[G.R. No. 152542.

July 8, 2004]
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M. SALVATIERRA, petitioner, vs.
ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M.
RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF
APPEALS, respondents.
[G.R. No. 155472. July 8, 2004]
ANTONIO B. MONFORT III, MA. LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT, CARLOS M. RODRIGUEZ,
EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ, petitioners, vs. HON. COURT
OF APPEALS, MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as represented by MA. ANTONIA M.
SALVATIERRA, and RAMON H. MONFORT, respondents.

Before the Court are consolidated petitions for review of the decisions of the Court of Appeals in the complaints for forcible entry and
replevin filed by Monfort Hermanos Agricultural Development Corporation (Corporation) and Ramon H. Monfort against the children,
nephews, and nieces of its original incorporators (collectively known as the group of Antonio Monfort III).
[1]

The petition in G.R. No. 152542, assails the October 5, 2001 Decision of the Special Tenth Division of the Court of Appeals in CA-G.R.
SP No. 53652, which ruled that Ma. Antonia M. Salvatierra has no legal capacity to represent the Corporation in the forcible entry case
docketed as Civil Case No. 534-C, before the Municipal Trial Court of Cadiz City. On the other hand, the petition in G.R. No. 155472, seeks to
[2]
set aside the June 7, 2002 Decision rendered by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No. 49251,
where it refused to address, on jurisdictional considerations, the issue of Ma. Antonia M. Salvatierras capacity to file a complaint for replevin
on behalf of the Corporation in Civil Case No. 506-C before the Regional Trial Court of Cadiz City, Branch 60.
Monfort Hermanos Agricultural Development Corporation, a domestic private corporation, is the registered owner of a farm, fishpond
[3]
and sugar cane plantation known as Haciendas San Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in Cadiz City. It also owns
[4]
one unit of motor vehicle and two units of tractors. The same allowed Ramon H. Monfort, its Executive Vice President, to breed and
[5]
maintain fighting cocks in his personal capacity at Hacienda San Antonio.
In 1997, the group of Antonio Monfort III, through force and intimidation, allegedly took possession of the 4 Haciendas, the produce
thereon and the motor vehicle and tractors, as well as the fighting cocks of Ramon H. Monfort.
In G.R. No. 155472:
On April 10, 1997, the Corporation, represented by its President, Ma. Antonia M. Salvatierra, and Ramon H. Monfort, in his personal
[6]
capacity, filed against the group of Antonio Monfort III, a complaint for delivery of motor vehicle, tractors and 378 fighting cocks, with
prayer for injunction and damages, docketed as Civil Case No. 506-C, before the Regional Trial Court of Negros Occidental, Branch 60.
The group of Antonio Monfort III filed a motion to dismiss contending, inter alia, that Ma. Antonia M. Salvatierra has no capacity to sue
[7]
on behalf of the Corporation because the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation is void as the purported Members of the Board who passed the same were not validly elected officers
of the Corporation.
[8]

On May 4, 1998, the trial court denied the motion to dismiss. The group of Antonio Monfort III filed a petition for certiorari with the
[9]
Court of Appeals but the same was dismissed on June 7, 2002. The Special Former Thirteenth Division of the appellate court did not resolve
the validity of the March 31, 1997 Board Resolution and the election of the officers who signed it, ratiocinating that the determination of said
question is within the competence of the trial court.
The motion for reconsideration filed by the group of Antonio Monfort III was denied.
this Court, docketed as G.R. No. 155472.

[10]

Hence, they instituted a petition for review with

In G.R. No. 152542:

On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a complaint for forcible entry, preliminary mandatory
injunction with temporary restraining order and damages against the group of Antonio Monfort III, before the Municipal Trial Court (MTC)
[11]
of Cadiz City.
It contended that the latter through force and intimidation, unlawfully took possession of the 4 Haciendas and deprived the
Corporation of the produce thereon.
[12]

In their answer, the group of Antonio Monfort III alleged that they are possessing and controlling the Haciendas and harvesting the
produce therein on behalf of the corporation and not for themselves. They likewise raised the affirmative defense of lack of legal capacity of
Ma. Antonia M. Salvatierra to sue on behalf of the Corporation.
[13]

On February 18, 1998, the MTC of Cadiz City rendered a decision dismissing the complaint. On appeal, the Regional Trial Court of
[14]
Negros Occidental, Branch 60, reversed the Decision of the MTCC and remanded the case for further proceedings.
Aggrieved, the group of Antonio Monfort III filed a petition for review with the Court of Appeals. On October 5, 2001, the Special Tenth
Division set aside the judgment of the RTC and dismissed the complaint for forcible entry for lack of capacity of Ma. Antonia M. Salvatierra to
[15]
[16]
represent the Corporation. The motion for reconsideration filed by the latter was denied by the appellate court.
Unfazed, the Corporation filed a petition for review with this Court, docketed as G.R. No. 152542 which was consolidated with G.R. No.
[17]
155472 per Resolution datedJanuary 21, 2004.
The focal issue in these consolidated petitions is whether or not Ma. Antonia M. Salvatierra has the legal capacity to sue on behalf of the
Corporation.

The group of Antonio Monfort III claims that the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon
H. Monfort to represent the Corporation is void because the purported Members of the Board who passed the same were not validly elected
officers of the Corporation.
A corporation has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to
its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. Thus,
it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of directors that exercises its
corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly
[18]
authorized for the purpose by corporate by-laws or by a specific act of the board of directors.
Corollary thereto, corporations are required under Section 26 of the Corporation Code to submit to the SEC within thirty (30) days after
the election the names, nationalities and residences of the elected directors, trustees and officers of the Corporation. In order to keep
stockholders and the public transacting business with domestic corporations properly informed of their organizational operational status, the
SEC issued the following rules:
xxx

xxx

xxx

2.
A General Information Sheet shall be filed with this Commission within thirty (30) days following the date of the annual stockholders
meeting. No extension of said period shall be allowed, except for very justifiable reasons stated in writing by the President, Secretary,
Treasurer or other officers, upon which the Commission may grant an extension for not more than ten (10) days.
2.A.
Should a director, trustee or officer die, resign or in any manner, cease to hold office, the corporation shall report such fact to the
Commission with fifteen (15) days after such death, resignation or cessation of office.
3.
If for any justifiable reason, the annual meeting has to be postponed, the company should notify the Commission in writing of such
postponement.
The General Information Sheet shall state, among others, the names of the elected directors and officers, together with their
corresponding position title (Emphasis supplied)
In the instant case, the six signatories to the March 31, 1997 Board Resolution authorizing Ma. Antonia M. Salvatierra and/or Ramon H.
Monfort to represent the Corporation, were: Ma. Antonia M. Salvatierra, President; Ramon H. Monfort, Executive Vice President; Directors
[19]
Paul M. Monfort, Yvete M. Benedicto and Jaqueline M. Yusay; and Ester S. Monfort, Secretary. However, the names of the last four (4)
signatories to the said Board Resolution do not appear in the 1996 General Information Sheet submitted by the Corporation with the
SEC. Under said General Information Sheet the composition of the Board is as follows:
1.

6.

Ma. Antonia M. Salvatierra (Chairman);

2.
Ramon H. Monfort (Member);
3.
Antonio H. Monfort, Jr., (Member);
4.
Joaquin H. Monfort (Member);
5.
Francisco H. Monfort (Member) and
[20]
Jesus Antonio H. Monfort (Member).

There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort, were indeed duly elected
[21]
Members of the Board legally constituted to bring suit in behalf of the Corporation.
[22]

In Premium Marble Resources, Inc. v. Court of Appeals, the Court was confronted with the similar issue of capacity to sue of the
officers of the corporation who filed a complaint for damages. In the said case, we sustained the dismissal of the complaint because it was
not established that the Members of the Board who authorized the filing of the complaint were the lawfully elected officers of the
corporation. Thus
The only issue in this case is whether or not the filing of the case for damages against private respondent was authorized by a duly
constituted Board of Directors of the petitioner corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare,
presented the Minutes of the meeting of its Board of Directors held on April 1, 1982, as proof that the filing of the case against private
respondent was authorized by the Board. On the other hand, the second set of officers, viz., Saturnino G. Belen, Jr., Alberto C. Nograles and
Jose L.R. Reyes, presented a Resolution dated July 30, 1986, to show that Premium did not authorize the filing in its behalf of any suit against
the private respondent International Corporate Bank.
Later on, petitioner submitted its Articles of Incorporation dated November 6, 1979 with the following as Directors: Mario C. Zavalla, Pedro C.
Celso, Oscar B. Gan, Lionel Pengson, and Jose Ma. Silva.
However, it appears from the general information sheet and the Certification issued by the SEC on August 19, 1986 that as of March 4, 1981,
the officers and members of the board of directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director

Saturnino G. Belen, Jr. Chairman of the Board.

While the Minutes of the Meeting of the Board on April 1, 1982 states that the newly elected officers for the year 1982 were Oscar Gan,
Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was reported to the SEC. In fact, the last
entry in their General Information Sheet with the SEC, as of 1986 appears to be the set of officers elected in March 1981.
We agree with the finding of public respondent Court of Appeals, that in the absence of any board resolution from its board of directors the
[sic] authority to act for and in behalf of the corporation, the present action must necessarily fail. The power of the corporation to sue and be
sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of
plaintiff-appellants subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of
the Securities & Exchange Commission.
By the express mandate of the Corporation Code (Section 26), all corporations duly organized pursuant thereto are required to submit within
the period therein stated (30 days) to the Securities and Exchange Commission the names, nationalities and residences of the directors,
trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26.
Report of election of directors, trustees and officers. Within thirty (30) days after the election of the directors, trustees and
officers of the corporation, the secretary, or any other officer of the corporation, shall submit to the Securities
and Exchange Commission, the names, nationalities and residences of the directors, trustees and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26 is to give the public information, under sanction of oath of responsible officers,
of the nature of business, financial condition and operational status of the company together with information on its key officers or managers
so that those dealing with it and those who intend to do business with it may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty. Dumadag, that Zaballa, et al., are the incumbent officers of Premium has not been
fully substantiated. In the absence of an authority from the board of directors, no person, not even the officers of the corporation, can
validly bind the corporation.
[23]

In the case at bar, the fact that four of the six Members of the Board listed in the 1996 General Information Sheet are already
dead at the time the March 31, 1997 Board Resolution was issued, does not automatically make the four signatories (i.e., Paul M. Monfort,
Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said Board Resolution (whose name do not appear in the 1996 General
Information Sheet) as among the incumbent Members of the Board. This is because it was not established that they were duly elected to
replace the said deceased Board Members.
[24]

To correct the alleged error in the General Information Sheet, the retained accountant of the Corporation informed the SEC in
its November 11, 1998 letter that the non-inclusion of the lawfully elected directors in the 1996 General Information Sheet was attributable
[25]
to its oversight and not the fault of the Corporation. This belated attempt, however, did not erase the doubt as to whether an election was
indeed held. As previously stated, a corporation is mandated to inform the SEC of the names and the change in the composition of its
officers and board of directors within 30 days after election if one was held, or 15 days after the death, resignation or cessation of office of
any of its director, trustee or officer if any of them died, resigned or in any manner, ceased to hold office. This, the Corporation failed to
do. The alleged election of the directors and officers who signed the March 31, 1997 Board Resolution was held on October 16, 1996, but the
SEC was informed thereof more than two years later, or on November 11, 1998. The 4 Directors appearing in the 1996 General Information
[26]
Sheet died between the years 1984 1987, but the records do not show if such demise was reported to the SEC.
What further militates against the purported election of those who signed the March 31, 1997 Board Resolution was the belated
submission of the alleged Minutes of the October 16, 1996 meeting where the questioned officers were elected. The issue of legal capacity
of Ma. Antonia M. Salvatierra was raised before the lower court by the group of Antonio Monfort III as early as 1997, but the Minutes of said
October 16, 1996 meeting was presented by the Corporation only in its September 29, 1999 Comment before the Court of
[27]
Appeals. Moreover, the Corporation failed to prove that the same October 16, 1996 Minutes was submitted to the SEC. In fact,
[28]
the 1997 General Information Sheet submitted by the Corporation does not reflect the names of the 4 Directors claimed to be elected
on October 16, 1996.
Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to prove that four of those who authorized her to represent
the Corporation were the lawfully elected Members of the Board of the Corporation. As such, they cannot confer valid authority for her to
sue on behalf of the corporation.
The Court notes that the complaint in Civil Case No. 506-C, for replevin before the Regional Trial Court of Negros Occidental, Branch 60,
has 2 causes of action, i.e., unlawful detention of the Corporations motor vehicle and tractors, and the unlawful detention of the of 387
fighting cocks of Ramon H. Monfort. Since Ramon sought redress of the latter cause of action in his personal capacity, the dismissal of the
complaint for lack of capacity to sue on behalf of the corporation should be limited only to the corporations cause of action for delivery of
[29]
motor vehicle and tractors. In view, however, of the demise of Ramon on June 25, 1999, substitution by his heirs is proper.
WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542 is DENIED. The October 5, 2001 Decision of the Special Tenth
Division of the Court of Appeals in CA-G.R. SP No. 53652, which set aside the August 14, 1998 Decision of the Regional Trial Court of Negros
Occidental, Branch 60 in Civil Case No. 822, is AFFIRMED.
In G.R. No. 155472, the petition is GRANTED and the June 7, 2002 Decision rendered by the Special Former Thirteenth Division of the
Court of Appeals in CA-G.R. SP No. 49251, dismissing the petition filed by the group of Antonio Monfort III, is REVERSED and SET ASIDE.
The complaint for forcible entry docketed as Civil Case No. 822 before the Municipal Trial Court of Cadiz City is DISMISSED. In Civil Case
No. 506-C with the Regional Trial Court of Negros Occidental, Branch 60, the action for delivery of personal property filed by Monfort

Hermanos Agricultural Development Corporation is likewiseDISMISSED. With respect to the action filed by Ramon H. Monfort for the
delivery of 387 fighting cocks, the Regional Trial Court of Negros Occidental, Branch 60, is ordered to effect the corresponding substitution of
parties.
No costs.
SO ORDERED.

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

BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and GENERAL CREDIT CORPORATION, respondents.
YNARES-SANTIAGO, J.:
Assailed in this petition for review is the consolidated decision of the Court of Appeals dated July 7, 1994, which reversed the separate
decisions of the Regional Trial Court of Pasig City and the Regional Trial Court of Quezon City in two cases between petitioner Reynoso and
respondent General Credit Corporation (GCC).
Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, CCC), a financing and investment firm, decided to
organize franchise companies in different parts of the country, wherein it shall hold thirty percent (30%) equity. Employees of the CCC were
designated as resident managers of the franchise companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident manager of
the franchise company in Quezon City, known as the Commercial Credit Corporation of Quezon City (hereinafter, CCC-QC).
CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the management and full control of
the business activities of the former. Under the contract, CCC-QC shall sell, discount and/or assign its receivables to CCC. Subsequently,
however, this discounting arrangement was discontinued pursuant to the so-called DOSRI Rule, prohibiting the lending of funds by
corporations to its directors, officers, stockholders and other persons with related interests therein.
On account of the new restrictions imposed by the Central Bank policy by virtue of the DOSRI Rule, CCC decided to form CCC Equity
Corporation, (hereinafter, CCC-Equity), a wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent equity in CCC-QC,
together with two seats in the latters Board of Directors.
Under the new set-up, several officials of Commercial Credit Corporation, including petitioner Reynoso, became employees of CCCEquity. While petitioner continued to be the Resident Manager of CCC-QC, he drew his salaries and allowances from CCCEquity. Furthermore, although an employee of CCC-Equity, petitioner, as well as all employees of CCC-QC, became qualified members of the
Commercial Credit Corporation Employees Pension Plan.
As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and supervised its employees. The business activities of
CCC-QC pertain to the acceptance of funds from depositors who are issued interest-bearing promissory notes. The amounts deposited are
then loaned out to various borrowers. Petitioner, in order to boost the business activities of CCC-QC, deposited his personal funds in the
company. In return, CCC-QC issued to him its interest-bearing promissory notes.
[1]
On August 15, 1980, a complaint for sum of money with preliminary attachment, docketed as Civil Case No. Q-30583, was instituted in
the then Court of First Instance of Rizal by CCC-QC against petitioner, who had in the meantime been dismissed from his employment by CCC[2]
Equity. The complaint was subsequently amended in order to include Hidelita Nuval, petitioners wife, as a party defendant. The complaint
alleged that petitioner embezzled the funds of CCC-QC amounting to P1,300,593.11. Out of this amount, at least P630,000.00 was used for
the purchase of a house and lot located at No. 12 Macopa Street, Valle Verde I, Pasig City. The property was mortgaged to CCC, and was later
foreclosed.
In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and asserted that the sum of P1,300,593.11
[3]
represented his money placements in CCC-QC, as shown by twenty-three (23) checks which he issued to the said company.
The case was subsequently transferred to the Regional Trial Court of Quezon City, Branch 86, pursuant to the Judiciary Reorganization
Act of 1980.
On January 14, 1985, the trial court rendered its decision, the decretal portion of which states:
Premises considered, the Court finds the complaint without merit. Accordingly, said complaint is hereby DISMISSED.
By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation, humiliation and mental anguish.
On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is hereby ordered:
a)
to pay defendant the sum of P185,000.00 plus 14% interest per annum from October 2, 1980 until fully paid;
b)
to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per annum from June 24, 1981, the date of filing of Amended
Answer, until fully paid; from this amount may be deducted the remaining obligation of defendant under the promissory note of October 24,
1977, in the sum of P9,738.00 plus penalty at the rate of 1% per month from December 24, 1977 until fully paid;
c)
to pay defendants P200,000.00 as moral damages;
d)
to pay defendants P100,000.00 as exemplary damages;
e)
to pay defendants P25,000.00 as and for attorney's fees; plus costs of the suit.
SO ORDERED.
Both parties appealed to the then Intermediate Appellate Court. The appeal of Commercial Credit Corporation of Quezon City was
dismissed for failure to pay docket fees. Petitioner, on the other hand, withdrew his appeal.
[4]
Hence, the decision became final and, accordingly, a Writ of Execution was issued on July 24, 1989. However, the judgment remained
[5]
unsatisfied, prompting petitioner to file a Motion for Alias Writ of Execution, Examination of Judgment Debtor, and to Bring Financial
[6]
Records for Examination to Court. CCC-QC filed an Opposition to petitioners motion, alleging that the possession of its premises and
records had been taken over by CCC.
Meanwhile, in 1983, CCC became known as the General Credit Corporation.
On November 22, 1991, the Regional Trial Court of Quezon City issued an Order directing General Credit Corporation to file its comment
[7]
on petitioners motion for alias writ of execution. General Credit Corporation filed a Special Appearance and Opposition on December 2,
[8]
1991, alleging that it was not a party to the case, and therefore petitioner should direct his claim against CCC-QC and not General Credit
[9]
Corporation. Petitioner filed his reply, stating that the CCC-QC is an adjunct instrumentality, conduit and agency of CCC. Furthermore,
petitioner invoked the decision of the Securities and Exchange Commission in SEC Case No. 2581, entitled, Avelina G. Ramoso, et al.,
Petitioner versus General Credit Corp., et al., Respondents, where it was declared that General Credit Corporation, CCC-Equity and other
franchised companies including CCC-QC were declared as one corporation.

