Mercantile Law

REPUBLIC OF THE PHILIPPINES v. SANDIGANBAYAN et al. 402 SCRA 84(2003), EN BANC (Carpio Morales, J.) The PCGG cannot vote sequestered shares to elect the ETPI Board of Directors or to amend the Articles of Incorporation for the purpose of increasing the authorized capital stock unless there is a prima facie evidence showing that said shares are ill-gotten and there is an imminent danger of dissipation. Two sets of board and officers of Eastern Telecommunications, Philippines, Inc. (ETPI) were elected, one by the Presidential Commission on Good Government (PCGG) and the other by the registered ETPI stockholders. Victor Africa, a stockholder of ETPI filed a petition for Certiorari before the Sandiganbayan alleging that the PCGG had been "illegally exercising the rights of stockholders of ETPI," in the election of the members of the board of directors. The Sandiganbayan ruled that only the registered owners, their duly authorized representatives or their proxies may vote their corresponding shares. The PCGG filed a petition for certiorari, mandamus and prohibition before the Court which was granted. The Court referred the PCGG's petition to hold the special stockholders' meeting to the Sandiganbayan for reception of evidence and resolution. The Sandiganbayan granted the PCGG "authority to cause the holding of a special stockholders' meeting of ETPI and held that there was an urgent necessity to increase ETPI's authorized capital stock; there existed a prima facie factual foundation for the issuance of the writ of sequestration covering the Class "A" shares of stock; and the PCGG was entitled to vote the sequestered shares of stock. The PCGG-controlled ETPI board of directors held a meeting and the increase in ETPI's authorized capital stock from P250 Million to P2.6 Billion was "unanimously approved. Africa filed a motion to nullify the stockholders meeting, contending that only the Court, and not the Sandiganbayan, has the power to authorize the PCGG to call a stockholders meeting and vote the sequestered shares. The Sandiganbayan denied the motions for reconsideration of prompting Africa to file before the Court a second petition, challenging the Sandiganbayan Resolutions authorizing the holding of a stockholders meeting and the one denying the motion for reconsideration. ISSUES: 1. Whether or not the Sandiganbayan gravely abused its discretion in ordering the holding of a stockholders meeting to elect the ETPI board of directors without first setting in place, through the amendment of the articles of incorporation and the by-laws of ETPI 2. Whether the PCGG can vote the sequestered ETPI Class "A" shares in the stockholders meeting for the election of the board of directors HELD:

First Issue
On the PCGG's imputation of grave abuse of discretion upon the Sandiganbayan for ordering the holding of a stockholders meeting to elect the ETPI board of directors without first setting in place, through the amendment of the articles of incorporation and the by-laws of ETPI, the safeguards prescribed in Cojuangco, Jr. v. Roxas. The Court laid down those safeguards because of the obvious need

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to reconcile the rights of the stockholder whose shares have been sequestered and the duty of the conservator to preserve what could be ill-gotten wealth. There is nothing in the Cojuangco case that would suggest that the above measures should be incorporated in the articles and by-laws before a stockholders meeting for the election of the board of directors is held. The PCGG nonetheless insists that those measures should be written in the articles and by-laws before such meeting, "otherwise, the {Marcos] cronies will elect themselves or their representatives, control the corporation, and for an appreciable period of time, have every opportunity to disburse funds, destroy or alter corporate records, and dissipate assets." That could be a possibility, but the peculiar circumstances of the case require that the election of the board of directors first be held before the articles of incorporation are amended. Section 16 of the Corporation Code requires the majority vote of the board of directors to amend the articles of incorporation. At the time Africa filed his motion for the holding of the annual stockholders meeting, there were two sets of ETPI directors, one controlled by the PCGG and the other by the registered stockholders. Which of them is the legitimate board of directors? Which of them may rightfully vote to amend the articles of incorporation and integrate the safeguards laid down in Cojuangco? It is essential, therefore, to cure the aberration of two boards of directors sitting in a single corporation before the articles of incorporation are amended to set in place the Cojuangco safeguards. The danger of the so-called Marcos cronies taking control of the corporation and dissipating its assets is, of course, a legitimate concern of the PCGG, charged as it is with the duties of a conservator. Nevertheless, such danger may be averted by the "substantially contemporaneous" amendment of the articles after the election of the board.

