANCE WITH EXECUTIVE ORDER NO. 1, s. 1986, THE CORRESPONDING `JUDICIAL ACTION OR PROCEEDING SHOULD BE FILED WITHIN THE SIX-MONTH PERIOD PRESCRIBED IN SECTION 26, ARTICLE XVIII, OF THE (1987) CONSTITUTION?, presuppose a valid and existing sequestration of the unimpleaded corporation/s concerned. Thus 1) Section 26, Article XVIII of the Constitution does not, by its terms or any fair interpretation thereof, require that corporations or business enterprises alleged to be repositories of `ill-gotten wealth, as the term is used in said provision, be actually and formally impleaded in the actions for the recovery thereof, in order to maintain in effect existing sequestrations thereof; 2) complaints for the recovery of ill-gotten wealth which merely identify and/or allege said corporations or enterprises to be the instruments, repositories or the fruits of ill-gotten wealth, without more, come within the meaning of the phrase `corresponding judicial action or proceeding contemplated by the constitutional provision referred to; the more so, that normally, said corporations, as distinguished from their stockholders or members, are not generally suable for the latters illegal or criminal actuations in the acquisition of the assets invested by them in the former; 3) even assuming the impleading of said corporations to be necessary and proper so that judgment may comprehensively and effectively be rendered in the actions, amendment of the complaints to implead them as defendants may, under existing rules of procedure, be done at any time during the pendency of the actions thereby initiated, and even during the pendency of an appeal to the Supreme Court - a procedure that, in any case, is not inconsistent with or proscribed by the constitutional time limits to the filing of the corresponding complaints `for - i.e., with regard or in relation to, in respect of, or in connection with, or concerning - orders of sequestration, freezing, or provisional takeover. xxx xxx xxx (underscoring supplied) There is no existing sequestration to talk about in this case, as the writ issued against Aerocom, to repeat, is invalid for reasons hereinbefore stated. Ergo, the suit in Civil Case No. 0009 against Mr. Nieto and Mr. Africa as shareholders in Aerocom is not and cannot ipso facto be a suit against the unimpleaded Aerocom itself without violating the fundamental principle that a corporation has a legal personality distinct and separate from its stockholders. Such is the [19] ruling laid down in PCGG v. Interco reiterated anew in a case of more recent vintage - Republic v. Sandiganbayan, Sipalay Trading Corp. and [20] Allied Banking Corp. where this Court, speaking through Mr. Justice [21] Ricardo J. Francisco, hewed to the lone dissent of Mr. Justice

Teodoro R. Padilla in the very same Republic v. Sandiganbayan case herein invoked by the PCGG, to wit: x x x failure to implead these corporations as defendants and merely annexing a list of such corporations to the complaints is a violation of their right to due process for it would in effect be disregarding their distinct and separate personality without a hearing. In cases where stocks of a corporation were allegedly the fruits of illgotten wealth, it should be remembered that in most of these cases the stocks involved constitute a substantial if not controlling interest in the corporations. The basic tenets of fair play demand that these corporations be impleaded as defendants since a judgment in favor of the government will undoubtedly substantially and decisively affect the corporations as distinct entities. The judgment could strip them of everything without being previously heard as they are not parties to the action in which the judgment is rendered. x x x. Holding that the `corresponding judicial action or proceeding contemplated by the Constitution is any action concerning or involving the corporation under sequestration is oversimplifying the solution, the result of which is antagonistic to the principles of justice and fair play. x x x the actions contemplated by the Constitution should be those which include the corporation not as a mere annex to the complaint but as defendant. This is the minimum requirement of the due process guarantee. Short of being impleaded, the corporation has no standing in the judicial action. It cannot adequately defend itself. It may not even be heard. On the x x x opinion that alternatively the corporations can be impleaded as defendants by amendment of the complaint, Section 26, Article XVIII of the Constitution would appear to preclude this procedure, for allowing amendment of the complaint to implead theretofore unimpleaded corporations would in effect allow complaints against the corporation to be filed beyond the periods fixed by said Section 26. xxx xxx xxx

[22]

While government efforts to recover illegally amassed wealth should have support from all its branches, eagerness and zeal should not be allowed to run berserk, overriding in the process the very principles that it is sworn to uphold. In our legal system, the ends do not always justify the means. Wrongs are never corrected by committing other wrongs, and as above-discussed the recovery of ill-gotten wealth does not and should never justify unreasonable intrusions into constitutionally forbidden grounds. x x x. The last area of discussion touches on the doctrine of estoppel. Let us rewind the events for a clear understanding of the issue involved. During the pendency of the Aerocom complaint against the PCGG, the latter approved the release of the cash dividends declared in the years 1989, 1991 and 1993 accruing to the shares of stock of Aerocom in the Philippine Overseas Telecommunications Co. (POTC) [23] per PCGG Certification dated June 29, 1993 and Resolution No. 94066 dated May 6, 1994 which read, respectively:

OFFICE OF THE PRESIDENT PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT CERTIFICATION This is to certify that the following is an excerpt of the Minutes of the Executive Committee Meeting held on June 18, 1993 at the PCGG th Commission Room, 6 Floor, Philcomcen Bldg., Pasig, Metro Manila: 03 POTC/AEROCOM INVESTORS, INC./MANUEL NIETO, JR. After deliberation on the letter-request dated May 30, 1993 of Aerocom Investors, Inc. and Mr. Manuel Nieto, Jr. thru counsel, the Commission has resolved to approve the release of the POTC cash dividends declared in 1989 and 1991. The Chairman further instructed Comm. Guiao to pursue the settlement with Mr. Nieto on more favorable terms to the government. Done on this 29 day of June, 1993 at Pasig, Metro Manila, Philippines. CERTIFIED CORRECT: (SGD.) ELIZABETH J. TRINIDAD Commission Secretary ___________________ _______________________
th

personal shares of stock of Mr. Manuel Nieto, Jr. in POTC and likewise, his shares of stock in Aerocom Investors & Managers, Inc. On the other hand, the release of the cash dividends declared in 1993 and previous years which are accruing to the shares of stock in POTC registered in the name of Polygon Investors, Inc. and Mr. Jose Africa is hereby deferred. DONE this 6 day of May, 1994 at Pasig, Metro Manila. (SGD.) MAGTANGGOL C. GUNIGUNDO Chairman (SGD.) REYNALDO S. GUIAO Commissioner (SGD.) JULIET C. BERTUBEN Commissioner (SGD.) HERMILO R. ROSAL Commissioner (SGD.) HERMINIO A. MENDOZA Commissioner
th

The PCGG issued the aforequoted Certification and Resolution [24] 94-066 apparently on the basis of a Memorandum prepared by Atty. Ismael B. Sanchez, former legal counsel of the PCGG, advising the latter not to interpose any objection to the release of the POTC cash dividends. A portion of the Memorandum reads: THE ISSUES:

REPUBLIC OF THE PHILIPPINES OFFICE OF THE PRESIDENT PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT RESOLUTION NO. 94-066 WHEREAS, the request of Polygon Investors, Inc. and Mr. Jose Africa and Aerocom Investors & Managers, Inc. and Mr. Manuel H. Nieto, Jr. was taken up in the Executive Committee Meeting of this Commission held on May 5, 1994; WHEREAS, it appears that Mr. Jose Africa and Mr. Manuel H. Nieto, Jr. are both defendants in Civil Case No. 009 before the Sandiganbayan, and representation has been made that Aerocom Investors & Managers, Inc. is not sequestered. NOW, THEREFORE, RESOLVED, AS IT IS HEREBY RESOLVED, that the PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT (PCGG) hereby interposes no objection to the release of the cash dividends declared in 1993 and accruing to the shares of stock in Philippine Overseas Telecommunications Co. (POTC) registered under the name of Aerocom Investors & Managers, Inc., except the cash dividends pertaining to the Is there legal basis to withhold the release of the POTC cash dividends declared in 1989 and 1991 in favor of Mr. Nieto and Aerocom? Was the sequestration order over Aerocom issued validly? As to the first issue. As resolved by the Sandiganbayan in its Resolution of October 2, 1991 and January 25, 1993, the PCGG has no authority to withhold satisfaction and release of dividends to stockholders whose shares in POTC are not and have never been sequestered. Thus, the Sandiganbayan ruled: `We have gone over the pleadings filed by the parties, and we find that herein petitioners, whose stockholdings in the POTC are not sequestered, have the right to the payment of their respective dividends. Respondent PCGG has no authority to withhold satisfaction and release of the same. There is nothing in the records of the Commission to show that a sequestration order issued against the shares of Mr. Nieto Jr. and

Aerocom in POTC. A distinction must be made in the matter of sequestration of the corporation itself and the sequestration of corporate shareholdings in another corporation. (Please see NOTE above regarding sequestration of Aerocom) The sequestration refers to Aerocom as a corporation. Being similarly situated as the petitioners in Sandiganbayan Civil Case No. 118 and considering the relevant facts stated above, it is the opinion of the undersigned that the POTC dividends due Mr. Nieto and Aerocom may be released to them. As to the second issue. With respect to the writ of sequestration issued on June 15, 1988 against Aerocom and served on August 3, 1988, the following points are to be considered: (1) It may be argued that this writ is a `midnight sequestration order considering the date of its issuance and the date it was served on Aerocom, that is, four (4) days before the expiration of the authority of PCGG to issue sequestration or freeze order as provided under Section 26, Article XVIII of the 1987 Constitution. (2) The sequestration order in question was issued after the effectivity of the 1987 Constitution exactly on June 15, 1988. As such, the sequestration order can only be issued upon showing aprima facie case of ill-gotten wealth. Nothing was mentioned in the writ against Aerocom of any ground or basis for its issuance. It just stated that the company is placed under sequestration. (3) Even assuming that it was valid when issued, the sequestration order was never implemented. In fact, in Sandiganbayan Civil Case No. 044, the PCGG through the Office of the Solicitor General agreed not to implement the sequestration order as earlier discussed. (4) PCGG has not filed any action against Aerocom. In the Interco case, the Supreme Court, citing Section 26, Article XVIII of the Constitution, has ruled and held `the sequestration or freeze order is deemed automatically lifted if no judicial action or proceeding is commenced as herein provided. Any action or proceeding against Aerocom should have been commenced or filed within six (6) months from June 15, 1988. CONCLUSION: IN VIEW OF ALL THE FOREGOING, it our considered opinion and recommendation that the Commission interpose no objection to the release of the POTC cash dividends declared in 1989 and 1991 in favor of Mr. Nieto Jr. and Aerocom Investors, Inc. Furthermore, appropriate instruction be given to the assigned Asset Monitor in POTC to approve the corresponding checks covering the cash dividends due Mr. Nieto Jr. and Aerocom Investors, Inc. (SGD.) ISMAEL B. SANCHEZ

Taking into account these documents, the Sandiganbayan thus found the PCGG to be in estoppel from denying the non-sequestered status of Aerocom and from refusing the release of cash dividends in favor of the latter. The PCGG takes exception to this finding on the claim that the State should not be held vulnerable to estoppel for the acts of past officials. The PCGGs contention is not persuasive under the attendant circumstances. While we agree with the statement that the State is immune from estoppel, this concept, as clarified by this Court thru Mr. [25] Justice Melo in Republic v. Sandiganbayan, et al. is understood to refer to acts and mistakes of its officials especially those which are [26] irregular. Here, other than its bare assertion that Atty. Sanchezs Opinion is illegal and prejudicial, the PCGG has not presented convincing evidence to prove irregularity or negligence on the part of Atty. Sanchez in rendering his Opinion favorable to Aerocom. In fact, no less than PCGG Chairman Magtanggol Gunigundo and the rest of the Commissioners clearly heeded the recommendation of Atty. Sanchez by affixing their signatures on Resolution No. 94-066 allowing the release of the cash dividends declared in 1993 accruing to Aerocoms shares of stock in POTC. Elementary notions of consistency and fair play call upon the PCGG to honor the release of the cash dividends presently requested by Aerocom, after a similar commitment has been collectively confirmed by its commissioners in black and white. A ruling to the contrary, in the erudite language of Justice Escareal of the Sandiganbayan as adopted in Republic v. Sandiganbayan, 226 SCRA 314, is not only illogical and irrational, but inequitable and pernicious as well, for it may open the door for capricious adventurism on the part of the policy-makers of the land, and disregard for the majesty of the law, which could ultimately bring about the citizenrys loss of faith and confidence in the sincerity of the government in its dealings with the governed. WHEREFORE, the instant petition is hereby DISMISSED. The assailed Resolutions of the Sandiganbayan promulgated on January 31, 1996 and May 7, 1996 are AFFIRMED in their entirety. SO ORDERED. 10. G.R. No. 82797 February 27, 1991 GOOD EARTH EMPORIUM INC., and LIM KA PING, petitioners, vs. HONORABLE COURT OF APPEALS and ROCES-REYES REALTY INC., respondents. PARAS, J.:p This is a petition for review on certiorari of the December 29, 1987 decision * of the Court of Appeals in CA-G.R. No. 11960 entitled "ROCES-REYES REALTY, INC. vs. HONORABLE JUDGE REGIONAL TRIAL COURT OF MANILA, BRANCH 44, GOOD EARTH EMPORIUM, INC. and LIM KA PING" reversing the decision of respondent Judge ** of the Regional Trial Court of Manila, Branch 44 in Civil Case No. 85-30484, which reversed the resolution of the Metropolitan Trial Court Of Manila, Branch 28 in Civil Case No. 09639, *** denying herein petitioners' motion to quash the alias writ of execution issued against them. As gathered from the records, the antecedent facts of this case, are as follows:

A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-REYES REALTY, INC., as lessor, and GOOD EARTH EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981 and ending October 31, 1984 at a monthly rental of P65,000.00 (Rollo, p. 32; Annex "C" of Petition). The building which was the subject of the contract of lease is a five-storey building located at the corner of Rizal Avenue and Bustos Street in Sta. Cruz, Manila. From March 1983, up to the time the complaint was filed, the lessee had defaulted in the payment of rentals, as a consequence of which, private respondent ROCES-REYES REALTY, INC., (hereinafter designated as ROCES for brevity) filed on October 14, 1984, an ejectment case (Unlawful Detainer) against herein petitioners, GOOD EARTH EMPORIUM, INC. and LIM KA PING, hereinafter designated as GEE, (Rollo, p. 21; Annex "B" of the Petition). After the latter had tendered their responsive pleading, the lower court (MTC, Manila) on motion of Roces rendered judgment on the pleadings dated April 17, 1984, the dispositive portion of which states: Judgment is hereby rendered ordering defendants (herein petitioners) and all persons claiming title under him to vacate the premises and surrender the same to the plaintiffs (herein respondents); ordering the defendants to pay the plaintiffs the rental of P65,000.00 a month beginning March 1983 up to the time defendants actually vacate the premises and deliver possession to the plaintiff; to pay attorney's fees in the amount of P5,000.00 and to pay the costs of this suit. (Rollo, p. 111; Memorandum of Respondents) On May 16, 1984, Roces filed a motion for execution which was opposed by GEE on May 28, 1984 simultaneous with the latter's filing of a Notice of Appeal (Rollo, p. 112, Ibid.). On June 13, 1984, the trial court resolved such motion ruling: After considering the motion for the issuance of a writ of execution filed by counsel for the plaintiff (herein respondents) and the opposition filed in relation thereto and finding that the defendant failed to file the necessary supersedeas bond, this court resolved to grant the same for being meritorious. (Rollo, p. 112) On June 14, 1984, a writ of execution was issued by the lower court. Meanwhile, the appeal was assigned to the Regional Trial Court (Manila) Branch XLVI. However, on August 15, 1984, GEE thru counsel filed with the Regional Trial Court of Manila, a motion to withdraw appeal citing as reason that they are satisfied with the decision of the Metropolitan Trial Court of Manila, Branch XXVIII, which said court granted in its Order of August 27, 1984 and the records were remanded to the trial court (Rollo, p. 32; CA Decision). Upon an ex-parte Motion of ROCES, the trial court issued an Alias Writ of Execution dated February 25, 1985 (Rollo, p. 104; Annex "D" of Petitioner's Memorandum), which was implemented on February 27, 1985. GEE thru counsel filed a motion to quash the writ of execution and notice of levy and an urgent Ex-parte Supplemental Motion for the issuance of a restraining order, on March 7, and 20, 1985, respectively. On March 21, 1985, the lower court issued a restraining order to the sheriff to hold the execution of the judgment pending hearing on the motion to quash the

writ of execution (Rollo, p. 22; RTC Decision). While said motion was pending resolution, GEE filed a Petition for Relief from judgment before another court, Regional Trial Court of Manila, Branch IX, which petition was docketed as Civil Case No. 80-30019, but the petition was dismissed and the injunctive writ issued in connection therewith set aside. Both parties appealed to the Court of Appeals; GEE on the order of dismissal and Roces on denial of his motion for indemnity, both docketed as CA-G.R. No. 15873-CV. Going back to the original case, the Metropolitan Trial Court after hearing and disposing some other incidents, promulgated the questioned Resolution, dated April 8, 1985, the dispositive portion of which reads as follows: Premises considered, the motion to quash the writ is hereby denied for lack of merit. The restraining orders issued on March 11 and 23, 1985 are hereby recalled, lifted and set aside. (Rollo, p. 20, MTC Decision) GEE appealed and by coincidence. was raffled to the same Court, RTC Branch IX. Roces moved to dismiss the appeal but the Court denied the motion. On certiorari, the Court of Appeals dismissed Roces' petition and remanded the case to the RTC. Meantime, Branch IX became vacant and the case was re-raffled to Branch XLIV. On April 6, 1987, the Regional Trial Court of Manila, finding that the amount of P1 million evidenced by Exhibit "I" and another P1 million evidenced by the pacto de retro sale instrument (Exhibit "2") were in full satisfaction of the judgment obligation, reversed the decision of the Municipal Trial Court, the dispositive portion of which reads: Premises considered, judgment is hereby rendered reversing the Resolution appealed from quashing the writ of execution and ordering the cancellation of the notice of levy and declaring the judgment debt as having been fully paid and/or Liquidated. (Rollo, p. 29). On further appeal, the Court of Appeals reversed the decision of the Regional Trial Court and reinstated the Resolution of the Metropolitan Trial Court of Manila, the dispositive portion of which is as follows: WHEREFORE, the judgment appealed from is hereby REVERSED and the Resolution dated April 8, 1985, of the Metropolitan Trial Court of Manila Branch XXXIII is hereby REINSTATED. No pronouncement as to costs. (Rollo, p. 40). GEE's Motion for Reconsideration of April 5, 1988 was denied (Rollo, p. 43). Hence, this petition. The main issue in this case is whether or not there was full satisfaction of the judgment debt in favor of respondent corporation which would justify the quashing of the Writ of Execution. A careful study of the common exhibits (Exhibits 1/A and 2/B) shows that nowhere in any of said exhibits was there any writing alluding to or referring to any settlement between the parties of petitioners' judgment obligation (Rollo, pp. 45-48).

Moreover, there is no indication in the receipt, Exhibit "1", that it was in payment, full or partial, of the judgment obligation. Likewise, there is no indication in the pacto de retro sale which was drawn in favor of Jesus Marcos Roces and Marcos V. Roces and not the respondent corporation, that the obligation embodied therein had something to do with petitioners' judgment obligation with respondent corporation. Finding that the common exhibit, Exhibit 1/A had been signed by persons other than judgment creditors (Roces-Reyes Realty, Inc.) coupled with the fact that said exhibit was not even alleged by GEE and Lim Ka Ping in their original motion to quash the alias writ of execution (Rollo, p. 37) but produced only during the hearing (Ibid.) which production resulted in petitioners having to claim belatedly that there was an "overpayment" of about half a million pesos (Rollo, pp. 25-27) and remarking on the utter absence of any writing in Exhibits "1/A" and "2/B" to indicate payment of the judgment debt, respondent Appellate Court correctly concluded that there was in fact no payment of the judgment debt. As aptly observed by the said court: What immediately catches one's attention is the total absence of any writing alluding to or referring to any settlement between the parties of private respondents' (petitioners') judgment obligation. In moving for the dismissal of the appeal Lim Ka Ping who was then assisted by counsel simply stated that defendants (herein petitioners) are satisfied with the decision of the Metropolitan Trial Court (Records of CA, p. 54). Notably, in private respondents' (petitioners') Motion to Quash the Writ of Execution and Notice of Levy dated March 7, 1985, there is absolutely no reference to the alleged payment of one million pesos as evidenced by Exhibit 1 dated September 20, 1984. As pointed out by petitioner (respondent corporation) this was brought out by Linda Panutat, Manager of Good Earth only in the course of the latter's testimony. (Rollo, p. 37) Article 1240 of the Civil Code of the Philippines provides that: Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person authorized to receive it. In the case at bar, the supposed payments were not made to RocesReyes Realty, Inc. or to its successor in interest nor is there positive evidence that the payment was made to a person authorized to receive it. No such proof was submitted but merely inferred by the Regional Trial Court (Rollo, p. 25) from Marcos Roces having signed the Lease Contract as President which was witnessed by Jesus Marcos Roces. The latter, however, was no longer President or even an officer of RocesReyes Realty, Inc. at the time he received the money (Exhibit "1") and signed the sale with pacto de retro (Exhibit "2"). He, in fact, denied being in possession of authority to receive payment for the respondent corporation nor does the receipt show that he signed in the same capacity as he did in the Lease Contract at a time when he was President for respondent corporation (Rollo, p. 20, MTC decision).