[10]

On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of an alias writ of execution. On December 20,
[11]
1991, General Credit Corporation filed an Omnibus Motion, alleging that SEC Case No. 2581 was still pending appeal, and maintaining that
the levy on properties of the General Credit Corporation by the deputy sheriff of the court was erroneous.
In his Opposition to the Omnibus Motion, petitioner insisted that General Credit Corporation is just the new name of Commercial Credit
Corporation; hence, General Credit Corporation and Commercial Credit Corporation should be treated as one and the same entity.
[12]
On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus Motion. On March 5, 1992, it issued an Order
[13]
directing the issuance of an alias writ of execution.
Previously, on February 21, 1992, General Credit Corporation instituted a complaint before the Regional Trial Court of Pasig against
[14]
Bibiano Reynoso IV and Edgardo C. Tanangco, in his capacity as Deputy Sheriff of Quezon City, docketed as Civil Case No. 61777, praying
that the levy on its parcel of land located in Pasig, Metro Manila and covered by Transfer Certificate of Title No. 29940 be declared null and
void, and that defendant sheriff be enjoined from consolidating ownership over the land and from further levying on other properties of
General Credit Corporation to answer for any liability under the decision in Civil Case No. Q-30583.
The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining order. Thus, General Credit Corporation instituted
[15]
two (2) petitions for certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 27518 and CA-G.R. SP No. 27683. These cases were
later consolidated.
On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated cases, the dispositive portion of which reads:
WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal to issue a restraining order as having been rendered
moot by our Resolution of 7 April 1992 which, by way of injunctive relief, provided that "the respondents and their representatives are
hereby enjoined from conducting an auction sale (on execution) of petitioner's properties as well as initiating similar acts of levying (upon)
and selling on execution other properties of said petitioner". The injunction thus granted, as modified by the words in parenthesis, shall
remain in force until Civil Case No. 61777 shall have been finally terminated.
In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET ASIDE, for having been issued in excess of jurisdiction,
the Order of 13 February 1992 in Civil Case No. Q-30583 as well as any other order or process through which the petitioner is made liable
under the judgment in said Civil Case No. Q-30583.
No damages and no costs.
[16]
SO ORDERED.
Hence, this petition for review anchored on the following arguments:
1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683 WHEN IT NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER
AND OTHER ORDERS OR PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL COURT OF QUEZON CITY THROUGH WHICH GENERAL CREDIT
CORPORATION IS MADE LIABLE UNDER THE JUDGMENT THAT WAS RENDERED IN CIVIL CASE NO. Q-30583.
2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518 WHEN IT ENJOINED THE AUCTION SALE ON EXECUTION OF THE
PROPERTIES OF GENERAL CREDIT CORPORATION AS WELL AS INITIATING SIMILAR ACTS OF LEVYING UPON AND SELLING ON EXECUTION OF
OTHER PROPERTIES OF GENERAL CREDIT CORPORATION.
3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL CREDIT CORPORATION IS A STRANGER TO CIVIL CASE NO. Q30583, INSTEAD OF, DECLARING THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY IS THE ALTER EGO, INSTRUMENTALITY,
CONDUIT OR ADJUNCT OF COMMERCIAL CREDIT CORPORATION AND ITS SUCCESSOR GENERAL CREDIT CORPORATION.
At the outset, it must be stressed that there is no longer any controversy over petitioners claims against his former employer, CCC-QC,
inasmuch as the decision in Civil Case No. Q-30583 of the Regional Trial Court of Quezon City has long become final and executory. The only
issue, therefore, to be resolved in the instant petition is whether or not the judgment in favor of petitioner may be executed against
respondent General Credit Corporation. The latter contends that it is a corporation separate and distinct from CCC-QC and, therefore, its
properties may not be levied upon to satisfy the monetary judgment in favor of petitioner. In short, respondent raises corporate fiction as its
defense. Hence, we are necessarily called upon to apply the doctrine of piercing the veil of corporate entity in order to determine if General
Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-QC.
The petition is impressed with merit.
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties
[17]
expressly authorized by law or incident to its existence. It is an artificial being invested by law with a personality separate and distinct from
[18]
those of the persons composing it as well as from that of any other legal entity to which it may be related. It was evolved to make possible
the aggregation and assembling of huge amounts of capital upon which big business depends. It also has the advantage of non-dependence
on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons.
Precisely because the corporation is such a prevalent and dominating factor in the business life of the country, the law has to look
carefully into the exercise of powers by these artificial persons it has created.
Any piercing of the corporate veil has to be done with caution. However, the Court will not hesitate to use its supervisory and
adjudicative powers where the corporate fiction is used as an unfair device to achieve an inequitable result, defraud creditors, evade
contracts and obligations, or to shield it from the effects of a court decision. The corporate fiction has to be disregarded when necessary in
the interest of justice.
[19]
In First Philippine International Bank v. Court of Appeals, et al., we held:
When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with
which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Also in the above-cited case, we stated that this Court has pierced the veil of corporate fiction in numerous cases where it was used,
[20]
[21]
among others, to avoid a judgment credit; to avoid inclusion of corporate assets as part of the estate of a decedent; to avoid liability
[22]
[23]
arising from debt; when made use of as a shield to perpetrate fraud and/or confuse legitimate issues; or to promote unfair objectives or
[24]
otherwise to shield them.
In the appealed judgment, the Court of Appeals sustained respondents arguments of separateness and its character as a different
corporation which is a non-party or stranger to this case.
The defense of separateness will be disregarded where the business affairs of a subsidiary corporation are so controlled by the mother
corporation to the extent that it becomes an instrument or agent of its parent. But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify
[25]
wrong, protect fraud or defend crime.

[26]

We stated in Tomas Lao Construction v. National Labor Relations Commission, that the legal fiction of a corporation being a judicial
entity with a distinct and separate personality was envisaged for convenience and to serve justice. Therefore, it should not be used as a
subterfuge to commit injustice and circumvent the law.
Precisely for the above reasons, we grant the instant petition.
It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation was intended to publicly identify it as a
component of the CCC group of companies engaged in one and the same business, i.e., investment and financing. Aside from CCC-Quezon
City, other franchise companies were organized such as CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary
corporations as what was done here is usually resorted to for the aggrupation of capital, the ability to cover more territory and population,
the decentralization of activities best decentralized, and the securing of other legitimate advantages. But when the mother corporation and
its subsidiary cease to act in good faith and honest business judgment, when the corporate device is used by the parent to avoid its liability
for legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate fraud or promote injustice, the law steps in
to remedy the problem. When that happens, the corporate character is not necessarily abrogated. It continues for legitimate
objectives. However, it is pierced in order to remedy injustice, such as that inflicted in this case.
Factually and legally, the CCC had dominant control of the business operations of CCC-QC. The exclusive management contract insured
that CCC-QC would be managed and controlled by CCC and would not deviate from the commands of the mother corporation. In addition to
the exclusive management contract, CCC appointed its own employee, petitioner, as the resident manager of CCC-QC.
Petitioners designation as resident manager implies that he was placed in CCC-QC by a superior authority. In fact, even after his
assignment to the subsidiary corporation, petitioner continued to receive his salaries, allowances, and benefits from CCC, which later became
respondent General Credit Corporation. Not only that. Petitioner and the other permanent employees of CCC-QC were qualified members
and participants of the Employees Pension Plan of CCC.
There are other indications in the record which attest to the applicability of the identity rule in this case, namely: the unity of interests,
management, and control; the transfer of funds to suit their individual corporate conveniences; and the dominance of policy and practice by
the mother corporation insure that CCC-QC was an instrumentality or agency of CCC.
As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line of business involving a single transaction
process. Under their discounting arrangements, CCC financed the operations of CCC-QC. The subsidiary sold, discounted, or assigned its
accounts receivables to CCC.
The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971, shows the pervasive and intensive auditing function of
[27]
CCC over CCC-QC. The two corporations also shared the same office space. CCC-QC had no office of its own.
The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by the director-representative of CCC. The lawyers
who filed the complaint and amended complaint were all in-house lawyers of CCC.
The challenged decision of the Court of Appeals states that CCC, now General Credit Corporation, is not a formal party in the case. The
reason for this is that the complaint was filed by CCC-QC against petitioner. The choice of parties was with CCC-QC. The judgment award in
this case arose from the counterclaim which petitioner set up against CCC-QC.
The circumstances which led to the filing of the aforesaid complaint are quite revealing. As narrated above, the discounting agreements
through which CCC controlled the finances of its subordinates became unlawful when Central Bank adopted the DOSRI prohibitions. Under
this rule the directors, officers, and stockholders are prohibited from borrowing from their company. Instead of adhering to the letter and
spirit of the regulations by avoiding DOSRI loans altogether, CCC used the corporate device to continue the prohibited practice. CCC
organized still another corporation, the CCC-Equity Corporation. However, as a wholly owned subsidiary, CCC-Equity was in fact only another
name for CCC. Key officials of CCC, including the resident managers of subsidiary corporations, were appointed to positions in CCC-Equity.
In order to circumvent the Central Banks disapproval of CCC-QCs mode of reducing its DOSRI lender accounts and its directive to follow
Central Bank requirements, resident managers, including petitioner, were told to observe a pseudo-compliance with the phasing out
orders. For his unwillingness to satisfactorily conform to these directives and his reluctance to resort to illegal practices, petitioner earned
the ire of his employers. Eventually, his services were terminated, and criminal and civil cases were filed against him.
Petitioner issued twenty-three checks as money placements with CCC-QC because of difficulties faced by the firm in implementing the
required phase-out program. Funds from his current account in the Far East Bank and Trust Company were transferred to CCC-QC. These
monies were alleged in the criminal complaints against him as having been stolen. Complaints for qualified theft and estafa were brought by
CCC-QC against petitioner. These criminal cases were later dismissed. Similarly, the civil complaint which was filed with the Court of First
Instance of Pasig and later transferred to the Regional Trial Court of Quezon City was dismissed, but his counterclaims were granted.
Faced with the financial obligations which CCC-QC had to satisfy, the mother firm closed CCC-QC, in obvious fraud of its creditors. CCCQC, instead of opposing its closure, cooperated in its own demise. Conveniently, CCC-QC stated in its opposition to the motion for alias writ
of execution that all its properties and assets had been transferred and taken over by CCC.
Under the foregoing circumstances, the contention of respondent General Credit Corporation, the new name of CCC, that the corporate
fiction should be appreciated in its favor is without merit.
[28]
[29]
Paraphrasing the ruling in Claparols v. Court of Industrial Relations, reiterated in Concept Builders Inc. v. National Labor Relations, it
is very obvious that respondent seeks the protective shield of a corporate fiction whose veil the present case could, and should, be pierced
as it was deliberately and maliciously designed to evade its financial obligation of its employees.
If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment debt and work an injustice. The decision raised
[30]
to us for review is an invitation to multiplicity of litigation. As we stated in Islamic Directorate vs. Court of Appeals, the ends of justice are
not served if further litigation is encouraged when the issue is determinable based on the records.
A court judgment becomes useless and ineffective if the employer, in this case CCC as a mother corporation, is placed beyond the legal
reach of the judgment creditor who, after protracted litigation, has been found entitled to positive relief. Courts have been organized to put
an end to controversy. This purpose should not be negated by an inapplicable and wrong use of the fiction of the corporate veil.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and ASIDE. The injunction against the holding of an auction sale
for the execution of the decision in Civil Case No. Q-30583 of properties of General Credit Corporation, and the levying upon and selling on
execution of other properties of General Credit Corporation, is LIFTED.
SO ORDERED.

[G.R. No. 143377. February 20, 2001]

SHIPSIDE INCORPORATED, petitioner, vs. THE HON. COURT OF APPEALS [Special Former Twelfth Division], HON. REGIONAL TRIAL COURT,
BRANCH 26 (San Fernando City, La Union) & The REPUBLIC OF THE PHILIPPINES, respondents.
MELO, J.:
Before the Court is a petition for certiorari filed by Shipside Incorporated under Rule 65 of the 1997 Rules on Civil Procedure against the
resolutions of the Court of Appeals promulgated on November 4, 1999 and May 23, 2000, which respectively, dismissed a petition
for certiorari and prohibition and thereafter denied a motion for reconsideration.
The antecedent facts are undisputed:
On October 29, 1958, Original Certificate of Title No. 0-381 was issued in favor of Rafael Galvez, over four parcels of land Lot 1 with
6,571 square meters; Lot 2, with 16,777 square meters; Lot 3 with 1,583 square meters; and Lot 4, with 508 square meters.
On April 11, 1960, Lots No. 1 and 4 were conveyed by Rafael Galvez in favor of Filipina Mamaril, Cleopatra Llana, Regina Bustos, and
Erlinda Balatbat in a deed of sale which was inscribed as Entry No. 9115 OCT No. 0-381 on August 10, 1960. Consequently, Transfer
Certificate No. T-4304 was issued in favor of the buyers covering Lots No. 1 and 4.
Lot No. 1 is described as:
A parcel of land (Lot 1, Plan PSU-159621, L. R. Case No. N-361; L. R. C. Record No. N-14012, situated in the Barrio of Poro, Municipality of San
Fernando, Province of La Union, bounded on the NE, by the Foreshore; on the SE, by Public Land and property of the Benguet Consolidated
Mining Company; on the SW, by properties of Rafael Galvez (US Military Reservation Camp Wallace) and Policarpio Munar; and on the NW,
by an old Barrio Road. Beginning at a point marked 1 on plan, being S. 74 deg. 11W. , 2670. 36 from B. L. L. M. 1, San Fernando, thence
S. 66 deg. 19E., 134.95 m. to point 2; S. 14 deg. 57W., 11.79 m. to point 3;
S. 12 deg. 45W., 27.00 m. to point 4; S. 12 deg. 45W, 6.90 m. to point 5;
N. 69 deg., 32W., 106.00 m. to point 6; N. 52 deg., 21W., 36. 85 m. to point 7;
N. 21 deg. 31E., 42. 01 m. to the point of beginning; containing an area of SIX THOUSAND FIVE HUNDRED AND SEVENTY-ONE (6,571)
SQUARE METERS, more or less. All points referred to are indicated on the plan; and marked on the ground; bearings true, date of survey,
February 421, 1957.
Lot No. 4 has the following technical description:
A parcel of land (Lot 4, Plan PSU-159621, L. R. Case No. N-361 L. R. C. Record No. N-14012), situated in the Barrio of Poro, Municipality of San
Fernando, La Union. Bounded on the SE by the property of the Benguet Consolidated Mining Company; on the S. by property of Pelagia
Carino; and on the NW by the property of Rafael Galvez (US Military Reservation, Camp Wallace). Beginning at a point marked 1 on plan,
being S. deg. 24W. 2591. 69 m. from B. L. L. M. 1, San Fernando, thence S. 12 deg. 45W., 73. 03 m. to point 2; N. 79 deg. 59W., 13.92 m. to
point 3; N. 23 deg. 26E. , 75.00 m. to the point of beginning; containing an area of FIVE HUNDED AND EIGHT (508) SQUARE METERS, more or
less. All points referred to are indicated in the plan and marked on the ground; bearings true, date of survey, February 4-21, 1957.
On August 16, 1960, Mamaril, et al. sold Lots No. 1 and 4 to Lepanto Consolidated Mining Company. The deed of sale covering the
aforesaid property was inscribed as Entry No. 9173 on TCT No. T-4304. Subsequently, Transfer Certificate No. T-4314 was issued in the name
of Lepanto Consolidated Mining Company as owner of Lots No. 1 and 4.
On February 1, 1963, unknown to Lepanto Consolidated Mining Company, the Court of First Instance of La Union, Second Judicial
District, issued an Order in Land Registration Case No. N-361 (LRC Record No. N-14012) entitled Rafael Galvez, Applicant, Eliza Bustos, et al.,
Parties-In-Interest; Republic of the Philippines, Movant declaring OCT No. 0-381 of the Registry of Deeds for the Province of La Union issued
in the name of Rafael Galvez, null and void, and ordered the cancellation thereof.
The Order pertinently provided:
Accordingly, with the foregoing, and without prejudice on the rights of incidental parties concerned herein to institute their respective
appropriate actions compatible with whatever cause they may have, it is hereby declared and this court so holds that both proceedings in
Land Registration Case No. N-361 and Original Certificate No. 0-381 of the Registry of Deeds for the province of La Union issued in virtue
thereof and registered in the name of Rafael Galvez, are null and void; the Register of Deeds for the Province of La Union is hereby ordered to
cancel the said original certificate and / or such other certificates of title issued subsequent thereto having reference to the same parcels of
land; without pronouncement as to costs.
On October 28, 1963, Lepanto Consolidated Mining Company sold to herein petitioner Lots No. 1 and 4, with the deed being entered in
TCT NO. 4314 as entry No. 12381. Transfer Certificate of Title No. T-5710 was thus issued in favor of the petitioner which starting since then
exercised proprietary rights over Lots No. 1 and 4.
In the meantime, Rafael Galvez filed his motion for reconsideration against the order issued by the trial court declaring OCT No. 0-381
null and void. The motion was denied on January 25, 1965. On appeal, the Court of Appeals ruled in favor of the Republic of the Philippines
in a Resolution promulgated on August 14, 1973 in CA-G. R. No. 36061-R.
Thereafter, the Court of Appeals issued an Entry of Judgment, certifying that its decision dated August 14, 1973 became final and
executory on October 23, 1973.
On April 22, 1974, the trial court in L. R. C. Case No. N-361 issued a writ of execution of the judgment which was served on the Register
of Deeds, San Fernando, La Union on April 29, 1974.
Twenty four long years thereafter, on January 14, 1999, the Office of the Solicitor General received a letter dated January 11, 1999 from
Mr. Victor G. Floresca, Vice-President, John Hay Poro Point Development Corporation, stating that the aforementioned orders and decision
of the trial court in L. R. C. No. N-361 have not been executed by the Register of Deeds, San Fernando, La Union despite receipt of the writ of
execution.
On April 21, 1999, the Office of the Solicitor General filed a complaint for revival of judgment and cancellation of titles before the
Regional Trial Court of the First Judicial Region (Branch 26, San Fernando, La Union) docketed therein as Civil Case No. 6346 entitled,
Republic of the Philippines, Plaintiff, versus Heirs of Rafael Galvez, represented by Teresita Tan, Reynaldo Mamaril, Elisa Bustos, Erlinda
Balatbat, Regina Bustos, Shipside Incorporated and the Register of Deeds of La Union, Defendants.
The evidence shows that the impleaded defendants (except the Register of Deeds of the province of La Union) are the successors-ininterest of Rafael Galvez (not Reynaldo Galvez as alleged by the Solicitor General) over the property covered by OCT No. 0-381, namely: (a)
Shipside Inc. which is presently the registered owner in fee simple of Lots No. 1 and 4 covered by TCT No. T-5710, with a total area of 7,079
square meters; (b) Elisa Bustos, Jesusito Galvez, and Teresita Tan who are the registered owners of Lot No. 2 of OCT No. 0-381;and (c) Elisa
Bustos, Filipina Mamaril, Regina Bustos and Erlinda Balatbat who are the registered owners of Lot No. 3 of OCT No. 0-381, now covered by
TCT No. T-4916, with an area of 1,583 square meters.
In its complaint in Civil Case No. 6346, the Solicitor General argued that since the trial court in LRC Case No. 361 had ruled and declared
OCT No. 0-381 to be null and void, which ruling was subsequently affirmed by the Court of Appeals, the defendants-successors-in-interest of