Second Issue:
The principle laid down in Baseco vs. PCGG was further enhanced in the subsequent cases of Cojuangco v. Calpo and Presidential Commission on Good Government v. Cojuangco, Jr., where the Court developed a "two-tiered" test in determining whether the PCGG may vote sequestered shares. The issue of whether PCGG may vote the sequestered shares in SMC necessitates a determination of at least two factual matters: a.) whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong to the state; and b.) whether there is an immediate danger of dissipation thus necessitating their continued sequestration and voting by the PCGG while the main issue pends with the Sandiganbayan. The two-tiered test, however, does not apply in cases involving funds of "public character." In such cases, the government is granted the authority to vote said shares, namely: (1) Where government shares are taken over by private persons or entities who/which registered them in their own names, and (2) Where the capitalization or shares that were acquired with public funds somehow landed in private hands. In short, when sequestered shares registered in the names of private individuals or entities are alleged to have been acquired with ill-gotten wealth, then the two-tiered test is applied. However, when the sequestered shares in the name of private individuals or entities are shown, prima facie, to have been (1) originally government shares, or (2) purchased with public funds or those affected with public interest, then the two-tiered test does not apply. The rule in the jurisdiction is, therefore, clear. The PCGG cannot perform acts of strict ownership of sequestered property. It is a mere conservator. It may not vote the shares in a corporation and elect members of the board of directors. The only conceivable exception is in a case of a takeover of

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a business belonging to the government or whose capitalization comes from public funds, but which landed in private hands as in BASECO. In short, the Sandiganbayan held that the public character exception does not apply, in which case it should have proceeded to apply the two-tiered test. This it failed to do. The questions thus remain if there is prima facie evidence showing that the subject shares are illgotten and if there is imminent danger of dissipation. The Court is not, however, a trier of facts, hence, it is not in a position to rule on the correctness of the PCGG's contention. Consequently, the issue must be remanded to the Sandiganbayan for resolution.

CENTRAL BANK OF THE PHILIPPINES v. CITYTRUST BANKING CORPORATION 578 SCRA 27 (2009), SECOND DIVISION (Carpio Morales, J.) If the plaintiffs negligence was only contributory, the immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. The Citytrust Banking Corporation (Citytrust) gave Central Bank of the Philippines a list of signatures of five of its officers authorized to sign checks and serve as drawers and indorsers for its account, and also the list of the roving tellers authorized to perform other transactions on its behalf, one of whom was Rounceval Flores (Flores). Flores presented two checks to the Central Banks Senior Teller Iluminada dela Cruz (Dela Cruz) and was subsequently approved. Dela Cruz prepared the cash transfer slip where Flores should sign but instead he sign as one Rosauro C. Cayabyab. This fact was missed by Dela Cruz. It was given to Cash Department and the signatures were examined and later on paid Flores for the checks. After one year and nine months, the Citytrust demanded that the checks be cancelled and the funds taken out be returned because the check was stolen before. Central Bank did not heed such call. Citytrust filed a complaint to collect the sum of money with damages against Central Bank to the Regional Trial Court (RTC). RTC found both parties negligent and held them equally liable for the loss. Court of Appeals affirmed the decision. ISSUE: Whether or not Citytrust can collect sum of money as damages from the Central Bank HELD: The law imposes on banks high standards in view of the fiduciary nature of banking. Section 2 of Republic Act No. 8791 (R.A. 8791), which took effect on 13 June 2000, declares that the State recognizes the fiduciary nature of banking that requires high standards of integrity and performance. This fiduciary relationship means that the banks obligation to observe high standards of integrity and performance is deemed written into every deposit agreement between a bank and its depositor. The fiduciary nature of banking requires banks to assume a degree of diligence higher than