On the other hand, Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt (Exhibit "1") is the payment for a loan extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is home by the receipt itself whereby they acknowledged payment of the loan in their names and in no other capacity. A corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or stockholder of a corporation does not make one's property also of the corporation, and vice-versa, for they are separate entities (Traders Royal Bank v. CA-G.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152 SCRA 482). Shareowners are in no legal sense the owners of corporate property (or credits) which is owned by the corporation as a distinct legal person (Concepcion Magsaysay-Labrador v. CA-G.R. No. 58168, December 19, 1989). As a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of the corporation (Prof. Jose Nolledo's "The Corporation Code of the Philippines, p. 5, 1988 Edition, citing Professor Ballantine). The absence of a note to evidence the loan is explained by Jesus Marcos Roces who testified that the IOU was subsequently delivered to private respondents (Rollo, pp. 97-98). Contrary to the Regional Trial Court's premise that it was incumbent upon respondent corporation to prove that the amount was delivered to the Roces brothers in the payment of the loan in the latter's favor, the delivery of the amount to and the receipt thereof by the Roces brothers in their names raises the presumption that the said amount was due to them. There is a disputable presumption that money paid by one to the other was due to the latter (Sec. 5(f) Rule 131, Rules of Court). It is for GEE and Lim Ka Ping to prove otherwise. In other words, it is for the latter to prove that the payments made were for the satisfaction of their judgment debt and not vice versa. The fact that at the time payment was made to the two Roces brothers, GEE was also indebted to respondent corporation for a larger amount, is not supportive of the Regional Trial Court's conclusions that the payment was in favor of the latter, especially in the case at bar where the amount was not receipted for by respondent corporation and there is absolutely no indication in the receipt from which it can be reasonably inferred, that said payment was in satisfaction of the judgment debt. Likewise, no such inference can be made from the execution of the pacto de retro sale which was not made in favor of respondent corporation but in favor of the two Roces brothers in their individual capacities without any reference to the judgment obligation in favor of respondent corporation. In addition, the totality of the amount covered by the receipt (Exhibit "1/A") and that of the sale with pacto de retro(Exhibit "2/B") all in the sum of P2 million, far exceeds petitioners' judgment obligation in favor of respondent corporation in the sum of P1,560,000.00 by P440,000.00, which militates against the claim of petitioner that the aforesaid amount (P2M) was in full payment of the judgment obligation. Petitioners' explanation that the excess is interest and advance rentals for an extension of the lease contract (Rollo, pp. 25-28) is belied by the absence of any interest awarded in the case and of any agreement as to the extension of the lease nor was there any such pretense in the Motion to Quash the Alias Writ of Execution.

Petitioners' averments that the respondent court had gravely abused its discretion in arriving at the assailed factual findings as contrary to the evidence and applicable decisions of this Honorable Court are therefore, patently unfounded. Respondent court was correct in stating that it "cannot go beyond what appears in the documents submitted by petitioners themselves (Exhibits "1" and "2") in the absence of clear and convincing evidence" that would support its claim that the judgment obligation has indeed been fully satisfied which would warrant the quashal of the Alias Writ of Execution. It has been an established rule that when the existence of a debt is fully established by the evidence (which has been done in this case), the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such a defense to the claim of the plaintiff creditor (herein respondent corporation) (Chua Chienco v. Vargas, 11 Phil. 219; Ramos v. Ledesma, 12 Phil. 656; Pinon v. De Osorio, 30 Phil. 365). For indeed, it is well-entrenched in Our jurisprudence that each party in a case must prove his own affirmative allegations by the degree of evidence required by law (Stronghold Insurance Co. v. CA, G.R. No. 83376, May 29,1989; Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366). The appellate court cannot, therefore, be said to have gravely abused its discretion in finding lack of convincing and reliable evidence to establish payment of the judgment obligation as claimed by petitioner. The burden of evidence resting on the petitioners to establish the facts upon which their action is premised has not been satisfactorily discharged and therefore, they have to bear the consequences. PREMISES CONSIDERED, the petition is hereby DENIED and the Decision of the Respondent court is hereby AFFIRMED, reinstating the April 8, 1985 Resolution of the Metropolitan Trial Court of Manila. SO ORDERED.

all audit services, and to stop charging auditing fees, to Leyte Metropolitan Water District (LMWD). The COA also denied petitioners request for COA to refund all auditing fees previously paid by LMWD.

Antecedent Facts

A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999 informing COAs Regional Director that the water district could not pay the auditing fees. Petitioner cited as basis for his action [2] Sections 6 and 20 of Presidential Decree 198 (PD 198) , as well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional Director referred petitioners reply to the COA Chairman on 18 October 1999. On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to COA. On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001. On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the petition.

The Ruling of the Commission on Audit

11. [G.R. No. 147402. January 14, 2004]

The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City Water District v. [3] Civil Service Commission and Commission on Audit, as follows: The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught petitioners contention that they are private corporations. It is clear therefrom that the power to appoint the members who will comprise the members of the Board of Directors belong to the local executives of the local subdivision unit where such districts are located. In contrast, the members of the Board of Directors or the trustees of a private corporation are elected from among members or stockholders thereof. It would not be amiss at this point to emphasize that a private corporation is created for the private purpose, benefit, aim and end of its members or stockholders. Necessarily, said members or stockholders should be given a free hand to choose who will compose the governing body of their corporation. But this is not the case here and this clearly indicates that petitioners are not private corporations. The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA to refund all auditing fees already paid.

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of COA Region VIII, respondents. DECISION CARPIO, J.:

The Case
[1]

This is a petition for certiorari to annul the Commission on Audits (COA) Resolution dated 3 January 2000 and the Decision dated 30 January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos request for COA to cease

The Issues

Whether LWDs are Private or Government-Owned and Controlled Corporations with Original Charters

Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner raises the following issues for resolution: 1. Whether a Local Water District (LWD) created under PD 198, as amended, is a government-owned or controlled corporation subject to the audit jurisdiction of COA; Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water districts; and Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations auditing fees.

2.

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long line of cases culminating in Davao City Water District v. Civil Service [5] Commission and just recently reiterated in De Jesus v. Commission [6] on Audit. Petitioner maintains that LWDs are not government-owned and controlled corporations with original charters. Petitioner even argues that LWDs are private corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a new perspective to the issue of the true character of water [7] districts. Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are created pursuant to and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an original charter that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only provides for their [8] formation on an optional or voluntary basis. Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as specified in PD 198. Petitioners contention deserves scant consideration.

3.

The Ruling of the Court

The petition lacks merit. The Constitution and existing laws mandate COA to audit all government agencies, including government-owned and controlled corporations (GOCCs) with original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit jurisdiction, as follows: SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government, which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied) The COAs audit jurisdiction extends not only to government agencies or instrumentalities, but also to government-owned and controlled corporations with original charters as well as other governmentowned or controlled corporations without original charters.
[4]

We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first refers to private corporations created under a general law. The second refers to government-owned or controlled corporations created by special charters. Section 16, Article XII of the Constitution provides: Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability. The Constitution emphatically prohibits the creation of private [9] corporations except by a general law applicable to all citizens. The purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, [10] families or groups special privileges denied to other citizens. In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently, only corporations created under a general law can qualify as private corporations. Under existing laws, [11] that general law is the Corporation Code, except that the [12] Cooperative Code governs the incorporation of cooperatives. The Constitution authorizes Congress to create governmentowned or controlled corporations through special charters. Since private corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are government-owned or controlled.

Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the Securities and Exchange Commission. Section 14 of the Corporation Code states that *A]ll corporations organized under this code shall file with the Securities and Exchange Commission articles of incorporation x x x. LWDs have no articles of incorporation, no incorporators and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus: From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations created pursuant to the Corporation Code. Significantly, petitioners are not created under the said code, but on the contrary, they were created pursuant to a special law and are governed primarily by its [13] provision. (Emphasis supplied) LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are private corporations with a special charter is to admit that their existence is constitutionally infirm. Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and power from PD 198. Sections 6 and 25 of PD [14] 198 provide: Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a district. For purposes of this Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As such, a district shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the powers granted in, and subject to such restrictions imposed, under this Act. (a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by said system, followed by the words Water District. (b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof. (c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the control of such city, municipality or province to such district upon the filing of resolution forming the district. (d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above. (e) The names of the initial directors of the district with the date of expiration of term of office for each.

(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title. (g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title. Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the district beyond that specifically provided for in this Act. If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be adopted in each city, municipality and province. xxx Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by this Title or which are necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to review by the Administration. (Emphasis supplied) Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall exercise the powers, rights and privileges given to private corporations under existing laws. Without PD 198, LWDs would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and controlled corporations with a special charter. The phrase government-owned and controlled corporations with original charters means GOCCs created under special laws and not under the general incorporation law. There is no difference between the term original charters and special charters. The Court [15] clarified this in National Service Corporation v. NLRC by citing the deliberations in the Constitutional Commission, as follows: THE PRESIDING OFFICER (Mr. Trenas). The session is resumed. Commissioner Romulo is recognized. MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows: including governmentowned or controlled corporations WITH ORIGINAL CHARTERS. The purpose of this amendment is to indicate that government corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However, corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil service. THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say? MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters, what exactly do we mean?

MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law. MR. FOZ. And not under the general corporation law. That is correct. Mr. Presiding Officer.

xxx (vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient waterworks system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and, for this purpose, extend the coverage of appropriate ordinances over all territory within the drainage area of said water supply and within one hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in connection with the water service; and regulate the consumption, use or wastage of water; x x x. (Emphasis supplied) The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity that will operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan has the power to create corporations, the LWDs would remain government-owned or controlled corporations subject to COAs audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the LWD a government-owned and controlled corporation with an original charter. In any event, the Court has already ruled in Baguio Water [19] District v. Trajano that the Sangguniang Bayan resolution is not the special charter of LWDs, thus: While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of the opinion that said resolution cannot be considered as its charter, the same being intended only to implement the provisions of said decree. Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an original charter. In short, petitioner argues that one special law cannot serve as enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the Constitution mandates that Congress shall not, except by general [20] law, provide for the creation of private corporations. Thus, the Constitution prohibits one special law to create one private corporation, requiring instead a general law to create private corporations. In contrast, the same Section 16 states that Government-owned or controlled corporations may be created or established by special charters. Thus, the Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress to create several GOCCs of the same class under one special enabling charter. The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs. There is no danger of creating special privileges to certain individuals, families or groups if there is one special law creating each GOCC. Certainly, such danger will not exist whether one special law creates one GOCC, or one special enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to LWDs.

MR. ROMULO.

MR. FOZ. With that understanding and clarification, the Committee accepts the amendment. MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out. MR. ROMULO. That is correct. (Emphasis supplied)

Again, in Davao City Water District v. Civil Service [16] Commission, the Court reiterated the meaning of the phrase government-owned and controlled corporations with original charters in this wise: By government-owned or controlled corporation with original charter, We mean government owned or controlled corporation created by a special law and not under the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We held: The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively from the deliberations of the 1986 Constitutional Commission in respect of the intent and meaning of the new phrase with original charter, in effect held that government-owned and controlled corporations with original charter refer to corporations chartered by special law as distinguished from corporations organized under our general incorporation statute the Corporation Code. In NASECO, the company involved had been organized under the general incorporation statute and was a subsidiary of the National Investment Development Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered by a special statute. Thus, government-owned or controlled corporations like NASECO are effectively, excluded from the scope of the Civil Service. (Emphasis supplied) Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang Bayan has the power to create corporations. This is a patently baseless assumption. The [17] Local Government Code does not vest in the Sangguniang Bayan the [18] power to create corporations. What the Local Government Code empowers the Sangguniang Bayan to do is to provide for the establishment of a waterworks system subject to existing laws. Thus, Section 447(5)(vii) of the Local Government Code provides: SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the legislative body of the municipality, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the municipality and its inhabitants pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as provided for under Section 22 of this Code, and shall:

Petitioner also contends that LWDs are private corporations [21] because Section 6 of PD 198 declares that LWDs shall be considered quasi-public in nature. Petitioners rationale is that only private corporations may be deemed quasi-public and not public corporations. Put differently, petitioner rationalizes that a public corporation cannot be deemed quasi-public because such corporation is already public. Petitioner concludes that the term quasi-public can only apply to private corporations. Petitioners argument is inconsequential. Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the governments ownership or control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is immaterial. The Constitution vests in the COA audit jurisdiction over government-owned and controlled corporations with original charters, as well as government-owned or controlled corporations without original charters. GOCCs with original charters are subject to COA pre-audit, while GOCCs without original charters are subject to COA post-audit. GOCCs without original charters refer to corporations created under the Corporation Code but are owned or controlled by the government. The nature or purpose of the corporation is not material in determining COAs audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law. The determining factor of COAs audit jurisdiction is government ownership or control of the corporation. In Philippine Veterans Bank [22] Employees Union-NUBE v. Philippine Veterans Bank, the Court even ruled that the criterion of ownership and control is more important than the issue of original charter, thus: This point is important because the Constitution provides in its Article IX-B, Section 2(1) that the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original charters. As the Bank is not owned or controlled by the Government although it does have an original charter in the form of R.A. No. [23] 3518, it clearly does not fall under the Civil Service and should be regarded as an ordinary commercial corporation. Section 28 of the said law so provides. The consequence is that the relations of the Bank with its employees should be governed by the labor laws, under which in fact they have already been paid some of their claims. (Emphasis supplied) Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law, PD 198. There is no private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or local government owns and controls all their assets. The government controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor, appoints all the board directors of an LWD for [24] a fixed term of six years. The board directors of LWDs are not coowners of the LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are [25] government employees subject to civil service laws and anti-graft [26] laws. While Section 8 of PD 198 states that *N+o public official shall serve as director of an LWD, it only means that the appointees to the board of directors of LWDs shall come from the private sector. Once such private sector representatives assume office as directors, they become public officials governed by the civil service law and anti-graft

laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution declaring that the civil service includes government-owned or controlled corporations with original charters. If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under the term agencies or instrumentalities of the government and thus still subject to COAs audit jurisdiction. However, the stark and undeniable fact is [27] that the government owns LWDs. Section 45 of PD 198 recognizes government ownership of LWDs when Section 45 states that the board of directors may dissolve an LWD only on the condition that another public entity has acquired the assets of the district and has assumed all obligations and liabilities attached thereto. The implication is clear that an LWD is a public and not a private entity. Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner advances the theory that the Water Districts owner is the District [28] itself. Assuming for the sake of argument that an LWD is self[29] owned, as petitioner describes an LWD, the government in any event controls all LWDs. First, government officials appoint all LWD directors to a fixed term of office. Second, any per diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration, and directors can receive no other [30] compensation for their services to the LWD. Third, the Local Water Utilities Administration can require LWDs to merge or consolidate their [31] facilities or operations. This element of government control subjects LWDs to COAs audit jurisdiction. Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of ownership of water facilities from local government units to their respective water districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves the transfer of government assets to a private entity. Petitioner concedes that the owner of the assets transferred [32] under Section 6 (c) of PD 198 is no other than the LWD itself. The transfer of assets mandated by PD 198 is a transfer of the water systems facilities managed, operated by or under the control of such [33] city, municipality or province to such (water) district. In short, the transfer is from one government entity to another government entity. PD 198 is bereft of any indication that the transfer is to privatize the operation and control of water systems. Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20 of PD 198 prevents [34] COA from auditing LWDs. Section 20 of PD 198 provides: Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe and define by resolution a system of business administration and accounting for the district, which shall be patterned upon and conform to the standards established by the Administration. Auditing shall be performed by a certified public accountant not in the government service. The Administration may, however, conduct annual audits of the fiscal operations of the district to be performed by an auditor retained by the Administration. Expenses incurred in connection therewith shall be borne equally by the water district concerned and the [35] Administration. (Emphasis supplied) Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing LWDs. Petitioner asserts that this is the import of the second sentence of Section 20 of

PD 198 when it states that *A+uditing shall be performed by a certified [36] public accountant not in the government service. PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus: Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public funds, from the jurisdiction of the Commission on Audit. (Emphasis supplied) The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange in the deliberations of the Constitutional Commission elucidates this intent of the framers: MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT. May I explain my reasons on record. We know that a number of entities of the government took advantage of the absence of a legislature in the past to obtain presidential decrees exempting themselves from the jurisdiction of the Commission on Audit, one notable example of which is the Philippine National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly on its own account. Its funds were not very impressive in quantity but underneath that shell there were billions of pesos in a multiplicity of companies. The PNOC the empty shell under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of pesos invested in different corporations underneath it were exempted from the coverage of the Commission on Audit. Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut levy is a form of taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was, I think, the basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the United Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted it from the jurisdiction of the Commission on Audit, it being a private organization. So these are the fetuses of future abuse that we are slaying right here with this additional section. May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.

THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople? MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the amendment. MR. OPLE: Gladly, Madam President. Thank you. MR. DE CASTRO: Madam President, point of inquiry on the new amendment. THE PRESIDENT: Commissioner de Castro is recognized. MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople. Is that not included in Section 2 (1) where it states: (c) government owned or controlled corporations and their subsidiaries? So that if these government-owned and controlled corporations and their subsidiaries are subjected to the audit of the COA, any law exempting certain government corporations or subsidiaries will be already unconstitutional. So I believe, Madam President, that the proposed amendment is unnecessary. MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by Commissioner de Castro. THE PRESIDENT: Commissioner Monsod will please proceed. MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same provision was in the 1973 Constitution and yet somehow a law or a decree was passed where certain institutions were exempted from audit. We are just reaffirming, emphasizing, the role of the Commission on Audit so that [37] this problem will never arise in the future. There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the Constitution.

On the Legality of COAs Practice of Charging Auditing Fees

Petitioner claims that the auditing fees COA charges LWDs for [38] audit services violate the prohibition in Section 18 of RA 6758, which states: Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In order to preserve the independence and integrity of the Commission on Audit (COA), its officials and employees are prohibited from receiving salaries, honoraria, bonuses, allowances

or other emoluments from any government entity, local government unit, government-owned or controlled corporations, and government financial institutions, except those compensation paid directly by COA out of its appropriations and contributions. Government entities, including government-owned or controlled corporations including financial institutions and local government units are hereby prohibited from assessing or billing other government entities, including government-owned or controlled corporations including financial institutions or local government units for services rendered by its officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and employees. (Emphasis supplied) Claiming that Section 18 is absolute and leaves no [39] doubt, petitioner asks COA to discontinue its practice of charging auditing fees to LWDs since such practice allegedly violates the law. Petitioners claim has no basis. Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government entity except compensation paid directly by COA out of its appropriations and contributions. Thus, RA 6758 itself recognizes an exception to the statutory ban on COA personnel receiving compensation from [40] GOCCs. In Tejada v. Domingo, the Court declared: There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to preserve the independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses, allowances or other emoluments from any government entity, local government unit, GOCCs and government financial institutions, except such compensation paid directly by the COA out of its appropriations and contributions, and (2) government entities, including GOCCs, government financial institutions and local government units from assessing or billing other government entities, GOCCs, government financial institutions or local government units for services rendered by the latters officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and employees. xxx The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the GOCCs and government financial institutions. Under the first, COA personnel assigned to auditing units of GOCCs or government financial institutions can receive only such salaries, allowances or fringe benefits paid directly by the COA out of its appropriations and contributions. The contributions referred to are the cost of audit services earlier mentioned which cannot include the extra emoluments or benefits now claimed by petitioners. The COA is further barred from assessing or billing GOCCs and government financial institutions for services rendered by its personnel as part of their regular audit functions for purposes of paying additional compensation to such personnel. x x x. (Emphasis supplied) In Tejada, the Court explained the meaning of the word contributions in Section 18 of RA 6758, which allows COA to charge GOCCs the cost of its audit services:

x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of the audit function in the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit cost shall include personnel services, maintenance and other operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the formers auditing units, the same shall be [41] directly defrayed by COA from its own appropriations x x x. COA may charge GOCCs actual audit cost but GOCCs must pay the same directly to COA and not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in excess of COAs actual audit cost. Neither has petitioner alleged that the auditing fees are paid by LWDs directly to individual COA auditors. Thus, petitioners contention must fail. WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30 January 2001 denying petitioners Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs. SO ORDERED. 12. G.R. No. 58168 December 19, 1989 CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAYCABRERA, LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr. Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAYDIAZ, petitioners, vs. THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix of the Estate of the late Genaro F. Magsaysay respondents.

