G.R. No.

L-23145

November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administratorappellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.
Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.
FERNANDO, J.:
Confronted by an obstinate and adamant refusal of the domiciliary administrator, the County Trust Company of New
York, United States of America, of the estate of the deceased Idonah Slade Perkins, who died in New York City on
March 27, 1960, to surrender to the ancillary administrator in the Philippines the stock certificates owned by her in a
Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate claims of local creditors, the lower court,
then presided by the Honorable Arsenio Santos, now retired, issued on May 18, 1964, an order of this tenor: "After
considering the motion of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by the
Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in connection with the
administration and liquidation of the Philippine estate of Idonah Slade Perkins the stock certificates covering the
33,002 shares of stock standing in her name in the books of the Benguet Consolidated, Inc., (2) orders said
certificates cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the same to be delivered
1
by said corporation to either the incumbent ancillary administrator or to the Probate Division of this Court."
From such an order, an appeal was taken to this Court not by the domiciliary administrator, the County Trust
Company of New York, but by the Philippine corporation, the Benguet Consolidated, Inc. The appeal cannot possibly
prosper. The challenged order represents a response and expresses a policy, to paraphrase Frankfurter, arising out of
a specific problem, addressed to the attainment of specific ends by the use of specific remedies, with full and ample
support from legal doctrines of weight and significance.
The facts will explain why. As set forth in the brief of appellant Benguet Consolidated, Inc., Idonah Slade Perkins, who
died on March 27, 1960 in New York City, left among others, two stock certificates covering 33,002 shares of
appellant, the certificates being in the possession of the County Trust Company of New York, which as noted, is the
2
domiciliary administrator of the estate of the deceased. Then came this portion of the appellant's brief: "On August
12, 1960, Prospero Sanidad instituted ancillary administration proceedings in the Court of First Instance of Manila;
Lazaro A. Marquez was appointed ancillary administrator, and on January 22, 1963, he was substituted by the
appellee Renato D. Tayag. A dispute arose between the domiciary administrator in New York and the ancillary
administrator in the Philippines as to which of them was entitled to the possession of the stock certificates in question.
On January 27, 1964, the Court of First Instance of Manila ordered the domiciliary administrator, County Trust
Company, to "produce and deposit" them with the ancillary administrator or with the Clerk of Court. The domiciliary
administrator did not comply with the order, and on February 11, 1964, the ancillary administrator petitioned the court
to "issue an order declaring the certificate or certificates of stocks covering the 33,002 shares issued in the name of
3
Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or] considered as lost."
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is immaterial" as far as it is concerned
as to "who is entitled to the possession of the stock certificates in question; appellant opposed the petition of the
ancillary administrator because the said stock certificates are in existence, they are today in the possession of the
4
domiciliary administrator, the County Trust Company, in New York, U.S.A...."
It is its view, therefore, that under the circumstances, the stock certificates cannot be declared or considered as lost.
Moreover, it would allege that there was a failure to observe certain requirements of its by-laws before new stock
certificates could be issued. Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The challenged order constitutes an emphatic
affirmation of judicial authority sought to be emasculated by the wilful conduct of the domiciliary administrator in
refusing to accord obedience to a court decree. How, then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response was called for by the realities of the situation.
What cannot be ignored is that conduct bordering on wilful defiance, if it had not actually reached it, cannot without
undue loss of judicial prestige, be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness
as to preclude such a solution, the more so as deeper reflection would make clear its being buttressed by indisputable
principles and supported by the strongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated the honor of the judiciary no less than that of
the country. Through this challenged order, there is thus dispelled the atmosphere of contingent frustration brought
about by the persistence of the domiciliary administrator to hold on to the stock certificates after it had, as admitted,
voluntarily submitted itself to the jurisdiction of the lower court by entering its appearance through counsel on June 27,
1963, and filing a petition for relief from a previous order of March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to what was decreed. For
without it, what it had been decided would be set at naught and nullified. Unless such a blatant disregard by the
domiciliary administrator, with residence abroad, of what was previously ordained by a court order could be thus
remedied, it would have entailed, insofar as this matter was concerned, not a partial but a well-nigh complete paralysis
of judicial authority.
1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee ancillary administrator to gain
control and possession of all assets of the decedent within the jurisdiction of the Philippines. Nor could it. Such a
5
power is inherent in his duty to settle her estate and satisfy the claims of local creditors. As Justice Tuason speaking
for this Court made clear, it is a "general rule universally recognized" that administration, whether principal or ancillary,
certainly "extends to the assets of a decedent found within the state or country where it was granted," the corollary
being "that an administrator appointed in one state or country has no power over property in another state or
6
country."
It is to be noted that the scope of the power of the ancillary administrator was, in an earlier case, set forth by Justice
Malcolm. Thus: "It is often necessary to have more than one administration of an estate. When a person dies intestate
owning property in the country of his domicile as well as in a foreign country, administration is had in both countries.
That which is granted in the jurisdiction of decedent's last domicile is termed the principal administration, while any
other administration is termed the ancillary administration. The reason for the latter is because a grant of
administration does not ex proprio vigore have any effect beyond the limits of the country in which it is granted. Hence,
an administrator appointed in a foreign state has no authority in the [Philippines]. The ancillary administration is
proper, whenever a person dies, leaving in a country other than that of his last domicile, property to be administered in
7
the nature of assets of the deceased liable for his individual debts or to be distributed among his heirs."
It would follow then that the authority of the probate court to require that ancillary administrator's right to "the stock
certificates covering the 33,002 shares ... standing in her name in the books of [appellant] Benguet Consolidated,
Inc...." be respected is equally beyond question. For appellant is a Philippine corporation owing full allegiance and
subject to the unrestricted jurisdiction of local courts. Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders.
8

Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue finds application. "In the instant case, the
actual situs of the shares of stock is in the Philippines, the corporation being domiciled [here]." To the force of the
above undeniable proposition, not even appellant is insensible. It does not dispute it. Nor could it successfully do so
even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion for the legality of the
challenged order, how does appellant, Benguet Consolidated, Inc. propose to carry the extremely heavy burden of
persuasion of precisely demonstrating the contrary? It would assign as the basic error allegedly committed by the
lower court its "considering as lost the stock certificates covering 33,002 shares of Benguet belonging to the deceased
9
Idonah Slade Perkins, ..." More specifically, appellant would stress that the "lower court could not "consider as lost"
the stock certificates in question when, as a matter of fact, his Honor the trial Judge knew, and does know, and it is
admitted by the appellee, that the said stock certificates are in existence and are today in the possession of the
10
domiciliary administrator in New York."
There may be an element of fiction in the above view of the lower court. That certainly does not suffice to call for the
reversal of the appealed order. Since there is a refusal, persistently adhered to by the domiciliary administrator in New
York, to deliver the shares of stocks of appellant corporation owned by the decedent to the ancillary administrator in
the Philippines, there was nothing unreasonable or arbitrary in considering them as lost and requiring the appellant to
issue new certificates in lieu thereof. Thereby, the task incumbent under the law on the ancillary administrator could
be discharged and his responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to depend on the uncontrolled
discretion of the party or entity, in this case domiciled abroad, which thus far has shown the utmost persistence in
refusing to yield obedience. Certainly, appellant would not be heard to contend in all seriousness that a judicial decree
could be treated as a mere scrap of paper, the court issuing it being powerless to remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did not correspond exactly with the
facts. To be more blunt, the quality of truth may be lacking in such a conclusion arrived at. It is to be remembered

however, again to borrow from Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends
11
have played an important part in its development."
Speaking of the common law in its earlier period, Cardozo could state fictions "were devices to advance the ends of
12
justice, [even if] clumsy and at times offensive." Some of them have persisted even to the present, that eminent
jurist, noting "the quasi contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the empire
13
of "as if" today." He likewise noted "a class of fictions of another order, the fiction which is a working tool of thought,
14
but which at times hides itself from view till reflection and analysis have brought it to the light."
What cannot be disputed, therefore, is the at times indispensable role that fictions as such played in the law. There
should be then on the part of the appellant a further refinement in the catholicity of its condemnation of such judicial
technique. If ever an occasion did call for the employment of a legal fiction to put an end to the anomalous situation of
a valid judicial order being disregarded with apparent impunity, this is it. What is thus most obvious is that this
particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its invoking one of the
provisions of its by-laws which would set forth the procedure to be followed in case of a lost, stolen or destroyed stock
certificate; it would stress that in the event of a contest or the pendency of an action regarding ownership of such
certificate or certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate or certificates
15
would await the "final decision by [a] court regarding the ownership [thereof]."
Such reliance is misplaced. In the first place, there is no such occasion to apply such by-law. It is admitted that the
foreign domiciliary administrator did not appeal from the order now in question. Moreover, there is likewise the express
admission of appellant that as far as it is concerned, "it is immaterial ... who is entitled to the possession of the stock
certificates ..." Even if such were not the case, it would be a legal absurdity to impart to such a provision
conclusiveness and finality. Assuming that a contrariety exists between the above by-law and the command of a court
decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to which, however, the judiciary
must yield deference, when appropriately invoked and deemed applicable. It would be most highly unorthodox,
however, if a corporate by-law would be accorded such a high estate in the jural order that a court must not only take
note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless the appealed order be set aside for
its inconsistency with one of its by-laws does not impress us. Its obedience to a lawful court order certainly constitutes
a valid defense, assuming that such apprehension of a possible court action against it could possibly materialize. Thus
far, nothing in the circumstances as they have developed gives substance to such a fear. Gossamer possibilities of a
future prejudice to appellant do not suffice to nullify the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with implications at war with the
basic postulates of corporate theory.
16

We start with the undeniable premise that, "a corporation is an artificial being created by operation of law...." It owes
its life to the state, its birth being purely dependent on its will. As Berle so aptly stated: "Classically, a corporation was
17
conceived as an artificial person, owing its existence through creation by a sovereign power." As a matter of fact, the
statutory language employed owes much to Chief Justice Marshall, who in the Dartmouth College decision defined a
18
corporation precisely as "an artificial being, invisible, intangible, and existing only in contemplation of law."
The well-known authority Fletcher could summarize the matter thus: "A corporation is not in fact and in reality a
person, but the law treats it as though it were a person by process of fiction, or by regarding it as an artificial person
distinct and separate from its individual stockholders.... It owes its existence to law. It is an artificial person created by
19
law for certain specific purposes, the extent of whose existence, powers and liberties is fixed by its charter." Dean
Pound's terse summary, a juristic person, resulting from an association of human beings granted legal personality by
20
the state, puts the matter neatly.
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to quote from Friedmann, "is the
21
reality of the group as a social and legal entity, independent of state recognition and concession." A corporation as
known to Philippine jurisprudence is a creature without any existence until it has received the imprimatur of the state
according to law. It is logically inconceivable therefore that it will have rights and privileges of a higher priority than that
of its creator. More than that, it cannot legitimately refuse to yield obedience to acts of its state organs, certainly not
excluding the judiciary, whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following American law still of persuasive authority in our
jurisdiction, comes more often within the ken of the judiciary than the other two coordinate branches. It institutes the

appropriate court action to enforce its right. Correlatively, it is not immune from judicial control in those instances,
where a duty under the law as ascertained in an appropriate legal proceeding is cast upon it.
To assert that it can choose which court order to follow and which to disregard is to confer upon it not autonomy which
may be conceded but license which cannot be tolerated. It is to argue that it may, when so minded, overrule the state,
the source of its very existence; it is to contend that what any of its governmental organs may lawfully require could be
ignored at will. So extravagant a claim cannot possibly merit approval.
22

5. One last point. In Viloria v. Administrator of Veterans Affairs, it was shown that in a guardianship proceedings then
pending in a lower court, the United States Veterans Administration filed a motion for the refund of a certain sum of
money paid to the minor under guardianship, alleging that the lower court had previously granted its petition to
consider the deceased father as not entitled to guerilla benefits according to a determination arrived at by its main
office in the United States. The motion was denied. In seeking a reconsideration of such order, the Administrator relied
on an American federal statute making his decisions "final and conclusive on all questions of law or fact" precluding
any other American official to examine the matter anew, "except a judge or judges of the United States
23
court." Reconsideration was denied, and the Administrator appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the opinion that the appeal
should be rejected. The provisions of the U.S. Code, invoked by the appellant, make the decisions of the U.S.
Veterans' Administrator final and conclusive when made on claims property submitted to him for resolution; but they
are not applicable to the present case, where the Administrator is not acting as a judge but as a litigant. There is a
great difference between actions against the Administrator (which must be filed strictly in accordance with the
conditions that are imposed by the Veterans' Act, including the exclusive review by United States courts), and those
actions where the Veterans' Administrator seeks a remedy from our courts and submits to their jurisdiction by filing
actions therein. Our attention has not been called to any law or treaty that would make the findings of the Veterans'
Administrator, in actions where he is a party, conclusive on our courts. That, in effect, would deprive our tribunals of
judicial discretion and render them mere subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as final and conclusive, determinations
made by foreign governmental agencies. It is infinitely worse if through the absence of any coercive power by our
courts over juridical persons within our jurisdiction, the force and effectivity of their orders could be made to depend on
the whim or caprice of alien entities. It is difficult to imagine of a situation more offensive to the dignity of the bench or
the honor of the country.
Yet that would be the effect, even if unintended, of the proposition to which appellant Benguet Consolidated seems to
be firmly committed as shown by its failure to accept the validity of the order complained of; it seeks its reversal.
Certainly we must at all pains see to it that it does not succeed. The deplorable consequences attendant on appellant
prevailing attest to the necessity of negative response from us. That is what appellant will get.
That is all then that this case presents. It is obvious why the appeal cannot succeed. It is always easy to conjure
extreme and even oppressive possibilities. That is not decisive. It does not settle the issue. What carries weight and
conviction is the result arrived at, the just solution obtained, grounded in the soundest of legal doctrines and
distinguished by its correspondence with what a sense of realism requires. For through the appealed order, the
imperative requirement of justice according to law is satisfied and national dignity and honor maintained.
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the Court of First Instance, dated
May 18, 1964, is affirmed. With costs against oppositor-appelant Benguet Consolidated, Inc.
Makalintal, Zaldivar and Capistrano, JJ., concur.
Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ., concur in the result.

G.R. No. L-20214

March 17, 1923

G. C. ARNOLD, plaintiff-appellant,
vs.
WILLITS & PATTERSON, LTD., defendant-appellee.
Fisher, DeWitt, Perkins and Brady for appellant.
Ross and Lawrence for appellee.
STATEMENT
For a number of years prior to the times alleged in the complaint, the plaintiff was in the employ of the International
Banking Corporation of Manila, and it is conceded that he is a competent and experienced business man. July 31,
1916, C. D. Willits and I. L. Patterson were partners doing business in San Francisco, California, under the name of
Willits & Patterson. The plaintiff was then in San Francisco, and as a result of negotiations the plaintiff and the firm
entered into a written contract, known in the record as Exhibit A, by which the plaintiff was employed as the agent of
the firm in the Philippine Islands for certain purposes for the period of five years at a minimum salary of $200 per
month and travelling expenses. The plaintiff returned to Manila and entered on the discharge of his duties under the
contract. As a result of plaintiff's employment and the world war conditions, the business of the firm in the Philippines
very rapidly increased and grew beyond the fondest hopes of either party. A dispute arose between the plaintiff and
the firm as to the construction of Exhibit A as to the amount which plaintiff should receive for his services. Meanwhile
Patterson retired from the firm and Willits became the sole owner of its assets. For convenience of operation and to
serve his own purpose, Willits organized a corporation under the laws of California with its principal office at San
Francisco, in and by which he subscribed for, and became the exclusive owner of all the capital stock except a few
shares for organization purposes only, and the name of the firm was used as the name of the corporation. A short time
after that Willits came to Manila and organized a corporation here known as Willits & Patterson, Ltd., in and to which
he again subscribed for all of the capital stock except the nominal shares necessary to qualify the directors. In legal
effect, the San Francisco corporation took over and acquired all of the assets and liabilities of the Manila corporation.
At the time that Willits was in Manila and while to all intents and purposes he was the sole owner of the stock of
corporations, there was a conference between him and the plaintiff over the disputed construction of Exhibit A. As a
result of which another instrument, known in the record as Exhibit B, was prepared in the form of a letter which the
plaintiff addressed to Willits at Manila on November 10, 1919, the purpose of which was to more clearly define and
specify the compensation which the plaintiff was to receive for his services. Willits received and confirmed this letter
by signing the name of Willits & Patterson, By C.d. Willits. At the time both corporations were legally organized, and
there is nothing in the corporate minutes to show that Exhibit B was ever formally ratified or approved by either
corporation. After its organization, the Manila corporation employed a regular accountant whose duty it was to audit
the accounts of the company and render financial statements both for the use of the local banks and the local and
parent corporations at San Francisco. From time to time and in the ordinary course of business such statements of
account were prepared by the accountant and duly forwarded to the home office, and among other things was a
statement of July 31, 1921, showing that there was due and owing the plaintiff under Exhibit B the sum of
P106,277.50. A short time previous to that date, the San Francisco corporation became involved in financial trouble,
and all of its assets were turned over to a "creditors' committee." When this statement was received, the "creditors'
committee" immediately protested its allowance. An attempt was made without success to adjust the matter on a
friendly basis and without litigation. January 10, 1922, the plaintiff brought this action to recover from the defendant
the sum of P106,277.50 with legal interest and costs, and written instruments known in the record as Exhibits A and B
were attached to, and made a part of, the complaint.
For answer, the defendant admits the formal parts of the complaint, the execution of Exhibit A and denies each and
every other allegation, except as specifically admitted, and alleges that what is known as Exhibit B was signed by
Willits without the authority of the defendant corporation or the firm of Willits & Patterson, and that it is not an
agreement which was ever entered into with the plaintiff by the defendant or the firm, and, as a separate defense and
counterclaim, it alleges that on the 30th of June, 1920, there was a balance due and owing the plaintiff from the
defendant under the contract Exhibit A of the sum of P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That about July 6, 1921, the plaintiff wrongfully took
P30,000 from the assets of the firm, and that he is now indebted to the firm in the sum of P10,858.95, with interest and
costs, from which it prays judgement.
The plaintiff admits that he withdrew the P30,000, but alleges that it was with the consent and authority of the
defendant, and denies all other new matter in the answer.
Upon such issues a trial was had, and the lower court rendered judgment in favor of the defendant as prayed for in its
counterclaim, from which the plaintiff appeals, contending that the trial court erred in not holding that the contract
between the parties is that which is embodied in Exhibits A and B, and that the defendant assumed all partnership
obligations, and in failing to render judgment for the plaintiff, as prayed for, and in dismissing his complaint, and
denying plaintiff's motion for a new trial.

JOHNS, J.:
In their respective briefs opposing counsel agree that the important questions involved are "what was the contract
under which the plaintiff rendered services for five years ending July 31, 1921," and "what is due the plaintiff under
that contract." Plaintiff contends that his services were performed under Exhibits A and B, and that the defendant
assumed all of the obligations of the original partnership under Exhibit A, and is now seeking to deny its liability under,
and repudiate, Exhibit B. The defendant admits that Exhibit A was the original contract between Arnold and the firm of
Willits & Patterson by which he came to the Philippine Islands, and that it was therein agreed that he was to be
employed for a period of five years as the agent of Willits & Patterson in the Philippine Islands to operate a certain oil
mill, and to do such other business as might be deemed advisable for which he was to receive, first, the travelling
expenses of his wife and self from San Francisco to Manila, second, the minimum salary of $200 per month, third, a
brokerage of 1 per cent upon all purchases and sales of merchandise, except for the account of the coconut oil mill,
fourth, one-half of the profits on any transaction in the name of the firm or himself not provided for in the agreement.
That the agreement also provided that if it be found that the business was operated at a loss, Arnold should receive a
monthly salary of $400 during such period. That the business was operated at a loss from June 30, 1920, to July 31,
1921, and that for such reason, he was entitled to nothing more than a salary of $400 per month, or for that period
P10,400. Adding this amount to the P8,741.05, which the defendant admits he owed Arnold on June 30, 1920, makes
a total of P19,141.05, leaving a balance due the defendant as set out in the counterclaim. In other words, that the
plaintiff's compensation was measured by, and limited to, the above specified provisions in the contract Exhibit A, and
that the defendant corporation is not bound by the terms or provisions of Exhibit B, which is as follows:
WILLITS & PATTERSON, LTD.
MANILA, P. I., Nov. 10, 1919.
CHAS. D. WILLITS, Esq.,
Present.
DEAR MR. WILLITS: My understanding of the intent of my agreement with Willits & Patterson is as
under:
Commissions. Willits & Patterson, San Francisco, pay me a commission of one per cent on all
purchases made for them in the Philippines or sales made to them by Manila and one per cent on all
sales made for them in the Philippines, or purchases made from them by Manila. If such purchases or
sales are on an f. o. b. basis the commission is on the f. o. b. price; if on a c. i. f. basis the commission
is computed on the c. i. f. price
These commissions are credited to me in San Francisco.
I do not participate in any profits on business transacted between Willits & Patterson, San Francisco,
and Willits & Patterson, Ltd., Manila.
Profits. On all business transacted between Willits & Patterson, Ltd. and others than Willits &
Patterson, San Francisco, half the profits are to be credited to my account and half to the Profit &
Loss account of Willits & Patterson, Ltd., Manila.
On all other business, such as the Cooperative Coconut Products Co. account, or any other business
we may undertake as agents or managers, half the profits are to be credited to my account and half to
the Profit & Loss account of Willits & Patterson, Ltd., Manila.
Where Willits & Patterson, San Francisco, or Willits & Patterson, Ltd., Manila, have their own funds
invested in the capital stock or a corporation, I of course do not participate in the earnings of such
stock, any more than Willits & Patterson would participate in the earnings of stock held by me on my
account.
If the foregoing conforms to your understanding of our agreement, please confirm below.
Yours faithfully,

(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS
There is no dispute about any of the following facts: That at the inception C.D. Willits and I. L. Patterson constituted
the firm of Willits & Patterson doing business in the City of San Francisco; that later Patterson retired from the firm,
and Willits acquired all of his interests and thereafter continued the business under the name and style of Willits &
Patterson; that the original contract Exhibit A was made between the plaintiff and the old firm at San Francisco on July
31, 1916, to cover a period of five years from that date; that plaintiff entered upon the discharged of his duties and
continued his services in the Philippine Islands to someone for the period of five years; that on November 10, 1919,
and as a result of conferences between Willits and the plaintiff, Exhibit B was addressed and signed in the manner
and form above stated in the City of Manila. A short time prior to that date Willits organized a corporation in San
Francisco, in the State of California, which took over and acquired all of the assets of the firm's business in California
then being conducted under the name and style of Willits & Patterson; that he subscribed for all of the capital stock of
the corporation, and that in truth and in fact he was the owner of all of its capital stock. After this was done he caused
a new corporation to be organized under the laws of the Philippine Islands with principal office at Manila, which took
over and acquired all the business and assets of the firm of Willits & Patterson in the Philippine Islands, in and to
which, in legal effect, he subscribed for all of its capital stock, and was the owner of all of its stock. After both
corporations were organized the above letter was drafted and signed. The plaintiff contends that the signing of Exhibit
B in the manner and under the conditions in which it was signed, and through the subsequent acts and conduct of the
parties, was ratified and, in legal effect, became and is now binding upon the defendant.
It will be noted that Exhibit B was executed in Manila, and that at the time it was signed by Willits, he was to all intents
and purposes the legal owner of all the stock in both corporations. It also appears from the evidence that the parent
corporation at San Francisco took over and acquired all of the assets and liabilities of the local corporation at Manila.
That after it was organized the Manila corporation kept separate records and account books of its own, and that from
time to time financial statements were made and forwarded to the home office, from which it conclusively appears that
plaintiff was basing his claim for services upon Exhibit A, as it was modified by Exhibit B. That at no time after Exhibit
B was signed was there ever any dispute between plaintiff and Willits as to the compensation for plaintiff's services.
That is to say, as between the plaintiff and Willits, Exhibit B was approved, followed and at all times in force and effect,
after it was signed November 10, 1919. It appears from an analysis of Exhibit B that it was for the mutual interest of
both parties. From a small beginning, the business was then in a very flourishing conditions and growing fast, and the
profits were very large and were running into big money.
Among other things, Exhibit A provided: "(a) That the net profits from said coconut oil business shall be divided in
equal shares between the said parties hereto; (b) that Arnold should receive a brokerage of 1 per cent from all
purchases and sales of merchandise, except for the account of the coconut mills; (c) that the net profits from all other
business should be divided in equal half shares between the parties hereto."
Under the above provisions, the plaintiff might well contend that he was entitled to one-half of all the profits and a
brokerage of 1 per cent from all purchases and sales, except those for the account of the coconut oil mills, which
under the volume of business then existing would run into a very large sum of money. It was for such reason and after
personal conferences between them, and to settle all disputed questions, that Exhibit B was prepared and signed.
The record recites that "the defendant admits that from July 31, 1916 to July 31, 1921, the plaintiff faithfully performed
all the duties incumbent upon him under his contract of employment, it being understood, however, that this admission
does not include an admission that the plaintiff placed a proper interpretation upon his right to remuneration under
said contract of employment."
It being admitted that the plaintiff worked "under his contract of employment" for the period of five years, the question
naturally arises, for whom was he working? His contract was made with the original firm of Willits & Patterson, and
that firm was dissolved and it ceased to exist, and all of its assets were merged in, and taken over by, the parent
corporation at San Francisco. In the very nature of things, after the corporation was formed, the plaintiff could not and
did not continue to work for the firm, and, yet, he continued his employment for the full period of five years. For whom
did he work after the partnership was merged in the corporation and ceased to exist?
It is very apparent that, under the conditions then existing, the signing of Exhibit B was for the mutual interests of both
parties, and that if the contract Exhibit A was to be enforced according to its terms, that Arnold might well contend for
a much larger sum of money for his services. In truth and in fact Willits and both corporations recognized his
employment and accepted the benefits of his services. He continued his employment and rendered his services after

the corporation were organized and Exhibit B was signed just the same as he did before, and both corporations
recognized and accepted his services. Although the plaintiff was president of the local corporation, the testimony is
conclusive that both of them were what is known as a one man corporation, and Willits, as the owner of all of the
stock, was the force and dominant power which controlled them. After Exhibit B was signed it was recognized by
Willits that the plaintiff's services were to be performed and measured by its term and provisions, and there never was
any dispute between plaintiff and Willits upon that question.
The controversy first arose after the corporation was in financial trouble and the appointment of what is known in the
record as a "creditors' committee." There is no claim or pretense that there was any fraud or collusion between plaintiff
and Willits, and it is very apparent that Exhibit B was to the mutual interest of both parties. It is elementary law that if
Exhibit B is a binding contract between the plaintiff and Willits and the corporations, it is equally binding upon the
creditors' committee. It would not have any higher or better legal right than the corporation itself, and could not make
any defense which it could not make. It is very significant that the claim or defense which is now interposed by the
creditors' committee was never made or asserted at any previous time by the defendant, and that it never was made
by Willits, and it is very apparent that if he had remained in control of the corporation, it would never have made the
defense which is now made by the creditors' committee. The record is conclusive that at the time he signed Exhibit B,
Willits was, in legal effect, the owner and holder of all the stock in both corporations, and that he approved it in their
interest, and to protect them from the plaintiff having and making a much larger claim under Exhibit A. As a matter of
fact, it appears from the statement of Mr. Larkin, the accountant, in the record that if plaintiff's cause of action was now
founded upon Exhibit A, he would have a claim for more than P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:
The proposition that a corporation has an existence separate and distinct from its membership has its
limitations. It must be noted that this separate existence is for particular purposes. It must also be
remembered that there can be no corporate existence without persons to compose it; there can be no
association without associates. This separate existence is to a certain extent a legal fiction. Whenever
necessary for the interests of the public or for the protection or enforcement of the rights of the membership,
courts will disregard this legal fiction and operate upon both the corporation and the persons composing it.
1

In the same section, the author quotes from a decision in 49 Ohio State, 137 ; 15 L. R. A., 145, in which the Supreme
Court of Ohio says:
"So long as a proper use is made of the fiction that a corporation is an entity apart from its shareholders, it is
harmless, and, because convenient, should not be called in question; but where it is urged to an end
subversive of its policy, or such is the issue, the fiction must be ignored, and the question determined whether
the act in question, though done by shareholders, that is to say, by the persons uniting in one body, was
done simply as individuals, and with respect to their individual interest as shareholders, or was done
ostensibly as such, but, as a matter of fact, to control the corporation, and affect the transaction of its
business, in the same manner as if the act had been clothed with all the formalities of a corporate act. This
must be so, because, the stockholders having a dual capacity, and capable of acting in either, and a possible
interest to conceal their character when acting in their corporate capacity, the absence of the formal evidence
of the character of the act cannot preclude judicial inquiry on the subject. If it were otherwise, then in that
department of the law fraud would enjoy an immunity awarded to it in no other."
Where the stock of a corporation is owned by one person whereby the corporation functions only for the
benefit of such individual owner, the corporation and the individual should be deemed to be the same. (U. S.
Gypsum Co. vs. Mackay Wall Plaster Co., 199 Pac., 249.)
Ruling Case Law, vol. 7, section 663, says:
While of course a corporation cannot ratify a contract which is strictly ultra vires, and which it in the first
instance could not have made, it may by ratification render binding on it a contract, entered into on its behalf
by its officers or agents without authority. As a general rule such ratification need not be manifested by any
voted or formal resolution of the corporation or be authenticated by the corporate seal; no higher degree of
evidence is requisite in establishing ratification on the part of a corporation, than is requisite in showing an
antecedent authorization.
xxx

xxx

xxx

SEC. 666. The assent or approval of a corporation to acts done on its account may be inferred in the same
manner that the absent of a natural person may be, and it is well settled that where a corporation with full
knowledge of the unauthorized act of its officer or agents acquiesces in and consents to such acts, it thereby
ratifies them, especially where the acquiescence results in prejudice to a third person.

xxx

xxx

xxx

SEC. 669. So, when, in the usual course of business of a corporation, an officer has been allowed in his
official capacity to manage its affair, his authority to represent the corporation may be inferred from the
manner in which he has been permitted by the directors to transact its business.
SEC. 656. In accordance with a well-known rule of the law of agency, notice to corporate officers or agents
within the scope or apparent scope of their authority is attributed to the corporation.
SEC. 667. As a general rule, if a corporation with knowledge of its agents unauthorized act received and
enjoys the benefits thereof, it impliedly ratifies the unauthorized act if it is one capable of ratification by parol.
In its article on corporations, Corpus Juris, in section 2241 says:
Ratification by a corporation of a transaction not previously authorized is more easily inferred where the
corporation receives and retains property under it, and as a general rule where a corporation, through its
proper officers or board, takes and retains the benefits of the unauthorized act or contract of an officer or
agent, with full knowledge of all the material facts, it thereby ratifies and becomes bound by such act of
contract, together with all the liabilities and burdens resulting therefrom, and in some jurisdiction this rule is, in
effect, declared by statute. Thus the corporation is liable on the ground of ratification where, with knowledge of
the facts, it accepts the benefit of services rendered under an unauthorized contract of employment . . . .
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was employed by the local corporation, and from time to time and in the
ordinary course of business made and prepared financial statements showing its assets and liabilities, true copies of
which were sent to the home office in San Francisco. It appears upon their face that plaintiff's compensation was
made and founded on Exhibit B, and that such statements were made and prepared by the accountant on the
assumption that Exhibit B was in full force and effect as between the plaintiff and the defendant. In the course of
business in the early part of 1920, plaintiff, as manager of the defendant, sold 500 tons of oil for future delivery at
P740 per ton. Due to break in the market, plaintiff was able to purchase the oil at P380 per ton or a profit of P180,000.
It appears from Exhibit B under the heading of "Profits" that:
On all the business transacted between Willits & Patterson, Ltd. and others than Willits & Patterson, San
Francisco, half the profit are to be credited to may account and half to the Profit & Loss account Willits &
Patterson, Ltd., Manila.
The purchasers paid P105,000 on the contracts and gave their notes for P75,000, and it was agreed that all of the oil
purchased should be held as security for the full payment of the purchase price. As a result, the defendant itself
received the P105,000 in cash, P75,000 in notes, and still holds the 500 tons of oil as security for the balance of the
purchase price. This transaction was shown in the semi-annual financial statement for the period ending December
31, 1920. That is to say, the business was transacted by and through the plaintiff, and the defendant received and
accepted all of the profits on the deal, and the statement which was rendered gave him a credit for P90,737.88, or half
the profit as provided in the contract Exhibit B, with interest.
Although the previous financial statements show upon their face that the account of plaintiff was credit with several
small items on the same basis, it was not until the 23d of March, 1921, that any objection was ever made by anyone,
and objection was made for the first time by the creditors' committee in a cable of that date.
As we analyze the facts Exhibit B was, in legal effect, ratified and approved and is now binding upon the defendant
corporation, and the plaintiff is entitled to recover for his services on that writing as it modified the original contract
Exhibit A.
It appears from the statement prepared by accountant Larkin founded upon Exhibit B that the plaintiff is entitled to
recover P106,277.50. It is very apparent that his statement was based upon the assumption that there was a net profit
of P180,000 on the 500 tons of oil, of which the plaintiff was entitled to one-half.
In the absence of any other proof, we have the right to assume that the 500 tons of oil was worth the amount which
the defendant paid for them at the time of the purchase or P380 per ton, and the record shows that the defendant took
and now has the possession of all of the oil secure the payment of the price at which it was sold. Hence, the profit on
the deal to the defendant at the time of the sale would amount to the difference between what the defendant paid for
the oil and the amount which it received for the oil at the time it sold the oil. It appears that at the time of the sale the

defendant only received P105,000 in cash, and that it took and accepted the promissory notes of Cruz & Tan Chong
Say, the purchasers, for P75,000 more which have been collected and may never be. Hence, it must follow that the
amount evidence by the notes cannot now be deemed or treated as profits on the deal and cannot be until such times
as the notes are paid.
The judgment of the lower court is reversed, and a money judgment will be entered here in favor of the plaintiff and
against the defendant for the sum of P68,527.50, with thereon at the rate of 6 per cent per annum from the 10th day of
January, 1922. In addition thereto, judgment will be rendered against the defendant in substance and to the effect that
the plaintiff is the owner of an undivided one-half interest in the promissory notes for P75,000 which were executed by
Cruz & Tan Chong Say, as a part of the purchase price of the oil, and that he is entitled to have and receive one-half
of all the proceeds from the notes or either of them, and that also he have judgment against the defendant for costs.
So ordered.
Araullo, C. J., Street, Malcolm, Avancea, Ostrand, and Romualdez, JJ., concur.

G.R. No. 141735

June 8, 2005

SAPPARI K. SAWADJAAN, petitioner,

vs.
THE HONORABLE COURT OF APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH INVESTMENT
BANK OF THE PHILIPPINES, respondents.
DECISION
CHICO-NAZARIO, J.:
1

This is a petition for certiorari under Rule 65 of the Rules of Court of the Decision of the Court of Appeals of 30 March
1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission (CSC) dated 11 August
1994 and 11 April 1995, respectively, which in turn affirmed Resolution No. 2309 of the Board of Directors of the AlAmanah Islamic Investment Bank of the Philippines (AIIBP) dated 13 December 1993, finding petitioner guilty of
Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and
2
dismissing him from the service, and its Resolution of 15 December 1999 dismissing petitioners Motion for
Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was among the first employees of the Philippine Amanah
Bank (PAB) when it was created by virtue of Presidential Decree No. 264 on 02 August 1973. He rose through the
ranks, working his way up from his initial designation as security guard, to settling clerk, bookkeeper, credit
3
investigator, project analyst, appraiser/ inspector, and eventually, loans analyst.
In February 1988, while still designated as appraiser/investigator, Sawadjaan was assigned to inspect the properties
offered as collaterals by Compressed Air Machineries and Equipment Corporation (CAMEC) for a credit line of Five
Million Pesos (P5,000,000.00). The properties consisted of two parcels of land covered by Transfer Certificates of Title
4
(TCTs) No. N-130671 and No. C-52576. On the basis of his Inspection and Appraisal Report, the PAB granted the
loan application. When the loan matured on 17 May 1989, CAMEC requested an extension of 180 days, but was
5
granted only 120 days to repay the loan.
In the meantime, Sawadjaan was promoted to Loans Analyst I on 01 July 1989.

In January 1990, Congress passed Republic Act 6848 creating the AIIBP and repealing P.D. No. 264 (which created
7
the PAB). All assets, liabilities and capital accounts of the PAB were transferred to the AIIBP, and the existing
8
personnel of the PAB were to continue to discharge their functions unless discharged. In the ensuing reorganization,
Sawadjaan was among the personnel retained by the AIIBP.
When CAMEC failed to pay despite the given extension, the bank, now referred to as the AIIBP, discovered that TCT
No. N-130671 was spurious, the property described therein non-existent, and that the property covered by TCT No. C52576 had a prior existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created an Investigating Committee to look into the CAMEC
9
transaction, which had cost the bank Six Million Pesos (P6,000,000.00) in losses. The subsequent events, as found
10
and decided upon by the Court of Appeals, are as follows:
On 18 June 1993, petitioner received a memorandum from Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo
charging him with Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of
the Service and preventively suspending him.
In his memorandum dated 8 September 1993, petitioner informed the Investigating Committee that he could not
submit himself to the jurisdiction of the Committee because of its alleged partiality. For his failure to appear before the
hearing set on 17 September 1993, after the hearing of 13 September 1993 was postponed due to the Manifestation
of even date filed by petitioner, the Investigating Committee declared petitioner in default and the prosecution was
allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a decision, the pertinent portions of which reads as
follows:
In view of respondent SAWADJAANS abject failure to perform his duties and assigned tasks as appraiser/inspector,
which resulted to the prejudice and substantial damage to the Bank, respondent should be held liable therefore. At this
juncture, however, the Investigating Committee is of the considered opinion that he could not be held liable for the
administrative offense of dishonesty considering the fact that no evidence was adduced to show that he profited or

benefited from being remiss in the performance of his duties. The record is bereft of any evidence which would show
that he received any amount in consideration for his non-performance of his official duties.
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties
resulted to the prejudice and substantial damage to the Islamic Bank for which he should be held liable for the
administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.
Premises considered, the Investigating Committee recommends that respondent SAPPARI SAWADJAAN be meted
the penalty of SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in accordance with the Civil Service
Commissions Memorandum Circular No. 30, Series of 1989.
On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted Resolution No. 2309 finding
petitioner guilty of Dishonesty in the Performance of Official Duties and/or Conduct Prejudicial to the Best Interest of
the Service and imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the Resolution No. 2332 on 20
February 1994 reducing the penalty imposed on petitioner from dismissal to suspension for a period of six (6) months
and one (1) day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal for lack of merit and affirming
Resolution No. 2309 dated 13 December 1993 of the Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on the following assignment of
errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has committed a grave abuse of
discretion amounting to excess or lack of jurisdiction when it initiated and conducted administrative
investigation without a validly promulgated rules of procedure in the adjudication of administrative cases at the
Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse of discretion amounting to lack
of jurisdiction when it prematurely and falsely assumed jurisdiction of the case not appealed to it, but to the
Merit System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in finding petitioner Sawadjaan of having
deliberately reporting false information and therefore guilty of Dishonesty and Conduct Prejudicial to the Best
Interest of the Service and penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this Honorable Court pursuant to
Revised Administrative Circular No. 1-95, which took effect on 01 June 1995.
We do not find merit [in] the petition.
Anent the first assignment of error, a reading of the records would reveal that petitioner raises for the first time the
alleged failure of the Islamic Bank [AIIBP] to promulgate rules of procedure governing the adjudication and disposition
of administrative cases involving its personnel. It is a rule that issues not properly brought and ventilated below may
not be raised for the first time on appeal, save in exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275
SCRA 257) none of which, however, obtain in this case. Granting arguendo that the issue is of such exceptional
character that the Court may take cognizance of the same, still, it must fail. Section 26 of Republic Act No. 6848
(1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest powers to manage the Islamic Bank,
x x x The Board shall adopt policy guidelines necessary to carry out effectively the provisions of this Charter as well
as internal rules and regulations necessary for the conduct of its Islamic banking business and all matters related
to personnel organization, office functions and salary administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled "Prescribing Procedure and Sanctions to
Ensure Speedy Disposition of Administrative Cases" directs, "all administrative agencies" to "adopt and include in their
respective Rules of Procedure" provisions designed to abbreviate administrative proceedings.

The above two (2) provisions relied upon by petitioner does not require the Islamic Bank [AIIBP] to promulgate rules of
procedure before administrative discipline may be imposed upon its employees. The internal rules of procedures
ordained to be adopted by the Board refers to that necessary for the conduct of its Islamic banking business and all
matters related to "personnel organization, office functions and salary administration." On the contrary, Section 26 of
RA 6848 gives the Board of Directors of the Islamic Bank the "broadest powers to manage the Islamic Bank." This
grant of broad powers would be an idle ceremony if it would be powerless to discipline its employees.
The second assignment of error must likewise fail. The issue is raised for the first time via this petition
forcertiorari. Petitioner submitted himself to the jurisdiction of the CSC. Although he could have raised the alleged lack
of jurisdiction in his Motion for Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By filing the
Motion for Reconsideration, he is estopped from denying the CSCs jurisdiction over him, as it is settled rule that a
party who asks for an affirmative relief cannot later on impugn the action of the tribunal as without jurisdiction after an
adverse result was meted to him. Although jurisdiction over the subject matter of a case may be objected to at any
stage of the proceedings even on appeal, this particular rule, however, means that jurisdictional issues in a case can
be raised only during the proceedings in said case and during the appeal of said case (Aragon v. Court of Appeals,
270 SCRA 603). The case at bar is a petition [for] certiorari and not an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution No. 93-2387 dated 29 June 1993,
provides:
Decisions in administrative cases involving officials and employees of the civil service appealable to the Commission
pursuant to Section 47 of Book V of the Code (i.e., Administrative Code of 1987) including personnel actions such as
contested appointments shall now be appealed directly to the Commission and not to the MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically held:
. . . The functions of the MSPB relating to the determination of administrative disciplinary cases were, in other words,
re-allocated to the Commission itself.
Be that as it may, "(i)t is hornbook doctrine that in order `(t)o ascertain whether a court (in this case, administrative
agency) has jurisdiction or not, the provisions of the law should be inquired into. Furthermore, `the jurisdiction of the
court must appear clearly from the statute law or it will not be held to exist."(Azarcon v. Sandiganbayan, 268 SCRA
747, 757) From the provision of law abovecited, the Civil Service Commission clearly has jurisdiction over the
Administrative Case against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners proposition that he should not be liable,
as in the first place, he was not qualified to perform the functions of appraiser/investigator because he lacked the
necessary training and expertise, and therefore, should not have been found dishonest by the Board of Directors of
Islamic Bank [AIIBP] and the CSC. Petitioner himself admits that the position of appraiser/inspector is "one of the most
serious [and] sensitive job in the banking operations." He should have been aware that accepting such a designation,
he is obliged to perform the task at hand by the exercise of more than ordinary prudence. As appraiser/investigator, he
is expected, among others, to check the authenticity of the documents presented by the borrower by comparing them
with the originals on file with the proper government office. He should have made it sure that the technical descriptions
in the location plan on file with the Bureau of Lands of Marikina, jibe with that indicated in the TCT of the collateral
offered by CAMEC, and that the mortgage in favor of the Islamic Bank was duly annotated at the back of the copy of
the TCT kept by the Register of Deeds of Marikina. This, petitioner failed to do, for which he must be held liable. That
he did not profit from his false report is of no moment. Neither the fact that it was not deliberate or willful, detracts from
the nature of the act as dishonest. What is apparent is he stated something to be a fact, when he really was not sure
that it was so.
Wherefore, above premises considered, the instant Petition is DISMISSED, and the assailed Resolutions of the Civil
Service Commission are hereby AFFIRMED.
11

On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of address, but apparently neglected
12
to notify his client of this fact. Thus, on 23 July 1999, Sawadjaan, by himself, filed a Motion for New Trial in the Court
of Appeals based on the following grounds: fraud, accident, mistake or excusable negligence and newly discovered
evidence. He claimed that he had recently discovered that at the time his employment was terminated, the AIIBP had
13
not yet adopted its corporate by-laws. He attached a Certification by the Securities and Exchange Commission
(SEC) that it was only on 27 May 1992 that the AIIBP submitted its draft by-laws to the SEC, and that its registration
was being held in abeyance pending certain corrections being made thereon. Sawadjaan argued that since the AIIBP
failed to file its by-laws within 60 days from the passage of Rep. Act No. 6848, as required by Sec. 51 of the said law,
the bank and its stockholders had "already forfeited its franchise or charter, including its license to exist and operate
14
as a corporation," and thus no longer have "the legal standing and personality to initiate an administrative case."

Sawadjaans counsel subsequently adopted his motion, but requested that it be treated as a motion for
15
16
reconsideration. This motion was denied by the court a quo in its Resolution of 15 December 1999.
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of the Rules of Court challenging
the above Decision and Resolution of the Court of Appeals on the ground that the court a quo erred: i) in ignoring the
facts and evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts and evidences that the
Islamic Bank lost its juridical personality as a corporation on 16 April 1990; iii) in ignoring the facts and evidences that
the alleged Islamic Bank and its alleged Board of Directors have no jurisdiction to act in the manner they did in the
absence of a valid by-laws; iv) in not correcting the acts of the Civil Service Commission who erroneously rendered
the assailed Resolutions No. 94-4483 and No. 95-2754 as a result of fraud, falsification and/or misrepresentations
committed by Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in affirming an unconscionably
harsh and/or excessive penalty; and vi) in failing to consider newly discovered evidence and reverse its decision
accordingly.
Subsequently, petitioner Sawadjaan filed an "Ex-parte Urgent Motion for Additional Extension of Time to File a Reply
17
(to the Comments of Respondent Al-Amanah Investment Bank of the Philippines), Reply (to Respondents
18
Consolidated Comment,) and Reply (to the Alleged Comments of Respondent Al-Amanah Islamic Bank of the
19
Philippines)." On 13 October 2000, he informed this Court that he had terminated his lawyers services, and, by
20
himself, prepared and filed the following: 1) Motion for New Trial; 2) Motion to Declare Respondents in Default
21
and/or Having Waived their Rights to Interpose Objection to Petitioners Motion for New Trial; 3) Ex-Parte Urgent
Motions to Punish Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon
A. Diaz for Being in Contempt of Court & to Inhibit them from Appearing in this Case Until they Can Present Valid
22
23
Evidence of Legal Authority; 4) Opposition/Reply (to Respondent AIIBPs Alleged Comment); 5) Ex-Parte Urgent
Motion to Punish Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment Order/Warrant
24
for His Arrest; 6) Reply/Opposition (To the Formal Notice of Withdrawal of Undersigned Counsel as Legal Counsel
for the Respondent Islamic Bank with Opposition to Petitioners Motion to Punish Undersigned Counsel for Contempt
25
26
of Court for the Issuance of a Warrant of Arrest); 7) Memorandum for Petitioner; 8) Opposition to SolGens Motion
27
for Clarification with Motion for Default and/or Waiver of Respondents to File their Memorandum; 9) Motion for
Contempt of Court and Inhibition/Disqualification with Opposition to OGCCs Motion for Extension of Time to File
28
29
Memorandum; 10) Motion for Enforcement (In Defense of the Rule of Law); 11) Motion and Opposition (Motion to
Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. Reyes, Odilon A. Diaz and Dominador R.
Isidoro, Jr., for Contempt of Court and the Issuance of a Warrant for their Arrest; and Opposition to their Alleged
30
"Manifestation and Motion" Dated February 5, 2002); 12) Motion for Reconsideration of Item (a) of Resolution dated
31
5 February 2002 with Supplemental Motion for Contempt of Court; 13) Motion for Reconsideration of Portion of
32
Resolution Dated 12 March 2002; 14) Ex-Parte Urgent Motion for Extension of Time to File Reply Memorandum (To:
33
CSC and AIIBPs Memorandum); 15) Reply Memorandum (To: CSCs Memorandum) With Ex-Parte Urgent Motion
34
for Additional Extension of time to File Reply Memorandum (To: AIIBPs Memorandum); and 16) Reply
35
Memorandum (To: OGCCs Memorandum for Respondent AIIBP).
Petitioners efforts are unavailing, and we deny his petition for its procedural and substantive flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment on the merits is appeal. This is
true even if the error, or one of the errors, ascribed to the court rendering the judgment is its lack of jurisdiction over
the subject matter, or the exercise of power in excess thereof, or grave abuse of discretion in the findings of fact or of
36
law set out in the decision.
The records show that petitioners counsel received the Resolution of the Court of Appeals denying his motion for
reconsideration on 27 December 1999. The fifteen day reglamentary period to appeal under Rule 45 of the Rules of
Court therefore lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of the resolution denying
his motion for reconsideration, the petitioner filed his petition for certiorari under Rule 65.
37

It is settled that a special civil action for certiorari will not lie as a substitute for the lost remedy of appeal, and though
38
there are instances where the extraordinary remedy of certiorari may be resorted to despite the availability of an
39
appeal, we find no special reasons for making out an exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat this as a special civil action
40
forcertiorari under Rule 65, the petition would nevertheless be dismissed for failure of the petitioner to show grave
abuse of discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the fact that since
respondent AIIBP failed to file its by-laws within the designated 60 days from the effectivity of Rep. Act No. 6848, all
proceedings initiated by AIIBP and all actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP and
its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the Islamic Bank, file administrative
charges and investigate petitioner in the manner they did and allegedly passed Board Resolution No. 2309 on
December 13, 1993 which is null and void for lack of an (sic) authorized and valid by-laws. The CIVIL SERVICE

COMMISSION was therefore affirming, erroneously, a null and void "Resolution No. 2309 dated December 13, 1993
of the Board of Directors of Al-Amanah Islamic Investment Bank of the Philippines" in CSC Resolution No. 94-4483
dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC in its Resolution No. 95-2754
dated April 11, 1995. Both acts/resolutions of the CSC are erroneous, resulting from fraud, falsifications and
misrepresentations of the alleged Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk A.
41
Carpizo and his group at the alleged Islamic Bank.
Nowhere in petitioners voluminous pleadings is there a showing that the court a quo committed grave abuse of
discretion amounting to lack or excess of jurisdiction reversible by a petition for certiorari. Petitioner already raised the
question of AIIBPs corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for Reconsideration
of 27 May 1997 and was denied by the Court of Appeals. Despite the volume of pleadings he has submitted thus far,
he has added nothing substantial to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts business, has shareholders,
corporate officers, a board of directors, assets, and personnel. It is, in fact, here represented by the Office of the
Government Corporate Counsel, "the principal law office of government-owned corporations, one of which is
42
respondent bank." At the very least, by its failure to submit its by-laws on time, the AIIBP may be considered ade
43
facto corporation whose right to exercise corporate powers may not be inquired into collaterally in any private suit to
44
which such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within the prescribed period does not ipso facto lose its
45
powers as such. The SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations, details
the procedures and remedies that may be availed of before an order of revocation can be issued. There is no showing
that such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a corporate controversy, but a labor dispute;
and it is an employers basic right to freely select or discharge its employees, if only as a measure of self-protection
46
against acts inimical to its interest. Regardless of whether AIIBP is a corporation, a partnership, a sole
proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the petitioners employer. AIIBP chose to retain
his services during its reorganization, controlled the means and methods by which his work was to be performed, paid
47
his wages, and, eventually, terminated his services.
And though he has had ample opportunity to do so, the petitioner has not alleged that he is anything other than an
employee of AIIBP. He has neither claimed, nor shown, that he is a stockholder or an officer of the corporation.
Having accepted employment from AIIBP, and rendered his services to the said bank, received his salary, and
accepted the promotion given him, it is now too late in the day for petitioner to question its existence and its power to
terminate his services. One who assumes an obligation to an ostensible corporation as such, cannot resist
48
performance thereof on the ground that there was in fact no corporation. 1avvphi1
Even if we were to consider the facts behind petitioner Sawadjaans dismissal from service, we would be hard pressed
to find error in the decision of the AIIBP.
As appraiser/investigator, the petitioner was expected to conduct an ocular inspection of the properties offered by
CAMEC as collaterals and check the copies of the certificates of title against those on file with the Registry of Deeds.
Not only did he fail to conduct these routine checks, but he also deliberately misrepresented in his appraisal report
that after reviewing the documents and conducting a site inspection, he found the CAMEC loan application to be in
order. Despite the number of pleadings he has filed, he has failed to offer an alternative explanation for his actions.
When he was informed of the charges against him and directed to appear and present his side on the matter, the
petitioner sent instead a memorandum questioning the fairness and impartiality of the members of the investigating
committee and refusing to recognize their jurisdiction over him. Nevertheless, the investigating committee rescheduled
the hearing to give the petitioner another chance, but he still refused to appear before it.
Thereafter, witnesses were presented, and a decision was rendered finding him guilty of dishonesty and dismissing
him from service. He sought a reconsideration of this decision and the same committee whose impartiality he
questioned reduced their recommended penalty to suspension for six months and one day. The board of directors,
however, opted to dismiss him from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to perform his official duties greatly prejudiced
the AIIBP, for which he should be held accountable. It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the performance of his duties as
appraiser/inspector. Had respondent performed his duties as appraiser/inspector, he could have easily noticed that
the property located at Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the properties

offered as collateral by CAMEC is encumbered to Divina Pablico. Had respondent reflected such fact in his
appraisal/inspection report on said property the ISLAMIC BANK would not have approved CAMECs loan of
P500,000.00 in 1987 and CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks policy of not
accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he failed to check and verify from the
Registry of Deeds of Marikina the authenticity of the property located at Mayamot, Antipolo, Rizal covered by TCT No.
N-130671 and which is one of the properties offered as collateral by CAMEC for its P5 Million loan in 1988. If he only
visited and verified with the Register of Deeds of Marikina the authenticity of TCT No. N-130671 he could have easily
discovered that TCT No. N-130671 is fake and the property described therein non-existent.
...
This notwithstanding, respondent cannot escape liability. As adverted to earlier, his failure to perform his official duties
resulted to the prejudice and substantial damage to the ISLAMIC BANK for which he should be held liable for the
49
administrative offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE SERVICE.
From the foregoing, we find that the CSC and the court a quo committed no grave abuse of discretion when they
sustained Sawadjaans dismissal from service. Grave abuse of discretion implies such capricious and whimsical
exercise of judgment as equivalent to lack of jurisdiction, or, in other words, where the power is exercised in an
arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross as to
amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in
50
contemplation of law. The records show that the respondents did none of these; they acted in accordance with the
law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of 30 March 1999 affirming
Resolutions No. 94-4483 and No. 95-2754 of the Civil Service Commission, and its Resolution of 15 December 1999
are hereby affirmed. Costs against the petitioner.
SO ORDERED.
Davide, Jr., C.J., Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez, Carpio, Austria-Martinez, Corona,
Carpio-Morales, Callejo, Sr., Azcuna, Tinga, and Garcia, JJ., concur.
Puno, J., on official leave.