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that of a good father of a family. Article 1172 of the Civil Code states that the degree of diligence required of an obligor is that prescribed by law or contract, and absent such stipulation then the diligence of a good father of a family. Section 2 of R.A. 8791 prescribes the statutory diligence required from banks that banks must observe high standards of integrity and performance in servicing their depositors. Citytrusts failure to timely examine its account, cancel the checks and notify petitioner of their alleged loss/theft should mitigate petitioners liability, in accordance wi th Article 2179 of the Civil Code which provides that if the plaintiffs negligence was only contributory, the immediate and proximate cause of the injury being the defendants lack of due care, the plaintiff may recover damages, but the courts shall mitigate the damages to be awarded. SMITH KLINE BECKMAN CORPORATION v. COURT OF APPEALS, et al. 409 SCRA 33 (2003), THIRD DIVISION (Carpio Morales, J.) When the language of its claims is clear and distinct, the patentee is bound thereby and may not claim anything beyond them. Petitioner Smith Kline Beckman Corporation (SKBC) was granted by the Philippine Patent Office Letters Patent No. 14561 over an invented compound entitled Methods and Compositions for Producing Biphasic Parasiticide Activity Using Methyl 5 Propylthio-2-Benzimidazole Carbamate. Such compound is claimed to be an active ingredient in fighting various parasites in certain types of domestic and livestock animals. Respondent Tryco Pharma (Tryco) sells veterinary products including a drug Impregon which contains Albendazole as an active ingredient which fights against parasites in animals. Petitioner SKBC then filed an action against respondent Tryco for patent infringement claiming that the patent granted to them includes said Albendazole. In their defense respondent Tryco alleges that Letters Patent No. 14561 granted to petitioner SKBC does not include Albendazole for nowhere is such word found in the patent. The Trial Court rendered its decision in favor of respondent Tryco which was affirmed by the Court of Appeals. Issues: Whether or not the Court of Appeals erred in not finding that Albendazole is included in petitioners Letter Pattent No. 14561

Held: From an examination of the evidence on record, the Court finds nothing infirm in the appellate courts conclusions with respect to the principal issue of whether Tycho Pharma committed patent infringement to the prejudice of SKBC.

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The burden of proof to substantiate a charge for patent infringement rests on the plaintiff. In the case at bar, petitioners evidence consists primarily of its Letters Patent No. 14561, and the testimony of Dr. Orinion, its general manager in the Philippines for its Animal Health Products Division, by which it sought to show that its patent for the compound methyl 5 propylthio-2benzimidazole carbamate also covers the substance Albendazole. From a reading of the 9 claims of Letters Patent No. 14561 in relation to the other portions thereof, no mention is made of the compound Albendazole. When the language of its claims is clear and distinct, the patentee is bound thereby and may not claim anything beyond them. And so are the courts bound which may not add to or detract from the claims matters not expressed or necessarily implied, nor may they enlarge the patent beyond the scope of that which the inventor claimed and the patent office allowed, even if the patentee may have been entitled to something more than the words it had chosen would include. It bears stressing that the mere absence of the word Albendazole in Letters Patent No. 14561 is not determinative of Albendazoles non-inclusion in the claims of the patent. While Albendazole is admittedly a chemical compound that exists by a name different from that covered in SKBCs letters patent, the language of Letter Patent No. 14561 fails to yield anything at all regarding Albendazole. And no extrinsic evidence had been adduced to prove that Albendazole inheres in SKBCs patent in spite of its omission therefrom or that the meaning of the claims of the patent embraces the same. While SKBC concedes that the mere literal wordings of its patent cannot establish Tyco Pharmas infringement, it urges the Court to apply the doctrine of equivalents. The doctrine of equivalents provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. Yet again, a scrutiny of SKBCs evidence fails to convince the Court of the substantial sameness of SKBCs patented compound and Albendazole. While both compounds have the effect of neutralizing parasites in animals, identity of result does not amount to infringement of patent unless Albendazole operates in substantially the same way or by substantially the same means as the patented compound, even though it performs the same function and achieves the same result. In other words, the principle or mode of operation must be the same or substantially the same. The doctrine of equivalents thus requires satisfaction of the function-means-and-result test, the patentee having the burden to show that all three components of such equivalency test are met.

WESTMONT BANK v. INLAND CONSTRUCTION AND DEVELOPMENT CORP. 582 SCRA 230 (2009), SECOND DIVISION (Carpio Morales, J.) If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officers authority.