FERNAN, C.J.: In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of the Court of Appeals dated July l3, 1 1981, affirming that of the Court of First Instance of Zambales and Olongapo City which denied petitioners' motion to intervene in an annulment suit filed by herein private respondent, and [2] its resolution dated September 7, 1981, denying their motion for reconsideration. Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly denied their motion for intervention. The facts are not controverted. On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late Senator Genaro Magsaysay, brought before the then Court of First Instance of Olongapo an action against Artemio Panganiban, Subic Land Corporation (SUBIC), Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in

1958, she and her husband acquired, thru conjugal funds, a parcel of land with improvements, known as "Pequena Island", covered by TCT No. 3258; that after the death of her husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by the late Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the foregoing acts were void and done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital consent to the annotation on TCT No. 3258 was not obtained, the change made by the Register of Deeds of the titleholders was effected without the approval of the Commissioner of Land Registration and that the late Senator did not execute the purported Deed of Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation. She further alleged that the assignment in favor of SUBIC was without consideration and consequently null and void. She prayed that the Deed of Assignment and the Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor. On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that on June 20, 1978, their brother conveyed to them one-half (1/2 ) of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around 41 % of the total outstanding shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of litigation and that they have a legal interest in the success of the suit with respect to SUBIC. On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no legal interest whatsoever in the matter in litigation and their being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle them to intervene because SUBIC has a personality separate and distinct from its stockholders. On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings of the lower court. The appellate court further stated that whatever claims the petitioners have against the late Senator or against SUBIC for that matter can be ventilated in a separate proceeding, such that with the denial of the motion for intervention, they are not left without any remedy or judicial relief under existing law. Petitioners' motion for reconsideration was denied. Hence, the instant recourse. Petitioners anchor their right to intervene on the purported assignment made by the late Senator of a certain portion of his shareholdings to 2 them as evidenced by a Deed of Sale dated June 20, 1978. Such transfer, petitioners posit, clothes them with an interest, protected by law, in the matter of litigation. Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil 3 Co., 49 Phil. 857,862 & 853 (1927), petitioners strongly argue that their ownership of 41.66% of the entire outstanding capital stock of SUBIC entitles them to a significant vote in the corporate affairs; that they are

affected by the action of the widow of their late brother for it concerns the only tangible asset of the corporation and that it appears that they are more vitally interested in the outcome of the case than SUBIC. Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's holding that petitioners herein have no legal interest in the subject matter in litigation so as to entitle them to intervene in the proceedings below. In the case of 4 Batama Farmers' Cooperative Marketing Association, Inc. v. Rosal, we held: "As clearly stated in Section 2 of Rule 12 of the Rules of Court, to be permitted to intervene in a pending action, the party must have a legal interest in the matter in litigation, or in the success of either of the parties or an interest against both, or he must be so situated as to be adversely affected by a distribution or other disposition of the property in the custody of the court or an officer thereof ." To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise qualified; and [b] consideration must be given as to whether the adjudication of the rights of the original parties may be delayed or prejudiced, or whether the intervenor's rights may be protected in a separate proceeding or not. Both requirements must concur as the first is not more important 5 than the second. The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and of such direct and immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if persons not parties of the action could be allowed to intervene, proceedings will become unnecessarily complicated, expensive and interminable. 6 And this is not the policy of the law. The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the 7 establishment of which plaintiff could not recover. Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations. While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature. Shareholders are in no legal sense the owners of corporate property, 8 which is owned by the corporation as a distinct legal person. Petitioners further contend that the availability of other remedies, as declared by the Court of appeals, is totally immaterial to the availability of the remedy of intervention. We cannot give credit to such averment. As earlier stated, that the movant's interest may be protected in a separate proceeding is a factor to be considered in allowing or disallowing a motion for intervention. It is significant to note at this juncture that as per records, there are four pending cases involving the parties herein, enumerated as follows: [1]

Special Proceedings No. 122122 before the CFI of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al. v. Subic Land Corp., et al.", involving the validity of the transfer by the late Genaro Magsaysay of one-half of his shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of Zambales, Branch III, "Adelaida RodriguezMagsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors", seeking to annul the purported Deed of Assignment in favor of SUBIC and its annotation at the back of TCT No. 3258 in the name of respondent's deceased husband; [3] SEC Case No. 001770, filed by respondent praying, among other things that she be declared in her capacity as the surviving spouse and administratrix of the estate of Genaro Magsaysay as the sole subscriber and stockholder of SUBIC. There, petitioners, by motion, sought to intervene. Their motion to reconsider the denial of their motion to intervene was granted; [4] SP No. Q-26739 before the CFI of Rizal, Branch IV, petitioners herein filing a contingent claim pursuant to Section 5, Rule 86, Revised Rules of 9 Court. Petitioners' interests are no doubt amply protected in these cases. Neither do we lend credence to petitioners' argument that they are more interested in the outcome of the case than the corporationassignee, owing to the fact that the latter is willing to compromise with widow-respondent and since a compromise involves the giving of reciprocal concessions, the only conceivable concession the corporation may give is a total or partial relinquishment of the 10 corporate assets. Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of litigation. The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to intervene on the strength of the transfer of shares allegedly executed by the late Senator. The 11 corporation did not keep books and records. Perforce, no transfer was ever recorded, much less effected as to prejudice third parties. The transfer must be registered in the books of the corporation to affect third persons. The law on corporations is explicit. Section 63 of the Corporation Code provides, thus: "No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred." And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred from intervening inasmuch as their rights can be ventilated and amply protected in another proceeding. WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners. SO ORDERED. 13. G.R. No. L-31061 August 17, 1976 SULO NG BAYAN INC., plaintiff-appellant, vs. GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS & SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and REGISTER OF DEEDS OF BULACAN, defendants-appellees.

ANTONIO, J.: The issue posed in this appeal is whether or not plaintiff corporation (non- stock may institute an action in behalf of its individual members for the recovery of certain parcels of land allegedly owned by said members; for the nullification of the transfer certificates of title issued in favor of defendants appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute owners of the property" and the issuance of the corresponding certificate of title; and for damages. On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District, Valenzuela, Bulacan, against defendants-appellees to recover the ownership and possession of a large tract of land in San Jose del Monte, Bulacan, containing an area of 27,982,250 square meters, more or less, registered under the Torrens System in the name 1 of defendants-appellees' predecessors-in-interest. The complaint, as amended on June 13, 1966, specifically alleged that plaintiff is a corporation organized and existing under the laws of the Philippines, with its principal office and place of business at San Jose del Monte, Bulacan; that its membership is composed of natural persons residing at San Jose del Monte, Bulacan; that the members of the plaintiff corporation, through themselves and their predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land, cultivated the same since the Spanish regime and continuously possessed the said property openly and public under concept of ownership adverse against the whole world; that defendant-appellee Gregorio Araneta, Inc., sometime in the year 1958, through force and intimidation, ejected the members of the plaintiff corporation fro their possession of the aforementioned vast tract of land; that upon investigation conducted by the members and officers of plaintiff corporation, they found out for the first time in the year 1961 that the land in question "had been either fraudelently or erroneously included, by direct or constructive fraud, in Original Certificate of Title No. 466 of the Land of Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious, non-existent and devoid of legal efficacy due to the fact that "no original survey nor plan whatsoever" appears to have been submitted as a basis thereof and that the Court of First Instance of Bulacan which issued the decree of registration did not acquire jurisdiction over the land registration case because no notice of such proceeding was given to the members of the plaintiff corporation who were then in actual possession of said properties; that as a consequence of the nullity of the original title, all subsequent titles derived therefrom, such as Transfer Certificate of Title No. 4903 issued in favor of Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer Certificate of Title No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued in the name of, the National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of Title No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer certificate of title in the name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently prayed (1) that Original Certificate of Title No. 466, as well as all transfer certificates of title issued and derived therefrom, be nullified; (2) that "plaintiff's members" be declared as absolute owners in common of said property and that the corresponding certificate of title be issued to plaintiff; and (3) that defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein specified.

On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the amended complaint on the grounds that (1) the complaint states no cause of action; and (2) the cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc. and Hacienda Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee National Waterworks & Sewerage Authority did not file any motion to dismiss. However, it pleaded in its answer as special and affirmative defenses lack of cause of action by the plaintiff-appellant and the barring of such action by prescription and laches. During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7, 1966, praying that the case be transferred to another branch of the Court of First Instance sitting at Malolos, Bulacan, According to defendants-appellees, they were not furnished a copy of said motion, hence, on October 14, 1966, the lower court issued an Order requiring plaintiff-appellant to furnish the appellees copy of said motion, hence, on October 14, 1966, defendantappellant's motion dated October 7, 1966 and, consequently, prayed that the said motion be denied for lack of notice and for failure of the plaintiff-appellant to comply with the Order of October 14, 1966. Similarly, defendant-appellee paradise Farms, Inc. filed, on December 2, 1966, a manifestation information the court that it also did not receive a copy of the afore-mentioned of appellant. On January 24, 1967, the trial court issued an Order dismissing the amended complaint. On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds that the court had no jurisdiction to issue the Order of dismissal, because its request for the transfer of the case from the Valenzuela Branch of the Court of First Instance to the Malolos Branch of the said court has been approved by the Department of Justice; that the complaint states a sufficient cause of action because the subject matter of the controversy in one of common interest to the members of the corporation who are so numerous that the present complaint should be treated as a class suit; and that the action is not barred by the statute of limitations because (a) an action for the reconveyance of property registered through fraud does not prescribe, and (b) an action to impugn a void judgment may be brought any time. This motion was denied by the trial court in its Order dated February 22, 1967. From the afore-mentioned Order of dismissal and the Order denying its motion for reconsideration, plaintiff-appellant appealed to the Court of Appeals. On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in the appeal but only questions of law and jurisdiction, certified this case to this Court for resolution of the legal issues involved in the controversy. I Appellant contends, as a first assignment of error, that the trial court acted without authority and jurisdiction in dismissing the amended complaint when the Secretary of Justice had already approved the transfer of the case to any one of the two branches of the Court of First Instance of Malolos, Bulacan. Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in the different branches of the same Court of First Instance. Jurisdiction implies the power of the court to decide a case, while venue the place of action. There is no question

that respondent court has jurisdiction over the case. The venue of actions in the Court of First Instance is prescribed in Section 2, Rule 4 of the Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but must be in accordance with the aforesaid provision of 2 the rules. The mere fact that a request for the transfer of a case to another branch of the same court has been approved by the Secretary of Justice does not divest the court originally taking cognizance thereof of its jurisdiction, much less does it change the venue of the action. As correctly observed by the trial court, the indorsement of the Undersecretary of Justice did not order the transfer of the case to the Malolos Branch of the Bulacan Court of First Instance, but only "authorized" it for the reason given by plaintiff's counsel that the transfer would be convenient for the parties. The trial court is not without power to either grant or deny the motion, especially in the light of a strong opposition thereto filed by the defendant. We hold that the court a quo acted within its authority in denying the motion for the transfer the case to Malolos notwithstanding the authorization" of the same by the Secretary of Justice. II Let us now consider the substantive aspect of the Order of dismissal. In dismissing the amended complaint, the court a quo said: The issue of lack of cause of action raised in the motions to dismiss refer to the lack of personality of plaintiff to file the instant action. Essentially, the term 'cause of action' is composed of two elements: (1) the right of the plaintiff and (2) the violation of such right by the defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules require that every action must be prosecuted and defended in the name of the real party in interest and that all persons having an interest in the subject of the action and in obtaining the relief demanded shall be joined as plaintiffs (Sec. 2, Rule 3). In the amended complaint, the people whose rights were alleged to have been violated by being deprived and dispossessed of their land are the members of the corporation and not the corporation itself. The corporation has a separate. and distinct personality from its members, and this is not a mere technicality but a matter of substantive law. There is no allegation that the members have assigned their rights to the corporation or any showing that the corporation has in any way or manner succeeded to such rights. The corporation evidently did not have any rights violated by the defendants for which it could seek redress. Even if the Court should find against the defendants, therefore, the plaintiff corporation would not be entitled to the reliefs prayed for, which are recoveries of ownership and possession of the land, issuance of the corresponding title in its name, and payment of damages. Neither can such reliefs be awarded to the members allegedly deprived of their land, since they are not parties to the suit. It appearing clearly that the action has not been filed in the names of the real parties in interest, the complaint must be 3 dismissed on the ground of lack of cause of action.

Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed the amended complaint. It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations and 4 transactions of its stockholders or members. The property of the corporation is its property and not that of the stockholders, as owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from 5 its members. Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless transferred to the 6 corporation, "even in the case of a one-man corporation. The mere fact that one is president of a corporation does not render the property which he owns or possesses the property of the corporation, since the president, as individual, and the corporation are separate 7 similarities. Similarly, stockholders in a corporation engaged in buying and dealing in real estate whose certificates of stock entitled the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their stock certificates were considered not to have such legal or equitable title or interest in the land, as would support a suit for title, especially against parties other than the 8 corporation. It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the persons composing it, is but a legal fiction introduced for the purpose of convenience and to 9 subserve the ends of justice. 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 10 equity. Thus, 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, the one being merely 11 regarded as part or instrumentality of the other. The same is true where a corporation is a dummy and serves no business purpose and is intended only as a blind, or an alter ego or business conduit for the sole 12 benefit of the stockholders. This doctrine of disregarding the distinct personality of the corporation has been applied by the courts in those 13 cases when the corporate entity is used for the evasion of taxes or when the veil of corporate fiction is used to confuse legitimate issue of 14 employer-employee relationship, or when necessary for the protection of creditors, in which case the veil of corporate fiction may be pierced and the funds of the corporation may be garnished to satisfy 15 the debts of a principal stockholder. The aforecited principle is resorted to by the courts as a measure protection for third parties to 16 prevent fraud, illegality or injustice. It has not been claimed that the members have assigned or transferred whatever rights they may have on the land in question to the plaintiff corporation. Absent any showing of interest, therefore, a corporation, like plaintiff-appellant herein, has no personality to bring an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or members in their personal capacities.

It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right conferred' by law upon a 17 person. Evidently, there can be no wrong without a corresponding right, and no breach of duty by one person without a corresponding 18 right belonging to some other person. Thus, the essential elements of a cause of action are legal right of the plaintiff, correlative obligation of the defendant, an act or omission of the defendant in violation of the 19 aforesaid legal right. Clearly, no right of action exists in favor of plaintiff corporation, for as shown heretofore it does not have any interest in the subject matter of the case which is material and, direct so as to entitle it to file the suit as a real party in interest. III Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant to Section 12 of Rule 3 of the Revised Rules of Court. In order that a class suit may prosper, the following requisites must be present: (1) that the subject matter of the controversy is one of common or general interest to many persons; and (2) that the parties are so numerous that it is impracticable to bring them all before the 20 court. Under the first requisite, the person who sues must have an interest in the controversy, common with those for whom he sues, and there must be that unity of interest between him and all such other persons which would entitle them to maintain the action if suit was brought by 21 them jointly. As to what constitutes common interest in the subject matter of the 22 controversy, it has been explained in Scott v. Donald thus: The interest that will allow parties to join in a bill of complaint, or that will enable the court to dispense with the presence of all the parties, when numerous, except a determinate number, is not only an interest in the question, but one in common in the subject Matter of the suit; ... a community of interest growing out of the nature and condition of the right in dispute; for, although there may not be any privity between the numerous parties, there is a common title out of which the question arises, and which lies at the foundation of the proceedings ... [here] the only matter in common among the plaintiffs, or between them and the defendants, is an interest in the Question involved which alone cannot lay a foundation for the joinder of parties. There is scarcely a suit at law, or in equity which settles a Principle or applies a principle to a given state of facts, or in which a general statute is interpreted, that does not involved a Question in which other parties are interested. ... (Emphasis supplied ) Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in the subject matter of the controversy, and cannot, therefore, represent its members or stockholders who claim to own in their individual capacities ownership of the said property. Moreover, as correctly stated by the appellees, a class suit does not lie

in actions for the recovery of property where several persons claim Partnership of their respective portions of the property, as each one could alleged and prove his respective right in a different way for each portion of the land, so that they cannot all be held to have Identical 23 title through acquisition prescription. Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower court cannot be considered as a class suit, it would be unnecessary and an Idle exercise for this Court to resolve the remaining issue of whether or not the plaintiffs action for reconveyance of real property based upon constructive or implied trust had already prescribed. ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant. 14. [G.R. No. 124715. January 24, 2000] RUFINA LUY LIM petitioner, vs. COURT OF APPEALS, AUTO TRUCK TBA CORPORATION, SPEED DISTRIBUTING, INC., ACTIVE DISTRIBUTORS, ALLIANCE MARKETING CORPORATION, ACTION COMPANY, INC. respondents. DECISION

In an order dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court, granted the private respondents twin motions, in this wise: "Wherefore, the Register of Deeds of Quezon City is hereby ordered to lift, expunge or delete the annotation of lis pendens on Transfer Certificates of Title Nos. 116716, 116717, 116718, 116719 and 5182 and it is hereby further ordered that the properties covered by the same titles as well as those properties by (sic) Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236 are excluded from these proceedings. SO ORDERED." Subsequently, Rufina Luy Lim filed a verified amended petition which contained the following averments: "3. The late Pastor Y. Lim personally owned during his lifetime the following business entities, to wit: Business Entity X X X X Marketing Block 3, Lot 6, Dacca Address:
[9]

[8]

BUENA, J.: May a corporation, in its universality, be the proper subject of and be included in the inventory of the estate of a deceased person? Petitioner disputes before us through the instant petition for review [1] on certiorari, the decision of the Court of Appeals promulgated on 18 April 1996, in CA-GR SP No. 38617, which nullified and set aside the [2] [3] orders dated 04 July 1995 , 12 September 1995 and 15 September [4] 1995 of the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court. Petitioner Rufina Luy Lim is the surviving spouse of the late Pastor Y. Lim whose estate is the subject of probate proceedings in Special Proceedings Q-95-23334, entitled, "In Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by George Luy, Petitioner". Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active Distributing, Inc. and Action Company are corporations formed, organized and existing under Philippine laws and which owned real properties covered under the Torrens system. On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented by her nephew George Luy, filed [5] on 17 March 1995, a joint petition for the administration of the estate of Pastor Y. Lim before the Regional Trial Court of Quezon City. Private respondent corporations, whose properties were included in [6] the inventory of the estate of Pastor Y. Lim, then filed a motion for [7] the lifting of lis pendens and motion for exclusion of certain properties from the estate of the decedent. Alliance ,Inc. BF Homes, Paraaque, Metro Manila. X X X X 910 Barrio

Speed Distributing Inc. Niog, Aguinaldo Highway, Bacoor, Cavite. X X X X

Auto Truck TBA Corp. Roosevelt Avenue, Quezon City. X X X X

2251

Active Distributors, Inc. 3, Lot 6, Dacca BF

Block

Homes, Paraaque, Metro Manila. X X X X 100

Copies of the above-mentioned Transfer Certificate of Title and/or Tax Declarations are hereto attached as Annexes "C" to "W". X X X X

Action Company 20th Avenue Murphy, Quezon City or 92-D Mc-Arthur Highway Valenzuela Bulacan.

"7. The aforementioned properties and/or real interests left by the late Pastor Y. Lim, are all conjugal in nature, having been acquired by him during the existence of his marriage with petitioner. "8. There are other real and personal properties owned by Pastor Y. Lim which petitioner could not as yet identify. Petitioner, however will submit to this Honorable Court the identities thereof and the necessary documents covering the same as soon as possible." On 04 July 1995, the Regional Trial Court acting on petitioners motion [10] issued an order , thus: "Wherefore, the order dated 08 June 1995 is hereby set aside and the Registry of Deeds of Quezon City is hereby directed to reinstate the annotation of lis pendens in case said annotation had already been deleted and/or cancelled said TCT Nos. 116716, 116717, 116718, 116719 and 51282. Further more (sic), said properties covered by TCT Nos. 613494, 365123, 236256 and 236237 by virtue of the petitioner are included in the instant petition. SO ORDERED." On 04 September 1995, the probate court appointed Rufina Lim as [11] special administrator and Miguel Lim and Lawyer Donald Lee, as cospecial administrators of the estate of Pastor Y. Lim, after which letters of administration were accordingly issued. In an order dated 12 September 1995, the probate court denied anew private respondents motion for exclusion, in this wise: "The issue precisely raised by the petitioner in her petition is whether the corporations are the mere alter egos or instrumentalities of Pastor Lim, Otherwise (sic) stated, the issue involves the piercing of the corporate veil, a matter that is clearly within the jurisdiction of this Honorable Court and not the Securities and Exchange Commission. Thus, in the case of Cease vs. Court of Appeals, 93 SCRA 483, the crucial issue decided by the regular court was whether the corporation involved therein was the mere extension of the decedent. After finding in the affirmative, the Court ruled that the assets of the corporation are also assets of the estate.
[12]

"3.1 Although the above business entities dealt and engaged in business with the public as corporations, all their capital, assets and equity were however, personally owned by the late Pastor Y Lim. Hence the alleged stockholders and officers appearing in the respective articles of incorporation of the above business entities were mere dummies of Pastor Y. Lim, and they were listed therein only for purposes of registration with the Securities and Exchange Commission. "4. Pastor Lim, likewise, had Time, Savings and Current Deposits with the following banks: (a) Metrobank, Grace Park, Caloocan City and Quezon Avenue, Quezon City Branches and (b) First Intestate Bank (formerly Producers Bank), Rizal Commercial Banking Corporation and in other banks whose identities are yet to be determined. "5. That the following real properties, although registered in the name of the above entities, were actually acquired by Pastor Y. Lim during his marriage with petitioner, to wit: Corporation Location X X X X TCT No. Title

k. Auto 617726 TBA Corporation

Truck Sto. Domingo

Cainta, Rizal q. Alliance 27896 Metro Manila Marketing Prance, TCT No.

A reading of P.D. 902, the law relied upon by oppositors, shows that the SECs exclusive (sic) applies only to intra-corporate controversy. It is simply a suit to settle the intestate estate of a deceased person who, during his lifetime, acquired several properties and put up corporations as his instrumentalities. SO ORDERED."

estate of the late deceased (sic) Pastor Y. Lim with the respondent Court of Appeals arrogating unto itself the power to repeal, to disobey or to ignore the clear and explicit provisions of Rules 81,83,84 and 87 of the Rules of Court and thereby preventing the petitioner, from performing her duty as special administrator of the estate as expressly provided in the said Rules." Petitioners contentions tread on perilous grounds.