G.R. No. L-14311

January 31, 1963

MANILA SANITARIUM & HOSPITAL and/or H.L. DYER, petitioner,

vs.
FAUSTO GABUCO and the COURT OF INDUSTRIAL RELATIONS, respondents.
Romeo J. Durez for petitioner.
Angel S. Dakita, Jr. for respondent Fausto Gabuco.
Pablo B. Cabrera for respondent Court of Industrial Relations.
PAREDES, J.:
On December 19, 1956, respondent Fausto Gabuco instituted with the respondent Court of Industrial Relations, a
complaint for Unfair Labor Practice against the petitioner (Case No. 1143 ULP), alleging
1. That the complainant being an employee of the respondents, together with some of his co-employees
proposed to respondents, through a petition in writing dated August 2, 1956 the return of the privileges they
usually enjoyed, i.e., (1) rental subsidies, (2) child allowance, (3) educational grant, and (4) transportation
allowance;
2. That on August 14, 1956, the complainant in company with his other co-employees in respondent hospital
convoked a meeting and organized a union in which he was elected President; and
3. That upon respondents' learning complainant's organization of union, they dismissed Fausto Gabuco on
September 30, 1956, in order to discourage union membership.
On December 26, 1956, the herein petitioners filed their Answer, specifically denying the charges and averred that
Fausto Gabuco was removed because (1) his job was longer necessary and (2) he was given the equity separation
allowance.
Under date of April 15, 1957, the Hospital presented a Motion to Dismiss, contending that the CIR did not have
jurisdiction over the case, since the Manila Sanitarium and Hospital was not established for profit or gain, and that
aside from being operated for charitable purposes it is also in the nature of an educational institution, for it educates
and trains nurses. On June 11, 1957, the following order was issued: "The grounds ..., having been found, after due
hearing, to be not indubitable, said motion is hereby denied without prejudice to the issues therein raised being
disposed of in the decision of the merits after all evidence is submitted." The parties presented evidence in support of
their respective contentions. After making definite findings, that Fausto Gabuco had organized the Hospital Employees
Union on August 14, 1956, and that respondents therein had learned of it, the trial court, anent the cause of the
dismissal of Gabuco, held:
PREMISES CONSIDERED, This Court is of the opinion and so holds that respondents are guilty of unfair
labor practices within the meaning of Section 4 (a), 1 and 4 of the Industrial Peace Act by discriminately
discharging Fausto Gabuco on September 30, 1956 for union activities. Hence, respondents are hereby
ordered to reinstate fully and immediately Fausto Gabuco with back wages from October 1, 1956 until
reinstated without prejudice to seniority or other rights privileges he enjoyed before his separation.
The respondents shall cease and desist from such unfair labor practice.
Respondents presented a Motion for Reconsideration, on the ground that the judgment was contrary to law and
jurisprudence and facts and evidence submitted during the hearing. In same Motion, respondents informed the court
that they would be submitting their arguments in support of the motion within ten (10) days from July 31, 1958. On
August 8, 1958, respondents presented a "Motion for Extension of Time" to file their memorandum, which was denied
on August 11, 1958, on the ground that the Court en banc has adopted a no-extension policy. Under date of August
13, 1958, respondents presented their Memorandum, assailing the decision on various grounds. On August 18, 1958,
complainant Gabuco, now respondent, presented a Motion to Dismiss the Motion for Reconsideration, alleging in
support thereof that the memorandum had been filed one (1) day late. The above motion was opposed by
respondents, claiming substantial compliance with the law. On August 21, 1958, the Court en banc dismissed the
motion for reconsideration. Judge Tabigne dissented.
The Manila Sanitarium and Hospital brought to this Court the decision and the resolutions denying its motion for
extension and dismissing its Motion for Reconsideration, on a Writ of Certiorari, claiming, that the CIR acted without or
in excess of its jurisdiction and/or with grave abuse of discretion, and committed substantial errors of law in:

1. Taking cognizance of the case subject of this petition and finding petitioner Manila Sanitarium & Hospital, to
be an institution operated for profit or gain;
2. Finding the herein petitioners guilty of unfair labor practices;
3. Ordering the herein petitioners to reinstate immediately Respondent Fausto Gabuco with back wages from
October 1, 1956 until fully reinstated; and
4. In not giving due course to petitioners' Motion for Reconsideration.
The conclusions reached by the respondent court on the question of jurisdiction has no factual and legal basis. The
grounds upon which the respondent court had predicated said conclusions on the nature, character and activities of
the petitioner, are set forth in the appealed decision, as follows
.... This Court cannot subscribe to the contention of respondents because the Manila Sanitarium and Hospital
is being operated not on charity but on practically business basis by charging medical and hospital fees and
does not main a free ward: whereas, the Boy Scouts of the Philippines has always been operating on charityaims from private as well as government entities, and the voluntary contributions of private individuals.
In other words, respondent hospital is operated, just like any other private hospital, for profit and gain. While
the yardstick used in the Boy Scouts of the Philippines v. Juliana Araos case for determining whether or not
an institution or concern is operated for profit or gain is the charitable end of the same, the instant case does
not fall under that norm considering that unlike the Boy Scouts it engages in charging medical and hospital
fees without even as much as maintaining a free ward.
The evidence of record, mainly documentary, definitely proves that the Manila Sanitarium and Hospital is a non-profit,
non-industrial establishment. The Articles of Incorporation of the Philippine Union Mission Corporation of the Seventh
Day Adventists, a religious corporation, (Exhs. A-B), to which the hospital is a subsidiary, provides the following
THIRD: That the general and principal purpose and object for which this corporation is formed is to teach
the people of all nations the commandments of God and the everlasting Gospel of Jesus Christ, and the
subsidiary purposes and objects for which this corporation is formed are: to issue notes, to grant annuities, to
acquire, possess, and hold title to real, personal and mixed estates, including public or private lands for
agricultural development and other purposes, water rights, mining rights, and forest rights, either in trust or
otherwise, by gift, bequest, device, or purchase, and to have the power to sell and convey the same by such
instrument or conveyance as may be suitable; to establish and operate sanitariums, hospitals, clinics,
publishing houses, and book and periodical agencies; ....
As such religious corporation, the Seventh Day Adventists expressly declared that it is not for personal profit or gain to
any individual, but that all its property and effects must be used and expended in carrying into effect the aims and
objects of its existence. The Commissioner of Internal Revenue, as early as March 11, 1956, an August 15, 1958, had
declared that "upon investigation conducted by a representative of this office, it was ascertained that the Manila
Sanitarium & Hospital where they (Pharmacists) are employed, is a religious and charitable institution not conducted
for private gain" (Annex O, of Petition; Appendix C). The Operating Policy of the Seventh Day Adventists, (Article II),
states that the object of the Hospital is "to advance through medical missionary work, the cause and Kingdom of Jesus
Christ .. it being understood that no dividends or profits shall ever be declared to any constituency, boards or to any of
its working force" (Annex A-1 of the petition). W.J. Hackett, Minister and President of the Philippine Union Mission
Corporation of the Seventh Day Adventists, Potenciano Romulo, Secretary of the same religious denomination and
Dr. Rey Jutry, Chief Medical Staff and Member of the Board of Management of the Manila Sanitarium and Hospital,
testified in unison that the hospital was not operated for private gain or profit. Their testimony has not been
contradicted by respondent Fausto Gabuco.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this
Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this
stipulation of facts. 1wph1.t
With respect to its management, the respondent Court commented that this medical institution is operated in the
fashion of an ordinary private hospital, imposing medical and hospital fees. This must be conceded; for it is one way of
obtaining maximum efficiency in its service. The mere charging of medical and hospital fees for those who can afford
to pay, did not make the institution established for profit or gain. It had to meet expenses for operation and
maintenance, in order to carry its lofty purposes to serve suffering humanity (U.S.T. Hospital Employees v. Santo
Tomas Hospital, G.R. No. L-6988, May 24, 1954; San Beda v. CIR & N.L.U., No. L-7649, Oct. 29, 1955; Quezon
Institute, et al. v. Velasco; Quezon Institute, et al. v. Paraiso, L-7742 & L-7743; Univ. of San Agustin v. CIR, et al., No.
L-12222, May 28, 1958). The petitioner hospital is not only established and run for religious purposes but it is also

educational in the sense that it trains and educates nurses and charitable and benevolent because it offers free
medical assistance to indigents. The fact that in the hospital, there is no separate place distinctly marked with the
words "Free Ward," does not necessarily prove that the hospital was not giving free medical assistance for not
admitting charity patients therein. Dr. Jutry testified that there was no such thing as "pay ward" and "free ward" in said
hospital, as it was an institution organized on a non-profit basis, to help people as much as possible medically; that the
hospital charged medical fees to patients who could afford to pay; partial medical fees to some; and free to many; so
that the more fees it collected, the more free services it could render; that indigent patients who were admitted as
charity cases occupied the same ward with paying patients; their treatment, facilities and accommodations were the
same. The hospital for the years 1952 to 1958 (7 years), had appropriated and actually spent around P890,855.65 for
free service (Appendix B).
Respondent court declared that petitioner hospital was a business concern because there is nothing in the evidence
which showed that it incurred losses in the operation. The criterion advanced by the respondent court in determining
whether or not an establishment is organized for profit or gain, is fallacious. The mere fact that an industrial or
commercial enterprise had incurred losses, does not follow as a consequence that it is not for profit or for gain,
although it is established for such purpose; much in the same way that if a charitable institution gains on its
operations, that it has become a business enterprise established for profit or gain. It has not been shown that the
petitioner-hospital, a non-stock corporation, ever declared dividends to its members or that its property, effects or
profit was used for personal or individual gain, and not for the purpose or carrying out the objectives of the hospital
itself.
In the case of Boy Scouts of the Philippines v. Araos, L-10091, Jan. 29, 1958, we have held:
On the basis of the foregoing considerations, there is every reason to believe that our labor legislation from
Commonwealth Act No. 103, creating the Court of Industrial Relations, down through the Eight-Hour Labor
Law, to the Industrial Peace Act, was intended by the Legislature to apply only to industrial employment and
to govern the relations between employers engaged in industry and occupation for purposes of profit and
gain, and their industrial employees, but not to organizations and entities which are organized, operated, and
maintained not for profit or gain, but for elevated and lofty, purposes, such as, charity, social service,
education and instruction, hospital and medical service, the encouragement and promotion of character,
patriotism and kindred virtues in the youth of the nation, etc. (See also University of San Agustin v. CIR, et
al., supra.)
it appearing that the petitioner Manila Sanitarium and Hospital is a purely charitable and educational institution, not
established or operated for profit or gain, the same is not governed by the said Act, and the respondent Court has
acted without jurisdiction and committed grave abuse of discretion and substantial error of law when it took
cognizance of the case, subject of the petition..
Because of the conclusions reached, consideration of the other issues involved herein is deemed unnecessary.
The decision sought to be reviewed is reversed, without pronouncement as to costs, reserving to the respondent
herein, Fausto Gabuco, the right to file the appropriate action, in the proper Court.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Dizon, Regala and Makalintal,
JJ., concur.

G.R. No. L-12719

May 31, 1962

THE COLLECTOR OF INTERNAL REVENUE, petitioner,

vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:
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 B-7 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
Surcharge therein

P9,599.07
2,399.77

As fixed tax for the years 1946 to 1952

Compromise penalty

70.00
500.00

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:
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 factoattach 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 profitor 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).
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. L-6807, 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 non-stock, 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 bylaws 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.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.

G.R. No. 115054-66

September 12, 2000

PEOPLE OF THE PHILIPPINES, plaintiff-appellee,

vs.
VICENTE MENIL, JR., accused-appellant.
DECISION
GONZAGA-REYES, J.:
1

On appeal is the joint decision dated 16 August 1993, of the Regional Trial Court of Surigao City, Branch 30, in
Criminal Case Nos. 2948, 2956, 3000, 3001, 3013, 3020, 3021, 3022, 3026, 3028, 3052, 3053, 3054, and 3058,
convicting accused-appellant Vicente "Boy" Menil, Jr. of one (1) count of large scale swindling and thirteen (13) counts
of estafa.
The facts of the case are as follows:
Vicente Menil, Jr. and his wife, Adrian B. Menil, were the proprietors of a business operating under the name ABM
Appliance and Upholstery with offices at the Denso Building, Capitol Road, Surigao City. On July 15, 1989, they,
through ushers and sales executives, began soliciting investments from the general public in Surigao City and its
neighboring towns. They assured would-be investors that their money would be multiplied ten-fold after fifteen (15)
calendar days. In other words, if a person invested P100.00, they claimed that after fifteen (15) calendar days the
investor would get the amount of P1,000.00 in return. Each investor may invest a maximum amount of P1000.00 for
which they were reportedly assured a return of P10,000.00. With respect to their ushers and sales executives, they
were given a 10% commission from the total amounts they remitted to the business.
The people who invested in the business were issued coupons which merely indicated the date of entry, the due date
of the investment, the amount given, the amount to be received, the name and address of the investor and the name
of the sales executive. Sales executives appointed by accused-appellant were given these coupons which they, in
turn, gave to the people they solicited from as proof of their investment. The sales executives likewise wrote down on
a piece of yellow pad paper the details of the investments they received during a particular day. These sales
executives were required to remit the investments they collected daily at the offices of ABM Appliance and Upholstery
by presenting the money and the yellow pad containing the names of the investors. A representative of ABM
Appliance and Upholstery then received the money and signed the yellow pad paper. The sales executives were then
immediately given their 10% commission from the amount remitted. When the investments matured, a lump sum
representing the total return of the investments were given to the sales executives who were given the task of
distributing them to the investors they dealt with.
Initially, the operation started with a few investors who invested small amounts. On the day of the start of the
operations, for example, less than P200.00 were invested at their offices. Gradually, the amounts invested and the
number of depositors increased. On June 30, 1989 alone, the business was able to attract more than 200 investors
and the total amount of investments they received was more than P40,000.00. Because of the small amounts initially
involved, accused-appellant and his wife were able to pay the returns on the investments as they fell due.
Sometime during the first week of August, 1989, accused-appellant and his wife, apparently to clothe their operations
with legitimacy, caused the incorporation of their business, under the name ABM Development Center, Inc. with the
2
Securities and Exchange Commission. As registered under S.E.C. Reg. No. 167274, the ABM Development Center,
Inc. was a non-stock corporation with twelve (12) incorporators and trustees, including accused-appellant Vicente
Menil, Jr. and his wife, Adriana B. Menil. Adriana B. Menil was likewise appointed as the treasurer of the non-stock
corporation. The corporation had a total capitalization of P12,000.00 and its purposes, as stated in its Articles of
3
Incorporation, are as follows:
"1. To assist in the total development of community members morally, physically, educationally and
economically and socially towards their present and future progress;
2. To operate, coordinate and/or organize community development centers;
3. To make or coordinate in the making of studies and researches;
4. To solicit, receive, channel and/or distribute donations, economic aids, grants, investments in money or in
kind;
5. To help train community members in newly acquired knowledge, modern trends and techniques;

6. To promote brotherhood, fellowship and unity among ourselves; and

7. To negotiate, represent, and deal with government and other agencies for the benefit and in behalf of the
members as well as for the community."
On August 15, 1989, accused-appellant and his wife held a meeting with the sales executives and ushers of the ABM
Development Center, Inc. at the Provincial Convention Center. At this meeting, accused-appellant informed the sales
executives that the business of ABM Development Center, Inc. was proceeding normally and that investments were
coming in. He advised the sales executives however that beginning that date, all investments accepted by the
business would only have returns of 1:7 which investors will receive after fifteen (15) working days, excluding
weekends and holidays. As such, if a person gave P100.00, his investment will mature only after fifteen (15) working
days and he will receive only P700.00. This change of policy was contained in a Memorandum dated August 24,
4
1989.
After this August 15, 1989 meeting, the sales executives continued accepting investments from the general public and
the offices of accused-appellant kept on accepting the remittances of the sales executives. By this time, daily
investments amounting to millions of pesos were pouring into the offices of ABM Development Center, Inc. and
payments of the returns became delayed. Allegedly due to the delay in the counting of the money for release to
investors, the payments which were set for release on August 28, 1989 were completely paid only on September 18,
1989.
On September 19, 1989, the ABM Development Center, Inc. stopped releasing payments. The sales investors went to
the offices of ABM Development Center, Inc. to inquire about the release of payments but there was no one around to
address their complaints. The whereabouts of accused-appellant and his wife was also unknown.
On October 10, 1989, accused-appellant and his wife made an announcement over the radio that payments were
forthcoming and that the investors should have no cause for alarm. They also repeated their announcement on
television. Despite these assurances and despite repeated demands made by the investors, accused-appellant
released no further payments and neither did he refund any investment remitted to him. Accused-appellant and his
wife went into hiding in Davao City but eventually they were arrested by police authorities led by a certain Colonel
Panchito.
Consequently, a case for large scale swindling was filed by the City Prosecutor of Surigao City against the accusedappellant and his wife. Additionally, twenty cases for estafa were filed against accused-appellant and his wife by the
Provincial Prosecutors Office. Of these twenty (20) cases, seven (7) were provisionally dismissed on October 21,
1991 for failure to prosecute.
5

In Criminal Case No. 2948, the information charging accused-appellant and his wife with the crime of large scale
swindling was filed on December 14, 1989. The information in this case reads as follows:
"That in or about the month of August, 1989, and/or sometime prior or subsequent thereto, in the city of Surigao,
Philippines, and within the jurisdiction of this Honorable Court, the above-named accused, conspiring and
confederating together and mutually helping one another, did then and there willfully, unlawfully and feloniously
defraud thousands of investors using as instruments innocent and defrauded sales executives and/or ushers, in the
following manner, to wit: the above-named accused, pretending to possess credit, property and a secret formula in
their pyramiding business scheme, enticed the general public to invest with ABM Development Center, Incorporated,
thru false manifestations and representations that the amount they would invest would earn seven hundred percent
(700%) after fifteen (15) working days from date of investment, by which enticing offer, the general public was
persuaded to invest large sums of money thru the innocent sales executives and/or ushers, amounting to more than
ONE HUNDRED THOUSAND PESOS (P100,000.00), Philippine Currency, which were duly remitted to and received
by the accused, doing business under the name and style ABM Development Center, Incorporated, which was the
front of their illegal transactions, but the accused once in the possession of the amounts invested and far from
complying with their aforesaid obligation, with deceit aforethought, misapplied, misappropriated, converted and
absconded the amounts received as investments to their own personal use and benefit and despite repeated
demands made for the payment of the benefits of the investments and/or the return of the amounts invested, said
accused failed and refused, and still fail and refuse to do so, to the damage and prejudice of the investors in such
sums as may be proven and such other damages as may be allowed by law.
Contrary to Article 315 of the Revised Penal Code, in relation to paragraph 2 of Presidential Decree No. 1689."
In Criminal Case No. 2956, accused appellant and his wife were charged with violation of Article 315 of the Revised
Penal Code. The information in this case reads as follows:

"That from July 26, 1989 to September 13, 1989, at Placer, Surigao del Norte, Philippines, xxx, the above-named
accused xxx with deliberate criminal intent to defraud the general public by pretending to have a huge amount as
sinking fund but later on was found out to be a pyramiding scam, accused Vicente Menil, Jr., being the Manager, and
his wife accused Adriana B. Menil, being the Treasurer of their association known as ABM Development Center, Inc.,
xxx operating on funds solicited from the general public in the form of investments with the enticing return of 10 times
then later reduced to 7 times the investment after due date and having successfully solicited thru their sales executive,
Zohar Mondaya, the total amount of P610,046.00, did then and there xxx misappropriate xxx the said amount xxx
remitted to them subject to the condition that xxx after the lapse of 15 working days from remittance, said investment
would be returned in seven folds to the investors, but xxx repeated demands made xxx said accused failed and
refused to pay or give as agreed upon by them xxx to the damage and prejudice of the investors in the said
amount P610,046.00 xxx resulting to more financial difficulties of the general public and therefore constitutes
economic sabotage that threatens the stability of the nation.
Contrary to Art. 315 of the Revised Penal Code."

Similarly worded informations were filed against the accused-appellant and his wife in Criminal Case Nos. 3000, 3001,
3013, 3020, 3021, 3022, 3026, 3028, 3052, 3053, 3054, and 3058. These informations likewise charged accusedappellant and his wife with violations of Article 315 of the Revised Penal Code and differed only in the amount
allegedly swindled, the names of the complainants and the sales executives, and the time and place where the
alleged swindling occurred.
Accused-appellant and his wife, upon being arraigned on April 4, 1990, pleaded not guilty to all the charges leveled
7
against them.
In the case for large scale swindling and in the thirteen (13) cases for estafa, a pre-trial was conducted. The pre-trial
8
order in Criminal Case No. 2948, for large scale swindling, shows the following stipulations:
1. That the accused Vicente Menil, Jr. and Adriana Menil are the General Manager and Treasurer,
respectively of the ABM Appliances and Upholstery with Assurances and Privileges which later on changed to
ABM Development Center;
2. That the ABM Development Center was operating business in Surigao City, particularly at the Capitol Road;
that it was duly registered with the Securities and Exchange Commission and was duly issued a Mayors
Permit to operate the same;
3. That the ABM Appliances and Upholstery with Assurances and Privileges, and later ABM Development
Center were merged into one, under one sanitary permit to operate as one entity;
4. That on August 24, 1989, Vicente Menil, Jr., the General Manager, issued a Memorandum to all investors
thereof regarding the decrease of the proceeds of the investment from one thousand percent to 700% so that
the P10.00 investment will get only the proceeds of P70.00; and,
5. That what remain to be proved in the trial on the merits will be limited only to the names of the sales
executives/investors and amounts of investment.
For the thirteen estafa cases, the following facts were stipulated:
1. That the accused operated the ABM Appliance and Upholstery with Assurance Privileges and ABM
Development Center, Inc., the latter being duly registered with the Securities and Exchange Commission;
2. That accused Vicente Menil, as General Manager, and Adriana Menil, as Treasurer, operating through the
sales executives who solicited/received investments from the general public and remitted to the corporation;
3. That the listed sales executives and the amounts claimed remitted and received are qualifiedly admitted;
and
4. That the operation of ABM stopped on September 18, 1989.

Thereafter, trial on the merits in the fourteen (14) cases commenced.

During the trial of the case, accused Adrian B. Menil, the wife of accused-appellant, died of tuberculosis on November
10
5, 1992 and accordingly, the trial court dismissed the cases as against her in an Order dated November 12, 1992.

In all the fourteen (14) cases before the trial court, the documentary evidence for the prosecution was similar,
consisting mainly of the investment records containing a listing of remittances made by the sales executives/ushers of
ABM Appliance and Upholstery and ABM Development Center, Inc. Likewise, the testimonial evidence for the
prosecution consisted mainly of the testimonies of the sales executives/ushers of ABM Appliance and Upholstery and
ABM Development Center, Inc., who testified on the mode of operations, the respective amounts which they solicited
11
from the public, and the places where they solicited
In Criminal Case No. 2948, for violation of P.D. 1689, due to the large number of witnesses listed in the complaint and
information (91 in all), the prosecution and defense agreed to limit the number of witnesses to only four (4) sales
executives.
These witnesses, namely Felicitas Gotostos, Gloria Apale, Wlfredo Lisandra and Nena Cagna-an, uniformly declared
that they were sales executives and investors appointed by accused-appellant Vicente Menil, Jr. to solicit investments
from people in Surigao City. Witness Felicitas Gatostos claimed that she remitted a total of P257,180.00. Gloria Apale
turned over investments totalling P1,397,619.00 while Nena Cagna-an claimed to have remitted a total of P94,120.00.
Finally, witness Wilfredo Lisondra allegedly turned over investments totaling P1,124,358.00. These amounts were
listed on sheets of paper which were marked and acknowledged received by representatives of the ABM office. These
four investments were included in a Summary of Total Investments presented by the prosecution containing the
names of 1,124 sales executives and/or investors who all in all remitted a total amount of P45,494,936.00.
For the thirteen (13) estafa cases, the prosecution presented the thirteen complainants who were sales executives
and/or investors of ABM assigned to the different barangays and municipalities in Surigao del Norte where ABM
collected investments. They all testified on the modus operandi employed by accused-appellant in conducting his
"investment business" and they identified documents which showed the names of the investors they solicited from and
the amounts which they remitted to ABM and which remained unpaid. Following is a summary of the amounts that
these witnesses claim as having been duly received by ABM for investment purposes and which remained unpaid to
date:
CRIMINAL CASE NO. WITNESS

PLACE

AMOUNT

2956

Zohar Mandaya

Placer, Surigao del Norte

P610,046.00

3000

Cedronio Cagampang Bacuag, Surigao del Norte

3001

Joseph Lacsamana

Brgy. del Rosario, Tubod,

Surigao del Norte

P203,850.00

3013

Domingo T. Tejada

Brgy. Anislagan, Placer,

Surigao del Norte

P 29,070.00

3020

Rosiefe M. Laid

Brgy. Sta Cruz, Placer,

Surigao del Norte

P114,620.00

3021

Gamaliela Mordeno

Brgy. Roxas, Mainit,

Surigao del Norte

3022

Rebecca Mosca

Brgy. Poblacion, Mainit,

Surigao del Norte

P275,280.00

3026

Patora Decalit

Brgy. Sta. Cruz, Placer,

Surigao del Norte

222,120.00

3028

Francisca Tado

Tubod, Surigao del Norte

3052

Porferia Etac

Brgy. Bad-as, Placer,

136,670.00

447,960.00

P399,650.00
172,910.00

Surigao del Norte

3053

Leodegaria Paquero

Brgy. Marga, Tubod,

Surigao del Norte

3054

Felomina Calamba

Tubod, Surigao del Norte

3058

Merlina Silva

Brgy. Bad-as, Placer,

148,278.00

P320,000.00
500,129.00

Accused Vicente Menil, Jr. put up a common defense in all the cases filed against him.
12

He testified that his investment business started on June 15, 1989 in Surigao City. He insists that his investment
business was legitimate as his corporation was registered with the Securities and Exchange Commission. He pointed
out that under paragraphs 3 and 4 of the Articles of Incorporation of ABM Development Center, Inc., he was
authorized to solicit and receive investments in money and in kind. He also presented a Mayors Permit which he
13
claimed authorized him to run the business.
In answer to a question as to how his business operates, the accused-appellant described it as a "rolling system"
14
which paid off dividends in the ratio of one is to ten initially and then one is to seven beginning August 15, 1989. He
claimed to have paid off these investments as they matured beginning June 30, 1989 and that he was able to pay off
15
all investments received by his office which matured on August 28, 1989 and earlier. He stated however, that
because of the large amounts involved, he was able to pay off the investments maturing on August 28, 1989 only on
16
September 18, 1989 as the counting of the money alone took two or three days to finish.
He alleged that he stopped giving payments after September 18, 1989 due to circumstances beyond his control. He
claimed that on September 19, 1989, he and his wife were fetched by a certain Lt. Arab and were brought to the PC
Headquarters where a certain Col. Macatangcop questioned them as to the delay in the payment of investments. He
was then mauled by a certain Lt. Arab and two sons of Col. Macatangcop when he refused to issue to them a check
for P500,000.00. He was released by Col. Macatangcop only after he issued a check for P250,000.00 and after he
17
promised that he will not submit himself to a medical examination.
After his experience with Col. Macatangcop, he proceeded back to his office to rest and to plan his next course of
action. He then went to the Provincial Hospital in order to have his injuries checked. He was able to secure a medical
18
certificate attesting to the injuries that he sustained. While at the hospital, he heard rumors that he was being hunted
by the military and so he transferred to the Miranda Clinic. Thereafter, he went to Toril, Davao City where he was
19
arrested by a certain Col. Panchito.
He stated that while in Davao City, a certain Sgt. Patino ransacked his belongings and took away his attache case
containing P50,000.00 in cash, several pieces of jewelry, watches, a camera, and an undisclosed amount in British
20
pounds and American dollars. All in all, he claimed that he lost a total of half a million pesos. He further stated that
he left around P3,000,000.00 inside a steel cabinet in his office which had been taken into the custody of the city
sheriff. When he checked the contents with the sheriffs office, he stated that the steel cabinet had been forcibly
21
opened and the money was now missing.
He further alleged that he had money in the Surigao City Banks amounting to half a million pesos but he gradually
withdrew this amount to pay off his obligations. At this point, he could no longer pay off all his financial obligations as
22
he had no more money and because he was detained at the Surigao City jail.
23

On August 16, 1993, the trial court rendered a joint decision finding accused-appellant guilty of one count of large
scale swindling and thirteen (13) counts of estafa. The dispositive portion of the joint decision provides, as follows:
"WHEREFORE, this Court hereby finds accused Vicente Menil, Jr. GUILTY beyond reasonable doubt of Estafa,
defined and penalized in Article 315, first paragraph and Sections 1(b) and 2(a) of the Revised Penal Code, in all the
above-entitled thirteen (13) provincial cases and one (1) city case, and, accordingly, hereby sentences him, the
following penalties:
Crim. Case No. 2948:
The qualified penalty provided for in second paragraph of Section 1, Presidential Decree No. 1689, for Large Scale
Swindling, and metes out an imprisonment of reclusion perpetua; and to indemnify all the listed investors in Exhibits

"PP-1" to "PP-2", in the total sum of P45,494,936.00, Exhibit "PP"; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 2956:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-5" to "A-188", in the amount of P624,726.00; to suffer the accessory penalties provided
for by law; and, to pay the costs.
Crim. Case No. 3000:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A" to "A-27", the sum of P136,670.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3001:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-83", the sum of P203,850.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3013:
An indeterminate penalty of Two (2) years, Four (4) Months of prision correccional , as the minimum, to Eight (8) years
of prision mayor, as the maximum; to indemnify the investors listed in Exhibits "A-1" to "A-8" the sum of P29,070.00; to
suffer the accessory penalties provided for by law; and, to pay the costs.
Crim. Case No. 3020:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-126" the sum of P114,620.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3021:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-126" the sum of P447,960.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3022:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-64" the sum of P275,280.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3026:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-28" the sum of P222,120.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3028:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-74" the sum of P399,650.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3052:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-26" the sum of P172,910.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.

Crim. Case No. 3053:

An indeterminate penalty of Two (2) Years and Four (4) Months of prision correccional, as the minimum, to Eight (8)
years of prision mayor; to indemnify the investors listed in Exhibits "A-1" to "A-17" the sum of P36,970.00; to suffer the
accessory penalties provided for by law; and, to pay the costs.
Crim. Case No. 3054:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-198" the sum of P920,883.00; to suffer the accessory penalties provided for by
law; and, to pay the costs.
Crim. Case No. 3058:
An indeterminate penalty of Eight (8) years of prision mayor to Twenty Years of reclusion temporal; to indemnify the
investors listed in Exhibits "A-1" to "A-150" the sum of P500,129.00; to suffer the accessory penalties provided for by
law; and, to pay the costs;
Without subsidiary imprisonment, in case of insolvency.
Pursuant to Article 70, the penalty of reclusion perpetua shall be served first and, thereafter, the simultaneous service
of the penalties imposed in the thirteen (13) provincial cases. Provided, however, that the maximum period shall in no
case exceed Forty (40) Years, after applying the three-fold rule length of time, corresponding to the most severe of the
penalties imposed, which is reclusion perpetua, computed at Thirty (30) years.
The accuseds preventive detention shall be credited in his favor, pursuant to law.
SO ORDERED."

24

Hence, this appeal where accused-appellant raises the following assignment of errors

25

I.
THE COURT A QUO ERRED IN NOT DECLARING AS PURELY CIVIL THE LIABILITY OF ACCUSED-APPELLANT
TO THE PRIVATE COMPLAINANTS/ INVESTORS.
II.
THE COURT A QUO MANIFESTLY ERRED IN CONVICTING ACCUSED-APPELLANT FOR LARGE SCALE
SWINDLING UNDER P.D. 1869 IN CRIM. CASE NO. 2948 AND ESTAFA IN CRIM. CASE NOS. 2956-3058,
RESPECTIVELY, DESPITE THE FACT THAT HIS GUILT WAS NOT PROVED BEYOND REASONABLE DOUBT.
We affirm the conviction of accused-appellant.
In convicting accused-appellant of the crimes of Large Scale Swindling punishable under P.D. 1689 in Criminal Case
No. 2948 and estafa in the thirteen other criminal cases filed against accused-appellant, the trial court made reference
to Article 315, par. 2 (a) of the Revised Penal Code. Under this provision, swindling or estafa by false pretenses or
fraudulent acts executed prior to or simultaneously with the commission of the fraud is committed by "using fictitious
name, or falsely pretending to possess power, influence, qualifications, property, credit, agency, business, or
imaginary transactions, or by other similar deceits." The elements of estafa under this penal provision are: (1) the
accused defrauded another by means of deceit and (2) damage or prejudice capable of pecuniary estimation is
26
caused to the offended party or third party.
In the case at bench, it is not disputed that the accused-appellant failed to pay the expected returns of the investments
and/or solicitations of the private complainants. Accused-appellant himself admits that he was not able to pay the
returns on the investments due August 29, 1989 onwards. Neither did he return the amount of their investments. Thus:
"Q: Okay. All right, you know this Crim. Case No. 3053, one Leodegarda Paquero claims that she had invested the
amount of P36,970.00 duly acknowledged as to have been received by the ABM. Can you tell, Mr. Menil, what
happened to this investment made by the said Leodegarda Paquero?
Court:

What municipality is that?

Pros. Calang:
Tubod, Barangay Marga, your Honor please.
Atty. Canoy:
I would like to request counsel to pinpoint your honor please, the amount?
Pros. Calang:
On pages 31-45 inclusive, on record.
Q: What happened to her investment of P36,970.00?
A: It was included in the damage when the business was closed.
Q: Meaning to say, not paid?
A: Not paid, sir.
Q: Even the total amount of investment was not returned?
A: Yes, it was not returned, sir.
Q: In Crim. Case No. 3000, one Cedronio Cagampang claims that he had invested to the ABM Development Center,
Inc. as usher as well as investor in the amount of P136,670.00 turned over and received by the ABM Development
Center, Incorporated. Kindly tell this Honorable Court what happened to this investment?
A: This one which was not yet due or arrived to its due date, so this was not paid.
Atty. Canoy:
Your honor, please, I think there is no need to present the same because it is admitted, your Honor, that all monies
invested and which became due after August 28 were not received.
Court:
Yes, that is why there is that manifestation. So we will save time the same is true with the other cases where it was
27
shown that the money were invested and due after August 28."
What needs to be determined therefore is whether or not the element of defraudation by means of deceit has been
established by the prosecution beyond reasonable doubt.
Fraud, in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions, and
concealment involving a breach of legal or equitable duty, trust, or confidence justly reposed, resulting in damage to
28
another, or by which an undue and unconscientious advantage is taken of another. It is a generic term embracing all
multifarious means which human ingenuity can devise, and which are resorted to by one individual to secure an
advantage over another by false suggestions or by suppression of truth and includes all surprise, trick, cunning,
29
dissembling and any unfair way by which another is cheated. On the other hand, deceit is the false representation of
a matter of fact, whether by words or conduct, by false or misleading allegations, or by concealment of that which
should have been disclosed which deceives or is intended to deceive another so that he shall act upon it to his legal
30
injury.
With these legal doctrines in mind, we hold that the testimonial and documentary evidence presented by the
prosecution, as well as the admissions made by accused-appellant, sufficiently prove that accused-appellant
employed fraud and deceit upon gullible people to induce them to invest in his "business." The inducement consisted
of accused-appellants assurance that money invested in his "business" would have returns of 1000%, later reduced
to 700%, after 15 days. Lured by the false promise of quick financial gains on their investments, the unsuspecting
people of Surigao del Norte readily turned over their hard-earned money to the coffers of ABM.

It has been held that where one states that the future profits or income of an enterprise shall be a certain sum, but he
actually knows that there will be none, or that they will be substantially less than he represents, the statements
31
constitute an actionable fraud where the hearer believes him and relies on the statement to his injury. In the case at
bench, it is abundantly clear that ultimately, the profits which accused-appellant promised to his investors would not be
realized. Accused-appellant admitted during his testimony that the money he used to pay off maturing investments
were taken from the remittances received by ABM Development Center, Inc. Thus:
Q: As far as you can recall as of June 30, 1989, how much investments were already made or received by your office?
A: More than forty thousand pesos.
Q: Your first due date was June 30, 1989, you said, the returns is estimated to be more than one thousand pesos?
A: Yes, sir.
Q: Where do you get this one thousand pesos for the investment due on June 30, 1989 is it not that you get it from the
investment of the previous days?
A: That is the amount that Im going to use. But I also have my own funds.
Q: How much was your funds as of June 30, 1989?
A: Two Hundred Fifty Thousand (P250,000.00) Pesos.
Q: The investments that were due on July 1, 1989, the money that you are to pay for these returns were taken from
the previous days, correct?
A: Yes, sir.
Q: The same is true with the investments due on July 2, you get all the money to pay from the investments made in
the previous days, correct?
A: Yes, sir.
Q: And the same thing is followed on the days after?
A: Yes, sir.
Q: Your last due date was August 28?
A: Yes, sir.
Q: Again the returns for these date were taken from the previous days, from the investments of the people from the
previous dates?
A: Yes, sir.
xxx
Q: On August 29, were there still investments?
A: There was still investment on that date, sir, but as far as I know there were so many releases on that day. I paid up
to September 18. But on September 19, there was already an incident that happened.
Q: The returns you made of investments on September 18, when was that investment made?
A: From the previous investments.
Q: My question is: Those amounts you paid on September 18, when was were those amounts invested, do you
agree that it was also fifteen days before?

A: Every due date we completely paid it. Every due date, we paid completely before going to the next day. Due date,
for example, it was delayed because it was delayed in counting money. For example, the one hundred thousand
pesos, it takes time in counting that one hundred thousand pesos.
Q: Are we to understand from you, Mr. Witness, that the returns of the investments due on August 28 were already
paid on August 28?
A: Yes, sir.
Q: And the money that you used in paying these returns were also taken from the previous days, from the investments
of the people?
A: Yes, sir.

32

In other words, accused-appellant merely paid the returns of maturing investments from the remittances of succeeding
investors. What accused-appellant actually offered to the public was a "Ponzi Scheme," an unsustainable investment
program that offers extravagantly high returns and pays these returns to early investors out of the capital contributed
33
by later investors. In People vs. Balasa , we had occasion to describe the workings of the "Ponzi Scheme" as
follows:
"Named after Charles Ponzi who promoted the scheme in the 1920s, the original scheme involved the issuance of
bonds which offered 50% interest in 45 days or a 100% profit if held for 90 days. Basically, Ponzi used the money he
received from later investors to pay extravagant rates of return to early investors, thereby inducing more investors to
place their money with him in the false hope of realizing this same extravagant rate of return themselves. This was the
very scheme practiced by the Panata Foundation.
However, the Ponzi scheme works only as long as there is an ever-increasing number of new investors joining the
scheme. To pay off the 50% bonds Ponzi had to come up with one-and-a-half times increase with each round. To pay
100% profit, he had to double the number of investors at each stage, and this is the reason why a Ponzi scheme is a
scheme and not an investment strategy. The progression it depends upon is unsustainable. The pattern of increase in
the number of participants in the system explains how it is able to succeed in the short run and, at the same time, why
it must fail in the long run. This game is difficult to sustain over a long period of time because to continue paying the
promised profits to early investors, the operator needs an ever larger pool of later investors. The idea behind this type
of swindle is that the conman collects his money from his second or third round of investors and then absconds
before anyone else shows up to collect. Necessarily, these schemes only last weeks, or months at most."
That there was no profit forthcoming can likewise be deduced from the fact that accused-appellant was not engaged
nor authorized to engage in any lucrative business to finance its operation. On this point, accused-appellant points out
that under the Articles of Incorporation of ABM Development Center, Inc., he was authorized to "make or coordinate in
the making of studies and researches" and "to solicit, receive, channel and/or distribute donations, economic aids,
grants, investments in money or in kind." Likewise, he presented a Mayors Permit that he claimed authorized him to
engage in the investment business.
There is no merit in these contentions of accused-appellant. As proven by the prosecution, the incorporation of the
ABM Development Center, Inc. on August 21, 1989 was undertaken by accused-appellant only to give a semblance of
legitimacy to its illegal operations. Accused-appellant started receiving investments from the public as early as July 15,
1989 and yet it was only after he was warned by a representative of the Department of Trade and Industry that his
34
operation was illegal that he went about with the business of incorporating his moneymaking scheme. Moreover, as
borne out by the Articles of Incorporation, the ABM Development Center, Inc. was incorporated as a non-stock
corporation. As a non-stock corporation, ABM Development Center, Inc. may only be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic, or other similar
35
purposes. It may not engage in undertakings, such as the investment business, where profit is the main or
underlying purpose. Although the non-stock corporation may obtain profits as an incident to its operation, such profits
36
are not to be distributed among its members but must be used for the furtherance of its purposes. In the same vein,
the Mayors Permit issued to accused-appellant shows that he was only permitted to "act as dealer of appliances and
upholstery." The permit did not give accused-appellant authority to engage in the investment business.
Finally, the fact that accused-appellant could not present any specific business plan or cite any donations or bequests
which he received to finance his money-making scheme clearly shows that the investment scheme which he foisted
on the unsuspecting public was fraudulent. It must be noted that according to the Articles of Incorporation of ABM
Development Center, Inc., its paid-up capital was only P11,000.00 and yet it was able to transact business in terms of
millions of pesos. It must likewise be stressed that accused-appellant refused to answer when asked about the
specifics of his business and about how he would be able to fulfill his obligation of paying the promised exorbitant
rates of return.

In his defense, accused-appellant points to the fact that several investors were paid the corresponding returns on their
investments. This fact, accused-appellant argues, negates any perceived false pretense or deceit on his part and as
such, his liability, if any should only be civil in nature.
There is no merit in this argument. As previously explained, the payment of returns to early investors is an integral part
of the illegal Ponzi scheme foisted by accused-appellant on the unsuspecting public. The fact that early investors were
paid the returns on their investments induced more people to participate in the illegal scheme with the hope of
realizing the same extravagant rate of return. In fact, after word of these payments spread like wildfire, the amount of
investments received by accused-appellant ballooned from thousands of pesos to several millions of pesos.
The prosecution having proved the two elements of damage and deceit in all the cases filed against accusedappellant, the trial court thus committed no error in finding accused-appellant guilty of one count of large scale
swindling and thirteen (13) counts of estafa. The Court notes, however, that the penalties imposed by the trial court
are erroneous.
In Criminal Case No. 2948, accused-appellant was charged with violation of P.D. 1689 and sentenced to
imprisonment of reclusion perpetua. Section 1 of the said law provides, as follows:
"Sec.1. Any person or persons who shall commit estafa or other forms of swindling as defined in Articles 315 and 316
of the Revised Penal Code, as amended, shall be punished by life imprisonment to death if the swindling (estafa) is
committed by a syndicate consisting of five or more persons formed with the intention of carrying out the unlawful or
illegal act, transaction, enterprise or scheme, and the defraudation results in the misappropriation of moneys
contributed by stockholders, or members of rural banks, cooperatives, "samahang nayons," or farmers associations,
or of funds solicited by corporations/associations from the general public.
When not committed by a syndicate as above defined, the penalty imposable shall be reclusion temporal toreclusion
perpetua if the amount of the fraud exceeds 100,000 pesos."
P.D. No. 1689 thus penalizes offenders with life imprisonment to death regardless of the amount involved, provided
that a syndicate committed the crime. A syndicate is defined in the same law as "consisting of five or more persons
formed with the intention of carrying out the unlawful or illegal act, transaction, enterprise or scheme." If the offenders
are not members of a syndicate, they shall nevertheless be held liable for the acts prohibited by the law but they shall
be penalized by reclusion temporal to reclusion perpetua if the amount of the fraud is more than one hundred
thousand pesos.
In the instant case, there was no showing by the prosecution that a syndicate perpetrated the Ponzi scheme. While
the prosecution proved that a non-stock corporation with eleven (11) incorporators, including accused-appellant and
his wife, was involved in the illegal scheme, there was no showing that these incorporators collaborated,
confederated, and mutually helped one another in directing the corporations activities. In fact, the evidence for the
prosecution shows that it was only accused-appellant and his wife who had knowledge of and who perpetrated the
illegal scheme.
As such, the trial court was correct in convicting accused-appellant under the second paragraph of Section 1 of P.D.
1689 considering that the amount swindled by accused-appellant totals P45,494,936.00. The trial court erred,
however, in imposing the penalty of reclusion perpetua. Given the absence of mitigating or aggravating
circumstances, the lesser penalty imposed under the said paragraph, reclusion temporal, should have been imposed
in its medium period. Applying the Indeterminate Sentence Law, accused-appellant, in Criminal Case No. 2948,
should have been sentenced to an indeterminate penalty of ten (10) years of prision mayor medium, as minimum, to
twenty (20) years of reclusion temporal medium, as maximum.
The trial court likewise erred in its application of the provisions of Article 315 of the Revised Penal Code and of the
Indeterminate Sentence Law in the imposition of the proper penalties for the thirteen (13) estafa cases.
The penalty for estafa depends on the amount defrauded. Article 315 of the Revised Penal Code provides that "the
penalty of prision correccional in its maximum period to prision mayor in its minimum period (or imprisonment ranging
from 4 years, 2 months, and 1 day to 8 years), if the amount of the fraud is over P12,000.00 but does not exceed
P22,000.00, and if such amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its
maximum period (6 years, 8 months and 21 days to 8 years), adding one year for each additional P10,000.00 pesos;
but the total penalty which may be imposed shall not exceed twenty years. In such case, and in connection with the
accessory penalties which may be imposed and for the purpose of the other provisions of this Code, the penalty shall
37
be termed prision mayor or reclusion temporal, as the case may be.
Under the Indeterminate Sentence Law, the maximum term of the penalty shall be "that which, in view of the attending
circumstances, could be properly imposed" under the Revised Penal Code, and the minimum shall be "within the

38

range of the penalty next lower to that prescribed" for the offense. The penalty next lower should be based on the
penalty prescribed by the Code for the offense, without first considering any modifying circumstance attendant to the
commission of the crime. The modifying circumstances are considered only in the imposition of the maximum term of
39
the indeterminate sentence.
In computing the penalty for estafa, the fact that the amounts involved exceed P22,000.00 should not be considered in
the initial determination of the indeterminate penalty; instead the matter should be taken as analogous to modifying
circumstances in the imposition of the maximum term of the full indeterminate sentence. This interpretation of the law
is in accord with the rule that penal laws should be construed in favor of the accused. Since the penalty prescribed by
law for estafa is prision correccional maximum to prision mayorminimum, the penalty next lower would then be prision
correccional in its minimum to medium periods. Thus, the minimum term of the indeterminate sentence should be
anywhere within six (6) months and one (1) day to four (4) years and two (2) months while the maximum term of the
indeterminate sentence should at least be six (6) years and one (1) day because the amounts involved exceeded
40
P22,000.00, plus one (1) year for each additional P10,000.00. The maximum penalty should not exceed twenty
years.
Accordingly, with respect to the cases of estafa filed against accused-appellant, the applicable periods of
imprisonment should, respectively, be as follows:
In Criminal Case No. 2956, where the amount swindled is P624,726.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3000, where the amount involved is P136,670.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to nineteen
(19) years of reclusion temporal as maximum.
In Criminal Case No. 3001, where the amount involved is P203,850.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3013, where the amount involved is P29,070.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum to eight (8)
years of prision mayor as maximum.
In Criminal Case No. 3020, where the amount involved is P114,620.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to seventeen
(17) years of reclusion temporal as maximum.
In Criminal Case No. 3021, where the amount involved is P447,960.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3022, where the amount involved is P275,280.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3026, where the amount involved is P222,120.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3028, where the amount involved is P399,650.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3052, where the amount involved is P172,910.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3053, where the amount involved is P36,970.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to nine (9)
years of prision mayor as maximum.

In Criminal Case No. 3054, where the amount involved is P920,883.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3058, where the amount involved is P500,129.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
The amounts ordered reimbursed to the respective complainants and investors listed in the documentary exhibits of
the prosecution are hereby affirmed.
WHEREFORE, premises considered, the decision appealed from is hereby AFFIRMED, subject to the following
modifications:
In Criminal Case No. 2948, where the total amount of the fraud is P45,494,936.00, accused-appellant is hereby
sentenced to an indeterminate penalty of ten (10) years of prision mayor medium, as minimum to twenty (20) years
of reclusion temporal medium, as maximum.
In Criminal Case No. 2956, where the amount swindled is P624,726.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3000, where the amount involved is P136,670.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to nineteen
(19) years of reclusion temporal as maximum.
In Criminal Case No. 3001, where the amount involved is P203,850.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3013, where the amount involved is P29,070.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum to eight (8)
years of prision mayor as maximum.
In Criminal Case No. 3020, where the amount involved is P114,620.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to seventeen
(17) years of reclusion temporal as maximum.
In Criminal Case No. 3021, where the amount involved is P447,960.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3022, where the amount involved is P275,280.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3026, where the amount involved is P222,120.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3028, where the amount involved is P399,650.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3052, where the amount involved is P172,910.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3053, where the amount involved is P36,970.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to nine (9)
years of prision mayor as maximum.

In Criminal Case No. 3054, where the amount involved is P920,883.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
In Criminal Case No. 3058, where the amount involved is P500,129.00, accused-appellant is hereby sentenced to an
indeterminate penalty of four (4) years and two (2) months of prision correccional medium, as minimum, to twenty (20)
years of reclusion temporal as maximum.
The amounts ordered reimbursed to the respective complainants and investors listed in the documentary exhibits of
the prosecution are hereby affirmed.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.