Rafael Galvez have no valid title over the property covered by OCT No. 0-381, and the subsequent Torrens titles issued in their names should
be consequently cancelled.
On July 22, 1999, petitioner Shipside, Inc. filed its Motion to Dismiss, based on the following grounds: (1) the complaint stated no cause
of action because only final and executory judgments may be subject of an action for revival of judgment; (2) the plaintiff is not the real
party-in-interest because the real property covered by the Torrens titles sought to be cancelled, allegedly part of Camp Wallace (Wallace Air
Station), were under the ownership and administration of the Bases Conversion Development Authority (BCDA) under Republic Act No. 7227;
(3) plaintiffs cause of action is barred by prescription; (4) twenty-five years having lapsed since the issuance of the writ of execution, no
action for revival of judgment may be instituted because under Paragraph 3 of Article 1144 of the Civil Code, such action may be brought only
within ten (10) years from the time the judgment had been rendered.
An opposition to the motion to dismiss was filed by the Solicitor General on August 23, 1999, alleging among others, that: (1) the real
party-in-interest is the Republic of the Philippines;and (2) prescription does not run against the State.
On August 31, 1999, the trial court denied petitioners motion to dismiss and on October 14, 1999, its motion for reconsideration was
likewise turned down.
On October 21, 1999, petitioner instituted a petition for certiorari and prohibition with the Court of Appeals, docketed therein as CAG.R. SP No. 55535, on the ground that the orders of the trial court denying its motion to dismiss and its subsequent motion for
reconsideration were issued in excess of jurisdiction.
On November 4, 1999, the Court of Appeals dismissed the petition in CA-G.R. SP No. 55535 on the ground that the verification and
certification in the petition, under the signature of Lorenzo Balbin, Jr., was made without authority, there being no proof therein that Balbin
was authorized to institute the petition for and in behalf and of petitioner.
On May 23, 2000, the Court of Appeals denied petitioners motion for reconsideration on the grounds that: (1) a complaint filed on
behalf of a corporation can be made only if authorized by its Board of Directors, and in the absence thereof, the petition cannot prosper and
be granted due course;and (2) petitioner was unable to show that it had substantially complied with the rule requiring proof of authority to
institute an action or proceeding.
Hence, the instant petition.
In support of its petition, Shipside, Inc. asseverates that:
1. The Honorable Court of Appeals gravely abused its discretion in dismissing the petition when it made a conclusive legal
presumption that Mr. Balbin had no authority to sign the petition despite the clarity of laws, jurisprudence and Secretarys
certificate to the contrary;
2. The Honorable Court of Appeals abused its discretion when it dismissed the petition, in effect affirming the grave abuse of
discretion committed by the lower court when it refused to dismiss the 1999 Complaint for Revival of a 1973 judgment, in
violation of clear laws and jurisprudence.
Petitioner likewise adopted the arguments it raised in the petition and comment/reply it filed with the Court of Appeals, attached to its
petition as Exhibit L and N, respectively.
In his Comment, the Solicitor General moved for the dismissal of the instant petition based on the following considerations: (1) Lorenzo
Balbin, who signed for and in behalf of petitioner in the verification and certification of non-forum shopping portion of the petition, failed to
show proof of his authorization to institute the petition for certiorari and prohibition with the Court of Appeals, thus the latter court acted
correctly in dismissing the same; (2) the real party-in-interest in the case at bar being the Republic of the Philippines, its claims are
imprescriptible.
In order to preserve the rights of herein parties, the Court issued a temporary restraining order on June 26, 2000 enjoining the trial
court from conducting further proceedings in Civil Case No. 6346.
The issues posited in this case are: (1) whether or not an authorization from petitioners Board of Directors is still required in order for
its resident manager to institute or commence a legal action for and in behalf of the corporation; and (2) whether or not the Republic of the
Philippines can maintain the action for revival of judgment herein.
We find for petitioner.
Anent the first issue:
The Court of Appeals dismissed the petition for certiorari on the ground that Lorenzo Balbin, the resident manager for petitioner, who
was the signatory in the verification and certification on non-forum shopping, failed to show proof that he was authorized by petitioners
board of directors to file such a petition.
A corporation, such as petitioner, has no power except those expressly conferred on it by the Corporation Code and those that are
implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and / or its duly authorized
officers and agents. Thus, it has been observed that the power of a corporation to sue and be sued in any court is lodged with the board of
directors that exercises its corporate powers (Premium Marble Resources, Inc. v. CA, 264 SCRA 11 [1996]). In turn, physical acts of the
corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by corporate by-laws
or by a specific act of the board of directors.
It is undisputed that on October 21, 1999, the time petitioners Resident Manager Balbin filed the petition, there was no proof attached
thereto that Balbin was authorized to sign the verification and non-forum shopping certification therein, as a consequence of which the
petition was dismissed by the Court of Appeals. However, subsequent to such dismissal, petitioner filed a motion for reconsideration,
attaching to said motion a certificate issued by its board secretary stating that on October 11, 1999, or ten days prior to the filing of the
petition, Balbin had been authorized by petitioners board of directors to file said petition.
The Court has consistently held that the requirement regarding verification of a pleading is formal, not jurisdictional (Uy v. LandBank,
G.R. No. 136100, July 24, 2000). Such requirement is simply a condition affecting the form of the pleading, non-compliance with which does
not necessarily render the pleading fatally defective. Verification is simply intended to secure an assurance that the allegations in the
pleading are true and correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in good
faith. The court may order the correction of the pleading if verification is lacking or act on the pleading although it is not verified, if the
attending circumstances are such that strict compliance with the rules may be dispensed with in order that the ends of justice may thereby
be served.
On the other hand, the lack of certification against forum shopping is generally not curable by the submission thereof after the filing of
the petition. Section 5, Rule 45 of the 1997 Rules of Civil Procedure provides that the failure of the petitioner to submit the required
documents that should accompany the petition, including the certification against forum shopping, shall be sufficient ground for the dismissal
thereof. The same rule applies to certifications against forum shopping signed by a person on behalf of a corporation which are
unaccompanied by proof that said signatory is authorized to file a petition on behalf of the corporation.

In certain exceptional circumstances, however, the Court has allowed the belated filing of the certification. In Loyola v. Court of
Appeals, et. al. (245 SCRA 477 [1995]), the Court considered the filing of the certification one day after the filing of an election protest as
substantial compliance with the requirement. In Roadway Express, Inc. v. Court of Appeals, et. al. (264 SCRA 696 [1996]), the Court allowed
the filing of the certification 14 days before the dismissal of the petition. In Uy v. LandBank, supra, the Court had dismissed Uys petition for
lack of verification and certification against non-forum shopping. However, it subsequently reinstated the petition after Uy submitted a
motion to admit certification and non-forum shopping certification. In all these cases, there were special circumstances or compelling
reasons that justified the relaxation of the rule requiring verification and certification on non-forum shopping.
In the instant case, the merits of petitioners case should be considered special circumstances or compelling reasons that justify
tempering the requirement in regard to the certificate of non-forum shopping. Moreover, in Loyola, Roadway, and Uy, the Court
excused non-compliance with the requirement as to the certificate of non-forum shopping. With more reason should we allow the instant
petition since petitioner herein did submit a certification on non-forum shopping, failing only to show proof that the signatory was authorized
to do so. That petitioner subsequently submitted a secretarys certificate attesting that Balbin was authorized to file an action on behalf of
petitioner likewise mitigates this oversight.
It must also be kept in mind that while the requirement of the certificate of non-forum shopping is mandatory, nonetheless the
requirements must not be interpreted too literally and thus defeat the objective of preventing the undesirable practice of forum-shopping
(Bernardo v. NLRC, 255 SCRA 108 [1996]). Lastly, technical rules of procedure should be used to promote, not frustrate justice. While the
swift unclogging of court dockets is a laudable objective, the granting of substantial justice is an even more urgent ideal.
Now to the second issue:
The action instituted by the Solicitor General in the trial court is one for revival of judgment which is governed by Article 1144(3) of the
Civil Code and Section 6, Rule 39 of the 1997 Rules on Civil Procedure. Article 1144(3) provides that an action upon a judgment must be
brought within 10 years from the time the right of action accrues." On the other hand, Section 6, Rule 39 provides that a final and executory
judgment or order may be executed on motion within five (5) years from the date of its entry, but that after the lapse of such time, and
before it is barred by the statute of limitations, a judgment may be enforced by action. Taking these two provisions into consideration, it is
plain that an action for revival of judgment must be brought within ten years from the time said judgment becomes final.
From the records of this case, it is clear that the judgment sought to be revived became final on October 23, 1973. On the other hand,
the action for revival of judgment was instituted only in 1999, or more than twenty-five (25) years after the judgment had become
final. Hence, the action is barred by extinctive prescription considering that such an action can be instituted only within ten (10) years from
the time the cause of action accrues.
The Solicitor General, nonetheless, argues that the States cause of action in the cancellation of the land title issued to petitioners
predecessor-in-interest is imprescriptible because it is included in Camp Wallace, which belongs to the government.
The argument is misleading.
While it is true that prescription does not run against the State, the same may not be invoked by the government in this case since it is
no longer interested in the subject matter. While Camp Wallace may have belonged to the government at the time Rafael Galvezs title was
ordered cancelled in Land Registration Case No. N-361, the same no longer holds true today.
Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992, created the Bases Conversion and
Development Authority. Section 4 pertinently provides:
Section 4. Purposes of the Conversion Authority. The Conversion Authority shall have the following purposes:
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, ODonnell Transmitter
Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro Manila
military camps which may be transferred to it by the President;
Section 2 of Proclamation No. 216, issued on July 27, 1993, also provides:
Section 2. Transfer of Wallace Air Station Areas to the Bases Conversion and Development Authority. All areas covered by the Wallace Air
Station as embraced and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as
amended, excluding those covered by Presidential Proclamations and some 25-hectare area for the radar and communication station of the
Philippine Air Force, are hereby transferred to the Bases Conversion Development Authority
With the transfer of Camp Wallace to the BCDA, the government no longer has a right or interest to protect. Consequently, the
Republic is not a real party in interest and it may not institute the instant action. Nor may it raise the defense of imprescriptibility, the same
being applicable only in cases where the government is a party in interest. Under Section 2 of Rule 3 of the 1997 Rules of Civil Procedure,
every action must be prosecuted or defended in the name of the real party in interest. To qualify a person to be a real party in interest in
whose name an action must be prosecuted, he must appear to be the present real owner of the right sought to enforced (Pioneer Insurance
v. CA, 175 SCRA 668 [1989]). A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the
party entitled to the avails of the suit. And by real interest is meant a present substantial interest, as distinguished from a mere expectancy,
or a future, contingent, subordinate or consequential interest (Ibonilla v. Province of Cebu, 210 SCRA 526 [1992]). Being the owner of the
areas covered by Camp Wallace, it is the Bases Conversion and Development Authority, not the Government, which stands to be benefited if
the land covered by TCT No. T-5710 issued in the name of petitioner is cancelled.
Nonetheless, it has been posited that the transfer of military reservations and their extensions to the BCDA is basically for the purpose
of accelerating the sound and balanced conversion of these military reservations into alternative productive uses and to enhance the benefits
to be derived from such property as a measure of promoting the economic and social development, particularly of Central Luzon and, in
general, the countrys goal for enhancement (Section 2, Republic Act No. 7227). It is contended that the transfer of these military
reservations to the Conversion Authority does not amount to an abdication on the part of the Republic of its interests, but simply a
recognition of the need to create a body corporate which will act as its agent for the realization of its program. It is consequently asserted
that the Republic remains to be the real party in interest and the Conversion Authority merely its agent.
We, however, must not lose sight of the fact that the BCDA is an entity invested with a personality separate and distinct from the
government. Section 3 of Republic Act No. 7227 reads:
Section 3. Creation of the Bases Conversion and Development Authority. There is hereby created a body corporate to be known as the
Conversion Authority which shall have the attribute of perpetual succession and shall be vested with the powers of a corporation.
It may not be amiss to state at this point that the functions of government have been classified into governmental or constituent and
proprietary or ministrant. While public benefit and public welfare, particularly, the promotion of the economic and social development of
Central Luzon, may be attributable to the operation of the BCDA, yet it is certain that the functions performed by the BCDA are basically
proprietary in nature. The promotion of economic and social development of Central Luzon, in particular, and the countrys goal for
enhancement, in general, do not make the BCDA equivalent to the Government. Other corporations have been created by government to
act as its agents for the realization of its programs, the SSS, GSIS, NAWASA and the NIA, to count a few, and yet, the Court has ruled that

these entities, although performing functions aimed at promoting public interest and public welfare, are not government-function
corporations invested with governmental attributes. It may thus be said that the BCDA is not a mere agency of the Government but a
corporate body performing proprietary functions.
Moreover, Section 5 of Republic Act No. 7227 provides:
Section 5. Powers of the Conversion Authority. To carry out its objectives under this Act, the Conversion Authority is hereby vested with
the following powers:
(a) To succeed in its corporate name, to sue and be sued in such corporate name and to adopt, alter and use a corporate seal which
shall be judicially noticed;
Having the capacity to sue or be sued, it should thus be the BCDA which may file an action to cancel petitioners title, not the Republic,
the former being the real party in interest. One having no right or interest to protect cannot invoke the jurisdiction of the court as a party
plaintiff in an action (Ralla v. Ralla, 199 SCRA 495 [1991]). A suit may be dismissed if the plaintiff or the defendant is not a real party in
interest. If the suit is not brought in the name of the real party in interest, a motion to dismiss may be filed, as was done by petitioner in this
case, on the ground that the complaint states no cause of action (Tanpingco v. IAC, 207 SCRA 652 [1992]).
However, E. B. Marcha Transport Co. , Inc. v. IAC (147 SCRA 276 [1987]) is cited as authority that the Republic is the proper party to sue
for the recovery of possession of property which at the time of the institution of the suit was no longer held by the national government but
by the Philippine Ports Authority. In E. B. Marcha, the Court ruled:
It can be said that in suing for the recovery of the rentals, the Republic of the Philippines, acted as principal of the Philippine Ports Authority,
directly exercising the commission it had earlier conferred on the latter as its agent. We may presume that, by doing so, the Republic of the
Philippines did not intend to retain the said rentals for its own use, considering that by its voluntary act it had transferred the land in question
to the Philippine Ports Authority effective July 11, 1974. The Republic of the Philippines had simply sought to assist, not supplant, the
Philippine Ports Authority, whose title to the disputed property it continues to recognize. We may expect then that the said rentals, once
collected by the Republic of the Philippines, shall be turned over by it to the Philippine Ports Authority conformably to the purposes of P. D.
No. 857.
E. B. Marcha is, however, not on all fours with the case at bar. In the former, the Court considered the Republic a proper party to sue
since the claims of the Republic and the Philippine Ports Authority against the petitioner therein were the same. To dismiss the complaint
in E. B. Marcha would have brought needless delay in the settlement of the matter since the PPA would have to refile the case on the same
claim already litigated upon. Such is not the case here since to allow the government to sue herein enables it to raise the issue of
imprescriptibility, a claim which is not available to the BCDA. The rule that prescription does not run against the State does not apply to
corporations or artificial bodies created by the State for special purposes, it being said that when the title of the Republic has been divested,
its grantees, although artificial bodies of its own creation, are in the same category as ordinary persons (Kingston v. LeHigh Valley Coal
Co., 241 Pa 469). By raising the claim of imprescriptibility, a claim which cannot be raised by the BCDA, the Government not only assists the
BCDA, as it did in E. B. Marcha, it even supplants the latter, a course of action proscribed by said case.
Moreover, to recognize the Government as a proper party to sue in this case would set a bad precedent as it would allow the Republic
to prosecute, on behalf of government-owned or controlled corporations, causes of action which have already prescribed, on the pretext that
the Government is the real party in interest against whom prescription does not run, said corporations having been created merely as agents
for the realization of government programs.
Parenthetically, petitioner was not a party to the original suit for cancellation of title commenced by the Republic twenty-seven years
for which it is now being made to answer, nay, being made to suffer financial losses.
It should also be noted that petitioner is unquestionably a buyer in good faith and for value, having acquired the property in 1963, or 5
years after the issuance of the original certificate of title, as a third transferee. If only not to do violence and to give some measure of respect
to the Torrens System, petitioner must be afforded some measure of protection.
One more point.
Since the portion in dispute now forms part of the property owned and administered by the Bases Conversion and Development
Authority, it is alienable and registerable real property.
We find it unnecessary to rule on the other matters raised by the herein parties.
WHEREFORE, the petition is hereby granted and the orders dated August 31, 1999 and October 4, 1999 of the Regional Trial Court of
the First National Judicial Region (Branch 26, San Fernando, La Union) in Civil Case No. 6346 entitled Republic of the Philippines, Plaintiff,
versus Heirs of Rafael Galvez, et. al., Defendants as well as the resolutions promulgated on November 4, 1999 and May 23, 2000 by the
Court of Appeals (Twelfth Division) in CA-G. R. SP No. 55535 entitled Shipside, Inc., Petitioner versus Hon. Alfredo Cajigal, as Judge, RTC, San
Fernando, La Union, Branch 26, and the Republic of the Philippines, Respondents are hereby reversed and set aside. The complaint in Civil
Case No. 6346, Regional Trial Court, Branch 26, San Fernando City, La Union entitled Republic of the Philippines, Plaintiff, versus Heirs of
Rafael Galvez, et al." is ordered dismissed, without prejudice to the filing of an appropriate action by the Bases Development and Conversion
Authority.
SO ORDERED.
Panganiban, Gonzaga-Reyes, and Sandoval-Gutierrez, JJ. , concur.
Vitug, J. , Please see separate opinion.
SEPARATE OPINION