On 15 September 1995, the probate court acting on an ex parte motion [13] filed by petitioner, issued an order the dispositive portion of which reads: "Wherefore, the parties and the following banks concerned herein under enumerated are hereby ordered to comply strictly with this order and to produce and submit to the special administrators , through this Honorable Court within (5) five days from receipt of this order their respective records of the savings/current accounts/time deposits and other deposits in the names of Pastor Lim and/or corporations above-mentioned, showing all the transactions made or done concerning savings /current accounts from January 1994 up to their receipt of this court order. XXX XXX XXX

In the instant petition for review, petitioner prays that we affirm the orders issued by the probate court which were subsequently set aside by the Court of Appeals. Yet, before we delve into the merits of the case, a review of the rules on jurisdiction over probate proceedings is indeed in order. The provisions of Republic Act 7691 , which introduced amendments to Batas Pambansa Blg. 129, are pertinent: "Section 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary Reorganization Act of 1980", is hereby amended to read as follows: Section 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive jurisdiction: xxx xxx xxx
[17]

SO ORDERED." Private respondent filed a special civil action for certiorari , with an urgent prayer for a restraining order or writ of preliminary injunction, before the Court of Appeals questioning the orders of the Regional Trial Court, sitting as a probate court. On 18 April 1996, the Court of Appeals, finding in favor of herein [15] private respondents, rendered the assailed decision , the decretal portion of which declares: "Wherefore, premises considered, the instant special civil action for certiorari is hereby granted, The impugned orders issued by respondent court on July 4,1995 and September 12, 1995 are hereby nullified and set aside. The impugned order issued by respondent on September 15, 1995 is nullified insofar as petitioner corporations" bank accounts and records are concerned. SO ORDERED." Through the expediency of Rule 45 of the Rules of Court, herein petitioner Rufina Luy Lim now comes before us with a lone assignment [16] of error : "The respondent Court of Appeals erred in reversing the orders of the lower court which merely allowed the preliminary or provisional inclusion of the private respondents as part of the
[14]

(4) In all matters of probate, both testate and intestate, where the gross value of the estate exceeds One Hundred Thousand Pesos (P100,000) or, in probate matters in Metro Manila, where such gross value exceeds Two Hundred Thousand Pesos (P200,000); xxx xxx xxx

Section 3. Section 33 of the same law is hereby amended to read as follows: Section 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in Civil Cases.-Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts shall exercise: 1. Exclusive original jurisdiction over civil actions and probate proceedings, testate and intestate, including the grant of provisional remedies in proper cases, where the value of the personal

property, estate or amount of the demand does not exceed One Hundred Thousand Pesos(P100,000) or, in Metro Manila where such personal property, estate or amount of the demand does not exceed Two Hundred Thousand Pesos (P200,000), exclusive of interest, damages of whatever kind, attorneys fees, litigation expenses and costs, the amount of which must be specifically alleged, Provided, that interest, damages of whatever kind, attorneys, litigation expenses and costs shall be included in the determination of the filing fees, Provided further, that where there are several claims or causes of actions between the same or different parties, embodied in the same complaint, the amount of the demand shall be the totality of the claims in all the causes of action, irrespective of whether the causes of action arose out of the same or different transactions; xxx xxx xxx"

"X X X The function of resolving whether or not a certain property should be included in the inventory or list of properties to be administered by the administrator is one clearly within the competence of the probate court. However, the courts determination is only provisional in character, not conclusive, and is subject to the final decision in a separate action which may be instituted by the parties." Further, in MORALES vs. CFI OF CAVITE citing CUIZON vs. [21] RAMOLETE , We made an exposition on the probate courts limited jurisdiction: "It is a well-settled rule that a probate court or one in charge of proceedings whether testate or intestate cannot adjudicate or determine title to properties claimed to be a part of the estate and which are equally claimed to belong to outside parties. All that the said court could do as regards said properties is to determine whether they should or should not be included in the inventory or list of properties to be administered by the administrator. If there is no dispute, well and good; but if there is, then the parties, the administrator and the opposing parties have to resort to an ordinary action for a final determination of the conflicting claims of title because the probate court cannot do so." Again, in VALERA vs. INSERTO , We had occasion to elucidate, [23] through Mr. Justice Andres Narvasa : "Settled is the rule that a Court of First Instance (now Regional Trial Court), acting as a probate court, exercises but limited jurisdiction, and thus has no power to take cognizance of and determine the issue of title to property claimed by a third person adversely to the decedent, unless the claimant and all other parties having legal interest in the property consent, expressly or impliedly, to the submission of the question to the probate court for adjudgment, or the interests of third persons are not thereby prejudiced, the reason for the exception being that the question of whether or not a particular matter should be resolved by the court in the exercise of its general jurisdiction or of its limited jurisdiction as a special court (e.g. probate, land registration, etc.), is in reality not a jurisdictional but in essence of procedural one, involving a mode of practice which may be waived. xxx x x x. These considerations assume greater cogency where, as here, the Torrens title is not in the decedents name but in others, a situation on which this Court has already had occasion to rule x x x."(emphasis Ours)
[22] [20]

Simply put, the determination of which court exercises jurisdiction over matters of probate depends upon the gross value of the estate of the decedent. As to the power and authority of the probate court, petitioner relies heavily on the principle that a probate court may pass upon title to certain properties, albeit provisionally, for the purpose of determining whether a certain property should or should not be included in the inventory. In a litany of cases, We defined the parameters by which the court may extend its probing arms in the determination of the question of title in probate proceedings. This Court, in PASTOR, JR. vs. COURT OF APPEALS,
[18]

held:

"X X X As a rule, the question of ownership is an extraneous matter which the probate court cannot resolve with finality. Thus, for the purpose of determining whether a certain property should or should not be included in the inventory of estate properties, the Probate Court may pass upon the title thereto, but such determination is provisional, not conclusive, and is subject to the final decision in a separate action to resolve title." We reiterated the rule in PEREIRA vs. COURT OF APPEALS
[19]

Petitioner, in the present case, argues that the parcels of land covered under the Torrens system and registered in the name of private respondent corporations should be included in the inventory of the estate of the decedent Pastor Y. Lim, alleging that after all the determination by the probate court of whether these properties should be included or not is merely provisional in nature, thus, not conclusive and subject to a final determination in a separate action brought for the purpose of adjudging once and for all the issue of title. Yet, under the peculiar circumstances, where the parcels of land are registered in the name of private respondent corporations, the [24] jurisprudence pronounced in BOLISAY vs., ALCID is of great essence and finds applicability, thus: "It does not matter that respondent-administratrix has evidence purporting to support her claim of ownership, for, on the other hand, petitioners have a Torrens title in their favor, which under the law is endowed with incontestability until after it has been set aside in the manner indicated in the law itself, which, of course, does not include, bringing up the matter as a mere incident in special proceedings for the settlement of the estate of deceased persons. x x x" "x x x. In regard to such incident of inclusion or exclusion, We hold that if a property covered by Torrens title is involved, the presumptive conclusiveness of such title should be given due weight, and in the absence of strong compelling evidence to the contrary, the holder thereof should be considered as the owner of the property in controversy until his title is nullified or modified in an appropriate ordinary action, particularly, when as in the case at bar, possession of the property itself is in the persons named in the title. x x x" A perusal of the records would reveal that no strong compelling evidence was ever presented by petitioner to bolster her bare assertions as to the title of the deceased Pastor Y. Lim over the properties. Even so, P.D. 1529, otherwise known as, " The Property Registration Decree", proscribes collateral attack on Torrens Title, hence: "xxx xxx xxx

"x x x Having been apprised of the fact that the property in question was in the possession of third parties and more important, covered by a transfer certificate of title issued in the name of such third parties, the respondent court should have denied the motion of the respondent administrator and excluded the property in question from the inventory of the property of the estate. It had no authority to deprive such third persons of their possession and ownership of the property. x x x" Inasmuch as the real properties included in the inventory of the estate of the late Pastor Y. Lim are in the possession of and are registered in the name of private respondent corporations, which under the law possess a personality separate and distinct from their stockholders, and in the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of private respondents should stand undisturbed. Accordingly, the probate court was remiss in denying private respondents motion for exclusion. While it may be true that the Regional Trial Court, acting in a restricted capacity and exercising limited jurisdiction as a probate court, is competent to issue orders involving inclusion or exclusion of certain properties in the inventory of the estate of the decedent, and to adjudge, albeit, provisionally the question of title over properties, it is no less true that such authority conferred upon by law and reinforced by jurisprudence, should be exercised judiciously, with due regard and caution to the peculiar circumstances of each individual case. Notwithstanding that the real properties were duly registered under the Torrens system in the name of private respondents, and as such were to be afforded the presumptive conclusiveness of title, the probate court obviously opted to shut its eyes to this gleamy fact and still proceeded to issue the impugned orders. By its denial of the motion for exclusion, the probate court in effect acted in utter disregard of the presumption of conclusiveness of title in favor of private respondents. Certainly, the probate court through such brazen act transgressed the clear provisions of law and infringed settled jurisprudence on this matter. Moreover, petitioner urges that not only the properties of private respondent corporations are properly part of the decedents estate but also the private respondent corporations themselves. To rivet such flimsy contention, petitioner cited that the late Pastor Y. Lim during his lifetime, organized and wholly-owned the five corporations, which are [25] the private respondents in the instant case. Petitioner thus attached [26] [27] as Annexes "F" and "G" of the petition for review affidavits executed by Teresa Lim and Lani Wenceslao which among others, contained averments that the incorporators of Uniwide Distributing, Inc. included on the list had no actual participation in the organization and incorporation of the said corporation. The affiants added that the persons whose names appeared on the articles of incorporation of Uniwide Distributing, Inc., as incorporators thereof, are mere dummies since they have not actually contributed any amount to the capital stock of the corporation and have been merely asked by the late Pastor Y. Lim to affix their respective signatures thereon.

Section 48. Certificate not subject to collateral attack. - A certificate of title shall not be subject to collateral attack. It cannot be altered, modified or cancelled except in a direct proceeding in accordance with law." In CUIZON vs. RAMOLETE, where similarly as in the case at bar, the property subject of the controversy was duly registered under the Torrens system, We categorically stated:

It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing it. It may not generally be held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders or those of the [28] entities connected with it. Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members. In the same vein, a corporation by legal fiction and convenience is an entity shielded by a protective mantle and imbued by law with a character alien to the persons comprising it. Nonetheless, the shield is not at all times invincible. Thus, in FIRST [29] PHILIPPINE INTERNATIONAL BANK vs. COURT OF APPEALS , We enunciated: "x x x When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals. x x x" Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing [30] corporate fiction. The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation. Where badges of fraud exist, where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come [31] to naught. Further, the test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and (3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence [32] of any of these elements prevent "piercing the corporate veil". Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate [33] personalities.

Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly [34] established. It cannot be presumed. Granting arguendo that the Regional Trial Court in this case was not merely acting in a limited capacity as a probate court, petitioner nonetheless failed to adduce competent evidence that would have justified the court to impale the veil of corporate fiction. Truly, the reliance reposed by petitioner on the affidavits executed by Teresa Lim and Lani Wenceslao is unavailing considering that the aforementioned documents possess no weighty probative value pursuant to the hearsay rule. Besides it is imperative for us to stress that such affidavits are inadmissible in evidence inasmuch as the affiants were not at all presented during the course of the proceedings in the lower court. To put it differently, for this Court to uphold the admissibility of said documents would be to relegate from Our duty to apply such basic rule of evidence in a manner consistent with the law and jurisprudence. Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs. [35] LEONIDAS finds pertinence: "Affidavits are classified as hearsay evidence since they are not generally prepared by the affiant but by another who uses his own language in writing the affiants statements, which may thus be either omitted or misunderstood by the one writing them. Moreover, the adverse party is deprived of the opportunity to cross-examine the affiants. For this reason, affidavits are generally rejected for being hearsay, unless the affiant themselves are placed on the witness stand to testify thereon." As to the order of the lower court, dated 15 September 1995, the Court of Appeals correctly observed that the Regional Trial Court, Branch 93 acted without jurisdiction in issuing said order; The probate court had no authority to demand the production of bank accounts in the name of the private respondent corporations. WHEREFORE, in view of the foregoing disquisitions, the instant petition is hereby DISMISSED for lack of merit and the decision of the Court of Appeals which nullified and set aside the orders issued by the Regional Trial Court, Branch 93, acting as a probate court, dated 04 July 1995 and 12 September 1995 is AFFIRMED. SO ORDERED. 15. Adm. Matter No. R-181-P July 31, 1987
[36]

ADELIO C. CRUZ, complainant, vs. QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents. RESOLUTION

FERNAN, J.:

In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged Quiterio L. Dalisay, Senior Deputy Sheriff of Manila, with "malfeasance in office, corrupt practices and serious irregularities" allegedly committed as follows: 1. Respondent sheriff attached and/or levied the money belonging to complainant Cruz when he was not himself the judgment debtor in the final judgment of NLRC NCR Case No. 8-12389-91 sought to be enforced but rather the company known as "Qualitrans Limousine Service, Inc.," a duly registered corporation; and, 2. Respondent likewise caused the service of the alias writ of execution upon complainant who is a resident of Pasay City, despite knowledge that his territorial jurisdiction covers Manila only and does not extend to Pasay City. In his Comments, respondent Dalisay explained that when he garnished complainant's cash deposit at the Philtrust bank, he was merely performing a ministerial duty. While it is true that said writ was addressed to Qualitrans Limousine Service, Inc., yet it is also a fact that complainant had executed an affidavit before the Pasay City assistant fiscal stating that he is the owner/president of said corporation and, because of that declaration, the counsel for the plaintiff in the labor case advised him to serve notice of garnishment on the Philtrust bank. On November 12, 1984, this case was referred to the Executive Judge of the Regional Trial Court of Manila for investigation, report and recommendation. Prior to the termination of the proceedings, however, complainant executed an affidavit of desistance stating that he is no longer interested in prosecuting the case against respondent Dalisay and that it was just a "misunderstanding" between them. Upon respondent's motion, the Executive Judge issued an order dated May 29, 1986 recommending the dismissal of the case. It has been held that the desistance of complainant does not preclude the taking of disciplinary action against respondent. Neither does it dissuade the Court from imposing the appropriate corrective sanction. One who holds a public position, especially an office directly connected with the administration of justice and the execution of judgments, must 1 at all times be free from the appearance of impropriety. We hold that respondent's actuation in enforcing a judgment against complainant who is not the judgment debtor in the case calls for disciplinary action. Considering the ministerial nature of his duty in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of a decision ordained or decreed in the 2 dispositive part should be the subject of execution. No more, no less. That the title of the case specifically names complainant as one of the respondents is of no moment as execution must conform to that directed in the dispositive portion and not in the title of the case. The tenor of the NLRC judgment and the implementing writ is clear enough. It directed Qualitrans Limousine Service, Inc. to reinstate the discharged employees and pay them full backwages. Respondent, however, chose to "pierce the veil of corporate entity" usurping a power belonging to the court and assumed improvidently that since the complainant is the owner/president of Qualitrans Limousine Service, Inc., they are one and the same. It is a well-settled doctrine both in law

and in equity that as a legal entity, a corporation has a personality distinct and separate from its individual stockholders or members. The mere fact that one is president of a corporation does not render the property he owns or possesses the property of the corporation, since 3 the president, as individual, and the corporation are separate entities. Anent the charge that respondent exceeded his territorial jurisdiction, suffice it to say that the writ of execution sought to be implemented was dated July 9, 1984, or prior to the issuance of Administrative Circular No. 12 which restrains a sheriff from enforcing a court writ outside his territorial jurisdiction without first notifying in writing and seeking the assistance of the sheriff of the place where execution shall take place. ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L. Dalisay NEGLIGENT in the enforcement of the writ of execution in NLRC CaseNo. 8-12389-91, and a fine equivalent to three [3] months salary is hereby imposed with a stern warning that the commission of the same or similar offense in the future will merit a heavier penalty. Let a copy of this Resolution be filed in the personal record of the respondent. SO ORDERED.

16. [G.R. No. 125986. January 28, 1999]

LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners, vs. HONORABLE COURT OF APPEALS, JAMES BUILDER CONSTRUCTION and/or JAIME T. BRAVO, respondents. DECISION MARTINEZ, J.: This petition for review assails the decision of the respondent [1] Court of Appeals dated March 15, 1996, which affirmed with modification the judgment of default rendered by the Regional Trial Court of Muntinlupa, Branch 276, in Civil Case No. 92-2592 granting all the reliefs prayed for in the complaint of private respondent James Builder Construction and/or Jaime T. Bravo. As culled from the record, the facts are as follows: Petitioner Aida M. Posadas and her two (2) minor children coowned a 1.6 hectare property in Sucat, Muntinlupa, which was occupied by squatters. Petitioner Posadas entered into negotiations with private respondent Jaime T. Bravo regarding the development of the said property into a residential subdivision. On May 3, 1989, she authorized private respondent to negotiate with the squatters to leave the said property. With a written authorization, respondent Bravo buckled down to work and started negotiations with the squatters. Meanwhile, some seven (7) months later, on December 11, 1989, petitioner Posadas and her two (2) children, through a Deed of Assignment, assigned the said property to petitioner Luxuria Homes, Inc., purportedly for organizational and tax avoidance purposes. Respondent Bravo signed as one of the witnesses to the

execution of the Deed of Assignment and the Articles of Incorporation of petitioner Luxuria Homes, Inc. Then sometime in 1992, the harmonious and congenial relationship of petitioner Posadas and respondent Bravo turned sour when the former supposedly could not accept the management contracts to develop the 1.6 hectare property into a residential subdivision, the latter was proposing. In retaliation, respondent Bravo demanded payment for services rendered in connection with the development of the land. In his statement of account dated 21 August [2] 1991 respondent demanded the payment of P1,708,489.00 for various services rendered, i.e., relocation of squatters, preparation of the architectural design and site development plan, survey and fencing. Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, private respondents James Builder Construction and Jaime T. Bravo instituted a complaint for specific performance before the trial court against petitioners Posadas and Luxuria Homes, Inc. Private respondents alleged therein that petitioner Posadas asked them to clear the subject parcel of land of squatters for a fee of P1,100,000.00 for which they were partially paid the amount of P461,511.50, leaving a balance of P638,488.50. They were also supposedly asked to prepare a site development plan and an architectural design for a contract price of P450,000.00 for which they were partially paid the amount of P25,000.00, leaving a balance of P425,000.00. And in anticipation of the signing of the land development contract, they had to construct a bunkhouse and warehouse on the property which amounted to P300,000.00, and a hollow blocks factory for P60,000.00. Private respondents also claimed that petitioner Posadas agreed that private respondents will develop the land into a first class subdivision thru a management contract and that petitioner Posadas is unjustly refusing to comply with her obligation to finalize the said management contract. The prayer in the complaint of the private respondents before the trial court reads as follows: WHEREFORE, premises considered, it is respectfully prayed of this Honorable Court that after hearing/trial judgment be rendered ordering defendant to: a) Comply with its obligation to deliver/finalize Management Contract of its land in Sucat, Muntinlupa, Metro Manila and to pay plaintiff its balance in the amount of P1,708,489.00; b) Pay plaintiff moral and exemplary damages in the amount of P500,000.00; c) Pay plaintiff actual damages in the amount of P500,000.00 (Bunkhouse/warehouse P300,000.00, Hollow-block factory P60,000.00, lumber, cement, etc., P120,000.00, guard P20,000.00); d) Pay plaintiff attorneys fee of P50,000 plus P700 per appearance in court and 5% of that which may be awarded by the court to plaintiff re its monetary claims; e) Pay cost of this suit.
[3]

jointly and in solidum with petitioner Luxuria Homes, Inc., to pay private respondents as follows: 1. x x x the balance of the payment for the various services performed by Plaintiff with respect to the land covered by TCT NO. 167895 previously No. 158290 in the total amount of P1,708,489.00. 2. x x x actual damages incurred for the construction of the warehouses/bunks, and for the materials used in the total sum of P1,500,000.00. 3. Moral and exemplary damages of P500,000.00. 4. Attorneys fee of P50,000.00. 5. And cost of this proceedings. Defendant Aida Posadas as the Representative of the Corporation Luxuria Homes, Incorporated, is further directed to execute the management contract she committed to do, also in consideration of [4] the various undertakings that Plaintiff rendered for her. Aggrieved by the aforecited decision, petitioners appealed to respondent Court of Appeals, which, as aforestated, affirmed with modification the decision of the trial court. The appellate court deleted the award of moral damages on the ground that respondent James Builder Construction is a corporation and hence could not experience physical suffering and mental anguish. It also reduced the award of exemplary damages. The dispositive portion of the decision reads: WHEREFORE, the decision appealed from is hereby AFFIRMED with the modification that the award of moral damages is ordered deleted and the award of exemplary damages to the plaintiffs-appellee should [5] only be in the amount of FIFTY THOUSAND (P50,000.00) PESOS. Petitioners motion for reconsideration was denied, prompting the filing of this petition for review before this Court. On January 15, 1997, the Third Division of this Court denied due course to this petition for failing to show convincingly any reversible error on the part of the Court of Appeals. This Court however deleted the grant of exemplary damages and attorneys fees. The Court also reduced the trial courts award of actual damages from P1,500,000.00 to P500,000.00 reasoning that the grant should not exceed the amount prayed for in the complaint. In the prayer in the complaint respondents asked for actual damages in the amount of P500,000.00 only. Still feeling aggrieved with the resolution of this Court, petitioners filed a motion for reconsideration. On March 17, 1997, this Court found merit in the petitioners motion for reconsideration and reinstated this petition for review. From their petition for review and motion for reconsideration before this Court, we now synthesize the issues as follows: 1. Were private respondents able to present exparte sufficient evidence to substantiate the allegations in their complaint and entitle them to their prayers?