G.R. No. 165443

April 16, 2009

CALATAGAN GOLF CLUB, INC. Petitioner,

vs.
SIXTO CLEMENTE, JR., Respondent.
DECISION
TINGA, J.:
1

Seeking the reversal of the Decision dated 1 June 2004 of the Court of Appeals in CA-G.R. SP No. 62331 and the
reinstatement of the Decision dated 15 November 2000 of the Securities and Exchange Commission (SEC) in SEC
Case No. 04-98-5954, petitioner Calatagan Golf Club, Inc. (Calatagan) filed this Rule 45 petition against respondent
Sixto Clemente, Jr. (Clemente).
The key facts are undisputed.
Clemente applied to purchase one share of stock of Calatagan, indicating in his application for membership his
mailing address at "Phimco Industries, Inc. P.O. Box 240, MCC," complete residential address, office and residence
telephone numbers, as well as the company (Phimco) with which he was connected, Calatagan issued to him
2
Certificate of Stock No. A-01295 on 2 May 1990 after paying P120,000.00 for the share.
Calatagan charges monthly dues on its members to meet expenses for general operations, as well as costs for
upkeep and improvement of the grounds and facilities. The provision on monthly dues is incorporated in Calatagans
3
Articles of Incorporation and By-Laws. It is also reproduced at the back of each certificate of stock. As reproduced in
the dorsal side of Certificate of Stock No. A-01295, the provision reads:
5. The owners of shares of stock shall be subject to the payment of monthly dues in an amount as may be prescribed
in the by-laws or by the Board of Directors which shall in no case be less that [sic] P50.00 to meet the expenses for
the general operations of the club, and the maintenance and improvement of its premises and facilities, in addition to
such fees as may be charged for the actual use of the facilities x x x
When Clemente became a member the monthly charge stood at P400.00. He paid P3,000.00 for his monthly dues on
21 March 1991 and another P5,400.00 on 9 December 1991. Then he ceased paying the dues. At that point, his
4
balance amounted to P400.00.
Ten (10) months later, Calatagan made the initial step to collect Clementes back accounts by sending a demand
letter dated 21 September 1992. It was followed by a second letter dated 22 October 1992. Both letters were sent to
Clementes mailing address as indicated in his membership application but were sent back to sender with the postal
5
note that the address had been closed.
Calatagan declared Clemente delinquent for having failed to pay his monthly dues for more than sixty (60) days,
specifically P5,600.00 as of 31 October 1992. Calatagan also included Clementes name in the list of delinquent
members posted on the clubs bulletin board. On 1 December 1992, Calatagans board of directors adopted a
resolution authorizing the foreclosure of shares of delinquent members, including Clementes; and the public auction
of these shares.
On 7 December 1992, Calatagan sent a third and final letter to Clemente, this time signed by its Corporate Secretary,
Atty. Benjamin Tanedo, Jr. The letter contains a warning that unless Clemente settles his outstanding dues, his share
would be included among the delinquent shares to be sold at public auction on 15 January 1993. Again, this letter was
6
sent to Clementes mailing address that had already been closed.
On 5 January 1993, a notice of auction sale was posted on the Clubs bulletin board, as well as on the clubs
premises. The auction sale took place as scheduled on 15 January 1993, and Clementes share sold
7
forP64,000. According to the Certificate of Sale issued by Calatagan after the sale, Clementes share was purchased
8
9
by a Nestor A. Virata. At the time of the sale, Clementes accrued monthly dues amounted toP5,200.00. A notice of
10
foreclosure of Clementes share was published in the 26 May 1993 issue of the Business World.
11

Clemente learned of the sale of his share only in November of 1997. He filed a claim with the Securities and
Exchange Commission (SEC) seeking the restoration of his shareholding in Calatagan with damages.
On 15 November 2000, the SEC rendered a decision dismissing Clementes complaint. Citing Section 69 of the
Corporation Code which provides that the sale of shares at an auction sale can only be questioned within six (6)

months from the date of sale, the SEC concluded that Clementes claim, filed four (4) years after the sale, had already
prescribed. The SEC further held that Calatagan had complied with all the requirements for a valid sale of the subject
share, Clemente having failed to inform Calatagan that the address he had earlier supplied was no longer his address.
Clemente, the SEC ruled, had acted in bad faith in assuming as he claimed that his non-payment of monthly dues
would merely render his share "inactive."
Clemente filed a petition for review with the Court of Appeals. On 1 June 2004, the Court of Appeals promulgated a
decision reversing the SEC. The appellate court restored Clementes one share with a directive to Calatagan to issue
in his a new share, and awarded to Clemente a total of P400,000.00 in damages, less the unpaid monthly dues
of P5,200.00.
In rejecting the SECs finding that the action had prescribed, the Court of Appeals cited the SECs own ruling in SEC
Case No. 4160, Caram v. Valley Golf Country Club, Inc., that Section 69 of the Corporation Code specifically refers to
unpaid subscriptions to capital stock, and not to any other debt of stockholders. With the insinuation that Section 69
does not apply to unpaid membership dues in non-stock corporations, the appellate court employed Article 1140 of the
Civil Code as the proper rule of prescription. The provision sets the prescription period of actions to recover movables
at eight (8) years.
The Court of Appeals also pointed out that since that Calatagans first two demand letters had been returned to it as
sender with the notation about the closure of the mailing address, it very well knew that its third and final demand
letter also sent to the same mailing address would not be received by Clemente. It noted the by-law requirement that
within ten (10) days after the Board has ordered the sale at auction of a members share of stock for indebtedness, the
Corporate Secretary shall notify the owner thereof and advise the Membership Committee of such fact. Finally, the
Court of Appeals ratiocinated that "a person who is in danger of the imminent loss of his property has the right to be
12
notified and be given the chance to prevent the loss."
Hence, the present appeal.
Calatagan maintains that the action of Clemente had prescribed pursuant to Section 69 of the Corporation Code, and
that the requisite notices under both the law and the by-laws had been rendered to Clemente.
Section 69 of the Code provides that an action to recover delinquent stock sold must be commenced by the filing of a
complaint within six (6) months from the date of sale. As correctly pointed out by the Court of Appeals, Section 69 is
part of Title VIII of the Code entitled "Stocks and Stockholders" and refers specifically to unpaid subscriptions to
capital stock, the sale of which is governed by the immediately preceding Section 68.
The Court of Appeals debunked both Calatagans and the SECs reliance on Section 69 by citing another SEC ruling
in the case of Caram v. Valley Golf. In connection with Section 69, Calatagan raises a peripheral point made in the
SECs Caram ruling. In Caram, the SEC, using as take-off Section 6 of the Corporation Code which refers to "such
rights, privileges or restrictions as may be stated in the articles of incorporation," pointed out that the Articles of
Incorporation of Valley Golf does not "impose any lien, liability or restriction on the Golf Share [of Caram]," but only its
(Valley Golfs) By-Laws does. Here, Calatagan stresses that its own Articles of Incorporation does provide that the
monthly dues assessed on owners of shares of the corporation, along with all other obligations of the shareholders to
the club, "shall constitute a first lien on the shares and in the event of delinquency such shares may be ordered sold
by the Board of Directors in the manner provided in the By-Laws to satisfy said dues or other obligations of the
13
shareholders." With its illative but incomprehensible logic, Calatagan concludes that the prescriptive period under
Section 69 should also apply to the sale of Clementes share as the lien that Calatagan perceives to be a restriction is
stated in the articles of incorporation and not only in the by-laws.
We remain unconvinced.
There are fundamental differences that defy equivalence or even analogy between the sale of delinquent stock under
Section 68 and the sale that occurred in this case. At the root of the sale of delinquent stock is the non-payment of the
subscription price for the share of stock itself. The stockholder or subscriber has yet to fully pay for the value of the
share or shares subscribed. In this case, Clemente had already fully paid for the share in Calatagan and no longer
had any outstanding obligation to deprive him of full title to his share. Perhaps the analogy could have been made if
Clemente had not yet fully paid for his share and the non-stock corporation, pursuant to an article or by-law provision
designed to address that situation, decided to sell such share as a consequence. But that is not the case here, and
there is no purpose for us to apply Section 69 to the case at bar.
Calatagan argues in the alternative that Clementes suit is barred by Article 1146 of the Civil Code which establishes
four (4) years as the prescriptive period for actions based upon injury to the rights of the plaintiff on the hypothesis that
the suit is purely for damages. As a second alternative still, Calatagan posits that Clementes action is governed by
Article 1149 of the Civil Code which sets five (5) years as the period of prescription for all other actions whose

prescriptive periods are not fixed in the Civil Code or in any other law. Neither article is applicable but Article 1140 of
the Civil Code which provides that an action to recover movables shall prescribe in eight (8) years. Calatagans action
is for the recovery of a share of stock, plus damages.
Calatagans advertence to the fact that the constitution of a lien on the members share by virtue of the explicit
provisions in its Articles of Incorporation and By-Laws is relevant but ultimately of no help to its cause. Calatagans
Articles of Incorporation states that the "dues, together with all other obligations of members to the club, shall
constitute a first lien on the shares, second only to any lien in favor of the national or local government, and in the
event of delinquency such shares may be ordered sold by the Board of Directors in the manner provided in the By14
Laws to satisfy said dues or other obligations of the stockholders." In turn, there are several provisions in the Bylaws that govern the payment of dues, the lapse into delinquency of the member, and the constitution and execution
on the lien. We quote these provisions:
ARTICLE XII MEMBERS ACCOUNT
SEC. 31. (a) Billing Members, Posting of Delinquent Members The Treasurer shall bill al members monthly. As soon
as possible after the end of every month, a statement showing the account of bill of a member for said month will be
prepared and sent to him. If the bill of any member remains unpaid by the 20th of the month following that in which the
bill was incurred, the Treasurer shall notify him that if his bill is not paid in full by the end of the succeeding month his
name will be posted as delinquent the following day at the Clubhouse bulletin board. While posted, a member, the
immediate members of his family, and his guests, may not avail of the facilities of the Club.
(b) Members on the delinquent list for more than 60 days shall be reported to the Board and their shares or
the shares of the juridical entities they represent shall thereafter be ordered sold by the Board at auction to
satisfy the claims of the Club as provided for in Section 32 hereon. A member may pay his overdue account at
any time before the auction sale.
Sec. 32. Lien on Shares; Sale of Share at Auction- The club shall have a first lien on every share of stock to secure
debts of the members to the Club. This lien shall be annotated on the certificates of stock and may be enforced by the
Club in the following manner:
(a) Within ten (10) days after the Board has ordered the sale at auction of a members share of stock for
indebtedness under Section 31(b) hereof, the Secretary shall notify the owner thereof, and shall advise the
Membership Committee of such fact.
(b) The Membership Committee shall then notify all applicants on the Waiting List and all registered
stockholders of the availability of a share of stock for sale at auction at a specified date, time and place, and
shall post a notice to that effect in the Club bulletin board for at least ten (10) days prior to the auction sale.
(c) On the date and hour fixed, the Membership Committee shall proceed with the auction by viva voce
bidding and award the sale of the share of stock to the highest bidder.
(d) The purchase price shall be paid by the winning bidder to the Club within twenty-four (24) hours after the
bidding. The winning bidder or the representative in the case of a juridical entity shall become a Regular
Member upon payment of the purchase price and issuance of a new stock certificate in his name or in the
name of the juridical entity he represents. The proceeds of the sale shall be paid by the Club to the selling
stockholder after deducting his obligations to the Club.
(e) If no bids be received or if the winning bidder fails to pay the amount of this bid within twenty-four (24)
hours after the bidding, the auction procedures may be repeated from time to time at the discretion of the
Membership Committee until the share of stock be sold.
(f) If the proceeds from the sale of the share of stock are not sufficient to pay in full the indebtedness of the
member, the member shall continue to be obligated to the Club for the unpaid balance. If the member whose
share of stock is sold fails or refuse to surrender the stock certificate for cancellation, cancellation shall be
effected in the books of the Club based on a record of the proceedings. Such cancellation shall render the
unsurrendered stock certificate null and void and notice to this effect shall be duly published.
It is plain that Calatagan had endeavored to install a clear and comprehensive procedure to govern the payment of
monthly dues, the declaration of a member as delinquent, and the constitution of a lien on the shares and its eventual
public sale to answer for the members debts. Under Section 91 of the Corporation Code, membership in a non-stock
corporation "shall be terminated in the manner and for the causes provided in the articles of incorporation or the bylaws." The By-law provisions are elaborate in explaining the manner and the causes for the termination of membership
in Calatagan, through the execution on the lien of the share. The Court is satisfied that the By-Laws, as written,

affords due protection to the member by assuring that the member should be notified by the Secretary of the looming
execution sale that would terminate membership in the club. In addition, the By-Laws guarantees that after the
execution sale, the proceeds of the sale would be returned to the former member after deducting the outstanding
obligations. If followed to the letter, the termination of membership under this procedure outlined in the By-Laws would
accord with substantial justice.
Yet, did Calatagan actually comply with the by-law provisions when it sold Clementes share? The appellate courts
finding on this point warrants our approving citation, thus:
In accordance with this provision, Calatagan sent the third and final demand letter to Clemente on December 7, 1992.
The letter states that if the amount of delinquency is not paid, the share will be included among the delinquent shares
to be sold at public auction. This letter was signed by Atty. Benjamin Tanedo, Jr., Calatagan Golfs Corporate
Secretary. It was again sent to Clementes mailing address Phimco Industries Inc., P.O. Box 240, MCC
Makati. As expected, it was returned because the post office box had been closed.
Under the By-Laws, the Corporate Secretary is tasked to "give or cause to be given, all notices required by law or by
these By-Laws. .. and keep a record of the addresses of all stockholders. As quoted above, Sec. 32 (a) of the ByLaws further provides that "within ten (10) days after the Board has ordered the sale at auction of a members share of
stock for indebtedness under Section 31 (b) hereof, the Secretary shall notify the owner thereof and shall advise the
Membership Committee of such fact.," The records do not disclose what report the Corporate Secretary transmitted to
the Membership Committee to comply with Section 32(a). Obviously, the reason for this mandatory requirement is to
give the Membership Committee the opportunity to find out, before the share is sold, if proper notice has been made
to the shareholder member.
We presume that the Corporate Secretary, as a lawyer is knowledgeable on the law and on the standards of good
faith and fairness that the law requires. As custodian of corporate records, he should also have known that the first
two letters sent to Clemente were returned because the P.O. Box had been closed. Thus, we are surprised given his
knowledge of the law and of corporate records that he would send the third and final letter Clementes last chance
before his share is sold and his membership lost to the same P.O. Box that had been closed.
Calatagan argues that it "exercised due diligence before the foreclosure sale" and "sent several notices to Clementes
specified mailing address." We do not agree; we cannot label as due diligence Calatagans act of sending the
December 7, 1992 letter to Clementes mailing address knowing fully well that the P.O. Box had been closed. Due
diligence or good faith imposes upon the Corporate Secretary the chief repository of all corporate records the
obligation to check Clementes other address which, under the By-Laws, have to be kept on file and are in fact on file.
One obvious purpose of giving the Corporate Secretary the duty to keep the addresses of members on file is
specifically for matters of this kind, when the member cannot be reached through his or her mailing address.
Significantly, the Corporate Secretary does not have to do the actual verification of other addressees on record; a
mere clerk can do the very simple task of checking the files as in fact clerks actually undertake these tasks. In fact,
one telephone call to Clementes phone numbers on file would have alerted him of his impending loss.
Ultimately, the petition must fail because Calatagan had failed to duly observe both the spirit and letter of its own bylaws. The by-law provisions was clearly conceived to afford due notice to the delinquent member of the impending
sale, and not just to provide an intricate faade that would facilitate Calatagans sale of the share. But then, the bad
faith on Calatagans part is palpable. As found by the Court of Appeals, Calatagan very well knew that Clementes
postal box to which it sent its previous letters had already been closed, yet it persisted in sending that final letter to the
same postal box. What for? Just for the exercise, it appears, as it had known very well that the letter would never
actually reach Clemente.1avvphi1
It is noteworthy that Clemente in his membership application had provided his residential address along with his
residence and office telephone numbers. Nothing in Section 32 of Calatagans By-Laws requires that the final notice
prior to the sale be made solely through the members mailing address. Clemente cites our aphorism-like
15
pronouncement in Rizal Commercial Banking Corporation v. Court of Appeals that "[a] simple telephone call and an
ounce of good faith x x x could have prevented this present controversy." That memorable observation is quite apt in
this case.
Calatagans bad faith and failure to observe its own By-Laws had resulted not merely in the loss of Clementes
privilege to play golf at its golf course and avail of its amenities, but also in significant pecuniary damage to him. For
that loss, the only blame that could be thrown Clementes way was his failure to notify Calatagan of the closure of the
P.O. Box. That lapse, if we uphold Calatagan would cost Clemente a lot. But, in the first place, does he deserve
answerability for failing to notify the club of the closure of the postal box? Indeed, knowing as he did that Calatagan
was in possession of his home address as well as residence and office telephone numbers, he had every reason to
assume that the club would not be at a loss should it need to contact him. In addition, according to Clemente, he was
not even aware of the closure of the postal box, the maintenance of which was not his responsibility but his employer
Phimcos.

16

The utter bad faith exhibited by Calatagan brings into operation Articles 19, 20 and 21 of the Civil Code, under the
Chapter on Human Relations. These provisions, which the Court of Appeals did apply, enunciate a general obligation
under law for every person to act fairly and in good faith towards one another. A non-stock corporation like Calatagan
is not exempt from that obligation in its treatment of its members. The obligation of a corporation to treat every person
honestly and in good faith extends even to its shareholders or members, even if the latter find themselves
contractually bound to perform certain obligations to the corporation. A certificate of stock cannot be a charter of
dehumanization.
We turn to the matter of damages. The award of actual damages is of course warranted since Clemente has
sustained pecuniary injury by reason of Calatagans wrongful violation of its own By-Laws. It would not be feasible to
deliver Clementes original Certificate of Stock because it had already been cancelled and a new one issued in its
place in the name of the purchases at the auction who was not impleaded in this case. However, the Court of Appeals
instead directed that Calatagan to issue to Clemente a new certificate of stock. That sufficiently redresses the actual
damages sustained by Clemente. After all, the certificate of stock is simply the evidence of the share.
The Court of Appeals also awarded Clemente P200,000.00 as moral damages, P100,000.00 as exemplary damages,
and P100,000.00 as attorneys fees. We agree that the award of such damages is warranted.
The Court of Appeals cited Calatagan for violation of Article 32 of the Civil Code, which allows recovery of damages
from any private individual "who directly or indirectly obstructs, defeats, violates or in any manner impedes or impairs"
the right "against deprivation of property without due process of laws." The plain letter of the provision squarely
entitles Clemente to damages from Calatagan. Even without Article 32 itself, Calatagan will still be bound to pay moral
and exemplary damages to Clemente. The latter was able to duly prove that he had sustained mental anguish, serious
anxiety and wounded feelings by reason of Calatagans acts, thereby entitling him to moral damages under Article
2217 of the Civil Code. Moreover, it is evident that Calatagans bad faith as exhibited in the
course of its corporate actions warrants correction for the public good, thereby justifying exemplary damages under
Article 2229 of the Civil Code.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals is AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 178158

December 4, 2009

STRATEGIC ALLIANCE DEVELOPMENT CORPORATION, Petitioner,

vs.
RADSTOCK SECURITIES LIMITED and PHILIPPINE NATIONAL CONSTRUCTION CORPORATION,Respondents.
ASIAVEST MERCHANT BANKERS BERHAD, Intervenor.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 180428
LUIS SISON, Petitioner,
vs.
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION and RADSTOCK SECURITIES LIMITED,Respondents.
DECISION
CARPIO, J.:
Prologue
1

This case is an anatomy of a P6.185 billion pillage of the public coffers that ranks among one of the most brazen and
hideous in the history of this country. This case answers the questions why our Government perennially runs out of

funds to provide basic services to our people, why the great masses of the Filipino people wallow in poverty, and why
a very select few amass unimaginable wealth at the expense of the Filipino people.
On 1 May 2007, the 30-year old franchise of Philippine National Construction Corporation (PNCC) under Presidential
Decree No. 1113 (PD 1113), as amended by Presidential Decree No. 1894 (PD 1894), expired. During the 13th
Congress, PNCC sought to extend its franchise. PNCC won approval from the House of Representatives, which
2
passed House Bill No. 5749 renewing PNCCs franchise for another 25 years. However, PNCC failed to secure
approval from the Senate, dooming the extension of PNCCs franchise. Led by Senator Franklin M. Drilon, the Senate
3
4
opposed PNCCs plea for extension of its franchise. Senator Drilons privilege speech explains why the Senate
chose not to renew PNCCs franchise:
I repeat, Mr. President. PNCC has agreed in a compromise agreement dated 17 August 2006 to transfer to Radstock
Securities Limited P17,676,063,922, no small money, Mr. President, my dear colleagues, P17.6 billion.
What does it consist of? It consists of the following: 19 pieces of real estate properties with an appraised value
ofP5,993,689,000. Do we know what is the bulk of this? An almost 13-hectare property right here in the Financial
Center. As we leave the Senate, as we go out of this Hall, as we drive thru past the GSIS, we will see on the right a
vacant lot, that is PNCC property. As we turn right on Diosdado Macapagal, we see on our right new buildings, these
are all PNCC properties. That is 12.9 hectares of valuable asset right in this Financial Center that is
worthP5,993,689.000.
What else, Mr. President? The 20% of the outstanding capital stock of PNCC with a par value of P2,300,000,000-- I
repeat, 20% of the outstanding capital stock of PNCC worth P2,300 billion-- was assigned to Radstock.
In addition, Mr. President and my dear colleagues, please hold on to your seats because part of the agreement is 50%
of PNCCs 6% share in the gross toll revenue of the Manila North Tollways Corporation for 27 years, from 2008 to
2035, is being assigned to Radstock. How much is this worth? It is worth P9,382,374,922. I repeat,P9,382,374,922.
xxxx
Mr. President, P17,676,000,000, however, was made to appear in the agreement to be only worthP6,196,156,488.
How was this achieved? How was an aggregate amount of P17,676,000,000 made to appear to be
only P6,196,156,488? First, the 19 pieces of real estate worth P5,993,689,000 were only assigned a value
ofP4,195,000,000 or only 70% of their appraised value.
Second, the PNCC shares of stock with a par value of P2.3 billion were marked to market and therefore were valued
only at P713 million.
Third, the share of the toll revenue assigned was given a net present value of only P1,287,000,000 because of a 15%
discounted rate that was applied.
In other words, Mr. President, the toll collection of P9,382,374,922 for 27 years was given a net present value of
only P1,287,000,000 so that it is made to appear that the compromise agreement is only worth P6,196,000,000.
Mr. President, my dear colleagues, this agreement will substantially wipe out all the assets of PNCC. It will be left with
nothing else except, probably, the collection for the next 25 years or so from the North Luzon Expressway. This
agreement brought PNCC to the cleaners and literally cleaned the PNCC of all its assets. They brought PNCC to the
cleaners and cleaned it to the tune of P17,676,000,000.
xxxx
Mr. President, are we not entitled, as members of the Committee, to know who is Radstock Securities Limited?
Radstock Securities Limited was allegedly incorporated under the laws of the British Virgin Islands. It has no known
board of directors, except for its recently appointed attorney-in-fact, Mr. Carlos Dominguez.
Mr. President, are the members of the Committee not entitled to know why 20 years after the account to Marubeni
Corporation, which gave rise to the compromise agreement 20 years after the obligation was allegedly incurred,
PNCC suddenly recognized this obligation in its books when in fact this obligation was not found in its books for 20
years?

In other words, Mr. President, for 20 years, the financial statements of PNCC did not show any obligation to Marubeni,
much less, to Radstock. Why suddenly on October 20, 2000, P10 billion in obligation was recognized? Why was it
recognized?
During the hearing on December 18, Mr. President, we asked this question to the Asset Privatization Trust (APT)
trustee, Atty. Raymundo Francisco, and he was asked: "What is the basis of your recommendation to recognize this?"
He said: "I based my recommendation on a legal opinion of Feria and Feria." I asked him: "Who knew of this opinion?"
He said: "Only me and the chairman of PNCC, Atty. Renato Valdecantos." I asked him: "Did you share this opinion
with the members of the board who recognized the obligation of P10 billion?" He said: "No." "Can you produce this
opinion now?" He said: "I have no copy."
Mysteriously, Mr. President, an obligation of P10 billion based on a legal opinion which, even Mr. Arthur Aguilar, the
chairman of PNCC, is not aware of, none of the members of the PNCC board on October 20, 2000 who recognized
this obligation had seen this opinion. It is mysterious.
Mr. President, are the members of our Committee not entitled to know why Radstock Securities Limited is given
preference over all other creditors notwithstanding the fact that this is an unsecured obligation? There is no mortgage
to secure this obligation.
More importantly, Mr. President, equally recognized is the obligation of PNCC to the Philippine government to the tune
of P36 billion. PNCC owes the Philippine government P36 billion recognized in its books, apart from P3 billion in
taxes. Why in the face of all of these is Radstock given preference? Why is it that Radstock is given preference to
claim P17.676 billion of the assets of PNCC and give it superior status over the claim of the Philippine government, of
the Filipino people to the extent of P36 billion and taxes in the amount of P3 billion? Why, Mr. President? Why is
Radstock given preference not only over the Philippine government claims of P39 billion but also over other creditors
including a certain best merchant banker in Asia, which has already a final and executory judgment against PNCC for
about P300 million? Why, Mr. President? Are we not entitled to know why the compromise agreement
5
assigned P17.676 billion to Radstock? Why was it executed? (Emphasis supplied)
Aside from Senator Drilon, Senator Sergio S. Osmea III also saw irregularities in the transactions involving the
Marubeni loans, thus:
SEN. OSMEA. Ah okay. Good.
Now, I'd like to point out to the Committee that it seems that this was a politically driven deal like IMPSA. Because
the acceptance of the 10 billion or 13 billion debt came in October 2000 and the Radstock assignment was January
10, 2001. Now, why would Marubeni sell for $2 million three months after there was a recognition that it was
owed P10 billion. Can you explain that, Mr. Dominguez?
MR. DOMINGUEZ. Your Honor, I am not aware of the decision making process of Marubeni. But my understanding
was, the Japanese culture is not a litigious one and they didn't want to get into a, you know, a court situation here in
the Philippines having a lot of other interest, et cetera.
SEN. OSMEA. Well, but that is beside the point, Mr. Dominguez. All I am asking is does it stand to reason that after
you get an acceptance by a debtor that he owes you 10 billion, you sell your note for 100 million.
Now, if that had happened a year before, maybe I would have understood why he sold for such a low amount. But
right after, it seems that this was part of an orchestrated deal wherein with certain powerful interest would be able to
say, "Yes, we will push through. We'll fix the courts. We'll fix the board. We'll fix the APT. And we will be able to do it,
just give us 55 percent of whatever is recovered," am I correct?
MR. DOMINGUEZ. As I said, Your Honor, I am not familiar with the decision making process of Marubeni. But my
understanding was, as I said, they didn't want to get into a
SEN. OSMEA. All right.
MR. DOMINGUEZ. ...litigious situation.

xxxx
SEN. OSMEA. All of these financial things can be arranged. They can hire a local bank, Filipino, to be trustee for the
real estate. So ...

SEN. DRILON. Well, then, thats a dummy relationship.

SEN. OSMEA. In any case, to me the main point here is that a third party, Radstock, whoever owns it, bought
Marubenis right for $2 million or P100 million. Then, they are able to go through all these legal machinations and get
awarded with the consent of PNCC of 6 billion. Thats a 100 million to 6 billion. Now, Mr. Aguilar, you have been in the
business for such a long time. I mean, this hedge funds whether its Radstock or New Bridge or Texas Pacific Group
or Carlyle or Avenue Capital, they look at their returns. So if Avenue Capital buys something for $2 million and you
give him $4 million in one year, its a 100 percent return. Theyll walk away and dance to their stockholders. So here in
this particular case, if you know that Radstock only bought it for $2 million, I would have gotten board approval and
say, "Okay, lets settle this for $4 million." And Radstock would have jumped up and down. So what looks to me is that
this was already a scheme. Marubeni wrote it off already. Marubeni wrote everything off. They just got a $2 million and
they probably have no more residual rights or maybe theres a clause there, a secret clause, that says, "I want 20
percent of whatever youre able to eventually collect." So $2 million. But whatever it is, Marubeni practically wrote it
off. Radstocks liability now or exposure is only $2 million plus all the lawyer fees, under-the-table, etcetera. All right.
Okay. So its pretty obvious to me that if anybody were using his brain, I would have gone up to Radstock and say,
"Heres $4 million. Heres P200 million. Okay." They would have walked away. But evidently, the "ninongs" of
Radstock See, I dont care who owns Radstock. I want to know who is the ninong here who stands to make a lot of
money by being able to get to courts, the government agencies, OGCC, or whoever else has been involved in this, to
agree to 6 billion or whatever it was. Thats a lot of money. And believe me, Radstock will probably get one or two
billion and four billion will go into somebody elses pocket. Or Radstock will turn around, sell that claim for P4 billion
and let the new guy just collect the payments over the years.
xxxx

SEN. OSMEA. x x x I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEA. If theyre not a 100 percent, why would they sign jointly and severally? I just want to plug the
loopholes.
MR. AGUILAR. I think it was if I may just speculate. It was just common ownership at that time.
SEN. OSMEA. Al right. Now Also, the ...
MR. AGUILAR. Ah, 13 percent daw, Your Honor.
SEN. OSMEA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEA. Whats 13 percent?
MR. AGUILAR. We owned ...
xxxx
SEN. OSMEA. x x x CDCP Mining, how many percent of the equity of CDCP Mining was owned by PNCC, formerly
CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?
MS. PASETES. Yes.
SEN. OSMEA. One-three? So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent
and they only own 13 percent.
8

x x x x (Emphasis supplied)

I.
The Case
9

Before this Court are the consolidated petitions for review filed by Strategic Alliance Development Corporation
(STRADEC) and Luis Sison (Sison), with a motion for intervention filed by Asiavest Merchant Bankers Berhad
(Asiavest), challenging the validity of the Compromise Agreement between PNCC and Radstock. The Court of
10
Appeals approved the Compromise Agreement in its Decision of 25 January 2007 in CA-G.R. CV No. 87971.
II.
The Antecedents
PNCC was incorporated in 1966 for a term of fifty years under the Corporation Code with the name Construction
11
Development Corporation of the Philippines (CDCP). PD 1113, issued on 31 March 1977, granted CDCP a 30-year
franchise to construct, operate and maintain toll facilities in the North and South Luzon Tollways. PD 1894, issued on
22 December 1983, amended PD 1113 to include in CDCPs franchise the Metro Manila Expressway, which would
"serve as an additional artery in the transportation of trade and commerce in the Metro Manila area."
Sometime between 1978 and 1981, Basay Mining Corporation (Basay Mining), an affiliate of CDCP, obtained loans
from Marubeni Corporation of Japan (Marubeni) amounting to 5,460,000,000 yen and US$5 million. A CDCP official
issued letters of guarantee for the loans, committing CDCP to pay solidarily for the full amount of the 5,460,000,000
yen loan and to the extent of P20 million for the US$5 million loan. However, there was no CDCP Board Resolution
authorizing the issuance of the letters of guarantee. Later, Basay Mining changed its name to CDCP Mining
Corporation (CDCP Mining). CDCP Mining secured the Marubeni loans when CDCP and CDCP Mining were still
privately owned and managed.
Subsequently in 1983, CDCP changed its corporate name to PNCC to reflect the extent of the Government's equity
investment in the company, which arose when government financial institutions converted their loans to PNCC into
12
equity following PNCCs inability to pay the loans. Various government financial institutions held a total of seventyseven point forty-eight percent (77.48%) of PNCCs voting equity, most of which were later transferred to the Asset
13
Privatization Trust (APT) under Administrative Orders No. 14 and 64, series of 1987 and 1988, respectively. Also,
the Presidential Commission on Good Government holds some 13.82% of PNCCs voting equity under a writ of
sequestration and through the voluntary surrender of certain PNCC shares. In fine, the Government owns 90.3% of
14
the equity of PNCC and only 9.70% of PNCCs voting equity is under private ownership.
Meanwhile, the Marubeni loans to CDCP Mining remained unpaid. On 20 October 2000, during the short-lived Estrada
15
Administration, the PNCC Board of Directors (PNCC Board) passed Board Resolution No. BD-092-2000 admitting
PNCCs liability to Marubeni for P10,743,103,388 as of 30 September 1999. PNCC Board Resolution No. BD-0922000 reads as follows:
RESOLUTION NO. BD-092-2000
RESOLVED, That the Board recognizes, acknowledges and confirms PNCCs obligations as of September 30, 1999
with the following entities, exclusive of the interests and other charges that may subsequently accrue and still become
due therein, to wit:
a). the Government of the Republic of the Philippines in the amount of P36,023,784,751.00; and
b). Marubeni Corporation in the amount of P10,743,103,388.00. (Emphasis supplied)
This was the first PNCC Board Resolution admitting PNCCs liability for the Marubeni loans. Previously, for two
decades the PNCC Board consistently refused to admit any liability for the Marubeni loans.
Less than two months later, or on 22 November 2000, the PNCC Board passed Board Resolution No. BD-099-2000
amending Board Resolution No. BD-092-2000. PNCC Board Resolution No. BD-099-2000 reads as follows:
RESOLUTION NO. BD-099-2000
RESOLVED, That the Board hereby amends its Resolution No. BD-092-2000 dated October 20, 2000 so as to read as
follows:
RESOLVED, That the Board recognizes, acknowledges and confirms its obligations as of September 30, 1999 with
the following entities, exclusive of the interests and other charges that may subsequently accrue and still due thereon,
subject to the final determination by the Commission on Audit (COA) of the amount of obligation involved, and subject

further to the declaration of the legality of said obligations by the Office of the Government Corporate Counsel
(OGCC), to wit:
a). the Government of the Republic of the Philippines in the amount of P36,023,784,751.00; and
b). Marubeni Corporation in the amount of P10,743,103,388.00. (Emphasis supplied)
In January 2001, barely three months after the PNCC Board first admitted liability for the Marubeni loans, Marubeni
assigned its entire credit to Radstock for US$2 million or less than P100 million. In short, Radstock paid Marubeni less
than 10% of the P10.743 billion admitted amount. Radstock immediately sent a notice and demand letter to PNCC.
On 15 January 2001, Radstock filed an action for collection and damages against PNCC before the Regional Trial
Court of Mandaluyong City, Branch 213 (trial court). In its order of 23 January 2001, the trial court issued a writ of
preliminary attachment against PNCC. The trial court ordered PNCCs bank accounts garnished and several of its real
properties attached. On 14 February 2001, PNCC moved to set aside the 23 January 2001 Order and to discharge the
writ of attachment. PNCC also filed a motion to dismiss the case. The trial court denied both motions. PNCC filed
motions for reconsideration, which the trial court also denied. PNCC filed a petition for certiorari before the Court of
Appeals, docketed as CA-G.R. SP No. 66654, assailing the denial of the motion to dismiss. On 30 August 2002, the
Court of Appeals denied PNCCs petition. PNCC filed a motion for reconsideration, which the Court of Appeals also
denied in its 22 January 2003 Resolution. PNCC filed a petition for review before this Court, docketed as G.R. No.
156887.
Meanwhile, on 19 June 2001, at the start of the Arroyo Administration, the PNCC Board, under a new President and
Chairman, revoked Board Resolution No. BD-099-2000.
The trial court continued to hear the main case. On 10 December 2002, the trial court ruled in favor of Radstock, as
follows:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and the defendant is
directed to pay the total amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty Six thousand
Five Hundred Twenty Eight Pesos (P13,151,956,528.00) with interest from October 15, 2001 plus Ten Million Pesos
(P10,000,000.00) as attorneys fees.
SO ORDERED.

16

PNCC appealed the trial courts decision to the Court of Appeals, docketed as CA-G.R. CV No. 87971.
On 19 March 2003, this Court issued a temporary restraining order in G.R. No. 156887 forbidding the trial court from
implementing the writ of preliminary attachment and ordering the suspension of the proceedings before the trial court
and the Court of Appeals. In its 3 October 2005 Decision, this Court ruled as follows:
WHEREFORE, the petition is partly GRANTED and insofar as the Motion to Set Aside the Order and/or Discharge the
Writ of Attachment is concerned, the Decision of the Court of Appeals on August 30, 2002 and its Resolution of
January 22, 2003 in CA-G.R. SP No. 66654 are REVERSED and SET ASIDE. The attachments over the properties by
the writ of preliminary attachment are hereby ordered LIFTED effective upon the finality of this Decision. The Decision
and Resolution of the Court of Appeals are AFFIRMED in all other respects. The Temporary Restraining Order is
DISSOLVED immediately and the Court of Appeals is directed to PROCEED forthwith with the appeal filed by PNCC.
No costs.
SO ORDERED.

17

On 17 August 2006, PNCC and Radstock entered into the Compromise Agreement where they agreed to reduce
PNCCs liability to Radstock, supposedly from P17,040,843,968, to P6,185,000,000. PNCC and Radstock submitted
the Compromise Agreement to this Court for approval. In a Resolution dated 4 December 2006 in G.R. No. 156887,
this Court referred the Compromise Agreement to the Commission on Audit (COA) for comment. The COA
recommended approval of the Compromise Agreement. In a Resolution dated 22 November 2006, this Court noted
the Compromise Agreement and referred it to the Court of Appeals in CA-G.R. CV No. 87971. In its 25 January 2007
Decision, the Court of Appeals approved the Compromise Agreement.
STRADEC moved for reconsideration of the 25 January 2007 Decision. STRADEC alleged that it has a claim against
PNCC as a bidder of the National Governments shares, receivables, securities and interests in PNCC. The matter is
subject of a complaint filed by STRADEC against PNCC and the Privatization and Management Office (PMO) for the

issuance of a Notice of Award of Sale to Dong-A Consortium of which STRADEC is a partner. The case, docketed as
Civil Case No. 05-882, is pending before the Regional Trial Court of Makati, Branch 146 (RTC Branch 146).
The Court of Appeals treated STRADECs motion for reconsideration as a motion for intervention and denied it in its
31 May 2007 Resolution. STRADEC filed a petition for review before this Court, docketed as G.R. No. 178158.
Rodolfo Cuenca (Cuenca), a stockholder and former PNCC President and Board Chairman, filed an intervention
before the Court of Appeals. Cuenca alleged that PNCC had no obligation to pay Radstock. The Court of Appeals also
denied Cuencas motion for intervention in its Resolution of 31 May 2007. Cuenca did not appeal the denial of his
motion.
On 2 July 2007, this Court issued an order directing PNCC and Radstock, their officers, agents, representatives, and
other persons under their control, to maintain the status quo ante.
Meanwhile, on 20 February 2007, Sison, also a stockholder and former PNCC President and Board Chairman, filed a
Petition for Annulment of Judgment Approving Compromise Agreement before the Court of Appeals. The case was
docketed as CA-G.R. SP No. 97982.
Asiavest, a judgment creditor of PNCC, filed an Urgent Motion for Leave to Intervene and to File the Attached
Opposition and Motion-in-Intervention before the Court of Appeals in CA-G.R. SP No. 97982.
In a Resolution dated 12 June 2007, the Court of Appeals dismissed Sisons petition on the ground that it had no
jurisdiction to annul a final and executory judgment also rendered by the Court of Appeals. In the same resolution, the
Court of Appeals also denied Asiavests urgent motion.
Asiavest filed its Urgent Motion for Leave to Intervene and to File the Attached Opposition and Motion-in-Intervention
18
in G.R. No. 178158.
Sison filed a motion for reconsideration. In its 5 November 2007 Resolution, the Court of Appeals denied Sisons
motion.
On 26 November 2007, Sison filed a petition for review before this Court, docketed as G.R. No. 180428.
In a Resolution dated 18 February 2008, this Court consolidated G.R. Nos. 178158 and 180428.
On 13 January 2009, the Court held oral arguments on the following issues:
1. Does the Compromise Agreement violate public policy?
2. Does the subject matter involve an assumption by the government of a private entitys obligation in violation
of the law and/or the Constitution? Is the PNCC Board Resolution of 20 October 2000 defective or illegal?
3. Is the Compromise Agreement viable in the light of the non-renewal of PNCCs franchise by Congress and
its inclusion of all or substantially all of PNCCs assets?
4. Is the Decision of the Court of Appeals annullable even if final and executory on grounds of fraud and
violation of public policy and the Constitution?
III.
Propriety of Actions
The Court of Appeals denied STRADECs motion for intervention on the ground that the motion was filed only after the
Court of Appeals and the trial court had promulgated their respective decisions.
Section 2, Rule 19 of the 1997 Rules of Civil Procedure provides:
SECTION 2. Time to intervene. The motion to intervene may be filed at any time before rendition of judgment by the
trial court. A copy of the pleading-in-intervention shall be attached to the motion and served on the original parties.
The rule is not absolute. The rule on intervention, like all other rules of procedure, is intended to make the powers of
19
the Court completely available for justice. It is aimed to facilitate a comprehensive adjudication of rival claims,
20
overriding technicalities on the timeliness of the filing of the claims. This Court has ruled:

[A]llowance or disallowance of a motion for intervention rests on the sound discretion of the court after consideration
of the appropriate circumstances. Rule 19 of the Rules of Court is a rule of procedure whose object is to make the
powers of the court fully and completely available for justice. Its purpose is not to hinder or delay but to facilitate and
promote the administration of justice. Thus, interventions have been allowed even beyond the prescribed period in the
Rule in the higher interest of justice. Interventions have been granted to afford indispensable parties, who have not
been impleaded, the right to be heard even after a decision has been rendered by the trial court, when the petition for
review of the judgment was already submitted for decision before the Supreme Court, and even where the assailed
order has already become final and executory. In Lim v. Pacquing (310 Phil. 722 (1995)], the motion for intervention
filed by the Republic of the Philippines was allowed by this Court to avoid grave injustice and injury and to settle once
21
and for all the substantive issues raised by the parties.
22

In Collado v. Court of Appeals, this Court reiterated that exceptions to Section 2, Rule 12 could be made in the
23
interest of substantial justice. Citing Mago v. Court of Appeals, the Court stated:
It is quite clear and patent that the motions for intervention filed by the movants at this stage of the proceedings where
trial had already been concluded x x x and on appeal x x x the same affirmed by the Court of Appeals and the instant
petition for certiorari to review said judgments is already submitted for decision by the Supreme Court, are obviously
and, manifestly late, beyond the period prescribed under x x x Section 2, Rule 12 of the Rules of Court.
But Rule 12 of the Rules of Court, like all other Rules therein promulgated, is simply a rule of procedure, the whole
purpose and object of which is to make the powers of the Court fully and completely available for justice. The purpose
of procedure is not to thwart justice. Its proper aim is to facilitate the application of justice to the rival claims of
contending parties. It was created not to hinder and delay but to facilitate and promote the administration of justice. It
does not constitute the thing itself which courts are always striving to secure to litigants. It is designed as the means
best adopted to obtain that thing. In other words, it is a means to an end.
Concededly, STRADEC has no legal interest in the subject matter of the Compromise Agreement. Section 1, Rule 19
of the 1997 Rules of Civil Procedure states:
SECTION 1. Who may intervene. - A person who has a legal interest in the matter in litigation, or in the success of
either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other
disposition of property in the custody of the court or of an officer thereof may, with leave of court, be allowed to
intervene in the action. The Court shall consider whether or not the intervention will unduly delay or prejudice the
adjudication of the rights of the original parties, and whether or not the intervenors rights may be fully protected in a
separate proceeding.
STRADECs interest is dependent on the outcome of Civil Case No. 05-882. Unless STRADEC can show that RTC
Branch 146 had already decided in its favor, its legal interest is simply contingent and expectant.
However, Asiavest has a direct and material interest in the approval or disapproval of the Compromise Agreement.
Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a writ of execution in its
favor. Asiavests interest is actual and material, direct and immediate characterized by either gain or loss from the
24
judgment that this Court may render. Considering that the Compromise Agreement involves the disposition of all or
substantially all of the assets of PNCC, Asiavest, as PNCCs judgment creditor, will be greatly prejudiced if the
Compromise Agreement is eventually upheld.
Sison has legal standing to challenge the Compromise Agreement. Although there was no allegation that Sison filed
the case as a derivative suit in the name of PNCC, it could be fairly deduced that Sison was assailing the Compromise
Agreement as a stockholder of PNCC. In such a situation, a stockholder of PNCC can sue on behalf of PNCC to annul
the Compromise Agreement.
25

A derivative action is a suit by a stockholder to enforce a corporate cause of action. Under the Corporation Code,
26
where a corporation is an injured party, its power to sue is lodged with its board of directors or trustees. However, an
individual stockholder may file a derivative suit on behalf of the corporation to protect or vindicate corporate rights
whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
27
corporation. In such actions, the corporation is the real party-in-interest while the suing stockholder, on behalf of the
28
corporation, is only a nominal party.
In this case, the PNCC Board cannot conceivably be expected to attack the validity of the Compromise Agreement
since the PNCC Board itself approved the Compromise Agreement. In fact, the PNCC Board steadfastly defends the
Compromise Agreement for allegedly being advantageous to PNCC.
Besides, the circumstances in this case are peculiar. Sison, as former PNCC President and Chairman of the PNCC
Board, was responsible for the approval of the Board Resolution issued on 19 June 2001 revoking the previous Board

29

Resolution admitting PNCCs liability for the Marubeni loans. Such revocation, however, came after Radstock had
filed an action for collection and damages against PNCC on 15 January 2001. Then, when the trial court rendered its
decision on 10 December 2002 in favor of Radstock, Sison was no longer the PNCC President and Chairman,
although he remains a stockholder of PNCC.
When the case was on appeal before the Court of Appeals, there was no need for Sison to avail of any remedy, until
PNCC and Radstock entered into the Compromise Agreement, which disposed of all or substantially all of PNCCs
assets. Sison came to know of the Compromise Agreement only in December 2006. PNCC and Radstock submitted
the Compromise Agreement to the Court of Appeals for approval on 10 January 2007. The Court of Appeals approved
the Compromise Agreement on 25 January 2007. To require Sison at this stage to exhaust all the remedies within the
corporation will render such remedies useless as the Compromise Agreement had already been approved by the
Court of Appeals. PNCCs assets are in danger of being dissipated in favor of a private foreign corporation. Thus,
Sison had no recourse but to avail of an extraordinary remedy to protect PNCCs assets.
Besides, in the interest of substantial justice and for compelling reasons, such as the nature and importance of the
30
issues raised in this case, this Court must take cognizance of Sisons action. This Court should exercise its
prerogative to set aside technicalities in the Rules, because after all, the power of this Court to suspend its own rules
31
whenever the interest of justice requires is well recognized. In Solicitor General v. The Metropolitan Manila
32
Authority, this Court held:
Unquestionably, the Court has the power to suspend procedural rules in the exercise of its inherent power, as
expressly recognized in the Constitution, to promulgate rules concerning pleading, practice and procedure in all
courts. In proper cases, procedural rules may be relaxed or suspended in the interest of substantial justice, which
otherwise may be miscarried because of a rigid and formalistic adherence to such rules. x x x
We have made similar rulings in other cases, thus:
Be it remembered that rules of procedure are but mere tools designed to facilitate the attainment of justice. Their strict
and rigid application, which would result in technicalities that tend to frustrate rather than promote substantial justice,
must always be avoided. x x x Time and again, this Court has suspended its own rules and excepted a particular case
from their operation whenever the higher interests of justice so require.
IV.
The PNCC Board Acted in Bad Faith and with Gross Negligence
in Directing the Affairs of PNCC
In this jurisdiction, the members of the board of directors have a three-fold duty: duty of obedience, duty of diligence,
33
and duty of loyalty. Accordingly, the members of the board of directors (1) shall direct the affairs of the corporation
34
only in accordance with the purposes for which it was organized; (2) shall not willfully and knowingly vote for or
assent to patently unlawful acts of the corporation or act in bad faith or with gross negligence in directing the
35
affairs of the corporation; and (3) shall not acquire any personal or pecuniary interest in conflict with their duty as
36
such directors or trustees.
In the present case, the PNCC Board blatantly violated its duty of diligence as it miserably failed to act in good faith in
handling the affairs of PNCC.
First. For almost two decades, the PNCC Board had consistently refused to admit liability for the Marubeni loans
because of the absence of a PNCC Board resolution authorizing the issuance of the letters of guarantee.
There is no dispute that between 1978 and 1980, Marubeni Corporation extended two loans to Basay Mining (later
renamed CDCP Mining): (1) US$5 million to finance the purchase of copper concentrates by Basay Mining; and
(2) Y5.46 billion to finance the completion of the expansion project of Basay Mining including working capital.
There is also no dispute that it was only on 20 October 2000 when the PNCC Board approved a resolution expressly
admitting PNCCs liability for the Marubeni loans. This was the first Board Resolution admitting liability for the
Marubeni loans, for PNCC never admitted liability for these debts in the past. Even Radstock admitted that PNCCs
37
1994 Financial Statements did not reflect the Marubeni loans. Also, former PNCC Chairman Arthur Aguilar stated
during the Senate hearings that "the Marubeni claim was never in the balance sheet x x x nor was it in a contingent
38
account." Miriam M. Pasetes, SVP Finance of PNCC, and Atty. Herman R. Cimafranca of the Office of the
Government Corporate Counsel, confirmed this fact, thus:
SEN. DRILON. x x x And so, PNCC itself did not recognize this as an obligation but the board suddenly recognized it
as an obligation. It was on that basis that the case was filed, is that correct? In fact, the case hinges on they knew

that this claim has prescribed but because of that board resolution which recognized the obligation they filed their
complaint, is that correct?
MR. CIMAFRANCA. Apparently, it's like that, Senator, because the filing of the case came after the
acknowledgement.
SEN. DRILON. Yes. In fact, the filing of the case came three months after the acknowledgement.
MR. CIMAFRANCA. Yes. And that made it difficult to handle on our part.
SEN. DRILON. That is correct. So, that it was an obligation which was not recognized in the financial
statements of PNCC but revived in the financial statements because it has prescribed but revived by the
board effectively. That's the theory, at least, of the plaintiff. Is that correct? Who can answer that?
Ms. Pasetes, yes.
39

MS. PASETES. It is not an obligation of PNCC that is why it is not reflected in the financial statements. (Emphasis
supplied)
In short, after two decades of consistently refuting its liability for the Marubeni loans, the PNCC Board suddenly and
inexplicably reversed itself by admitting in October 2000 liability for the Marubeni loans. Just three months after the
PNCC Board recognized the Marubeni loans, Radstock acquired Marubeni's receivable and filed the present collection
case.
Second. The PNCC Board admitted liability for the Marubeni loans despite PNCCs total liabilities far exceeding its
assets. There is no dispute that the Marubeni loans, once recognized, would wipe out the assets of PNCC, "virtually
40
emptying the coffers of the PNCC." While PNCC insists that it remains financially viable, the figures in the COA Audit
41
Reports tell otherwise. For 2006 and 2005, "the Corporation has incurred negative gross margin of P84.531
Million and P80.180 Million, respectively, and net losses that had accumulated in a deficit of P14.823 Billion as
42
of 31 December 2006." The COA even opined that "unless [PNCC] Management addresses the issue on net
losses in its financial rehabilitation plan, x x x the Corporation may not be able to continue its operations as a
going concern."
Notably, during the oral arguments before this Court, the Government Corporate Counsel admitted the PNCCs huge
negative net worth, thus:
JUSTICE CARPIO
x x x what is the net worth now of PNCC? Negative what? Negative 6 Billion at least[?]
ATTY. AGRA
Yes, your Honor.

43

(Emphasis supplied)

Clearly, the PNCC Boards admission of liability for the Marubeni loans, given PNCCs huge negative net worth of at
least P6 billion as admitted by PNCCs counsel, or P14.823 billion based on the 2006 COA Audit Report, would leave
PNCC an empty shell, without any assets to pay its biggest creditor, the National Government with an admitted
receivable of P36 billion from PNCC.
Third. In a debilitating self-inflicted injury, the PNCC Board revived what appeared to have been a dead claim by
abandoning one of PNCCs strong defenses, which is the prescription of the action to collect the Marubeni loans.
44

Settled is the rule that actions prescribe by the mere lapse of time fixed by law. Under Article 1144 of the Civil Code,
an action upon a written contract, such as a loan contract, must be brought within ten years from the time the right of
action accrues. The prescription of such an action is interrupted when the action is filed before the court, when there is
a written extrajudicial demand by the creditor, or when there is any written acknowledgment of the debt by the
45
debtor.
In this case, Basay Mining obtained the Marubeni loans sometime between 1978 and 1981. While Radstock claims
that numerous demand letters were sent to PNCC, based on the records, the extrajudicial demands to pay the loans
appear to have been made only in 1984 and 1986. Meanwhile, the written acknowledgment of the debt, in the form of
Board Resolution No. BD-092-2000, was issued only on 20 October 2000.

Thus, more than ten years would have already lapsed between Marubenis extrajudicial demands in 1984 and 1986
and the acknowledgment by the PNCC Board of the Marubeni loans in 2000. However, the PNCC Board suddenly
passed Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni loans. In short, the PNCC
Board admitted liability for the Marubeni loans despite the fact that the same might no longer be judicially collectible.
Although the legal advantage was obviously on its side, the PNCC Board threw in the towel even before the fight
could begin. During the Senate hearings, the matter of prescription was discussed, thus:
SEN. DRILON. ... the prescription period is 10 years and there were no payments the last demands were made,
when? The last demands for payment?
MS. OGAN. It was made January 2001 prior to the filing of the case.
SEN. DRILON. Yes, all right. Before that, when was the last demand made? By the time they filed the complaint more
than 10 years already lapsed.
MS. OGAN. On record, Mr. Chairman, we have demands starting from - - a series of demands which started from May
23, 1984, letter from Marubeni to PNCC, demand payment. And we also have the letter of September 3, 1986, letter of
Marubeni to then PNCC Chair Mr. Jaime. We have the June 24, 1986 letter from Marubeni to the PNCC Chairman.
Also the March 4, 1988 letter...
SEN. DRILON. The March 4, 1988 letter is not a demand letter.
MS. OGAN. It is exactly addressed to the Asset Privatization Trust.
SEN. DRILON. It is not a demand letter? Okay.
MS. OGAN. And we have also...
SEN. DRILON. Anyway...
THE CHAIRMAN. Please answer when you are asked, Ms. Ogan. We want to put it on the record whether it is "yes"
or "no".
MS. OGAN. Yes, sir.
SEN. DRILON. So, even assuming that all of those were demand letters, the 10 years prescription set in and it should
have prescribed in 1998, whatever is the date, or before the case was filed in 2001.
MR. CIMAFRANCA. The 10-year period for if the contract is written, it's 10 years and it should have prescribed in 10
years and we did raise that in our answer, in our motion to dismiss.
SEN. DRILON. I know. You raised this in your motion to dismiss and you raised this in your answer. Now, we are not
saying that you were negligent in not raising that. What we are just putting on the record that indeed there is basis to
argue that these claims have prescribed.
Now, the reason why there was a colorable basis on the complaint filed in 2001 was that somehow the board of PNCC
recognized the obligation in a special board meeting on October 20, 2000. Hindi ba ganoon 'yon?
MS. OGAN. Yes, that is correct.
SEN. DRILON. Why did the PNCC recognize this obligation in 2000 when it was very clear that at that point more than
10 years have lapsed since the last demand letter?
MR. AGUILAR. May I volunteer an answer?
SEN. DRILON. Please.
MR. AGUILAR. I looked into that, Mr. Chairman, Your Honor. It was as a result of and I go to the folder letter "N." In
our own demand research it was not period, Your Honor, that Punongbayan in the big folder, sir, letter "N" it was the
period where PMO was selling PNCC and Punongbayan and Araullo Law Office came out with an investment
brochure that indicated liabilities both to national government and to Marubeni/Radstock. So, PMO said, "For good
order, can you PNCC board confirm that by board resolution?" That's the tone of the letter.

SEN. DRILON. Confirm what? Confirm the liabilities that are contained in the Punongbayan investment prospectus
both to the national government and to PNCC. That is the reason at least from the record, Your Honor, how the PNCC
board got to deliberate on the Marubeni.
THE CHAIRMAN. What paragraph? Second to the last paragraph?
MR. AGUILAR. Yes. Yes, Mr. Chairman. Ito po 'yong that"s to our recollection, in the records, that was the reason.
SEN. DRILON. Is that the only reason why ...
MR. AGUILAR. From just the records, Mr. Chairman, and then interviews with people who are still around.
SEN. DRILON. You mean, you acknowledged a prescribed obligation because of this paragraph?
MR. AGUILAR. I dont know what legal advice we were following at that time, Mr. Chairman.

46

(Emphasis supplied)

Besides prescription, the Office of the Government Corporate Counsel (OGCC) originally believed that PNCC had
another formidable legal weapon against Radstock, that is, the lack of authority of Alfredo Asuncion, then Executive
Vice-President of PNCC, to sign the letter of guarantee on behalf of CDCP. During the Senate hearings, the following
exchange reveals the OGCCs original opinion:
THE CHAIRMAN. What was the opinion of the Office of the Government Corporate Counsel?
MS. OGAN. The opinion of the Office of the Government Corporate Counsel is that PNCC should exhaust all means
to resist the case using all defenses available to a guarantee and a surety that there is a valid ground for PNCC's
refusal to honor or make good the alleged guarantee obligation. It appearing that from the documents submitted to the
OGCC that there is no board authority in favor or authorizing Mr. Asuncion, then EVP, to sign or execute the letter of
guarantee in behalf of CDCP and that said letter of guarantee is not legally binding upon or enforceable against CDCP
47
as principals, your Honors.
xxxx
SEN. DRILON. Now that we have read this, what was the opinion of the Government Corporate Counsel, Mr.
Cimafranca?
MR. CIMAFRANCA. Yes, Senator, we did issue an opinion upon the request of PNCC and our opinion was that there
48
was no valid obligation, no valid guarantee. And we incorporated that in our pleadings in court. (Emphasis supplied)
Clearly, PNCC had strong defenses against the collection suit filed by Radstock, as originally opined by the OGCC. It
is quite puzzling, therefore, that the PNCC Board, which had solid grounds to refute the legitimacy of the Marubeni
loans, admitted its liability and entered into a Compromise Agreement that is manifestly and grossly prejudicial to
PNCC.
Fourth. The basis for the admission of liability for the Marubeni loans, which was an opinion of the Feria Law Office,
was not even shown to the PNCC Board.
Atty. Raymundo Francisco, the APT trustee overseeing the proposed privatization of PNCC at the time, was
responsible for recommending to the PNCC Board the admission of PNCCs liability for the Marubeni loans. Atty.
Francisco based his recommendation solely on a mere alleged opinion of the Feria Law Office. Atty. Francisco did not
bother to show this "Feria opinion" to the members of the PNCC Board, except to Atty. Renato Valdecantos, who as
the then PNCC Chairman did not also show the "Feria opinion" to the other PNCC Board members. During the Senate
hearings, Atty. Francisco could not produce a copy of the "Feria opinion." The Senators grilled Atty. Francisco on his
recommendation to recognize PNCCs liability for the Marubeni loans, thus:
THE CHAIRMAN. x x x You were the one who wrote this letter or rather this memorandum dated 17 October 2000 to
Atty. Valdecantos. Can you tell us the background why you wrote the letter acknowledging a debt which is nonexistent?
MR. FRANCISCO. I was appointed as the trustee in charge of the privatization of the PNCC at that time, sir. And I
was tasked to do a study and engage the services of financial advisors as well as legal advisors to do a legal audit
and financial study on the position of PNCC. I bidded out these engagements, the financial advisership went to
Punongbayan and Araullo. The legal audit went to the Feria Law Offices.

THE CHAIRMAN. Spell it. Boy Feria?

MR. FRANCISCO. Feria-- Feria.
THE CHAIRMAN. Lugto?
MR. FRANCISCO. Yes. Yes, Your Honor. And this was the findings of the Feria Law Office that the Marubeni
account was a legal obligation.
So, I presented this to our board. Based on the findings of the legal audit conducted by the Ferial Law Offices, sir.
THE CHAIRMAN. Why did you not ask the government corporate counsel? Why did you have to ask for the opinion of
an outside counsel?
MR. FRANCISCO. That was the that was the mandate given to us, sir, that we have to engage the ...
THE CHAIRMAN. Mandate given by whom?
MR. FRANCISCO. That is what we usually do, sir, in the APT.
THE CHAIRMAN. Ah, you get outside counsel?
MR. FRANCISCO. Yes, we...
THE CHAIRMAN. Not necessarily the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. So, on the basis of the opinion of outside counsel, private, you proceeded to, in effect, recognize an
obligation which is not even entered in the books of the PNCC? You probably resuscitated a non-existing obligation
anymore?
MR. FRANCISCO. Sir, I just based my recommendation on the professional findings of the law office that we
engaged, sir.
THE CHAIRMAN. Did you not ask for the opinion of the government corporate counsel?
MR. FRANCISCO. No, sir.
THE CHAIRMAN. Why?
MR. FRANCISCO. I felt that the engagements of the law office was sufficient, anyway we were going to raise it to the
Committee on Privatization for their approval or disapproval, sir.
THE CHAIRMAN. The COP?
MR. FRANCISCO. Yes, sir.
THE CHAIRMAN. Thats a cabinet level?
MR. FRANCISCO. Yes, sir. And we did that, sir.
THE CHAIRMAN. Now... So you sent your memo to Atty. Renato B. Valdecantos, who unfortunately is not here but I
think we have to get his response to this. And as part of the minutes of special meeting with the board of directors on
October 20, 2000, the board resolved in its Board Resolution No. 092-2000, the board resolved to recognize,
acknowledge and confirm PNCCs obligations as of September 30, 1999, etcetera, etcetera. (A), or rather (B),
Marubeni Corporation in the amount of P10,740,000.
Now, we asked to be here because the franchise of PNCC is hanging in a balance because of the on the questions
on this acknowledgement. So we want to be educated.

Now, the paper trail starts with your letter. So, thats it thats my kuwan, Frank.
Yes, Senator Drilon.
SEN. DRILON. Thank you, Mr. Chairman.
Yes, Atty. Francisco, you have a copy of the minutes of October 20, 2000?
MR. FRANCISCO. Im sorry, sir, we dont have a copy.
SEN. DRILON. May we ask the corporate secretary of PNCC to provide us with a copy?
Okay naman andiyan siya.
(Ms. Ogan handing the document to Mr. Francisco.)
You have familiarized yourselves with the minutes, Atty. Francisco?
MR. FRANCISCO. Yes, sir.
SEN. DRILON. Now, mention is made of a memorandum here on line 8, page 3 of this boards minutes. It says,
"Director Francisco has prepared a memorandum requesting confirmation, acknowledgement, and ratification of this
indebtedness of PNCC to the national government which was determined by Bureau of Treasury as of September 30,
1999 is 36,023,784,751. And with respect to PNCCs obligation to Marubeni, this has been determined to be in the
total amount of 10,743,103,388, also as of September 30, 1999; that there is need to ratify this because there has
already been a representation made with respect to the review of the financial records of PNCC by Punongbayan and
Araullo, which have been included as part of the package of APTs disposition to the national governments interest in
PNCC."
You recall having made this representation as found in the minutes, I assume, Atty. Francisco?
MR. FRANCISCO. Yes, sir. But Id like to be refreshed on the memorandum, sir, because I dont have a copy.
SEN. DRILON. Yes, this memorandum was cited earlier by Senator Arroyo, and maybe the secretary can give him a
copy? Give him a copy?
MS. OGAN. (Handing the document to Mr. Francisco.)
MR. FRANCISCO. Your Honor, I have here a memorandum to the PNCC board through Atty. Valdecantos, which
says that in the last paragraph, if I may read? "May we request therefore, that a board resolution be adopted,
acknowledging and confirming the aforementioned PNCC obligations with the national government and Marubeni as
borne out by the due diligence audit."
SEN. DRILON. This is the memorandum referred to in these minutes. This memorandum dated 17 October 2000 is
the memorandum referred to in the minutes.
MR. FRANCISCO. I would assume, Mr. Chairman.
SEN. DRILON. Right.
Now, the Punongbayan representative who was here yesterday, Mr...
THE CHAIRMAN. Navarro.
SEN. DRILON. ... Navarro denied that he made this recommendation.
THE CHAIRMAN. He asked for opinion, legal opinion.
SEN. DRILON. He said that they never made this representation and the transcript will bear us out. They said that
they never made this representation that the account of Marubeni should be recognized.