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Respondent Inland Construction and Development Corp. (Inland) obtained various loans from petitioner Westmont Bank (Westmont). To secure the payment of its obligations, Inland executed Real Estate Mortgages over three real properties and issued promissory notes in favor of the bank. By a Deed of Assignment, Conveyance and Release, one Felix Aranda, assigned and conveyed all his rights and interests at Hanil-Gonzales Construction & Development Phils. Corporation (HGCDP) in favor of Horacio Abrante. Under the same Deed, it appears that HGCDP assumed the obligations of Inland. Westmonts Account Officer, Lionel Calo, Jr. (Calo), signed for its conformity to the deed. Inland was subsequently served with a Notice of Sheriffs Sale foreclosing the real estate mortgages over its real properties prompting it to file a complaint for injunction against the Westmont. In its answer, Westmont underscored that it had no knowledge, much less did it give its conformity to the alleged assignment of the obligation. The trial court found that Westmont ratified the act of Calo. It accordingly rendered judgment in favor of Inland. On appeal, the appellate court affirmed the trial courts decision insofar as it finds Westmont to have ratified the Deed of Assignment. ISSUE: Whether or not Westmont Bank ratified the Deed of Assignment HELD: The general rule remains that, in the absence of authority from the board of directors, no person, not even its officers, can validly bind a corporation. If a corporation, however, consciously lets one of its officers, or any other agent, to act within the scope of an apparent authority, it will be estopped from denying such officers authority. The records show that Calo was the one assigned to transact on petitioners behalf respecting the loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and Abrantes. Since it conducted business through Calo, who is an Account Officer, it is presumed that he had authority to sign for the bank in the Deed of Assignment. Unmistakably, the Courts directive in Yao Ka Sin Trading is that a corporation should first prove by clear evidence that its corporate officer is not in fact authorized to act on its behalf before the burden of evidence shifts to the other party to prove, by previous specific acts, that an officer was clothed by the corporation with apparent authority. In the present petitions, Westmont Bank failed to discharge its primary burden of proving that Calo was not authorized to bind it, as it did not present proof that Calo was unauthorized. It did not present, much less cite, any Resolution from its Board of Directors or its Charter or By-laws from which the Court could reasonably infer that he indeed had no authority to sign in its behalf or bind it in the Deed of Assignment. PHILIPPINE COMMERCIAL AND INTERNATIONAL BANK (now BANCO DE ORO-EPCI, INC.) v. DENNIS CUSTODIO, et al. 545 SCRA 367 (2008), SECOND DIVISION (Carpio Morales, J.) A corporation has personality separate and district from those who compose it.

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Rolando Francisco (Francisco) and his wife, on behalf of Traders Group Corporation (ROL-ED), entered into a Foreign Bills Purchase Line Agreement (FBPLA) with the PCIB-Greenhills bank to which Spouses Francisco deposited four dollar checks. The checks were cleared and paid by Chase Manhattan Bank but they were subsequently dishonored for insufficient funds. Chase Manhattan Bank thus debited the amount of the dishonored checks from the account of PCIB-Greenhills which it maintained with it. Having received notice of the debiting from its account, PCIB-Greenhills in turn debited from Franciscos joint account the partial payment of the dishonored checks. In the meantime, Wilfredo Gliane remitted US$42,300 to the above-said joint account of Francisco at the PCIB-Greenhills but it was no longer feasible as the amount had already been applied as partial payment of Franciscos outstanding obligation with PCIB-Greenhills. A complaint against PCIB and Francisco for specific performance and damages was subsequently filed before the Regional Trial Court (RTC) of Makati to recover the remittance. The RTC held PCIB solely liable to pay the sum of US$42,300 and decreed that PCIB had the right of reimbursement of the amount from Francisco. On appeal, the Court of Appeals freed PCIB from liability and ruled that Francisco is solely liable thereof. Hence, this petition. Francisco contends that he has a separate personality from ROL-ED. ISSUE: Whether or not the separate and distinct legal personality of Francisco from ROL-ED be considered in determining his liability HELD: While Francisco claims that the loan in question was that of ROL-ED and not his, he, as earlier stated, deposited the US$651,000 checks in his joint account with Erlinda and not in the account of ROL-ED. At all events, while a corporation is clothed with a personality separate and distinct from the persons composing it, the veil of separate corporate personality may be lifted when it is used as a shield to confuse legitimate issues, or where lifting the veil is necessary to achieve equity or for the protection of the creditors. In the case at bar, there can be no mistake that Francisco belatedly invoked the separate identity of ROL-ED to evade his liability to PCIB.