VITUG, J.:
I find no doctrinal difficulty in adhering to the draft ponencia written by our esteemed Chairman. Mr. Justice JARM, insofar as it
declares that an action for revival of judgment is barred by extinctive prescription, if not brought within ten (10) years from the time the right
of action accrues, pursuant to Article 1144(3) of the New Civil Code. It appears that the judgment in the instant case has become final on 23
October 1973 or well more than two decades prior to the action for its revival instituted only in 1999.
With due respect, however, I still am unable to subscribe to the idea that prescription may not be invoked by the government in this
case upon the thesis that the transfer of Camp Wallace to the Bases Conversion Development authority renders the Republic with no right or
interest to protect and thus unqualified under the rules of procedure to be the real party-in-interest. While it is true that Republic Act 7227,
otherwise known as the Bases Conversion and Development Act of 1992, authorizes the transfer of the military reservations and their
extensions to the conversion Authority, the same, however, is basically for the purpose of accelerating the sound and balanced conversion of
these military reservations into alternative productive uses and to enhance the benefits to be derived from such property as a measure of
[1]
promoting the economic and social development, particularly, of Central Luzon and, in general, the countrys goal for enhancement. The
transfer of these military reservations to the Conversion Authority does not amount to an abdication on the part of the Republic of its

interests but simply a recognition of the need to create a body corporate which will act as its agent for the realization of its program specified
in the Act. It ought to follow that the Republic remains to be the real party-in-interest and the Conversion authority being merely its agent.
[2]
In E. B. Marcha Transport Co. , Inc. vs. Intermediate Appellate Court, the Court succinctly resolved the issue of whether or not the
Republic of the Philippines would be a proper party to sue for the recovery of possession of property which at time of the institution of the
suit was no longer being held by the national government but by the Philippine Ports Authority. The Court ruled:
More importantly, as we see it, dismissing the complaint on the ground that the Republic of the Philippines is not the proper party would
result in needless delay in the settlement of this matter and also in derogation of the policy against multiplicity of suits. Such a decision
would require the Philippine Ports Authority to refile the very same complaint already proved by the Republic of the Philippines and bring
back the parties as it were to square one.
It can be said that in suing for the recovery of the rentals, the Republic of the Philippines, acted as principal of the Philippine Ports Authority,
directly exercising the commission it had earlier conferred on the latter as its agent. We may presume that, by doing so, the republic of the
Philippines did not intend to retain the said rentals for its own use, considering that by its voluntary act it had transferred the land in question
to the Philippine Ports authority effective July 11, 1974. The Republic of the Philippines had simply sought to assist, not supplant, the
Philippine Ports Authority, whose title to the disputed property it continues to recognize. We may expect then that the said rentals, once
collected by the Republic of the Philippines, shall be turned over by it to the Philippine Ports Authority conformably to the purposes of P.
D. No. 857."
There would seem to be no cogent reason for ignoring that rationale specially when taken in light of the fact that the original suit for
cancellation of title of petitioners predecessor-in-interest was commenced by the Republic itself, and it was only in 1992 that the subject
military camp was transferred to the Conversion Authority.
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG, ancillary administrator-appellee,
vs.
BENGUET CONSOLIDATED, INC., oppositor-appellant.
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,
1
the same to be delivered 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
2
County Trust Company of New York, which as noted, is the 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 Idonah Slade
3
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 domiciliary administrator, the County Trust Company, in New York,
4
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 power is inherent in his duty to settle her estate and
5
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 the nature of assets of the deceased
7
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
9
Benguet belonging to the deceased 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 domiciliary administrator in
10
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
11
fictions which the law may rely upon in the pursuit of legitimate ends 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 justice, [even if] clumsy
12
and at times offensive." Some of them have persisted even to the present, that eminent jurist, noting "the quasi contract, the adopted
13
child, the constructive trust, all of flourishing vitality, to attest the empire of "as if" today." He likewise noted "a class of fictions of another
order, the fiction which is a working tool of thought, but which at times hides itself from view till reflection and analysis have brought it to the
14
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
15
issuance of a new certificate or certificates 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 conceived as an artificial person, owing its
17
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 corporation precisely as "an artificial being, invisible, intangible, and existing only
18
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 law for certain specific purposes, the extent of whose
19
existence, powers and liberties is fixed by its charter." Dean Pound's terse summary, a juristic person, resulting from an association of
20
human beings granted legal personality by 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 reality of the group as a
21
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 exi stence; 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.

G.R. No. 119002

October 19, 2000
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,
vs.
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.
On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the
Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services as a
1
travel agency to the latter. The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala
Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83.
2
For the tickets received, the Federation made two partial payments, both in September of 1989, in the total amount of P176,467.50.
On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the amount of
3
4
P265,894.33. On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.
On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the
5
Federation. Thereafter, no further payments were made despite repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in his personal capacity and
as President of the Federation and impleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the
6
unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.
Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount P207,524.20,
representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of action against him either in his personal
capacity or in his official capacity as president of the Federation. He maintained that he did not guarantee payment but merely acted as an
7
agent of the Federation which has a separate and distinct juridical personality.
On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court.

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally liable for the unpaid
obligation of the Federation. In arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation.
The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of
the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports
association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate
existence is within the personal knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that
it is a mere sports association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The contract entered
into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves
personally liable.
xxx

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

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

10

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court rendered a decision
reversing the trial court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another one is rendered dismissing
11
the complaint against defendant Henri S. Kahn.
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that since petitioner failed
to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable for the same as said entity has a separate
and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation.
The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof the Philippine
Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court dismissed the complaint against the
Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to
this appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating the due process clause, let
alone the fact that the judgment dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to appeal
12
therefrom. The alternative prayer is therefore similarly DENIED.
Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned errors:

13

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL
FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO
REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE
OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN
BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS
ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. In
the assailed decision, the appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135,
otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from
which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports
associations. This may be gleaned from the powers and functions granted to these associations. Section 14 of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and
duties:
1. To adopt a constitution and by-laws for their internal organization and government;
2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not inconsistent with this
Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations shall have the following functions,
powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to the Department and
any amendment thereto shall take effect upon approval by the Department: Provided, however, That no team, school, club,
organization, or entity shall be admitted as a voting member of an association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the promotion of their
sport;
5. Affiliate with international or regional sports associations after due consultation with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a juridical personality.
The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with
juridical capacity. However, while we agree with the appellate court that national sports associations may be accorded corporate status, such
does not automatically take place by the mere passage of these laws.
It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a
special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine
Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision
creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the
manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be organized for each individual sports in
the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition as a
National Sports' Association shall be filed with the executive committee together with, among others, a copy of the constitution and by-laws
and a list of the members of the proposed association, and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the purposes of this Act and
particularly section three thereof. No application shall be held pending for more than three months after the filing thereof without any action
having been taken thereon by the executive committee. Should the application be rejected, the reasons for such rejection shall be clearly
stated in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application which shall
be considered as unacted upon: Provided, however, That until the executive committee herein provided shall have been formed, applications
for recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine Amateur Athletic
Federation. The said executive committee shall be dissolved upon the organization of the executive committee herein provided: Provided,
further, That the functioning executive committee is charged with the responsibility of seeing to it that the National Sports' Associations are
formed and organized within six months from and after the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports association for each individual sport in
the Philippines shall be filed with the Department together with, among others, a copy of the Constitution and By-Laws and a list of the
members of the proposed association.
The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized will promote the
objectives of this Decree and has substantially complied with the rules and regulations of the Department: Provided, That the Department
may withdraw accreditation or recognition for violation of this Decree and such rules and regulations formulated by it.
The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical control over the
development and promotion of the particular sport for which they are organized.
Clearly the above cited provisions require that before an entity may be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and
Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical
existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and bylaws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule
that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have
corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the unincorporated
Philippine Football Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts
14
performed as such agent. As president of the Federation, Henri Kahn is presumed to have known about the corporate existence or nonexistence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was
defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt with the
15
Federation in such a manner as to recognize and in effect admit its existence. The doctrine of corporation by estoppel is mistakenly applied
by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a
16
contract from which he has benefited on the irrelevant ground of defective incorporation. In the case at bar, the petitioner is not trying to
escape liability from the contract but rather is the one claiming from the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil
Case No. 90-53595 is hereby REINSTATED.
SO ORDERED.
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC., respondents.
1

The Securities and Exchange Commission is the government agency, under the direct general supervision of the Office of the President, with
the immense task of enforcing the Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its inumerable
functions, and one of the most important, is the supervision of all corporations, partnerships or associations, who are grantees of primary
2
franchise and/or a license or permit issued by the government to operate in the Philippines. Just how far this regulatory authority extends,
particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the respondent Court of Appeals, dated June 27, 1996, which
affirmed the decision of the Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc. to allow the private
respondent Puerto Azul Land, Inc. to be listed in its stock market, thus paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to offer its shares to the public in order to raise funds
allegedly to develop its properties and pay its loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its
shares to the public by the Securities and Exchange Commission (SEC). To facilitate the trading of its shares among investors, PALI sought to
course the trading of its shares through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an
application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's application, recommended to the PSE's Board of Governors
the approval of PALI's listing application.
On February 14, 1996, before it could act upon PALI's application, the Board of Governors of the PSE received a letter from the heirs of
Ferdinand E. Marcos, claiming that the late President Marcos was the legal and beneficial owner of certain properties forming part of the
Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate Development Corporation, which
is among the stockholders of PALI, likewise appears to have been held and continue to be held in trust by one Rebecco Panlilio for then
President Marcos and now, effectively for his estate, and requested PALI's application to be deferred. PALI was requested to comment upon
the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its
assets. On the contrary, the resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities distinct from
PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses responded that their claim is not confined
to the facilities forming part of the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal and beneficial
ownership of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the Presidential Commission on Good Government (PCGG)
requesting for comments on the letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that the Marcoses received a
Temporary Restraining Order on the same date, enjoining the Marcoses from, among others, "further impeding, obstructing, delaying or
interfering in any manner by or any means with the consideration, processing and approval by the PSE of the initial public offering of PALI."
The TRO was issued by Judge Martin S. Villarama, Executive Judge of the RTC of Pasig City in Civil Case No. 65561, pending in Branch 69
thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE reached its decision to reject PALI's application, citing the
existence of serious claims, issues and circumstances surrounding PALI's ownership over its assets that adversely affect the suitability of
listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention
the action taken by the PSE in the application of PALI for the listing of its shares with the PSE, and requesting that the SEC, in the exercise of
its supervisory and regulatory powers over stock exchanges under Section 6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing
application and institute such measures as are just and proper under the circumstances.

On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto the letter of PALI and directing the PSE to file its
comments thereto within five days from its receipt and for its authorized representative to appear for an "inquiry" on the matter. On April
22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11, 1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The dispositive portion of the said order reads:
WHEREFORE, premises considered, and invoking the Commissioner's authority and jurisdiction under Section 3 of the
Revised Securities Act, in conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A, the decision of the
Board of Governors of the Philippine Stock Exchange denying the listing of shares of Puerto Azul Land, Inc., is hereby set
aside, and the PSE is hereby ordered to immediately cause the listing of the PALI shares in the Exchange, without prejudice
to its authority to require PALI to disclose such other material information it deems necessary for the protection of the
investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was, however denied by the Commission in its May 9, 1996
Order which states:
WHEREFORE, premises considered, the Commission finds no compelling reason to reconsider its order dated April 24, 1996,
and in the light of recent developments on the adverse claim against the PALI properties, PSE should require PALI to submit
full disclosure of material facts and information to protect the investing public. In this regard, PALI is hereby ordered to
amend its registration statements filed with the Commission to incorporate the full disclosure of these material facts and
information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a Petition for Review (with Application for Writ of
Preliminary Injunction and Temporary Restraining Order), assailing the above mentioned orders of the SEC, submitting the following as errors
of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN ISSUING THE ASSAILED ORDERS
WITHOUT POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO POWER TO ORDER THE LISTING AND SALE
OF SHARES OF PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW AND SUBSTITUTE DECISIONS OF
PSE ON LISTING APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF DISCRETION IN FINDING THAT PSE ACTED IN
AN ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING PALI'S LISTING APPLICATION;
III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID FOR ALLOWING FURTHER DISPOSITION OF
PROPERTIES IN CUSTODIA LEGIS AND WHICH FORM PART OF NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently, a Comment and Motion to Dismiss. On June 10, 1996,
PSE fled its Reply to Comment and Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the PSE's Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look into the decision of the petitioner PSE, pursuant to
3
4
5
Section 3 of the Revised Securities Act in relation to Section 6(j) and 6(m) of P.D. No. 902-A, and Section 38(b) of the Revised Securities
Act, and for the purpose of ensuring fair administration of the exchange. Both as a corporation and as a stock exchange, the petitioner is
subject to public respondent's jurisdiction, regulation and control. Accepting the argument that the public respondent has the authority
merely to supervise or regulate, would amount to serious consequences, considering that the petitioner is a stock exchange whose business
is impressed with public interest. Abuse is not remote if the public respondent is left without any system of control. If the securities act
vested the public respondent with jurisdiction and control over all corporations; the power to authorize the establishment of stock
exchanges; the right to supervise and regulate the same; and the power to alter and supplement rules of the exchange in the listing or
delisting of securities, then the law certainly granted to the public respondent the plenary authority over the petitioner; and the power of
review necessarily comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing, affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive manner in disapproving the application of PALI for
listing of its shares in the face of the following considerations:
1. PALI has clearly and admittedly complied with the Listing Rules and full disclosure requirements of the Exchange;

2. In applying its clear and reasonable standards on the suitability for listing of shares, PSE has failed to justify why it acted
differently on the application of PALI, as compared to the IPOs of other companies similarly situated that were allowed
listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were even less serious than the claims against the
assets of the other companies in that, the assertions of the Marcoses that they are owners of the disputed properties were
not substantiated enough to overcome the strength of a title to properties issued under the Torrens System as evidence of
ownership thereof;
4. No action has been filed in any court of competent jurisdiction seeking to nullify PALI's ownership over the disputed
properties, neither has the government instituted recovery proceedings against these properties. Yet the import of PSE's
decision in denying PALI's application is that it would be PALI, not the Marcoses, that must go to court to prove the legality
of its ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval Reservation does not inspire belief. The point is, the PALI
properties are now titled. A property losses its public character the moment it is covered by a title. As a matter of fact, the titles have long
been settled by a final judgment; and the final decree having been registered, they can no longer be re-opened considering that the one year
period has already passed. Lastly, the determination of what standard to apply in allowing PALI's application for listing, whether the
discretion method or the system of public disclosure adhered to by the SEC, should be addressed to the Securities Commission, it being the
government agency that exercises both supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant Petition for Review on Certiorari, taking exception to the
rulings of the SEC and the Court of Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996. On the same date, the
PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed up by the PCGG's Petition for Intervention on October 21,
1996. A supplemental Comment was filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC and the
Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the PCGG's motion for leave to file petition for intervention,
PALI filed its Comment thereto on January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
On February 25, 1996, the PSE filed its Consolidated Reply to the comments of respondent PALI (October 17, 1996) and the Solicitor General
(December 26, 1996). On May 16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to order the PSE to list the shares of PALI in the stock
exchange. Under presidential decree No. 902-A, the powers of the SEC over stock exchanges are more limited as compared to its authority
over ordinary corporations. In connection with this, the powers of the SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to reverse the decisions of the stock exchange. Authorities are in abundance
even in the United States, from which the country's security policies are patterned, to the effect of giving the Securities Commission less
control over stock exchanges, which in turn are given more lee-way in making the decision whether or not to allow corporations to offer their
stock to the public through the stock exchange. This is in accord with the "business judgment rule" whereby the SEC and the courts are
barred from intruding into business judgments of corporations, when the same are made in good faith. the said rule precludes the reversal of
the decision of the PSE to deny PALI's listing application, absent a showing of bad faith on the part of the PSE. Under the listing rules of the
PSE, to which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject applications for listing. Thus, even if an
issuer has complied with the PSE listing rules and requirements, PSE retains the discretion to accept or reject the issuer's listing application if
the PSE determines that the listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered corporations, nor with corporations whose properties are under
sequestration. A reading of Republic of the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that the properties of
PALI, which were derived from the Ternate Development Corporation (TDC) and the Monte del Sol Development Corporation (MSDC). are
under sequestration by the PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is the "law of the case"
between the Republic and TDC and MSDC. It categorically declares that the assets of these corporations were sequestered by the PCGG on
March 10, 1986 and April 4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership over its properties can no longer be questioned, since
certificates of title have been issued to PALI and more than one year has since lapsed, is erroneous and ignores well settled jurisprudence on
land titles. That a certificate of title issued under the Torrens System is a conclusive evidence of ownership is not an absolute rule and admits
certain exceptions. It is fundamental that forest lands or military reservations are non-alienable. Thus, when a title covers a forest reserve or
a government reservation, such title is void.
PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy of "full disclosure" to uphold the listing of PALI's shares
with the PSE, in the absence of a clear mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI did not
comply with the listing rules and disclosure requirements. In fact, PALI's documents supporting its application contained misrepresentations
and misleading statements, and concealed material information. The matter of sequestration of PALI's properties and the fact that the same
form part of military/naval/forest reservations were not reflected in PALI's application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed with the markings of a corporate entity, it
functions as the primary channel through which the vessels of capital trade ply. The PSE's relevance to the continued operation and filtration
of the securities transactions in the country gives it a distinct color of importance such that government intervention in its affairs becomes
justified, if not necessarily. Indeed, as the only operational stock exchange in the country today, the PSE enjoys a monopoly of securities
transactions, and as such, it yields an immense influence upon the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give special treatment to the administration and
6
regulation of stock exchanges.