On September 27, 1993, the trial court declared petitioner Posadas in default and allowed the private respondents to present their evidence ex-parte. On March 8, 1994, it ordered petitioner Posadas,

2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents for the transactions supposedly entered into between petitioner Posadas and private respondents? 3. Can petitioners be compelled to enter into a management contract with private respondents? Petitioners who were declared in default assert that the private respondents who presented their evidence ex-parte nonetheless utterly failed to substantiate the allegations in their complaint and as such cannot be entitled to the reliefs prayed for. A perusal of the record shows that petitioner Posadas contracted respondents Bravo to render various services for the initial development of the property as shown by vouchers evidencing payments made by petitioner Posadas to respondents Bravo for squatter relocation, architectural design, survey and fencing. Respondents prepared the architectural design, site development plan and survey in connection with petitioner Posadas application with the Housing and Land Regulatory Board (HLRUB) for the issuance of the Development Permit, Preliminary Approval and Locational [6] Clearance. Petitioner benefited from said services as the Development Permit and the Locational Clearance were eventually issued by the HLURB in her favor. Petitioner Posadas is therefore liable to pay for these services rendered by respondents. The contract price for the survey of the land is P140,000.00. Petitioner made partial payments totaling P130,000.00 leaving a payable balance of P10,000.00. In his testimony, he alleged that the agreed price for the preparation of the site development plan is P500,000.00 and that the preparation of the architectural designs is for P450,000, or a total of P950,000.00 for the two contracts. In his complaint however, respondent Bravo alleged that he was asked to prepare the site development plan and the architectural designs x x x for a contract [8] price of P450,000.00 x x x. The discrepancy or inconsistency was never reconciled and clarified. We reiterate that we cannot award an amount higher than what was claimed in the complaint. Consequently for the preparation of both the architectural design and site development plan, respondent is entitled to the amount of P450,000.00 less partial payments made in [9] the amount of P25,000.00. In Policarpio v. RTC of Quezon City, it was held that a court is bereft of jurisdiction to award, in a judgment by default, a relief other than that specifically prayed for in the complaint. As regards the contracts for the ejectment of squatters and fencing, we believe however that respondents failed to show proof that they actually fulfilled their commitments therein. Aside from the bare testimony of respondent Bravo, no other evidence was presented to show that all the squatter were ejected from the property. Respondent Bravo failed to show how many shanties or structures were actually occupying the property before he entered the same, to serve as basis for concluding whether the task was finished or not. His testimony alone that he successfully negotiated for the ejectment of all the squatters from the property will not suffice. Likewise, in the case of fencing, there is no proof that it was accomplished as alleged. Respondent Bravo claims that he finished sixty percent (60%) of the fencing project but he failed to present evidence showing the area sought to be fenced and the actual area fenced by him. We therefore have no basis to determining the veracity respondents allegations. We cannot assume that the said services rendered for it will be unfair to require petitioner to pay the full
[7]

amount claimed in case the respondents obligations were not completely fulfilled. For respondents failure to show proof of accomplishment of the aforesaid services, their claims cannot be granted. In P.T. Cerna Corp. [10] v. Court of Appeals, we ruled that in civil cases, the burden of proof rests upon the party who, as determined by the pleadings or the nature of the case, asserts the affirmative of an issue. In this case the burden lies on the complainant, who is duty bound to prove the allegations in the complaint. As this Court has held, he who alleges a fact has the burden of proving it and A MERE ALLEGATION IS NOT EVIDENCE. And the rules do not change even if the defendant is declared in [11] default. In the leading case of Lopez v. Mendezona, this Court ruled that after entry of judgment in default against a defendant who has neither appeared nor answered, and before final judgment in favor of the plaintiff, the latter must establish by competent evidence all the material allegations of his complaint upon which he bases his prayer for [12] relief. In De los Santos v. De la Cruz this Court declared that a judgment by default against a defendant does not imply a waiver of rights except that of being heard and of presenting evidence in his favor. It does not imply admission by the defendant of the facts and causes of action of the plaintiff, because the codal section requires the latter to adduce his evidence in support of his allegations as an indispensable condition before final judgment could be given in his favor. Nor could it be interpreted as an admission by the defendant that the plaintiffs causes of action finds support in the law or that the latter is entitled to the relief prayed for. We explained the rule in judgments by default in Pascua v. [13] Florendo, where we said that nowhere is it stated that the complainants are automatically entitled to the relief prayed for, once the defendants are declared in default. Favorable relief can be granted only after the court has ascertained that the evidence offered and the facts proven by the presenting party warrant the grant of the same. Otherwise it would be meaningless to require presentation of evidence if everytime the other party is declared in default, a decision would automatically be rendered in favor of the non-defaulting party and exactly according to the tenor of his prayer. In Lim Tanhu v. [14] Ramolete we elaborated and said that a defaulted defendant is not actually thrown out of court. The rules see to it that any judgment against him must be in accordance with law. The evidence to support the plaintiffs cause is, of course, presented in his absence, but the court is not supposed to admit that which is basically incompetent. Although the defendant would not be in a position to object, elementary justice requires that only legal evidence should be considered against him. If the evidence presented should not be sufficient to justify a judgment for the plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed the amount or be different in kind from what is prayed for in the complaint. The prayer for actual damages in the amount of P500,000.00, supposedly for the bunkhouse/warehouse, hollow-block factory, lumber, cement, guard, etc., which the trial court granted and even increased toP1,500,000.00, and which this Court would have rightly reduced to the amount prayed for in the complaint, was not established, as shown upon further review of the record. No receipts or vouchers were presented by private respondents to show that they [15] actually spent the amount. In Salas v. Court of Appeals, we said that the burden of proof of the damages suffered is on the party claiming the same. It his duty to present evidence to support his claim for actual

damages. If he failed to do so, he has only himself to blame if no award for actual damages is handed down. In fine, as we declared in PNOC Shipping & Transport Corp. v. [16] Court of Appeals, basic is the rule that to recover actual damages, the amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon competent proof or best evidence obtainable of the actual amount thereof. We go to the second issue of whether Luxuria Homes, Inc., was a party to the transactions entered into by petitioner Posadas and private respondents and thus could be held jointly and severally with petitioner Posadas. Private respondents contend that petitioner Posadas surreptitiously formed Luxuria Homes, Inc., and transferred the subject parcel of land to it to evade payment and defraud creditors, including private respondents. This allegation does not find support in the evidence on record. On the contrary we hold that respondents Court of Appeals committed a reversible error when it upheld the factual finding of the trial court that petitioners liability was aggravated by the fact that Luxuria Homes, Inc., was formed by petitioner Posadas after demand for payment had been made, evidently for her to evade payment of her obligation, thereby showing that the transfer of her property to Luxuria Homes, Inc., was in fraud of creditors. We easily glean from the record that private respondents sent demand letters on 21 August 1991 and 14 September 1991, or more than a year and a half after the execution of the Deed of Assignment on 11 December 1989, and the issuance of the Articles of Incorporation of petitioner Luxuria Homes on 26 January 1990. And, the transfer was made at the time the relationship between petitioner Posadas and private respondents was supposedly very pleasant. In fact the Deed of Assignment dated 11 December 1989 and the Articles of Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were both signed by respondent Bravo himself as witness. It cannot be said then that the incorporation of petitioner Luxuria Homes and the eventual transfer of the subject property to it were in fraud of private respondent as such were done with the full knowledge of respondent Bravo himself. Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes, Inc., as erroneously stated by the lower court. The Articles of Incorporation of petitioner Luxuria Homes, Inc., clearly show that petitioner Posadas owns approximately 33% only of the capital stock. Hence petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria Homes, Inc. To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be presumed. This is elementary. Thus in Bayer-Roxas v. Court of [17] Appeals, we said that the separate personality of the corporation may be disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the protection of the creditors. Accordingly in Del Rosario v. [18] NLRC, where the Philsa International Placement and Services Corp. was organized and registered with the POEA in 1981, several years before the complainant was filed a case in 1985, we held that this cannot imply fraud. Obviously in the instant case, private respondents failed to show proof that petitioner Posadas acted in bad faith. Consequently since private respondents failed to show that petitioner Luxuria Homes, Inc., was a party to any of the supposed transactions, not even to the

agreement to negotiate with and relocate the squatters, it cannot be held liable, nay jointly and in solidum, to pay private respondents. In this case since it was petitioner Aida M. Posadas who contracted respondent Bravo to render the subject services, only she is liable to pay the amounts adjudged herein. We now resolved the third and final issue. Private respondents urge the court to compel petitioners to execute a management contract with them on the basis of the authorization letter dated May 3, 1989. The full text of Exh D reads: I hereby certify that we have duly authorized the bearer, Engineer Bravo to negotiate, in our behalf, the ejectment of squatters from our property of 1.6 hectares, more or less, in Sucat, Muntinlupa. This authority is extended to him as the representatives of the Managers, under our agreement for them to undertake the development of said area and the construction of housing units intended to convert the land into a first class subdivision. The aforecited document is nothing more than a to-whom-itmay-concern authorization letter to negotiate with the squatters. Although it appears that there was an agreement for the development of the area, there is no showing that same was never perfected and finalized. Private respondents presented in evidence only drafts of a proposed management contract with petitioners handwritten marginal notes but the management contract was not put in its final form. The reason why there was no final uncorrected draft was because the parties could not agree on the stipulations of said contract, which even the private respondents admitted as found by the [19] trial court. As a consequence the management drafts submitted by the private respondents should at best be considered as mere unaccepted offers. We find no cogent reason, considering that the parties no longer are in a harmonious relationship, for the execution of a contract to develop a subdivision. It is fundamental that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the parties. To compel petitioner Posadas, whether as representatives of petitioners Luxuria Homes or in her personal capacity, to execute a management contract under the terms and conditions of private respondents would be to violate the principle of consensuality of [20] contracts. In Philippine National bank v. Court of Appeals , we held that if the assent is wanting on the part of one who contracts, his act has no more efficacy than if it had been done under duress or by a person of unsound mind. In ordering petitioner Posadas to execute a management contract with private respondents, the trial court in effect is putting her under duress. The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime prior to the perfection of a contract, unaccepted offers and proposals remain as such and cannot be considered as binding commitments; hence not demandable. WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision dated March 15, 1996, of respondent Honorable Court of Appeals and its Resolution dated August 12, 1996, are MODIFIED ordering PETITIONER AIDA M. POSADAS to pay PRIVATE RESPONDENTS the amount of P435,000.00 as balance for the preparation of the architectural design, site development plan and survey. All other claims of respondents are hereby DENIED for lack of merit. SO ORDERED

19. [G.R. No. 142936. April 17, 2002]

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners, vs. ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent. DECISION PANGANIBAN, J.:

foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to perform the following, to wit (a) Construction of one (1) power house building; Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine generating set[s]; Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets; Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s]; Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided those stated units are completely supplied with their accessories; Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and earth fillings all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as Annex A and made an integral part of this complaint;

Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMILs contractual debts to respondent.

(b)

(c)

(d) Statement of the Case (e)

Before us is a Petition for Review assailing the April 17, 2000 [1] Decision of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal portion of the challenged Decision reads as follows: WHEREFORE, the judgment appealed from is hereby AFFIRMED.
[2]

(f) The Facts

The factual antecedents of the case are summarized by the Court of Appeals as follows: In its complaint, the plaintiff *herein respondent+ alleged that it is a partnership duly organized, existing, and operating under the laws of the Philippines, with office and principal place of business at Nos. 794812 Del Monte [A]venue, Quezon City, while the defendant [herein petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm of nd the PNB, with office and principal place of business at the 2 Floor, Sampaguita Building, Cubao, Quezon City; and the defendant Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier

that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra work, and provide electrical equipment and spare parts, such as: (a) (b) (c) (d) (e) (f) Supply of electrical devices; Extra mechanical works; Extra fabrication works; Supply of materials and consumable items; Electrical shop repair; Supply of parts and related works for turbine generator;

(g) (h)

Supply of electrical equipment for machinery; Supply of diesel engine parts and other related works including fabrication of parts.

that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is appended as Annex C of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment to the plaintiff ofP14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this official th holds office at the 10 Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the plaintiff; that because of the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way of attorneys fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL, jointly and severally to wit: (1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the obligation falls due and demandable; (2) Condemning the defendants to pay attorneys fees amounting to 25% of the amount claim; (3) Ordering the defendants to pay the costs of the suit.

That the complaint does not state a sufficient cause of action against the defendant NASUDECO because: (a) NASUDECO is not x x x privy to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the taking over by NASUDECO of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved in the present case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the problems concerning the same. By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of attorneys fees as well as exemplary damages. In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged services rendered by the plaintiff to the defendant PASUMIL upon which plaintiffs suit is erected, was rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No. 189A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNBs management and operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975, the PNB and the Development Bank of the Philippines (DBP) entered into a Redemption Agreement whereby DBP sold, transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal properties of PASUMIL, as shown in Annex C which is made an integral part of the answer; (6) that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under the above Redemption Agreement. This is shown in Annex D which is also made an integral part of the answer; *7+ that as a consequence of the said Deed of Assignment, PNB on October 21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL, which function was now actually transferred to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate obligations of PASUMIL,

The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214. The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the defendants to file their answer to the complaint within 15 days. In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:

including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to make a study of and submit recommendation on the problems concerning the claims of PASUMIL creditors, under subpar. 5 LOI No. 311. In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is entitled to claim attorneys fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorneys fees, aside from exemplary damages in such amount that the court may seem just and equitable in the premises. Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial Court. After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads: WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly and severally the former the following: 1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25, 1980 until fully paid; 2. The sum of P102,724.76 as attorneys fees; and, 3. Costs. SO ORDERED. Manila, Philippines, September 4, 1986.

In their Memorandum, petitioners raise the following errors for the Courts consideration: I The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a corporation whose corporate existence has not been legally extinguished or terminated, simply because of petitioners*+ takeover of the management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311. II The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific [6] Farms, 15 SCRA 415. Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent.

This Courts Ruling

The Petition is meritorious.

Main Issue: Liability for Corporate Debts

As a general rule, questions of fact may not be raised in a petition [7] for review under Rule 45 of the Rules of Court. To this rule, however, there are some exceptions enumerated in Fuentes v. Court of [8] Appeals. After a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts misappreciated [9] the evidence presented. Overlooked by the CA were certain relevant facts that would justify a conclusion different from that reached in the [10] assailed Decision. Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latters foreclosed assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly and severally held liable for PASUMILs unpaid obligation. As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is [11] fraudulently entered into in order to escape liability for those debts.

Ruling of the Court of Appeals

Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and operate the business of another corporation, while disavowing or [4] repudiating any responsibility, obligation or liability arising therefrom. Hence, this Petition.
[5]

Issues

Piercing the Corporate Veil Not Warranted

separate corporate veil had been used to conceal fraud, illegality or [36] inequity. While we agree with respondents claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily [37] traced to PASUMIL, we are not convinced that the transfer of the latters assets to petitioners was fraudulently entered into in order to [38] escape liability for its debt to respondent. A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest [39] bidder at the public auction conducted. The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20 percent of the total outstanding [40] obligation. Thus, DBP had not only a right, but also a duty under the [41] law to foreclose the subject properties. Pursuant to LOI No. 189-A as amended by LOI No. 311, PNB acquired PASUMILs assets that DBP had foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a [44] subsidiary corporation. PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. [45] 3135. These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption [46] Agreement. PNB, as successor-in-interest, stepped into the shoes of [47] [48] DBP as PASUMILs creditor. By way of a Deed of Assignment, PNB then transferred to NASUDECO all its rights under the Redemption Agreement. In Development Bank of the Philippines v. Court of Appeals, we had the occasion to resolve a similar issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Minings unpaid obligations to Remington Industrial Sales Corporation (Remington) after the two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil. In the instant case, the CA erred in affirming the trial courts [50] lifting of the corporate mask. The CA did not point to any fact [51] evidencing bad faith on the part of PNB and its transferee. The corporate fiction was not used to defeat public convenience, justify a [52] wrong, protect fraud or defend crime. None of the foregoing [53] exceptions was shown to exist in the present case. On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot allow.
[49] [42] [43]

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and [12] properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it, [13] as well as from any other legal entity to which it may be related. This is basic. Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just [14] an alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will [15] justifiably be impaled only when it becomes a shield for fraud, [16] illegality or inequity committed against third persons. Hence, any application of the doctrine of piercing the corporate [17] veil should be done with caution. A court should be mindful of the [18] milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was [19] committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be [20] presumed. Otherwise, an injustice that was never unintended may [21] result from an erroneous application. This Court has pierced the corporate veil to ward off a judgment [22] credit, to avoid inclusion of corporate assets as part of the estate of [23] [24] the decedent, to escape liability arising from a debt, or to [25] perpetuate fraud and/or confuse legitimate issues either to promote [26] or to shield unfair objectives or to cover up an otherwise blatant [27] violation of the prohibition against forum-shopping. Only in these [28] and similar instances may the veil be pierced and disregarded. The question of whether a corporation is a mere alter ego is one [29] of fact. Piercing the veil of corporate fiction may be allowed only if the following elements concur: (1) control -- not mere stock control, but complete domination -- not only of finances, but of policy and business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiffs legal right; and (3) the said control and breach of duty must have proximately [30] caused the injury or unjust loss complained of. We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of [31] corporate personalities. Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or [32] person. Third, respondent was not defrauded or injured when [33] petitioners acquired the assets of PASUMIL. Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence to justify the setting aside of the separate corporate [34] personality rule. However, it utterly failed to discharge this [35] burden; it failed to establish by competent evidence that petitioners

No Merger or Consolidation

Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a corporation. A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on

the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the [54] combined business. The merger, however, does not become effective upon the mere [55] agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express [56] provision of law authorizing them. For a valid merger or consolidation, the approval by the Securities and Exchange Commission [57] (SEC) of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective [58] stockholders of the constituent corporations. In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure [59] prescribed under Title IX of the Corporation Code was not followed. In fact, PASUMILs corporate existence, as correctly found by the [60] CA, had not been legally extinguished or terminated. Further, prior to PNBs acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the formers obligation in the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another P14,000. Neither did petitioner expressly or impliedly agree to assume the [61] debt of PASUMIL to respondent. LOI No. 11 explicitly provides that PNB shall study and submit recommendations on the claims of [62] PASUMILs creditors. Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondents insistence to the [63] contrary. WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs. SO ORDERED.

representing the unpaid balance on the cost of repair of the vehicle; and six thousand pesos (P6,000.00) for cost of suit and attorneys [3] fees. To the original balance on the price of jeep body were added [4] the costs of repair. In their answer, private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the amount of fifty thousand pesos (P50,000) which was not paid by the incorporators, directors and officers of the petitioner. The trial court decided the case on June 26, 1985, in favor of petitioner in regard to the petitioners claim for money, but also allowed the counter-claim of private respondents. Both parties appealed. On April 15, 1991, the [5] Court of Appeals sustained the trial courts decision. Hence, the present petition. For our review in particular is the propriety of the permissive counterclaim which private respondents filed together with their answer to petitioners complaint for a sum of money. Private respondent Gregorio Manuel alleged as an affirmative defense that, while he was petitioners Assistant Legal Officer, he represented members of the Francisco family in the intestate estate proceedings of the late Benita Trinidad. However, even after the termination of the proceedings, his services were not paid. Said family members, he said, were also incorporators, directors and officers of petitioner. Hence to counter petitioners collection suit, he filed a permissive counterclaim [6] for the unpaid attorneys fees. For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score, and evidence exparte was presented on the counterclaim. The trial court ruled in favor of private respondents and found that Gregorio Manuel indeed rendered legal services to the Francisco family in Special Proceedings Number 7803- In the Matter of Intestate Estate of Benita Trinidad. Said court also found that his legal services were not compensated despite repeated demands, and thus ordered petitioner [7] to pay him the amount of fifty thousand (P50,000.00) pesos. Dissatisfied with the trial courts order, petitioner elevated the matter to the Court of Appeals, posing the following issues: I.

18. [G.R. No. 100812. June 25, 1999]

WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE PERSON OF THE DEFENDANT. II. WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES. III.

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents. DECISION QUISUMBING, J.: This petition for review on certiorari, under Rule 45 of the Rules [1] of Court, seeks to annul the decision of the Court of Appeals in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this petition are as follows: On January 23, 1985, petitioner filed a complaint against private respondents to recover three thousand four hundred twelve and six centavos (P3,412.06), representing the balance of the jeep body purchased by the Manuels from petitioner; an additional sum of twenty thousand four hundred fifty-four and eighty centavos (P20,454.80)
[2]

WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF[8] APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly served on it together with the copy of the answer containing the permissive counterclaim. Further, petitioner questions the propriety of its being made party to the case because it was not the real party in interest but

the individual members of the Francisco family concerned with the intestate case. In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must be answered in ten (10) days, pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the Rules that a party still needed to be summoned anew if a counterclaim was set up against him. Failure to serve summons, said respondent court, did not effectively negate trial courts jurisdiction over petitioner in the matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused from answering the counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy of the answer with counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover when petitioners new counsel, Jose N. Aquino, entered his appearance, three (3) days still remained within the period to file an answer to the counterclaim. Having failed to answer, [9] petitioner was correctly considered in default by the trial court. Even assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a motion for reconsideration seeking relief from the said order of default, petitioner [10] was estopped from further questioning the trial courts jurisdiction. On the question of its liability for attorneys fees owing to private respondent Gregorio Manuel, petitioner argued that being a corporation, it should not be held liable therefor because these fees were owed by the incorporators, directors and officers of the corporation in their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis--vis the individual persons who hired the services of private [11] respondent, is separate and distinct, hence, the liability of said individuals did not become an obligation chargeable against petitioner. Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows: However, this distinct and separate personality is merely a fiction created by law for convenience and to promote justice. Accordingly, this separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for found (sic) illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons and the legal fiction of a separate corporate personality is not a shield for the commission of injustice and inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408) In the instant case, evidence shows that the plain tiff-appellant Francisco Motors Corporation is composed of the heirs of the late Benita Trinidad as directors and incorporators for whom defendant Gregorio Manuel rendered legal services in the intestate estate case of their deceased mother. Considering the aforestated principles and circumstances established in this case, equity and justice demands plaintiff-appellants veil of corporate identity should be pierced and the defendant be compensated for legal services rendered to the heirs, [12] who are directors of the plaintiff-appellant corporation. Now before us, petitioner assigns the following errors: I.

THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY. II. THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER PETITIONER WITH RESPECT TO THE [13] COUNTERCLAIM. Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction because the transaction concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad. According to petitioner, there was no cause of action by said respondent against petitioner; personal concerns of the heirs should be distinguished from those involving corporate affairs. Petitioner further contends that the present case does not fall among the instances wherein the courts may look beyond the distinct personality of a corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity, and not involve the [14] corporation. With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the answer containing the permissive counterclaim. It claims that the counterclaim is a separate case which can only be properly served upon the opposing party through summons. Further petitioner states that by nature, a permissive counterclaim is one which does not arise out of nor is necessarily connected with the subject of the opposing partys claim. Petitioner avers that since there was no service of summons upon it with regard to the counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action independent from the answer, according to petitioner, then in effect there should be two simultaneous actions between the same parties: each party is at the same time both plaintiff and defendant [15] with respect to the other, requiring in each case separate summonses. In their Comment, private respondents focus on the two questions raised by petitioner. They defend the propriety of piercing the veil of corporate fiction, but deny the necessity of serving separate summonses on petitioner in regard to their permissive counterclaim contained in the answer. Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was employed as assistant legal officer of petitioner corporation, and that his services were solicited by the incorporators, directors and members to handle and represent them in Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They assert that the members of petitioner corporation took advantage of their positions by not compensating respondent Gregorio Manuel after the termination of the estate proceedings despite his repeated demands for payment of his services. They cite findings of the appellate court that support piercing the veil of corporate identity in this particular case. They assert that the corporate veil may be disregarded when it is used to defeat public convenience, justify wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In

these instances, they aver, the corporation should be treated merely as [16] an association of individual persons. Private respondents dispute petitioners claim that its right to due process was violated when respondents counterclaim was granted due course, although no summons was served upon it. They claim that no provision in the Rules of Court requires service of summons upon a defendant in a counterclaim. Private respondents argue that when the petitioner filed its complaint before the trial court it voluntarily submitted itself to the jurisdiction of the court. As a consequence, the issuance of summons on it was no longer necessary. Private respondents say they served a copy of their answer with affirmative defenses and counterclaim on petitioners former counsel, Nicanor G. Alvarez. While petitioner would have the Court believe that respondents served said copy upon Alvarez after he had withdrawn his appearance as counsel for the petitioner, private respondents assert that this contention is utterly baseless. Records disclose that the answer was received two (2) days before the former counsel for petitioner withdrew his appearance, according to private respondents. They maintain that the present petition is but a form of dilatory appeal, to set off petitioners obligations to the respondents by running up more interest it could recover from them. Private [17] respondents therefore claim damages against petitioner. To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction. Basic in corporation law is the principle that a corporation has a separate personality distinct from its stockholders and from other [18] corporations to which it may be connected. However, under the doctrine of piercing the veil of corporate entity, the corporations separate juridical personality may be disregarded, for example, when the corporate identity is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Also, where the corporation is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation, then its distinct personality may be [19] ignored. In these circumstances, the courts will treat the corporation as a mere aggrupation of persons and the liability will directly attach to them. The legal fiction of a separate corporate personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably set aside. In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant application here. Respondent court erred in permitting the trial courts resort to this doctrine. The rationale behind piercing a corporations identity in a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. Note that according to private respondent Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent them in the intestate proceedings over Benita Trinidads estate. These estate proceedings did not involve any business of petitioner.

Note also that he sought to collect legal fees not just from certain Francisco family members but also from petitioner corporation on the claims that its management had requested his services and he acceded thereto as an employee of petitioner from whom it could be deduced he was also receiving a salary. His move to recover unpaid legal fees through a counterclaim against Francisco Motors Corporation, to offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious misapprehension that petitioners corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators. Such result if permitted could easily prejudice the corporation, its own creditors, and even other stockholders; hence, clearly inequitous to petitioner. Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors and officers of the corporation had incurred, it was incurred in their personal capacity. When directors and officers of a corporation are unable to compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice, and be thereby held liable therefor by piercing its corporate veil. While there are no hard and fast rules on disregarding separate corporate identity, we must always be mindful of its function and purpose. A court should be careful in assessing the milieu where the doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous application. The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to be kept separate in this case. The claim for legal fees against the concerned individual incorporators, officers and directors could not be properly directed against the corporation without violating basic principles governing corporations. Moreover, every action including a counterclaim must be prosecuted or defended in the name of the [20] real party in interest. It is plainly an error to lay the claim for legal fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family. However, with regard to the procedural issue raised by petitioners allegation, that it needed to be summoned anew in order for the court to acquire jurisdiction over it, we agree with respondent courts view to the contrary. Section 4, Rule 11 of the Rules of Court provides that a counterclaim or cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Court says that summons should first be served on the defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the court to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely distinct and independent action, the defendant in the counterclaim, being the plaintiff in the original complaint, has already submitted to the jurisdiction of the court. Following Rule 9, Section 3 of the 1997 Rules [21] of Civil Procedure, if a defendant (herein petitioner) fails to answer the counterclaim, then upon motion of plaintiff, the defendant may be declared in default. This is what happened to petitioner in this case, and this Court finds no procedural error in the disposition of the appellate court on this particular issue. Moreover, as noted by the respondent court, when petitioner filed its motion seeking to set aside the order of default, in effect it submitted itself to the jurisdiction of the court. As well said by respondent court: Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request, plaintiff-appellant was granted time to file a motion for reconsideration of the disputed decision. Plaintiff-appellant did file its motion for reconsideration to

set aside the order of default and the judgment rendered on the counterclaim. Thus, even if the court acquired no jurisdiction over plaintiff -appellant on the counterclaim, as it vigorously insists, plaintiff-appellant is considered to have submitted to the courts jurisdiction when it filed the motion for reconsideration seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily submitting himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA [22] 37). WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only as it held Francisco Motors Corporation liable for the legal obligation owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing the proper suit against the concerned members of the Francisco family in their personal capacity. No pronouncement as to costs. SO ORDERED.

Petitioner Concept Builders, Inc., a domestic corporation, with principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction business. Private respondents were employed by said company as laborers, carpenters and riggers. On November, 1981, private respondents were served individual written notices of termination of employment by petitioner, effective on November 30, 1981. It was stated in the individual notices that their contracts of employment had expired and the project in which they were hired had been completed. Public respondent found it to be, the fact, however, that at the time of the termination of private respondents employment, the project in which they were hired had not yet been finished and completed. Petitioner had to engage the services of sub-contractors whose workers performed the functions of private respondents. Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay, overtime pay and thirteenth-month pay against petitioner. On December 19, 1984, the Labor Arbiter rendered 1 judgment ordering petitioner to reinstate private respondents and to pay them back wages equivalent to one year or three hundred working days. On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for reconsideration filed by petitioner on the ground that the said decision had already become final and 2 executory. On October 16, 1986, the NLRC Research and Information Department made the finding that private respondents backwages 3 amounted to P199,800.00. On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated December 19, 1984. The writ was partially satisfied through garnishment of sums from petitioners debtor, the Metropolitan Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the NLRC. On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from herein petitioner the sum of P117,414.76, representing the balance of the judgment award, and to reinstate private respondents to their former positions. On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security guard on duty but the service was refused on the ground that petitioner no longer occupied the premises. On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of execution. The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated November 2, 1989: 1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent; 2. Levy was made upon personal properties he found in the premises;

17. [G.R. No. 108734. May 29, 1996]

CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben Robalos, respondents. DECISION HERMOSISIMA, JR., J.: The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another corporation. Where badges of fraud exist; where public convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the notion of legal entity should come to naught. The law in these instances will regard the corporation as a mere association of persons and, in case of two corporations, merge them into one. Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for damages, the corporation may not be heard to say that it has a personality separate and distinct from the other corporation. The piercing of the corporate veil comes into play. This special civil action ostensibly raises the question of whether the National Labor Relations Commission committed grave abuse of discretion when it issued a break-open order to the sheriff to be enforced against personal property found in the premises of petitioners sister company.

3. Security guards with high-powered guns prevented him from 4 removing the properties he had levied upon. The said special sheriff recommended that a break-open order be issued to enable him to enter petitioners premises so that he could proceed with the public auction sale of the aforesaid personal properties on November 7, 1989. On November 6, 1989, a certain Dennis Cuyegkeng filed a thirdparty claim with the Labor Arbiter alleging that the properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President. On November 23, 1989, private respondents filed a Motion for Issuance of a Break-Open Order, alleging that HPPI and petitioner corporation were owned by the same incorporator! stockholders. They also alleged that petitioner temporarily suspended its business operations in order to evade its legal obligations to them and that private respondents were willing to post an indemnity bond to answer for any damages which petitioner and HPPI may suffer because of the issuance of the break-open order. In support of their claim against HPPI, private respondents presented duly certified copies of the General Informations Sheet, dated May 15, 1987, submitted by petitioner to the Securities and Exchange Commission (SEC) and the General Information Sheet, dated May 15, 1987, submitted by HPPI to the Securities and Exchange Commission. The General Information Sheet submitted by the petitioner1 revealed the following: 1. Breakdown of Subscribed Capital

3.

Corporate Officers President Assistant to the President Treasurer Corporate Secretary

Antonio W. Lim Dennis S. Cuyegkeng Elisa 0. Lim Virgilio O. Casino 4. Principal Office

355 Maysan Road Valenzuela, Metro Manila.

5

On the other hand, the General Information Sheet of HPPI revealed the following: 1. Breakdown of Subscribed Capital

Name of Stockholder Amount Subscribed Antonio W. Lim Elisa C. Lim AWL Trading Dennis S. Cuyegkeng Teodulo R. Dino Virgilio O. Casino 2. Board of Directors Chairman Member Member Member Member P400,000.00 57,700.00 455,000.00 40,100.00 100.00 100.00

Name of Stockholder Amount Subscribed HPPI Antonio W. Lim Dennis S. Cuyegkeng Elisa C. Lim Teodulo R. Dino Virgilio O. Casino 2. Board of Directors Chairman Member Member Member Member P6,999,500.00 2,900,000.00 300.00 100,000.00 100.00 100.00

Antonio W. Lim Elisa C. Lim Dennis S. Cuyegkeng Virgilio O. Casino Teodulo R. Dino 3. Corporate Officers Antonio W. Lim Dennis S. Cuyegkeng Elisa O. Lim

Antonio W. Lim Dennis S. Cuyegkeng Elisa C. Lim Teodulo R. Dino Virgilio O. Casino

President Assistant to the President Treasurer

Virgilio O. Casino 4. Principal Office

Corporate Secretary

2. 3.

Identity of directors and officers. The manner of keeping corporate books and records. Methods of conducting the business.
13

355 Maysan Road, Valenzuela, Metro Manila.

4.

On February 1, 1990, HPPI filed an Opposition to private respondents motion for issuance of a break-open order, contending that HPPI is a corporation which is separate and distinct from petitioner. HPPI also alleged that the two corporations are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction. On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents motion for break-open order. Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor Arbiter, issued a breakopen order and directed private respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties already levied upon. It dismissed the third-party claim for lack of merit. Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated December 3, 1992. Hence, the resort to the present petition. Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision despite a thirdparty claim on the levied property. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents. It also contends that HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from petitioners construction business. Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same President and the same 7 set of officers and subscribers. We find petitioners contention to be unmeritorious. It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other 8 corporations to which it may be connected. But, this separate and distinct personality of a corporation is merely a fiction created by law 9 for convenience and to promote justice. So, when the notion of separate juridical personality is used to defeat public convenience, justify wrong, protect fraud or defend crime, or is used as a device to 10 defeat the labor laws, this separate personality of the corporation 11 may be disregarded or the veil of corporate fiction pierced. This is true likewise when the corporation is merely an adjunct, a business 12 conduit or an alter ego of another corporation. The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case. No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the application of the doctrine of piercing the corporate veil, to wit: 1. Stock ownership by one or common ownership of both corporations.

The SEC en banc explained the instrumentality rule which the courts have applied in disregarding the separate juridical personality of corporations as follows: Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made. The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; 2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and 3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. The absence of any one of these elements prevents piercing the corporate veil. in applying the instrumentality or alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to 14 that operation. Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one 15 of fact. In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro Manila. Furthermore, the NLRC stated that:

Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of both corporations. It would also not be amiss to note that both corporations had the same president, the same board of directors, the same corporate officers, and substantially the same subscribers. From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of 16 respondents. Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of backwages and to bar their reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid the financial liability that already attached to petitioner corporation. The facts in this case are analogous to Claparols v. Court of 17 Industrial Relations where we had the occasion to rule: Respondent courts findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate, were not disputed by petitioner. it is very clear that the latter corporation was a continuation and successor of the first entity x x x. Both predecessors and successor were owned and controlled by petitioner Eduardo Claparols and there was no break in the succession and continuity of the same business. This avoiding-the-liability scheme is very patent, considering that 90% of the subscribed shares of stock of the Claparols Steel Corporation (the second corporation) was owned by respondent x x x Claparols himself, and all the assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging Claparols Steel Corporation. It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees. In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private respondents had no other recourse but to apply for a break-open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that: Should the losing party, his agent or representative, r efuse or prohibit the Sheriff or his representative entry to the place where the property subject of execution is located or kept, the judgment creditor may apply to the Commission or Labor Arbiter concerned for a break-open order. Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were complied with. Petitioner and the third-party claimant were given the opportunity to submit evidence in support of their claim. Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor Arbiter.

Finally, we do not find any reason to disturb the rule that factual findings of quasi-judicial agencies supported by substantial evidence are binding on this Court and are entitled to great respect, in the 18 absence of showing of grave abuse of a discretion. WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED. SO ORDERED.

21. [G.R. No. 142435. April 30, 2003]

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EXOFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD, respondents. DECISION QUISUMBING, J.: This petition for review on certiorari seeks the reversal of the [1] Decision dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein petitioners appeal from the [2] Decision dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners complaint for annulment of real estate mortgage and the extra-judicial foreclosure thereof. Likewise brought for our [3] review is the Resolution dated February 23, 2000 of the Court of Appeals which denied petitioners motion for reconsideration. The facts, as culled from records, are as follows: Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned Belas Export Trading (BET), a single proprietorship with principal office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and foreign consumption. The Lipats also owned the Mystical Fashions in the United States, which sells goods imported from the Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing Mystical Fashions in the United States. In order to facilitate the convenient operation of BET, Estelita Lipat executed on December 14, 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from respondent Pacific Banking Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as security for the obligations to be extended by Pacific Bank including any extension or renewal thereof. Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank amounting toP583,854.00 to buy fabrics to be manufactured by BET and exported to Mystical Fashions in the United States. As security therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their

property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary, as appears in the [4] accounts, books and records of the Mortgagee. On September 5, 1979, BET was incorporated into a family corporation named Belas Export Corporation (BEC) in order to facilitate the management of the business. BEC was engaged in the business of manufacturing and exportation of all kinds of garments of whatever [5] kind and description and utilized the same machineries and equipment previously used by BET. Its incorporators and directors included the Lipat spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and [6] other close relatives and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-president and general manager. Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained by BEC with the corresponding promissory notes duly executed by Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank for additional finances. These transactions were all secured by the real estate mortgage over the Lipats property. The promissory notes, export bills, and trust receipt eventually became due and demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Banks demand letters, Estelita Lipat went to the office of the banks liquidator and asked for additional time to enable her to personally settle BECs obligations. The bank acceded to her request but Estelita failed to fulfill her promise. Consequently, the real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged property was sold at public auction. On January 31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder. On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint, which was docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they were executed without the requisite board resolution of the Board of Directors of BEC. The Lipats also averred that assuming said acts were valid and binding on BEC, the same were the corporations sole obligation, it having a personality distinct and separate from spouses Lipat. It was likewise pointed out that Teresitas authority to secure a loan from Pacific Bank was specifically limited to Mrs. Lipats sole use and benefit and that the real estate mortgage was executed to secure the Lipats and BETsP583,854.00 loan only. In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments of the value of

the promissory notes, trust receipt, and export bills with their property because they and the BEC are one and the same, the latter being a family corporation. Respondent Trinidad further claimed that he was a buyer in good faith and for value and that petitioners are estopped from denying BECs existence after holding themselves out as a corporation. After trial on the merits, the RTC dismissed the complaint, thus: WHEREFORE, this Court holds that in view of the facts contained in the record, the complaint filed in this case must be, as is hereby, dismissed. Plaintiffs however has five (5) months and seventeen (17) days reckoned from the finality of this decision within which to exercise their right of redemption. The writ of injunction issued is automatically dissolved if no redemption is effected within that period. The counterclaims and cross-claim are likewise dismissed for lack of legal and factual basis. No costs. IT IS SO ORDERED.
[7]

The trial court ruled that there was convincing and conclusive evidence proving that BEC was a family corporation of the Lipats. As such, it was a mere extension of petitioners personality and business and a mere alter ego or business conduit of the Lipats established for their own benefit. Hence, to allow petitioners to invoke the theory of separate corporate personality would sanction its use as a shield to [8] further an end subversive of justice. Thus, the trial court pierced the veil of corporate fiction and held that Belas Export Corporation and petitioners (Lipats) are one and the same. Pacific Bank had transacted business with both BET and BEC on the supposition that both are one and the same. Hence, the Lipats were estopped from disclaiming any obligations on the theory of separate personality of corporations, which is contrary to principles of reason and good faith. The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No. 41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The Court of Appeals found that there was ample evidence on record to support the application of the doctrine of piercing the veil of corporate fiction. In affirming the findings of the RTC, the appellate court noted that Mrs. Lipat had full control over the activities of the corporation and used the same to [9] further her business interests. In fact, she had benefited from the loans obtained by the corporation to finance her business. It also found unnecessary a board resolution authorizing Teresita Lipat to secure loans from Pacific Bank on behalf of BEC because the corporations by-laws allowed such conduct even without a board resolution. Finally, the Court of Appeals ruled that the mortgage property was not only liable for the original loan of P583,854.00 but likewise for the value of the promissory notes, trust receipt, and export bills as the mortgage contract equally applies to additional or new loans, discounting lines, overdrafts, and credit accommodations which petitioners subsequently obtained from Pacific Bank. The Lipats then moved for reconsideration, but this was denied [10] by the appellate court in its Resolution of February 23, 2000. Hence, this petition, with petitioners submitting that the court a quo erred

1) .IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION APPLIES IN THIS CASE. 2) .IN HOLDING THAT PETITIONERS PROPERTY CAN BE HELD LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS OF BELAS EXPORT CORPORATION. 3) .IN HOLDING THAT THE IMPOSITION OF 15% ATTORNEYS FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURTS JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS APPEAL. 4) .IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING TO HIM. 5) .IN DENYING PETITIONERS MOTION FOR RECONSIDERATION AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS AN UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY [11] CONSEQUENCE TO APPELLANTS.

Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded. The control necessary to invoke the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its [13] principal. xxx We find that the evidence on record demolishes, rather than buttresses, petitioners contention that BET and BEC are separate business entities. Note that Estelita Lipat admitted that she and her [14] husband, Alfredo, were the owners of BET and were two of the [15] incorporators and majority stockholders of BEC. It is also undisputed that Estelita Lipat executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and credit lines from Pacific Bank on [16] her behalf. Incidentally, Teresita was designated as executive-vice president and general manager of both BET and BEC, [17] respectively. We note further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET and BEC, [18] respectively; (2) both firms were managed by their daughter, [19] Teresita; (3) both firms were engaged in the garment business, supplying products to Mystical Fashion, a U.S. firm established by Estelita Lipat; (4) both firms held office in the same building owned by [20] the Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the business operations of the BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family [21] members; (9) Estelita had full control over the activities of and [22] decided business matters of the corporation; and that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to finance [23] her business abroad and from the export bills secured by BEC for the [24] account of Mystical Fashion. It could not have been coincidental that BET and BEC are so intertwined with each other in terms of ownership, business purpose, and management. Apparently, BET and BEC are one and the same and the latter is a conduit of and merely succeeded the former. Petitioners attempt to isolate themselves from and hide behind the corporate personality of BEC so as to evade their liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In our view, BEC is a mere continuation and successor of BET, and petitioners cannot evade their obligations in the mortgage contract secured under the name of BEC on the pretext that it was signed for the benefit and under the name of BET. We are thus constrained to rule that the Court of Appeals did not err when it applied the instrumentality doctrine in piercing the corporate veil of BEC. On the second issue, petitioners contend that their mortgaged property should not be made liable for the subsequent credit lines and loans incurred by BEC because, first, it was not covered by the mortgage contract of BET which only covered the loan of P583,854.00 and which allegedly had already been paid; and, second, it was secured by Teresita Lipat without any authorization or board resolution of BEC. We find petitioners contention untenable. As found by the Court of Appeals, the mortgaged property is not limited to answer for the loan of P583,854.00. Thus: Finally, the extent to which the Lipats property can be held liable under the real estate mortgage is not limited to P583,854.00. It can be

In sum, the following are the relevant issues for our resolution: 1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case; 2. Whether or not petitioners' property under the real estate mortgage is liable not only for the amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and export bills subsequently incurred by BEC; and 3. Whether or not petitioners are liable to pay the 15% attorneys fees stipulated in the deed of real estate mortgage. On the first issue, petitioners contend that both the appellate and trial courts erred in holding them liable for the obligations incurred by BEC through the application of the doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on their part. Respondents counter that there is clear and convincing evidence to show fraud on part of petitioners given the findings of the trial court, as affirmed by the Court of Appeals, that BEC was organized as a business conduit for the benefit of petitioners. Petitioners contentions fail to persuade this Court. A careful reading of the judgment of the RTC and the resolution of the appellate court show that in finding petitioners mortgaged property liable for the obligations of BEC, both courts below relied upon the alter ego doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the corporation is the mere alter ego or business conduit of a person, the separate personality of the [12] corporation may be disregarded. This is commonly referred to as the instrumentality rule or the alter egodoctrine, which the courts have applied in disregarding the separate juridical personality of corporations. As held in one case,

held liable for the value of the promissory notes, trust receipt and export bills as well. For the mortgage was executed not only for the purpose of securing the Belas Export Tradings original loan of P583,854.00, but also for other additional or new loans, discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly principal or secondary, as appears in the accounts, books and records [25] of the mortgagee. As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot be reviewed on appeal by the Supreme Court, provided they are borne out by the record or based on [26] substantial evidence. As noted earlier, BEC merely succeeded BET as petitioners alter ego; hence, petitioners mortgaged property must be held liable for the subsequent loans and credit lines of BEC. Further, petitioners contention that the original loan had already been paid, hence, the mortgaged property should not be made liable to the loans of BEC, is unsupported by any substantial evidence other than Estelita Lipats self-serving testimony. Two disputable presumptions under the rules on evidence weigh against petitioners, namely: (a) that [27] a person takes ordinary care of his concerns; and (b) that things have happened according to the ordinary course of nature and the ordinary [28] habits of life. Here, if the original loan had indeed been paid, then logically, petitioners would have asked from Pacific Bank for the required documents evidencing receipt and payment of the loans and, as owners of the mortgaged property, would have immediately asked for the cancellation of the mortgage in the ordinary course of things. However, the records are bereft of any evidence contradicting or overcoming said disputable presumptions. Petitioners contend further that the mortgaged property should not bind the loans and credit lines obtained by BEC as they were secured without any proper authorization or board resolution. They also blame the bank for its laxity and complacency in not requiring a board resolution as a requisite for approving the loans. Such contentions deserve scant consideration. Firstly, it could not have been possible for BEC to release a board resolution since per admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners rebuttal witness, no business or stockholders meetings were conducted nor were there election of officers held since its incorporation. In fact, not a single board resolution was passed by [29] the corporate board and it was Estelita Lipat and/or Teresita Lipat [30] who decided business matters. Secondly, the principle of estoppel precludes petitioners from denying the validity of the transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and BEC. While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is lodged in its board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers to officers, committees, or agents. The authority of such

individuals to bind the corporation is generally derived from law, corporate by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of [31] business. Apparent authority, is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or [32] beyond the scope of his ordinary powers. In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding business matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were for the [33] benefit of Mystical Fashion owned by Estel ita Lipat. Hence, Pacific Bank cannot be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped [34] from denying the agents authority. We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity of the real estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans obtained using the same mortgage contract since it is, by its very terms, a continuing mortgage contract. On the third and final issue, petitioners assail the decision of the Court of Appeals for not taking cognizance of the issue on attorneys fees on the ground that it was raised for the first time on appeal. We find the conclusion of the Court of Appeals to be in accord with settled jurisprudence. Basic is the rule that matters not raised in the complaint [35] cannot be raised for the first time on appeal. A close perusal of the complaint yields no allegations disputing the attorneys fees imposed under the real estate mortgage and petitioners cannot now allege that they have impliedly disputed the same when they sought the annulment of the contract. In sum, we find no reversible error of law committed by the Court of Appeals in rendering the decision and resolution herein assailed by petitioners. WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs against petitioners. SO ORDERED.

22. G.R. No. 136448. November 3, 1999]

LIM TONG LIM, petitioner, vs. PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

DECISION PANGANIBAN, J.: A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract.

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale); e. Cost of suit. With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount of P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of defendants. From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats. Considering, however, that the total judgment obligation as computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the defendants who are not entitled to damages and who did not put up a single centavo to raise the amount of P900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason, the defendants are hereby relieved from any and all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court. SO ORDERED.
[3]

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of Appeals in CA-GR CV [1] 41477, which disposed as follows: WHEREFORE, *there being+ no reversible error in the appealed [2] decision, the same is hereby affirmed. The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as follows: WHEREFORE, the Court rules: 1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990; 2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter made by reason of the special and unique facts and circumstances and the proceedings that transpired during the trial of this case; a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement; b. 12% interest per annum counted from date of plaintiffs invoices and computed on their respective amounts as follows:

The Facts

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990; ii. Accrued interest of P27,904.02 on for P146,868.00 dated February 13, 1990; Invoice No. 14413 On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted toP532,045. Four hundred pieces of floats [4] worth P68,000 were also sold to the Corporation. The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent filed a collection suit against Chua,

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990; c. P50,000.00 as and for attorneys representing P500.00 per appearance in court; fees, plus P8,500.00

Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation as shown by a Certification [5] from the Securities and Exchange Commission. On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila. Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of [6] Attachment. The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and [7] deposited with the said court the sales proceeds of P900,000. On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were [8] jointly liable to pay respondent. The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses presented and (2) [9] on a Compromise Agreement executed by the three in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of [10] ownership of fishing boats; (d) an injunction and (e) damages. The Compromise Agreement provided: a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim; b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao; c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; [11] 1/3 Peter Yao. The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability could be [12] presumed from the equal distribution of the profit and loss. Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC. Ruling of the Court of Appeals In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may thus be held

liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The appellate court ruled: The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a partnership for a specific undertaking, that is for commercial fishing x x x. Obviously, the ultimate undertaking of the defendants was to divide the profits among themselves which is what a partnership essentially is x x x. By a contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves (Article 1767, New [13] Civil Code). Hence, petitioner brought this recourse before this Court.
[14]

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds: I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM. II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL. III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIMS GOODS. In determining whether petitioner may be held liable for the fishing nets and floats purchased from respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

This Courts Ruling

The Petition is devoid of merit.

First and Second Issues: Existence of a Partnership and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the respondent company. Petitioner further argues that he was a

lessor, not a partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership -- the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat. We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides: Article 1767 - By the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Specifically, both lower courts ruled that a partnership among the [15] three existed based on the following factual findings: (1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while Antonio Chua was already Yaos partner; (2) That after convening for a few times, Lim Chua, and Yao verbally agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million; (3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture. (4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus Lim; (5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry docking and other expenses for the boats would be shouldered by Chua and Yao; (6) That because of the unavailability of funds, Jesus Lim again extended a loan to the partnership in the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership papers of two other boats, Chuas FB Lady Anne Mel and Yaos FB Tracy to Lim Tong Lim. (7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported business name. (8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages. (9) That the case was amicably settled through a Compromise Agreement executed between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioners brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term common fund under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership. Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded. Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the proceeds from the sales and operations thereof would be divided among them. We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present action is embraced by one of the [16] exceptions to the rule. In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement Not the Sole Basis of Partnership

Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership was the Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment of the relationship extant among the parties prior to its execution. A proper adjudication of claimants rights mandates that courts must review and thoroughly appraise all relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored all the possible consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts factual findings mentioned above nullified petitioners argument that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner, Not a Lessor

We are not convinced by petitioners argument that he was merely the lessor of the boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found. His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among all three. Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim. We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts [17] entered into or for other acts performed as such agent. The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits. On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of. There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The only question [18] here is whether petitioner should be held jointly liable with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he cannot be held liable. Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel. It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners. Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We [19] reiterate the ruling of the Court in Alonso v. Villamor: A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position , entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him. Again, we disagree. Section 21 of the Corporation Code of the Philippines provides: Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality. One who assumes an obligation to an ostensible corporation as s uch, cannot resist performance thereof on the ground that there was in fact no corporation. Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. The reason behind this doctrine is obvious - an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself

Third Issue: Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats were specifically manufactured and tailor-made according to their own design, and were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full payment thereof. WHEREFORE, the Petition is DENIED and Decision AFFIRMED. Costs against petitioner. SO ORDERED. 23. G.R. No. L-2598 June 29, 1950 the assailed

the Court of First Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber and Commercial Co. was an unregistered partnership; that they wished to have it dissolved because of bitter dissension among the members, mismanagement and fraud by the managers and heavy financial losses. (5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of action. (6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; and at the request of plaintiffs, appointed of the properties thereof, upon the filing of a P20,000 bond. (7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the receiver, but the respondent judge refused to accept the offer and to discharge the receiver. Whereupon, the present special civil action was instituted in this court. It is based upon two main propositions, to wit: (a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, because it being ade facto corporation, dissolution thereof may only be ordered in a quo warranto proceeding instituted in accordance with section 19 of the Corporation Law. (b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation but only a partnership. Discussion: The second proposition may at once be dismissed. All the parties are informed that the Securities and Exchange Commission has not, so far, issued the corresponding certificate of incorporation. All of them know, or sought to know, that the personality of a corporation begins to exist only from the moment such certificate is issued not before (sec. 11, Corporation Law). The complaining associates have not represented to the others that they were incorporated any more than the latter had made similar representations to them. And as nobody was led to believe anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is not an instance requiring the enforcement of contracts with the corporation through the rule of estoppel. The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern Lumber and Commercial Co., is a de facto corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction to take cognizance of said civil case number 381. Section 19 reads as follows: . . . The due incorporation of any corporations claiming in good faith to be a corporation under this Act and its right to exercise corporate powers shall not be inquired into collaterally in any private suit to which the corporation may be a party, but such inquiry may be had at the suit of the Insular Government on information of the Attorney-General. There are least two reasons why this section does not govern the situation. Not having obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co. even its stockholders may not probably claim "in good faith" to be a corporation.

C. ARNOLD HALL and BRADLEY P. HALL, petitioners, vs. EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc.,respondents. Claro M. Recto for Ramon Diokno and Jose W. Diokno for respondents. BENGZON, J.: This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instance of Leyte and to enjoin the respondent judge from further acting upon the same. Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized to engage in a general lumber business to carry on as general contractors, operators and managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with certain properties transferred to the corporation described in a list appended thereto. (2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do business with the adoption of by-laws and the election of its officers. (3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities and Exchange Commissioner, for the issuance of the corresponding certificate of incorporation. (4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmental office, the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before petitioners.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate of incorporation by the Director of the Bureau of Commerce and Industry which calls a corporation into being. The immunity if collateral attack is granted to corporations "claiming in good faith to be a corporation under this act." Such a claim is compatible with the existence of errors and irregularities; but not with a total or substantial disregard of the law. Unless there has been an evident attempt to comply with the law the claim to be a corporation "under this act" could not be made "in good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.) Second, this is not a suit in which the corporation is a party. This is a litigation between stockholders of the alleged corporation, for the purpose of obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a private suit for its dissolution between stockholders, without the intervention of the state. There might be room for argument on the right of minority 1 stockholders to sue for dissolution; but that question does not affect the court's jurisdiction, and is a matter for decision by the judge, subject to review on appeal. Whkch brings us to one principal reason why this petition may not prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the proper time. There is a secondary issue in connection with the appointment of a receiver. But it must be admitted that receivership is proper in proceedings for dissolution of a company or corporation, and it was no error to reject the counter-bond, the court having declared the dissolution. As to the amount of the bond to be demanded of the receiver, much depends upon the discretion of the trial court, which in this instance we do not believe has been clearly abused. Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofore issued will be dissolved.

and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in September of 1989, in the total amount of [2] P176,467.50. On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the amount of [3] P265,894.33. On 30 October 1989, the Federation, through the [4] Project Gintong Alay, paid the amount of P31,603.00. On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of [5] the Federation. Thereafter, no further payments were made despite repeated demands. This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the [6] said obligation. Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of action against him either in his personal capacity or in his official capacity as president of the Federation. He maintained that he did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical [7] personality. On the other hand, the Federation failed to file its answer, hence, [8] was declared in default by the trial court. In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized: Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate existence is within the personal knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not. xxx

24. G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents. DECISION KAPUNAN, J.: On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services [1] as a travel agency to the latter. The offer was accepted. Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves personally liable. xxx
[9]

The dispositive portion of the trial court's decision reads: WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees. The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the defendant Henri Kahn are hereby dismissed. With the costs against defendant Henri Kahn.
[10]

BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION. C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION. The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which said Federation derives its existence. As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14 of R.A. 3135 provides: SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and duties: 1. To adopt a constitution and by-laws for their internal organization and government; 2. To raise funds by donations, benefits, and other means for their purposes. 3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose; 4. To affiliate with international or regional sports' Associations after due consultation with the executive committee; xxx 13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not inconsistent with this Act. Section 8 of P.D. 604, grants similar functions to these sports associations: SEC. 8. Functions, Powers, and Duties of National Sports Association. The National sports associations shall have the following functions, powers, and duties: 1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to the Department and any amendment thereto shall take effect upon approval by the Department: Provided,however, That no team, school, club, organization, or entity shall be admitted as a voting member of an association unless 60 per cent of the athletes composing said team, school, club, organization, or entity are Filipino citizens;

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads: WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another one is rendered [11] dismissing the complaint against defendant Henri S. Kahn. In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable for the same as said entity has a separate and distinct personality from its officers. Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that: As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating the due process clause, let alone the fact that the judgment dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to appeal [12] therefrom. The alternative prayer is therefore similarly DENIED. Petitioner now seeks recourse to this Court and alleges that the [13] respondent court committed the following assigned errors: A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY. B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the Department; 3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their purpose; 4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the promotion of their sport; 5. Affiliate with international or regional sports associations after due consultation with the Department; xxx 13. Perform such other functions as may be provided by law. The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with juridical capacity. However, while we agree with the appellate court that national sports associations may be accorded corporate status, such does not automatically take place by the mere passage of these laws. It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135 provides: SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall be filed with the executive committee together with, among others, a copy of the constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten pesos. The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the purposes of this Act and particularly section three thereof. No application shall be held pending for more than three months after the filing thereof without any action having been taken thereon by the executive committee. Should the application be rejected, the reasons for such rejection shall be clearly stated in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application which shall be considered as unacted upon: Provided, however, That until the executive committee herein provided shall have been formed, applications for recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon the organization of the executive committee herein provided: Provided, further, That the functioning executive committee

is charged with the responsibility of seeing to it that the National Sports' Associations are formed and organized within six months from and after the passage of this Act. Section 7 of P.D. 604, similarly provides: SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports association for each individual sport in the Philippines shall be filed with the Department together with, among others, a copy of the Constitution and By-Laws and a list of the members of the proposed association. The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized will promote the objectives of this Decree and has substantially complied with the rules and regulations of the Department: Provided, That the Department may withdraw accreditation or recognition for violation of this Decree and such rules and regulations formulated by it. The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical control over the development and promotion of the particular sport for which they are organized. Clearly the above cited provisions require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and bylaws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own. Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts [14] performed as such agent. As president of the Federation, Henri Kahn is presumed to have known about the corporate existence or nonexistence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its [15] existence. The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant [16] ground of defective incorporation. In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.

WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED. SO ORDERED. 25. G.R. No. L-12719 May 31, 1962 REVENUE, petitioner,

Surcharge therein As fixed tax for the years 1946 to 1952 Compromise penalty

2,399.77 70.00 500.00

THE COLLECTOR OF INTERNAL vs. THE CLUB FILIPINO, INC. DE CEBU, respondent. Office of the Solicitor General V. Jaime and L. E. Petilla for respondent. PAREDES, J.:

The Club wrote the Collector, requesting for the cancellation of the assessment. The request having been denied, the Club filed the instant petition for review. The dominant issues involved in this case are twofold:

for

petitioner. 1. Whether the respondent Club is liable for the payment of the sum of 12,068.84, as fixed and percentage taxes and surcharges prescribed in sections 182, 183 and 191 of the Tax Code, under which the assessment was made, in connection with the operation of its bar and restaurant, during the periods mentioned above; and 2. Whether it is liable for the payment of the sum of P500.00 as compromise penalty. Section 182, of the Tax Code states, "Unless otherwise provided, every person engaging in a business on which the percentage tax is imposed shall pay in full a fixed annual tax of ten pesos for each calendar year or fraction thereof in which such person shall engage in said business." Section 183 provides in general that "the percentage taxes on business shall be payable at the end of each calendar quarter in the amount lawfully due on the business transacted during each quarter; etc." And section 191, same Tax Code, provides "Percentage tax . . . Keepers of restaurants, refreshment parlors and other eating places shall pay a tax three per centum, and keepers of bar and cafes where wines or liquors are served five per centum of their gross receipts . . .". It has been held that the liability for fixed and percentage taxes, as provided by these sections, does not ipso facto attach by mere reason of the operation of a bar and restaurant. For the liability to attach, the operator thereof must be engaged in the business as a barkeeper and restaurateur. The plain and ordinary meaning of business is restricted to activities or affairs where profit is the purpose or livelihood is the motive, and the term business when used without qualification, should be construed in its plain and ordinary meaning, restricted to activities for profit or livelihood (The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, giving full definitions of the word "business"; Coll. of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960). Having found as a fact that the Club was organized to develop and cultivate sports of all class and denomination, for the healthful recreation and entertainment of its stockholders and members; that upon its dissolution, its remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu; that it is operated mainly with funds derived from membership fees and dues; that the Club's bar and restaurant catered only to its members and their guests; that there was in fact no cash dividend distribution to its stockholders and that whatever was derived on retail from its bar and restaurant was used to defray its overall overhead expenses and to improve its golf-course (cost-plus-expenses-basis), it stands to reason that the Club is not engaged in the business of an operator of bar and restaurant (same authorities, cited above).

This is a petition to review the decision of the Court of Tax Appeals, reversing the decision of the Collector of Internal Revenue, assessing against and demanding from the "Club Filipino, Inc. de Cebu", the sum of P12,068.84 as fixed and percentage taxes, surcharge and compromise penalty, allegedly due from it as a keeper of bar and restaurant. As found by the Court of Tax Appeals, the "Club Filipino, Inc. de Cebu," (Club, for short), is a civic corporation organized under the laws of the Philippines with an original authorized capital stock of P22,000.00, which was subsequently increased to P200,000.00, among others, to it "proporcionar, operar, y mantener un campo de golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling alleys), mesas de billar y pool, y toda clase de juegos no prohibidos por leyes generales y ordenanzas generales; y desarollar y cultivar deportes de toda clase y denominacion cualquiera para el recreo y entrenamiento saludable de sus miembros y accionistas" (sec. 2, Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in the articles or by-laws is there a provision relative to dividends and their distribution, although it is covenanted that upon its dissolution, the Club's remaining assets, after paying debts, shall be donated to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del Club, Exh. A-a.). The Club owns and operates a club house, a bowling alley, a golf course (on a lot leased from the government), and a bar-restaurant where it sells wines and liquors, soft drinks, meals and short orders to its members and their guests. The bar-restaurant was a necessary incident to the operation of the club and its golf-course. The club is operated mainly with funds derived from membership fees and dues. Whatever profits it had, were used to defray its overhead expenses and to improve its golf-course. In 1951. as a result of a capital surplus, arising from the re-valuation of its real properties, the value or price of which increased, the Club declared stock dividends; but no actual cash dividends were distributed to the stockholders. In 1952, a BIR agent discovered that the Club has never paid percentage tax on the gross receipts of its bar and restaurant, although it secured B-4, B-9(a) and B7 licenses. In a letter dated December 22, 1852, the Collector of Internal Revenue assessed against and demanded from the Club, the following sums: As percentage tax on its gross receipts during the tax years 1946 to 1951

P9,599.07

It is conceded that the Club derived profit from the operation of its bar and restaurant, but such fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to the primary object of developing and cultivating sports for the healthful recreation and entertainment of the stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v. Collector of Int. Rev., G.R. No. L6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1wph1.t It is claimed that unlike the two cases just cited (supra), which are nonstock, the appellee Club is a stock corporation. This is unmeritorious. The facts that the capital stock of the respondent Club is divided into shares, does not detract from the finding of the trial court that it is not engaged in the business of operator of bar and restaurant. What is determinative of whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws. It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not engaged in the business as a barkeeper and restaurateur. Moreover, for a stock corporation to exist, two requisites must be complied with, to wit: (1) a capital stock divided into shares and (2) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of the shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of incorporation or by-laws could be found an authority for the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock corporation, within the contemplation of the corporation law. A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit, nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club, et al., supra), which is not the case in the present appeal. Having arrived at the conclusion that respondent Club is not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty. WHEREFORE, the decision appealed from is affirmed without costs. 26. G.R. No. 79182 September 11, 1991 PNOC-ENERGY DEVELOPMENT CORPORATION, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION (Third Division) and DANILO MERCADO, respondents. Bacorro & Associates for petitioner. Alberto L. Dalmacion for private respondent.