MR. FRANCISCO. Mr. Chairman, in the memorandum, I only mentioned here the acknowledgement and confirmation
of the PNCC obligations. I was not asking for a ratification. I never mentioned ratification in the memorandum. I just
based my memo based on the due diligence audit of the Feria Law Offices.
SEN. DRILON. Can you say that again? You never asked for a ratification...
MR. FRANCISCO. No. I never mentioned in my memorandum that I was asking for a ratification. I was just in my
memo it says, "acknowledging and confirming the PNCC obligation." This was what ...
SEN. DRILON. Isnt it the same as ratification? I mean, whats the difference?
MR. FRANCISCO. I well, my memorandum was meant really just to confirm the findings of the legal audit as ...
SEN. DRILON. In your mind as a lawyer, Atty. Francisco, theres a difference between ratification and whats your
term? -- acknowledgment and confirmation?
MR. FRANCISCO. Well, I guess theres no difference, Mr. Chairman.
SEN. DRILON. Right.
Anyway, just of record, the Punongbayan representatives here yesterday said that they never made such
representation.
In any case, now youre saying its the Feria Law Office who rendered that opinion? Can we you know, yesterday we
were asking for a copy of this opinion but we were never furnished one. The ... no less than the Chairman of this
Committee was asking for a copy.
THE CHAIRMAN. Well, copy of the opinion...
MS. OGAN. Yes, Mr. Chairman, we were never furnished a copy of this opinion because its opinion rendered for the
Asset Privatization Trust which is its client, not the PNCC, Mr. Chairman.
THE CHAIRMAN. All right. The question is whether but you see, this is a memorandum of Atty. Francisco to the
Chairman of the Asset Privatization Trust. You say now that you were never furnished a copy because thats
supposed to be with the Asset ...
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. ... but yet the action of or rather the opinion of the Feria Law Offices was in effect adopted by the
board of directors of PNCC in its minutes of October 20, 2000 where you are the corporate secretary, Ms. Ogan.
MS. OGAN. Yes, Mr. Chairman.
THE CHAIRMAN. So, what I am saying is that this opinion or rather the opinion of the Feria Law Offices of which you
dont have a copy?
MS. OGAN. Yes, sir.
THE CHAIRMAN. And the reason being that, it does not concern the PNCC because thats an opinion rendered for
APT and not for the PNCC.
MS. OGAN. Yes, Mr. Chairman, that was what we were told although we made several requests to the APT, sir.
THE CHAIRMAN. All right. Now, since it was for the APT and not for the PNCC, I ask the question why did PNCC
adopt it? That was not for the consumption of PNCC. It was for the consumption of the Asset Privatization Trust. And
that is what Atty. Francisco says and its confirmed by you saying that this was a memo you dont have a copy
because this was sought for by APT and the Feria Law Offices just provided an opinion provided the APT with an
opinion. So, as corporate secretary, the board of directors of PNCC adopted it, recognized the Marubeni Corporation.
You read the minutes of the October 20, 2000 meeting of the board of directors on Item V. The resolution speaks of ..
so, go ahead.

MS. OGAN. I gave my copies. Yes, sir.

THE CHAIRMAN. In effect the Feria Law Offices opinion was for the consumption of the APT.
MS. OGAN. That was what we were told, Mr. Chairman.
THE CHAIRMAN. And you were not even provided with a copy.
THE CHAIRMAN. Yet you adopted it.
MS. OGAN. Yes, sir.
SEN DRILON. Considering you were the corporate secretary.
THE CHAIRMAN. She was the corporate secretary.
SEN. DRILON. She was just recording the minutes.
THE CHAIRMAN. Yes, she was recording.
Now, we are asking you now why it was taken up?
MS. OGAN. Yes, sir, Mr. Chairman, this was mentioned in the memorandum of Atty. Francisco, memorandum to the
board.
SEN. DRILON. Mr. Chairman, Mr. Francisco represented APT in the board of PNCC. And is that correct, Mr.
Francisco?
THE CHAIRMAN. Youre an ex-officio member.
SEN. DRILON. Yes.
MR. FRANCISCO. Ex-officio member only, sir, as trustee in charge of the privatization of PNCC.
SEN. DRILON. With the permission of Mr. Chair, may I ask a question...
THE CHAIRMAN. Oh, yes, Senator Drilon.
SEN. DRILON. Atty. Francisco, you sat in the PNCC board as APT representative, you are a lawyer, there was a legal
opinion of Feria, Feria, Lugto, Lao Law Offices which you cited in your memorandum. Did you discuss first, did you
give a copy of this opinion to PNCC?
MR. FRANCISCO. I gave a copy of this opinion, sir, to our chairman who was also a member of the board of PNCC,
Mr. Valdecantos, sir.
SEN. DRILON. And because he was...
MR. FRANCISCO. Because he was my immediate boss in the APT.
SEN. DRILON. Apparently, [it] just ended up in the personal possession of Mr. Valdecantos because the corporate
secretary, Glenda Ogan, who is supposed to be the custodian of the records of the board never saw a copy of this.
MR. FRANCISCO. Well, sir, my the copy that I gave was to Mr. Valdecantos because he was the one sitting in the
PNCC board, sir.
SEN. DRILON. No, you sit in the board.
MR. FRANCISCO. I was just an ex-officio member. And all my reports were coursed through our Chairman, Mr.
Valdecantos, sir.

SEN. DRILON. Now, did you ever tell the board that there is a legal position taken or at least from the documents it is
possible that the claim has prescribed?
MR. FRANCISCO. I took this up in the board meeting of the PNCC at that time and I told them about this matter, sir.
SEN. DRILON. No, you told them that the claim could have, under the law, could have prescribed?
MR. FRANCISCO. No, sir.
SEN. DRILON. Why? You mean, you didnt tell the board that it is possible that this liability is no longer a valid liability
because it has prescribed?
MR. FRANCISCO. I did not dwell into the findings anymore, sir, because I found the professional opinion of the Feria
49
Law Office to be sufficient. (Emphasis supplied)
Atty. Franciscos act of recommending to the PNCC Board the acknowledgment of the Marubeni loans based only on
an opinion of a private law firm, without consulting the OGCC and without showing this opinion to the members of the
PNCC Board except to Atty. Valdecantos, reflects how shockingly little his concern was for PNCC, contrary to his
claim that "he only had the interest of PNCC at heart." In fact, if what was involved was his own money, Atty.
Francisco would have preferred not just two, but at least three different opinions on how to deal with the matter, and
he would have maintained his non-liability.
SEN. OSMEA. x x x
All right. And lastly, just to clear our minds, there has always been this finger-pointing, of course, whenever this is
typical Filipino. When they're caught in a bind, they always point a finger, they pretend they don't know. And it just
amazes me that you have been appointed trustees, meaning, representatives of the Filipino people, that's what you
were at APT, right? You were not Erap's representatives, you were representative of the Filipino people and you were
tasked to conserve the assets that that had been confiscated from various cronies of the previous administration. And
here, you are asked to recognize the P10 billion debt and you point only to one law firm. If you have cancer, don't you
to a second opinion, a second doctor or a third doctor? This is just a question. I am just asking you for your opinion if
you would take the advice of the first doctor who tells you that he's got to open you up.
MR. FRANCISCO. I would go to three or more doctors, sir.
SEN. OSMEA. Three or more. Yeah, that's right. And in this case the APT did not do so.
MR. FRANCISCO. We relied on the findings of the
SEN. OSMEA. If these were your money, would you have gone also to obtain a second, third opinion from other law
firms. Kung pera mo itong 10 billion na ito. Siguro you're not gonna give it up that easily ano, 'di ba?
MR. FRANCISCO. Yes, sir.
SEN. OSMEA. You'll probably keep it in court for the next 20 years.
xxxx

50

(Emphasis supplied)

This is a clear admission by Atty. Francisco of bad faith in directing the affairs of PNCC - that he would not have
recognized the Marubeni loans if his own funds were involved or if he were the owner of PNCC.
The PNCC Board admitted liability for the P10.743 billion Marubeni loans without seeing, reading or discussing the
"Feria opinion" which was the sole basis for its admission of liability. Such act surely goes against ordinary human
nature, and amounts to gross negligence and utter bad faith, even bordering on fraud, on the part of the PNCC Board
in directing the affairs of the corporation. Owing loyalty to PNCC and its stockholders, the PNCC Board should have
exercised utmost care and diligence in admitting a gargantuan debt of P10.743 billion that would certainly force PNCC
into insolvency, a debt that previous PNCC Boards in the last two decades consistently refused to admit.
Instead, the PNCC Board admitted PNCCs liability for the Marubeni loans relying solely on a mere opinion of a private
law office, which opinion the PNCC Board members never saw, except for Atty. Valdecantos and Atty. Francisco. The
PNCC Board knew that PNCC, as a government owned and controlled corporation (GOCC), must rely "exclusively" on
the opinion of the OGCC. Section 1 of Memorandum Circular No. 9 dated 27 August 1998 issued by the President
states:

SECTION 1. All legal matters pertaining to government-owned or controlled corporations, their subsidiaries, other
corporate off-springs and government acquired asset corporations (GOCCs) shall be exclusively referred to and
handled by the Office of the Government Corporate Counsel (OGCC). (Emphasis supplied)
The PNCC Board acted in bad faith in relying on the opinion of a private lawyer knowing that PNCC is required to rely
"exclusively" on the OGCCs opinion. Worse, the PNCC Board, in admitting liability for P10.743 billion, relied on the
recommendation of a private lawyer whose opinion the PNCC Board members have not even seen.
During the oral arguments, Atty. Sison explained to the Court that the intention of APT was for the PNCC Board
merely to disclose the claim of Marubeni as part of APT's full disclosure policy to prospective buyers of PNCC. Atty.
Sison stated that it was not the intention of APT for the PNCC Board to admit liability for the Marubeni loans, thus:
x x x It was the Asset Privatization Trust A-P-T that was tasked to sell the company. The A-P-T, for purposes of
disclosure statements, tasked the Feria Law Office to handle the documentation and the study of all legal issues that
had to be resolved or clarified for the information of prospective bidders and or buyers. In the performance of its
assigned task the Feria Law Office came upon the Marubeni claim and mentioned that the APTC and/or PNCC must
disclose that there is a claim by Marubeni against PNCC for purposes of satisfying the requirements of full disclosure.
This seemingly innocent statement or requirement made by the Feria Law Office was then taken by two officials of the
Asset Privatization Trust and with malice aforethought turned it into the basis for a multi-billion peso debt by the now
51
government owned and/or controlled PNCC. x x x. (Emphasis supplied)
While the PNCC Board passed Board Resolution No. BD-099-2000 amending Board Resolution No. BD-092-2000,
such amendment merely added conditions for the recognition of the Marubeni loans, namely, subjecting the
recognition to a final determination by COA of the amount involved and to the declaration by OGCC of the legality of
PNCCs liability. However, the PNCC Board reiterated and stood firm that it "recognizes, acknowledges and confirms
its obligations" for the Marubeni loans. Apparently, Board Resolution No. BD-099-2000 was a futile attempt to "revoke"
Board Resolution No. BD-092-2000. Atty. Alfredo Laya, Jr., a former PNCC Director, spoke on his protests against
Board Resolution No. BD-092-2000 at the Senate hearings, thus:
MR. LAYA. Mr. Chairman, if I can
THE CHAIRMAN. Were you also at the board?
MR. LAYA. At that time, yes, sir.
THE CHAIRMAN. Okay, go ahead.
MR. LAYA. That's why if maybe this can help clarify the sequence. There was this meeting on October 20. This
matter of the Marubeni liability or account was also discussed. Mr. Macasaet, if I may try to refresh. And there was
some discussion, sir, and in fact, they were saying even at that stage that there should be a COA or an OGCC audit.
Now, that was during the discussion of October 20. Later on, the minutes came out. The practice, then, sir, was for the
minutes to come out at the start of the meeting of the subsequent. So the minutes of October 20 came out on
November 22 and then we were going over it. And that is in the subsequent minutes of the meeting
THE CHAIRMAN. May I interrupt. You were taking up in your November 22 meeting the October 20 minutes?
MR. LAYA. Yes, sir.
THE CHAIRMAN. This minutes that we have?
MR. LAYA. Yes, sir.
THE CHAIRMAN. All right, go ahead.
MR. LAYA. Now, in the November 22 meeting, we noticed this resolution already for confirmation of the board
proceedings of October 20. So immediately we made actually, protest would be a better term for that we protested
the wording of the resolution and that's why we came up with this resolution amending the October 20 resolution.
SEN. DRILON. So you are saying, Mr. Laya, that the minutes of October 20 did not accurately reflect the decisions
that you made on October 20 because you were saying that this recognition should be subject to OGCC and COA?
You seem to imply and we want to make it and I want to get that for the record. You seem to imply that there was no
decision to recognize the obligation during that meeting because you wanted it to subject it to COA and OGCC, is that
correct?

MR. LAYA. Yes, your Honor.

SEN. DRILON. So how did...
MR. LAYA. That's my understanding of the proceedings at that time, that's why in the subsequent November 22
meeting, we raised this point about obtaining a COA and OGCC opinion.
SEN. DRILON. Yes. But you know, the November 22 meeting repeated the wording of the resolution previously
adopted only now you are saying subject to final determination which is completely of different import from what you
are saying was your understanding of the decision arrived at on October 20.
MR. LAYA. Yes, sir. Because our thinking then...
SEN. DRILON. What do you mean, yes, sir?
MR. LAYA. It's just a claim under discussion but then the way it is translated, as the minutes of October 20 were not
really verbatim.
SEN. DRILON. So, you never intended to recognize the obligation.
MR. LAYA. I think so, sir. That was our personally, that was my position.
SEN. DRILON. How did it happen, Corporate Secretary Ogan, that the minutes did not reflect what the board
THE CHAIRMAN. Ms. Pasetes
MS. PASETES. Yes, Mr. Chairman.
THE CHAIRMAN. you are the chief financial officer of PNCC.
MS. PASETES. Your Honor, before that November 22 board meeting, management headed by Mr. Rolando
Macasaet, myself and Atty. Ogan had a discussion about the recognition of the obligations of 10 billion of Marubeni
and 36 billion of the national government on whether to recognize this as an obligation in our books or recognize it as
an obligation in the pro forma financial statement to be used for the privatization of PNCC because recognizing both
obligations in the books of PNCC would defeat our going concern status and that is where the position of the president
then, Mr. Macasaet, stemmed from and he went back to the board and moved to reconsider the position of October
52
20, 2000, Mr. Chair. (Emphasis supplied)
In other words, despite Atty. Layas objections to PNCCs admitting liability for the Marubeni loans, the PNCC Board
still admitted the same and merely imposed additional conditions to temper somehow the devastating effects of Board
Resolution No. BD-092-2000.
The act of the PNCC Board in issuing Board Resolution No. BD-092-2000 expressly admitting liability for the Marubeni
loans demonstrates the PNCC Boards gross and willful disregard of the requisite care and diligence in managing the
affairs of PNCC, amounting to bad faith and resulting in grave and irreparable injury to PNCC and its stockholders.
This reckless and treacherous move on the part of the PNCC Board clearly constitutes a serious breach of its fiduciary
duty to PNCC and its stockholders, rendering the members of the PNCC Board liable under Section 31 of the
Corporation Code, which provides:
SEC. 31. Liability of directors, trustees or officers. -- Directors or trustees who willfully and knowingly vote for or assent
to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of
the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation of his duty, any interest adverse to the
corporation in respect of any matter which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
Soon after the short-lived Estrada Administration, the PNCC Board revoked its previous admission of liability for the
Marubeni loans. During the oral arguments, Atty. Sison narrated to the Court:

x x x After President Estrada was ousted, I was appointed as President and Chairman of PNCC in April of 2001, this
particular board resolution was brought to my attention and I immediately put the matter before the board. I had no
problem in convincing them to reverse the recognition as it was illegal and had no basis in fact. The vote to overturn
that resolution was unanimous. Strange to say that some who voted to overturn the recognition were part of the old
board that approved it. Stranger still, Renato Valdecantos who was still a member of the Board voted in favor of
reversing the resolution he himself instigated and pushed. Some of the board members who voted to recognize the
53
obligation of Marubeni even came to me privately and said "pinilit lang kami." x x x. (Emphasis supplied)
In approving PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board caused undue injury to
the Government and gave unwarranted benefits to Radstock, through manifest partiality, evident bad faith or gross
inexcusable negligence of the PNCC Board. Such acts are declared under Section 3(e) of RA 3019 or the Anti-Graft
and Corrupt Practices Act, as "corrupt practices xxx and xxx unlawful." Being unlawful and criminal acts, these PNCC
Board Resolutions are void ab initio and cannot be implemented or in any way given effect by the Executive or Judicial
branch of the Government.
Not content with forcing PNCC to commit corporate suicide with the admission of liability for the Marubeni loans under
Board Resolution Nos. BD-092-2000 and BD-099-2000, the PNCC Board drove the last nail on PNCCs coffin when
the PNCC Board entered into the manifestly and grossly disadvantageous Compromise Agreement with Radstock.
This time, the OGCC, headed by Agnes DST Devanadera, reversed itself and recommended approval of the
Compromise Agreement to the PNCC Board. As Atty. Sison explained to the Court during the oral arguments:
x x x While the case was pending in the Court of Appeals, Radstock in a rare display of extreme generosity,
conveniently convinced the Board of PNCC to enter into a compromise agreement for the amount of the judgment
rendered by the RTC or P6.5 Billion Pesos. This time the OGCC, under the leadership of now Solicitor General Agnes
Devanadera, approved the compromise agreement abandoning the previous OGCC position that PNCC had a
meritorious case and would be hard press to lose the case. What is strange is that although the compromise
agreement we seek to stop ostensibly is for P6.5 Billion only, truth and in fact, the agreement agrees to convey to
Radstock all or substantially all of the assets of PNCC worth P18 Billion Pesos. There are three items that are
undervalued here, the real estate that was turned over as a result of the controversial agreement, the toll revenues
that were being assigned and the value of the new shares of PNCC the difference is about P12 Billion Pesos. x x x
(Emphasis supplied)
V.
The Compromise Agreement is Void
for Being Contrary to the Constitution,
Existing Laws, and Public Policy
For a better understanding of the present case, the pertinent terms and conditions of the Compromise Agreement
between PNCC and Radstock are quoted below:
COMPROMISE AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement made and entered into this 17th day of August 2006, in Mandaluyong City, Metro Manila, Philippines,
by and between:
PHILIPPINE NATIONAL CONSTRUCTION CORPORATION, a government acquired asset corporation, created and
existing under the laws of the Republic of the Philippines, with principal office address at EDSA corner Reliance
Street, Mandaluyong City, Philippines, duly represented herein by its Chairman ARTHUR N. AGUILAR, pursuant to a
Board Resolution attached herewith as Annex "A" and made an integral part hereof, hereinafter referred to as PNCC;
- and RADSTOCK SECURITIES LIMITED, a private corporation incorporated in the British Virgin Islands, with office
address at Suite 1402 1 Duddell Street, Central Hongkong duly-represented herein by its Director, CARLOS G.
DOMINGUEZ, pursuant to a Board Resolution attached herewith as Annex "B" and made an integral part hereof,
hereinafter referred to as RADSTOCK.
WITNESSETH:
WHEREAS, on January 15, 2001, RADSTOCK, as assignee of Marubeni Corporation, filed a complaint for sum of
money and damages with application for a writ of preliminary attachment with the Regional Trial Court (RTC),

Mandaluyong City, docketed as Civil Case No. MC-01-1398, to collect on PNCCs guarantees on the unpaid loan
obligations of CDCP Mining Corporation as provided under an Advance Payment Agreement and Loan Agreement;
WHEREAS, on December 10, 2002, the RTC of Mandaluyong rendered a decision in favor of plaintiff RADSTOCK
directing PNCC to pay the total amount of Thirteen Billion One Hundred Fifty One Million Nine Hundred Fifty-Six
Thousand Five Hundred Twenty-Eight Pesos (P13,151,956,528.00) with interest from October 15, 2001 plus Ten
Million Pesos (P10,000,000.00) as attorney's fees.
WHEREAS, PNCC had elevated the case to the Court of Appeals (CA-G.R. SP No. 66654) on Certiorari and
thereafter, to the Supreme Court (G.R. No. 156887) which Courts have consistently ruled that the RTC did not commit
grave abuse of discretion when it denied PNCCs Motion to Dismiss which sets forth similar or substantially the same
grounds or defenses as those raised in PNCC's Answer;
WHEREAS, the case has remained pending for almost six (6) years even after the main action was appealed to the
Court of Appeals;
WHEREAS, on the basis of the RTC Decision dated December 10, 2002, the current value of the judgment debt
against PNCC stands at P17,040,843,968.00 as of July 31, 2006 (the "Judgment Debt");
WHEREAS, RADSTOCK is willing to settle the case at the reduced Compromise Amount of Six Billion One Hundred
Ninety-Six Million Pesos (P6,196,000,000.00) which may be paid by PNCC, either in cash or in kind to avoid the
trouble and inconvenience of further litigation as a gesture of goodwill and cooperation;
WHEREAS, it is an established legal policy or principle that litigants in civil cases should be encouraged to
compromise or amicably settle their claims not only to avoid litigation but also to put an end to one already
commenced (Articles 2028 and 2029, Civil Code);
WHEREAS, this Compromise Agreement has been approved by the respective Board of Directors of both PNCC and
RADSTOCK, subject to the approval of the Honorable Court;
NOW, THEREFORE, for and in consideration of the foregoing premises, and the mutual covenants, stipulations and
agreements herein contained, PNCC and RADSTOCK have agreed to amicably settle the above captioned Radstock
case under the following terms and conditions:
1. RADSTOCK agrees to receive and accept from PNCC in full and complete settlement of the Judgment
Debt, the reduced amount of Six Billion, One Hundred Ninety-Six Million Pesos (P6,196,000,000.00) (the
"Compromise Amount").
2. This Compromise Amount shall be paid by PNCC to RADSTOCK in the following manner:
a. PNCC shall assign to a third party assignee to be designated by RADSTOCK all its rights and interests to the
following real properties provided the assignee shall be duly qualified to own real properties in the Philippines;
(1) PNCCs rights over that parcel of land located in Pasay City with a total area of One Hundred Twenty-Nine
Thousand Five Hundred Forty-Eight (129,548) square meters, more or less, and which is covered by and
more particularly described in Transfer Certificate of Title No. T-34997 of the Registry of Deeds for Pasay
City. The transfer value is P3,817,779,000.00.
PNCCs rights and interests in Transfer Certificate of Title No. T-34997 of the Registry of Deeds for Pasay
City is defined and delineated by Administrative Order No. 397, Series of 1998, and RADSTOCK is fully
aware and recognizes that PNCC has an undertaking to cede at least 2 hectares of this property to its
creditor, the Philippine National Bank; and that furthermore, the Government Service Insurance System has
also a current and existing claim in the nature of boundary conflicts, which undertaking and claim will not
result in the diminution of area or value of the property. Radstock recognizes and acknowledges the rights and
interests of GSIS over the said property.
(2) T-452587 (T-23646) - Paraaque (5,123 sq. m.) subject to the clarification of the Privatization and
Management Office (PMO) claims thereon. The transfer value isP45,000,900.00.
(3) T-49499 (529715 including T-68146-G (S-29716) (1,9747-A)-Paraaque (107 sq. m.) (54 sq. m.) subject to
the clarification of the Privatization and Management Office (PMO) claims thereon. The transfer value
is P1,409,100.00.

(4) 5-29716-Paraaque (27,762 sq. m.) subject to the clarification of the Privatization and Management Office
(PMO) claims thereon. The transfer value is P242,917,500.00.
(5) P-169 - Tagaytay (49,107 sq. m.). The transfer value is P13,749,400.00.
(6) P-170 - Tagaytay (49,100 sq. m.). The transfer value is P13,749,400.00.
(7) N-3320 - Town and Country Estate, Antipolo (10,000 sq. m.). The transfer value isP16,800,000.00.
(8) N-7424 - Antipolo (840 sq. m.). The transfer value is P940,800.00.
(9) N-7425 - Antipolo (850 sq. m.). The transfer value is P952,000.00.
(10) N-7426 - Antipolo (958 sq. m.). The transfer value is P1,073,100.00.
(11) T-485276 - Antipolo (741 sq. m.). The transfer value is P830,200.00.
(12) T-485277 - Antipolo (680 sq. m.). The transfer value is P761,600.00.
(13) T-485278 - Antipolo (701 sq. m.). The transfer value is P785,400.00.
(14) T-131500 - Bulacan (CDCP Farms Corp.) (4,945 sq, m.). The transfer value isP6,475,000.00.
(15) T-131501 - Bulacan (678 sq. m.). The transfer value is P887,600.00.
(16) T-26,154 (M) - Bocaue, Bulacan (2,841 sq. m.). The transfer value is P3,779,300.00.
(17) T-29,308 (M) - Bocaue, Bulacan (733 sq. m.). The transfer value is P974,400.00.
(18) T-29,309 (M) Bocaue, Bulacan (1,141 sq. m.). The transfer value is P1,517,600.00.
(19) T-260578 (R. Bengzon) Sta. Rita, Guiguinto, Bulacan (20,000 sq. m.). The transfer value
is P25,200,000.00.
The transfer values of the foregoing properties are based on 70% of the appraised value of the respective properties.
b. PNCC shall issue to RADSTOCK or its assignee common shares of the capital stock of PNCC issued at par value
which shall comprise 20% of the outstanding capital stock of PNCC after the conversion to equity of the debt exposure
of the Privatization Management Office (PMO) and the National Development Company (NDC) and other government
agencies and creditors such that the total government holdings shall not fall below 70% voting equity subject to the
approval of the Securities and Exchange Commission (SEC) and ratification of PNCCs stockholders, if necessary.
The assigned value of the shares issued to RADSTOCK is P713 Million based on the approximate last trading price of
PNCC shares in the Philippine Stock Exchange as the date of this agreement, based further on current generally
accepted accounting standards which stipulates the valuation of shares to be based on the lower of cost or market
value.
Subject to the procurement of any and all necessary approvals from the relevant governmental authorities, PNCC
shall deliver to RADSTOCK an instrument evidencing an undertaking of the Privatization and Management Office
(PMO) to give RADSTOCK or its assignee the right to match any offer to buy the shares of the capital stock and debts
of PNCC held by PMO, in the event the same shares and debt are offered for privatization.
c. PNCC shall assign to RADSTOCK or its assignee 50% of the PNCC's 6% share in the gross toll revenue of the
Manila North Tollways Corporation (MNTC), with a Net Present Value of P1.287 Billion computed in the manner
outlined in Annex "C" herein attached as an integral part hereof, that shall be due and owing to PNCC pursuant to the
Joint Venture Agreement between PNCC and First Philippine Infrastructure Development Corp. dated August 29,
1995 and other related existing agreements, commencing in 2008. It shall be understood that as a result of this
assignment, PNCC shall charge and withhold the amounts, if any, pertaining to taxes due on the amounts assigned.
Under the Compromise Agreement, PNCC shall pay Radstock the reduced amount ofP6,185,000,000.00 in full
settlement of PNCCs guarantee of CDCP Minings debt allegedly totalingP17,040,843,968.00 as of 31 July 2006. To
satisfy its reduced obligation, PNCC undertakes to (1) "assign to a third party assignee to be designated by Radstock
all its rights and interests" to the listed real properties therein; (2) issue to Radstock or its assignee common shares of

the capital stock of PNCC issued at par value which shall comprise 20% of the outstanding capital stock of PNCC; and
(3) assign to Radstock or its assignee 50% of PNCCs 6% share, for the next 27 years (2008-2035), in the gross toll
revenues of the Manila North Tollways Corporation.
A. The PNCC Board has no power to compromise
the P6.185 billion amount.
Does the PNCC Board have the power to compromise the P6.185 billion "reduced" amount? The answer is in the
negative.1avvphi1
The Dissenting Opinion asserts that PNCC has the power, citing Section 36(2) of Presidential Decree No. 1445 (PD
1445), otherwise known as the Government Auditing Code of the Philippines, enacted in 1978. Section 36 states:
SECTION 36. Power to Compromise Claims. (1) When the interest of the government so requires, the Commission
may compromise or release in whole or in part, any claim or settled liability to any government agency not exceeding
ten thousand pesos and with the written approval of the Prime Minister, it may likewise compromise or release any
similar claim or liability not exceeding one hundred thousand pesos, the application for relief therefrom shall be
submitted, through the Commission and the Prime Minister, with their recommendations, to the National Assembly.
(2) The respective governing bodies of government-owned or controlled corporations, and self-governing boards,
commissions or agencies of the government shall have the exclusive power to compromise or release any similar
claim or liability when expressly authorized by their charters and if in their judgment, the interest of their respective
corporations or agencies so requires. When the charters do not so provide, the power to compromise shall be
exercised by the Commission in accordance with the preceding paragraph. (Emphasis supplied)
The Dissenting Opinion asserts that since PNCC is incorporated under the Corporation Code, the PNCC Board has all
the powers granted to the governing boards of corporations incorporated under the Corporation Code, which includes
the power to compromise claims or liabilities.
Section 36 of PD 1445, enacted on 11 June 1978, has been superseded by a later law -- Section 20(1), Chapter IV,
Subtitle B, Title I, Book V of Executive Order No. 292 or the Administrative Code of 1987, which provides:
Section 20. Power to Compromise Claims. - (1) When the interest of the Government so requires, the Commission
may compromise or release in whole or in part, any settled claim or liability to any government agency not exceeding
ten thousand pesos arising out of any matter or case before it or within its jurisdiction, and with the written approval of
the President, it may likewise compromise or release any similar claim or liability not exceeding one hundred thousand
pesos. In case the claim or liability exceeds one hundred thousand pesos, the application for relief therefrom shall be
submitted, through the Commission and the President, with their recommendations, to the Congress[.] x x x
(Emphasis supplied)
54

Under this provision, the authority to compromise a settled claim or liability exceeding P100,000.00 involving a
government agency, as in this case where the liability amounts to P6.185 billion, is vested not in COA but exclusively
in Congress. Congress alone has the power to compromise the P6.185 billion purported liability of PNCC. Without
congressional approval, the Compromise Agreement between PNCC and Radstock involvingP6.185 billion is void for
being contrary to Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987.
PNCC is a "government agency" because Section 2 on Introductory Provisions of the Revised Administrative Code of
1987 provides that
Agency of the Government refers to any of the various units of the Government, including a department, bureau,
office, instrumentality, or government-owned or controlled corporation, or a local government or a distinct unit therein.
(Boldfacing supplied)
Thus, Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 applies to PNCC, which
indisputably is a government owned or controlled corporation.
In the same vein, the COAs stamp of approval on the Compromise Agreement is void for violating Section 20(1),
Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987. Clearly, the Dissenting Opinions reliance on
the COAs finding that the terms and conditions of the Compromise Agreement are "fair and above board" is patently
erroneous.

55

Citing Benedicto v. Board of Administrators of Television Stations RPN, BBC and IBC, the Dissenting Opinion views
that congressional approval is not required for the validity of the Compromise Agreement because the liability of
PNCC is not yet "settled."
In Benedicto, the PCGG filed in the Sandiganbayan a civil case to recover from the defendants (including Roberto S.
Benedicto) their ill-gotten wealth consisting of funds and other properties. The PCGG executed a compromise
agreement with Roberto S. Benedicto ceding to the latter a substantial part of his ill-gotten assets and the State
granting him immunity from further prosecution. The Court held that prior congressional approval is not required for
the PCGG to enter into a compromise agreement with persons against whom it has filed actions for recovery of illgotten wealth.
In Benedicto, the Court found that the governments claim against Benedicto was not yet settled unlike here where the
PNCC Board expressly admitted the liability of PNCC for the Marubeni loans. In Benedicto, the ownership of the
alleged ill-gotten assets was still being litigated in the Sandiganbayan and no party ever admitted any liability, unlike
here where the PNCC Board had already admitted through a formal Board Resolution PNCCs liability for the
Marubeni loans. PNCCs express admission of liability for the Marubeni loans is essentially the premise of the
execution of the Compromise Agreement. In short, Radstocks claim against PNCC is settled by virtue of PNCCs
express admission of liability for the Marubeni loans. The Compromise Agreement merely reduced this settled liability
from P17 billion to P6.185 billion.
The provision of the Revised Administrative Code on the power to settle claims or liabilities was precisely enacted to
prevent government agencies from admitting liabilities against the government, then compromising such "settled"
liabilities. The present case is exactly what the law seeks to prevent, a compromise agreement on a creditors claim
settled through admission by a government agency without the approval of Congress for amounts
exceeding P100,000.00. What makes the application of the law even more necessary is that the PNCC Boards twin
moves are manifestly and grossly disadvantageous to the Government. First, the PNCC admitted solidary liability for a
staggering P10.743 billion private debt incurred by a private corporation which PNCC does not even control. Second,
the PNCC Board agreed to pay Radstock P6.185 billion as a compromise settlement ahead of all other creditors,
including the Government which is the biggest creditor.
The Dissenting Opinion further argues that since the PNCC is incorporated under the Corporation Code, it has the
power, through its Board of Directors, to compromise just like any other private corporation organized under the
Corporation Code. Thus, the Dissenting Opinion states:
Not being a government corporation created by special law, PNCC does not owe its creation to some charter or
special law, but to the Corporation Code. Its powers are enumerated in the Corporation Code and its articles of
incorporation. As an autonomous entity, it undoubtedly has the power to compromise, and to enter into a settlement
through its Board of Directors, just like any other private corporation organized under the Corporation Code. To
maintain otherwise is to ignore the character of PNCC as a corporate entity organized under the Corporation Code, by
which it was vested with a personality and identity distinct and separate from those of its stockholders or members.
(Boldfacing and underlining supplied)
The Dissenting Opinion is woefully wide off the mark. The PNCC is not "just like any other private corporation"
precisely because it is not a private corporation but indisputably a government owned corporation. Neither is PNCC
"an autonomous entity" considering that PNCC is under the Department of Trade and Industry, over which the
President exercises control. To claim that PNCC is an "autonomous entity" is to say that it is a lost command in the
Executive branch, a concept that violates the President's constitutional power of control over the entire Executive
56
branch of government.
The government nominees in the PNCC Board, who practically compose the entire PNCC Board, are public officers
subject to the Anti-Graft and Corrupt Practices Act, accountable to the Government and the Filipino people. To hold
that a corporation incorporated under the Corporation Code, despite its being 90.3% owned by the Government, is "an
autonomous entity" that could solely through its Board of Directors compromise, and transfer ownership of,
substantially all its assets to a private third party without the approval required under the Administrative Code of
57
1987, is to invite the plunder of all such government owned corporations.
The Dissenting Opinions claim that PNCC is an autonomous entity just like any other private corporation is
inconsistent with its assertion that Section 36(2) of the Government Auditing Code is the governing law in determining
PNCC's power to compromise. Section 36(2) of the Government Auditing Code expressly states that it applies to the
governing bodies of "government-owned or controlled corporations." The phrase "government-owned or controlled
corporations" refers to both those created by special charter as well as those incorporated under the Corporation
Code. Section 2, Article IX-D of the Constitution provides:
SECTION 2. (1) The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or held in

trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned or 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.
(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope of its
audit and examination, establish the techniques and methods required therefor, and promulgate accounting and
auditing rules and regulations, including those for the prevention and disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. (Emphasis
supplied)
In explaining the extent of the jurisdiction of COA over government owned or controlled corporations, this Court
58
declared in Feliciano v. Commission on Audit:
The COA's audit jurisdiction extends not only to government "agencies or instrumentalities," but also to "governmentowned and controlled corporations with original charters" as well as "other government-owned or controlled
corporations" without original charters.
xxxx
Petitioner forgets that the constitutional criterion on the exercise of COA's audit jurisdiction depends on the
government's 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 COA's audit jurisdiction. Neither is
the manner of creation of a corporation, whether under a general or special law.
Clearly, the COAs audit jurisdiction extends to government owned or controlled corporations incorporated under the
Corporation Code. Thus, the COA must apply the Government Auditing Code in the audit and examination of the
accounts of such government owned or controlled corporations even though incorporated under the Corporation
Code. This means that Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the Administrative Code of 1987 on the
power to compromise, which superseded Section 36 of the Government Auditing Code, applies to the present case in
determining PNCCs power to compromise. In fact, the COA has been regularly auditing PNCC on a post-audit basis
in accordance with Section 2, Article IX-D of the Constitution, the Government Auditing Code, and COA rules and
regulations.
B. PNCCs toll fees are public funds.
PD 1113 granted PNCC a 30-year franchise to construct, operate and maintain toll facilities in the North and South
59
Luzon Expressways. Section 1 of PD 1113 provides:
Section 1. Any provision of law to the contrary notwithstanding, there is hereby granted to the Construction and
Development Corporation of the Philippines (CDCP), a corporation duly organized and registered under the laws of
the Philippines, hereinafter called the GRANTEE, for a period of thirty (30) years from May 1, 1977 the right, privilege
and authority to construct, operate and maintain toll facilities covering the expressways from Balintawak (Station 9 +
563) to Carmen, Rosales, Pangasinan and from Nichols, Pasay City (Station 10 + 540) to Lucena, Quezon,
hereinafter referred to collectively as North Luzon Expressway, respectively.
The franchise herein granted shall include the right to collect toll fees at such rates as may be fixed and/or authorized
by the Toll Regulatory Board hereinafter referred to as the Board created under Presidential Decree No. 1112 for the
use of the expressways above-mentioned. (Emphasis supplied)
Section 2 of PD 1894,
provides:

60

which amended PD 1113 to include in PNCCs franchise the Metro Manila expressway, also

Section 2. The term of the franchise provided under Presidential Decree No. 1113 for the North Luzon Expressway
and the South Luzon Expressway which is thirty (30) years from 1 May 1977 shall remain the same; provided that, the
franchise granted for the Metro Manila Expressway and all extensions linkages, stretches and diversions that may be
constructed after the date of approval of this decree shall likewise have a term of thirty (30) years commencing from
the date of completion of the project. (Emphasis supplied)
Based on these provisions, the franchise of the PNCC expired on 1 May 2007 or thirty years from 1 May 1977.
PNCC, however, claims that under PD 1894, the North Luzon Expressway (NLEX) shall have a term of 30 years from
the date of its completion in 2005. PNCC argues that the proviso in Section 2 of PD 1894 gave "toll road projects
completed within the franchise period and after the approval of PD No. 1894 on 12 December 1983 their own thirtyyear term commencing from the date of the completion of the said project, notwithstanding the expiry of the said
franchise."
This contention is untenable.
The proviso in Section 2 of PD 1894 refers to the franchise granted for the Metro Manila Expressway and all
extensions linkages, stretches and diversions constructed after the approval of PD 1894. It does not pertain to the
NLEX because the term of the NLEX franchise, "which is 30 years from 1 May 1977, shall remain the same," as
expressly provided in the first sentence of the same Section 2 of PD 1894. To construe that the NLEX franchise had a
new term of 30 years starting from 2005 glaringly conflicts with the plain, clear and unequivocal language of the first
sentence of Section 2 of PD 1894. That would be clearly absurd.
There is no dispute that Congress did not renew PNCCs franchise after its expiry on 1 May 2007. However, PNCC
asserts that it "remains a viable corporate entity even after the expiration of its franchise under Presidential Decree
No. 1113." PNCC points out that the Toll Regulatory Board (TRB) granted PNCC a "Tollway Operation Certificate"
(TOC) which conferred on PNCC the authority to operate and maintain toll facilities, which includes the power to
collect toll fees. PNCC further posits that the toll fees are private funds because they represent "the consideration
given to tollway operators in exchange for costs they incurred or will incur in constructing, operating and maintaining
the tollways."
This contention is devoid of merit.
With the expiration of PNCCs franchise, the assets and facilities of PNCC were automatically turned over, by
operation of law, to the government at no cost. Sections 2(e) and 9 of PD 1113 and Section 5 of PD 1894 provide:
Section 2 [of PD 1113]. In consideration of this franchise, the GRANTEE shall:
(e) Turn over the toll facilities and all equipment directly related thereto to the government upon expiration of the
franchise period without cost.
Section 9 [of PD 1113]. For the purposes of this franchise, the Government, shall turn over to the GRANTEE (PNCC)
not later than April 30, 1977 all physical assets and facilities including all equipment and appurtenances directly
related to the operations of the North and South Toll Expressways: Provided, That, the extensions of such
Expressways shall also be turned over to GRANTEE upon completion of their construction or of functional sections
thereof: Provided, However, That upon termination of the franchise period, said physical assets and facilities including
improvements thereon, together with equipment and appurtenances directly related to their operations, shall be turned
over to the Government without any cost or obligation on the part of the latter. (Emphasis supplied)
Section 5 [of PD No. 1894]. In consideration of this franchise, the GRANTEE shall:
(a) Construct, operate and maintain at its own expense the Expressways; and
(b) Turn over, without cost, the toll facilities and all equipment, directly related thereto to the Government upon
expiration of the franchise period. (Emphasis supplied)
The TRB does not have the power to give back to PNCC the toll assets and facilities which were automatically turned
over to the Government, by operation of law, upon the expiration of the franchise of the PNCC on 1 May 2007.
Whatever power the TRB may have to grant authority to operate a toll facility or to issue a "Tollway Operation
Certificate," such power does not obviously include the authority to transfer back to PNCC ownership of National
Government assets, like the toll assets and facilities, which have become National Government property upon the
expiry of PNCCs franchise. Such act by the TRB would repeal Section 5 of PD 1894 which automatically vested in the
National Government ownership of PNCCs toll assets and facilities upon the expiry of PNCCs franchise. The TRB

obviously has no power to repeal a law. Further, PD 1113, as amended by PD 1894, granting the franchise to PNCC,
is a later law that must necessarily prevail over PD 1112 creating the TRB. Hence, the provisions of PD 1113, as

amended by PD 1894, are controlling.

The governments ownership of PNCC's toll assets and facilities inevitably results in the governments ownership
of the toll fees and the net income derived from these toll assets and facilities. Thus, the toll fees form part of the
National Governments General Fund, which includes public moneys of every sort and other resources
pertaining to any agency of the government.61 Even Radstocks counsel admits that the toll fees are public
funds, to wit:
ASSOCIATE JUSTICE CARPIO:
Okay. Now, when the franchise of PNCC expired on May 7, 2007, under the terms of the franchise under PD 1896, all the assets, toll way assets,
equipment, etcetera of PNCC became owned by government at no cost, correct, under the franchise?
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. So this is now owned by the national government. [A]ny income from these assets of the national government is national government income,
correct?
DEAN AGABIN:
Yes, Your Honor.62
xxxx
ASSOCIATE JUSTICE CARPIO:
x x x My question is very simple x x x Is the income from these assets of the national government (interrupted)
DEAN AGABIN:
Yes, Your Honor.63
xxxx
ASSOCIATE JUSTICE CARPIO:
So, its the government [that] decides whether it goes to the general fund or another fund. [W]hat is that other fund? Is there another fund where
revenues of the government go?
DEAN AGABIN:
Its the same fund, Your Honor, except that (interrupted)
ASSOCIATE JUSTICE CARPIO:
So it goes to the general fund?
DEAN AGABIN:
Except that it can be categorized as a private fund in a commercial sense, and it can be categorized as a public fund in a Public Law sense.
ASSOCIATE JUSTICE CARPIO:
Okay. So we agree that, okay, it goes to the general fund. I agree with you, but you are saying it is categorized still as a private funds?
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:

But its part of the general fund. Now, if it is part of the general fund, who has the authority to spend that money?
DEAN AGABIN:
Well, the National Government itself.
ASSOCIATE JUSTICE CARPIO:
Who in the National Government, the Executive, Judiciary or Legislative?
DEAN AGABIN:
Well, the funds are usually appropriated by the Congress.
ASSOCIATE JUSTICE CARPIO:
x x x you mean to say there are exceptions that money from the general fund can be spent by the Executive without going t[hrough] Congress, or
xxx is [that] the absolute rule?
DEAN AGABIN:
Well, in so far as the general fund is concerned, that is the absolute rule set aside by the National Government.
ASSOCIATE JUSTICE CARPIO:
x x x you are saying this is general fund money - the collection from the assets[?]
DEAN AGABIN:
Yes.64 (Emphasis supplied)
Forming part of the General Fund, the toll fees can only be disposed of in accordance with the fundamental principles governing financial
transactions and operations of any government agency, to wit: (1) no money shall be paid out of the Treasury except in pursuance of an
appropriation made by law, as expressly mandated by Section 29(1), Article VI of the Constitution; and (2) government funds or property shall be
spent or used solely for public purposes, as expressly mandated by Section 4(2) of PD 1445 or the Government Auditing Code. 65
Section 29(1), Article VI of the Constitution provides:
Section 29(1). No money shall be paid out of the Treasury except in pursuance of an appropriation made by law.
The power to appropriate money from the General Funds of the Government belongs exclusively to the Legislature. Any act in violation of this ironclad rule is unconstitutional.
Reinforcing this Constitutional mandate, Sections 84 and 85 of PD 1445 require that before a government agency can enter into a contract involving
the expenditure of government funds, there must be an appropriation law for such expenditure, thus:
Section 84. Disbursement of government funds.
1. Revenue funds shall not be paid out of any public treasury or depository except in pursuance of an appropriation law or other specific statutory
authority.
xxxx
Section 85. Appropriation before entering into contract.
1. No contract involving the expenditure of public funds shall be entered into unless there is an appropriation therefor, the unexpended balance of
which, free of other obligations, is sufficient to cover the proposed expenditure.
xxxx
Section 86 of PD 1445, on the other hand, requires that the proper accounting official must certify that funds have been appropriated for the
purpose.66 Section 87 of PD 1445 provides that any contract entered into contrary to the requirements of Sections 85 and 86 shall be void,
thus:
Section 87. Void contract and liability of officer. Any contract entered into contrary to the requirements of the two immediately preceding sections
shall be void, and the officer or officers entering into the contract shall be liable to the government or other contracting party for any consequent
damage to the same extent as if the transaction had been wholly between private parties. (Emphasis supplied)

Applying Section 29(1), Article VI of the Constitution, as implanted in Sections 84 and 85 of the Government Auditing Code, a law must first be
enacted by Congress appropriating P6.185 billion as compromise money before payment to Radstock can be made.67 Otherwise, such payment
violates a prohibitory law and thus void under Article 5 of the Civil Code which states that "[a]cts executed against the provisions of mandatory
or prohibitory laws shall be void, except when the law itself authorizes their validity."
Indisputably, without an appropriation law, PNCC cannot lawfully pay P6.185 billion to Radstock. Any contract allowing such payment, like the
Compromise Agreement, "shall be void" as provided in Section 87 of the Government Auditing Code. In Comelec v. Quijano-Padilla,68 this Court
ruled:
Petitioners are justified in refusing to formalize the contract with PHOTOKINA. Prudence dictated them not to enter into a contract not backed up by
sufficient appropriation and available funds. Definitely, to act otherwise would be a futile exercise for the contract would inevitably suffer the vice of
nullity. In Osmea vs. Commission on Audit, this Court held:
The Auditing Code of the Philippines (P.D. 1445) further provides that no contract involving the expenditure of public funds shall be entered into
unless there is an appropriation therefor and the proper accounting official of the agency concerned shall have certified to the officer entering into
the obligation that funds have been duly appropriated for the purpose and the amount necessary to cover the proposed contract for the current
fiscal year is available for expenditure on account thereof. Any contract entered into contrary to the foregoing requirements shall be VOID.
Clearly then, the contract entered into by the former Mayor Duterte was void from the very beginning since the agreed cost for the project
(P,368,920.00) was way beyond the appropriated amount (P,419,180.00) as certified by the City Treasurer. Hence, the contract was properly
declared void and unenforceable in COA's 2nd Indorsement, dated September 4, 1986. The COA declared and we agree, that:
The prohibition contained in Sec. 85 of PD 1445 (Government Auditing Code) is explicit and mandatory. Fund availability is, as it has always been,
an indispensable prerequisite to the execution of any government contract involving the expenditure of public funds by all government agencies at
all levels. Such contracts are not to be considered as final or binding unless such a certification as to funds availability is issued (Letter of Instruction
No. 767, s. 1978). Antecedent of advance appropriation is thus essential to government liability on contracts (Zobel vs. City of Manila, 47 Phil. 169).
This contract being violative of the legal requirements aforequoted, the same contravenes Sec. 85 of PD 1445 and is null and void by virtue of Sec.
87.
Verily, the contract, as expressly declared by law, is inexistent and void ab initio. This is to say that the proposed contract is without force and effect
from the very beginning or from its incipiency, as if it had never been entered into, and hence, cannot be validated either by lapse of time or
ratification. (Emphasis supplied)
Significantly, Radstocks counsel admits that an appropriation law is needed before PNCC can use toll fees to pay Radstock, thus:
ASSOCIATE JUSTICE CARPIO:
Okay, I agree with you. Now, you are saying that money can be paid out of the general fund only through an appropriation by Congress, correct?
Thats what you are saying.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
I agree with you also. Okay, now, can PNCC xxx use this money to pay Radstock without Congressional approval?
DEAN AGABIN:
Well, I believe that that may not be necessary. Your Honor, because earlier, the government had already decreed that PNCC should be properly
paid for the reclamation works which it had done. And so (interrupted)
ASSOCIATE JUSTICE CARPIO:
No. I am talking of the funds.
DEAN AGABIN:
And so it is like a foreign obligation.
ASSOCIATE JUSTICE CARPIO:
Counsel, I'm talking of the general funds, collection from the toll fees. Okay. You said, they go to the general fund. You also said, money from the
general fund can be spent only if there is an appropriation law by Congress.
DEAN AGABIN:
Yes, Your Honor.
There is no law.

DEAN AGABIN:
Yes, except that, Your Honor, this fund has not yet gone to the general fund.
ASSOCIATE JUSTICE CARPIO:
No. Its being collected everyday. As of May 7, 2007, national government owned those assets already. All those x x x collections that would have
gone to PNCC are now national government owned. It goes to the general fund. And any body who uses that without appropriation from Congress
commits malversation, I tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the general fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the agent, PNCC. It has not been remitted to the National Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that You just agreed that all those collections now will go to the National Government forming part of the general fund. If,
somehow, PNCC is holding this money in the meantime, it holds xxx it in trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National Government.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Okay. Can the person holding in trust use it to pay his private debt?
DEAN AGABIN:
No, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Cannot be.
DEAN AGABIN:
But I assume that there must be some portion of the collections which properly pertain to PNCC.
ASSOCIATE JUSTICE CARPIO:
If there is some portion that xxx may be [for] operating expenses of PNCC. But that is not
DEAN AGABIN:
Even profit, Your Honor.
ASSOCIATE JUSTICE CARPIO:

Yeah, but that is not the six percent. Out of the six percent, that goes now to PNCC, thats entirely national government. But the National
Government and the PNCC can agree on service fees for collecting, to pay toll collectors.
DEAN AGABIN:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But those are expenses. We are talking of the net income. It goes to the general fund. And its only Congress that can authorize that expenditure.
Not even the Court of Appeals can give its stamp of approval that it goes to Radstock, correct?
DEAN AGABIN:
Yes, Your Honor.69 (Emphasis supplied)
Without an appropriation law, the use of the toll fees to pay Radstock would constitute malversation of public funds. Even counsel for Radstock
expressly admits that the use of the toll fees to pay Radstock constitutes malversation of public funds, thus:
ASSOCIATE JUSTICE CARPIO:
x x x As of May 7, 2007, [the] national government owned those assets already. All those x x x collections that would have gone to PNCC are now
national government owned. It goes to the general fund. And any body who uses that without appropriation from Congress commits malversation, I
tell you.
DEAN AGABIN:
That is correct, Your Honor, as long as it has already gone into the general fund.
ASSOCIATE JUSTICE CARPIO:
Oh, you mean to say that its still being held now by the agent, PNCC. It has not been remitted to the National Government?
DEAN AGABIN:
Well, if PNCC (interrupted)
ASSOCIATE JUSTICE CARPIO:
But if (interrupted)
DEAN AGABIN:
If this is the share that properly belongs to PNCC as a private entity (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. I am saying that You just agreed that all those collections now will go to the National Government forming part of the general fund. If,
somehow, PNCC is holding this money in the meantime, it holds x x x it in trust, correct? Because you said, it goes to the general fund, National
Government. So it must be holding this in trust for the National Government.
DEAN AGABIN:
Yes, Your Honor.70 (Emphasis supplied)
Indisputably, funds held in trust by PNCC for the National Government cannot be used by PNCC to pay a private debt of CDCP Mining to
Radstock, otherwise the PNCC Board will be liable for malversation of public funds.
In addition, to pay Radstock P6.185 billion violates the fundamental public policy, expressly articulated in Section 4(2) of the Government Auditing
Code,71 that government funds or property shall be spent or used solely for pubic purposes, thus:
Section 4. Fundamental Principles. x x x (2) Government funds or property shall be spent or used solely for public purposes. (Emphasis supplied)
There is no question that the subject of the Compromise Agreement is CDCP Minings private debt to Marubeni, which Marubeni subsequently
assigned to Radstock. Counsel for Radstock admits that Radstock holds a private debt of CDCP Mining, thus:
ASSOCIATE JUSTICE CARPIO:

So your client is holding a private debt of CDCP Mining, correct?

DEAN AGABIN:
Correct, Your Honor.72 (Emphasis supplied)
CDCP Mining obtained the Marubeni loans when CDCP Mining and PNCC (then CDCP) were still privately owned and managed corporations. The
Government became the majority stockholder of PNCC only because government financial institutions converted their loans to PNCC into equity
when PNCC failed to pay the loans. However, CDCP Mining have always remained a majority privately owned corporation with PNCC owning only
13% of its equity as admitted by former PNCC Chairman Arthur N. Aguilar and PNCC SVP Finance Miriam M. Pasetes during the Senate hearings,
thus:
SEN. OSMEA. x x x I just wanted to know is CDCP Mining a 100 percent subsidiary of PNCC?
MR. AGUILAR. Hindi ho. Ah, no.
SEN. OSMEA. If theyre not a 100 percent, why would they sign jointly and severally? I just want to plug the loopholes.
MR. AGUILAR. I think it was if I may just speculate. It was just common ownership at that time.
SEN. OSMEA. Al right. Now Also, the ...
MR. AGUILAR. Ah, 13 percent daw, your Honor.
SEN. OSMEA. Huh?
MR. AGUILAR. Thirteen percent ho.
SEN. OSMEA. Whats 13 percent?
MR. AGUILAR. We owned ...
MS. PASETES. Thirteen percent of ...
SEN. OSMEA. PNCC owned ...
MS. PASETES. (Mike off) CDCP ...
SEN. DRILON. Use the microphone, please.
MS. PASETES. Sorry. Your Honor, the ownership of CDCP of CDCP Basay Mining ...
SEN. OSMEA. No, no, the ownership of CDCP. CDCP Mining, how many percent of the equity of CDCP Mining was owned by PNCC, formerly
CDCP?
MS. PASETES. Thirteen percent.
SEN. OSMEA. Thirteen. And as a 13 percent owner, they agreed to sign jointly and severally?
MS. PASETES. Yes.
SEN. OSMEA. One-three?
So poor PNCC and CDCP got taken to the cleaners here. They sign for a 100 percent and they only own 13 percent.
x x x x73 (Emphasis supplied)
PNCC cannot use public funds, like toll fees that indisputably form part of the General Fund, to pay a private debt of CDCP Mining to Radstock.
Such payment cannot qualify as expenditure for a public purpose. The toll fees are merely held in trust by PNCC for the National Government,
which is the owner of the toll fees.
Considering that there is no appropriation law passed by Congress for the P6.185 billion compromise amount, the Compromise Agreement is void
for being contrary to law, specifically Section 29(1), Article VI of the Constitution and Section 87 of PD 1445. And since the payment of the P6.185
billion pertains to CDCP Minings private debt to Radstock, the Compromise Agreement is also void for being contrary to the fundamental public
policy that government funds or property shall be spent or used solely for public purposes, as provided in Section 4(2) of the Government Auditing
Code.
C. Radstock is not qualified to own land in the Philippines.