These provisions, read together with the general grant of jurisdiction, and right of supervision and control over all corporations under Sec. 3
of P.D. 902-A, give the SEC the special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the interests of the
investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's challenged control authority over the
petitioner PSE even as it provides that "the Commission shall have absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or permit issued by the government to operate in
the Philippines. . ." The SEC's regulatory authority over private corporations encompasses a wide margin of areas, touching nearly all of a
corporation's concerns. This authority springs from the fact that a corporation owes its existence to the concession of its corporate franchise
from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be considered as necessary or incidental to the
carrying out of the SEC's express power to insure fair dealing in securities traded upon a stock exchange or to ensure the fair administration
7
of such exchange. It is, likewise, observed that the principal function of the SEC is the supervision and control over corporations,
partnerships and associations with the end in view that investment in these entities may be encouraged and protected, and their activities
8
for the promotion of economic development.
Thus, it was in the alleged exercise of this authority that the SEC reversed the decision of the PSE to deny the application for listing in the
stock exchange of the private respondent PALI. The SEC's action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not securities, including shares of stock of a corporation, may be
traded or not in the stock exchange. This is in line with the SEC's mission to ensure proper compliance with the laws, such as the Revised
9
Securities Act and to regulate the sale and disposition of securities in the country. As the appellate court explains:
Paramount policy also supports the authority of the public respondent to review petitioner's denial of the listing. Being a
stock exchange, the petitioner performs a function that is vital to the national economy, as the business is affected with
public interest. As a matter of fact, it has often been said that the economy moves on the basis of the rise and fall of stocks
being traded. By its economic power, the petitioner certainly can dictate which and how many users are allowed to sell
securities thru the facilities of a stock exchange, if allowed to interpret its own rules liberally as it may please. Petitioner can
either allow or deny the entry to the market of securities. To repeat, the monopoly, unless accompanied by control,
becomes subject to abuse; hence, considering public interest, then it should be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature, through the Revised Securities Act, Presidential Decree No.
902-A, and other pertinent laws, has entrusted to it the serious responsibility of enforcing all laws affecting corporations and other forms of
10
associations not otherwise vested in some other government office.
This is not to say, however, that the PSE's management prerogatives are under the absolute control of the SEC. The PSE is, alter all, a
corporation authorized by its corporate franchise to engage in its proposed and duly approved business. One of the PSE's main concerns, as
such, is still the generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right to
sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third persons, and to perform all other legal
acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an assumed corporate name, and with a distinct legal personality.
11
In organizing itself as a collective body, it waives no constitutional immunities and perquisites appropriate to such a body. As to its
corporate and management decisions, therefore, the state will generally not interfere with the same. Questions of policy and of management
are left to the honest decision of the officers and directors of a corporation, and the courts are without authority to substitute their judgment
for the judgment of the board of directors. The board is the business manager of the corporation, and so long as it acts in good faith, its
12
orders are not reviewable by the courts.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to reverse the PSE's decision in matters of
application for listing in the market, the SEC may exercise such power only if the PSE's judgment is attended by bad faith. In Board of
13
Liquidators vs. Kalaw, it was held that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or
some moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or interest of ill will, partaking
of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered important facts, which, in the general scheme, brings to
serious question the qualification of PALI to sell its shares to the public through the stock exchange. During the time for receiving objections
to the application, the PSE heard from the representative of the late President Ferdinand E. Marcos and his family who claim the properties
of the private respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of sequestration has been
issued covering the properties of PALI, and suit for reconveyance to the state has been filed in the Sandiganbayan Court. How the properties
were effectively transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent
PALI, in only a short span of time, are not yet explained to the Court, but it is clear that such circumstances give rise to serious doubt as to the
integrity of PALI as a stock issuer. The petitioner was in the right when it refused application of PALI, for a contrary ruling was not to the best
interest of the general public. The purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the investing
14
public against fraudulent representations, or false promises, and the imposition of worthless ventures.
It is to be observed that the U.S. Securities Act emphasized its avowed protection to acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act, was designed not only to provide investors with
adequate information upon which to base their decisions to buy and sell securities, but also to protect legitimate business

seeking to obtain capital through honest presentation against competition from crooked promoters and to prevent fraud in
the sale of securities. (Tenth Annual Report, U.S. Securities & Exchange Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1) prevention of excesses and fraudulent transactions,
merely by requirement of that their details be revealed; (2) placing the market during the early stages of the offering of a
security a body of information, which operating indirectly through investment services and expert investors, will tend to
produce a more accurate appraisal of a security, . . . Thus, the Commission may refuse to permit a registration statement to
become effective if it appears on its face to be incomplete or inaccurate in any material respect, and empower the
Commission to issue a stop order suspending the effectiveness of any registration statement which is found to include any
untrue statement of a material fact or to omit to state any material fact required to be stated therein or necessary to make
the statements therein not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who choose to transact through its facilities. It was reasonable for the PSE,
therefore, to exercise its judgment in the manner it deems appropriate for its business identity, as long as no rights are trampled upon, and
public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no longer be assailed is of no moment. At this juncture, there is
the claim that the properties were owned by TDC and MSDC and were transferred in violation of sequestration orders, to Rebecco Panlilio
and later on to PALI, besides the claim of the Marcoses that such properties belong to the Marcos estate, and were held only in trust by
Rebecco Panlilio. It is also alleged by the petitioner that these properties belong to naval and forest reserves, and therefore beyond private
dominion. If any of these claims is established to be true, the certificates of title over the subject properties now held by PALI map be
disregarded, as it is an established rule that a registration of a certificate of title does not confer ownership over the properties described
therein to the person named as owner. The inscription in the registry, to be effective, must be made in good faith. The defense of
indefeasibility of a Torrens Title does not extend to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing the application of PALI, the true ownership of the
properties of PALI need not be determined as an absolute fact. What is material is that the uncertainty of the properties' ownership and
alienability exists, and this puts to question the qualification of PALI's public offering. In sum, the Court finds that the SEC had acted arbitrarily
in arrogating unto itself the discretion of approving the application for listing in the PSE of the private respondent PALI, since this is a matter
addressed to the sound discretion of the PSE, a corporation entity, whose business judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the registration and sale of securities in the SEC is not for the Court to
determine, but is left to the sound discretion of the Securities and Exchange Commission. In mandating the SEC to administer the Revised
Securities Act, and in performing its other functions under pertinent laws, the Revised Securities Act, under Section 3 thereof, gives the SEC
the power to promulgate such rules and regulations as it may consider appropriate in the public interest for the enforcement of the said
laws. The second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt by law, shall be issued,
endorsed, sold, transferred or in any other manner conveyed to the public, unless registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for the protection of investors by the Commission. Presidential Decree No. 902-A, on the
other hand, provides that the SEC, as regulatory agency, has supervision and control over all corporations and over the securities market as a
whole, and as such, is given ample authority in determining appropriate policies. Pursuant to this regulatory authority, the SEC has
manifested that it has adopted the policy of "full material disclosure" where all companies, listed or applying for listing, are required to
divulge truthfully and accurately, all material information about themselves and the securities they sell, for the protection of the investing
public, and under pain of administrative, criminal and civil sanctions. In connection with this, a fact is deemed material if it tends to induce or
15
otherwise effect the sale or purchase of its securities. While the employment of this policy is recognized and sanctioned by the laws,
nonetheless, the Revised Securities Act sets substantial and procedural standards which a proposed issuer of securities must
16
satisfy. Pertinently, Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of the registration of a security:
The Commission may reject a registration statement and refuse to issue a permit to sell the securities included in such
registration statement if it finds that
(1) The registration statement is on its face incomplete or inaccurate in any material respect or includes any untrue
statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant
(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of this Act, or the rules promulgated pursuant
thereto, or any order of the Commission;
(iii) has failed to comply with any of the applicable requirements and conditions that the Commission
may, in the public interest and for the protection of investors, impose before the security can be
registered;
(iv) has been engaged or is engaged or is about to engage in fraudulent transaction;

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

(vi) does not conduct its business in accordance with law or is engaged in a business that is illegal or
contrary to government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound business principles;
(4) An officer, member of the board of directors, or principal stockholder of the issuer is disqualified to be such officer,
director or principal stockholder; or
(5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its security would not work
to the prejudice of the public interest or as a fraud upon the purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make the registration and issuance of securities dependent, to a
certain extent, on the merits of the securities themselves, and of the issuer, to be determined by the Securities and Exchange Commission.
This measure was meant to protect the interests of the investing public against fraudulent and worthless securities, and the SEC is mandated
by law to safeguard these interests, following the policies and rules therefore provided. The absolute reliance on the full disclosure method in
the registration of securities is, therefore, untenable. As it is, the Court finds that the private respondent PALI, on at least two points (nos. 1
and 5) has failed to support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the conclusion that the
PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not discount the effectivity of whatever method the SEC, in
the exercise of its vested authority, chooses in setting the standard for public offerings of corporations wishing to do so. However, the SEC
must recognize and implement the mandate of the law, particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection, discounting, therefore, any imputation of arbitrariness and
whimsical animation on its part. Its action in refusing to allow the listing of PALI in the stock exchange is justified by the law and by the
circumstances attendant to this case. ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS the Petition for
Review onCertiorari. The Decisions of the Court of Appeals and the Securities and Exchange Commission dated July 27, 1996 and April 24,
1996 respectively, are hereby REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of the Philippine
Stock Exchange to deny the application for listing of the private respondent Puerto Azul Land, Inc. SO ORDERED.

G.R. No. L-41337 June 30, 1988

TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE OF BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC
PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG COMPANY,respondents.
This is a petition for certiorari, with prayer for preliminary injunction, to annul and set aside the March 26, 1975 Order of the then Court of
First Instance of Manila, Branch XXIII, setting aside the sale of "Heidelberg" cylinder press executed by the sheriff in favor of the herein
petitioner, as well as the levy on the said property, and ordering the sheriff to return the said machinery to its owner, herein private
respondent Philippine American Drug Company.
Petitioner herein, doing business under the name and style of Anchor Supply Co., sold on credit to herein private respondent Graphic
Publishing, Inc. (GRAPHIC for short) paper products amounting to P55,214.73. On December 20, 1972, GRAPHIC made partial payment by
check to petitioner in the total amount of P24,848.74; and on December 21, 1972, a promissory note was executed to cover the balance of
P30,365.99. In the said promissory note, it was stipulated that the amount will be paid on monthly installments and that failure to pay any
installment would make the amount immediately demandable with an interest of 12% per annum. On September 6, 1973, for failure of
GRAPHIC to pay any installment, petitioner filed with the then Court of First Instance of Manila, Branch XXIII, presided over by herein
respondent judge, Civil Case No. 91857 for a Sum of Money (Rollo, pp. 36-38). Respondent judge declared GRAPHIC in default for failure to
file its answer within the reglementary period and plaintiff (petitioner herein) was allowed to present its evidence ex parte. In a Decision
dated January 18, 1974 (Ibid., pp. 39-40), the trial court ordered GRAPHIC to pay the petitioner the sum of P30,365.99 with 12% interest from
March 30, 1973 until fully paid, plus the costs of suit. On motion of petitioner, a writ of execution was issued by respondent judge; but the
aforestated writ having expired without the sheriff finding any property of GRAPHIC, an alias writ of execution was issued on July 2, 1974.
Pursuant to the said issued alias writ of execution, the executing sheriff levied upon one (1) unit printing machine Identified as "Original
Heidelberg Cylinder Press" Type H 222, NR 78048, found in the premises of GRAPHIC. In a Notice of Sale of Execution of Personal Property
dated July 29, 1974, said printing machine was scheduled for auction sale on July 26, 1974 at 10:00 o'clock at 14th St., Cor. Atlanta St., Port
Area, Manila (lbid., p. 45); but in a letter dated July 19, 1974, herein private respondent, Philippine American Drug Company (PADCO for
short) had informed the sheriff that the printing machine is its property and not that of GRAPHIC, and accordingly, advised the sheriff to
cease and desist from carrying out the scheduled auction sale on July 26, 1974. Notwithstanding the said letter, the sheriff proceeded with
the scheduled auction sale, sold the property to the petitioner, it being the highest bidder, and issued a Certificate of Sale in favor of
petitioner (Rollo, p. 48). More than five (5) hours after the auction sale and the issuance of the certificate of sale, PADCO filed an "Affidavit of
Third Party Claim" with the Office of the City Sheriff (Ibid., p. 47). Thereafter, on July 30,1974, PADCO filed with the Court of First Instance of
Manila, Branch XXIII, a Motion to Nullify Sale on Execution (With Injunction) (Ibid., pp, 49-55), which was opposed by the petitioner (Ibid., pp.
5668). Respondent judge, in an Order dated March 26, 1975 (Ibid., pp. 64-69), ruled in favor of PADCO. The decretal portion of the said order,
reads:

WHEREFORE, the sale of the 'Heidelberg cylinder press executed by the Sheriff in favor of the plaintiff as well as the levy on
the said property is hereby set aside and declared to be without any force and effect. The Sheriff is ordered to return the
said machinery to its owner, the Philippine American Drug Co.
Petitioner filed a Motion For Reconsideration (Ibid., pp. 7093) and an Addendum to Motion for Reconsideration (Ibid., pp. 94-08), but in an
Order dated August 13, 1975, the same was denied for lack of merit (Ibid., p. 109). Hence, the instant petition.
In a Resolution dated September 12, 1975, the Second Division of this Court resolved to require the respondents to comment, and to issue a
temporary restraining order (Rollo, p. 111 ). After submission of the parties' Memoranda, the case was submitted for decision in the
Resolution of November 28, 1975 (Ibid., p. 275).
Petitioner, to support its stand, raised two (2) issues, to wit:
I
THE RESPONDENT JUDGE GRAVELY EXCEEDED, IF NOT ACTED WITHOUT JURISDICTION WHEN HE ACTED UPON THE MOTION OF PADCO, NOT
ONLY BECAUSE SECTION 17, RULE 39 OF THE RULES OF COURT WAS NOT COMPLIED WITH, BUT ALSO BECAUSE THE CLAIMS OF PADCO
WHICH WAS NOT A PARTY TO THE CASE COULD NOT BE VENTILATED IN THE CASE BEFORE HIM BUT IN INDEPENDENT PROCEEDING.
II
THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION WHEN HE REFUSED TO PIERCE THE PADCO'S (IDENTITY) AND DESPITE THE
ABUNDANCE OF EVIDENCE CLEARLY SHOWING THAT PADCO WAS CONVENIENTLY SHIELDING UNDER THE THEORY OF CORPORATE PETITION.
Petitioner contends that respondent judge gravely exceeded, if not, acted without jurisdiction, in nullifying the sheriffs sale not only because
Section 17, Rule 39 of the Rules of Court was not complied with, but more importantly because PADCO could not have litigated its claim in
the same case, but in an independent civil proceeding.
This contention is well-taken.
In the case of Bayer Philippines, Inc. vs. Agana (63 SCRA 355, 366-367 [1975]), this Court categorically ruled as follows:
In other words, constitution, Section 17 of Rule 39 of the Revised Rules of Court, the rights of third-party claimants over
certain properties levied upon by the sheriff to satisfy the judgment should not be decided inthe action where the thirdparty claims have been presented, but in the separate action instituted by the claimants.
... Otherwise stated, the court issuing a writ of execution is supposed to enforce the authority only over properties of the
judgment debtor, and should a third party appeal- to claim the property levied upon by the sheriff, the procedure laid down
by the Rules is that such claim should be the subject of a separate and independent action.
xxx xxx xxx
... This rule is dictated by reasons of convenience, as "intervention is more likely to inject confusion into the issues between
the parties in the case . . . with which the third-party claimant has nothing to do and thereby retard instead of facilitate the
prompt dispatch of the controversy which is the underlying objective of the rules of pleading and practice." Besides,
intervention may not be permitted after trial has been concluded and a final judgment rendered in the case.
However, the fact that petitioner questioned the jurisdiction of the court during the initial hearing of the case but nevertheless actively
participated in the trial, bars it from questioning now the court's jurisdiction. A party who voluntarily participated in the trial, like the herein
petitioner, cannot later on raise the issue of the court's lack of jurisdiction (Philippine National Bank vs. Intermediate Appellate Court, 143
SCRA [1986]).
As to the second issue (the non-piercing of PADCO's corporate Identity) the decision of respondent judge is as follows:
The plaintiff, however, contends that the controlling stockholders of the Philippine American Drug Co. are also the same
controlling stockholders of the Graphic Publishing, Inc. and, therefore, the levy upon the said machinery which was found in
the premises occupied by the Graphic Publishing, Inc. should be upheld. This contention cannot be sustained because the
two corporations were duly incorporated under the Corporation Law and each of them has a juridical personality distinct
and separate from the other and the properties of one cannot be levied upon to satisfy the obligation of the other. This
legal preposition is elementary and fundamental.
It is true that a corporation, upon coming into being, is invested by law with a personality separate and distinct from that of the persons
composing it as well as from any other legal entity to which it may be related (Yutivo & Sons Hardware Company vs. Court of Tax Appeals, 1
SCRA 160 [1961]; and Emilio Cano Enterprises, Inc. vs. CIR, 13 SCRA 290 [1965]). As a matter of fact, the doctrine that a corporation is a legal
entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within
reason and the law (Villa Rey Transit, Inc. vs. Ferrer, 25 SCRA 845 [1968]). However, this separate and distinct personality is merely a fiction
created by law for convenience and to promote justice (Laguna Transportation Company vs. SSS, 107 Phil. 833 [1960]). Accordingly, this
separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or
cover for fraud or illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of creditors

(Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347 [1976]). Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity (Chenplex Philippines, Inc., et al. vs. Hon. Pamatian et al., 57
SCRA 408 (19741). Likewise, this is true when the corporation is merely an adjunct, business conduit or alter ego of another corporation. In
such case, the fiction of separate and distinct corporation entities should be disregarded (Commissioner of Internal Revenue vs. Norton &
Harrison, 11 SCRA 714 [1964]).
In the instant case, petitioner's evidence established that PADCO was never engaged in the printing business; that the board of directors and
the officers of GRAPHIC and PADCO were the same; and that PADCO holds 50% share of stock of GRAPHIC. Petitioner likewise stressed that
PADCO's own evidence shows that the printing machine in question had been in the premises of GRAPHIC since May, 1965, long before
PADCO even acquired its alleged title on July 11, 1966 from Capitol Publishing. That the said machine was allegedly leased by PADCO to
GRAPHIC on January 24, 1966, even before PADCO purchased it from Capital Publishing on July 11, 1966, only serves to show that PADCO's
claim of ownership over the printing machine is not only farce and sham but also unbelievable.
Considering the aforestated principles and the circumstances established in this case, respondent judge should have pierced PADCO's veil of
corporate Identity.
Respondent PADCO argues that if respondent judge erred in not piercing the veil of its corporate fiction, the error is merely an error of
judgment and not an error of jurisdiction correctable by appeal and not by certiorari.
To this argument of respondent, suffice it to say that the same is a mere technicality. In the case of Rubio vs. Mariano (52 SCRA 338, 343
[1973]), this Court ruled:
While We recognize the fact that these movants the MBTC, the Phillips spouses, the Phillips corporation and the
Hacienda Benito, Inc. did raise in their respective answers the issue as to the propriety of the instant petition for
certiorari on the ground that the remedy should have been appeal within the reglementary period, We considered such
issue as a mere technicality which would have accomplished nothing substantial except to deny to the petitioner the right
to litigate the matters he raised ...
Litigations should, as much as possible, be decided on their merits and not on technicality (De las Alas vs. Court of Appeals, 83 SCRA 200, 216
[1978]). Every party-litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the
unacceptable plea of technicalities (Heirs of Ceferino Morales vs. Court of Appeals, 67 SCRA 304, 310 [1975]).
PREMISES CONSIDERED, the March 26,1975 Order of the then Court of First Instance of Manila, is ANNULLED and SET ASIDE, and the
Temporary Restraining Order issued is hereby made permanent.
SO ORDERED.
[G.R. Nos. 84132-33 : December 10, 1990.]
192 SCRA 257
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and
GODOFREDO QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna, Respondents.