REPUBLIC OF THE PHILIPPINES v. INSTITUTE FOR SOCIAL CONCERN, et al. 449 SCRA 512 (2005), THIRD DIVISION (Carpio Morales, J.) The veil of corporate fiction may be disregarded only upon showing that it is used to perpetrate fraud. On September 28, 1989, the Government of the Republic of the Philippines, through the Office of the President (the Republic), and the respondent Institute for Social Concern (ISC), represented by its

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Executive Director Ramon Garcia, entered into a Memorandum of Agreement (MOA) wherein ISC, for a consideration of P8,488,880.00, undertook to construct 45 one storey two-classroom school buildings in the Cordillera Autonomous Region, Region 2 and Region 5. It was made clear in the MOA that ISC would deliver those two buildings within 90 days from the release of funds and should it fail to comply therewith, petitioner may exact liquidated damages equivalent to 0.1% of the total amount for each day of delay. ISC failed to comply with its obligation, it having been found that the construction of school buildings was lagging behind the schedule. Even after the full payment to respondent and amendment of the MOA, ISC failed to honor its commitment, pushing the Republic to file a complaint for damages against ISC et al. ISC and Suzara failed to show up at the pre-trial and were thus declared in default. They appealed the decision and cited some errors one of which was the issue of the case. ISC wanted to include both the chairman and executive board of the ISC, Suzara and Garcia, respectively, as joint and solidarily liable as well. The trial court arrived at the conclusion that petition to include Suzara, together with Garcia as jointly and solidarily liable with ISC must be dismissed for lack of merit. On appeal, the Court of Appeals affirmed the dismissal. Hence, this petition. ISSUE: Whether or not the Court of Appeals is correct in not applying the Doctrine of Piercing the Veil of Corporate Entity HELD: To infer from the above-specified documents, as what the Republic did in its brief before the appellate and this Court, that Suzara being then Chairman of ISC "clearly assented to a patently unlawful act" by agreeing "to divert the funds intended for the construction of 45 school buildings" is a non sequitor. Parenthetically, the allegation of fraud involving Suzara in the complaint was one arising from misrepresentation of financial capability and technical expertise and experience to construct the school buildings, not from "diversion." In fine, the participation, if any, by Suzara in the alleged diversion is not unexplainable. Unfortunately, he was declared as in default. At all events, it is speculatory. As such, fraud as the Republics basis in urging the piercing the veil of corporate fiction does not lie. The Supreme Court would not also hold Suzara personally liable for, as correctly found by the appellate court which cited Tramat Mercantile, Inc. v. CA enumerating instances when personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may, as a rule, attach, none of those or of analogous instances is present in Suzaras case. RYUICHI YAMAMOTO v. NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO 551 SCRA 447 (2008), SECOND DIVISION (Carpio Morales, J.)

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To disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in contravention of a plaintiff's legal rights must be clearly and convincingly established. Also, without acceptance, a mere offer produces no obligation. Ryuichi Yamamoto and Ikuo Nishino agreed to enter into a joint venture wherein Nishino would acquire such number of shares of stock equivalent to 70% of the authorized capital stock of the corporation. However, Nishino and his brother Yoshinobu Nishino acquired more than 70% of the authorized capital stock. Negotiations subsequently ensued in light of a planned takeover by Nishino who would buy-out the shares of stock of Yamamoto who was advised through a letter that he may take all the equipment/ machinery he had contributed to the company (for his own use and sale) provided that the value of such machines is deducted from the capital contributions which will be paid to him. However, the letter requested that he give his comments on all the above, soonest. On the basis of the said letter, Yamamoto attempted to recover the machineries but Nishino hindered him to do so, drawing him to file a Writ of Replevin. The Trial Court issued the writ. However, on appeal, Nishino claimed that the properties being recovered were owned by the corporation and the above-said letter was a mere proposal which was not yet authorized by the Board of Directors. Thus, the Court of Appeals reversed the trial courts decision despite Yamamotos contention tha t the company is merely an instrumentality of the Nishinos. ISSUE: Whether or not Yamamoto can recover the properties he contributed to the company in view of the Doctrine of Piercing the Veil of Corporate Fiction and Doctrine of Promissory Estoppel HELD: . One of the elements determinative of the applicability of the doctrine of piercing the veil of corporate fiction is that 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 the plaintiff's legal rights. To disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in contravention of a plaintiff's legal rights must be clearly and convincingly established; it cannot be presumed. Without a demonstration that any of the evils sought to be prevented by the doctrine is present, it does not apply. Estoppel may arise from the making of a promise. However, it bears noting that the letter was followed by a request for Yamamoto to give his "comments on all the above, soonest." What was thus proffered to Yamamoto was not a promise, but a mere offer, subject to his acceptance. Without acceptance, a mere offer produces no obligation. Thus, the machineries and equipment, which comprised Yamamoto's investment, remained part of the capital property of the corporation.

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