Radstock is a private corporation incorporated in the British Virgin Islands. Its office address is at Suite 14021 Duddell Street, Central Hongkong. As
a foreign corporation, with unknown owners whose nationalities are also unknown, Radstock is not qualified to own land in the Philippines pursuant
to Section 7, in relation to Section 3, Article XII of the Constitution. These provisions state:
Section. 3. Lands of the public domain are classified into agricultural, forest or timber, mineral lands, and national parks. Agricultural lands of the
public domain may be further classified by law according to the uses to which they may be devoted. Alienable lands of the public domain shall be
limited to agricultural lands. Private corporations or associations may not hold such lands of the public domain except by lease, for a period not
exceeding twenty-five years, renewable for not more than twenty-five years, and not to exceed one hundred thousand hectares in area. Citizens of
the Philippines may lease not more than five hundred hectares, or acquire not more than twelve hectares thereof by purchase, homestead, or grant.
Taking into account the requirements of conservation, ecology, and development, and subject to the requirements of agrarian reform, the Congress
shall determine, by law, the size of lands of the public domain which may be acquired, developed, held, or leased and the conditions therefor.
xxxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or
associations qualified to acquire or hold lands of the public domain.
The OGCC admits that Radstock cannot own lands in the Philippines. However, the OGCC claims that Radstock can own the rights to ownership of
lands in the Philippines, thus:
ASSOCIATE JUSTICE CARPIO:
Under the law, a foreigner cannot own land, correct?
ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
Can a foreigner who xxx cannot own land assign the right of ownership to the land?
ATTY. AGRA:
Again, Your Honor, at that particular time, it will be PNCC, not through Radstock, that chain of events should be, theres a qualified nominee
(interrupted)
ASSOCIATE JUSTICE CARPIO:
Yes, xxx you said, Radstock will assign the right of ownership to the qualified assignee[.] So my question is, can a foreigner own the right to
ownership of a land when it cannot own the land itself?
ATTY. AGRA:
The foreigner cannot own the land, Your Honor.
ASSOCIATE JUSTICE CARPIO:
But you are saying it can own the right of ownership to the land, because you are saying, the right of ownership will be assigned by Radstock.
ATTY. AGRA:
The rights over the properties, Your Honors, if theres a valid assignment made to a qualified party, then the assignment will be made.
ASSOCIATE JUSTICE CARPIO:
Who makes the assignment?
ATTY. AGRA:
It will be Radstock, Your Honor.
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it, correct?
ATTY. AGRA:

Pursuant to the compromise agreement, once approved, yes, Your Honors.

ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise (interrupted)
ASSOCIATE JUSTICE CARPIO:
No, no. Whether there is such a compromise agreement - - Its an academic question I am asking you, can a foreigner assign rights to ownership of
a land in the Philippines?
ATTY. AGRA:
Under the Compromise Agreement, Your Honors, these rights should be respected.
ASSOCIATE JUSTICE CARPIO:
So, it can?
ATTY. AGRA:
It can. Your Honor. But again, this right must, cannot be perfected or cannot be, could not take effect.
ASSOCIATE JUSTICE CARPIO:
But if it cannot - - Its not perfected, how can it assign?
ATTY. AGRA:
Not directly, Your Honors. Again, there must be a qualified nominee assigned by Radstock.
ASSOCIATE JUSTICE CARPIO:
Its very clear, its an indirect way of selling property that is prohibited by law, is it not?
ATTY. AGRA:
Again, Your Honor, know, believe this is a Compromise Agreement. This is a dacion en pago.
ASSOCIATE JUSTICE CARPIO:
So, dacion en pago is an exception to the constitutional prohibition.
ATTY. AGRA:
No, Your Honor. PNCC, will still hold on to the property, absent a valid assignment of properties.
ASSOCIATE JUSTICE CARPIO:
But what rights will PNCC have over that land when it has already signed the compromise? It is just waiting for instruction xxx from Radstock what
to do with it? So, its a trustee of somebody, because it does not, it cannot, [it] has no dominion over it anymore? Its just holding it for Radstock. So,
PNCC becomes a dummy, at that point, of Radstock, correct?
ATTY. AGRA:

No, Your Honor, I believe it (interrupted)

ASSOCIATE JUSTICE CARPIO:
Yeah, but it does not own the land, but it still holding the land in favor of the other party to the Compromise Agreement
ATTY. AGRA:
Pursuant to the compromise agreement, that will happen.
ASSOCIATE JUSTICE CARPIO:
Okay. May I (interrupted)
ATTY. AGRA:
Again, Your Honor, if the compromise agreement ended with a statement that Radstock will be the owner of the property (interrupted)
ASSOCIATE JUSTICE CARPIO:
Yeah. Unfortunately, it says, to a qualified assignee.
ATTY. AGRA:
Yes, Your Honor.
ASSOCIATE JUSTICE CARPIO:
And at this point, when it is signed and execut[ed] and approved, PNCC has no dominion over that land anymore. Who has dominion over it?
ATTY. AGRA:
Pending the assignment to a qualified party, Your Honor, PNCC will hold on to the property.
ASSOCIATE JUSTICE CARPIO:
Hold on, but who x x x can exercise acts of dominion, to sell it, to lease it?
ATTY. AGRA:
Again, Your Honor, without the valid assignment to a qualified nominee, the compromise agreement in so far as the transfer of these properties will
not become effective. It is subject to such condition. Your Honor.74 (Emphasis supplied)
There is no dispute that Radstock is disqualified to own lands in the Philippines. Consequently, Radstock is also disqualified to own the rights to
ownership of lands in the Philippines. Contrary to the OGCCs claim, Radstock cannot own the rights to ownership of any land in the Philippines
because Radstock cannot lawfully own the land itself. Otherwise, there will be a blatant circumvention of the Constitution, which prohibits a foreign
private corporation from owning land in the Philippines. In addition, Radstock cannot transfer the rights to ownership of land in the Philippines if it
cannot own the land itself. It is basic that an assignor or seller cannot assign or sell something he does not own at the time the ownership, or the
rights to the ownership, are to be transferred to the assignee or buyer. 75
The third party assignee under the Compromise Agreement who will be designated by Radstock can only acquire rights duplicating those which its
assignor (Radstock) is entitled by law to exercise. 76 Thus, the assignee can acquire ownership of the land only if its assignor, Radstock, owns the
land. Clearly, the assignment by PNCC of the real properties to a nominee to be designated by Radstock is a circumvention of the Constitutional
prohibition against a private foreign corporation owning lands in the Philippines. Such circumvention renders the Compromise Agreement void.
D. Public bidding is required for
the disposal of government properties.
Under Section 79 of the Government Auditing Code,77 the disposition
of government lands to private parties requires public bidding.78 COA Circular No. 89-926, issued on 27 January 1989, sets forth the guidelines on
the disposal of property and other assets of the government. Part V of the COA Circular provides:
V. MODE OF DISPOSAL/DIVESTMENT: -

This Commission recognizes the following modes of disposal/divestment of assets and property of national
government agencies, local government units and government-owned or controlled corporations and their
subsidiaries, aside from other such modes as may be provided for by law.

1. Public Auction
Conformably to existing state policy, the divestment or disposal of government property as contemplated herein
shall be undertaken primarily thru public auction. Such mode of divestment or disposal shall observe and adhere
to established mechanics and procedures in public bidding, viz:
a. adequate publicity and notification so as to attract the greatest number of interested parties; (vide,
Sec. 79, P.D. 1445)
b. sufficient time frame between publication and date of auction;
c. opportunity afforded to interested parties to inspect the property or assets to be disposed of;
d. confidentiality of sealed proposals;
e. bond and other prequalification requirements to guarantee performance; and
f. fair evaluation of tenders and proper notification of award.
It is understood that the Government reserves the right to reject any or all of the tenders. (Emphasis supplied)
Under the Compromise Agreement, PNCC shall dispose of substantial parcels of land, by way of dacion en
pago, in favor of Radstock. Citing Uy v. Sandiganbayan,79 PNCC argues that a dacion en pago is an exception to
the requirement of a public bidding.
PNCCs reliance on Uy is misplaced. There is nothing in Uy declaring that public bidding is dispensed with in a
dacion en pago transaction. The Court explained the transaction in Uy as follows:
We do not see any infirmity in either the MOA or the SSA executed between PIEDRAS and respondent banks.
By virtue of its shareholdings in OPMC, PIEDRAS was entitled to subscribe to 3,749,906,250 class "A" and
2,499,937,500 class "B" OPMC shares. Admittedly, it was financially sound for PIEDRAS to exercise its preemptive rights as an existing shareholder of OPMC lest its proportionate shareholdings be diluted to its
detriment. However, PIEDRAS lacked the necessary funds to pay for the additional subscription. Thus, it
resorted to contract loans from respondent banks to finance the payment of its additional subscription. The mode
of payment agreed upon by the parties was that the payment would be made in the form of part of the shares
subscribed to by PIEDRAS. The OPMC shares therefore were agreed upon by the parties to be equivalent
payment for the amount advanced by respondent banks. We see the wisdom in the conditions of the loan
transaction. In order to save PIEDRAS and/or the government from the trouble of selling the shares in order to
raise funds to pay off the loans, an easier and more direct way was devised in the form of the dacion en pago
agreements.
Moreover, we agree with the Sandiganbayan that neither PIEDRAS nor the government sustained any loss in
these transactions. In fact, after deducting the shares to be given to respondent banks as payment for the
shares, PIEDRAS stood to gain about 1,540,781,554 class "A" and 710,550,000 class "B" OPMC shares virtually
for free. Indeed, the question that must be asked is whether or not PIEDRAS, in the exercise of its pre-emptive
rights, would have been able to acquire any of these shares at all if it did not enter into the financing agreements
with the respondent banks.80
Suffice it to state that in Uy, neither PIEDRAS81 nor the government suffered any loss in the dacion en
pagotransactions, unlike here where the government stands to lose at least P6.185 billion worth of assets.
Besides, a dacion en pago is in essence a form of sale, which basically involves a disposition of a property. In
Filinvest Credit Corp. v. Philippine Acetylene, Co., Inc.,82 the Court defined dacion en pago in this wise:
Dacion en pago, according to Manresa, is the transmission of the ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of obligation. In dacion en pago, as a special mode of
payment, the debtor offers another thing to the creditor who accepts it as equivalent of payment of an
outstanding debt. The undertaking really partakes in one sense of the nature of sale, that is, the creditor is really
buying the thing or property of the debtor, payment for which is to be charged against the debtor's debt.As such,
the essential elements of a contract of sale, namely, consent, object certain, and cause or consideration must be
present. In its modern concept, what actually takes place in dacion en pago is an objective novation of the

obligation where the thing offered as an accepted equivalent of the performance of an obligation is considered
as the object of the contract of sale, while the debt is considered as the purchase price. In any case, common
consent is an essential prerequisite, be it sale or innovation to have the effect of totally extinguishing the debt or
obligation.83 (Emphasis supplied)
E. PNCC must follow rules on preference of credit.
Radstock is only one of the creditors of PNCC. Asiavest is PNCCs judgment creditor. In its Board Resolution
No. BD-092-2000, PNCC admitted not only its debt to Marubeni but also its debt to the National Government84 in
the amount of P36 billion.85 During the Senate hearings, PNCC admitted that it owed the Government P36
billion, thus:
SEN. OSMEA. All right. Now, second question is, the management of PNCC also recognize the obligation to
the national government of 36 billion. It is part of the board resolution.
MS. OGAN. Yes, sir, it is part of the October 20 board resolution.
SEN. OSMEA. All right. So if you owe the national government 36 billion and you owe Marubeni 10 billion, you
know, I would just declare bankruptcy and let an orderly disposition of assets be done. What happened in this
case to the claim, the 36 billion claim of the national government? How was that disposed of by the PNCC? Mas
malaki ang utang ninyo sa national government, 36 billion. Ang gagawin ninyo, babayaran lahat ang utang ninyo
sa Marubeni without any assets left to satisfy your obligations to the national government. There should have
been, at least, a pari passu payment of all your obligations, 'di ba?
MS. PASETES. Mr. Chairman...
SEN. OSMEA. Yes.
MS. PASETES. PNCC still carries in its books an equity account called equity adjustments arising from transfer
of obligations to national government - - 5.4 billion - - in addition to shares held by government amounting to 1.2
billion.
SEN. OSMEA. What is the 36 billion?
THE CHAIRMAN. Ms. Pasetes...
SEN. OSMEA. Wait, wait, wait.
THE CHAIRMAN. Baka ampaw yun eh.
SEN. OSMEA. Teka muna. What is the 36 billion that appear in the resolution of the board in September 2000
(sic)? This is the same resolution that recognizes, acknowledges and confirms PNCC's obligations to Marubeni.
And subparagraph (a) says "Government of the Philippines, in the amount of 36,023,784,000 and change. And
then (b) Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in the same resolution, you
acknowledged that had something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did
not protect the national government's 36 billion? And then, number two, why is it now in your books, the 36
billion is now down to five? If you use that ratio, then Marubeni should be down to one.
MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.
SEN. OSMEA. And what about Marubeni? Is that just principal only?
MS. PASETES. Principal and interest.
SEN. OSMEA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal plus penalties
plus interest, hindi ba?
MS. PASETES. Yes, sir. Yes, Your Honor.

SEN. OSMEA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion and change and
the national government is only recognizing 5 billion. I don't think that's protecting the interest of the national
government at all.86
In giving priority and preference to Radstock, the Compromise Agreement is certainly in fraud of PNCCs other
creditors, including the National Government, and violates the provisions of the Civil Code on concurrence and
preference of credits.
This Court has held that while the Corporation Code allows the transfer of all or substantially all of the assets of
a corporation, the transfer should not prejudice the creditors of the assignor corporation.87 Assuming that PNCC
may transfer all or substantially all its assets, to allow PNCC to do so without the consent of its creditors or
without requiring Radstock to assume PNCCs debts will defraud the other PNCC creditors88 since the
assignment will place PNCCs assets beyond the reach of its other creditors.89 As this Court held in Caltex
(Phil.), Inc. v. PNOC Shipping and Transport Corporation:90
While the Corporation Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can
proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The
acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the
assumption of the assignor's liabilities, unless the creditors who did not consent to the transfer choose to rescind
the transfer on the ground of fraud. To allow an assignor to transfer all its business, properties and assets
without the consent of its creditors and without requiring the assignee to assume the assignor's obligations will
defraud the creditors. The assignment will place the assignor's assets beyond the reach of its creditors.
(Emphasis supplied)
Also, the law, specifically Article 138791 of the Civil Code, presumes that there is fraud of creditors when property
is alienated by the debtor after judgment has been rendered against him, thus:
Alienations by onerous title are also presumed fraudulent when made by persons against whom some judgment
has been rendered in any instance or some writ of attachment has been issued. The decision or attachment
need not refer to the property alienated, and need not have been obtained by the party seeking rescission.
(Emphasis supplied)
As stated earlier, Asiavest is a judgment creditor of PNCC in G.R. No. 110263 and a court has already issued a
writ of execution in its favor. Thus, when PNCC entered into the Compromise Agreement conveying several
prime lots in favor of Radstock, by way of dacion en pago, there is a legal presumption that such conveyance is
fraudulent under Article 1387 of the Civil Code.92 This presumption is strengthened by the fact that the
conveyance has virtually left PNCCs other creditors, including the biggest creditor the National Government with no other asset to garnish or levy.
Notably, the presumption of fraud or intention to defraud creditors is not just limited to the two instances set forth
in the first and second paragraphs of Article 1387 of the Civil Code. Under the third paragraph of the same
article, "the design to defraud creditors may be proved in any other manner recognized by the law of evidence."
In Oria v. Mcmicking,93 this Court considered the following instances as badges of fraud:
1. The fact that the consideration of the conveyance is fictitious or is inadequate.
2. A transfer made by a debtor after suit has begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly
embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present other of the above
circumstances.
7. The failure of the vendee to take exclusive possession of all the property. (Emphasis supplied)

Among the circumstances indicating fraud is a transfer of all or nearly all of the debtors assets, especially when
the debtor is greatly embarrassed financially. Accordingly, neither a declaration of insolvency nor the institution
of insolvency proceedings is a condition sine qua non for a transfer of all or nearly all of a debtors assets to be
regarded in fraud of creditors. It is sufficient that a debtor is greatly embarrassed financially.
In this case, PNCCs huge negative net worth - at least P6 billion as expressly admitted by PNCCs counsel
during the oral arguments, or P14 billion based on the 2006 COA Audit Report - necessarily translates to an
extremely embarrassing financial situation. With its huge negative net worth arising from unpaid billions of pesos
in debt, PNCC cannot claim that it is financially stable. As a consequence, the Compromise Agreement
stipulating a transfer in favor of Radstock of substantially all of PNCCs assets constitutes fraud. To legitimize
the Compromise Agreement just because there is still no judicial declaration of PNCCs insolvency will work
fraud on PNCCs other creditors, the biggest creditor of which is the National Government. To insist that PNCC
is very much liquid, given its admitted huge negative net worth, is nothing but denial of the truth. The toll fees
that PNCC collects belong to the National Government. Obviously, PNCC cannot claim it is liquid based on its
collection of such toll fees, because PNCC merely holds such toll fees in trust for the National Government.
PNCC does not own the toll fees, and such toll fees do not form part of PNCCs assets.
PNCC owes the National Government P36 billion, a substantial part of which constitutes taxes and fees, thus:
SEN. ROXAS. Thank you, Mr. Chairman.
Mr. PNCC Chairman, could you describe for us the composition of your debt of about five billion there are in
thousands, so this looks like five and half billion. Current portion of long-term debt, about five billion. What is this
made of?
MS. PASETES. The five billion is composed of what is owed the Bureau of Treasury and the Toll
Regulatory Board for concession fees thats almost three billion and another 2.4 billion owed Philippine
National Bank.
SEN. ROXAS. So, how much is the Bureau of Treasury?
MS. PASETES. Three billion.
SEN. ROXAS. Three Why do you owe the Bureau of Treasury three billion?
MS. PASETES. That represents the concession fees due Toll Regulatory Board principal plus interest, Your
Honor.
x x x x94 (Emphasis supplied)
In addition, PNCCs 2006 Audit Report by COA states as follows:
TAX MATTERS
The Company was assessed by the Bureau of Internal Revenue (BIR) of its deficiencies in various taxes.
However, no provision for any liability has been made yet in the Companys financial statements.
1980 deficiency income tax, deficiency contractors tax and deficiency documentary stamp tax assessments by
the BIR totaling P212.523 Million.
xxxx
Deficiency business tax of P64 Million due the Belgian Consortium, PNCCs partner in its LRT Project.
1992 deficiency income tax, deficiency value-added tax and deficiency expanded withholding tax of P1.04
Billion which was reduced to P709 Million after the Companys written protest.
xxxx
2002 deficiency internal revenue taxes totaling P72.916 Million.

x x x x.95 (Emphasis supplied)

Clearly, PNCC owes the National Government substantial taxes and fees amounting to billions of pesos.
The P36 billion debt to the National Government was acknowledged by the PNCC Board in the same board
resolution that recognized the Marubeni loans. Since PNCC is clearly insolvent with a huge negative net worth,
the government enjoys preference over Radstock in the satisfaction of PNCCs liability arising from taxes and
duties, pursuant to the provisions of the Civil Code on concurrence and preference of credits. Articles
2241,96224297 and 224398 of the Civil Code expressly mandate that taxes and fees due the National Government
"shall be preferred" and "shall first be satisfied" over claims like those arising from the Marubeni loans which
"shall enjoy no preference" under Article 2244.99
However, in flagrant violation of the Civil Code, the PNCC Board favored Radstock over the National
Government in the order of credits. This would strip PNCC of its assets leaving virtually nothing for the National
Government. This action of the PNCC Board is manifestly and grossly disadvantageous to the National
Government and amounts to fraud.
During the Senate hearings, Senator Osmea pointed out that in the Board Resolution of 20 October 2000,
PNCC acknowledged its obligations to the National Government amounting to P36,023,784,000 and to Marubeni
amounting to P10,743,000,000. Yet, Senator Osmea noted that in the PNCC books at the time of the hearing,
the P36 billion obligation to the National Government was reduced to P5 billion. PNCCs Miriam M. Pasetes
could not properly explain this discrepancy, except by stating that the P36 billion includes the principal plus
interest and penalties, thus:
SEN. OSMEA. Teka muna. What is the 36 billion that appear in the resolution of the board in September 2000
(sic)? This is the same resolution that recognizes, acknowledges and confirms PNCC's obligations to Marubeni.
And subparagraph (a) says "Government of the Philippines, in the amount of 36,023,784,000 and change. And
then (b) Marubeni Corporation in the amount of 10,743,000,000. So, therefore, in the same resolution, you
acknowledged that had something like P46.7 billion in obligations. Why did PNCC settle the 10 billion and did
not protect the national government's 36 billion? And then, number two, why is it now in your books, the 36
billion is now down to five? If you use that ratio, then Marubeni should be down to one.
MS. PASETES. Sir, the amount of 36 billion is principal plus interest and penalties.
SEN. OSMEA. And what about Marubeni? Is that just principal only?
MS. PASETES. Principal and interest.
SEN. OSMEA. So, I mean, you know, it's equal treatment. Ten point seven billion is principal plus penalties
plus interest, hindi ba?
MS. PASETES. Yes, sir. Yes, Your Honor.
SEN. OSMEA. All right. So now, what you are saying is that you gonna pay Marubeni 6 billion and change and
the national government is only recognizing 5 billion. I don't think that's protecting the interest of the national
government at all.100
PNCC failed to explain satisfactorily why in its books the obligation to the National Government was reduced
when no payment to the National Government appeared to have been made. PNCC failed to justify why it made
it appear that the obligation to the National Government was less than the obligation to Marubeni. It is another
obvious ploy to justify the preferential treatment given to Radstock to the great prejudice of the National
Government.
VI.
Supreme Court is Not Legitimizer of Violations of Laws
During the oral arguments, counsels for Radstock and PNCC admitted that the Compromise Agreement violates
the Constitution and existing laws. However, they rely on this Court to approve the Compromise Agreement to
shield their clients from possible criminal acts arising from violation of the Constitution and existing laws. In their
view, once this Court approves the Compromise Agreement, their clients are home free from prosecution, and
can enjoy the P6.185 billion loot. The following exchanges during the oral arguments reveal this view:

ASSOCIATE JUSTICE CARPIO:

If there is no agreement, they better remit all of that to the National Government. They cannot just hold that.
They are holding that [in] trust, as you said, x x x you agree, for the National Government.
DEAN AGABIN:
Yes, thats why, they are asking the Honorable Court to approve the compromise agreement.
ASSOCIATE JUSTICE CARPIO:
We cannot approve that if the power to authorize the expenditure [belongs] to Congress. How can we
usurp x x x the power of Congress to authorize that expenditure[?] Its only Congress that can authorize
the expenditure of funds from the general funds.
DEAN AGABIN:
But, Your Honor, if the Honorable Court would approve of this compromise agreement, I believe that this
would be binding on Congress.
ASSOCIATE JUSTICE CARPIO:
Ignore the Constitutional provision that money shall be paid out of the National Treasury only pursuant
to an appropriation by law. You want us to ignore that[?]
DEAN AGABIN:
Not really, Your Honor, but I suppose that Congress would have no choice, because this is a final judgment of
the Honorable Court. 101
xxxx
ASSOCIATE JUSTICE CARPIO:
So, if Radstock makes the assignment, it must own its rights, otherwise, it cannot assign it, correct?
ATTY. AGRA:
Pursuant to the compromise agreement, once approved, yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
So, you are saying that Radstock can own the rights to ownership of the land?
ATTY. AGRA:
Yes, Your Honors.
ASSOCIATE JUSTICE CARPIO:
Yes?
ATTY. AGRA:
The premise, Your Honor, you mentioned a while ago was, if this Court approves said compromise
(interrupted).102 (Emphasis supplied)
This Court is not, and should never be, a rubber stamp for litigants hankering to pocket public funds for their
selfish private gain. This Court is the ultimate guardian of the public interest, the last bulwark against those who

seek to plunder the public coffers. This Court cannot, and must never, bring itself down to the level of legitimizer
of violations of the Constitution, existing laws or public policy.
Conclusion
In sum, the acts of the PNCC Board in (1) issuing Board Resolution Nos. BD-092-2000 and BD-099-2000
expressly admitting liability for the Marubeni loans, and (2) entering into the Compromise Agreement, constitute
evident bad faith and gross inexcusable negligence, amounting to fraud, in the management of PNCCs affairs.
Being public officers, the government nominees in the PNCC Board must answer not only to PNCC and its
stockholders, but also to the Filipino people for grossly mishandling PNCCs finances.
Under Article 1409 of the Civil Code, the Compromise Agreement is "inexistent and void from the beginning,"
and "cannot be ratified," thus:
Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or
public policy;
xxx
(7) Those expressly prohibited or declared void by law.
These contracts cannot be ratified. x x x. (Emphasis supplied)
The Compromise Agreement is indisputably contrary to the Constitution, existing laws and public policy. Under
Article 1409, the Compromise Agreement is expressly declared void and "cannot be ratified." No court, not even
this Court, can ratify or approve the Compromise Agreement. This Court must perform its duty to defend and
uphold the Constitution, existing laws, and fundamental public policy. This Court must not shirk in declaring the
Compromise Agreement inexistent and void ab initio.
WHEREFORE, we GRANT the petition in G.R. No. 180428. We SET ASIDE the Decision dated 25 January
2007 and the Resolutions dated 12 June 2007 and 5 November 2007 of the Court of Appeals. We DECLARE (1)
PNCC Board Resolution Nos. BD-092-2000 and BD-099-2000 admitting liability for the Marubeni loans VOID AB
INITIO for causing undue injury to the Government and giving unwarranted benefits to a private party,
constituting a corrupt practice and unlawful act under Section 3(e) of the Anti-Graft and Corrupt Practices Act,
and (2) the Compromise Agreement between the Philippine National Construction Corporation and Radstock
Securities Limited INEXISTENT AND VOID AB INITIO for being contrary to Section 29(1), Article VI and
Sections 3 and 7, Article XII of the Constitution; Section 20(1), Chapter IV, Subtitle B, Title I, Book V of the
Administrative Code of 1987; Sections 4(2), 79, 84(1), and 85 of the Government Auditing Code; and Articles
2241, 2242, 2243 and 2244 of the Civil Code.
We GRANT the intervention of Asiavest Merchant Bankers Berhad in G.R. No. 178158 but DECLARE that
Strategic Alliance Development Corporation has no legal standing to sue.
SO ORDERED.
ANTONIO T. CARPIO
Associate Justice
WE CONCUR:

G.R. No. 124293

January 31, 2005

J.G. SUMMIT HOLDINGS, INC., petitioner,

vs.
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET PRIVATIZATION
TRUST; and PHILYARDS HOLDINGS, INC., respondents.
RESOLUTION
PUNO, J.:
For resolution before this Court are two motions filed by the petitioner, J.G. Summit Holdings, Inc. for reconsideration
of our Resolution dated September 24, 2003 and to elevate this case to the Court En Banc. The petitioner questions
the Resolution which reversed our Decision of November 20, 2000, which in turn reversed and set aside a Decision of
the Court of Appeals promulgated on July 18, 1995.
I. Facts
The undisputed facts of the case, as set forth in our Resolution of September 24, 2003, are as follows:
On January 27, 1997, the National Investment and Development Corporation (NIDC), a government corporation,
entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for
the construction, operation and management of the Subic National Shipyard, Inc. (SNS) which subsequently became
the Philippine Shipyard and Engineering Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI will
contribute P330 million for the capitalization of PHILSECO in the proportion of 60%-40% respectively. One of its
salient features is the grant to the parties of the right of first refusal should either of them decide to sell, assign or
transfer its interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its interest in SNS [PHILSECO] to any third party
without giving the other under the same terms the right of first refusal. This provision shall not apply if the transferee is
a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI affiliate.
On November 25, 1986, NIDC transferred all its rights, title and interest in PHILSECO to the Philippine National Bank
(PNB). Such interests were subsequently transferred to the National Government pursuant to Administrative Order
No. 14. On December 8, 1986, President Corazon C. Aquino issued Proclamation No. 50 establishing the Committee
on Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and possession of, conserve, manage
and dispose of non-performing assets of the National Government. Thereafter, on February 27, 1987, a trust
agreement was entered into between the National Government and the APT wherein the latter was named the trustee
of the National Government's share in PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to
settle its huge obligations to PNB, the National Government's shareholdings in PHILSECO increased to 97.41%
thereby reducing KAWASAKI's shareholdings to 2.59%.
In the interest of the national economy and the government, the COP and the APT deemed it best to sell the National
Government's share in PHILSECO to private entities. After a series of negotiations between the APT and KAWASAKI,
they agreed that the latter's right of first refusal under the JVA be "exchanged" for the right to top by five percent (5%)
the highest bid for the said shares. They further agreed that KAWASAKI would be entitled to name a company in
which it was a stockholder, which could exercise the right to top. On September 7, 1990, KAWASAKI informed APT
1
that Philyards Holdings, Inc. (PHI) would exercise its right to top.
At the pre-bidding conference held on September 18, 1993, interested bidders were given copies of the JVA between
NIDC and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR) drafted for the National Government's 87.6%
equity share in PHILSECO. The provisions of the ASBR were explained to the interested bidders who were notified
that the bidding would be held on December 2, 1993. A portion of the ASBR reads:
1.0 The subject of this Asset Privatization Trust (APT) sale through public bidding is the National Government's equity
in PHILSECO consisting of 896,869,942 shares of stock (representing 87.67% of PHILSECO's outstanding capital
stock), which will be sold as a whole block in accordance with the rules herein enumerated.
xxx xxx xxx

2.0 The highest bid, as well as the buyer, shall be subject to the final approval of both the APT Board of Trustees and
the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids.
3.0 This public bidding shall be on an Indicative Price Bidding basis. The Indicative price set for the National
Government's 87.67% equity in PHILSECO is PESOS: ONE BILLION THREE HUNDRED MILLION
(P1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at its regular meeting following the
bidding, for the purpose of determining whether or not it should be endorsed by the APT Board of Trustees to the
COP, and the latter approves the same. The APT shall advise Kawasaki Heavy Industries, Inc. and/or its nominee,
[PHILYARDS] Holdings, Inc., that the highest bid is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a period of thirty (30) calendar days from the date
of receipt of such advice from APT within which to exercise their "Option to Top the Highest Bid" by offering a bid
equivalent to the highest bid plus five (5%) percent thereof.
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. exercise their "Option to Top the
Highest Bid," they shall so notify the APT about such exercise of their option and deposit with APT the amount
equivalent to ten percent (10%) of the highest bid plus five percent (5%) thereof within the thirty (30)-day period
mentioned in paragraph 6.0 above. APT will then serve notice upon Kawasaki Heavy Industries, Inc. and/or
[PHILYARDS] Holdings, Inc. declaring them as the preferred bidder and they shall have a period of ninety (90) days
from the receipt of the APT's notice within which to pay the balance of their bid price.
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. fail to exercise their "Option to Top
the Highest Bid" within the thirty (30)-day period, APT will declare the highest bidder as the winning bidder.
xxx xxx xxx
12.0 The bidder shall be solely responsible for examining with appropriate care these rules, the official bid forms,
including any addenda or amendments thereto issued during the bidding period. The bidder shall likewise be
responsible for informing itself with respect to any and all conditions concerning the PHILSECO Shares which may, in
any manner, affect the bidder's proposal. Failure on the part of the bidder to so examine and inform itself shall be its
sole risk and no relief for error or omission will be given by APT or COP. . . .
2

At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc. submitted a bid of Two Billion and Thirty
Million Pesos (P2,030,000,000.00) with an acknowledgment of KAWASAKI/[PHILYARDS'] right to top, viz:
4. I/We understand that the Committee on Privatization (COP) has up to thirty (30) days to act on APT's
recommendation based on the result of this bidding. Should the COP approve the highest bid, APT shall advise
Kawasaki Heavy Industries, Inc. and/or its nominee, [PHILYARDS] Holdings, Inc. that the highest bid is acceptable to
the National Government. Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have a
period of thirty (30) calendar days from the date of receipt of such advice from APT within which to exercise their
"Option to Top the Highest Bid" by offering a bid equivalent to the highest bid plus five (5%) percent thereof.
As petitioner was declared the highest bidder, the COP approved the sale on December 3, 1993 "subject to the right
of Kawasaki Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's bid by 5% as specified in the bidding
rules."
On December 29, 1993, petitioner informed APT that it was protesting the offer of PHI to top its bid on the grounds
that: (a) the KAWASAKI/PHI consortium composed of KAWASAKI, [PHILYARDS], Mitsui, Keppel, SM Group, ICTSI
and Insular Life violated the ASBR because the last four (4) companies were the losing bidders thereby circumventing
the law and prejudicing the weak winning bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the
same option to top to PHI constituted unwarranted benefit to a third party; (d) no right of first refusal can be exercised
in a public bidding or auction sale; and (e) the JG Summit consortium was not estopped from questioning the
proceedings.
On February 2, 1994, petitioner was notified that PHI had fully paid the balance of the purchase price of the subject
bidding. On February 7, 1994, the APT notified petitioner that PHI had exercised its option to top the highest bid and
that the COP had approved the same on January 6, 1994. On February 24, 1994, the APT and PHI executed a Stock
Purchase Agreement. Consequently, petitioner filed with this Court a Petition for Mandamus under G.R. No. 114057.
On May 11, 1994, said petition was referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied

the same for lack of merit. It ruled that the petition for mandamus was not the proper remedy to question the
constitutionality or legality of the right of first refusal and the right to top that was exercised by KAWASAKI/PHI, and
that the matter must be brought "by the proper party in the proper forum at the proper time and threshed out in a full
blown trial." The Court of Appeals further ruled that the right of first refusal and the right to top are prima facie legal
and that the petitioner, "by participating in the public bidding, with full knowledge of the right to top granted to
KAWASAKI/[PHILYARDS] isestopped from questioning the validity of the award given to [PHILYARDS] after the
latter exercised the right to top and had paid in full the purchase price of the subject shares, pursuant to the ASBR."
Petitioner filed a Motion for Reconsideration of said Decision which was denied on March 15, 1996. Petitioner thus
filed a Petition for Certiorari with this Court alleging grave abuse of discretion on the part of the appellate court.
On November 20, 2000, this Court rendered x x x [a] Decision ruling among others that the Court of Appeals erred
when it dismissed the petition on the sole ground of the impropriety of the special civil action of mandamus because
the petition was also one of certiorari. It further ruled that a shipyard like PHILSECO is a public utility whose
capitalization must be sixty percent (60%) Filipino-owned. Consequently, the right to top granted to KAWASAKI under
the Asset Specific Bidding Rules (ASBR) drafted for the sale of the 87.67% equity of the National Government in
PHILSECO is illegal not only because it violates the rules on competitive bidding but more so, because it allows
foreign corporations to own more than 40% equity in the shipyard. It also held that "although the petitioner had the
opportunity to examine the ASBR before it participated in the bidding, it cannot be estopped from questioning the
unconstitutional, illegal and inequitable provisions thereof." Thus, this Court voided the transfer of the national
government's 87.67% share in PHILSECO to Philyard[s] Holdings, Inc., and upheld the right of JG Summit, as the
highest bidder, to take title to the said shares, viz:
WHEREFORE, the instant petition for review on certiorari is GRANTED. The assailed Decision and Resolution of the
Court of Appeals are REVERSED and SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion
Thirty Million Pesos (P2,030,000,000.00), less its bid deposit plus interests upon the finality of this Decision. In turn,
APT is ordered to:
(a) accept the said amount of P2,030,000,000.00 less bid deposit and interests from petitioner;
(b) execute a Stock Purchase Agreement with petitioner;
(c) cause the issuance in favor of petitioner of the certificates of stocks representing 87.6% of PHILSECO's
total capitalization;
(d) return to private respondent PHGI the amount of Two Billion One Hundred Thirty-One Million Five Hundred
Thousand Pesos (P2,131,500,000.00); and
(e) cause the cancellation of the stock certificates issued to PHI.
SO ORDERED.
In separate Motions for Reconsideration, respondents submit[ted] three basic issues for x x x resolution: (1) Whether
PHILSECO is a public utility; (2) Whether under the 1977 JVA, KAWASAKI can exercise its right of first refusal only up
to 40% of the total capitalization of PHILSECO; and (3) Whether the right to top granted to KAWASAKI violates the
3
principles of competitive bidding. (citations omitted)
In a Resolution dated September 24, 2003, this Court ruled in favor of the respondents. On the first issue, we held that
Philippine Shipyard and Engineering Corporation (PHILSECO) is not a public utility, as by nature, a shipyard is not a
4
5
public utility and that no law declares a shipyard to be a public utility. On the second issue, we found nothing in the
1977 Joint Venture Agreement (JVA) which prevents Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI)
6
from acquiring more than 40% of PHILSECOs total capitalization. On the final issue, we held that the right to top
7
granted to KAWASAKI in exchange for its right of first refusal did not violate the principles of competitive bidding.
8

On October 20, 2003, the petitioner filed a Motion for Reconsideration and a Motion to Elevate This Case to the
9
Court En Banc. Public respondents Committee on Privatization (COP) and Asset Privatization Trust (APT), and
private respondent Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Summit Holdings, Inc.s (JG
Summits) Motion for Reconsideration and Motion to Elevate This Case to the Court En Banc on January 29, 2004 and
February 3, 2004, respectively.
II. Issues
Based on the foregoing, the relevant issues to resolve to end this litigation are the following:

1. Whether there are sufficient bases to elevate the case at bar to the Court en banc.
2. Whether the motion for reconsideration raises any new matter or cogent reason to warrant a
reconsideration of this Courts Resolution of September 24, 2003.
Motion to Elevate this Case to the
Court En Banc
The petitioner prays for the elevation of the case to the Court en banc on the following grounds:
1. The main issue of the propriety of the bidding process involved in the present case has been confused with
the policy issue of the supposed fate of the shipping industry which has never been an issue that is
10
determinative of this case.
2. The present case may be considered under the Supreme Court Resolution dated February 23, 1984 which
included among en banc cases those involving a novel question of law and those where a doctrine or principle
11
laid down by the Court en banc or in division may be modified or reversed.
3. There was clear executive interference in the judicial functions of the Court when the Honorable Jose Isidro
Camacho, Secretary of Finance, forwarded to Chief Justice Davide, a memorandum dated November 5, 2001,
attaching a copy of the Foreign Chambers Report dated October 17, 2001, which matter was placed in the
12
agenda of the Court and noted by it in a formal resolution dated November 28, 2001.
Opposing J.G. Summits motion to elevate the case en banc, PHILYARDS points out the petitioners inconsistency in
previously opposing PHILYARDS Motion to Refer the Case to the Court En Banc. PHILYARDS contends that J.G.
Summit should now be estopped from asking that the case be referred to the Court en banc. PHILYARDS further
contends that the Supreme Court en banc is not an appellate court to which decisions or resolutions of its divisions
13
may be appealed citing Supreme Court Circular No. 2-89 dated February 7, 1989. PHILYARDS also alleges that
there is no novel question of law involved in the present case as the assailed Resolution was based on well-settled
jurisprudence. Likewise, PHILYARDS stresses that the Resolution was merely an outcome of the motions for
reconsideration filed by it and the COP and APT and is "consistent with the inherent power of courts to amend and
14
control its process and orders so as to make them conformable to law and justice. (Rule 135, sec. 5)" Private
respondent belittles the petitioners allegations regarding the change in ponente and the alleged executive
interference as shown by former Secretary of Finance Jose Isidro Camachos memorandum dated November 5, 2001
arguing that these do not justify a referral of the present case to the Court en banc.
In insisting that its Motion to Elevate This Case to the Court En Banc should be granted, J.G. Summit further argued
that: its Opposition to the Office of the Solicitor Generals Motion to Refer is different from its own Motion to Elevate;
different grounds are invoked by the two motions; there was unwarranted "executive interference"; and the change
15
in ponente is merely noted in asserting that this case should be decided by the Court en banc.
We find no merit in petitioners contention that the propriety of the bidding process involved in the present case has
been confused with the policy issue of the fate of the shipping industry which, petitioner maintains, has never been an
issue that is determinative of this case. The Courts Resolution of September 24, 2003 reveals a clear and definitive
ruling on the propriety of the bidding process. In discussing whether the right to top granted to KAWASAKI in
exchange for its right of first refusal violates the principles of competitive bidding, we made an exhaustive discourse
16
on the rules and principles of public bidding and whether they were complied with in the case at bar. This Court
categorically ruled on the petitioners argument that PHILSECO, as a shipyard, is a public utility which should maintain
a 60%-40% Filipino-foreign equity ratio, as it was a pivotal issue. In doing so, we recognized the impact of our ruling
17
on the shipbuilding industry which was beyond avoidance.
We reject petitioners argument that the present case may be considered under the Supreme Court Resolution dated
February 23, 1984 which included among en banc cases those involving a novel question of law and those where a
doctrine or principle laid down by the court en banc or in division may be modified or reversed. The case was resolved
based on basic principles of the right of first refusal in commercial law and estoppel in civil law. Contractual obligations
arising from rights of first refusal are not new in this jurisdiction and have been recognized in numerous
18
cases. Estoppel is too known a civil law concept to require an elongated discussion. Fundamental principles on
public bidding were likewise used to resolve the issues raised by the petitioner. To be sure, petitioner leans on the
right to top in a public bidding in arguing that the case at bar involves a novel issue. We are not swayed. The right to
top was merely a condition or a reservation made in the bidding rules which was fully disclosed to all bidding parties.
19
In Bureau Veritas, represented by Theodor H. Hunermann v. Office of the President, et al., we dealt with this
conditionality, viz:

x x x It must be stressed, as held in the case of A.C. Esguerra & Sons v. Aytona, et al., (L-18751, 28 April 1962, 4
SCRA 1245), that in an "invitation to bid, there is a condition imposed upon the bidders to the effect that the
bidding shall be subject to the right of the government to reject any and all bids subject to its discretion. In
the case at bar, the government has made its choice and unless an unfairness or injustice is shown, the
losing bidders have no cause to complain nor right to dispute that choice. This is a well-settled doctrine in
this jurisdiction and elsewhere."
The discretion to accept or reject a bid and award contracts is vested in the Government agencies entrusted with that
function. The discretion given to the authorities on this matter is of such wide latitude that the Courts will not interfere
therewith, unless it is apparent that it is used as a shield to a fraudulent award (Jalandoni v. NARRA, 108 Phil. 486
[1960]). x x x The exercise of this discretion is a policy decision that necessitates prior inquiry, investigation,
comparison, evaluation, and deliberation. This task can best be discharged by the Government agencies concerned,
not by the Courts. The role of the Courts is to ascertain whether a branch or instrumentality of the Government has
transgressed its constitutional boundaries. But the Courts will not interfere with executive or legislative discretion
exercised within those boundaries. Otherwise, it strays into the realm of policy decision-making.
It is only upon a clear showing of grave abuse of discretion that the Courts will set aside the award of a contract made
by a government entity. Grave abuse of discretion implies a capricious, arbitrary and whimsical exercise of power
(Filinvest Credit Corp. v. Intermediate Appellate Court, No. 65935, 30 September 1988, 166 SCRA 155). The abuse of
discretion must be so patent and gross as to amount to an evasion of positive duty or to a virtual refusal to perform a
duty enjoined by law, as to act at all in contemplation of law, where the power is exercised in an arbitrary and despotic
manner by reason of passion or hostility (Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-40867, 26 July 1988, 163
SCRA 489).
The facts in this case do not indicate any such grave abuse of discretion on the part of public respondents when they
awarded the CISS contract to Respondent SGS. In the "Invitation to Prequalify and Bid" (Annex "C," supra), the CISS
Committee made an express reservation of the right of the Government to "reject any or all bids or any part
thereof or waive any defects contained thereon and accept an offer most advantageous to the Government." It
is a well-settled rule that where such reservation is made in an Invitation to Bid, the highest or lowest bidder,
as the case may be, is not entitled to an award as a matter of right (C & C Commercial Corp. v. Menor, L-28360,
27 January 1983, 120 SCRA 112). Even the lowest Bid or any Bid may be rejected or, in the exercise of sound
discretion, the award may be made to another than the lowest bidder (A.C. Esguerra & Sons v. Aytona, supra, citing
43 Am. Jur., 788). (emphases supplied)1awphi1.nt
Like the condition in the Bureau Veritas case, the right to top was a condition imposed by the government in the
bidding rules which was made known to all parties. It was a condition imposed on all bidders equally, based on
the APTs exercise of its discretion in deciding on how best to privatize the governments shares in
PHILSECO. It was not a whimsical or arbitrary condition plucked from the ether and inserted in the bidding rules but a
condition which the APT approved as the best way the government could comply with its contractual obligations to
KAWASAKI under the JVA and its mandate of getting the most advantageous deal for the government. The right to
top had its history in the mutual right of first refusal in the JVA and was reached by agreement of the government and
KAWASAKI.
Further, there is no "executive interference" in the functions of this Court by the mere filing of a memorandum by
Secretary of Finance Jose Isidro Camacho. The memorandum was merely "noted" to acknowledge its filing. It had no
further legal significance. Notably too, the assailed Resolution dated September 24, 2003 was decided
unanimously by the Special First Division in favor of the respondents.
20

Again, we emphasize that a decision or resolution of a Division is that of the Supreme Court and the Court en
21
banc is not an appellate court to which decisions or resolutions of a Division may be appealed.
For all the foregoing reasons, we find no basis to elevate this case to the Court en banc.
Motion for Reconsideration
Three principal arguments were raised in the petitioners Motion for Reconsideration. First, that a fair resolution of the
case should be based on contract law, not on policy considerations; the contracts do not authorize the right to top to
22
be derived from the right of first refusal. Second, that neither the right of first refusal nor the right to top can be legally
exercised by the consortium which is not the proper party granted such right under either the JVA or the Asset
23
Specific Bidding Rules (ASBR). Third, that the maintenance of the 60%-40% relationship between the National
Investment and Development Corporation (NIDC) and KAWASAKI arises from contract and from the Constitution
because PHILSECO is a landholding corporation and need not be a public utility to be bound by the 60%-40%
24
constitutional limitation.

On the other hand, private respondent PHILYARDS asserts that J.G. Summit has not been able to show compelling
25
reasons to warrant a reconsideration of the Decision of the Court. PHILYARDS denies that the Decision is based
mainly on policy considerations and points out that it is premised on principles governing obligations and contracts
and corporate law such as the rule requiring respect for contractual stipulations, upholding rights of first refusal, and
26
recognizing the assignable nature of contracts rights. Also, the ruling that shipyards are not public utilities relies on
established case law and fundamental rules of statutory construction. PHILYARDS stresses that KAWASAKIs right of
27
first refusal or even the right to top is not limited to the 40% equity of the latter. On the landholding issue raised by
J.G. Summit, PHILYARDS emphasizes that this is a non-issue and even involves a question of fact. Even assuming
that this Court can take cognizance of such question of fact even without the benefit of a trial, PHILYARDS opines that
landholding by PHILSECO at the time of the bidding is irrelevant because what is essential is that ultimately a
28
qualified entity would eventually hold PHILSECOs real estate properties. Further, given the assignable nature of the
right of first refusal, any applicable nationality restrictions, including landholding limitations, would not affect the right of
29
first refusal itself, but only the manner of its exercise. Also, PHILYARDS argues that if this Court takes cognizance of
J.G. Summits allegations of fact regarding PHILSECOs landholding, it must also recognize PHILYARDS assertions
30
that PHILSECOs landholdings were sold to another corporation. As regards the right of first refusal, private
respondent explains that KAWASAKIs reduced shareholdings (from 40% to 2.59%) did not translate to a deprivation
31
or loss of its contractually granted right of first refusal. Also, the bidding was valid because PHILYARDS exercised
32
the right to top and it was of no moment that losing bidders later joined PHILYARDS in raising the purchase price.
In cadence with the private respondent PHILYARDS, public respondents COP and APT contend:
1. The conversion of the right of first refusal into a right to top by 5% does not violate any provision in the JVA
between NIDC and KAWASAKI.
2. PHILSECO is not a public utility and therefore not governed by the constitutional restriction on foreign
ownership.
3. The petitioner is legally estopped from assailing the validity of the proceedings of the public bidding as it
voluntarily submitted itself to the terms of the ASBR which included the provision on the right to top.
4. The right to top was exercised by PHILYARDS as the nominee of KAWASAKI and the fact that
PHILYARDS formed a consortium to raise the required amount to exercise the right to top the highest bid by
5% does not violate the JVA or the ASBR.
5. The 60%-40% Filipino-foreign constitutional requirement for the acquisition of lands does not apply to
PHILSECO because as admitted by petitioner itself, PHILSECO no longer owns real property.
6. Petitioners motion to elevate the case to the Court en banc is baseless and would only delay the
33
termination of this case.
In a Consolidated Comment dated March 8, 2004, J.G. Summit countered the arguments of the public and private
respondents in this wise:
1. The award by the APT of 87.67% shares of PHILSECO to PHILYARDS with losing bidders through the
exercise of a right to top, which is contrary to law and the constitution is null and void for being violative of
substantive due process and the abuse of right provision in the Civil Code.
a. The bidders[] right to top was actually exercised by losing bidders.
b. The right to top or the right of first refusal cannot co-exist with a genuine competitive bidding.
c. The benefits derived from the right to top were unwarranted.
2. The landholding issue has been a legitimate issue since the start of this case but is shamelessly ignored by
the respondents.
a. The landholding issue is not a non-issue.
b. The landholding issue does not pose questions of fact.
c. That PHILSECO owned land at the time that the right of first refusal was agreed upon and at the
time of the bidding are most relevant.

d. Whether a shipyard is a public utility is not the core issue in this case.
3. Fraud and bad faith attend the alleged conversion of an inexistent right of first refusal to the right to top.
a. The history behind the birth of the right to top shows fraud and bad faith.
b. The right of first refusal was, indeed, "effectively useless."
4. Petitioner is not legally estopped to challenge the right to top in this case.
a. Estoppel is unavailing as it would stamp validity to an act that is prohibited by law or against public
policy.
b. Deception was patent; the right to top was an attractive nuisance.
c. The 10% bid deposit was placed in escrow.
J.G. Summits insistence that the right to top cannot be sourced from the right of first refusal is not new and we have
already ruled on the issue in our Resolution of September 24, 2003. We upheld the mutual right of first refusal in the
34
JVA. We also ruled that nothing in the JVA prevents KAWASAKI from acquiring more than 40% of PHILSECOs total
35
capitalization. Likewise, nothing in the JVA or ASBR bars the conversion of the right of first refusal to the right to top.
In sum, nothing new and of significance in the petitioners pleading warrants a reconsideration of our ruling.
Likewise, we already disposed of the argument that neither the right of first refusal nor the right to top can legally be
exercised by the consortium which is not the proper party granted such right under either the JVA or the ASBR. Thus,
we held:
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Group, Insular Life Assurance, Mitsui
and ICTSI), has joined PHILYARDS in the latter's effort to raise P2.131 billion necessary in exercising the right to top
is not contrary to law, public policy or public morals. There is nothing in the ASBR that bars the losing bidders from
joining either the winning bidder (should the right to top is not exercised) or KAWASAKI/PHI (should it exercise its right
to top as it did), to raise the purchase price. The petitioner did not allege, nor was it shown by competent evidence,
that the participation of the losing bidders in the public bidding was done with fraudulent intent. Absent any proof of
fraud, the formation by [PHILYARDS] of a consortium is legitimate in a free enterprise system. The appellate court is
thus correct in holding the petitioner estopped from questioning the validity of the transfer of the National
36
Government's shares in PHILSECO to respondent.
Further, we see no inherent illegality on PHILYARDS act in seeking funding from parties who were losing bidders.
This is a purely commercial decision over which the State should not interfere absent any legal infirmity. It is
emphasized that the case at bar involves the disposition of shares in a corporation which the government sought to
privatize. As such, the persons with whom PHILYARDS desired to enter into business with in order to raise funds to
purchase the shares are basically its business. This is in contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity of the buyer/bidder or financier constitutes an important
consideration. In such cases, the government would have to take utmost precaution to protect public interest by
ensuring that the parties with which it is contracting have the ability to satisfactorily construct or operate the
infrastructure.
On the landholding issue, J.G. Summit submits that since PHILSECO is a landholding company, KAWASAKI could
exercise its right of first refusal only up to 40% of the shares of PHILSECO due to the constitutional prohibition on
landholding by corporations with more than 40% foreign-owned equity. It further argues that since KAWASAKI already
held at least 40% equity in PHILSECO, the right of first refusal was inutile and as such, could not subsequently be
37
converted into the right to top. Petitioner also asserts that, at present, PHILSECO continues to violate the
38
constitutional provision on landholdings as its shares are more than 40% foreign-owned. PHILYARDS admits that it
39
may have previously held land but had already divested such landholdings. It contends, however, that even if
PHILSECO owned land, this would not affect the right of first refusal but only the exercise thereof. If the land is
retained, the right of first refusal, being a property right, could be assigned to a qualified party. In the alternative, the
land could be divested before the exercise of the right of first refusal. In the case at bar, respondents assert that since
the right of first refusal was validly converted into a right to top, which was exercised not by KAWASAKI, but by
PHILYARDS which is a Filipino corporation (i.e., 60% of its shares are owned by Filipinos), then there is no violation of
40
the Constitution. At first, it would seem that questions of fact beyond cognizance by this Court were involved in the
issue. However, the records show that PHILYARDS admits it had owned land up until the time of the
41
bidding. Hence, the only issue is whether KAWASAKI had a valid right of first refusal over PHILSECO shares
under the JVA considering that PHILSECO owned land until the time of the bidding and KAWASAKI already
held 40% of PHILSECOs equity.