This case involves the constitutionality of a presidential decree which, like all other issuances of President Marcos during his regime, was at
that time regarded as sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the touchstone of the fundamental
law that even then was supposed to limit presidential action.: rd
The particular enactment in question is Pres. Decree No. 1717, which ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law outlined the procedure for filing claims against the Agrix companies
and created a Claims Committee to process these claims. Especially relevant to this case, and noted at the outset, is Sec. 4(1) thereof
providing that "all mortgages and other liens presently attaching to any of the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent Philippine Veterans Bank a real estate mortgage dated
July 7, 1978, over three (3) parcels of land situated in Los Baos, Laguna. During the existence of the mortgage, AGRIX went bankrupt. It was
for the expressed purpose of salvaging this and the other Agrix companies that the aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee for the payment of its loan credit. In the meantime,
the New Agrix, Inc. and the National Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with the
Regional Trial Court of Calamba, Laguna, for the cancellation of the mortgage lien in favor of the private respondent. For its part, the private
respondent took steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second case with the same court to stop
the foreclosure. The two cases were consolidated.
After the submission by the parties of their respective pleadings, the trial court rendered the impugned decision. Judge Francisco Ma.
Guerrero annulled not only the challenged provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1) the
presidential exercise of legislative power was a violation of the principle of separation of powers; (2) the law impaired the obligation of
contracts; and (3) the decree violated the equal protection clause. The motion for reconsideration of this decision having been denied, the
present petition was filed.: rd
The petition was originally assigned to the Third Division of this Court but because of the constitutional questions involved it was transferred
to the Court en banc. On August 30, 1988, the Court granted the petitioner's prayer for a temporary restraining order and instructed the
respondents to cease and desist from conducting a public auction sale of the lands in question. After the Solicitor General and the private

respondent had filed their comments and the petitioners their reply, the Court gave due course to the petition and ordered the parties to file
simultaneous memoranda. Upon compliance by the parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the validity of the decree. In support of this
contention, it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also
raised but not resolved. The Court, after noting that the petitioners had already filed their claims with the AGRIX Claims Committee created
by the decree, had simply dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the provisions of Pres. Decree No. 1717 by filing a claim with
the AGRIX Claims Committee. Failing to get results, it sought to foreclose the real estate mortgage executed by AGRIX in its favor, which had
been extinguished by the decree. It was only when the petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that the
private respondent attacked the validity of the provision. At that stage, however, consistent with Mendoza, the private respondent was
already estopped from questioning the constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims Committee pursuant to this decree. It must be noted,
however, that this was done in 1980, when President Marcos was the absolute ruler of this country and his decrees were the absolute law.
Any judicial challenge to them would have been futile, not to say foolhardy. The private respondent, no less than the rest of the nation, was
aware of that reality and knew it had no choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to question the dictator's decisions before the courts of justice then. The
record will show, however, that not a single act or issuance of President Marcos was ever declared unconstitutional, not even by the highest
court, as long as he was in power. To rule now that the private respondent is estopped for having abided with the decree instead of boldly
assailing it is to close our eyes to a cynical fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after filing their claims with the AGRIX Claims Committee, received in
settlement thereof shares of stock valued at P40,000.00 without protest or reservation. The herein private respondent has not been paid a
single centavo on its claim, which was kept pending for more than seven years for alleged lack of supporting papers. Significantly, the validity
of that claim was not questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the mortgage by the private
respondent. The petitioner limited itself to the argument that the private respondent was estopped from questioning the decree because of
its earlier compliance with its provisions.
Independently of these observations, there is the consideration that an affront to the Constitution cannot be allowed to continue existing
simply because of procedural inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above, extinguishing all mortgages and other liens attaching to the
assets of AGRIX. It also notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured obligations shall not bear
interest" and in Subsection (iii) that "all accrued interests, penalties or charges as of date hereof pertaining to the obligations, whether
secured or unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in Section 1 that "no person shall be deprived of life, liberty
or property without due course of law nor shall any person be denied the equal protection of the law" and in Section 10 that "no law
impairing the obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all rights, are subject to regulation under the police power for the
promotion of the common welfare. The contention is that this inherent power of the state may be exercised at any time for this purpose so
long as the taking of the property right, even if based on contract, is done with due process of law.
This argument is an over-simplification of the problem before us. The police power is not a panacea for all constitutional maladies. Neither
does its mere invocation conjure an instant and automatic justification for every act of the government depriving a person of his life, liberty
or property.
A legislative act based on the police power requires the concurrence of a lawful subject and a lawful method. In more familiar words, a) the
interests of the public generally, as distinguished from those of a particular class, should justify the interference of the state; and b) the
means employed are reasonably necessary for the accomplishment of the purpose and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the interests of the public are not sufficiently involved to warrant the
interference of the government with the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the small
investors," who would be prejudiced if the corporation were not to be assisted. However, the record does not state how many there are of
such investors, and who they are, and why they are being preferred to the private respondent and other creditors of AGRIX with vested
property rights.:-cralaw
The public interest supposedly involved is not identified or explained. It has not been shown that by the creation of the New Agrix, Inc. and
the extinction of the property rights of the creditors of AGRIX, the interests of the public as a whole, as distinguished from those of a
particular class, would be promoted or protected. The indispensable link to the welfare of the greater number has not been established. On
the contrary, it would appear that the decree was issued only to favor a special group of investors who, for reasons not given, have been
preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means employed to rehabilitate AGRIX fall far short of the
requirement that they shall not be unduly oppressive. The oppressiveness is patent on the face of the decree. The right to property in all
mortgages, liens, interests, penalties and charges owing to the creditors of AGRIX is arbitrarily destroyed. No consideration is paid for the
extinction of the mortgage rights. The accrued interests and other charges are simply rejected by the decree. The right to property is
dissolved by legislative fiat without regard to the private interest violated and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes under the protection of the Bill of Rights. So do interests on loans, as
well as penalties and charges, which are also vested rights once they accrue. Private property cannot simply be taken by law from one person
and given to another without compensation and any known public purpose. This is plain arbitrariness and is not permitted under the
Constitution.

And not only is there arbitrary taking, there is discrimination as well. In extinguishing the mortgage and other liens, the decree lumps the
secured creditors with the unsecured creditors and places them on the same level in the prosecution of their respective claims. In this
respect, all of them are considered unsecured creditors. The only concession given to the secured creditors is that their loans are allowed to
earn interest from the date of the decree, but that still does not justify the cancellation of the interests earned before that date. Such
interests, whether due to the secured or the unsecured creditors, are all extinguished by the decree. Even assuming such cancellation to be
valid, we still cannot see why all kinds of creditors, regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated alike, both in the privileges conferred and the
obligations imposed. Conversely, all persons or things differently situated should be treated differently. In the case at bar, persons differently
situated are similarly treated, in disregard of the principle that there should be equality only among equals.- nad
One may also well wonder why AGRIX was singled out for government help, among other corporations where the stockholders or investors
were also swindled. It is not clear why other companies entitled to similar concern were not similarly treated. And surely, the stockholders of
the private respondent, whose mortgage lien had been cancelled and legitimate claims to accrued interests rejected, were no less deserving
of protection, which they did not get. The decree operated, to use the words of a celebrated case, 3 "with an evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the provision of Article XIV, Section 4 of the 1973
Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the formation, organization, or regulation of private
corporations, unless such corporations are owned or controlled by the Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the government. The National Development Corporation was merely required to
extend a loan of not more than P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the management of the
corporation, but with the obligation of making periodic reports to the Agrix board of directors. After payment of the loan, the said board can
then appoint its own management. The stocks of the new corporation are to be issued to the old investors and stockholders of AGRIX upon
proof of their claims against the abolished corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is entirely
private and so should have been organized under the Corporation Law in accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract between AGRIX and the private respondent without justification.
While it is true that the police power is superior to the impairment clause, the principle will apply only where the contract is so related to the
public welfare that it will be considered congenitally susceptible to change by the legislature in the interest of the greater number. 5 Most
present-day contracts are of that nature. But as already observed, the contracts of loan and mortgage executed by AGRIX are purely private
transactions and have not been shown to be affected with public interest. There was therefore no warrant to amend their provisions and
deprive the private respondent of its vested property rights.
It is worth noting that only recently in the case of the Development Bank of the Philippines v. NLRC, 6 we sustained the preference in
payment of a mortgage creditor as against the argument that the claims of laborers should take precedence over all other claims, including
those of the government. In arriving at this ruling, the Court recognized the mortgage lien as a property right protected by the due process
and contract clauses notwithstanding the argument that the amendment in Section 110 of the Labor Code was a proper exercise of the police
power.: nad
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police power, not being in conformity with the traditional
requirements of a lawful subject and a lawful method. The extinction of the mortgage and other liens and of the interest and other charges
pertaining to the legitimate creditors of AGRIX constitutes taking without due process of law, and this is compounded by the reduction of the
secured creditors to the category of unsecured creditors in violation of the equal protection clause. Moreover, the new corporation, being
neither owned nor controlled by the Government, should have been created only by general and not special law. And insofar as the decree
also interferes with purely private agreements without any demonstrated connection with the public interest, there is likewise an
impairment of the obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on the authority of President Marcos to promulgate Pres. Decree No.
1717 under Amendment No. 6 of the 1973 Constitution. Even if he had such authority, the decree must fall just the same because of its
violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared UNCONSTITUTIONAL. The temporary restraining order dated
August 30, 1988, is LIFTED. Costs against the petitioners.- nad
SO ORDERED.

G.R. No. 147402

January 14, 2004

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban
City, petitioner,
vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional
Director of COA Region VIII, respondents.
The Case
1

This is a petition for certiorari to annul the Commission on Audits ("COA") Resolution dated 3 January 2000 and the Decision dated 30
January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos request for COA to cease all audit
services, and to stop charging auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA also denied petitioners request for
COA to refund all auditing fees previously paid by LMWD.

Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD received a letter from COA
dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COAs Regional Director that the water district could not pay the auditing fees. Petitioner cited as basis for his action Sections 6 and
2
20 of Presidential Decree 198 ("PD 198") , as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director referred
petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying his requests. Petitioner
filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City Water District v. Civil Service
3
Commission and Commission on Audit, as follows:
The above-quoted provision *referring to Section 3(b) PD 198+ definitely sets to naught petitioners contention that they are private
corporations. It is clear therefrom that the power to appoint the members who will comprise the members of the Board of Directors
belong to the local executives of the local subdivision unit where such districts are located. In contrast, the members of the Board of
Directors or the trustees of a private corporation are elected from among members or stockholders thereof. It would not be amiss at
this point to emphasize that a private corporation is created for the private purpose, benefit, aim and end of its members or
stockholders. Necessarily, said members or stockholders should be given a free hand to choose who will compose the governing
body of their corporation. But this is not the case here and this clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA to refund all auditing
fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a government-owned or controlled corporation
subject to the audit jurisdiction of COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
4

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

Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long line of cases culminating
5
6
in Davao City Water District v. Civil Service Commission and just recently reiterated in De Jesus v. Commission on Audit. Petitioner
maintains that LWDs are not government-owned and controlled corporations with original charters. Petitioner even argues that LWDs are
private corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a "new
7
perspective to the issue of the true character of water districts."
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and not the LWDs. Petitioner claims
that LWDs are created "pursuant to" and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an "original charter"
that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner elaborates
that PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only provides for their formation on an
8
optional or voluntary basis. Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian Resolution as
specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The first
refers to private corporations created under a general law. The second refers to government-owned or controlled corporations created by
special charters. Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and
subject to the test of economic viability.
9

The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens. The purpose of
this constitutional provision is to ban private corporations created by special charters, which historically gave certain individuals, families or
10
groups special privileges denied to other citizens.
In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional. Private
corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated differently,
only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the Corporation
11
12
Code, except that the Cooperative Code governs the incorporation of cooperatives.
The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private
corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations are
government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation Code states that "[A]ll corporations organized under this code shall file
with the Securities and Exchange Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all corporations
registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors of LWDs for a
fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations
created pursuant to the Corporation Code. Significantly, petitioners are not created under the said code, but on the contrary, they
13
were created pursuant to a special law and are governed primarily by its provision. (Emphasis supplied)
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence and
14
power from PD 198. Sections 6 and 25 of PD 198 provide:
Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a district. For purposes
of this Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As
such, a district shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the
powers granted in, and subject to such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served
by said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the
city or municipality. A district may include one or more municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the
control of such city, municipality or province to such district upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5
above.

(e) The names of the initial directors of the district with the date of expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the
district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution
shall be adopted in each city, municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by this Title or which are
necessarily implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out the objectives of
this Act, a district is hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to review by the
Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers. Section 6 of PD 198
provides that LWDs "shall exercise the powers, rights and privileges given to private corporations under existing laws." Without PD 198, LWDs
would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that LWDs are
government-owned and controlled corporations with a special charter.
The phrase "government-owned and controlled corporations with original charters" means GOCCs created under special laws and not under
the general incorporation law. There is no difference between the term "original charters" and "special charters." The Court clarified this
15
in National Service Corporation v. NLRC by citing the deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows: "including
government-owned or controlled corporations WITH ORIGINAL CHARTERS." The purpose of this amendment is to indicate that
government corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However,
corporations which are subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded
from the coverage of the civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
16

Again, in Davao City Water District v. Civil Service Commission, the Court reiterated the meaning of the phrase "government-owned and
controlled corporations with original charters" in this wise:
By "government-owned or controlled corporation with original charter," We mean government owned or controlled corporation
created by a special law and not under the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No.
82819, February 8, 1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No. 69870,
promulgated on 29 November 1988, quoting extensively from the deliberations of the 1986 Constitutional Commission in
respect of the intent and meaning of the new phrase with original charter, in effect held that government-owned and
controlled corporations with original charter refer to corporations chartered by special law as distinguished from
corporations organized under our general incorporation statute the Corporation Code. In NASECO, the company
involved had been organized under the general incorporation statute and was a subsidiary of the National Investment
Development Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered by a

special statute. Thus, government-owned or controlled corporations like NASECO are effectively, excluded from the scope
of the Civil Service." (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang Bayan has the power to
17
create corporations. This is a patently baseless assumption. The Local Government Code does not vest in the Sangguniang Bayan the power
18
to create corporations. What the Local Government Code empowers the Sangguniang Bayan to do is to provide for the establishment of a
waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the legislative body of the
municipality, shall enact ordinances, approve resolutions and appropriate funds for the general welfare of the municipality and its
inhabitants pursuant to Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as provided
for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient waterworks
system to supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants, pumps,
cisterns and reservoirs; protect the purity and quantity of the water supply of the municipality and, for this purpose, extend
the coverage of appropriate ordinances over all territory within the drainage area of said water supply and within one
hundred (100) meters of the reservoir, conduit, canal, aqueduct, pumping station, or watershed used in connection with
the water service; and regulate the consumption, use or wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The Sangguniang Bayan has no
power to create a corporate entity that will operate its waterworks system. However, the Sangguniang Bayan may avail of existing enabling
laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake of argument that the Sangguniang Bayan has
the power to create corporations, the LWDs would remain government-owned or controlled corporations subject to COAs audit jurisdiction.
The resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the LWD a government-owned and controlled
19
corporation with an original charter. In any event, the Court has already ruled in Baguio Water District v. Trajano that the Sangguniang
Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of the opinion
that said resolution cannot be considered as its charter, the same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an original charter. In short,
petitioner argues that one special law cannot serve as enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the
20
Constitution mandates that "Congress shall not, except by general law," provide for the creation of private corporations. Thus, the
Constitution prohibits one special law to create one private corporation, requiring instead a "general law" to create private corporations. In
contrast, the same Section 16 states that "Government-owned or controlled corporations may be created or established by special charters."
Thus, the Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress to create
several GOCCs of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs. There is no danger of creating
special privileges to certain individuals, families or groups if there is one special law creating each GOCC. Certainly, such danger will not exist
whether one special law creates one GOCC, or one special enabling law creates several GOCCs. Thus, Congress may create GOCCs either by
special charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD 198 which applies only to
LWDs.
21