PARAS, J.:p This is a petition for certiorari to set aside the Resolution * dated July 3, 1987 of respondent National Labor Relations Commission (NLRC for brevity) which affirmed the decision dated April 30, 1986 of Labor Arbiter Vito J. Minoria of the NLRC, Regional Arbitration Branch No. VII at Cebu City in Case No. RAB-VII-0556-85 entitled "Danilo Mercado, Complainant, vs. Philippine National Oil Company-Energy Development Corporation, Respondent", ordering the reinstatement of complainant Danilo Mercado and the award of various monetary claims. The factual background of this case is as follows: Private respondent Danilo Mercado was first employed by herein petitioner Philippine National Oil Company-Energy Development Corporation (PNOC-EDC for brevity) on August 13, 1979. He held various positions ranging from clerk, general clerk to shipping clerk during his employment at its Cebu office until his transfer to its establishment at Palimpinon, Dumaguete, Oriental Negros on September 5, 1984. On June 30, 1985, private respondent Mercado was dismissed. His last salary was P1,585.00 a month basic pay plus P800.00 living allowance (Labor Arbiter's Decision, Annex "E" of Petition, Rollo, p. 52). The grounds for the dismissal of Mercado are allegedly serious acts of dishonesty committed as follows: 1. On ApriI 12, 1985, Danilo Mercado was ordered to purchase 1,400 pieces of nipa shingles from Mrs. Leonardo Nodado of Banilad, Dumaguete City, for the total purchase price of Pl,680.00. Against company policy, regulations and specific orders, Danilo Mercado withdrew the nipa shingles from the supplier but paid the amount of P1,000.00 only. Danilo Mercado appropriated the balance of P680.00 for his personal use; 2. In the same transaction stated above, the supplier agreed to give the company a discount of P70.00 which Danilo Mercado did not report to the company; 3. On March 28, 1985, Danilo Mercado was instructed to contract the services of Fred R. Melon of Dumaguete City, for the fabrication of rubber stamps, for the total amount of P28.66. Danilo Mercado paid the amount of P20.00 to Fred R. Melon and appropriated for his personal use the balance of P8.66. In addition, private respondent, Danilo Mercado violated company rules and regulations in the following instances: 1. On June 5, 1985, Danilo Mercado was absent from work without leave, without proper turn-over

of his work, causing disruption and delay of company work activities; 2. On June 15, 1985, Danilo Mercado went on vacation leave without prior leave, against company policy, rules and regulations. (Petitioner's Memorandum, Rollo, p. 195). On September 23, 1985, private respondent Mercado filed a complaint for illegal dismissal, retirement benefits, separation pay, unpaid wages, etc. against petitioner PNOC-EDC before the NLRC Regional Arbitration Branch No. VII docketed as Case No. RAB-VII-0556-85. After private respondent Mercado filed his position paper on December 16, 1985 (Annex "B" of the Petition, Rollo, pp. 28-40), petitioner PNOCEDC filed its Position Paper/Motion to Dismiss on January 15, 1986, praying for the dismissal of the case on the ground that the Labor Arbiter and/or the NLRC had no jurisdiction over the case (Annex "C" of the Petition, Rollo, pp. 41-45), which was assailed by private respondent Mercado in his Opposition to the Position Paper/Motion to Dismiss dated March 12, 1986 (Annex "D" of the Petition, Rollo, pp. 4650). The Labor Arbiter ruled in favor of private respondent Mercado. The dispositive onion of said decision reads as follows: WHEREFORE, in view of the foregoing, respondents are hereby ordered: 1) To reinstate complainant to his former position with full back wages from the date of his dismissal up to the time of his actual reinstatement without loss of seniority rights and other privileges; 2) To pay complainant the amount of P10,000.00 representing his personal share of his savings account with the respondents; 3) To pay complainants the amount of P30,000.00 moral damages; P20,000.00 exemplary damages and P5,000.00 attorney's fees; 4) To pay complainant the amount of P792.50 as his proportionate 13th month pay for 1985. Respondents are hereby further ordered to deposit the aforementioned amounts with this Office within ten days from receipt of a copy of this decision for further disposition. SO (Labor Arbiter's Decision, Rollo, p. 56) ORDERED.

The issues raised by petitioner in this instant petition are: 1. Whether or not matters of employment affecting the PNOC-EDC, a government-owned and controlled corporation, are within the jurisdiction of the Labor Arbiter and the NLRC. 2. Assuming the affirmative, whether or not the Labor Arbiter and the NLRC are justified in ordering the reinstatement of private respondent, payment of his savings, and proportionate 13th month pay and payment of damages as well as attorney's fee. Petitioner PNOC-EDC alleges that it is a corporation wholly owned and controlled by the government; that the Energy Development Corporation is a subsidiary of the Philippine National Oil Company which is a government entity created under Presidential Decree No. 334, as amended; that being a government-owned and controlled corporation, it is governed by the Civil Service Law as provided for in Section 1, Article XII-B of the 1973 Constitution, Section 56 of Presidential Decree No. 807 (Civil Service Decree) and Article 277 of Presidential Decree No. 442, as amended (Labor Code). The 1973 Constitution provides: The Civil Service embraces every branch, agency, subdivision and instrumentality of the government including government-owned or controlled corporations. Petitioner PNOC-EDC argued that since Labor Arbiter Minoria rendered the decision at the time when the 1973 Constitution was in force, said decision is null and void because under the 1973 Constitution, government-owned and controlled corporations were governed by the Civil Service Law. Even assuming that PNOC-EDC has no original or special charter and Section 2(i), Article IX-B of the 1987 Constitution provides that: The Civil Service embraces all branches, subdivision, instrumentalities and agencies of the Government, including government-owned or controlled corporations with original charters. such circumstances cannot give validity to the decision of the Labor Arbiter (Ibid., pp. 192-193). This issue has already been laid to rest in the case of PNOC-EDC vs. Leogardo, 175 SCRA 26 (July 5, 1989), involving the same petitioner and the same issue, where this Court ruled that the doctrine that employees of government-owned and/or con controlled corporations, whether created by special law or formed as subsidiaries under the General Corporation law are governed by the Civil Service Law and not by the Labor Code, has been supplanted by the present Constitution. "Thus, under the present state of the law, the test in determining whether a government-owned or controlled corporation is subject to the Civil Service Law are the manner of its creation, such that government corporations created by special charter are subject to its provisions while those incorporated under the General Corporation Law are not within its coverage."

The appeal to the NLRC was dismissed for lack of merit on July 3, 1987 and the assailed decision was affirmed. Hence, this petition.

Specifically, the PNOC-EDC having been incorporated under the General Corporation Law was held to be a government owned or controlled corporation whose employees are subject to the provisions of the Labor Code (Ibid.). The fact that the case arose at the time when the 1973 Constitution was still in effect, does not deprive the NLRC of jurisdiction on the premise that it is the 1987 Constitution that governs because it is the Constitution in place at the time of the decision (NASECO v. NLRC, G.R. No. 69870, 168 SCRA 122 [1988]). In the case at bar, the decision of the NLRC was promulgated on July 3, 1987. Accordingly, this case falls squarely under the rulings of the aforementioned cases. As regards the second issue, the record shows that PNOC-EDC's accusations of dishonesty and violations of company rules are not supported by evidence. Nonetheless, while acknowledging the rule that administrative bodies are not governed by the strict rules of evidence, petitioner PNOC-EDC alleges that the labor arbiter's propensity to decide the case through the position papers submitted by the parties is violative of due process thereby rendering the decision null and void (Ibid., p. 196). On the other hand, private respondent contends that as can be seen from petitioner's Motion for Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 57- 64), the latter never questioned the findings of facts of the Labor Arbiter but simply limited its objection to the lack of legal basis in view of its stand that the NLRC had no jurisdiction over the case (Private Respondent's Memorandum, Rollo, p. 104). Petitioner PNOC-EDC filed its Position Paper/Motion to Dismiss dated January 15, 1986 (Annex "C" of the Petition Rollo, pp. 41-45) before the Regional Arbitration Branch No. VII of Cebu City and its Motion for Reconsideration and/or Appeal dated July 28, 1986 (Annex "F" of the Petition, Rollo, pp. 57-64) before the NLRC of Cebu City. Indisputably, the requirements of due process are satisfied when the parties are given an opportunity to submit position papers. What the fundamental law abhors is not the absence of previous notice but rather the absolute lack of opportunity to ventilate a party's side. There is no denial of due process where the party submitted its position paper and flied its motion for reconsideration (Odin Security Agency vs. De la Serna, 182 SCRA 472 [February 21, 1990]). Petitioner's subsequent Motion for Reconsideration and/or Appeal has the effect of curing whatever irregularity might have been committed in the proceedings below (T.H. Valderama and Sons, Inc. vs. Drilon, 181 SCRA 308 [January 22, 1990]). Furthermore, it has been consistently held that findings of administrative agencies which have acquired expertise because their jurisdiction is confined to specific matters are accorded not only respect but even finality (Asian Construction and Development Corporation vs. NLRC, 187 SCRA 784 [July 27, 1990]; Lopez Sugar Corporation vs. Federation of Free Workers, 189 SCRA 179 [August 30, 1990]). Judicial review by this Court does not go so far as to evaluate the sufficiency of the evidence but is limited to issues of jurisdiction or grave abuse of discretion (Filipinas Manufacturers Bank vs. NLRC, 182 SCRA 848 [February 28, 1990]). A careful study of the records shows no substantive reason to depart from these established principles.

While it is true that loss of trust or breach of confidence is a valid ground for dismissing an employee, such loss or breach of trust must have some basis (Gubac v. NLRC, 187 SCRA 412 [July 13, 1990]). As found by the Labor Arbiter, the accusations of petitioner PNOC-EDC against private respondent Mercado have no basis. Mrs. Leonardo Nodado, from whom the nipa shingles were purchased, sufficiently explained in her affidavit (Rollo, p. 36) that the total purchase price of P1,680.00 was paid by respondent Mercado as agreed upon. The alleged discount given by Mrs. Nodado is not supported by evidence as well as the alleged appropriation of P8.66 from the cost of fabrication of rubber stamps. The Labor Arbiter, likewise, found no evidence to support the alleged violation of company rules. On the contrary, he found respondent Mercado's explanation in his affidavit (Rollo, pp. 3840) as to the alleged violations to be satisfactory. Moreover, these findings were never contradicted by petitioner petitioner PNOC-EDC. PREMISES CONSIDERED, the petition is DENIED and the resolution of respondent NLRC dated July 3, 1987 is AFFIRMED with the modification that the moral damages are reduced to Ten Thousand (P10,000.00) Pesos, and the exemplary damages reduced to Five Thousand (P5,000.00) Pesos. SO ORDERED. 27. G.R. No. L-22619 December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee, vs. THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant. JOHNSON, J.: This action was brought in the Court of First Instance of the City of Manila on the 17th day of July, 1923, for the purpose of recovering the sum of P12,044.68, alleged to have been paid under protest by the plaintiff company to the defendant, as specific tax on 24,089.3 tons of coal. Said company is a corporation created by Act No. 2705 of the Philippine Legislature for the purpose of developing the coal industry in the Philippine Islands and is actually engaged in coal mining on reserved lands belonging to the Government. It claimed exemption from taxes under the provision of sections 14 and 15 of Act No. 2719, and prayed for a judgment ordering the defendant to refund to the plaintiff said sum of P12,044.68, with legal interest from the date of the presentation of the complaint, and costs against the defendant. The defendant answered denying generally and specifically all the material allegations of the complaint, except the legal existence and personality of the plaintiff. As a special defense, the defendant alleged (a) that the sum of P12,044.68 was paid by the plaintiff without protests, and (b) that said sum was due and owing from the plaintiff to the Government of the Philippine Islands under the provisions of section 1496 of the Administrative Code and prayed that the complaint be dismissed, with costs against the plaintiff. Upon the issue thus presented, the case was brought on for trial. After a consideration of the evidence adduced by both parties, the Honorable Pedro Conception, judge, held that the words "lands owned by any person, etc.," in section 15 of Act No. 2719 should be understood to mean "lands held in lease or usufruct," in harmony with the other provision of said Act; that the coal lands possessed by

the plaintiff, belonging to the Government, fell within the provisions of section 15 of Act No. 2719; and that a tax of P0.04 per ton of 1,016 kilos on each ton of coal extracted therefrom, as provided in said section, was the only tax which should be collected from the plaintiff; and sentenced the defendant to refund to the plaintiff the sum of P11,081.11 which is the difference between the amount collected under section 1496 of the Administrative Code and the amount which should have been collected under the provisions of said section 15 of Act No. 2719. From that sentence the defendant appealed, and now makes the following assignments of error: I. The court below erred in holding that section 15 of Act No. 2719 does not refer to coal lands owned by persons and corporations. II. The court below erred in holding that the plaintiff was not subject to the tax prescribed in section 1496 of the Administrative Code. The question confronting us in this appeal is whether the plaintiff is subject to the taxes under section 15 of Act No. 2719, or to the specific taxes under section 1496 of the Administrative Code. The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for the purpose of developing the coal industry in the Philippine Island, in harmony with the general plan of the Government to encourage the development of the natural resources of the country, and to provided facilities therefor. By said Act, the company was granted the general powers of a corporation "and such other powers as may be necessary to enable it to prosecute the business of developing coal deposits in the Philippine Island and of mining, extracting, transporting and selling the coal contained in said deposits." (Sec. 2, Act No. 2705.) By the same law (Act No. 2705) the Government of the Philippine Islands is made the majority stockholder, evidently in order to insure proper government supervision and control, and thus to place the Government in a position to render all possible encouragement, assistance and help in the prosecution and furtherance of the company's business. On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal Company, the Philippine Legislature passed Act No. 2719 "to provide for the leasing and development of coal lands in the Philippine Islands." On October 18, 1917, upon petition of the National Coal Company, the Governor-General, by Proclamation No. 39, withdrew "from settlement, entry, sale or other disposition, all coalbearing public lands within the Province of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of Tayabas." Almost immediately after the issuance of said proclamation the National Coal Company took possession of the coal lands within the said reservation, with an area of about 400 hectares, without any further formality, contract or lease. Of the 30,000 shares of stock issued by the company, the Government of the Philippine Islands is the owner of 29,809 shares, that is, of 99 1/3 per centum of the whole capital stock. If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the land from which it has mined the coal in question and is therefore subject to the provisions of section 15 of Act No. 2719 and not to the provisions of the section 1496 of the Administrative Code. That contention of the plaintiff leads us to an examination of the evidence upon the question of the ownership of the land from which the coal in question was mined. Was the plaintiff the

owner of the land from which the coal in question was mined? If the evidence shows the affirmative, then the judgment should be affirmed. If the evidence shows that the land does not belong to the plaintiff, then the judgment should be reversed, unless the plaintiff's rights fall under section 3 of said Act. The only witness presented by the plaintiff upon the question of the ownership of the land in question was Mr. Dalmacio Costas, who stated that he was a member of the board of directors of the plaintiff corporation; that the plaintiff corporation took possession of the land in question by virtue of the proclamation of the Governor-General, known as Proclamation No. 39 of the year 1917; that no document had been issued in favor of the plaintiff corporation; that said corporation had received no permission from the Secretary of Agriculture and Natural Resources; that it took possession of said lands covering an area of about 400 hectares, from which the coal in question was mined, solely, by virtue of said proclamation (Exhibit B, No. 39). Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then Governor-General, on the 18th day of October, 1917, and provided: "Pursuant to the provision of section 71 of Act No. 926, I hereby withdraw from settlement, entry, sale, or other disposition, all coal-bearing public lands within the Province of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of Tayabas." It will be noted that said proclamation only provided that all coal-bearing public lands within said province and island should be withdrawn from settlement, entry, sale, or other disposition. There is nothing in said proclamation which authorizes the plaintiff or any other person to enter upon said reversations and to mine coal, and no provision of law has been called to our attention, by virtue of which the plaintiff was entitled to enter upon any of the lands so reserved by said proclamation without first obtaining permission therefor. The plaintiff is a private corporation. The mere fact that the Government happens to the majority stockholder does not make it a public corporation. Act No. 2705, as amended by Act No. 2822, makes it subject to all of the provisions of the Corporation Law, in so far as they are not inconsistent with said Act (No. 2705). No provisions of Act No. 2705 are found to be inconsistent with the provisions of the Corporation Law. As a private corporation, it has no greater rights, powers or privileges than any other corporation which might be organized for the same purpose under the Corporation Law, and certainly it was not the intention of the Legislature to give it a preference or right or privilege over other legitimate private corporations in the mining of coal. While it is true that said proclamation No. 39 withdrew "from settlement, entry, sale, or other disposition of coal-bearing public lands within the Province of Zamboanga . . . and the Island of Polillo," it made no provision for the occupation and operation by the plaintiff, to the exclusion of other persons or corporations who might, under proper permission, enter upon the operate coal mines. On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature of the Philippine Island in "an Act for the leasing and development of coal lands in the Philippine Islands" (Act No. 2719), made liberal provision. Section 1 of said Act provides: "Coalbearing lands of the public domain in the Philippine Island shall not be disposed of in any manner except as provided in this Act," thereby giving a clear indication that no "coal-bearing lands of the public domain" had been disposed of by virtue of said proclamation.

Neither is there any provision in Act No. 2705 creating the National Coal Company, nor in the amendments thereof found in Act No. 2822, which authorizes the National Coal Company to enter upon any of the reserved coal lands without first having obtained permission from the Secretary of Agriculture and Natural Resources.lawphi1.net The following propositions are fully sustained by the facts and the law: (1) The National Coal Company is an ordinary private corporation organized under Act No. 2705, and has no greater powers nor privileges than the ordinary private corporation, except those mentioned, perhaps, in section 10 of Act No. 2719, and they do not change the situation here. (2) It mined on public lands between the month of July, 1920, and the months of March, 1922, 24,089.3 tons of coal. (3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as taxes under the provisions of article 1946 of the Administrative Code on the 15th day of December, 1922. (4) It is admitted that it is neither the owner nor the lessee of the lands upon which said coal was mined. (5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of October, 1917, by authority of section 1 of Act No. 926, withdrawing from settlement, entry, sale, or other dispositon all coalbearing public lands within the Province of Zamboanga and the Island of Polillo, was not a reservation for the benefit of the National Coal Company, but for any person or corporation of the Philippine Islands or of the United States. (6) That the National Coal Company entered upon said land and mined said coal, so far as the record shows, without any lease or other authority from either the Secretary of Agriculture and Natural Resources or any person having the power to grant a leave or authority. From all of the foregoing facts we find that the issue is well defined between the plaintiff and the defendant. The plaintiff contends that it was liable only to pay the internal revenue and other fees and taxes provided for under section 15 of Act No. 2719; while the defendant contends, under the facts of record, the plaintiff is obliged to pay the internal revenue duty provided for in section 1496 of the Administrative Code. That being the issue, an examination of the provisions of Act No. 2719 becomes necessary. An examination of said Act (No. 2719) discloses the following facts important for consideration here: First. All "coal-bearing lands of the public domain in the Philippine Islands shall not be disposed of in any manner except as provided in this Act." Second. Provisions for leasing by the Secretary of Agriculture and Natural Resources of "unreserved, unappropriated coal-bearing public lands," and the obligation to the Government which shall be imposed by said Secretary upon the lessee.lawphi1.net Third. The internal revenue duty and tax which must be paid upon coalbearing lands owned by any person, firm, association or corporation.

To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax upon unreserved, unappropriated coal-bearing public lands which may be leased by the Secretary of Agriculture and Natural Resources; and, second, that said Act (No. 2719) provides an internal revenue duty and tax imposed upon any person, firm, association or corporation, who may be the owner of "coal-bearing lands." A reading of said Act clearly shows that the tax imposed thereby is imposed upon two classes of persons only lessees and owners. The lower court had some trouble in determining what was the correct interpretation of section 15 of said Act, by reason of what he believed to be some difference in the interpretation of the language used in Spanish and English. While there is some ground for confusion in the use of the language in Spanish and English, we are persuaded, considering all the provisions of said Act, that said section 15 has reference only to persons, firms, associations or corporations which had already, prior to the existence of said Act, become the owners of coal lands. Section 15 cannot certainty refer to "holders or lessees of coal lands' for the reason that practically all of the other provisions of said Act has reference to lessees or holders. If section 15 means that the persons, firms, associations, or corporation mentioned therein are holders or lessees of coal lands only, it is difficult to understand why the internal revenue duty and tax in said section was made different from the obligations mentioned in section 3 of said Act, imposed upon lessees or holders. From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor an owner of coal-bearing lands, and is, therefore, not subject to any other provisions of Act No. 2719. But, is the plaintiff subject to the provisions of section 1496 of the Administrative Code? Section 1496 of the Administrative Code provides that "on all coal and coke there shall be collected, per metric ton, fifty centavos." Said section (1496) is a part of article, 6 which provides for specific taxes. Said article provides for a specific internal revenue tax upon all things manufactured or produced in the Philippine Islands for domestic sale or consumption, and upon things imported from the United States or foreign countries. It having been demonstrated that the plaintiff has produced coal in the Philippine Islands and is not a lessee or owner of the land from which the coal was produced, we are clearly of the opinion, and so hold, that it is subject to pay the internal revenue tax under the provisions of section 1496 of the Administrative Code, and is not subject to the payment of the internal revenue tax under section 15 of Act No. 2719, nor to any other provisions of said Act. Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby relieved from all responsibility under the complaint. And, without any finding as to costs, it is so ordered.