We uphold the validity of the mutual rights of first refusal under the JVA between KAWASAKI and NIDC. First of all,
the right of first refusal is a property right of PHILSECO shareholders, KAWASAKI and NIDC, under the terms of their
JVA. This right allows them to purchase the shares of their co-shareholder before they are offered to a third party. The
agreement of co-shareholders to mutually grant this right to each other, by itself, does not constitute a
violation of the provisions of the Constitution limiting land ownership to Filipinos and Filipino corporations.
As PHILYARDS correctly puts it, if PHILSECO still owns land, the right of first refusal can be validly assigned to a
qualified Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does not amount to a violation of
the Anti-Dummy Laws, absent proof of any fraudulent intent. The transfer could be made either to a nominee or such
other party which the holder of the right of first refusal feels it can comfortably do business with. Alternatively,
PHILSECO may divest of its landholdings, in which case KAWASAKI, in exercising its right of first refusal, can exceed
40% of PHILSECOs equity. In fact, it can even be said that if the foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign stockholders ownership of the shares which is adversely
affected but the capacity of the corporation to own land that is, the corporation becomes disqualified to own
land. This finds support under the basic corporate law principle that the corporation and its stockholders are separate
juridical entities. In this vein, the right of first refusal over shares pertains to the shareholders whereas the capacity to
own land pertains to the corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders of their
right of first refusal. No law disqualifies a person from purchasing shares in a landholding corporation even if
the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.
This is the clear import of the following provisions in the Constitution:
Section 2. All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of
potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the
State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration,
development, and utilization of natural resources shall be under the full control and supervision of the State. The State
may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least sixty per centum of whose capital is
owned by such citizens. Such agreements may be for a period not exceeding twenty-five years, renewable for not
more than twenty-five years, and under such terms and conditions as may be provided by law. In cases of water rights
for irrigation, water supply, fisheries, or industrial uses other than the development of water power, beneficial use may
be the measure and limit of the grant.
xxx xxx xxx
Section 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to
42
individuals, corporations, or associations qualified to acquire or hold lands of the public domain. (emphases
supplied)
The petitioner further argues that "an option to buy land is void in itself (Philippine Banking Corporation v. Lui She, 21
SCRA 52 [1967]). The right of first refusal granted to KAWASAKI, a Japanese corporation, is similarly void. Hence, the
43
right to top, sourced from the right of first refusal, is also void." Contrary to the contention of petitioner, the case
of Lui She did not that say "an option to buy land is void in itself," for we ruled as follows:
x x x To be sure, a lease to an alien for a reasonable period is valid. So is an option giving an alien the right to
buy real property on condition that he is granted Philippine citizenship. As this Court said in Krivenko vs.
Register of Deeds:
[A]liens are not completely excluded by the Constitution from the use of lands for residential purposes. Since their
residence in the Philippines is temporary, they may be granted temporary rights such as a lease contract which is not
forbidden by the Constitution. Should they desire to remain here forever and share our fortunes and misfortunes,
Filipino citizenship is not impossible to acquire.
But if an alien is given not only a lease of, but also an option to buy, a piece of land, by virtue of which the
Filipino owner cannot sell or otherwise dispose of his property, this to last for 50 years, then it becomes clear
that the arrangement is a virtual transfer of ownership whereby the owner divests himself in stages not only
of the right to enjoy the land (jus possidendi, jus utendi, jus fruendi and jus abutendi) but also of the right to
dispose of it (jus disponendi) rights the sum total of which make up ownership. It is just as if today the
possession is transferred, tomorrow, the use, the next day, the disposition, and so on, until ultimately all the
rights of which ownership is made up are consolidated in an alien. And yet this is just exactly what the parties in this
case did within this pace of one year, with the result that Justina Santos'[s] ownership of her property was reduced to
a hollow concept. If this can be done, then the Constitutional ban against alien landholding in the Philippines, as
44
announced in Krivenko vs. Register of Deeds, is indeed in grave peril. (emphases supplied; Citations omitted)
In Lui She, the option to buy was invalidated because it amounted to a virtual transfer of ownership as the owner
could not sell or dispose of his properties. The contract in Lui She prohibited the owner of the land from selling,
donating, mortgaging, or encumbering the property during the 50-year period of the option to buy. This is not so in the

case at bar where the mutual right of first refusal in favor of NIDC and KAWASAKI does not amount to a virtual
transfer of land to a non-Filipino. In fact, the case at bar involves a right of first refusal over shares of stock while
the Lui She case involves an option to buy the land itself. As discussed earlier, there is a distinction between the
shareholders ownership of shares and the corporations ownership of land arising from the separate juridical
personalities of the corporation and its shareholders.
We note that in its Motion for Reconsideration, J.G. Summit alleges that PHILSECO continues to violate the
45
Constitution as its foreign equity is above 40% and yet owns long-term leasehold rights which are real rights. It
cites Article 415 of the Civil Code which includes in the definition of immovable property, "contracts for public works,
46
and servitudes and other real rights over immovable property." Any existing landholding, however, is denied by
47
PHILYARDS citing its recent financial statements. First, these are questions of fact, the veracity of which would
require introduction of evidence. The Court needs to validate these factual allegations based on competent and
reliable evidence. As such, the Court cannot resolve the questions they pose. Second, J.G. Summit misreads the
provisions of the Constitution cited in its own pleadings, to wit:
29.2 Petitioner has consistently pointed out in the past that private respondent is not a 60%-40% corporation, and this
violates the Constitution x x x The violation continues to this day because under the law, it continues to own real
property
xxx xxx xxx
32. To review the constitutional provisions involved, Section 14, Article XIV of the 1973 Constitution (the JVA was
signed in 1977), provided:
"Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain."
32.1 This provision is the same as Section 7, Article XII of the 1987 Constitution.
32.2 Under the Public Land Act, corporations qualified to acquire or hold lands of the public domain are
corporations at least 60% of which is owned by Filipino citizens (Sec. 22, Commonwealth Act 141, as amended).
(emphases supplied)
As correctly observed by the public respondents, the prohibition in the Constitution applies only to ownership of
48
land. It does not extend to immovable or real property as defined under Article 415 of the Civil
Code.Otherwise, we would have a strange situation where the ownership of immovable property such as trees, plants
49
and growing fruit attached to the land would be limited to Filipinos and Filipino corporations only.
III.
WHEREFORE, in view of the foregoing, the petitioners Motion for Reconsideration is DENIED WITH FINALITY and
the decision appealed from is AFFIRMED. The Motion to Elevate This Case to the Court En Banc is likewise DENIED
for lack of merit.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Ynares-Santiago, Corona, and Tinga, JJ., concur.

How to determine the nationality of a corporation (part 2)

Posted on August 25, 2010 by Hector M. de Leon Jr. Posted in Commercial Law, Constitutional Law Tagged corporation
The July 26 post describes two tests for the determining the nationality of a corporation: the control test and the grandfather
rule. Which one applies? As discussed below, the control test is the primary test for determining the nationality of a
corporation; however, a recent decision of the SEC raises the question of whether the SEC is now abandoning the control test in
favor of the grandfather rule.
The control test as the primary test
As a rule, the control test applies. The primacy of the control test over the grandfather rule can be traced to DOJ Opinion No. 19,
s. 1989 (the 1989 DOJ Ruling), which states:
. . . the Grandfather Rule, which was evolved and applied by the SEC in several cases, will not apply in cases where the 60-40
Filipino-alien equity ownership in a particular natural resource corporation is not in doubt. (underscoring supplied)
In other words, according to the Department of Justice, the control test generally applies, with the grandfather rule applicable only
when the 60-40 Filipino-alien equity ownership is in doubt.
On the basis of the 1989 DOJ Ruling, the SEC issued several opinions doing away with the grandfather rule. For example, in a
May 30, 1990 opinion, the SEC stated:
. . . the Commission En Banc, on the basis of the Opinion of the Department of Justice No. 18., S. 1989 dated January 19,
9189 voted and decided to do away with the strict application/computation of the so called grandfather rule. . . and instead
applied the so-called control test method for determining corporate nationality. (underscoring supplied)(see also SEC Opinion
dated August 6, 1991; SEC Opinion dated October 14, 1991)
Around two years after the issuance of the 1989 DOJ Ruling, Congress enacted the Foreign Investments Act of 1991 (FIA),
which expressly embodied the control test. Section 3(a) of the FIA (as amended by Republic Act No. 8179) provides:
. . . the term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by
citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of
the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of
the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee
retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue
to the benefit of Philippine nationals: Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%)
of the members of the Board of Directors, in order that the corporation shall be considered a Philippine national. (underscoring
supplied)
Similarly, Section 1(a) of the rules and regulations implementing the FIA expressly provides for the application of the control test:
Philippine national shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of
the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefits of the Philippine
nationals; Provided, that where a corporation and its non-Filipino stockholders own stocks in Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each
of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the
Board of Directors of each of both corporation must be citizens of the Philippines, in order that the corporation shall be considered
a Philippine national. The control test shall be applied for this purpose. (underscoring supplied)
While the control test was enshrined in the FIA and its implementing rules, the SEC continues to apply the grandfather rule when
the Filipino equity ownership is in doubt (as provided in the 1989 DOJ Ruling). For example, in SEC-OGC Opinion No. 22-07
dated December 7, 2007, the SEC stated:
. . . when there is doubt as to the actual extent of Filipino equity in the investee corporation, the Commission is not precluded from
using the Grandfather Rule.
My former professor at the UP College of Law, Prof. Raul Palabrica, makes a great summary of the SEC position in his Philippine
Daily Inquirer column:
. . . this should not be taken to mean that the grandfather rule is already history. In an inverse way, the SEC pointed out that the
grandfather rule will not apply in cases where the 60-40 Filipino equity ownership is not in doubt.

The rule therefore is: While the control test shall be used as standard to determine the nationality of corporations, the grandfather
rule will be applied if there are questions about compliance with Filipino ownership requirements. (see Raul Palabrica, Nationality
Ownership Rule, Philippine Daily Inquirer, October 19, 2007)
Based on the FIA and its implementing rules and regulations (which embody the control test), my personal view is that the control
test should be the test used in determining the nationality of a corporation. While the 1989 DOJ opinion made reference to the
application of the grandfather rule when the 60-40 equity ownership interest is in doubt, the 1989 DOJ opinion was issued prior to
the enactment of the FIA. Also, I believe that if there is doubt as to the 60-40 Filipino-alien equity ownership interest in the
investing corporation that has a 60% equity in a corporation engaged in a partly nationalized activity, what should be applied is
the Anti-Dummy Law (in conjunction with the control test), not the grandfather rule. Thus, if 60% of the shares of the investing
corporation is held by Filipinos as dummies for foreigners, that 60% equity in the investing corporation will not be deemed held
by Philippine nationals. Applying the control test, the investee corporation will not also be a Philippine national.
A return to the grandfather rule?
It is noteworthy that a recent SEC case raises the issue of whether the SEC is now going back to the grandfather rule as the
primary test for determining the nationality of a corporation. In Redmont Consolidated Mines Corporation vs. McArthur Mining
Corporation, SEC En Banc Case No. 09-09-177 dated March 25, 2010, the SEC applied the grandfather rule because the foreign
investor provided practically all the funds of the Philippine mining companies; as such, the SEC concluded that the 60-40
Filipino alien equity ownership was in doubt and therefore the grandfather rule should be applied. However, the SEC did not stop
there the SEC made statements that seem to indicate a return to the grandfather rule. The SEC said:
The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily,
therefore, the Rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate
ownership and control. But the constitutional provision, as interpreted and practiced via the 1967 SEC Rules, has favored
foreigners contrary to the command of the Constitution. Hence, the Grandfather Rule must be applied to accurately determine the
actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business.
Compliance with the constitutional limitation(s) on engaging in nationalized activities must be determined by ascertaining if 60%
of the investing corporations outstanding capital stock is owned by Filipino citizens, or as interpreted, by natural or individual
Filipino citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process
must be observed. One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing
corporations have been established, the very essence of the Grandfather Rule.
Lastly, it was the intent of the framers of the 1987 Constitution to adopt the Grandfather Rule.
While the constitutional deliberations certainly made reference to the grandfather rule, there is nothing in the Constitution that
ultimately embodied the grandfather rule. In the absence of any provision in the Constitution embodying the grandfather rule, I
believe that Congress can adopt a law (in this case the FIA) embodying the control test.
Hopefully, the statements made by the SEC in Redmont do not signal a return to the grandfather rule. A change in the rules of the
game will have a tremendous adverse impact on investor confidence in the Philippines.
One final note. Redmont involved mining companies that require 60% Filipino ownership because these mining companies
apparently applied for a Mineral Production Sharing Agreement (which can be granted to Philippine nationals only). In Redmont,
the SEC appears to have reached the conclusion that the 60-40 Filipino-alien equity ownership was in doubt because the foreign
investor provided practically all the funds of the Philippine mining companies. My own view is that the fact that the foreign
investor may have contributed a big chunk of the corporate funds should not, by itself, put the 60-40 Filipino-alien equity
ownership in doubt. The important consideration is whether the Filipino stockholders legally and beneficially own and control
60% of the shares in the relevant company (and do not otherwise act as dummies for the foreigners). If the foreigner wishes to
provide greater financial support for the mining project, that should be fine for as long as Filipinos remain the legal and beneficial
owner of 60% of the shares in the mining company (or in a layered structure, the investing company). We should not deprive
Filipinos of the ability to enter into contracts with foreigners whereby foreigners provide greater funding to projects that remain
under Filipino control.
(Note: This is part of a series of How To articles. These articles intend to give the reader a general overview of the legal
aspects of doing certain things and they will not contain all details regarding the proposed action. There may be changes to
applicable laws and regulations after the article is posted. You should consult your lawyer if you wish to take a particular action.
See Disclaimer page for additional disclaimers.

DOJ OPENION NO. 18 SERIES 1989

How to determine the nationality of a corporation (part 2)
Posted on August 25, 2010 by Hector M. de Leon Jr. Posted in Commercial Law, Constitutional Law Tagged corporation

The July 26 post describes two tests for the determining the nationality of a corporation: the control test and the grandfather
rule. Which one applies? As discussed below, the control test is the primary test for determining the nationality of a
corporation; however, a recent decision of the SEC raises the question of whether the SEC is now abandoning the control
test in favor of the grandfather rule.
The control test as the primary test
As a rule, the control test applies. The primacy of the control test over the grandfather rule can be traced to DOJ Opinion
No. 19, s. 1989 (the 1989 DOJ Ruling), which states:
. . . the Grandfather Rule, which was evolved and applied by the SEC in several cases, will not apply in cases where the
60-40 Filipino-alien equity ownership in a particular natural resource corporation is not in doubt. (underscoring supplied)
In other words, according to the Department of Justice, the control test generally applies, with the grandfather rule
applicable only when the 60-40 Filipino-alien equity ownership is in doubt.
On the basis of the 1989 DOJ Ruling, the SEC issued several opinions doing away with the grandfather rule. For example,
in a May 30, 1990 opinion, the SEC stated:
. . . the Commission En Banc, on the basis of the Opinion of the Department of Justice No. 18., S. 1989 dated January 19,
9189 voted and decided to do away with the strict application/computation of the so called grandfather rule. . . and instead
applied the so-called control test method for determining corporate nationality. (underscoring supplied)(see also SEC
Opinion dated August 6, 1991; SEC Opinion dated October 14, 1991)
Around two years after the issuance of the 1989 DOJ Ruling, Congress enacted the Foreign Investments Act of 1991
(FIA), which expressly embodied the control test. Section 3(a) of the FIA (as amended by Republic Act No. 8179)
provides:
Continue reading

G.R. No. 103372 June 22, 1992

EPG CONSTRUCTION COMPANY, INC., and EMMANUEL P. DE GUZMAN, petitioner,
vs.
HONARABLE COURT OF APPEALS (17th Division), ( Republic of the Philippines), UNIVERSITY OF THE
PHILIPPINES, respondents.

CRUZ, J.:
Petitioner EPG Construction Co., Inc. and the University of the Philippines, herein private respondent, entered into a
contract for the construction of the UP Law Library Building for the stipulated price of P7,545,000.00. The agreement
included the following provision:
ARTICLE XI
GUARANTEE
CONTRACTOR guarantees that the work completed under the contract and any change order,
thereto, shall be in accordance with the plans and specification prepared by ARCHITECT, and shall
conform to the specific requirements, performances, and capacities required by the contract, and shall
be free from imperfect workmanship or materials. CONTRACTOR shall repair at his own cost and
expenses for a period of one (1) year from date of substantial completion and acceptance of the work
by the OWNER, all the work covered under the contract and change orders that may prove defective
except maintenance works. The CONTRACTOR shall be liable in accordance with Art. 1723 of the
Civil Code in case, within 15 years from completion of the project, the building collapses on account of
defects in the construction or the use of materials of inferior quality furnished by him or due to any
violation of the terms of contract.
Upon its completion, the building was formally turned over by EPG to the private respondent. UP issued a certification
of acceptance dated January 13, 1983, reading as follows:
This is to certify that the General Construction Work of the College of Law Library Annex Building,
University of the Philippines, Diliman, Quezon City, has been satisfactorily completed as per plans
and specifications as of January 11, 1983 without any defects whatsoever and therefore accepted.
Release of the 10% retention is hereby recommended in favor of EPG Construction, Inc.
Sometime in July, 1983, the private respondent complained to the petitioner that 6 air-conditioning units on the third
floor of the building were not cooling properly. After inspection of the equipment, EPG agreed to shoulder the
expenses for their repair, including labor and materials, in the amount of P38.000.00.
For whatever reason, the repair was never undertaken. UP repeated its complaints to EPG, which again sent its
representatives to assess the defects. Finally, it made UP a written offer to repair the system for P194,000.00.
UP insisted that EPG was obligated to repair the defects at its own expense under the guarantee provision in their
contract. EPG demurred. UP then contracted with another company, which repaired the defects for P190,000.00.
The private respondent subsequently demanded from EPG reimbursement of the said amount plus an equal sum as
liquidated damages. When the demand was rejected, UP sued EPG and its president, Emmanuel P. de Guzman, in
the Regional Trial Court of Quezon City. De Guzman moved to dismiss the complaint as to him for lack of a cause of
action, but the motion was denied.
After trial, judgment was rendered by Judge Antonio P. Solano requiring both defendants jointly and severally to pay
the plaintiff P190,000.00 as actual damages, P50,000.00 as liquidated damages, P10,000.00 as attorney's fees, and
costs.
1

The petitioners appealed to the Court of Appeals, which sustained the trial court. They then came to this Court to
fault the respondent court for not holding that: 1) UP was estopped by its certificate of acceptance from imputing
liability to EPG for the defects; 2) the defects were due to force majeure or fortuitous event; and 3) Emmanuel de
Guzman has a separate personality from that of EPG Construction Co., Inc.

The petitioners argue that by issuing the certificate of acceptance, UP waived the guarantee provision and is now
estopped from invoking it. The argument is absurd. All UP certified to was that the building was in good condition at
the time it was turned over to it on January 13, 1983. It did not thereby relieve the petitioners of liability for any defect
that might arise or be discovered later during the one-year period of the guarantee. Any other interpretation would
make the guarantee provision useless to begin with as it would have automatically become functus officio with the
turn-over of the construction.
The petitioners bolster their argument by quoting Article 1719 of the Civil Code thus, "Acceptance of the work by the
employer relieves the contractor of liability . . . " and stopping there. The Article reads in full as follows:
Art. 1719. Acceptance of the work by the employer relieves the contractor of liability for any defect in
the work, unless:
(1) The defect is hidden and the employer is not, by his special knowledge, expected to recognize the
same; or
(2) The employer expressly reserves his rights against the contractor by reason of the defect.
The exceptions were omitted by the petitioners for obvious reasons. The defects complained against were hidden and
the employer was not expected to recognize them at the time the work was accepted. Moreover, there was an express
reservation by UP of its right to hold the contractor liable for the defects during a period of one year.
The petitioners' contention that the defects were caused by force majeure or fortuitous event as a result of the
frequent brown-outs in Metro Manila is not meritorious. The Court is not prepared to accept that the recurrent power
cut-offs can be classified as force majeure or a fortuitous event, We agree that the real cause of the problem,
according to the petitioners' own subcontractor, was poor workmanship, as discovered upon inspection of the cooling
system, Among the detects noted were improper interlocking of the entire electrical system in all the six units; wrong
specification of the time delay relay, also in all the six units; incorrect wiring connections on the oil pressure switches;
improper setting of the Hi and Lo pressure switches; and many missing parts like bolts and screws of panels, and the
2
compressor terminal insulation, and the terminal screws of a circuit breaker.
Curiously, it has not been shown that the cooling system in buildings within the same area have been similarly
damaged by the power cut-offs. The brown-outs have become an intolerable annoyance, but they cannot excuse all
contractual irregularities, including the petitioners' shortcomings.
The petitioners also claim that the breakdown of the cooling system was caused by the failure of UP to do
maintenance work thereon. We do not see how mere maintenance work could have corrected the above-mentioned
defects. At any rate, whether the repairs in the air-conditioning system can be considered mere maintenance work is a
factual issue. The resolution thereof by the lower courts is binding upon this Court in the absence of a clear showing
that it comes under the accepted exceptions to the rule. There is no such showing here.
The final point of the petition is that Emmanuel P. de Guzman has a separate legal personality from EPG Construction
Co., Inc. and should not be held solidarity liable with it. He stresses that the acts of the company are its own
responsibility and there is no reason why any liability arising from such acts should be ascribed to him. Thus:
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 transactions of its stockholders
3
or members.
The trial court did not explain why Emmanuel de Guzman was held solidarity liable with EPG Construction Co., Inc.,
and neither did the respondent court when it affirmed the appealed decision, In its Comment on the present petition,
UP also did not refute the petitioners' argument and simply passed upon it sub silentio although the matter was
squarely raised and discussed in the petition.
Notably, when Emmanuel de Guzman moved to dismiss the complaint as to him, UP said in its opposition to the
motion that it was suing him "in his official capacity and not in his personal capacity." His inclusion as President of the
company was therefore superfluous, as De Guzman correctly contended, because his acts as such were corporate
acts imputable to EPG itself as his principal. It is settled that;
A corporation is invested by law with a personality separate and distinct from those of the persons
composing it as well as from that of any other entity to which it may be related. Mere ownership by a
single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate personality. The general

manager of a corporation therefore should not be made personally answerable for the payment of the
employee's backwages unless he had acted maliciously or in bad faith in terminating the services of
4
the employee.
The exception noted is where the official "had acted maliciously or in bad faith," in which event he may be made
personally liable for his own act. That exception is not applicable in the case at bar, because it has not been proved
that De Guzman acted maliciously or in bad faith when, as President of EPG, he sought to protect its interests and
resisted UP's claims. Whatever damage was caused to UP as a result of his acts is the sole responsibility of EPG
even though De Guzman was its principal officer and controlling stockholder.
In sum, we hold that the lower court did not err in holding EPG liable for the repair of the air-conditioning system at its
expense pursuant to the guarantee provision in the construction contract with UP. However, Emmanuel de Guzman is
not solidarily liable with it, having acted on its behalf within the scope of his authority and without any demonstrated
malice or bad faith.
WHEREFORE, the appealed decision is AFFIRMED but with the modification that EPG Construction Co., Inc. shall be
solely liable for the damages awarded in favor of the University of the Philippines. It is so ordered.
Grio-Aquino, Medialdea and Bellosillo, JJ., concur.

G.R. No. 100152

March 31, 2000

ACEBEDO OPTICAL COMPANY, INC., petitioner,

vs.
THE HONORABLE COURT OF APPEALS, Hon. MAMINDIARA MANGOTARA, in his capacity as Presiding
Judge of the RTC, 12th Judicial Region, Br. 1, Iligan City; SAMAHANG OPTOMETRIST Sa PILIPINAS Iligan
City Chapter, LEO T. CAHANAP, City Legal Officer, and Hon. CAMILO P. CABILI, City Mayor of
Iligan, respondents.
PURISIMA, J.:
At bar is a petition for review under Rule 45 of the Rules of Court seeking to nullify the dismissal by the Court of
Appeals of the original petition for certiorari, prohibition and mandamus filed by the herein petitioner against the City
Mayor and City Legal Officer of Iligan and the Samahang Optometrist sa Pilipinas Iligan Chapter (SOPI, for brevity).
The antecedent facts leading to the filing of the instant petition are as follows:
Petitioner applied with the Office of the City Mayor of Iligan for a business permit. After consideration of petitioner's
application and the opposition interposed thereto by local optometrists, respondent City Mayor issued Business Permit
No. 5342 subject to the following conditions:
1. Since it is a corporation, Acebedo cannot put up an optical clinic but only a commercial store;
2. Acebedo cannot examine and/or prescribe reading and similar optical glasses for patients, because these
are functions of optical clinics;
3. Acebedo cannot sell reading and similar eyeglasses without a prescription having first been made by an
independent optometrist (not its employee) or independent optical clinic. Acebedo can only sell directly to the
public, without need of a prescription, Ray-Ban and similar eyeglasses;
4. Acebedo cannot advertise optical lenses and eyeglasses, but can advertise Ray-Ban and similar glasses
and frames;
5. Acebedo is allowed to grind lenses but only upon the prescription of an independent optometrist.

On December 5, 1988, private respondent Samahan ng Optometrist Sa Pilipinas (SOPI), Iligan Chapter, through its
Acting President, Dr. Frances B. Apostol, lodged a complaint against the petitioner before the Office of the City Mayor,
alleging that Acebedo had violated the conditions set forth in its business permit and requesting the cancellation
and/or revocation of such permit.
Acting on such complaint, then City Mayor Camilo P. Cabili designated City Legal Officer Leo T. Cahanap to conduct
an investigation on the matter. On July 12, 1989, respondent City Legal Officer submitted a report to the City Mayor
finding the herein petitioner guilty of violating all the conditions of its business permit and recommending the
disqualification of petitioner from operating its business in Iligan City. The report further advised that no new permit
shall be granted to petitioner for the year 1989 and should only be given time to wind up its affairs.
On July 19, 1989, the City Mayor sent petitioner a Notice of Resolution and Cancellation of Business Permit effective
as of said date and giving petitioner three (3) months to wind up its affairs.
On October 17, 1989, petitioner brought a petition for certiorari, prohibition and mandamus with prayer for restraining
order/preliminary injunction against the respondents, City Mayor, City Legal Officer and Samahan ng Optometrists sa
Pilipinas-Iligan City Chapter (SOPI), docketed as Civil Case No. 1497 before the Regional Trial Court of Iligan City,
Branch I. Petitioner alleged that (1) it was denied due process because it was not given an opportunity to present its
evidence during the investigation conducted by the City Legal Officer; (2) it was denied equal protection of the laws as
the limitations imposed on its business permit were not imposed on similar businesses in Iligan City; (3) the City
Mayor had no authority to impose the special conditions on its business permit; and (4) the City Legal Officer had no
authority to conduct the investigation as the matter falls within the exclusive jurisdiction of the Professional Regulation
Commission and the Board of Optometry.
Respondent SOPI interposed a Motion to Dismiss the Petition on the ground of non-exhaustion of administrative
remedies but on November 24, 1989, Presiding Judge Mamindiara P. Mangotara deferred resolution of such Motion to
Dismiss until after trial of the case on the merits. However, the prayer for a writ of preliminary injunction was granted.
Thereafter, respondent SOPI filed its answer.1wphi1.nt

On May 30, 1990, the trial court dismissed the petition for failure to exhaust administrative remedies, and dissolved
the writ of preliminary injunction it earlier issued. Petitioner's motion for reconsideration met the same fate. It was
denied by an Order dated June 28, 1990.
On October 3, 1990, instead of taking an appeal, petitioner filed a petition for certiorari, prohibition and mandamus
with the Court of Appeals seeking to set aside the questioned Order of Dismissal, branding the same as tainted with
grave abuse of discretion on the part of the trial court.
2

On January 24, 1991, the Ninth Division of the Court of Appeals dismissed the petition for lack of merit. Petitioner's
motion reconsideration was also denied in the Resolution dated May 15, 1991.
Undaunted, petitioner has come before this court via the present petition, theorizing that:
A.
THE RESPONDENT COURT, WHILE CORRECTLY HOLDING THAT THE RESPONDENT CITY MAYOR
ACTED BEYOND HIS AUTHORITY IN IMPOSING THE SPECIAL CONDITIONS IN THE PERMIT AS THEY
HAD NO BASIS IN ANY LAW OR ORDINANCE, ERRED IN HOLDING THAT THE SAID SPECIAL
CONDITIONS NEVERTHELESS BECAME BINDING ON PETITIONER UPON ITS ACCEPTANCE THEREOF
AS A PRIVATE AGREEMENT OR CONTRACT.
B.
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT BETWEEN
PETITIONER AND THE CITY OF ILIGAN WAS ENTERED INTO BY THE LATTER IN THE PERFORMANCE
OF ITS PROPRIETARY FUNCTIONS.
The petition is impressed with merit.
Although petitioner agrees with the finding of the Court of Appeals that respondent City Mayor acted beyond the scope
of his authority in imposing the assailed conditions in subject business permit, it has excepted to the ruling of the Court
of Appeals that the said conditions nonetheless became binding on petitioner, once accepted, as a private agreement
or contract. Petitioner maintains that the said special conditions are null and void for being ultra vires and cannot be
given effect; and therefore, the principle of estoppel cannot apply against it.
On the other hand, the public respondents, City Mayor and City Legal Officer, private respondent SOPI and the Office
of the Solicitor General contend that as a valid exercise of police power, respondent City Mayor has the authority to
impose, as he did, special conditions in the grant of business permits.
Police power as an inherent attribute of sovereignty is the power to prescribe regulations to promote the health,
9
morals, peace, education, good order or safety and general welfare of the people. The State, through the legislature,
has delegated the exercise of police power to local government units, as agencies of the State, in order to effectively
4
accomplish and carry out the declared objects of their creation. This delegation of police power is embodied in the
general welfare clause of the Local Government Code which provides:
Sec. 6. General Welfare. Every local government unit shall exercise the powers expressly granted, those
necessarily implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and
effective governance, and those which are essential to the promotion of the general welfare. Within their
respective territorial jurisdictions, local government units shall ensure and support, among other things, the
preservation and enrichment of culture, promote health and safety, enhance the right of the people to a
balanced ecology, encourage and support the development of appropriate and self-reliant scientific and
technological capabilities, improve public morals, enhance economic prosperity and social justice, promote full
employment among their residents, maintain peace and order, and preserve the comfort and convenience of
their inhabitants.
The scope of police power has been held to be so comprehensive as to encompass almost all matters affecting the
health, safety, peace, order, morals, comfort and convenience of the community. Police power is essentially regulatory
in nature and the power to issue licenses or grant business permits, if exercised for a regulatory and not revenue5
raising purpose, is within the ambit of this power.
The authority of city mayors to issue or grant licenses and business permits is beyond cavil. It is provided for by law.
Section 171, paragraph 2 (n) of Batas Pambansa Bilang 337 otherwise known as the Local Government Code of
1983, reads:

Sec. 171. The City Mayor shall:

xxx

xxx

xxx

n) Grant or refuse to grant, pursuant to law, city licenses or permits, and revoke the same for violation of law
or ordinance or the conditions upon which they are granted.
However, the power to grant or issue licenses or business permits must always be exercised in accordance with law,
with utmost observance of the rights of all concerned to due process and equal protection of the law.
Succinct and in point is the ruling of this Court, that:
. . . While a business may be regulated, such regulation must, however, be within the bounds of reason,i.e.,
the regulatory ordinance must be reasonable, and its provision cannot be oppressive amounting to an
arbitrary interference with the business or calling subject of regulation. A lawful business or calling may not,
under the guise of regulation, be unreasonably interfered with even by the exercise of police power. . . .
xxx

xxx

xxx

. . . The exercise of police power by the local government is valid unless it contravenes the fundamental law of
the land or an act of the legislature, or unless it is against public policy or is unreasonable, oppressive, partial,
6
discriminating or in derogation of a common right.
In the case under consideration, the business permit granted by respondent City Mayor to petitioner was burdened
with several conditions. Petitioner agrees with the holding by the Court of Appeals that respondent City Mayor acted
beyond his authority in imposing such special conditions in its permit as the same have no basis in the law or
ordinance. Public respondents and private respondent SOPI, on the other hand, are one in saying that the imposition
of said special conditions on petitioner's business permit is well within the authority of the City Mayor as a valid
exercise of police power.
As aptly discussed by the Solicitor General in his Comment, the power to issue licenses and permits necessarily
includes the corollary power to revoke, withdraw or cancel the same. And the power to revoke or cancel, likewise
includes the power to restrict through the imposition of certain conditions. In the case of Austin7
Hardware, Inc. vs.Court of Appeals, it was held that the power to license carries with it the authority to provide
reasonable terms and conditions under which the licensed business shall be conducted. As the Solicitor General puts
it:
If the City Mayor is empowered to grant or refuse to grant a license, which is a broader power, it stands to
reason that he can also exercise a lesser power that is reasonably incidental to his express power, i.e. to
restrict a license through the imposition of certain conditions, especially so that there is no positive prohibition
to the exercise of such prerogative by the City Mayor, nor is there any particular official or body vested with
8
such authority.
However, the present inquiry does not stop there, as the Solicitor General believes. The power or authority of the City
Mayor to impose conditions or restrictions in the business permit is indisputable. What petitioner assails are the
conditions imposed in its particular case which, it complains, amount to a confiscation of the business in which
petitioner is engaged.
Distinction must be made between the grant of a license or permit to do business and the issuance of a license to
engage in the practice of a particular profession. The first is usually granted by the local authorities and the second is
issued by the Board or Commission tasked to regulate the particular profession. A business permit authorizes the
person, natural or otherwise, to engage in business or some form of commercial activity. A professional license, on the
other hand, is the grant of authority to a natural person to engage in the practice or exercise of his or her profession.
In the case at bar, what is sought by petitioner from respondent City Mayor is a permit to engage in the business of
running an optical shop. It does not purport to seek a license to engage in the practice of optometry as a corporate
body or entity, although it does have in its employ, persons who are duly licensed to practice optometry by the Board
of Examiners in Optometry.
The case of Samahan ng Optometrists sa Pilipinas vs. Acebedo International Corporation, G.R. No.
9
117097, promulgated by this Court on March 21, 1997, is in point. The factual antecedents of that case are similar to
those of the case under consideration and the issue ultimately resolved therein is exactly the same issue posed for
resolution by this Court en banc.

In the said case, the Acebedo International Corporation filed with the Office of the Municipal Mayor an application for a
business permit for the operation of a branch of Acebedo Optical in Candon, Ilocos Sur. The application was opposed
by the Samahan ng Optometrists sa Pilipinas-Ilocos Sur Chapter, theorizing that Acebedo is a juridical entity not
qualified to practice optometry. A committee was created by the Office of the Mayor to study private respondent's
application. Upon recommendation of the said committee, Acebedo's application for a business permit was denied.
Acebedo filed a petition with the Regional Trial Court but the same was dismissed. On appeal, however, the Court of
Appeals reversed the trial court's disposition, prompting the Samahan ng Optometrists to elevate the matter to this
Court.
The First Division of this Court, then composed of Honorable Justice Teodoro Padilla, Josue Bellosillo, Jose Vitug and
Santiago Kapunan, with Honorable Justice Regino Hermosisima, Jr. as ponente, denied the petition and ruled in favor
of respondent Acebedo International Corporation, holding that "the fact that private respondent hires optometrists who
practice their profession in the course of their employment in private respondent's optical shops, does not translate
10
into a practice of optometry by private respondent itself," The Court further elucidated that in both the old and new
Optometry Law, R.A. No. 1998, superseded by R.A. No. 8050, it is significant to note that there is no prohibition
against the hiring by corporations of optometrists. The Court concluded thus:
All told, there is no law that prohibits the hiring by corporations of optometrists or considers the hiring by
corporations of optometrists as a practice by the corporation itself of the profession of optometry.
In the present case, the objective of the imposition of subject conditions on petitioner's business permit could be
attained by requiring the optometrists in petitioner's employ to produce a valid certificate of registration as optometrist,
from the Board of Examiners in Optometry. A business permit is issued primarily to regulate the conduct of business
and the City Mayor cannot, through the issuance of such permit, regulate the practice of a profession, like that of
optometry. Such a function is within the exclusive domain of the administrative agency specifically empowered by law
to supervise the profession, in this case the Professional Regulations Commission and the Board of Examiners in
Optometry.
It is significant to note that during the deliberations of the bicameral conference committee of the Senate and the
House of Representatives on R.A. 8050 (Senate Bill No. 1998 and House Bill No. 14100), the committee failed to
reach a consensus as to the prohibition on indirect practice of optometry by corporations. The proponent of the bill,
former Senator Freddie Webb, admitted thus:
Senator Webb: xxx xxx xxx
The focus of contention remains to be the proposal of prohibiting the indirect practice of optometry by
corporations.1wphi1 We took a second look and even a third look at the issue in the bicameral conference,
11
but a compromise remained elusive.
Former Senator Leticia Ramos-Shahani likewise voted her reservation in casting her vote:
Senator Shahani: Mr. President.
The optometry bills have evoked controversial views from the members of the panel. While we realize the
need to uplift the standards of optometry as a profession, the consesnsus of both Houses was to avoid
touching sensitive issues which properly belong to judicial determination. Thus, the bicameral conference
committee decided to leave the issue of indirect practice of optometry and the use of trade names open to the
12
wisdom of the Courts which are vested with the prerogative of interpreting the laws.
From the foregoing, it is thus evident that Congress has not adopted a unanimous position on the matter of prohibition
of indirect practice of optometry by corporations, specifically on the hiring and employment of licensed optometrists by
optical corporations. It is clear that Congress left the resolution of such issue for judicial determination, and it is
therefore proper for this Court to resolve the issue.
Even in the United States, jurisprudence varies and there is a conflict of opinions among the federal courts as to the
13
right of a corporation or individual not himself licensed, to hire and employ licensed optometrists.
Courts have distinguished between optometry as a learned profession in the category of law and medicine, and
optometry as a mechanical art. And, insofar as the courts regard optometry as merely a mechanical art, they have
tended to find nothing objectionable in the making and selling of eyeglasses, spectacles and lenses by corporations so
14
long as the patient is actually examined and prescribed for by a qualified practitioner.
The primary purpose of the statute regulating the practice of optometry is to insure that optometrical services are to be
rendered by competent and licensed persons in order to protect the health and physical welfare of the people from the

dangers engendered by unlicensed practice. Such purpose may be fully accomplished although the person rendering
15
the service is employed by a corporation.
Furthermore, it was ruled that the employment of a qualified optometrist by a corporation is not against public
16
17
policy. Unless prohibited by statutes, a corporation has all the contractual rights that an individual has and it does
18
not become the practice of medicine or optometry because of the presence of a physician or optometrist. The
manufacturing, selling, trading and bartering of eyeglasses and spectacles as articles of merchandise do not
19
constitute the practice of optometry.
20

In the case of Dvorine vs. Castelberg Jewelry Corporation, defendant corporation conducted as part of its business,
a department for the sale of eyeglasses and the furnishing of optometrical services to its clients. It employed a
registered optometrist who was compensated at a regular salary and commission and who was furnished instruments
and appliances needed for the work, as well as an office. In holding that corporation was not engaged in the practice
of optometry, the court ruled that there is no public policy forbidding the commercialization of optometry, as in law and
medicine, and recognized the general practice of making it a commercial business by advertising and selling
eyeglasses.
To accomplish the objective of the regulation, a state may provide by statute that corporations cannot sell eyeglasses,
spectacles, and lenses unless a duly licensed physician or a duly qualified optometrist is in charge of, and in personal
21
attendance at the place where such articles are sold. In such a case, the patient's primary and essential safeguard
22
lies in the optometrist's control of the "treatment" by means of prescription and preliminary and final examination.
In analogy, it is noteworthy that private hospitals are maintained by corporations incorporated for the purpose of
furnishing medical and surgical treatment. In the course of providing such treatments, these corporations employ
physicians, surgeons and medical practitioners, in the same way that in the course of manufacturing and selling
eyeglasses, eye frames and optical lenses, optical shops hire licensed optometrists to examine, prescribe and
dispense ophthalmic lenses. No one has ever charged that these corporations are engaged in the practice of
medicine. There is indeed no valid basis for treating corporations engaged in the business of running optical shops
differently.
It also bears stressing, as petitioner has pointed out, that the public and private respondents did not appeal from the
ruling of the Court of Appeals. Consequently, the holding by the Court of Appeals that the act of respondent City
Mayor in imposing the questioned special conditions on petitioner's business permit is ultra vires cannot be put into
issue here by the respondents. It is well-settled that:
A party who has not appealed from the decision may not obtain any affirmative relief from the appellate court
23
other than what he had obtain from the lower court, if any, whose decision is brought up on appeal.
. . . an appellee who is not an appellant may assign errors in his brief where his purpose is to maintain the
judgment on other grounds, but he cannot seek modification or reversal of the judgment or affirmative relief
24
unless he has also appealed.
Thus, respondents' submission that the imposition of subject special conditions on petitioner's business permit is
not ultra vires cannot prevail over the finding and ruling by the Court of Appeals from which they (respondents) did not
appeal.
Anent the second assigned error, petitioner maintains that its business permit issued by the City Mayor is not a
contract entered into by Iligan City in the exercise of its proprietary functions, such that although petitioner agreed to
such conditions, it cannot be held in estoppel since ultra vires acts cannot be given effect.
Respondents, on the other hand, agree with the ruling of the Court of Appeals that the business permit in question is
in the nature of a contract between Iligan City and the herein petitioner, the terms and conditions of which are binding
upon agreement, and that petitioner is estopped from questioning the same. Moreover, in the Resolution denying
petitioner's motion for reconsideration, the Court of Appeals held that the contract between the petitioner and the City
of Iligan was entered into by the latter in the performance of its proprietary functions.
This Court holds otherwise. It had occasion to rule that a license or permit is not in the nature of a contract but a
special privilege.
. . . a license or a permit is not a contract between the sovereignty and the licensee or permitee, and is not a
property in the constitutional sense, as to which the constitutional proscription against impairment of the
obligation of contracts may extend. A license is rather in the nature of a special privilege, of a permission or
25
authority to do what is within its terms. It is not in any way vested, permanent or absolute.

It is therefore decisively clear that estoppel cannot apply in this case. The fact that petitioner acquiesced in the special
conditions imposed by the City Mayor in subject business permit does not preclude it from challenging the said
imposition, which is ultra vires or beyond the ambit of authority of respondent City Mayor. Ultra vires acts or acts which
are clearly beyond the scope of one's authority are null and void and cannot be given any effect. The doctrine of
estoppel cannot operate to give effect to an act which is otherwise null and void or ultra vires.
The Court of Appeals erred in adjudging subject business permit as having been issued by responded City Mayor in
the performance of proprietary functions of Iligan City. As hereinabove elaborated upon, the issuance of business
licenses and permits by a municipality or city is essentially regulatory in nature. The authority, which devolved upon
local government units to issue or grant such licenses or permits, is essentially in the exercise of the police power of
the State within the contemplation of the general welfare clause of the Local Government Code.
WHEREFORE, the petition is GRANTED; the Decision of the Court of Appeals in CA-GR SP No. 22995 REVERSED:
and the respondent City Mayor is hereby ordered to reissue petitioner's business permit in accordance with law and
with this disposition. No pronouncement as to costs.
SO ORDERED.
Bellosillo, Puno, Mendoza, Quisumbing, Buena, Gonzaga-Reyes, Ynares-Santiago and De Leon, Jr., JJ., concur.
Kapunan, J., see concurring opinion.
Vitug, J., please see dissent.
Davide, Jr., C.J., I join Justice Vitug in his dissent.
Melo, J., I join the dissent of Justice Vitug.
Panganiban, J., I join Justice Vitug's Dissent.
Pardo, J., I join dissent of Justice Vitug.

G.R. No. 116123 March 13, 1997

SERGIO F. NAGUIAT, doing business under the name and style SERGIO F. NAGUIAT ENT., INC., & CLARK
FIELD TAXI, INC., petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION (THIRD DIVISION), NATIONAL ORGANIZATION OF
WORKINGMEN and its members, LEONARDO T. GALANG, et al., respondents.

PANGANIBAN, J.:
Are private respondent-employees of petitioner Clark Field Taxi, Inc., who were separated from service due the
closure of Clark Air Base, entitled to separation pay and, if so, in what amount? Are officers of corporations ipso
facto liable jointly and severally with the companies they represent for the payment of separation pay?
These questions are answered by the Court in resolving this petition for certiorari under Rule 65 of the Rules of Court
1
assailing the Resolutions of the National Labor Relations Commission (Third Division) promulgated on February 28,
2
3
4
1994, and May 31, 1994. The February 28, 1994 Resolution affirmed with modifications the decision of Labor
Arbiter Ariel C. Santos in NLRC Case No. RAB-III-12-2477-91. The second Resolution denied the motion for
reconsideration of herein petitioners.
The NLRC modified the decision of the labor arbiter by granting separation pay to herein individual respondents in the
increased amount of US$120.00 for every year of service or its peso equivalent, and holding Sergio F. Naguiat
Enterprises, Inc., Sergio F. Naguiat and Antolin T. Naguiat, jointly and severally liable with Clark Field Taxi, Inc.
("CFTI").
The Facts
The following facts are derived from the records of the case:
Petitioner CFTI held a concessionaire's contract with the Army Air Force Exchange Services ("AAFES") for the
operation of taxi services within Clark Air Base. Sergio F. Naguiat was CFTI's president, while Antolin T. Naguiat was
its vice-president. Like Sergio F. Naguiat Enterprises, Incorporated ("Naguiat Enterprises"), a trading firm, it was a
family-owned corporation.
Individual respondents were previously employed by CFTI as taxicab drivers. During their employment, they were
required to pay a daily "boundary fee" in the amount of US$26.50 for those working from 1:00 a.m. to 12:00 noon, and
US$27.00 for those working from 12:00 noon to 12:00 midnight. All incidental expenses for the maintenance of the
vehicles they were driving were accounted against them, including gasoline expenses.
The drivers worked at least three to four times a week, depending on the availability of taxicabs. They earned not less
than US$15.00 daily.
In excess of that amount, however, they were required to make cash deposits to the company, which they could later
withdraw every fifteen days.
Due to the phase-out of the US military bases in the Philippines, from which Clark Air Base was not spared, the
AAFES was dissolved, and the services of individual respondents were officially terminated on November 26, 1991.
The AAFES Taxi Drivers Association ("drivers' union"), through its local president, Eduardo Castillo, and CFTI held
negotiations as regards separation benefits that should be awarded in favor of the drivers. They arrived at an
agreement that the separated drivers will be given P500.00 for every year of service as severance pay. Most of the
drivers accepted said amount in December 1991 and January 1992. However, individual respondents herein refused
to accept theirs.
Instead, after disaffiliating themselves from the drivers' union, individual respondents, through the National
Organization of Workingmen ("NOWM"), a labor organization which they subsequently joined, filed a
5
complaint against "Sergio F. Naguiat doing business under the name and style Sergio F. Naguiat Enterprises, Inc.,
Army-Air Force Exchange Services (AAFES) with Mark Hooper as Area Service Manager, Pacific Region, and AAFES
Taxi Drivers Association with Eduardo Castillo as President," for payment of separation pay due to termination/phase-

out. Said complaint was later amended to include additional taxi drivers who were similarly situated as complainants,
and CFTI with Antolin T. Naguiat as vice president and general manager, as party respondent.
In their complaint, herein private respondents alleged that they were regular employees of Naguiat Enterprises,
although their individual applications for employment were approved by CFTI. They claimed to have been assigned to
Naguiat Enterprises after having been hired by CFTI, and that the former thence managed, controlled and supervised
their employment. They averred further that they were entitled to separation pay based on their latest daily earnings of
US$15.00 for working sixteen (16) days a month.
In their position paper submitted to the labor arbiter, herein petitioners claimed that the cessation of business of CFTI
on November 26, 1991, was due to "great financial losses and lost business opportunity" resulting from the phase-out
of Clark Air Base brought about by the Mt. Pinatubo eruption and the expiration of the RP-US military bases
agreement. They admitted that CFTI had agreed with the drivers' union, through its President Eduardo Castillo who
claimed to have had blanket authority to negotiate with CFTI in behalf of union members, to grant its taxi driveremployees separation pay equivalent to P500.00 for every year of service.
The labor arbiter, finding the individual complainants to be regular workers of CFTI, ordered the latter to pay them
P1,200.00 for every year of service "for humanitarian consideration," setting aside the earlier agreement between
CFTI and the drivers' union of P500.00 for every year of service. The labor arbiter rejected the allegation of CFTI that
it was forced to close business due to "great financial losses and lost business opportunity" since, at the time it ceased
operations, CFTI was profitably earning and the cessation of its business was due to the untimely closure of Clark Air
Base. In not awarding separation pay in accordance with the Labor Code, the labor arbiter explained:
To allow respondents exemption from its (sic) obligation to pay separation pay would be inhuman to
complainants but to impose a monetary obligation to an employer whose profitable business was
7
abruptly shot (sic) down by force majeure would be unfair and unjust to say the least.
and thus, simply awarded an amount for "humanitarian consideration."
Herein individual private respondents appealed to the NLRC. In its Resolution, the NLRC modified the decision of the
labor arbiter by granting separation pay to the private respondents. The concluding paragraphs of the NLRC
Resolution read:
The contention of complainant is partly correct. One-half month salary should be US$120.00 but this
amount can not be paid to the complainant in U.S. Dollar which is not the legal tender in the
Philippines. Paras, in commenting on Art. 1249 of the New Civil Code, defines legal tender as "that
which a debtor may compel a creditor to accept in payment of the debt. The complainants who are the
creditors in this instance can be compelled to accept the Philippine peso which is the legal tender, in
which case, the table of conversion (exchange rate) at the time of payment or satisfaction of the
judgment should be used. However, since the choice is left to the debtor, (respondents) they may
choose to pay in US dollar." (Phoenix Assurance Co. vs. Macondray & Co. Inc., L-25048, May 13,
1975)
In discharging the above obligations, Sergio F. Naguiat Enterprises, which is headed by Sergio F.
Naguiat and Antolin Naguiat, father and son at the same time the President and Vice-President and
General Manager, respectively, should be joined as indispensable party whose liability is joint and
8
several. (Sec. 7, Rule 3, Rules of Court)
As mentioned earlier, the motion for reconsideration of herein petitioners was denied by the NLRC. Hence, this
petition with prayer for issuance of a temporary restraining order. Upon posting by the petitioners of a surety bond, a
9
temporary restraining order was issued by this Court enjoining execution of the assailed Resolutions.
Issues
The petitioners raise the following issues before this Court for resolution:
I. Whether or not public respondent NLRC (3rd Div.) committed grave abuse of discretion amounting
to lack of jurisdiction in issuing the appealed resolution;
II. Whether or not Messrs. Teofilo Rafols and Romeo N. Lopez could validly represent herein private
respondents; and,
III. Whether or not the resolution issued by public respondent is contrary to law.

10

11

Petitioners also submit two additional issues by way of a supplement to their petition, to wit: that Petitioners Sergio
F. Naguiat and Antolin Naguiat were denied due process; and that petitioners were not furnished copies of private
respondents' appeal to the NLRC. As to the procedural lapse of insufficient copies of the appeal, the proper forum
before which petitioners should have raised it is the NLRC. They, however, failed to question this in their motion for
reconsideration. As a consequence, they are deemed to have waived the same and voluntarily submitted themselves
to the jurisdiction of the appellate body.
Anent the first issue raised in their original petition, petitioners contend that NLRC committed grave abuse of
discretion amounting to lack or excess of jurisdiction in unilaterally increasing the amount of severance pay granted by
the labor arbiter. They claim that this was not supported by substantial evidence since it was based simply on the selfserving allegation of respondents that their monthly take-home pay was not lower than $240.00.
On the second issue, petitioners aver that NOWM cannot make legal representations in behalf of individual
respondents who should, instead, be bound by the decision of the union (AAFES Taxi Drivers Association) of which
they were members.
As to the third issue, petitioners incessantly insist that Sergio F. Naguiat Enterprises, Inc. is a separate and distinct
juridical entity which cannot be held jointly and severally liable for the obligations of CFTI. And similarly, Sergio F.
Naguiat and Antolin Naguiat were merely officers and stockholders of CFTI and, thus, could not be held personally
accountable for corporate debts.
Lastly, Sergio and Antolin Naguiat assail the Resolution of NLRC holding them solidarily liable despite not having
been impleaded as parties to the complaint.
Individual respondents filed a comment separate from that of NOWM. In sum, both aver that petitioners had the
opportunity but failed to refute, the taxi drivers' claim of having an average monthly earning of $240.00; that individual
respondents became members of NOWM after disaffiliating themselves from the AAFES Taxi Drivers Association
which, through the manipulations of its President Eduardo Castillo, unconscionably compromised their separation pay;
and that Naguiat Enterprises, being their indirect employer, is solidarily liable under the law for violation of the Labor
Code, in this case, for nonpayment of their separation pay.
The Solicitor General unqualifiedly supports the allegations of private respondents. In addition, he submits that the
separate personalities of respondent corporations and their officers should be disregarded and considered one and
the same as these were used to perpetrate injustice to their employees.
The Court's Ruling
As will be discussed below, the petition is partially meritorious.
First Issue: Amount of Separation Pay
Firmly, we reiterate the rule that in a petition for certiorari filed pursuant to Rule 65 of the Rules of Court, which is the
only way a labor case may reach the Supreme Court, the petitioner/s must clearly show that the NLRC acted without
12
or in excess of jurisdiction or with grave abuse of discretion.
Long-standing and well-settled in Philippine jurisprudence is the judicial dictum that findings of fact of administrative
agencies and quasi-judicial bodies, which have acquired expertise because their jurisdiction is confined to specific
matters, are generally accorded not only great respect but even finality; and are binding upon this Court unless there
is a showing of grave abuse of discretion, or where it is clearly shown that they were arrived at arbitrarily or in
13
disregard of the evidence on record.
Nevertheless, this Court carefully perused the records of the instant case if only to determine whether public
respondent committed grave abuse of discretion, amounting to lack of jurisdiction, in granting the clamor of private
respondents that their separation pay should be based on the amount of $240.00, allegedly their minimum monthly
earnings as taxi drivers of petitioners.
In their amended complaint before the Regional Arbitration Branch in San Fernando, Pampanga, herein private
respondents set forth in detail the work schedule and financial arrangement they had with their employer. Therefrom
they inferred that their monthly take-home pay amounted to not less than $240.00. Herein petitioners did not bother to
refute nor offer any evidence to controvert said allegations. Remaining undisputed, the labor arbiter adopted such
facts in his decision. Petitioners did not even appeal from the decision of the labor arbiter nor manifest any error in his
findings and conclusions. Thus, petitioners are in estoppel for not having questioned such facts when they had all
opportunity to do so. Private respondents, like petitioners, are bound by the factual findings of Respondent
Commission.

Petitioners also claim that the closure of their taxi business was due to great financial losses brought about by the
eruption of Mt. Pinatubo which made the roads practically impassable to their taxicabs. Likewise well-settled is the rule
that business losses or financial reverses, in order to sustain retrenchment of personnel or closure of business and
14
warrant exemption from payment of separation pay, must be proved with clear and satisfactory evidence. The
records, however, are devoid of such evidence.
The labor arbiter, as affirmed by NLRC, correctly found that petitioners stopped their taxi business within Clark Air
Base because of the phase-out of U.S. military presence thereat. It was not due to any great financial loss because
petitioners' taxi business was earning profitably at the time of its closure.
With respect to the amount of separation pay that should be granted, Article 283 of the Labor Code provides:
. . . In case of retrenchment to prevent losses and in cases of closures or cessation of operations of
establishment or undertaking not due to serious business losses or financial reverses, the separation
pay shall be equivalent to one (1) month pay or at least one-half (1/2) month pay for every year of
service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole
year.
Considering the above, we find that NLRC did not commit grave abuse of discretion in ruling that individual
15
respondents were entitled to separation pay in the amount $120.00 (one-half of $240.00 monthly pay) or its peso
equivalent for every year of service.
Second Issue: NOWM's Personality to
Represent Individual Respondents-Employees
On the question of NOWM's authority to represent private respondents, we hold petitioners in estoppel for not having
seasonably raised this issue before the labor arbiter or the NLRC. NOWM was already a party-litigant as the
organization representing the taxi driver-complainants before the labor arbiter. But petitioners who were partyrespondents in said complaint did not assail the juridical personality of NOWM and the validity of its representations in
behalf of the complaining taxi drivers before the quasi-judicial bodies. Therefore, they are now estopped from raising
such question before this Court. In any event, petitioners acknowledged before this Court that the taxi drivers allegedly
16
represented by NOWM, are themselves parties in this case.
Third Issue: Liability of PetitionerCorporations and Their Respective Officers
The resolution of this issue involves another factual finding that Naguiat Enterprises actually managed, supervised
and controlled employment terms of the taxi drivers, making it their indirect employer. As adverted to earlier, factual
findings of quasi-judicial bodies are binding upon the court in the absence of a showing of grave abuse of discretion.
Unfortunately, the NLRC did not discuss or give any explanation for holding Naguiat Enterprises and its officers jointly
and severally liable in discharging CFTI's liability for payment of separation pay. We again remind those concerned
that decisions, however concisely written, must distinctly and clearly set forth the facts and law upon which they are
17
based. This rule applies as well to dispositions by quasi-judicial and administrative bodies.
Naguiat Enterprise Not Liable
In impleading Naguiat Enterprises as solidarily liable for the obligations of CFTI, respondents rely on Articles
18
19
20
106, 107 and 109 of the Labor Code.
Based on factual submissions of the parties, the labor arbiter, however, found that individual respondents were regular
employees of CFTI who received wages on a boundary or commission basis.
We find no reason to make a contrary finding. Labor-only contracting exists where: (1) the person supplying workers
to an employer does not have substantial capital or investment in the form of tools, equipment, machinery, and work
premises, among others; and (2) the workers recruited and placed by such person are performing activities which are
21
directly related to the principal business of the employer. Independent contractors, meanwhile, are those who
exercise independent employment, contracting to do a piece of work according to their own methods without being
22
subject to control of their employer except as to the result of their Work.
From the evidence proffered by both parties, there is no substantial basis to hold that Naguiat Enterprises is an
indirect employer of individual respondents much less a labor only contractor. On the contrary, petitioners submitted
23
24
documents such as the drivers' applications for employment with CFTI, and social security remittances and

25

payroll of Naguiat Enterprises showing that none of the individual respondents were its employees. Moreover, in the
26
contract between CFTI and AAFES, the former, as concessionaire, agreed to purchase from AAFES for a certain
amount within a specified period a fleet of vehicles to be "ke(pt) on the road" by CFTI, pursuant to their
concessionaire's contract. This indicates that CFTI became the owner of the taxicabs which became the principal
investment and asset of the company.
Private respondents failed to substantiate their claim that Naguiat Enterprises managed, supervised and controlled
their employment. It appears that they were confused on the personalities of Sergio F. Naguiat as an individual who
was the president of CFTI, and Sergio F. Naguiat Enterprises, Inc., as a separate corporate entity with a separate
27
business. They presumed that Sergio F. Naguiat, who was at the same time a stockholder and director of Sergio F.
Naguiat Enterprises, Inc., was managing and controlling the taxi business on behalf of the latter. A closer scrutiny and
analysis of the records, however, evince the truth of the matter: that Sergio F. Naguiat, in supervising the taxi drivers
and determining their employment terms, was rather carrying out his responsibilities as president of CFTI. Hence,
Naguiat Enterprises as a separate corporation does not appear to be involved at all in the taxi business.
To illustrate further, we refer to the testimony of a driver-claimant on cross examination.
Atty. Suarez
Is it not true that you applied not with Sergio F. Naguiat but with Clark Field Taxi?
Witness
I applied for (sic) Sergio F. Naguiat.
Atty. Suarez
Sergio F. Naguiat as an individual or the corporation?
Witness
Sergio F. Naguiat na tao.
Atty. Suarez
Who is Sergio F. Naguiat?
Witness
He is the one managing the Sergio F. Naguiat Enterprises and he is the one whom
we believe as our employer
Atty. Suarez
What is exactly the position of Sergio F. Naguiat with the Sergio F. Naguiat
Enterprises?
Witness
He is the owner, sir.
Atty. Suarez
How about with Clark Field Taxi Incorporated what is the position of Mr. Naguiat?
Witness
What I know is that he is a concessionaire.
xxx xxx xxx

Atty. Suarez
But do you also know that Sergio F. Naguiat is the President of Clark Field Taxi,
Incorporated?
Witness
Yes, sir.
Atty. Suarez
How about Mr. Antolin Naguiat what is his role in the taxi services, the operation of
the Clark Field Taxi, Incorporated?
Witness
He is the vice president.