Petitioner also contends that LWDs are private corporations because Section 6 of PD 198 declares that LWDs "shall be considered quasipublic" in nature. Petitioners rationale is that only private corporations may be deemed "quasi-public" and not public corporations. Put
differently, petitioner rationalizes that a public corporation cannot be deemed "quasi-public" because such corporation is already public.
Petitioner concludes that the term "quasi-public" can only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the governments ownership or
control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with original charters," as well as
"government-owned or controlled corporations" without original charters. GOCCs with original charters are subject to COA pre-audit, while
GOCCs without original charters are subject to COA post-audit. GOCCs without original charters refer to corporations created under the
Corporation Code but are owned or controlled by the government. The nature or purpose of the corporation is not material in determining
COAs audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law.
The determining factor of COAs audit jurisdiction is government ownership or control of the corporation. InPhilippine Veterans Bank
22
Employees Union-NUBE v. Philippine Veterans Bank, the Court even ruled that the criterion of ownership and control is more important
than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the Civil Service embraces all branches,
subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with
original charters." As the Bank is not owned or controlled by the Government although it does have an original charter in the form

23

of R.A. No. 3518, it clearly does not fall under the Civil Service and should be regarded as an ordinary commercial corporation.
Section 28 of the said law so provides. The consequence is that the relations of the Bank with its employees should be governed by
the labor laws, under which in fact they have already been paid some of their claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law, PD 198. There is no
private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or local government owns and
controls all their assets. The government controls LWDs because under PD 198 the municipal or city mayor, or the provincial governor,
24
appoints all the board directors of an LWD for a fixed term of six years. The board directors of LWDs are not co-owners of the LWDs. LWDs
have no private stockholders or members. The board directors and other personnel of LWDs are government employees subject to civil
25
26
service laws and anti-graft laws.
While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means that the appointees to the board of
directors of LWDs shall come from the private sector. Once such private sector representatives assume office as directors, they become
public officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section 2(1), Article IXB of the Constitution declaring that the civil service includes "government-owned or controlled corporations with original charters."
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under the term "agencies or
instrumentalities" of the government and thus still subject to COAs audit jurisdiction. However, the stark and undeniable fact is that the
27
government owns LWDs. Section 45 of PD 198 recognizes government ownership of LWDs when Section 45 states that the board of
directors may dissolve an LWD only on the condition that "another public entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto." The implication is clear that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner advances the theory that
28
29
the "Water Districts owner is the District itself." Assuming for the sake of argument that an LWD is "self-owned," as petitioner describes
an LWD, the government in any event controls all LWDs. First, government officials appoint all LWD directors to a fixed term of office.
Second, any per diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration, and directors
30
can receive no other compensation for their services to the LWD. Third, the Local Water Utilities Administration can require LWDs to merge
31
or consolidate their facilities or operations. This element of government control subjects LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of ownership of water facilities
from local government units to their respective water districts as mandated by PD 198. Petitioner is grasping at straws. Privatization involves
the transfer of government assets to a private entity. Petitioner concedes that the owner of the assets transferred under Section 6 (c) of PD
32
198 is no other than the LWD itself. The transfer of assets mandated by PD 198 is a transfer of the water systems facilities "managed,
33
operated by or under the control of such city, municipality or province to such (water) district." In short, the transfer is from one
government entity to another government entity. PD 198 is bereft of any indication that the transfer is to privatize the operation and control
of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20 of PD 198 prevents COA
34
from auditing LWDs. Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe and define by resolution a system of
business administration and accounting for the district, which shall be patterned upon and conform to the standards established by
the Administration. Auditing shall be performed by a certified public accountant not in the government service. The
Administration may, however, conduct annual audits of the fiscal operations of the district to be performed by an auditor retained
by the Administration. Expenses incurred in connection therewith shall be borne equally by the water district concerned and the
35
Administration. (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing LWDs. Petitioner
asserts that this is the import of the second sentence of Section 20 of PD 198 when it states that "[A]uditing shall be performed by a certified
36
public accountant not in the government service."
PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from COAs audit jurisdiction.
Section 3, Article IX-C of the Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of
public funds, from the jurisdiction of the Commission on Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of Presidential Decrees, like
that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange in the deliberations of the Constitutional
Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW SHALL BE
PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF
PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a legislature in the past to obtain
presidential decrees exempting themselves from the jurisdiction of the Commission on Audit, one notable example of which is the
Philippine National Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly on its own account. Its

funds were not very impressive in quantity but underneath that shell there were billions of pesos in a multiplicity of companies. The
PNOC the empty shell under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions
of pesos invested in different corporations underneath it were exempted from the coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut levy is a form of
taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that
was, I think, the basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the United
Coconut Planters Bank. The charter of the UCPB, through a presidential decree, exempted it from the jurisdiction of the Commission
on Audit, it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON
AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled corporations and their subsidiaries"? So
that if these government-owned and controlled corporations and their subsidiaries are subjected to the audit of the COA, any law
exempting certain government corporations or subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by Commissioner de
Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same provision was
in the 1973 Constitution and yet somehow a law or a decree was passed where certain institutions were exempted from audit. We
37
are just reaffirming, emphasizing, the role of the Commission on Audit so that this problem will never arise in the future.
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors from auditing LWDs and
Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of Section
20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
38

Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section 18 of RA 6758, which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In order to preserve the independence
and integrity of the Commission on Audit (COA), its officials and employees are prohibited from receiving salaries, honoraria,
bonuses, allowances or other emoluments from any government entity, local government unit, government-owned or controlled
corporations, and government financial institutions, except those compensation paid directly by COA out of its appropriations
andcontributions.
Government entities, including government-owned or controlled corporations including financial institutions and local government
units are hereby prohibited from assessing or billing other government entities, including government-owned or controlled
corporations including financial institutions or local government units for services rendered by its officials and employees as part of
their regular functions for purposes of paying additional compensation to said officials and employees. (Emphasis supplied)
39

Claiming that Section 18 is "absolute and leaves no doubt," petitioner asks COA to discontinue its practice of charging auditing fees to LWDs
since such practice allegedly violates the law.
Petitioners claim has no basis.

Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government entity except "compensation
paid directly by COA out of its appropriations and contributions." Thus, RA 6758 itself recognizes an exception to the statutory ban on COA
40
personnel receiving compensation from GOCCs. In Tejada v. Domingo, the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to preserve the
independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving salaries,
honoraria, bonuses, allowances or other emoluments from any government entity, local government unit, GOCCs and government
financial institutions, except such compensation paid directly by the COA out of its appropriations and contributions, and (2)
government entities, including GOCCs, government financial institutions and local government units from assessing or billing other
government entities, GOCCs, government financial institutions or local government units for services rendered by the latters
officials and employees as part of their regular functions for purposes of paying additional compensation to said officials and
employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the GOCCs and
government financial institutions. Under the first, COA personnel assigned to auditing units of GOCCs or government financial
institutions can receive only such salaries, allowances or fringe benefits paid directly by the COA out of its appropriations and
contributions. The contributions referred to are the cost of audit services earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The COA is further barred from assessing or billing GOCCs and government
financial institutions for services rendered by its personnel as part of their regular audit functions for purposes of paying additional
compensation to such personnel. x x x. (Emphasis supplied)
In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which allows COA to charge GOCCs the cost
of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of the audit
function in the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit cost shall include
personnel services, maintenance and other operating expenses, depreciation on capital and equipment and out-of-pocket expenses.
In respect to the allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the formers auditing units,
41
the same shall be directly defrayed by COA from its own appropriations x x x.
COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to COA auditors. Petitioner has not alleged
that COA charges LWDs auditing fees in excess of COAs "actual audit cost." Neither has petitioner alleged that the auditing fees are paid by
LWDs directly to individual COA auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30 January 2001 denying petitioners
Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared VOID for being
inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.
SO ORDERED.

G.R. No. 88404 October 18, 1990

PHILIPPINE LONG DISTANCE TELEPHONE CO. [PLDT], petitioner,
vs.
THE NATIONAL TELECOMMUNICATIONS COMMISSION AND CELLCOM, INC., (EXPRESS TELECOMMUNICATIONS CO., INC.
[ETCI]), respondents.
Petitioner Philippine Long Distance Telephone Company (PLDT) assails, by way of certiorari and Prohibition under Rule 65, two (2) Orders of
public respondent National Telecommunications Commission (NTC), namely, the Order of 12 December 1988 granting private respondent
Express Telecommunications Co., Inc. (ETCI) provisional authority to install, operate and maintain a Cellular Mobile Telephone System in
Metro-Manila (Phase A) in accordance with specified conditions, and the Order, dated 8 May 1988, denying reconsideration.
On 22 June 1958, Rep. Act No. 2090, was enacted, otherwise known as "An Act Granting Felix Alberto and Company, Incorporated, a
Franchise to Establish Radio Stations for Domestic and Transoceanic Telecommunications." Felix Alberto & Co., Inc. (FACI) was the original
corporate name, which was changed to ETCI with the amendment of the Articles of Incorporation in 1964. Much later, "CELLCOM, Inc." was
the name sought to be adopted before the Securities and Exchange Commission, but this was withdrawn and abandoned.
On 13 May 1987, alleging urgent public need, ETCI filed an application with public respondent NTC (docketed as NTC Case No. 87-89) for the
issuance of a Certificate of Public Convenience and Necessity (CPCN) to construct, install, establish, operate and maintain a Cellular Mobile
Telephone System and an Alpha Numeric Paging System in Metro Manila and in the Southern Luzon regions, with a prayer for provisional
authority to operate Phase A of its proposal within Metro Manila.
PLDT filed an Opposition with a Motion to Dismiss, based primarily on the following grounds: (1) ETCI is not capacitated or qualified under its
legislative franchise to operate a systemwide telephone or network of telephone service such as the one proposed in its application; (2) ETCI
lacks the facilities needed and indispensable to the successful operation of the proposed cellular mobile telephone system; (3) PLDT has itself
a pending application with NTC, Case No. 86-86, to install and operate a Cellular Mobile Telephone System for domestic and international
service not only in Manila but also in the provinces and that under the "prior operator" or "protection of investment" doctrine, PLDT has the

priority or preference in the operation of such service; and (4) the provisional authority, if granted, will result in needless, uneconomical and
harmful duplication, among others.
In an Order, dated 12 November 1987, NTC overruled PLDT's Opposition and declared that Rep. Act No. 2090 (1958) should be liberally
construed as to include among the services under said franchise the operation of a cellular mobile telephone service.
In the same Order, ETCI was required to submit the certificate of registration of its Articles of Incorporation with the Securities and Exchange
Commission, the present capital and ownership structure of the company and such other evidence, oral or documentary, as may be
necessary to prove its legal, financial and technical capabilities as well as the economic justifications to warrant the setting up of cellular
mobile telephone and paging systems. The continuance of the hearings was also directed.
After evaluating the reconsideration sought by PLDT, the NTC, in October 1988, maintained its ruling that liberally construed, applicant's
franchise carries with it the privilege to operate and maintain a cellular mobile telephone service.
On 12 December 1988, NTC issued the first challenged Order. Opining that "public interest, convenience and necessity further demand a
second cellular mobile telephone service provider and finds PRIMA FACIE evidence showing applicant's legal, financial and technical
capabilities to provide a cellular mobile service using the AMPS system," NTC granted ETCI provisional authority to install, operate and
maintain a cellular mobile telephone system initially in Metro Manila, Phase A only, subject to the terms and conditions set forth in the same
Order. One of the conditions prescribed (Condition No. 5) was that, within ninety (90) days from date of the acceptance by ETCI of the terms
and conditions of the provisional authority, ETCI and PLDT "shall enter into an interconnection agreement for the provision of adequate
interconnection facilities between applicant's cellular mobile telephone switch and the public switched telephone network and shall jointly
submit such interconnection agreement to the Commission for approval."
In a "Motion to Set Aside the Order" granting provisional authority, PLDT alleged essentially that the interconnection ordered was in violation
of due process and that the grant of provisional authority was jurisdictionally and procedurally infirm. On 8 May 1989, NTC denied
reconsideration and set the date for continuation of the hearings on the main proceedings. This is the second questioned Order.
PLDT urges us now to annul the NTC Orders of 12 December 1988 and 8 May 1989 and to order ETCI to desist from, suspend, and/or
discontinue any and all acts intended for its implementation.
On 15 June 1989, we resolved to dismiss the petition for its failure to comply fully with the requirements of Circular No. 1-88. Upon
satisfactory showing, however, that there was, in fact, such compliance, we reconsidered the order, reinstated the Petition, and required the
respondents NTC and ETCI to submit their respective Comments.
On 27 February 1990, we issued a Temporary Restraining Order enjoining NTC to "Cease and Desist from all or any of its on-going
proceedings and ETCI from continuing any and all acts intended or related to or which will amount to the implementation/execution of its
provisional authority." This was upon PLDT's urgent manifestation that it had been served an NTC Order, dated 14 February 1990, directing
immediate compliance with its Order of 12 December 1988, "otherwise the Commission shall be constrained to take the necessary measures
and bring to bear upon PLDT the full sanctions provided by law."
We required PLDT to post a bond of P 5M. It has complied, with the statement that it was "post(ing) the same on its agreement and/or
consent to have the same forfeited in favor of Private Respondent ETCI/CELLCOM should the instant Petition be dismissed for lack of merit."
ETCI took exception to the sufficiency of the bond considering its initial investment of approximately P 225M, but accepted the forfeiture
proferred.
ETCI moved to have the TRO lifted, which we denied on 6 March 1990. We stated, however, that the inaugural ceremony ETCI had scheduled
for that day could proceed, as the same was not covered by the TRO.
PLDT relies on the following grounds for the issuance of the Writs prayed for:
1. Respondent NTC's subject order effectively licensed and/or authorized a corporate entity without any franchise to
operate a public utility, legislative or otherwise, to establish and operate a telecommunications system.
2. The same order validated stock transactions of a public service enterprise contrary to and/or in direct violation of Section
20(h) of the Public Service Act.
3. Respondent NTC adjudicated in the same order a controverted matter that was not heard at all in the proceedings under
which it was promulgated.
As correctly pointed out by respondents, this being a special civil action for certiorari and Prohibition, we only need determine if NTC acted
without jurisdiction or with grave abuse of discretion amounting to lack or excess of jurisdiction in granting provisional authority to ETCI
under the NTC questioned Orders of 12 December 1988 and 8 May 1989.
The case was set for oral argument on 21 August 1990 with the parties directed to address, but not limited to, the following issues: (1) the
status and coverage of Rep. Act No. 2090 as a franchise; (2) the transfer of shares of stock of a corporation holding a CPCN; and (3) the
principle and procedure of interconnection. The parties were thereafter required to submit their respective Memoranda, with which they
have complied.
We find no grave abuse of discretion on the part of NTC, upon the following considerations:

1. NTC Jurisdiction
There can be no question that the NTC is the regulatory agency of the national government with jurisdiction over all telecommunications
entities. It is legally clothed with authority and given ample discretion to grant a provisional permit or authority. In fact, NTC may, on its own
initiative, grant such relief even in the absence of a motion from an applicant.
Sec. 3. Provisional Relief. Upon the filing of an application, complaint or petition or at any stage thereafter, the Board
may grant on motion of the pleaders or on its own initiative, the relief prayed for, based on the pleading, together with the
affidavits and supporting documents attached thereto, without prejudice to a final decision after completion of the hearing
which shall be called within thirty (30) days from grant of authority asked for. (Rule 15, Rules of Practice and Procedure
Before the Board of Communications (now NTC).
What the NTC granted was such a provisional authority, with a definite expiry period of eighteen (18) months unless sooner renewed, and
which may be revoked, amended or revised by the NTC. It is also limited to Metro Manila only. What is more, the main proceedings are
clearly to continue as stated in the NTC Order of 8 May 1989.
The provisional authority was issued after due hearing, reception of evidence and evaluation thereof, with the hearings attended by various
oppositors, including PLDT. It was granted only after a prima facie showing that ETCI has the necessary legal, financial and technical
capabilities and that public interest, convenience and necessity so demanded.
PLDT argues, however, that a provisional authority is nothing short of a Certificate of Public Convenience and Necessity (CPCN) and that it is
merely a "distinction without a difference." That is not so. Basic differences do exist, which need not be elaborated on. What should be borne
in mind is that provisional authority would be meaningless if the grantee were not allowed to operate. Moreover, it is clear from the very
Order of 12 December 1988 itself that its scope is limited only to the first phase, out of four, of the proposed nationwide telephone system.
The installation and operation of an alpha numeric paging system was not authorized. The provisional authority is not exclusive. Its lifetime is
limited and may be revoked by the NTC at any time in accordance with law. The initial expenditure of P130M more or less, is rendered
necessary even under a provisional authority to enable ETCI to prove its capability. And as pointed out by the Solicitor General, on behalf of
the NTC, if what had been granted were a CPCN, it would constitute a final order or award reviewable only by ordinary appeal to the Court of
Appeals pursuant to Section 9(3) of BP Blg. 129, and not by certiorari before this Court.
The final outcome of the application rests within the exclusive prerogative of the NTC. Whether or not a CPCN would eventually issue would
depend on the evidence to be presented during the hearings still to be conducted, and only after a full evaluation of the proof thus
presented.
2. The Coverage of ETCI's Franchise
Rep. Act No. 2090 grants ETCI (formerly FACI) "the right and privilege of constructing, installing, establishing and operating in the entire
Philippines radio stations for reception and transmission of messages on radio stations in the foreign and domestic public fixed point-to-point
and public base, aeronautical and land mobile stations, ... with the corresponding relay stations for the reception and transmission of wireless
messages on radiotelegraphy and/or radiotelephony ...." PLDT maintains that the scope of the franchise is limited to "radio stations" and
excludes telephone services such as the establishment of the proposed Cellular Mobile Telephone System (CMTS). However, in its Order of 12
November 1987, the NTC construed the technical term "radiotelephony" liberally as to include the operation of a cellular mobile telephone
system. It said:
In resolving the said issue, the Commission takes into consideration the different definitions of the term "radiotelephony."
As defined by the New International Webster Dictionary the term "radiotelephony" is defined as a telephone carried on by
aid of radiowaves without connecting wires. The International Telecommunications Union (ITU) defines a "radiotelephone
call" as a "telephone call, originating in or intended on all or part of its route over the radio communications channels of the
mobile service or of the mobile satellite service." From the above definitions, while under Republic Act 2090 a system-wide
telephone or network of telephone service by means of connecting wires may not have been contemplated, it can be
construed liberally that the operation of a cellular mobile telephone service which carries messages, either voice or record,
with the aid of radiowaves or a part of its route carried over radio communication channels, is one included among the
services under said franchise for which a certificate of public convenience and necessity may be applied for.
The foregoing is the construction given by an administrative agency possessed of the necessary special knowledge, expertise and experience
and deserves great weight and respect (Asturias Sugar Central, Inc. v. Commissioner of Customs, et al., L-19337, September 30, 1969, 29
SCRA 617). It can only be set aside on proof of gross abuse of discretion, fraud, or error of law (Tupas Local Chapter No. 979 v. NLRC, et al., L60532-33, November 5, 1985, 139 SCRA 478). We discern none of those considerations sufficient to warrant judicial intervention.
3. The Status of ETCI Franchise
PLDT alleges that the ETCI franchise had lapsed into nonexistence for failure of the franchise holder to begin and complete construction of
1
the radio system authorized under the franchise as explicitly required in Section 4 of its franchise, Rep. Act No. 2090. PLDT also invokes Pres.
Decree No. 36, enacted on 2 November 1972, which legislates the mandatory cancellation or invalidation of all franchises for the operation of
communications services, which have not been availed of or used by the party or parties in whose name they were issued.
However, whether or not ETCI, and before it FACI, in contravention of its franchise, started the first of its radio telecommunication stations
within (2) years from the grant of its franchise and completed the construction within ten (10) years from said date; and whether or not its
franchise had remained unused from the time of its issuance, are questions of fact beyond the province of this Court, besides the well-settled
procedural consideration that factual issues are not subjects of a special civil action for certiorari (Central Bank of the Philippines vs. Court of