28

And, although the witness insisted that Naguiat Enterprises was his employer, he could not deny that he received his
29
salary from the office of CFTI inside the base.
Another driver-claimant admitted, upon the prodding of counsel for the corporations, that Naguiat Enterprises was in
30
the trading business while CFTI was in taxi services.
31

In addition, the Constitution of CFTI-AAFES Taxi Drivers Association which, admittedly, was the union of individual
respondents while still working at Clark Air Base, states that members thereof are the employees of CFTI and "(f)or
collective bargaining purposes, the definite employer is the Clark Field Taxi Inc."
From the foregoing, the ineludible conclusion is that CFTI was the actual and direct employer of individual
respondents, and that Naguiat Enterprises was neither their indirect employer nor labor-only contractor. It was not
involved at all in the taxi business.
CFTI president
solidarily liable
Petitioner-corporations would likewise want to avoid the solidary liability of their officers. To bolster their position,
Sergio F. Naguiat and Antolin T. Naguiat specifically aver that they were denied due process since they were not
32
parties to the complaint below. In the broader interest of justice, we, however, hold that Sergio F. Naguiat, in his
capacity as president of CFTI, cannot be exonerated from joint and several liability in the payment of separation pay to
individual respondents.
33

A.C. Ransom Labor Union-CCLU vs. NLRC is the case in point. A.C. Ransom Corporation was a family corporation,
the stockholders of which were members of the Hernandez family. In 1973, it filed an application for clearance to close
or cease operations, which was duly granted by the Ministry of Labor and Employment, without prejudice to the right
of employees to seek redress of grievance, if any. Backwages of 22 employees, who engaged in a strike prior to the
closure, were subsequently computed at P164,984.00. Up to September 1976, the union filed about ten (10) motions
for execution against the corporation, but none could be implemented, presumably for failure to find leviable assets of
said corporation. In its last motion for execution, the union asked that officers and agents of the company be held
personally liable for payment of the backwages. This was granted by the labor arbiter. In the corporation's appeal to
the NLRC, one of the issues raised was: "Is the judgment against a corporation to reinstate its dismissed employees
with backwages, enforceable against its officer and agents, in their individual, private and personal capacities, who
were not parties in the case where the judgment was rendered!" The NLRC answered in the negative, on the ground
that officers of a corporation are not liable personally for official acts unless they exceeded the scope of their authority.
On certiorari, this Court reversed the NLRC and upheld the labor arbiter. In imposing joint and several liability upon
the company president, the Court, speaking through Mme. Justice Ameurfina Melencio-Herrera, ratiocinated this wise:
(b) How can the foregoing (Articles 265 and 273 of the Labor Code) provisions be implemented when
the employer is a corporation? The answer is found in Article 212(c) of the Labor Code which
provides:

(c) "Employer" includes any person acting in the interest of an employer, directly or indirectly. The
term shall not include any labor organization or any of its officers or agents except when acting as
employer.
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an
artificial person, it must have an officer who can be presumed to be the employer, being the "person
acting in the interest of (the) employer" RANSOM. The corporation, only in the technical sense, is the
employer.
The responsible officer of an employer corporation can be held personally, not to say even criminally,
liable for nonpayment of back wages. That is the policy of the law. . . .
(c) If the policy of the law were otherwise, the corporation employer can have devious ways for
evading payment of back wages. . . .
(d) The record does not clearly identify "the officer or officers" of RANSOM directly responsible for
failure to pay the back wages of the 22 strikers. In the absence of definite Proof in that regard, we
believe it should be presumed that the responsible officer is the President of the corporation who can
be deemed the chief operation officer thereof. Thus, in RA 602, criminal responsibility is with the
"Manager or in his default, the person acting as such." In RANSOM. the President appears to be the
Manager. (Emphasis supplied.)
Sergio F. Naguiat, admittedly, was the president of CFTI who actively managed the business. Thus, applying the
ruling in A.C. Ransom, he falls within the meaning of an "employer" as contemplated by the Labor Code, who may be
held jointly and severally liable for the obligations of the corporation to its dismissed employees.
34

Moreover, petitioners also conceded that both CFTI and Naguiat Enterprises were "close family corporations" owned
by the Naguiat family. Section 100, paragraph 5, (under Title XII on Close Corporations) of the Corporation Code,
states:
(5) To the extent that the stockholders are actively engage(d) in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be personally liable for corporate
tortsunless the corporation has obtained reasonably adequate liability insurance. (emphasis supplied)
Nothing in the records show whether CFTI obtained "reasonably adequate liability insurance;" thus, what
remains is to determine whether there was corporate tort.
Our jurisprudence is wanting as to the definite scope of "corporate tort." Essentially, "tort" consists in the violation of a
35
36
right given or the omission of a duty imposed by law. Simply stated, tort is a breach of a legal duty. Article 283 of
the Labor Code mandates the employer to grant separation pay to employees in case of closure or cessation of
operations of establishment or undertaking not due to serious business losses or financial reverses, which is the
condition obtaining at bar. CFTI failed to comply with this law-imposed duty or obligation. Consequently, its
stockholder who was actively engaged in the management or operation of the business should be held personally
liable.
37

Furthermore, in MAM Realty Development vs. NLRC, the Court recognized that a director or officer may still be held
solidarily liable with a corporation by specific provision of law. Thus:
. . . A corporation, being a juridical entity, may act only through its directors, officers and employees.
Obligations incurred by them, acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. True, solidary liabilities may at times be incurred but
only when exceptional circumstances warrant such as, generally, in the following cases:
xxx xxx xxx
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his
corporate action. (footnotes omitted)
As pointed out earlier, the fifth paragraph of Section 100 of the Corporation Code specifically imposes personal liability
upon the stockholder actively managing or operating the business and affairs of the close corporation.

In fact, in posting the surety bond required by this Court for the issuance of a temporary restraining order enjoining the
execution of the assailed NLRC Resolutions, only Sergio F. Naguiat, in his individual and personal capacity, principally
bound himself to comply with the obligation thereunder, i.e., "to guarantee the payment to private respondents of any
damages which they may incur by reason of the issuance of a temporary restraining order sought, if it should be finally
38
adjudged that said principals were not entitled thereto.
The Court here finds no application to the rule that a corporate officer cannot be held solidarily liable with a
39
corporation in the absence of evidence that he had acted in bad faith or with malice. In the present case, Sergio
Naguiat is held solidarily liable for corporate tort because he had actively engaged in the management and operation
of CFTI, a close corporation.
Antolin Naguiat not personally liable
Antolin T. Naguiat was the vice president of the CFTI. Although he carried the title of "general manager" as well, it had
not been shown that he had acted in such capacity. Furthermore, no evidence on the extent of his participation in the
management or operation of the business was preferred. In this light, he cannot be held solidarily liable for the
obligations of CFTI and Sergio Naguiat to the private respondents.
Fourth Issue: No Denial of Due Process
Lastly, in petitioners' Supplement to their original petition, they assail the NLRC Resolution holding Sergio F. Naguiat
and Antolin T. Naguiat jointly and severally liable with petitioner-corporations in the payment of separation pay,
averring denial of due process since the individual Naguiats were not impleaded as parties to the complaint.
We advert to the case of A.C. Ransom once more. The officers of the corporation were not parties to the case when
the judgment in favor of the employees was rendered. The corporate officers raised this issue when the labor arbiter
granted the motion of the employees to enforce the judgment against them. In spite of this, the Court held the
corporation president solidarily liable with the corporation.
Furthermore, Sergio and Antolin Naguiat voluntarily submitted themselves to the jurisdiction of the labor arbiter when
40
they, in their individual capacities, filed a position paper together with CFTI, before the arbiter. They cannot now
claim to have been denied due process since they availed of the opportunity to present their positions.
WHEREFORE, the foregoing premises considered, the petition is PARTLY GRANTED. The assailed February 28,
1994 Resolution of the NLRC is hereby MODIFIED as follows:
(1) Petitioner Clark Field Taxi, Incorporated, and Sergio F. Naguiat, president and co-owner thereof, are ORDERED to
pay, jointly and severally, the individual respondents their separation pay computed at US$120.00 for every year of
service, or its peso equivalent at the time of payment or satisfaction of the judgment;
(2) Petitioner Sergio F. Naguiat Enterprises, Incorporated, and Antolin T. Naguiat are ABSOLVED from liability in the
payment of separation pay to individual respondents.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Francisco, JJ., concur.
Footnotes

Corporate Law Case Digest: PNB V. CA (1978)

G.R. No. L-27155 May 18, 1978
Lessons Applicable: Liability for Torts (Corporate Law)

FACTS:

PNB executed its bond w/ Rita Gueco Tapnio as principal, in favor of the PNB to guarantee the payment of Tapnio's
account with PNB.

Indemnity Agreement w/ 12% int. and 15% atty. fees

Sept 18 1957: PNB sent a letter of demand for Tapnio to pay the reduced amount of 2,379.91

PNB demanded both oral and written but to no avail

Tapnio mortgaged to the bank her lease agreement w/ Jacobo Tuazon for her unused export sugar quota at P2.80 per
picular or a total of P2,800 which was more than the value of the bond

PNB insisted on raising it to P3.00 per picular so Tuazon rejected the offer

ISSUE: W/N PNB should be liable for tort

HELD: YES. affirmed.

While Tapnio had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to the bank, it certainly CANNOT escape its responsibility of observing, for the protection of the interest of
Tapnio and Tuazon, that the degree of care, precaution and vigilance which the circumstances justly demand in
approving or disapproving the lease of said sugar quota

Art. 21 of the Civil Code: any person who wilfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy shall compensate the latter for the damage.

G.R. No. L-27155 May 18, 1978

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE PHILIPPINE AMERICAN
GENERAL INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.

ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court of First Instance of
Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant, to pay respondent Rita Gueco Tapnio, as
third-party plaintiff, the sum of P2,379.71, plus 12% interest per annum from September 19, 1957 until the same is
fully paid, P200.00 attorney's fees and costs, the same amounts which Rita Gueco Tapnio was ordered to pay the
Philippine American General Insurance Co., Inc., to be paid directly to the Philippine American General Insurance Co.,
Inc. in full satisfaction of the judgment rendered against Rita Gueco Tapnio in favor of the former; plus P500.00
attorney's fees for Rita Gueco Tapnio and costs. The basic action is the complaint filed by Philamgen (Philippine
American General Insurance Co., Inc.) as surety against Rita Gueco Tapnio and Cecilio Gueco, for the recovery of the
sum of P2,379.71 paid by Philamgen to the Philippine National Bank on behalf of respondents Tapnio and Gueco,
pursuant to an indemnity agreement. Petitioner Bank was made third-party defendant by Tapnio and Gueco on the
theory that their failure to pay the debt was due to the fault or negligence of petitioner.
The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of First Instance of
Manila, are quoted hereunder:
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal, in favor of the
Philippine National Bank Branch at San Fernando, Pampanga, to guarantee the payment of
defendant Rita Gueco Tapnio's account with said Bank. In turn, to guarantee the payment of whatever
amount the bonding company would pay to the Philippine National Bank, both defendants executed
the indemnity agreement, Exh. B. Under the terms and conditions of this indemnity agreement,
whatever amount the plaintiff would pay would earn interest at the rate of 12% per annum, plus
attorney's fees in the amount of 15 % of the whole amount due in case of court litigation.
The original amount of the bond was for P4,000.00; but the amount was later reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in the sum of P2,000.00,
plus accumulated interests unpaid, which she failed to pay despite demands. The Bank wrote a letter
of demand to plaintiff, as per Exh. C; whereupon, plaintiff paid the bank on September 18, 1957, the
full amount due and owing in the sum of P2,379.91, for and on account of defendant Rita Gueco's
obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written, upon defendants (Exhs. E and F),
but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims, however, when demand
was made upon her by plaintiff for her to pay her debt to the Bank, that she told the Plaintiff that she
did not consider herself to be indebted to the Bank at all because she had an agreement with one
Jacobo-Nazon whereby she had leased to the latter her unused export sugar quota for the 1956-1957
agricultural year, consisting of 1,000 piculs at the rate of P2.80 per picul, or for a total of P2,800.00,
which was already in excess of her obligation guaranteed by plaintiff's bond, Exh. A. This lease
agreement, according to her, was with the knowledge of the bank. But the Bank has placed obstacles
to the consummation of the lease, and the delay caused by said obstacles forced 'Nazon to rescind
the lease contract. Thus, Rita Gueco Tapnio filed her third-party complaint against the Bank to
recover from the latter any and all sums of money which may be adjudged against her and in favor of
the plaitiff plus moral damages, attorney's fees and costs.
Insofar as the contentions of the parties herein are concerned, we quote with approval the following
findings of the lower court based on the evidence presented at the trial of the case:

It has been established during the trial that Mrs. Tapnio had an export sugar quota of
1,000 piculs for the agricultural year 1956-1957 which she did not need. She agreed
to allow Mr. Jacobo C. Tuazon to use said quota for the consideration of P2,500.00
(Exh. "4"-Gueco). This agreement was called a contract of lease of sugar allotment.
At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National
Bank at San Fernando, Pampanga. Her indebtedness was known as a crop loan and
was secured by a mortgage on her standing crop including her sugar quota allocation
for the agricultural year corresponding to said standing crop. This arrangement was
necessary in order that when Mrs. Tapnio harvests, the P.N.B., having a lien on the
crop, may effectively enforce collection against her. Her sugar cannot be exported
without sugar quota allotment Sometimes, however, a planter harvest less sugar than
her quota, so her excess quota is utilized by another who pays her for its use. This is
the arrangement entered into between Mrs. Tapnio and Mr. Tuazon regarding the
former's excess quota for 1956-1957 (Exh. "4"-Gueco).
Since the quota was mortgaged to the P.N.B., the contract of lease had to be
approved by said Bank, The same was submitted to the branch manager at San
Fernando, Pampanga. The latter required the parties to raise the consideration of
P2.80 per picul or a total of P2,800.00 (Exh. "2-Gueco") informing them that "the
minimum lease rental acceptable to the Bank, is P2.80 per picul." In a letter
addressed to the branch manager on August 10, 1956, Mr. Tuazon informed the
manager that he was agreeable to raising the consideration to P2.80 per picul. He
further informed the manager that he was ready to pay said amount as the funds
were in his folder which was kept in the bank.
Explaining the meaning of Tuazon's statement as to the funds, it was stated by him
that he had an approved loan from the bank but he had not yet utilized it as he was
intending to use it to pay for the quota. Hence, when he said the amount needed to
pay Mrs. Tapnio was in his folder which was in the bank, he meant and the manager
understood and knew he had an approved loan available to be used in payment of
the quota. In said Exh. "6-Gueco", Tuazon also informed the manager that he would
want for a notice from the manager as to the time when the bank needed the money
so that Tuazon could sign the corresponding promissory note.
Further Consideration of the evidence discloses that when the branch manager of the Philippine
National Bank at San Fernando recommended the approval of the contract of lease at the price of
P2.80 per picul (Exh. 1 1-Bank), whose recommendation was concurred in by the Vice-president of
said Bank, J. V. Buenaventura, the board of directors required that the amount be raised to 13.00 per
picul. This act of the board of directors was communicated to Tuazon, who in turn asked for a
reconsideration thereof. On November 19, 1956, the branch manager submitted Tuazon's request for
reconsideration to the board of directors with another recommendation for the approval of the lease at
P2.80 per picul, but the board returned the recommendation unacted upon, considering that the
current price prevailing at the time was P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board of directors of the Bank to grant the
motion for reconsideration. The matter stood as it was until February 22, 1957, when Tuazon wrote a
letter (Exh. 10-Bank informing the Bank that he was no longer interested to continue the deal,
referring to the lease of sugar quota allotment in favor of defendant Rita Gueco Tapnio. The result is
that the latter lost the sum of P2,800.00 which she should have received from Tuazon and which she
could have paid the Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that failure of the negotiation for the lease of the
sugar quota allocation of Rita Gueco Tapnio to Tuazon was due to the fault of the directors of the
Philippine National Bank, The refusal on the part of the bank to approve the lease at the rate of P2.80
per picul which, as stated above, would have enabled Rita Gueco Tapnio to realize the amount of
P2,800.00 which was more than sufficient to pay off her indebtedness to the Bank, and its insistence
on the rental price of P3.00 per picul thus unnecessarily increasing the value by only a difference of
P200.00. inevitably brought about the rescission of the lease contract to the damage and prejudice of
Rita Gueco Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of the position adopted
by the board of directors of the Philippine National Bank in refusing to approve the lease at the rate of
P2.80 per picul and insisting on the rate of P3.00 per picul, if only to increase the retail value by only
P200.00 is shown by the fact that all the accounts of Rita Gueco Tapnio with the Bank were secured
by chattel mortgage on standing crops, assignment of leasehold rights and interests on her
properties, and surety bonds, aside from the fact that from Exh. 8-Bank, it appears that she was

offering to execute a real estate mortgage in favor of the Bank to replace the surety bond This
statement is further bolstered by the fact that Rita Gueco Tapnio apparently had the means to pay her
obligation fact that she has been granted several value of almost P80,000.00 for the agricultural years
1
from 1952 to 56.
Its motion for the reconsideration of the decision of the Court of Appeals having been denied, petitioner filed the
present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota allocation of respondent Rita
Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified refusal of petitioner to approve said lease contract, and
its unreasonable insistence on the rental price of P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the possession of the
petitioner, the latter's Board of Directors correctly fixed the rental of price per picul of 1,000 piculs of sugar quota
leased by respondent Rita Gueco Tapnio to Jacobo C. Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under its own Charter and
under the Corporation Law, to safeguard and protect its rights and interests under the deed of assignment, which
include the right to approve or disapprove the said lease of sugar quota and in the exercise of that authority, its
Board of Directors necessarily had authority to determine and fix the rental price per picul of the sugar quota subject of
the lease between private respondents and Jacobo C. Tuazon. It argued further that both under its Charter and the
Corporation Law, petitioner, acting thru its Board of Directors, has the perfect right to adopt a policy with respect to
fixing of rental prices of export sugar quota allocations, and in fixing the rentals at P3.00 per picul, it did not act
arbitrarily since the said Board was guided by statistics of sugar price and prices of sugar quotas prevailing at the
time. Since the fixing of the rental of the sugar quota is a function lodged with petitioner's Board of Directors and is a
matter of policy, the respondent Court of Appeals could not substitute its own judgment for that of said Board of
Directors, which acted in good faith, making as its basis therefore the prevailing market price as shown by statistics
which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great injustice because as a creditor,
it shall be deprived of a just claim against its debtor (respondent Rita Gueco Tapnio) as it would be required to return
to respondent Philamgen the sum of P2,379.71, plus interest, which amount had been previously paid to petitioner by
said insurance company in behalf of the principal debtor, herein respondent Rita Gueco Tapnio, and without recourse
against respondent Rita Gueco Tapnio.
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature is limited to reviewing
only errors of law, accepting as conclusive the factual fin dings of the Court of Appeals upon its own assessment of
2
the evidence.
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio and Jacobo C. Tuazon
was executed on April 17, 1956. This contract was submitted to the Branch Manager of the Philippine National Bank
at San Fernando, Pampanga. This arrangement was necessary because Tapnio's indebtedness to petitioner was
secured by a mortgage on her standing crop including her sugar quota allocation for the agricultural year
corresponding to said standing crop. The latter required the parties to raise the consideration to P2.80 per picul, the
minimum lease rental acceptable to the Bank, or a total of P2,800.00. Tuazon informed the Branch Manager, thru a
letter dated August 10, 1956, that he was agreeable to raising the consideration to P2.80 per picul. He further
informed the manager that he was ready to pay the said sum of P2,800.00 as the funds were in his folder which was
kept in the said Bank. This referred to the approved loan of Tuazon from the Bank which he intended to use in paying
for the use of the sugar quota. The Branch Manager submitted the contract of lease of sugar quota allocation to the
Head Office on September 7, 1956, with a recommendation for approval, which recommendation was concurred in by
the Vice-President of the Bank, Mr. J. V. Buenaventura. This notwithstanding, the Board of Directors of petitioner
required that the consideration be raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for a reconsideration thereof. On
November 19, 1956, the Branch Manager submitted the request for reconsideration and again recommended the
approval of the lease at P2.80 per picul, but the Board returned the recommendation unacted, stating that the current
price prevailing at that time was P3.00 per picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer interested in continuing the
lease of sugar quota allotment. The crop year 1956-1957 ended and Mrs. Tapnio failed to utilize her sugar quota,

resulting in her loss in the sum of P2,800.00 which she should have received had the lease in favor of Tuazon been
implemented.
It has been clearly shown that when the Branch Manager of petitioner required the parties to raise the consideration of
the lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they readily agreed. Hence, in his letter to the Branch
Manager of the Bank on August 10, 1956, Tuazon informed him that the minimum lease rental of P2.80 per picul was
acceptable to him and that he even offered to use the loan secured by him from petitioner to pay in full the sum of
P2,800.00 which was the total consideration of the lease. This arrangement was not only satisfactory to the Branch
Manager but it was also approves by Vice-President J. V. Buenaventura of the PNB. Under that arrangement, Rita
Gueco Tapnio could have realized the amount of P2,800.00, which was more than enough to pay the balance of her
indebtedness to the Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957 was due to the
disapproval of the lease by the Board of Directors of petitioner. The issue, therefore, is whether or not petitioner is
liable for the damage caused.
As observed by the trial court, time is of the essence in the approval of the lease of sugar quota allotments, since the
same must be utilized during the milling season, because any allotment which is not filled during such milling season
3
may be reallocated by the Sugar Quota Administration to other holders of allotments. There was no proof that there
was any other person at that time willing to lease the sugar quota allotment of private respondents for a price higher
than P2.80 per picul. "The fact that there were isolated transactions wherein the consideration for the lease was P3.00
a picul", according to the trial court, "does not necessarily mean that there are always ready takers of said price. " The
unreasonableness of the position adopted by the petitioner's Board of Directors is shown by the fact that the difference
between the amount of P2.80 per picul offered by Tuazon and the P3.00 per picul demanded by the Board amounted
only to a total sum of P200.00. Considering that all the accounts of Rita Gueco Tapnio with the Bank were secured by
chattel mortgage on standing crops, assignment of leasehold rights and interests on her properties, and surety bonds
and that she had apparently "the means to pay her obligation to the Bank, as shown by the fact that she has been
granted several sugar crop loans of the total value of almost P80,000.00 for the agricultural years from 1952 to 1956",
there was no reasonable basis for the Board of Directors of petitioner to have rejected the lease agreement because
of a measly sum of P200.00.
While petitioner had the ultimate authority of approving or disapproving the proposed lease since the quota was
mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for the protection of the
interest of private respondents, that degree of care, precaution and vigilance which the circumstances justly demand
in approving or disapproving the lease of said sugar quota. The law makes it imperative that every person "must in the
exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe
4
honesty and good faith, This petitioner failed to do. Certainly, it knew that the agricultural year was about to expire,
that by its disapproval of the lease private respondents would be unable to utilize the sugar quota in question. In failing
to observe the reasonable degree of care and vigilance which the surrounding circumstances reasonably impose,
petitioner is consequently liable for the damages caused on private respondents. Under Article 21 of the New Civil
Code, "any person who wilfully causes loss or injury to another in a manner that is contrary to morals, good customs
or public policy shall compensate the latter for the damage." The afore-cited provisions on human relations were
intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy for the untold number of
5
moral wrongs which is impossible for human foresight to specifically provide in the statutes.
A corporation is civilly liable in the same manner as natural persons for torts, because "generally speaking, the rules
governing the liability of a principal or master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which he expressly directs or
authorizes, and this is just as true of a corporation as of a natural person, A corporation is liable, therefore, whenever
a tortious act is committed by an officer or agent under express direction or authority from the stockholders or
6
members acting as a body, or, generally, from the directors as the governing body."
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.

PCIB V. CA
350 SCRA 446

FACTS:
Ford Philippines filed actions to recover from the drawee bank Citibank and
collecting bank PCIB the value of several checks payable to the Commissioner of Internal Revenue which
were embezzled allegedly by an organized syndicate. What prompted this action was the drawing of a
check by Ford, which it deposited to PCIB as payment and was debited from their Citibank account. It later on
found out that the payment wasnt received by the Commissioner. Meanwhile, according to the NBI report, one
of the checks issued by petitioner was withdrawn from PCIB for alleged mistake in the amount to be paid. This was
replaced with managers check by PCIB, which were allegedly stolen by the syndicate and deposited in their
own account.
The trial court decided in favor of Ford.

ISSUE:
Has Ford the right to recover the value of the checks intended as payment to CIR?

HELD:
The checks were drawn against the drawee bank but the title of the person negotiating the same was allegedly
defective because the instrument was obtained by fraud and unlawful means, and the proceeds of the checks
were not remitted to the payee. It was established that instead paying the
Commissioner, the checks were diverted and encashed for the eventual distribution among members of the
syndicate.
Pursuant to this, it is vital to show that the negotiation is made by the perpetrator in breach of faith amounting
to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If the
principal could prove that there was no negligence in the performance
of his duties, he may set up the personal defense to escape liability and recover from other parties who,
through their own negligence, allowed the commission of the crime.
It should be resolved if Ford is guilty of the imputed contributory negligence that would defeat its claim for
reimbursement, bearing in mind that its employees were among the members of the syndicate. It appears
although the employees of Ford initiated the transactions attributable to
the organized syndicate, their actions were not the proximate cause of
encashing the checks payable to CIR. The degree of Fords negligence couldnt be characterized as the
proximate cause of the injury to parties. The mere fact that the forgery was committed by a drawer-payors
confidential employee or agent, who by virtue of his position had unusual facilities for perpetrating the fraud and
imposing the forged paper upon the bank, doesnt entitle the bank to shift the loss to the drawer-payor, in the absence
of some circumstance raising estoppel against the drawer.
Note: not only PCIB but also Citibank is responsible for negligence. Citibank was negligent in the performance
of its duties as a drawee bank. It failed to establish its payments of Fords checks were made in due course
and legally in order.

G.R. No. 121413

January 29, 2001

PHILIPPINE COMMERCIAL INTERNATIONAL BANK (formerly INSULAR BANK OF ASIA AND

AMERICA),petitioner,
vs.
COURT OF APPEALS and FORD PHILIPPINES, INC. and CITIBANK, N.A., respondents.

G.R. No. 121479

January 29, 2001

FORD PHILIPPINES, INC., petitioner-plaintiff,

vs.
COURT OF APPEALS and CITIBANK, N.A. and PHILIPPINE COMMERCIAL INTERNATIONAL
BANK,respondents.

G.R. No. 128604

January 29, 2001

FORD PHILIPPINES, INC., petitioner,

vs.
CITIBANK, N.A., PHILIPPINE COMMERCIAL INTERNATIONAL BANK and COURT OF APPEALS, respondents.
QUISUMBING, J.:
These consolidated petitions involve several fraudulently negotiated checks.
The original actions a quo were instituted by Ford Philippines to recover from the drawee bank, CITIBANK, N.A.
(Citibank) and collecting bank, Philippine Commercial International Bank (PCIBank) [formerly Insular Bank of Asia and
America], the value of several checks payable to the Commissioner of Internal Revenue, which were embezzled
allegedly by an organized syndicate.1wphi1.nt
1

G.R. Nos. 121413 and 121479 are twin petitions for review of the March 27, 1995 Decision of the Court of Appeals in
CA-G.R. CV No. 25017, entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Insular Bank of Asia and America (now
2
Philipppine Commercial International Bank), and the August 8, 1995 Resolution, ordering the collecting bank,
Philippine Commercial International Bank, to pay the amount of Citibank Check No. SN-04867.
3

In G.R. No. 128604, petitioner Ford Philippines assails the October 15, 1996 Decision of the Court of Appeals and its
4
March 5, 1997 Resolution in CA-G.R. No. 28430 entitled "Ford Philippines, Inc. vs. Citibank, N.A. and Philippine
Commercial International Bank," affirming in toto the judgment of the trial court holding the defendant drawee bank,
Citibank, N.A., solely liable to pay the amount of P12,163,298.10 as damages for the misapplied proceeds of the
plaintiff's Citibanl Check Numbers SN-10597 and 16508.
I. G.R. Nos. 121413 and 121479
The stipulated facts submitted by the parties as accepted by the Court of Appeals are as follows:
"On October 19, 1977, the plaintiff Ford drew and issued its Citibank Check No. SN-04867 in the amount of
P4,746,114.41, in favor of the Commissioner of Internal Revenue as payment of plaintiff;s percentage or
manufacturer's sales taxes for the third quarter of 1977.
The aforesaid check was deposited with the degendant IBAA (now PCIBank) and was subsequently cleared
at the Central Bank. Upon presentment with the defendant Citibank, the proceeds of the check was paid to
IBAA as collecting or depository bank.
The proceeds of the same Citibank check of the plaintiff was never paid to or received by the payee thereof,
the Commissioner of Internal Revenue.
As a consequence, upon demand of the Bureau and/or Commissioner of Internal Revenue, the plaintiff was
compelled to make a second payment to the Bureau of Internal Revenue of its percentage/manufacturers'
sales taxes for the third quarter of 1977 and that said second payment of plaintiff in the amount of
P4,746,114.41 was duly received by the Bureau of Internal Revenue.

It is further admitted by defendant Citibank that during the time of the transactions in question, plaintiff had
been maintaining a checking account with defendant Citibank; that Citibank Check No. SN-04867 which was
drawn and issued by the plaintiff in favor of the Commissioner of Internal Revenue was a crossed check in
that, on its face were two parallel lines and written in between said lines was the phrase "Payee's Account
Only"; and that defendant Citibank paid the full face value of the check in the amount of P4,746,114.41 to the
defendant IBAA.
It has been duly established that for the payment of plaintiff's percentage tax for the last quarter of 1977, the
Bureau of Internal Revenue issued Revenue Tax Receipt No. 18747002, dated October 20, 1977, designating
therein in Muntinlupa, Metro Manila, as the authorized agent bank of Metrobanl, Alabang branch to receive
the tax payment of the plaintiff.
On December 19, 1977, plaintiff's Citibank Check No. SN-04867, together with the Revenue Tax Receipt No.
18747002, was deposited with defendant IBAA, through its Ermita Branch. The latter accepted the check and
sent it to the Central Clearing House for clearing on the samd day, with the indorsement at the back "all prior
indorsements and/or lack of indorsements guaranteed." Thereafter, defendant IBAA presented the check for
payment to defendant Citibank on same date, December 19, 1977, and the latter paid the face value of the
check in the amount of P4,746,114.41. Consequently, the amount of P4,746,114.41 was debited in plaintiff's
account with the defendant Citibank and the check was returned to the plaintiff.
Upon verification, plaintiff discovered that its Citibank Check No. SN-04867 in the amount of P4,746,114.41
was not paid to the Commissioner of Internal Revenue. Hence, in separate letters dated October 26, 1979,
addressed to the defendants, the plaintiff notified the latter that in case it will be re-assessed by the BIR for
the payment of the taxes covered by the said checks, then plaintiff shall hold the defendants liable for
reimbursement of the face value of the same. Both defendants denied liability and refused to pay.
In a letter dated February 28, 1980 by the Acting Commissioner of Internal Revenue addressed to the plaintiff
- supposed to be Exhibit "D", the latter was officially informed, among others, that its check in the amount of
P4, 746,114.41 was not paid to the government or its authorized agent and instead encashed by unauthorized
persons, hence, plaintiff has to pay the said amount within fifteen days from receipt of the letter. Upon advice
of the plaintiff's lawyers, plaintiff on March 11, 1982, paid to the Bureau of Internal Revenue, the amount of
P4,746,114.41, representing payment of plaintiff's percentage tax for the third quarter of 1977.
As a consequence of defendant's refusal to reimburse plaintiff of the payment it had made for the second time
to the BIR of its percentage taxes, plaintiff filed on January 20, 1983 its original complaint before this Court.
On December 24, 1985, defendant IBAA was merged with the Philippine Commercial International Bank (PCI
Bank) with the latter as the surviving entity.
Defendant Citibank maintains that; the payment it made of plaintiff's Citibank Check No. SN-04867 in the
amount of P4,746,114.41 "was in due course"; it merely relied on the clearing stamp of the
depository/collecting bank, the defendant IBAA that "all prior indorsements and/or lack of indorsements
guaranteed"; and the proximate cause of plaintiff's injury is the gross negligence of defendant IBAA in
indorsing the plaintiff's Citibank check in question.
It is admitted that on December 19, 1977 when the proceeds of plaintiff's Citibank Check No. SN-048867 was
paid to defendant IBAA as collecting bank, plaintiff was maintaining a checking account with defendant
5
Citibank."
Although it was not among the stipulated facts, an investigation by the National Bureau of Investigation (NBI) revealed
that Citibank Check No. SN-04867 was recalled by Godofredo Rivera, the General Ledger Accountant of Ford. He
purportedly needed to hold back the check because there was an error in the computation of the tax due to the
Bureau of Internal Revenue (BIR). With Rivera's instruction, PCIBank replaced the check with two of its own
Manager's Checks (MCs). Alleged members of a syndicate later deposited the two MCs with the Pacific Banking
Corporation.
Ford, with leave of court, filed a third-party complaint before the trial court impleading Pacific Banking Corporation
(PBC) and Godofredo Rivera, as third party defendants. But the court dismissed the complaint against PBC for lack of
cause of action. The course likewise dismissed the third-party complaint against Godofredo Rivera because he could
not be served with summons as the NBI declared him as a "fugitive from justice".
On June 15, 1989, the trial court rendered its decision, as follows:
"Premises considered, judgment is hereby rendered as follows:

"1. Ordering the defendants Citibank and IBAA (now PCI Bank), jointly and severally, to pay the
plaintiff the amount of P4,746,114.41 representing the face value of plaintiff's Citibank Check No. SN04867, with interest thereon at the legal rate starting January 20, 1983, the date when the original
complaint was filed until the amount is fully paid, plus costs;
"2. On defendant Citibank's cross-claim: ordering the cross-defendant IBAA (now PCI Bank) to
reimburse defendant Citibank for whatever amount the latter has paid or may pay to the plaintiff in
accordance with next preceding paragraph;
"3. The counterclaims asserted by the defendants against the plaintiff, as well as that asserted by the
cross-defendant against the cross-claimant are dismissed, for lack of merits; and
"4. With costs against the defendants.
6

SO ORDERED."

Not satisfied with the said decision, both defendants, Citibank and PCIBank, elevated their respective petitions for
review on certiorari to the Courts of Appeals. On March 27, 1995, the appellate court issued its judgment as follows:
"WHEREFORE, in view of the foregoing, the court AFFIRMS the appealed decision with modifications.
The court hereby renderes judgment:
1. Dismissing the complaint in Civil Case No. 49287 insofar as defendant Citibank N.A. is concerned;
2. Ordering the defendant IBAA now PCI Bank to pay the plaintiff the amount of P4,746,114.41
representing the face value of plaintiff's Citibank Check No. SN-04867, with interest thereon at the
legal rate starting January 20, 1983, the date when the original complaint was filed until the amount is
fully paid;
3. Dismissing the counterclaims asserted by the defendants against the plaintiff as well as that
asserted by the cross-defendant against the cross-claimant, for lack of merits.
Costs against the defendant IBAA (now PCI Bank).
IT IS SO ORDERED."

PCI Bank moved to reconsider the above-quoted decision of the Court of Appeals, while Ford filed a "Motion for
Partial Reconsideration." Both motions were denied for lack of merit.
Separately, PCIBank and Ford filed before this Court, petitions for review by certiorari under Rule 45.
In G.R. No. 121413, PCIBank seeks the reversal of the decision and resolution of the Twelfth Division of the Court of
Appeals contending that it merely acted on the instruction of Ford and such casue of action had already prescribed.
PCIBank sets forth the following issues for consideration:
I. Did the respondent court err when, after finding that the petitioner acted on the check drawn by respondent
Ford on the said respondent's instructions, it nevertheless found the petitioner liable to the said respondent for
the full amount of the said check.
II. Did the respondent court err when it did not find prescription in favor of the petitioner.

In a counter move, Ford filed its petition docketed as G.R. No. 121479, questioning the same decision and resolution
of the Court of Appeals, and praying for the reinstatement in toto of the decision of the trial court which found both
PCIBank and Citibank jointly and severally liable for the loss.
In G.R. No. 121479, appellant Ford presents the following propositions for consideration:
I. Respondent Citibank is liable to petitioner Ford considering that:

1. As drawee bank, respondent Citibank owes to petitioner Ford, as the drawer of the subject check
and a depositor of respondent Citibank, an absolute and contractual duty to pay the proceeds of the
subject check only to the payee thereof, the Commissioner of Internal Revenue.
2. Respondent Citibank failed to observe its duty as banker with respect to the subject check, which
was crossed and payable to "Payee's Account Only."
3. Respondent Citibank raises an issue for the first time on appeal; thus the same should not be
considered by the Honorable Court.
4. As correctly held by the trial court, there is no evidence of gross negligence on the part of petitioner
9
Ford.
II. PCI Bank is liable to petitioner Ford considering that:
1. There were no instructions from petitioner Ford to deliver the proceeds of the subject check to a
person other than the payee named therein, the Commissioner of the Bureau of Internal Revenue;
thus, PCIBank's only obligation is to deliver the proceeds to the Commissioner of the Bureau of
10
Internal Revenue.
2. PCIBank which affixed its indorsement on the subject check ("All prior indorsement and/or lack of
11
indorsement guaranteed"), is liable as collecting bank.
3. PCIBank is barred from raising issues of fact in the instant proceedings.
4. Petitioner Ford's cause of action had not prescribed.

12

13

II. G.R. No. 128604

The same sysndicate apparently embezzled the proceeds of checks intended, this time, to settle Ford's percentage
taxes appertaining to the second quarter of 1978 and the first quarter of 1979.
The facts as narrated by the Court of Appeals are as follows:
Ford drew Citibank Check No. SN-10597 on July 19, 1978 in the amount of P5,851,706.37 representing the
percentage tax due for the second quarter of 1978 payable to the Commissioner of Internal Revenue. A BIR Revenue
Tax Receipt No. 28645385 was issued for the said purpose.
On April 20, 1979, Ford drew another Citibank Check No. SN-16508 in the amount of P6,311,591.73, representing the
payment of percentage tax for the first quarter of 1979 and payable to the Commissioner of Internal Revenue. Again a
BIR Revenue Tax Receipt No. A-1697160 was issued for the said purpose.
Both checks were "crossed checks" and contain two diagonal lines on its upper corner between, which were written
the words "payable to the payee's account only."
The checks never reached the payee, CIR. Thus, in a letter dated February 28, 1980, the BIR, Region 4-B, demanded
for the said tax payments the corresponding periods above-mentioned.
As far as the BIR is concernced, the said two BIR Revenue Tax Receipts were considered "fake and spurious". This
anomaly was confirmed by the NBI upon the initiative of the BIR. The findings forced Ford to pay the BIR a new, while
an action was filed against Citibank and PCIBank for the recovery of the amount of Citibank Check Numbers SN10597 and 16508.
The Regional Trial Court of Makati, Branch 57, which tried the case, made its findings on the modus operandi of the
syndicate, as follows:
"A certain Mr. Godofredo Rivera was employed by the plaintiff FORD as its General Ledger Accountant. As
such, he prepared the plaintiff's check marked Ex. 'A' [Citibank Check No. Sn-10597] for payment to the BIR.
Instead, however, fo delivering the same of the payee, he passed on the check to a co-conspirator named
Remberto Castro who was a pro-manager of the San Andres Branch of PCIB.* In connivance with one
Winston Dulay, Castro himself subsequently opened a Checking Account in the name of a fictitious person
denominated as 'Reynaldo reyes' in the Meralco Branch of PCIBank where Dulay works as Assistant
Manager.

After an initial deposit of P100.00 to validate the account, Castro deposited a worthless Bank of America
Check in exactly the same amount as the first FORD check (Exh. "A", P5,851,706.37) while this worthless
check was coursed through PCIB's main office enroute to the Central Bank for clearing, replaced this
worthless check with FORD's Exhibit 'A' and accordingly tampered the accompanying documents to cover the
replacement. As a result, Exhibit 'A' was cleared by defendant CITIBANK, and the fictitious deposit account of
'Reynaldo Reyes' was credited at the PCIB Meralco Branch with the total amount of the FORD check Exhibit
'A'. The same method was again utilized by the syndicate in profiting from Exh. 'B' [Citibank Check No. SN16508] which was subsequently pilfered by Alexis Marindo, Rivera's Assistant at FORD.
From this 'Reynaldo Reyes' account, Castro drew various checks distributing the sahres of the other
participating conspirators namely (1) CRISANTO BERNABE, the mastermind who formulated the method for
the embezzlement; (2) RODOLFO R. DE LEON a customs broker who negotiated the initial contact between
Bernabe, FORD's Godofredo Rivera and PCIB's Remberto Castro; (3) JUAN VASTILLO who assisted de
Leon in the initial arrangements; (4) GODOFREDO RIVERA, FORD's accountant who passed on the first
check (Exhibit "A") to Castro; (5) REMERTO CASTRO, PCIB's pro-manager at San Andres who performed
the switching of checks in the clearing process and opened the fictitious Reynaldo Reyes account at the PCIB
Meralco Branch; (6) WINSTON DULAY, PCIB's Assistant Manager at its Meralco Branch, who assisted
Castro in switching the checks in the clearing process and facilitated the opening of the fictitious Reynaldo
Reyes' bank account; (7) ALEXIS MARINDO, Rivera's Assistant at FORD, who gave the second check (Exh.
"B") to Castro; (8) ELEUTERIO JIMENEZ, BIR Collection Agent who provided the fake and spurious revenue
tax receipts to make it appear that the BIR had received FORD's tax payments.
Several other persons and entities were utilized by the syndicate as conduits in the disbursements of the
proceeds of the two checks, but like the aforementioned participants in the conspiracy, have not been
impleaded in the present case. The manner by which the said funds were distributed among them are
traceable from the record of checks drawn against the original "Reynaldo Reyes" account and indubitably
14
identify the parties who illegally benefited therefrom and readily indicate in what amounts they did so."
On December 9, 1988, Regional Trial Court of Makati, Branch 57, held drawee-bank, Citibank, liable for the value of
the two checks while adsolving PCIBank from any liability, disposing as follows:
"WHEREFORE, judgment is hereby rendered sentencing defendant CITIBANK to reimburse plaintiff FORD
the total amount of P12,163,298.10 prayed for in its complaint, with 6% interest thereon from date of first
written demand until full payment, plus P300,000.00 attorney's fees and expenses litigation, and to pay the
defendant, PCIB (on its counterclaim to crossclaim) the sum of P300,000.00 as attorney's fees and costs of
litigation, and pay the costs.
15

SO ORDERED."

Both Ford and Citibank appealed to the Court of Appeals which affirmed, in toto, the decision of the trial court. Hence,
this petition.
Petitioner Ford prays that judgment be rendered setting aside the portion of the Court of Appeals decision and its
resolution dated March 5, 1997, with respect to the dismissal of the complaint against PCIBank and holding Citibank
solely responsible for the proceeds of Citibank Check Numbers SN-10597 and 16508 for P5,851,706.73 and
P6,311,591.73 respectively.
Ford avers that the Court of Appeals erred in dismissing the complaint against defendant PCIBank considering that:
I. Defendant PCIBank was clearly negligent when it failed to exercise the diligence required to be exercised by
it as a banking insitution.
II. Defendant PCIBank clearly failed to observe the diligence required in the selection and supervision of its
officers and employees.
III. Defendant PCIBank was, due to its negligence, clearly liable for the loss or damage resulting to the plaintiff
Ford as a consequence of the substitution of the check consistent with Section 5 of Central Bank Circular No.
580 series of 1977.
IV. Assuming arguedo that defedant PCIBank did not accept, endorse or negotiate in due course the subject
checks, it is liable, under Article 2154 of the Civil Code, to return the money which it admits having received,
16
and which was credited to it its Central bank account.

The main issue presented for our consideration by these petitions could be simplified as follows: Has petitioner Ford
the right to recover from the collecting bank (PCIBank) and the drawee bank (Citibank) the value of the checks
intended as payment to the Commissioner of Internal Revenue? Or has Ford's cause of action already prescribed?
Note that in these cases, the checks were drawn against the drawee bank, but the title of the person negotiating the
same was allegedly defective because the instrument was obtained by fraud and unlawful means, and the proceeds of
the checks were not remitted to the payee. It was established that instead of paying the checks to the CIR, for the
settlement of the approprite quarterly percentage taxes of Ford, the checks were diverted and encashed for the
eventual distribution among the mmbers of the syndicate. As to the unlawful negotiation of the check the applicable
law is Section 55 of the Negotiable Instruments Law (NIL), which provides:
"When title defective -- The title of a person who negotiates an instrument is defective within the meaning of
this Act when he obtained the instrument, or any signature thereto, by fraud, duress, or fore and fear, or other
unlawful means, or for an illegal consideration, or when he negotiates it in breach of faith or under such
circumstances as amount to a fraud."
Pursuant to this provision, it is vital to show that the negotiation is made by the perpetator in breach of faith amounting
to fraud. The person negotiating the checks must have gone beyond the authority given by his principal. If the principal
could prove that there was no negligence in the performance of his duties, he may set up the personal defense to
escape liability and recover from other parties who. Though their own negligence, alowed the commission of the
crime.
In this case, we note that the direct perpetrators of the offense, namely the embezzlers belonging to a syndicate, are
now fugitives from justice. They have, even if temporarily, escaped liability for the embezzlement of millions of pesos.
We are thus left only with the task of determining who of the present parties before us must bear the burden of loss of
these millions. It all boils down to thequestion of liability based on the degree of negligence among the parties
concerned.
Foremost, we must resolve whether the injured party, Ford, is guilty of the "imputed contributory negligence" that
would defeat its claim for reimbursement, bearing ing mind that its employees, Godofredo Rivera and Alexis Marindo,
were among the members of the syndicate.
Citibank points out that Ford allowed its very own employee, Godofredo Rivera, to negotiate the checks to his coconspirators, instead of delivering them to the designated authorized collecting bank (Metrobank-Alabang) of the
payee, CIR. Citibank bewails the fact that Ford was remiss in the supervision and control of its own employees,
inasmuch as it only discovered the syndicate's activities through the information given by the payee of the checks after
an unreasonable period of time.
PCIBank also blames Ford of negligence when it allegedly authorized Godofredo Rivera to divert the proceeds of
Citibank Check No. SN-04867, instead of using it to pay the BIR. As to the subsequent run-around of unds of Citibank
Check Nos. SN-10597 and 16508, PCIBank claims that the proximate cause of the damge to Ford lies in its own
officers and employees who carried out the fradulent schemes and the transactions. These circumstances were not
checked by other officers of the company including its comptroller or internal auditor. PCIBank contends that the
inaction of Ford despite the enormity of the amount involved was a sheer negligence and stated that, as between two
innocent persons, one of whom must suffer the consequences of a breach of trust, the one who made it possible, by
his act of negligence, must bear the loss.
For its part, Ford denies any negligence in the performance of its duties. It avers that there was no evidence
presented before the trial court showing lack of diligence on the part of Ford. And, citing the case of Gempesaw vs.
17
Court of Appeals, Ford argues that even if there was a finding therein that the drawer was negligent, the drawee
bank was still ordered to pay damages.
Furthermore, Ford contends the Godofredo rivera was not authorized to make any representation in its behalf,
specifically, to divert the proceeds of the checks. It adds that Citibank raised the issue of imputed negligence against
Ford for the first time on appeal. Thus, it should not be considered by this Court.
On this point, jurisprudence regarding the imputed negligence of employer in a master-servant relationship is
instructive. Since a master may be held for his servant's wrongful act, the law imputes to the master the act of the
servant, and if that act is negligent or wrongful and proximately results in injury to a third person, the negligence or
18
wrongful conduct is the negligence or wrongful conduct of the master, for which he is liable. The general rule is that if
the master is injured by the negligence of a third person and by the concuring contributory negligence of his own
servant or agent, the latter's negligence is imputed to his superior and will defeat the superior's action against the third
person, asuming, of course that the contributory negligence was the proximate cause of the injury of which complaint
19
is made.

Accordingly, we need to determine whether or not the action of Godofredo Rivera, Ford's General Ledger Accountant,
and/or Alexis Marindo, his assistant, was the proximate cause of the loss or damage. AS defined, proximate cause is
that which, in the natural and continuous sequence, unbroken by any efficient, intervening cause produces the injury
20
and without the result would not have occurred.
It appears that although the employees of Ford initiated the transactions attributable to an organized syndicate, in our
view, their actions were not the proximate cause of encashing the checks payable to the CIR. The degree of Ford's
negligence, if any, could not be characterized as the proximate cause of the injury to the parties.
The Board of Directors of Ford, we note, did not confirm the request of Godofredo Rivera to recall Citibank Check No.
SN-04867. Rivera's instruction to replace the said check with PCIBank's Manager's Check was not in theordinary
course of business which could have prompted PCIBank to validate the same.
As to the preparation of Citibank Checks Nos. SN-10597 and 16508, it was established that these checks were made
payable to the CIR. Both were crossed checks. These checks were apparently turned around by Ford's emploees,
who were acting on their own personal capacity.
Given these circumstances, the mere fact that the forgery was committed by a drawer-payor's confidential employee
or agent, who by virtue of his position had unusual facilities for perpertrating the fraud and imposing the forged paper
upon the bank, does notentitle the bank toshift the loss to the drawer-payor, in the absence of some circumstance
21
raising estoppel against the drawer. This rule likewise applies to the checks fraudulently negotiated or diverted by
the confidential employees who hold them in their possession.
With respect to the negligence of PCIBank in the payment of the three checks involved, separately, the trial courts
found variations between the negotiation of Citibank Check No. SN-04867 and the misapplication of total proceeds of
Checks SN-10597 and 16508. Therefore, we have to scrutinize, separately, PCIBank's share of negligence when the
syndicate achieved its ultimate agenda of stealing the proceeds of these checks.
G.R. Nos. 121413 and 121479
Citibank Check No. SN-04867 was deposited at PCIBank through its Ermita Branch. It was coursed through the
ordinary banking transaction, sent to Central Clearing with the indorsement at the back "all prior indorsements and/or
lack of indorsements guaranteed," and was presented to Citibank for payment. Thereafter PCIBank, instead of
remitting the proceeds to the CIR, prepared two of its Manager's checks and enabled the syndicate to encash the
same.
On record, PCIBank failed to verify the authority of Mr. Rivera to negotiate the checks. The neglect of PCIBank
employees to verify whether his letter requesting for the replacement of the Citibank Check No. SN-04867 was duly
authorized, showed lack of care and prudence required in the circumstances.
Furthermore, it was admitted that PCIBank is authorized to collect the payment of taxpayers in behalf of the BIR. As
an agent of BIR, PCIBank is duty bound to consult its principal regarding the unwarranted instructions given by the
payor or its agent. As aptly stated by the trial court, to wit:
"xxx. Since the questioned crossed check was deposited with IBAA [now PCIBank], which claimed to be a
depository/collecting bank of BIR, it has the responsibility to make sure that the check in question is deposited
in Payee's account only.
xxx

xxx

xxx

As agent of the BIR (the payee of the check), defendant IBAA should receive instructions only from its
principal BIR and not from any other person especially so when that person is not known to the defendant. It
is very imprudent on the part of the defendant IBAA to just rely on the alleged telephone call of the one
Godofredo Rivera and in his signature considering that the plaintiff is not a client of the defendant IBAA."
It is a well-settled rule that the relationship between the payee or holder of commercial paper and the bank to which it
22
is sent for collection is, in the absence of an argreement to the contrary, that of principal and agent. A bank which
23
receives such paper for collection is the agent of the payee or holder.
Even considering arguendo, that the diversion of the amount of a check payable to the collecting bank in behalf of the
designated payee may be allowed, still such diversion must be properly authorized by the payor. Otherwise stated, the
diversion can be justified only by proof of authority from the drawer, or that the drawer has clothed his agent with
apparent authority to receive the proceeds of such check.

Citibank further argues that PCI Bank's clearing stamp appearing at the back of the questioned checks stating that
ALL PRIOR INDORSEMENTS AND/OR LACK OF INDORSEMENTS GURANTEED should render PCIBank liable
because it made it pass through the clearing house and therefore Citibank had no other option but to pay it. Thus,
Citibank had no other option but to pay it. Thus, Citibank assets that the proximate cause of Ford's injury is the gross
negligence of PCIBank. Since the questione dcrossed check was deposited with PCIBank, which claimed to be a
depository/collecting bank of the BIR, it had the responsibility to make sure that the check in questions is deposited in
Payee's account only.
Indeed, the crossing of the check with the phrase "Payee's Account Only," is a warning that the check should be
deposited only in the account of the CIR. Thus, it is the duty of the collecting bank PCIBank to ascertain that the check
be deposited in payee's account only. Therefore, it is the collecting bank (PCIBank) which is bound to scruninize the
check and to know its depositors before it could make the clearing indorsement "all prior indorsements and/or lack of
indorsement guaranteed".
In Banco de Oro Savings and Mortgage Bank vs. Equitable Banking Corporation,

24

we ruled:

"Anent petitioner's liability on said instruments, this court is in full accord with the ruling of the PCHC's Board
of Directors that:
'In presenting the checks for clearing and for payment, the defendant made an express guarantee on the
validity of "all prior endorsements." Thus, stamped at the back of the checks are the defedant's clear warranty:
ALL PRIOR ENDORSEMENTS AND/OR LACK OF ENDORSEMENTS GUARANTEED. Without such
warranty, plaintiff would not have paid on the checks.'
No amount of legal jargon can reverse the clear meaning of defendant's warranty. As the warranty has proven
to be false and inaccurate, the defendant is liable for any damage arising out of the falsity of its
25
representation."
Lastly, banking business requires that the one who first cashes and negotiates the check must take some percautions
to learn whether or not it is genuine. And if the one cashing the check through indifference or othe circumstance
assists the forger in committing the fraud, he should not be permitted to retain the proceeds of the check from the
drawee whose sole fault was that it did not discover the forgery or the defect in the title of the person negotiating the
instrument before paying the check. For this reason, a bank which cashes a check drawn upon another bank, without
requiring proof as to the identity of persons presenting it, or making inquiries with regard to them, cannot hold the
proceeds against the drawee when the proceeds of the checks were afterwards diverted to the hands of a third party.
In such cases the drawee bank has a right to believe that the cashing bank (or the collecting bank) had, by the usual
proper investigation, satisfied itself of the authenticity of the negotiation of the checks. Thus, one who encashed a
check which had been forged or diverted and in turn received payment thereon from the drawee, is guilty of
negligence which proximately contributed to the success of the fraud practiced on the drawee bank. The latter may
26
recover from the holder the money paid on the check.
Having established that the collecting bank's negligence is the proximate cause of the loss, we conclude that PCIBank
is liable in the amount corresponding to the proceeds of Citibank Check No. SN-04867.
G.R. No. 128604
The trial court and the Court of Appeals found that PCIBank had no official act in the ordinary course of business that
would attribute to it the case of the embezzlement of Citibank Check Numbers SN-10597 and 16508, because
PCIBank did not actually receive nor hold the two Ford checks at all. The trial court held, thus:
"Neither is there any proof that defendant PCIBank contributed any official or conscious participation in the
process of the embezzlement. This Court is convinced that the switching operation (involving the checks while
in transit for "clearing") were the clandestine or hidden actuations performed by the members of the syndicate
in their own personl, covert and private capacity and done without the knowledge of the defendant
27
PCIBank"
In this case, there was no evidence presented confirming the conscious particiapation of PCIBank in the
embezzlement. As a general rule, however, a banking corporation is liable for the wrongful or tortuous acts and
28
declarations of its officers or agents within the course and scope of their employment. A bank will be held liable for
the negligence of its officers or agents when acting within the course and scope of their employment. It may be liable
for the tortuous acts of its officers even as regards that species of tort of which malice is an essential element. In this
case, we find a situation where the PCIBank appears also to be the victim of the scheme hatched by a syndicate in
which its own management employees had particiapted.

The pro-manager of San Andres Branch of PCIBank, Remberto Castro, received Citibank Check Numbers SN-10597
and 16508. He passed the checks to a co-conspirator, an Assistant Manager of PCIBank's Meralco Branch, who
helped Castro open a Checking account of a fictitious person named "Reynaldo Reyes." Castro deposited a worthless
Bank of America Check in exactly the same amount of Ford checks. The syndicate tampered with the checks and
succeeded in replacing the worthless checks and the eventual encashment of Citibank Check Nos. SN 10597 and
16508. The PCIBank Ptro-manager, Castro, and his co-conspirator Assistant Manager apparently performed their
activities using facilities in their official capacity or authority but for their personal and private gain or benefit.
A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these
officers or agents were enabled to perpetrate in the apparent course of their employment; nor will t be permitted to
shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom. For the general rule
is that a bank is liable for the fraudulent acts or representations of an officer or agent acting within the course and
29
apparent scope of his employment or authority. And if an officer or employee of a bank, in his official capacity,
receives money to satisfy an evidence of indebetedness lodged with his bank for collection, the bank is liable for his
30
misappropriation of such sum.
31

Moreover, as correctly pointed out by Ford, Section 5 of Central Bank Circular No. 580, Series of 1977 provides that
any theft affecting items in transit for clearing, shall be for the account of sending bank, which in this case is PCIBank.
But in this case, responsibility for negligence does not lie on PCIBank's shoulders alone.
The evidence on record shows that Citibank as drawee bank was likewise negligent in the performance of its duties.
Citibank failed to establish that its payment of Ford's checjs were made in due course and legally in order. In its
defense, Citibank claims the genuineness and due execution of said checks, considering that Citibank (1) has no
knowledge of any informity in the issuance of the checks in question (2) coupled by the fact that said checks were
sufficiently funded and (3) the endorsement of the Payee or lack thereof was guaranteed by PCI Bank (formerly
IBAA), thus, it has the obligation to honor and pay the same.
For its part, Ford contends that Citibank as the drawee bank owes to Ford an absolute and contractual duty to pay the
32
proceeds of the subject check only to the payee thereof, the CIR. Citing Section 62 of the Negotiable Instruments
Law, Ford argues that by accepting the instrument, the acceptro which is Citibank engages that it will pay according to
the tenor of its acceptance, and that it will pay only to the payee, (the CIR), considering the fact that here the check
was crossed with annotation "Payees Account Only."
As ruled by the Court of Appeals, Citibank must likewise answer for the damages incurred by Ford on Citibank Checks
Numbers SN 10597 and 16508, because of the contractual relationship existing between the two. Citibank, as the
drawee bank breached its contractual obligation with Ford and such degree of culpability contributed to the damage
caused to the latter. On this score, we agree with the respondent court's ruling.
Citibank should have scrutinized Citibank Check Numbers SN 10597 and 16508 before paying the amount of the
proceeds thereof to the collecting bank of the BIR. One thing is clear from the record: the clearing stamps at the back
of Citibank Check Nos. SN 10597 and 16508 do not bear any initials. Citibank failed to notice and verify the absence
of the clearing stamps. Had this been duly examined, the switching of the worthless checks to Citibank Check Nos.
10597 and 16508 would have been discovered in time. For this reason, Citibank had indeed failed to perform what
was incumbent upon it, which is to ensure that the amount of the checks should be paid only to its designated payee.
The fact that the drawee bank did not discover the irregularity seasonably, in our view, consitutes negligence in
carrying out the bank's duty to its depositors. The point is that as a business affected with public interest and because
of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care,
33
always having in mind the fiduciary nature of their relationship.
Thus, invoking the doctrine of comparative negligence, we are of the view that both PCIBank and Citibank failed in
their respective obligations and both were negligent in the selection and supervision of their employees resulting in the
encashment of Citibank Check Nos. SN 10597 AND 16508. Thus, we are constrained to hold them equally liable for
the loss of the proceeds of said checks issued by Ford in favor of the CIR.
Time and again, we have stressed that banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount umportance such that the appropriate standard of diligence must
34
be very high, if not the highest, degree of diligence. A bank's liability as obligor is not merely vicarious but primary,
35
wherein the defense of exercise of due diligence in the selection and supervision of its employees is of no moment.
36

Banks handle daily transactions involving millions of pesos. By the very nature of their work the degree of
responsibility, care and trustworthiness expected of their employees and officials is far greater than those of ordinary
37
clerks and employees. Banks are expected to exercise the highest degree of diligence in the selection and
38
supervision of their employees.

On the issue of prescription, PCIBank claims that the action of Ford had prescribed because of its inability to seek
judicial relief seasonably, considering that the alleged negligent act took place prior to December 19, 1977 but the
relief was sought only in 1983, or seven years thereafter.
The statute of limitations begins to run when the bank gives the depositor notice of the payment, which is ordinarily
39
when the check is returned to the alleged drawer as a voucher with a statement of his account, and an action upon a
40
check is ordinarily governed by the statutory period applicable to instruments in writing.
Our laws on the matter provide that the action upon a written contract must be brought within ten year from the time
41
the right of action accrues. hence, the reckoning time for the prescriptive period begins when the instrument was
issued and the corresponding check was returned by the bank to its depositor (normally a month thereafter). Applying
the same rule, the cause of action for the recovery of the proceeds of Citibank Check No. SN 04867 would normally
be a month after December 19, 1977, when Citibank paid the face value of the check in the amount of P4,746,114.41.
Since the original complaint for the cause of action was filed on January 20, 1984, barely six years had lapsed. Thus,
we conclude that Ford's cause of action to recover the amount of Citibank Check No. SN 04867 was seasonably filed
within the period provided by law.
Finally, we also find thet Ford is not completely blameless in its failure to detect the fraud. Failure on the part of the
depositor to examine its passbook, statements of account, and cancelled checks and to give notice within a
reasonable time (or as required by statute) of any discrepancy which it may in the exercise of due care and diligence
find therein, serves to mitigate the banks' liability by reducing the award of interest from twelve percent (12%) to six
percent (6%) per annum. As provided in Article 1172 of the Civil Code of the Philippines, respondibility arising from
negligence in the performance of every kind of obligation is also demandable, but such liability may be regulated by
the courts, according to the circumstances. In quasi-delicts, the contributory negligence of the plaintiff shall reduce the
42
damages that he may recover.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 25017
areAFFIRMED. PCIBank, know formerly as Insular Bank of Asia and America, id declared solely responsible for the
loss of the proceeds of Citibank Check No SN 04867 in the amount P4,746,114.41, which shall be paid together with
six percent (6%) interest thereon to Ford Philippines Inc. from the date when the original complaint was filed until said
amount is fully paid.
However, the Decision and Resolution of the Court of Appeals in CA-G.R. No. 28430 are MODIFIED as follows:
PCIBank and Citibank are adjudged liable for and must share the loss, (concerning the proceeds of Citibank Check
Numbers SN 10597 and 16508 totalling P12,163,298.10) on a fifty-fifty ratio, and each bank is ORDEREDto pay Ford
Philippines Inc. P6,081,649.05, with six percent (6%) interest thereon, from the date the complaint was filed until full
payment of said amount.1wphi1.nt
Costs against Philippine Commercial International Bank and Citibank N.A.
SO ORDERED.
Bellosillo, Mendoza, Buena, De Leon, Jr., JJ, concur.

MANUEL C. ESPIRITU, JR., AUDIE G.R. No. 170891

LLONA, FREIDA F. ESPIRITU,

CARLO F. ESPIRITU, RAFAEL F.

ESPIRITU, ROLANDO M. MIRABUNA,
HERMILYN A. MIRABUNA, KIM
ROLAND A. MIRABUNA, KAYE
ANN A. MIRABUNA, KEN RYAN A.
MIRABUNA, JUANITO P. DE
CASTRO, GERONIMA A. ALMONITE
and MANUEL C. DEE, who are the
officers and directors of BICOL GAS
REFILLING PLANT CORPORATION,
Petitioners,
Present:
Carpio, J., Chairperson,
Leonardo-De Castro,

- versus -

Brion,
Del Castillo, and
Abad, JJ.
PETRON CORPORATION and
CARMEN J. DOLOIRAS, doing
business under the name KRISTINA

Promulgated:

PATRICIA ENTERPRISES,
Respondents.

November 24, 2009

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

DECISION

ABAD, J.:

This case is about the offense or offenses that arise from the reloading of the liquefied petroleum gas cylinder container of
one brand with the liquefied petroleum gas of another brand.

The Facts and the Case

Respondent Petron Corporation (Petron) sold and distributed liquefied petroleum gas (LPG) in cylinder tanks that
carried its trademark Gasul.

[1]

Respondent Carmen J. Doloiras owned and operated Kristina Patricia Enterprises (KPE), the

exclusive distributor of Gasul LPGs in the whole of Sorsogon.

[2]

Jose Nelson Doloiras (Jose) served as KPEs manager.

Bicol Gas Refilling Plant Corporation (Bicol Gas) was also in the business of selling and distributing LPGs in Sorsogon but
theirs carried the trademark Bicol Savers Gas. Petitioner Audie Llona managed Bicol Gas.

In the course of trade and competition, any given distributor of LPGs at times acquired possession of LPG cylinder tanks
belonging to other distributors operating in the same area. They called these captured cylinders. According to Jose, KPEs
manager, in April 2001 Bicol Gas agreed with KPE for the swapping of captured cylinders since one distributor could not refill
captured cylinders with its own brand of LPG. At one time, in the course of implementing this arrangement, KPEs Jose visited
the Bicol Gas refilling plant. While there, he noticed several Gasul tanks in Bicol Gas possession. He requested a swap but
Audie Llona of Bicol Gas replied that he first needed to ask the permission of the Bicol Gas owners. That permission was given
and they had a swap involving around 30 Gasul tanks held by Bicol Gas in exchange for assorted tanks held by KPE.

KPEs Jose noticed, however, that Bicol Gas still had a number of Gasul tanks in its yard. He offered to make a swap for
these but Llona declined, saying the Bicol Gas owners wanted to send those tanks to Batangas. Later Bicol Gas told Jose that it
had no more Gasul tanks left in its possession. Jose observed on almost a daily basis, however, that Bicol Gas trucks which plied
the streets of the province carried a load of Gasul tanks. He noted that KPEs volume of sales dropped significantly from June to
July 2001.

On August 4, 2001 KPEs Jose saw a particular Bicol Gas truck on the Maharlika Highway. While the truck carried mostly
Bicol Savers LPG tanks, it had on it one unsealed 50-kg Gasul tank and one 50-kg Shellane tank. Jose followed the truck and
when it stopped at a store, he asked the driver, Jun Leorena, and the Bicol Gas sales representative, Jerome Misal, about the
Gasul tank in their truck. They said it was empty but, when Jose turned open its valve, he noted that it was not. Misal and
Leorena then admitted that the Gasul and Shellane tanks on their truck belonged to a customer who had them filled up by Bicol
Gas. Misal then mentioned that his manager was a certain Rolly Mirabena.

[3]

Because of the above incident, KPE filed a complaint for violations of Republic Act (R.A.) 623 (illegally filling up
registered cylinder tanks), as amended, and Sections 155 (infringement of trade marks) and 169.1 (unfair competition) of the
Intellectual Property Code (R.A. 8293). The complaint charged the following: Jerome Misal, Jun Leorena, Rolly Mirabena, Audie
Llona, and several John and Jane Does, described as the directors, officers, and stockholders of Bicol Gas. These directors,
officers, and stockholders were eventually identified during the preliminary investigation.

Subsequently, the provincial prosecutor ruled that there was probable cause only for violation of R.A. 623 (unlawfully
filling up registered tanks) and that only the four Bicol Gas employees, Mirabena, Misal, Leorena, and petitioner Llona, could be
charged. The charge against the other petitioners who were the stockholders and directors of the company was dismissed.

Dissatisfied, Petron and KPE filed a petition for review with the Office of the Regional State Prosecutor, Region V, which
initially denied the petition but partially granted it on motion for reconsideration. The Office of the Regional State Prosecutor
ordered the filing of additional informations against the four employees of Bicol Gas for unfair competition. It ruled, however,
that no case for trademark infringement was present. The Secretary of Justice denied the appeal of Petron and KPE and their
motion for reconsideration.

[4]

Undaunted, Petron and KPE filed a special civil action for certiorari with the Court of Appeals but the Bicol Gas
employees and stockholders concerned opposed it, assailing the inadequacy in its certificate of non-forum shopping, given that
[5]

only Atty. Joel Angelo C. Cruz signed it on behalf of Petron. In its Decision dated October 17, 2005, the Court of Appeals ruled,
however, that Atty. Cruzs certification constituted sufficient compliance. As to the substantive aspect of the case, the Court of
Appeals reversed the Secretary of Justices ruling. It held that unfair competition does not necessarily absorb trademark
infringement. Consequently, the court ordered the filing of additional charges of trademark infringement against the concerned
Bicol Gas employees as well.

Since the Bicol Gas employees presumably acted under the direct order and control of its owners, the Court of Appeals
also ordered the inclusion of the stockholders of Bicol Gas in the various charges, bringing to 16 the number of persons to be
charged, now including petitioners Manuel C. Espiritu, Jr., Freida F. Espiritu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M.
Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A. Mirabuna, Ken Ryan A. Mirabuna, Juanito P. de Castro,
Geronima A. Almonite, and Manuel C. Dee (together with Audie Llona), collectively, petitioners Espiritu, et al. The court denied
the motion for reconsideration of these employees and stockholders in its Resolution dated January 6, 2006, hence, the present
[6]

petition for review before this Court.

The Issues Presented

The petition presents the following issues:

1.
Whether or not the certificate of non-forum shopping that accompanied the petition filed with
the Court of Appeals, signed only by Atty. Cruz on behalf of Petron, complied with what the rules require;

2.

Whether or not the facts of the case warranted the filing of charges against the Bicol Gas people

for:

a)
Filling up the LPG tanks registered to another manufacturer without the
latters consent in violation of R.A. 623, as amended;

b) Trademark infringement consisting in Bicol Gas use of a trademark that is

confusingly similar to Petrons registered Gasul trademark in violation of section 155 also
of R.A. 8293; and

c)
Unfair competition consisting in passing off Bicol Gas-produced LPGs for
Petron-produced Gasul LPG in violation of Section 168.3 of R.A. 8293.

The Courts Rulings

First. Petitioners Espiritu, et al. point out that the certificate of non-forum shopping that respondents KPE and Petron
attached to the petition they filed with the Court of Appeals was inadequate, having been signed only by Petron, through Atty.
Cruz.

But, while procedural requirements such as that of submittal of a certificate of non-forum shopping cannot be totally
disregarded, they may be deemed substantially complied with under justifiable circumstances.

[7]

One of these circumstances is

where the petitioners filed a collective action in which they share a common interest in its subject matter or raise a common
cause of action. In such a case, the certification by one of the petitioners may be deemed sufficient.

[8]

Here, KPE and Petron shared a common cause of action against petitioners Espiritu, et al., namely, the violation of their
proprietary rights with respect to the use of Gasul tanks and trademark. Furthermore, Atty. Cruz said in his certification that he
was executing it for and on behalf of the Corporation, and co-petitioner Carmen J. Doloiras.

[9]

Thus, the object of the

requirement to ensure that a party takes no recourse to multiple forums was substantially achieved. Besides, the failure of
KPE to sign the certificate of non-forum shopping does not render the petition defective with respect to Petron which signed it
through Atty. Cruz.

[10]

The Court of Appeals, therefore, acted correctly in giving due course to the petition before it.

Second. The Court of Appeals held that under the facts of the case, there is probable cause that petitioners Espiritu, et
al. committed all three crimes: (a) illegally filling up an LPG tank registered to Petron without the latters consent in violation of
R.A. 623, as amended; (b) trademark infringement which consists in Bicol Gas use of a trademark that is confusingly similar to
Petrons registered Gasul trademark in violation of Section 155 of R.A. 8293; and (c) unfair competition which consists in
petitioners Espiritu, et al. passing off Bicol Gas-produced LPGs for Petron-produced Gasul LPG in violation of Section 168.3 of
R.A. 8293.

Here, the complaint adduced at the preliminary investigation shows that the one 50-kg Petron Gasul LPG tank found on
the Bicol Gas truck belonged to *a Bicol Gas+ customer who had the same filled up by BICOL GAS.
customer had that one Gasul LPG tank brought to Bicol Gas for refilling and the latter obliged.

[11]

In other words, the

R.A. 623, as amended,

[12]

punishes any person who, without the written consent of the manufacturer or seller of gases

contained in duly registered steel cylinders or tanks, fills the steel cylinder or tank, for the purpose of sale, disposal or trafficking,
other than the purpose for which the manufacturer or seller registered the same. This was what happened in this case,
assuming the allegations of KPEs manager to be true. Bicol Gas employees filled up with their firms gas the tank registered to
Petron and bearing its mark without the latters written authority. Consequently, they may be prosecuted for that offense.

But, as for the crime of trademark infringement, Section 155 of R.A. 8293 (in relation to Section 170

[13]

) provides that it

is committed by any person who shall, without the consent of the owner of the registered mark:

1.
Use in commerce any reproduction, counterfeit, copy or colorable imitation of a registered mark
or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution,
advertising of any goods or services including other preparatory steps necessary to carry out the sale of any
goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to
deceive; or
2.
Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature
thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale,
offering for sale, distribution, or advertising of goods or services on or in connection with which such use is
likely to cause confusion, or to cause mistake, or to deceive.

KPE and Petron have to show that the alleged infringer, the responsible officers and staff of Bicol Gas, used Petrons
Gasul trademark or a confusingly similar trademark on Bicol Gas tanks with intent to deceive the public and defraud its
competitor as to what it is selling.

[14]

Examples of this would be the acts of an underground shoe manufacturer in Malabon

producing Nike branded rubber shoes or the acts of a local shirt company with no connection to La Coste, producing and
selling shirts that bear the stitched logos of an open-jawed alligator.

Here, however, the allegations in the complaint do not show that Bicol Gas painted on its own tanks Petrons Gasul
trademark or a confusingly similar version of the same to deceive its customers and cheat Petron. Indeed, in this case, the one
tank bearing the mark of Petron Gasul found in a truck full of Bicol Gas tanks was a genuine Petron Gasul tank, more of a
captured cylinder belonging to competition. No proof has been shown that Bicol Gas has gone into the business of distributing
imitation Petron Gasul LPGs.

As to the charge of unfair competition, Section 168.3 (a) of R.A. 8293 (also in relation to Section 170) describes the acts
constituting the offense as follows:

168.3. In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:

(a)
Any person, who is selling his goods and gives them the general appearance
of goods of another manufacturer or dealer, either as to the goods themselves or in the
wrapping of the packages in which they are contained, or the devices or words thereon, or in
any other feature of their appearance, which would be likely to influence purchasers to
believe that the goods offered are those of a manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall
deceive the public and defraud another of his legitimate trade, or any subsequent vendor of
such goods or any agent of any vendor engaged in selling such goods with a like purpose;

Essentially, what the law punishes is the act of giving ones goods the general appearance of the goods of another,
which would likely mislead the buyer into believing that such goods belong to the latter. Examples of this would be the act of
manufacturing or selling shirts bearing the logo of an alligator, similar in design to the open-jawed alligator in La Coste shirts,
except that the jaw of the alligator in the former is closed, or the act of a producer or seller of tea bags with red tags showing
the shadow of a black dog when his competitor is producing or selling popular tea bags with red tags showing the shadow of a
black cat.

Here, there is no showing that Bicol Gas has been giving its LPG tanks the general appearance of the tanks of Petrons
Gasul. As already stated, the truckfull of Bicol Gas tanks that the KPE manager arrested on a road in Sorsogon just happened to
have mixed up with them one authentic Gasul tank that belonged to Petron.

The only point left is the question of the liability of the stockholders and members of the board of directors of Bicol Gas
with respect to the charge of unlawfully filling up a steel cylinder or tank that belonged to Petron. The Court of Appeals ruled
that they should be charged along with the Bicol Gas employees who were pointed to as directly involved in overt acts
constituting the offense.

Bicol Gas is a corporation. As such, it is an entity separate and distinct from the persons of its officers, directors, and
stockholders. It has been held, however, that corporate officers or employees, through whose act, default or omission the
corporation commits a crime, may themselves be individually held answerable for the crime.

[15]

Jose claimed in his affidavit that, when he negotiated the swapping of captured cylinders with Bicol Gas, its manager,
petitioner Audie Llona, claimed that he would be consulting with the owners of Bicol Gas about it. Subsequently, Bicol Gas
declined the offer to swap cylinders for the reason that the owners wanted to send their captured cylinders to Batangas. The
Court of Appeals seized on this as evidence that the employees of Bicol Gas acted under the direct orders of its owners and that
the owners of Bicol Gas have full control of the operations of the business.

[16]

The owners of a corporate organization are its stockholders and they are to be distinguished from its directors and
officers. The petitioners here, with the exception of Audie Llona, are being charged in their capacities as stockholders of Bicol

Gas. But the Court of Appeals forgets that in a corporation, the management of its business is generally vested in its board of
directors, not its stockholders.

[17]

Stockholders are basically investors in a corporation. They do not have a hand in running the

day-to-day business operations of the corporation unless they are at the same time directors or officers of the
corporation. Before a stockholder may be held criminally liable for acts committed by the corporation, therefore, it must be
shown that he had knowledge of the criminal act committed in the name of the corporation and that he took part in the same or
gave his consent to its commission, whether by action or inaction.

The finding of the Court of Appeals that the employees could not have committed the crimes without the consent,
*abetment+, permission, or participation of the owners of Bicol Gas

[18]

is a sweeping speculation especially since, as

demonstrated above, what was involved was just one Petron Gasul tank found in a truck filled with Bicol Gas tanks. Although
the KPE manager heard petitioner Llona say that he was going to consult the owners of Bicol Gas regarding the offer to swap
additional captured cylinders, no indication was given as to which Bicol Gas stockholders Llona consulted. It would be unfair to
charge all the stockholders involved, some of whom were proved to be minors.

[19]

No evidence was presented establishing the

names of the stockholders who were charged with running the operations of Bicol Gas. The complaint even failed to allege who
among the stockholders sat in the board of directors of the company or served as its officers.

The Court of Appeals of course specifically mentioned petitioner stockholder Manuel C. Espiritu, Jr. as the registered
owner of the truck that the KPE manager brought to the police for investigation because that truck carried a tank of Petron
Gasul. But the act that R.A. 623 punishes is the unlawful filling up of registered tanks of another. It does not punish the act of
transporting such tanks. And the complaint did not allege that the truck owner connived with those responsible for filling up
that Gasul tank with Bicol Gas LPG.

WHEREFORE, the Court REVERSES and SETS ASIDE the Decision of the Court of Appeals in CA-G.R. SP 87711 dated
October 17, 2005 as well as its Resolution dated January 6, 2006, the Resolutions of the Secretary of Justice dated March 11,
2004 and August 31, 2004, and the Order of the Office of the Regional State Prosecutor, Region V, dated February 19, 2003. The
Court REINSTATESthe Resolution of the Office of the Provincial Prosecutor of Sorsogon in I.S. 2001-9231 (inadvertently referred
in the Resolution itself as I.S. 2001-9234), dated February 26, 2002. The names of petitioners Manuel C. Espiritu, Jr., Freida F.
Espititu, Carlo F. Espiritu, Rafael F. Espiritu, Rolando M. Mirabuna, Hermilyn A. Mirabuna, Kim Roland A. Mirabuna, Kaye Ann A.
Mirabuna, Ken Ryan A. Mirabuna, Juanito P. De Castro, Geronima A. Almonite and Manuel C. Dee are ORDERED excluded from
the charge.

SO ORDERED.

G. R. No. 164317

February 6, 2006

ALFREDO CHING, Petitioner,

vs.
THE SECRETARY OF JUSTICE, ASST. CITY PROSECUTOR ECILYN BURGOS-VILLAVERT, JUDGE EDGARDO
SUDIAM of the Regional Trial Court, Manila, Branch 52; RIZAL COMMERCIAL BANKING CORP. and THE
PEOPLE OF THE PHILIPPINES, Respondents.
DECISION
CALLEJO, SR., J.:
1

Before the Court is a petition for review on certiorari of the Decision of the Court of Appeals (CA) in CA-G.R. SP No.
57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner Alfredo Ching, and its
2
Resolution dated June 28, 2004 denying the motion for reconsideration thereof.
Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in September to October
1980, PBMI, through petitioner, applied with the Rizal Commercial Banking Corporation (respondent bank) for the
3
issuance of commercial letters of credit to finance its importation of assorted goods.
Respondent bank approved the application, and irrevocable letters of credit were issued in favor of petitioner. The
4
goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust receipts as surety, acknowledging
delivery of the following goods:
T/R
Nos.

Date Granted

Maturity Date

Principal

1845

12-05-80

03-05-81

P1,596,470.05

1853

12-08-80

03-06-81

P198,150.67

3,000 pcs. (15 bundles)

Calorized Lance Pipes

1824

11-28-80

02-26-81

P707,879.71

One Lot High Fired Refractory

Tundish Bricks

1798

11-21-80

02-19-81

P835,526.25

5 cases spare parts for CCM

1808

11-21-80

02-19-81

P370,332.52

200 pcs. ingot moulds

2042

01-30-81

04-30-81

P469,669.29

High Fired Refractory Nozzle

Bricks

1801

11-21-80

02-19-81

P2,001,715.17

Synthetic Graphite Electrode

[with] tapered pitch filed
nipples

1857

12-09-80

03-09-81

1895

12-17-80

03-17-81

P67,652.04

Spare parts for

Spectrophotometer

1911

12-22-80

03-20-81

P91,497.85

50 pcs. Ingot moulds

2041

01-30-81

04-30-81

P91,456.97

50 pcs. Ingot moulds

2099

02-10-81

05-11-81

P66,162.26

8 pcs. Kubota Rolls for rolling

mills

2100

02-10-81

05-12-81

P210,748.00

Spare parts for Lacolaboratory

5
Equipment

P197,843.61

Description of Goods
79.9425 M/T "SDK" Brand
Synthetic Graphite Electrode

3,000 pcs. (15 bundles

calorized lance pipes [)]

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell but not by way of
conditional sale, pledge or otherwise; and in case such goods were sold, to turn over the proceeds thereof as soon as

received, to apply against the relative acceptances and payment of other indebtedness to respondent bank. In case
the goods remained unsold within the specified period, the goods were to be returned to respondent bank without any
need of demand. Thus, said "goods, manufactured products or proceeds thereof, whether in the form of money or
bills, receivables, or accounts separate and capable of identification" were respondent banks property.
When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return their value
6
amounting to P6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for estafa against petitioner
in the Office of the City Prosecutor of Manila.
After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115, otherwise known as the
Trust Receipts Law. Thirteen (13) Informations were filed against the petitioner before the Regional Trial Court (RTC)
of Manila. The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31 of said court.
Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was dismissed in a
7
Resolution dated March 17, 1987, and petitioner moved for its reconsideration. On December 23, 1987, the Minister
8
of Justice granted the motion, thus reversing the previous resolution finding probable cause against petitioner. The
City Prosecutor was ordered to move for the withdrawal of the Informations.
This time, respondent bank filed a motion for reconsideration, which, however, was denied on February 24,
9
1988. The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the ground that the
10
material allegations therein did not amount to estafa.
11

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoez, holding that the penal
provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited
to transactions involving goods which are to be sold (retailed), reshipped, stored or processed as a component of a
product ultimately sold. The Court also ruled that "the non-payment of the amount covered by a trust receipt is an act
12
violative of the obligation of the entrustee to pay."
On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner before the Office of
the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no probable cause
to charge petitioner with violating P.D. No. 115, as petitioners liability was only civil, not criminal, having signed the
13
trust receipts as surety. Respondent bank appealed the resolution to the Department of Justice (DOJ) via petition for
review, alleging that the City Prosecutor erred in ruling:
1. That there is no evidence to show that respondent participated in the misappropriation of the goods subject
of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and
3. That the liability of the respondent is only civil in nature.

14

15

On July 13, 1999, the Secretary of Justice issued Resolution No. 250 granting the petition and reversing the assailed
resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior Vice-President of PBMI,
executed the 13 trust receipts and as such, was the one responsible for the offense. Thus, the execution of said
receipts is enough to indict the petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary
also declared that petitioner could not contend that P.D. No. 115 covers only goods ultimately destined for sale, as this
16
issue had already been settled in Allied Banking Corporation v. Ordoez, where the Court ruled that P.D. No. 115 is
"not limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of
a product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said
goods if unsold or not otherwise disposed of in accordance with the terms of the trust receipts."
The Justice Secretary further stated that the respondent bound himself under the terms of the trust receipts not only
as a corporate official of PBMI but also as its surety; hence, he could be proceeded against in two (2) ways: first, as
surety as determined by the Supreme Court in its decision in Rizal Commercial Banking Corporation v. Court of
17
Appeals; and second, as the corporate official responsible for the offense under P.D. No. 115, via criminal
prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers "without prejudice to the
civil liabilities arising from the criminal offense." Thus, according to the Justice Secretary, following Rizal Commercial
Banking Corporation, the civil liability imposed is clearly separate and distinct from the criminal liability of the accused
under P.D. No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations against
petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as Criminal Cases No. 99178596 to 99-178608 and consolidated for trial before Branch 52 of said court. Petitioner filed a motion for
18
reconsideration, which the Secretary of Justice denied in a Resolution dated January 17, 2000.
Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of the
Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING
OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION DESPITE THE
FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS PARTICIPATION IN THE ALLEGED
TRANSACTIONS.
2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF
DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED PROSECUTION OF
THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE TERMINATION OF THE
PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE DISMISSAL OF THE INSTANT CASE.
3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR ACTED IN
GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION WHEN THEY
19
CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK OF SUFFICIENT BASIS.
In his petition, petitioner incorporated a certification stating that "as far as this Petition is concerned, no action or
proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency. It is
finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby
20
undertakes to notify this Honorable Court within five (5) days from such notice."
In its Comment on the petition, the Office of the Solicitor General alleged that A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER ALFREDO
CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT THE ACTS OF
PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN RELATION TO ARTICLE 315,
PAR. 1(B) OF THE REVISED PENAL CODE.
B.
THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY HAS MARRED THE
CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE, JUSTIFYING ITS DISMISSAL.
C.
THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS IS NOT THE
PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT OF JUSTICE. THE
21
PRESENT PETITION MUST THEREFORE BE DISMISSED.
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural grounds. On
the procedural issue, it ruled that (a) the certification of non-forum shopping executed by petitioner and incorporated in
the petition was defective for failure to comply with the first two of the three-fold undertakings prescribed in Rule 7,
Section 5 of the Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and mandamus was
not the proper remedy of the petitioner.
On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were correctly
issued for the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the signatory to the trust
receipts, is criminally liable for violation of P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated
P.D. No. 115 by his actuations, had already been resolved and laid to rest in Allied Bank Corporation v.
22
Ordoez; and (c) petitioner was estopped from raising the
City Prosecutors delay in the final disposition of the preliminary investigation because he failed to do so in the DOJ.
Thus, petitioner filed the instant petition, alleging that:

I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND THAT THE
CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS DEFECTIVE.
II
THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY THE SECRETARY OF
23
JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS.
The Court will delve into and resolve the issues seriatim.
The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the rules of
procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of Court should be
construed liberally especially when, as in this case, his substantial rights are adversely affected; hence, the deficiency
in his certification of non-forum shopping should not result in the dismissal of his petition.
The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the certificate of nonforum shopping incorporated in the petition before the CA is defective because it failed to disclose essential facts
about pending actions concerning similar issues and parties. It asserts that petitioners failure to comply with the Rules
of Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of
24
Appeals.
We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in his petition
before the appellate court is defective. The certification reads:
It is further certified that as far as this Petition is concerned, no action or proceeding in the Supreme Court, the Court
of Appeals or different divisions thereof, or any tribunal or agency.
It is finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before
the Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby
25
undertakes to notify this Honorable Court within five (5) days from such notice.
Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be accompanied by
a sworn certification of non-forum shopping, as provided in the third paragraph of Section 3, Rule 46 of said Rules.
The latter provision reads in part:
SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. The petition shall contain the
full names and actual addresses of all the petitioners and respondents, a concise statement of the matters involved,
the factual background of the case and the grounds relied upon for the relief prayed for.
xxx
The petitioner shall also submit together with the petition a sworn certification that he has not theretofore commenced
any other action involving the same issues in the Supreme Court, the Court of Appeals or different divisions thereof, or
any other tribunal or agency; if there is such other action or proceeding, he must state the status of the same; and if
he should thereafter learn that a similar action or proceeding has been filed or is pending before the Supreme Court,
the Court of Appeals, or different divisions thereof, or any other tribunal or agency, he undertakes to promptly inform
the aforesaid courts and other tribunal or agency thereof within five (5) days therefrom. xxx
Compliance with the certification against forum shopping is separate from and independent of the avoidance of forum
shopping itself. The requirement is mandatory. The failure of the petitioner to comply with the foregoing requirement
26
shall be sufficient ground for the dismissal of the petition without prejudice, unless otherwise provided.
Indubitably, the first paragraph of petitioners certification is incomplete and unintelligible. Petitioner failed to certify
that he "had not heretofore commenced any other action involving the same issues in the Supreme Court, the Court of
Appeals or the different divisions thereof or any other tribunal or agency" as required by paragraph 4, Section 3, Rule
46 of the Revised Rules of Court.
We agree with petitioners contention that the certification is designed to promote and facilitate the orderly
administration of justice, and therefore, should not be interpreted with absolute literalness. In his works on the Revised
Rules of Civil Procedure, former Supreme Court Justice Florenz Regalado states that, with respect to the contents of

27

the certification which the pleader may prepare, the rule of substantial compliance may be availed of. However, there
must be a special circumstance or compelling reason which makes the strict application of the requirement clearly
unjustified. The instant petition has not alleged any such extraneous circumstance. Moreover, as worded, the
certification cannot even be regarded as substantial compliance with the procedural requirement. Thus, the CA was
not informed whether, aside from the petition before it, petitioner had commenced any other action involving the same
issues in other tribunals.
On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of Justice committed
grave abuse of discretion in finding probable cause against the petitioner for violation of estafa under Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are not persuasive enough to
justify the desired conclusion that respondent Secretary of Justice gravely abused its discretion in coming out with his
assailed Resolutions. Petitioner posits that, except for his being the Senior Vice-President of the PBMI, there is no iota
of evidence that he was a participes crimines in violating the trust receipts sued upon; and that his liability, if at all, is
purely civil because he signed the said trust receipts merely as a xxx surety and not as the entrustee. These
assertions are, however, too dull that they cannot even just dent the findings of the respondent Secretary, viz:
"x x x it is apropos to quote section 13 of PD 115 which states in part, viz:
xxx If the violation or offense is committed by a corporation, partnership, association or other judicial entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers, employees or other officials or
persons therein responsible for the offense, without prejudice to the civil liabilities arising from the criminal offense.
"There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the thirteen (13) trust
receipts. As such, the law points to him as the official responsible for the offense. Since a corporation cannot be
proceeded against criminally because it cannot commit crime in which personal violence or malicious intent is
required, criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the
corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil. 401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the
execution by respondent of said receipts is enough to indict him as the official responsible for violation of PD 115.
"Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are ultimately destined
for sale and not goods, like those imported by PBM, for use in manufacture. This issue has already been settled in the
Allied Banking Corporation case, supra, where he was also a party, when the Supreme Court ruled that PD 115 is not
limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component or a
product ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said
goods if unsold or disposed of in accordance with the terms of the trust receipts.
"In regard to the other assigned errors, we note that the respondent bound himself under the terms of the trust
receipts not only as a corporate official of PBM but also as its surety. It is evident that these are two (2) capacities
which do not exclude the other. Logically, he can be proceeded against in two (2) ways: first, as surety as determined
by the Supreme Court in its decision in RCBC vs. Court of Appeals, 178 SCRA 739; and, secondly, as the corporate
official responsible for the offense under PD 115, the present case is an appropriate remedy under our penal law.
"Moreover, PD 115 explicitly allows the prosecution of corporate officers without prejudice to the civil liabilities arising
from the criminal offense thus, the civil liability imposed on respondent in RCBC vs. Court of Appeals case is clearly
28
separate and distinct from his criminal liability under PD 115."
Petitioner asserts that the appellate courts ruling is erroneous because (a) the transaction between PBMI and
respondent bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in his capacity as
PBMI Senior Vice-President; (c) he never received the goods as an entrustee for PBMI, hence, could not have
committed any dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods and used
the same in operating its machineries and equipment and not for resale.
The OSG, for its part, submits a contrary view, to wit:
34. Petitioner further claims that he is not a person responsible for the offense allegedly because "[b]eing charged as
the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be held criminally liable as the
transactions sued upon were clearly entered into in his capacity as an officer of the corporation" and that [h]e never
received the goods as an entrustee for PBM as he never had or took possession of the goods nor did he commit
dishonesty nor "abuse of confidence in transacting with RCBC." Such argument is bereft of merit.

35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him from any
liability. Petitioners responsibility as the corporate official of PBM who received the goods in trust is premised on
Section 13 of P.D. No. 115, which provides:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise
known as the Revised Penal Code. If the violation or offense is committed by a corporation, partnership, association
or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received the goods for PBM, it
was inevitable that the petitioner is the proper corporate officer to be proceeded against by virtue of the PBMs
29
violation of P.D. No. 115.
The ruling of the CA is correct.
30

In Mendoza-Arce v. Office of the Ombudsman (Visayas), this Court held that the acts of a quasi-judicial officer may
be assailed by the aggrieved party via a petition for certiorari and enjoined (a) when necessary to afford adequate
protection to the constitutional rights of the accused; (b) when necessary for the orderly administration of justice; (c)
when the acts of the officer are without or in excess of authority; (d) where the charges are manifestly false and
31
motivated by the lust for vengeance; and (e) when there is clearly no prima facie case against the accused. The
Court also declared that, if the officer conducting a preliminary investigation (in that case, the Office of the
Ombudsman) acts without or in excess of his authority and resolves to file an Information despite the absence of
32
probable cause, such act may be nullified by a writ of certiorari.
33

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure, the Information shall be prepared by the
Investigating Prosecutor against the respondent only if he or she finds probable cause to hold such respondent for
trial. The Investigating Prosecutor acts without or in excess of his authority under the Rule if the Information is filed
34
against the respondent despite absence of evidence showing probable cause therefor. If the Secretary of Justice
reverses the Resolution of the Investigating Prosecutor who found no probable cause to hold the respondent for trial,
and orders such prosecutor to file the Information despite the absence of probable cause, the Secretary of Justice
acts contrary to law, without authority and/or in excess of authority. Such resolution may likewise be nullified in a
35
petition for certiorari under Rule 65 of the Revised Rules of Civil Procedure.
A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive prosecution, is
an inquiry to determine whether (a) a crime has been committed; and (b) whether there is probable cause to believe
that the accused is guilty thereof. It is a means of discovering the person or persons who may be reasonably charged
with a crime. Probable cause need not be based on clear and convincing evidence of guilt, as the investigating officer
acts upon probable cause of reasonable belief. Probable cause implies probability of guilt and requires more than bare
suspicion but less than evidence which would justify a conviction. A finding of probable cause needs only to rest on
36
evidence showing that more likely than not, a crime has been committed by the suspect.
However, while probable cause should be determined in a summary manner, there is a need to examine the evidence
with care to prevent material damage to a potential accuseds constitutional right to liberty and the guarantees of
37
freedom and fair play and to protect the State from the burden of unnecessary expenses in prosecuting alleged
38
offenses and holding trials arising from false, fraudulent or groundless charges.
In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in issuing
the assailed resolutions. Indeed, he acted in accord with law and the evidence.
Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:
Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the meaning of this Decree, is
any transaction by and between a person referred to in this Decree as the entruster, and another person referred to in
this Decree as entrustee, whereby the entruster, who owns or holds absolute title or security interests over certain
specified goods, documents or instruments, releases the same to the possession of the entrustee upon the latters
execution and delivery to the entruster of a signed document called a "trust receipt" wherein the entrustee binds
himself to hold the designated goods, documents or instruments in trust for the entruster and to sell or otherwise
dispose of the goods, documents or instruments with the obligation to turn over to the entruster the proceeds thereof
to the extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or

instruments themselves if they are unsold or not otherwise disposed of, in accordance with the terms and conditions
specified in the trust receipt, or for other purposes substantially equivalent to any of the following:
1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture or process
the goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered under trust receipt
for the purpose of manufacturing or processing before its ultimate sale, the entruster shall retain its title over
the goods whether in its original or processed form until the entrustee has complied fully with his obligation
under the trust receipt; or (c) to load, unload, ship or otherwise deal with them in a manner preliminary or
necessary to their sale; or
2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a principal; or
c) to effect the consummation of some transactions involving delivery to a depository or register; or d) to effect
their presentation, collection or renewal.
The sale of goods, documents or instruments by a person in the business of selling goods, documents or instruments
for profit who, at the outset of the transaction, has, as against the buyer, general property rights in such goods,
documents or instruments, or who sells the same to the buyer on credit, retaining title or other interest as security for
the payment of the purchase price, does not constitute a trust receipt transaction and is outside the purview and
coverage of this Decree.
An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt transaction,
and any successor in interest of such person for the purpose of payment specified in the trust receipt
39
agreement. The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster and
shall dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds
in trust for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or
as appears on the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other
casualties; (4) keep said goods or proceeds thereof whether in money or whatever form, separate and capable of
identification as property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or
upon demand of the entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the
40
provisions of the decree.
The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a
trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to
the return of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights
41
conferred on him in the trust receipt; provided, such are not contrary to the provisions of the document.
In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt transactions
envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to PBMI under the trust
receipts signed by petitioner, as entrustee, with the bank as entruster. The agreement was as follows:
And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as its property with
liberty to sell the same within ____days from the date of the execution of this Trust Receipt and for the Banks
account, but without authority to make any other disposition whatsoever of the said goods or any part thereof (or the
proceeds) either by way of conditional sale, pledge or otherwise.
I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage or other casualties as
directed by the BANK, the sum insured to be payable in case of loss to the BANK, with the understanding that the
BANK is, not to be chargeable with the storage premium or insurance or any other expenses incurred on said goods.
In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the BANK, to apply against
the relative acceptances (as described above) and for the payment of any other indebtedness of mine/ours to the
BANK. In case of non-sale within the period specified herein, I/we agree to return the goods under this Trust Receipt
to the BANK without any need of demand.
I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the form of money or bills,
42
receivables, or accounts separate and capable of identification as property of the BANK.
It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public policy, the
failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or to return said goods, if
43
not sold, is a public nuisance to be abated by the imposition of penal sanctions.
The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods procured
as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation v.
44
Ordoez. The law applies to goods used by the entrustee in the operation of its machineries and equipment. The

non-payment of the amount covered by the trust receipts or the non-return of the goods covered by the receipts, if not
sold or otherwise not disposed of, violate the entrustees obligation to pay the amount or to return the goods to the
entruster.
45

In Colinares v. Court of Appeals, the Court declared that there are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers to money received under the obligation involving the
duty to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which
46
refers to merchandise received under the obligation to return it (devolvera) to the owner. Thus, failure of the
entrustee to turn over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return
said goods if they were not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115,
without need of proving intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of
money or goods to the prejudice of the entruster, regardless of whether the latter is the owner or not. A mere failure to
deliver the proceeds of the sale of the goods, if not sold, constitutes a criminal offense that causes prejudice, not only
47
to another, but more to the public interest.
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI and had no
physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115.
The penalty clause of the law, Section 13 of P.D. No. 115 reads:
Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the goods, documents
or instruments covered by a trust receipt to the extent of the amount owing to the entruster or as appears in the trust
receipt or to return said goods, documents or instruments if they were not sold or disposed of in accordance with the
terms of the trust receipt shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as amended, otherwise
known as the Revised Penal Code.1wphi1 If the violation or offense is committed by a corporation, partnership,
association or other juridical entities, the penalty provided for in this Decree shall be imposed upon the directors,
officers, employees or other officials or persons therein responsible for the offense, without prejudice to the civil
liabilities arising from the criminal offense.
The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article 315 of
the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a corporation or other juridical
entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said Article
315, which reads:
ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the means mentioned
hereinbelow shall be punished by:
1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum period, if the
amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such amount exceeds the
latter sum, the penalty provided in this paragraph shall be imposed in its maximum period, adding one year for
each additional 10,000 pesos; but the total penalty which may be imposed shall not exceed twenty years. In
such cases, and in connection with the accessory penalties which may be imposed and for the purpose of the
other provisions of this Code, the penalty shall be termed prision mayor or reclusion temporal, as the case
may be;
2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the fraud is over
6,000 pesos but does not exceed 12,000 pesos;
3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum period, if such
amount is over 200 pesos but does not exceed 6,000 pesos; and
4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200 pesos, provided that
in the four cases mentioned, the fraud be committed by any of the following means; xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other
officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board
of directors, officers, or other officials or employees responsible for the offense. The rationale is that such officers or
employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the
law and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of
48
the law.
If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other officers
thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of

the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a
49
crime punishable by imprisonment. However, a corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be
50
prosecuted and, if found guilty, may be fined.
A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A necessary
part of the definition of every crime is the designation of the author of the crime upon whom the penalty is to be
inflicted. When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it
creates a criminal offense which, otherwise, would not exist and such can be committed only by the corporation. But
when a penal statute does not expressly apply to corporations, it does not create an offense for which a corporation
may be punished. On the other hand, if the State, by statute, defines a crime that may be committed by a corporation
but prescribes the penalty therefor to be suffered by the officers, directors, or employees of such corporation or other
51
persons responsible for the offense, only such individuals will suffer such penalty. Corporate officers or employees,
through whose act, default or omission the corporation commits a crime, are themselves individually guilty of the
52
crime.
The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those corporate
agents who themselves commit the crime and to those, who, by virtue of their managerial positions or other similar
relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the
53
corporation, they had the power to prevent the act. Moreover, all parties active in promoting a crime, whether agents
54
or not, are principals. Whether such officers or employees are benefited by their delictual acts is not a touchstone of
their criminal liability. Benefit is not an operative fact.
In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the separate
corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect himself
55
behind a corporation where he is the actual, present and efficient actor.
IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner.
SO ORDERED.
ROMEO J. CALLEJO, SR.
Associate Justice
WE CONCUR:
ARTEMIO V. PANGANIBAN

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
1

This petition for review assails the 4 January 1999 Decision and 26 January 2000 Resolution of the Court of Appeals
3
in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification 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 pay Ago Medical and Educational Center-Bicol Christian College of Medicine moral damages,
attorneys fees and costs of suit.
The Antecedents
4

"Expos" is a radio documentary program hosted by Carmelo Mel Rima ("Rima") and Hermogenes Jun Alegre
5
("Alegre"). Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network, Inc.
6
("FBNI"). "Expos" is heard over Legazpi 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 of
7
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 purpose of the institution (AMEC) is to deceive

students at cross purpose with its reason for being it is possible for these foreign foundations to lift or suspend their
8
donations temporarily.
xxx
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
9
improve their social status are even more burdened with false 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.
10

On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil 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
11
counsel of Atty. 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.
12

On 14 December 1992, the trial court rendered a 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

(Emphasis supplied)

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, 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.1awphi1.nt
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL
DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre against
17
AMEC. While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint reveals that
18
AMECs cause of action is based on Articles 30 and 33 of the Civil Code. Article 30 authorizes a separate civil action
19
to recover civil liability arising from a criminal offense. On the other hand, Article 33 particularly provides that the
injured party may bring a separate civil action for damages in cases of defamation, fraud, and physical injuries. AMEC
20
21
22
also invokes Article 19 of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 and 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
24
juridical person, or to blacken the memory of 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.
25

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
26
27
information." Hearing the students alleged complaints a month 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
28
they were many and not because there 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 subjective awareness of the truth
29
or 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
30
an existing controversy, and a party to that controversy makes the defamatory statement.
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of
31
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
32
to be mistaken, as long as it 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 in Borjal, the questioned broadcasts are not based on established facts. The record
supports the following findings of the trial court:
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. Crebuttal). 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.l^vvphi1.net 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
33
examination easily and become prosperous and responsible professionals.
Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion happens
34
to be mistaken, as long as it might reasonably be inferred from the facts. However, the comments of Rima and
Alegre were not backed up by facts. Therefore, the broadcasts are not privileged and remain libelousper se.
The broadcasts also violate the Radio Code
Item I(B) of the Radio Code provides:

35

of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. ("Radio Code").

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x
4. 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.
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.
8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public interest,
36
general welfare and good order in the presentation of public affairs and public issues. (Emphasis supplied)
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 manner contrary to morals
38
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 because it is a corporation.

39

A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience
40
physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. The
41
Court of Appeals cites Mambulao Lumber Co. v. PNB, et al. to justify the award of moral damages. However, the
Courts statement in Mambulao that "a corporation may have a good reputation which, if besmirched, may also be a
42
ground for the award of moral damages" is an obiter dictum.
43

Nevertheless, AMECs claim for moral damages falls under item 7 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
44
corporation can validly complain for libel or any other form of defamation and claim for moral damages.
45

Moreover, where the broadcast is libelous per se, the law implies damages. In such a case, evidence of an honest
46
mistake or the want of character or reputation of the party libeled goes only in mitigation of 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.
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.
48
FBNI adds that the 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
49
failed to explicitly state in their respective decisions the rationale for the award of attorneys fees. InInter-Asia
50
Investment Industries, Inc. v. Court of 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
51
reason for the award of attorneys fees. (Emphasis supplied)
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 jointly and severally liable for the tort which they
52
commit. Joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance,
53
cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit. Thus,
AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of the Civil Code.1a\^/phi1.net
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
54
procures, or participates in, the making of the 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
55
when the employer 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 andsupervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised
diligence in theselection of its broadcasters without introducing any evidence to prove that it observed the same
diligence in thesupervision 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 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 deficiencies in their KBP
56
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 andsupervising 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.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

G.R. No. 142936

April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners,

vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:
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.
Statement of the Case
1

Before us is a Petition for Review assailing the April 17, 2000 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."

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. 794-812 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 the PNB, with office and principal place of business at the 2nd 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
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;
(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine
generating set[s];
(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo
generator sets;
(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating
set[s];
(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical
wirings and pipe provided those stated units are completely supplied with their accessories;
(f) 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;
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) Supply of electrical devices;
(b) Extra mechanical works;
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
(e) Electrical shop repair;
(f) Supply of parts and related works for turbine generator;
(g) Supply of electrical equipment for machinery;
(h) 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 of
P14,000.00, 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 holds office at the 10th
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.
"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:
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. 189-A; (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, 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 sub-par. 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.
'(SGD) ERNESTO S. TENGCO
3
Judge"
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 repudiating any responsibility,
4
obligation or liability arising therefrom.
Hence, this Petition.

Issues
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[] take-over 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
6
Edward J. Nell Co. v. Pacific 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
7

As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court. To
8
this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals. After a careful scrutiny of
the records and the pleadings submitted by the parties, we find that the lower courts misappreciated the evidence
9
presented. Overlooked by the CA were certain relevant facts that would justify a conclusion different from that
10
reached in the 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.1wphi1.nt
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 fraudulently entered into in order to
11
escape liability for those debts.
Piercing the Corporate

Veil Not Warranted

A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers,
12
attributes, and properties expressly authorized by law or incident to its existence. It has a personality separate and
13
distinct from the persons composing it, as well as from any other legal entity to which it may be related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the
14
corporation is just an alter ego of a person or of another corporation. For reasons of public policy and in the interest
15
of justice, the corporate veil will justifiably be impaled only when it becomes a shield for fraud, illegality or inequity
16
committed against third persons.
17

Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be
18
mindful of the milieu where it is to be applied. It must be certain that the corporate fiction was misused to such an
19
extent that injustice, fraud, or crime was committed against another, in disregard of its rights. The wrongdoing must
20
be clearly and convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended
21
may result from an erroneous application.
22

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of corporate assets as part
23
24
of the estate of the decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse
25
26
legitimate issues either to promote or to shield unfair objectives or to cover up an otherwise blatant violation of the
27
28
prohibition against forum-shopping. Only in these and similar instances may the veil be pierced and disregarded.
29

The question of whether a corporation is a mere alter ego is one 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
30
and breach of duty must have proximately 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
31
over it warrants the disregard of 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
32
ego, business conduit or instrumentality of another entity or person. Third, respondent was not defrauded or injured
33
when 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
34
convincing evidence to justify the setting aside of the separate corporate personality rule. However, it utterly failed to
35
discharge this burden; it failed to establish by competent evidence that petitioners separate corporate veil had been
36
used to conceal fraud, illegality or inequity.
While we agree with respondents claim that the assets of the National Sugar Development Corporation (NASUDECO)
37
can be easily traced to PASUMIL, we are not convinced that the transfer of the latters assets to petitioners was
38
fraudulently entered into in order to 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
39
assets as the highest 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
41
obligation. Thus, DBP had not only a right, but also a duty under the law to foreclose the subject properties.
42

43

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
44
operation of such assets either by itself or through a subsidiary corporation.
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act
45
No. 3135. These assets were later conveyed to PNB for a consideration, the terms of which were embodied in the
46
47
Redemption Agreement. PNB, as successor-in-interest, stepped into the shoes of DBP as PASUMILs creditor. By
48
way of a Deed of Assignment, PNB then transferred to NASUDECO all its rights under the Redemption Agreement.
49

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.
50

In the instant case, the CA erred in affirming the trial courts lifting of the corporate mask. The CA did not point to any
51
fact evidencing bad faith on the part of PNB and its transferee. The corporate fiction was not used to defeat public
52
convenience, justify a wrong, protect fraud or defend crime. None of the foregoing exceptions was shown to exist in
53
the present case. On the contrary, the lifting of the corporate veil would result in manifest injustice. This we cannot
allow.
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
54
that survives and continues the combined business.
55

The merger, however, does not become effective upon the mere 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
56
creditors, there must be an express provision of law authorizing them. For a valid merger or consolidation, the
approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is
57
required. These articles must likewise be duly approved by a majority of the respective stockholders of the
58
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 CA, had not been legally extinguished or
60
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.
61

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. LOI No. 11
62
explicitly provides that PNB shall study and submit recommendations on the claims of PASUMILs creditors. Clearly,
63
the corporate separateness between PASUMIL and PNB remains, despite respondents insistence to the contrary.
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to
costs.
SO ORDERED.
Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.