Appeals, G.R. No. 41859, 8 March 1989, 171 SCRA 49; Ygay vs. Escareal, G.R. No. 44189, 8 February 1985, 135 SCRA 78; Filipino Merchant's
Insurance Co., Inc. vs. Intermediate Appellate Court, G.R. No. 71640, 27 June 1988, 162 SCRA 669). Moreover, neither Section 4, Rep. Act No.
2090 nor Pres. Decree No. 36 should be construed as self-executing in working a forfeiture. Franchise holders should be given an opportunity
to be heard, particularly so, where, as in this case, ETCI does not admit any breach, in consonance with the rudiments of fair play. Thus, the
factual situation of this case differs from that in Angeles Ry Co. vs. City of Los Angeles (92 Pacific Reporter 490) cited by PLDT, where the
grantee therein admitted its failure to complete the conditions of its franchise and yet insisted on a decree of forfeiture.
More importantly, PLDT's allegation partakes of a Collateral attack on a franchise Rep. Act No. 2090), which is not allowed. A franchise is a
property right and cannot be revoked or forfeited without due process of law. The determination of the right to the exercise of a franchise, or
whether the right to enjoy such privilege has been forfeited by non-user, is more properly the subject of the prerogative writ of quo
warranto, the right to assert which, as a rule, belongs to the State "upon complaint or otherwise" (Sections 1, 2 and 3, Rule 66, Rules of
2
Court), the reason being that the abuse of a franchise is a public wrong and not a private injury. A forfeiture of a franchise will have to be
declared in a direct proceeding for the purpose brought by the State because a franchise is granted by law and its unlawful exercise is
primarily a concern of Government.
A ... franchise is ... granted by law, and its ... unlawful exercise is the concern primarily of the Government. Hence, the latter
as a rule is the party called upon to bring the action for such ... unlawful exercise of franchise. (IV-B V. FRANCISCO, 298
[1963 ed.], citing Cruz vs. Ramos, 84 Phil. 226).
4. ETCI's Stock Transactions
ETCI admits that in 1964, the Albertos, as original owners of more than 40% of the outstanding capital stock sold their holdings to the Orbes.
In 1968, the Albertos re-acquired the shares they had sold to the Orbes. In 1987, the Albertos sold more than 40% of their shares to Horacio
Yalung. Thereafter, the present stockholders acquired their ETCI shares. Moreover, in 1964, ETCI had increased its capital stock from
P40,000.00 to P360,000.00; and in 1987, from P360,000.00 to P40M.
PLDT contends that the transfers in 1987 of the shares of stock to the new stockholders amount to a transfer of ETCI's
franchise, which needs Congressional approval pursuant to Rep. Act No. 2090, and since such approval had not been
obtained, ETCI's franchise had been invalidated. The provision relied on reads, in part, as follows:
SECTION 10. The grantee shall not lease, transfer, grant the usufruct of, sell or assign this franchise nor the rights and
privileges acquired thereunder to any person, firm, company, corporation or other commercial or legal entity nor merge
with any other person, company or corporation organized for the same purpose, without the approval of the Congress of
the Philippines first had. ...
It should be noted, however, that the foregoing provision is, directed to the "grantee" of the franchise, which is the corporation itself and
refers to a sale, lease, or assignment of that franchise. It does not include the transfer or sale of shares of stock of a corporation by the
latter's stockholders.
The sale of shares of stock of a public utility is governed by another law, i.e., Section 20(h) of the Public Service Act (Commonwealth Act No.
146). Pursuant thereto, the Public Service Commission (now the NTC) is the government agency vested with the authority to approve the
transfer of more than 40% of the subscribed capital stock of a telecommunications company to a single transferee, thus:
SEC. 20. Acts requiring the approval of the Commission. Subject to established stations and exceptions and saving
provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof, without
the approval and authorization of the Commission previously had
xxx xxx xxx
(h) To sell or register in its books the transfer or sale of shares of its capital stock, if the result of that sale in itself or in
connection with another previous sale, shall be to vest in the transferee more than forty per centum of the subscribed
capital of said public service. Any transfer made in violation of this provision shall be void and of no effect and shall not be
registered in the books of the public service corporation. Nothing herein contained shall be construed to prevent the
holding of shares lawfully acquired. (As amended by Com. Act No. 454).
In other words, transfers of shares of a public utility corporation need only NTC approval, not Congressional authorization. What transpired in
ETCI were a series of transfers of shares starting in 1964 until 1987. The approval of the NTC may be deemed to have been met when it
authorized the issuance of the provisional authority to ETCI. There was full disclosure before the NTC of the transfers. In fact, the NTC Order
of 12 November 1987 required ETCI to submit its "present capital and ownership structure." Further, ETCI even filed a Motion before the
NTC, dated 8 December 1987, or more than a year prior to the grant of provisional authority, seeking approval of the increase in its capital
stock from P360,000.00 to P40M, and the stock transfers made by its stockholders.
A distinction should be made between shares of stock, which are owned by stockholders, the sale of which requires only NTC approval, and
the franchise itself which is owned by the corporation as the grantee thereof, the sale or transfer of which requires Congressional sanction.
Since stockholders own the shares of stock, they may dispose of the same as they see fit. They may not, however, transfer or assign the
property of a corporation, like its franchise. In other words, even if the original stockholders had transferred their shares to another group of
shareholders, the franchise granted to the corporation subsists as long as the corporation, as an entity, continues to exist The franchise is not
thereby invalidated by the transfer of the shares. A corporation has a personality separate and distinct from that of each stockholder. It has
the right of continuity or perpetual succession (Corporation Code, Sec. 2).

To all appearances, the stock transfers were not just for the purpose of acquiring the ETCI franchise, considering that, as heretofore stated, a
series of transfers was involved from 1964 to 1987. And, contrary to PLDT's assertion, the franchise was not the only property of ETCI of
meaningful value. The "zero" book value of ETCI assets, as reflected in its balance sheet, was plausibly explained as due to the accumulated
depreciation over the years entered for accounting purposes and was not reflective of the actual value that those assets would command in
the market.
But again, whether ETCI has offended against a provision of its franchise, or has subjected it to misuse or abuse, may more properly be
inquired into in quo warranto proceedings instituted by the State. It is the condition of every franchise that it is subject to amendment,
alteration, or repeal when the common good so requires (1987 Constitution, Article XII, Section 11).
5. The NTC Interconnection Order
In the provisional authority granted by NTC to ETCI, one of the conditions imposed was that the latter and PLDT were to enter into an
interconnection agreement to be jointly submitted to NTC for approval.
PLDT vehemently opposes interconnection with its own public switched telephone network. It contends: that while PLDT welcomes
interconnections in the furtherance of public interest, only parties who can establish that they have valid and subsisting legislative franchises
are entitled to apply for a CPCN or provisional authority, absent which, NTC has no jurisdiction to grant them the CPCN or interconnection
with PLDT; that the 73 telephone systems operating all over the Philippines have a viability and feasibility independent of any interconnection
with PLDT; that "the NTC is not empowered to compel such a private raid on PLDT's legitimate income arising out of its gigantic investment;"
that "it is not public interest, but purely a private and selfish interest which will be served by an interconnection under ETCI's terms;" and that
"to compel PLDT to interconnect merely to give viability to a prospective competitor, which cannot stand on its own feet, cannot be justified
in the name of a non-existent public need" (PLDT Memorandum, pp. 48 and 50).
PLDT cannot justifiably refuse to interconnect.
Rep. Act No. 6849, or the Municipal Telephone Act of 1989, approved on 8 February 1990, mandates interconnection providing as it does that
"all domestic telecommunications carriers or utilities ... shall be interconnected to the public switch telephone network." Such regulation of
the use and ownership of telecommunications systems is in the exercise of the plenary police power of the State for the promotion of the
general welfare. The 1987 Constitution recognizes the existence of that power when it provides.
SEC. 6. The use of property bears a social function, and all economic agents shall contribute to the common good.
Individuals and private groups, including corporations, cooperatives, and similar collective organizations, shall have the
right to own, establish, and operate economic enterprises, subject to the duty of the State to promote distributive justice
and to intervene when the common good so demands (Article XII).
The interconnection which has been required of PLDT is a form of "intervention" with property rights dictated by "the objective of
government to promote the rapid expansion of telecommunications services in all areas of the Philippines, ... to maximize the use of
telecommunications facilities available, ... in recognition of the vital role of communications in nation building ... and to ensure that all users
of the public telecommunications service have access to all other users of the service wherever they may be within the Philippines at an
acceptable standard of service and at reasonable cost" (DOTC Circular No. 90-248). Undoubtedly, the encompassing objective is the common
good. The NTC, as the regulatory agency of the State, merely exercised its delegated authority to regulate the use of telecommunications
networks when it decreed interconnection.
The importance and emphasis given to interconnection dates back to Ministry Circular No. 82-81, dated 6 December 1982, providing:
Sec. 1. That the government encourages the provision and operation of public mobile telephone service within local subbase stations, particularly, in the highly commercialized areas;
Sec. 5. That, in the event the authority to operate said service be granted to other applicants, other than the franchise
holder, the franchise operator shall be under obligation to enter into an agreement with the domestic telephone network,
under an interconnection agreement;
Department of Transportation and Communication (DOTC) Circular No. 87-188, issued in 1987, also decrees:
12. All public communications carriers shall interconnect their facilities pursuant to comparatively efficient interconnection
(CEI) as defined by the NTC in the interest of economic efficiency.
The sharing of revenue was an additional feature considered in DOTC Circular No. 90-248, dated 14 June 1990, laying down the "Policy on
Interconnection and Revenue Sharing by Public Communications Carriers," thus:
WHEREAS, it is the objective of government to promote the rapid expansion of telecommunications services in all areas of
the Philippines;
WHEREAS, there is a need to maximize the use of telecommunications facilities available and encourage investment in
telecommunications infrastructure by suitably qualified service providers;
WHEREAS, in recognition of the vital role of communications in nation building, there is a need to ensure that all users of
the public telecommunications service have access to all other users of the service wherever they may be within the
Philippines at an acceptable standard of service and at reasonable cost.

WHEREFORE, ... the following Department policies on interconnection and revenue sharing are hereby promulgated:
1. All facilities offering public telecommunication services shall be interconnected into the nationwide
telecommunications network/s.
xxx xxx xxx
4. The interconnection of networks shall be effected in a fair and non-discriminatory manner and within
the shortest time-frame practicable.
5. The precise points of interface between service operators shall be as defined by the NTC; and the
apportionment of costs and division of revenues resulting from interconnection of telecommunications
networks shall be as approved and/or prescribed by the NTC.
xxx xxx xxx
Since then, the NTC, on 12 July 1990, issued Memorandum Circular No. 7-13-90 prescribing the "Rules and Regulations Governing the
Interconnection of Local Telephone Exchanges and Public Calling Offices with the Nationwide Telecommunications Network/s, the Sharing of
Revenue Derived Therefrom, and for Other Purposes."
The NTC order to interconnect allows the parties themselves to discuss and agree upon the specific terms and conditions of the
interconnection agreement instead of the NTC itself laying down the standards of interconnection which it can very well impose. Thus it is
that PLDT cannot justifiably claim denial of clue process. It has been heard. It will continue to be heard in the main proceedings. It will surely
heard in the negotiations concerning the interconnection agreement.
As disclosed during the hearing, the interconnection sought by ETCI is by no means a "parasitic dependence" on PLDT. The ETCI system can
operate on its own even without interconnection, but it will be limited to its own subscribers. What interconnection seeks to accomplish is to
enable the system to reach out to the greatest number of people possible in line with governmental policies laid down. Cellular phones can
access PLDT units and vice versa in as wide an area as attainable. With the broader reach, public interest and convenience will be better
served. To be sure, ETCI could provide no mean competition (although PLDT maintains that it has nothing to fear from the "innocuous
interconnection"), and eat into PLDT's own toll revenue cream PLDT revenue," in its own words), but all for the eventual benefit of all that
the system can reach.
6. Ultimate Considerations
The decisive consideration are public need, public interest, and the common good. Those were the overriding factors which motivated NTC in
granting provisional authority to ETCI. Article II, Section 24 of the 1987 Constitution, recognizes the vital role of communication and
information in nation building. It is likewise a State policy to provide the environment for the emergence of communications structures
suitable to the balanced flow of information into, out of, and across the country (Article XVI, Section 10, Ibid.). A modern and dependable
communications network rendering efficient and reasonably priced services is also indispensable for accelerated economic recovery and
development. To these public and national interests, public utility companies must bow and yield.
Despite the fact that there is a virtual monopoly of the telephone system in the country at present. service is sadly inadequate. Customer
demands are hardly met, whether fixed or mobile. There is a unanimous cry to hasten the development of a modern, efficient, satisfactory
and continuous telecommunications service not only in Metro Manila but throughout the archipelago. The need therefor was dramatically
emphasized by the destructive earthquake of 16 July 1990. It may be that users of the cellular mobile telephone would initially be limited to a
few and to highly commercialized areas. However, it is a step in the right direction towards the enhancement of the telecommunications
infrastructure, the expansion of telecommunications services in, hopefully, all areas of the country, with chances of complete disruption of
communications minimized. It will thus impact on, the total development of the country's telecommunications systems and redound to the
benefit of even those who may not be able to subscribe to ETCI.
Free competition in the industry may also provide the answer to a much-desired improvement in the quality and delivery of this type of
public utility, to improved technology, fast and handy mobile service, and reduced user dissatisfaction. After all, neither PLDT nor any other
public utility has a constitutional right to a monopoly position in view of the Constitutional proscription that no franchise certificate or
authorization shall be exclusive in character or shall last longer than fifty (50) years (ibid., Section 11; Article XIV Section 5, 1973 Constitution;
Article XIV, Section 8, 1935 Constitution). Additionally, the State is empowered to decide whether public interest demands that monopolies
be regulated or prohibited (1987 Constitution. Article XII, Section 19).
WHEREFORE, finding no grave abuse of discretion, tantamount to lack of or excess of jurisdiction, on the part of the National
Telecommunications Commission in issuing its challenged Orders of 12 December 1988 and 8 May 1989 in NTC Case No. 87-39, this Petition is
DISMISSED for lack of merit. The Temporary Restraining Order heretofore issued is LIFTED. The bond issued as a condition for the issuance of
said restraining Order is declared forfeited in favor of private respondent Express Telecommunications Co., Inc. Costs against petitioner.
SO ORDERED.
Separate Opinions
GUTIERREZ, JR., J., dissenting:

I share with the rest of the Court the desire to have a "modern, efficient, satisfactory, and continuous telecommunications service" in the
Philippines. I register this dissent, however, because I believe that any frustrations over the present state of telephone services do not justify
our affirming an illegal and inequitable order of the National Telecommunications Commission (NTC). More so when it appears that the
questioned order is not really a solution to the problems bugging our telephone industry.
My dissent is based on three primary considerations, namely:
(1) The Court has sustained nothing less than the desire of respondent ETCI to set-up a profitable business catering to an affluent clientele
through the use of billions of pesos worth of another company's properties. No issues of public welfare, breaking up of monopolies, or other
high sounding principles are involved. The core question is purely and simply whether or not to grant ETCI's desire for economic gains
through riding on another firm's investments.
(2) The Court has permitted respondent ETCI to operate a telephone system without a valid legislative franchise. It strains the imagination
too much to interpret a legislative franchise authorizing "radio stations" as including the provisional permit for a sophisticated telephone
system which has absolutely nothing to do with radio broadcasts and transmissions. The Court subverts the legislative will when it validates a
provisional permit on the basis of authority which never envisioned much less intended its use for a regular telephone system catering to
thousands of individual receiver units. There is nothing in Rep. Act No. 2090 which remotely suggests a cellular mobile telephone system.
(3) The authority given by Rep. Act No. 2090 has expired. ETCI is not only riding on another company's investments and using legislative
authority for a purpose never dreamed of by the legislators but is also trying to extract life from and resurrect an unused and dead franchise.
My principal objection to the disputed NTC order arises from the fact that respondent Express Telecommunications Co. Inc. (ETCI) cannot
exist without using the facilities of Philippine Long Distance Telephone Co. (PLDT). Practically all of its business will be conducted through
another company's property.
While pretending to set up a separate phone company, ETCI's cellular phones would be useless most of the time, if not all the time, unless
they use PLDT lines. It would be different if ETCI phone owners would primarily communicate with one another and tap into PLDT lines only
rarely or occasionally.
To compare ETCI with the Government Telephone System (GTS) or with an independent phone company serving a province or city is
misleading. The defunct GTS was set up to connect government offices and personnel with one another. It could exist independently and was
not primarily or wholly dependent on PLDT connections. A provincial or city system serves the residents of a province or city. It primarily
relies on its own investments and infrastructure. It asks for PLDT services only when long distance calls to another country, city, or province
have to be made.
I can, therefore, understand PLDT's reluctance Since it has its own franchise to operate exactly the same services which ETCI is endeavoring
to establish. PLDT would be using its own existing lines. Under the Court's decision, it would be compelled to allow another company to use
those same lines in direct competition with the lines owner. The cellular system is actually only an adjunct to a regular telephone system, not
a separate and independent system. As an adjunct and component unit or as a parasite (if a foreign body) it must be fed by the mother
organism or unit if it is to survive.
Under the disputed order, ETCI will be completely dependent upon its use of the P16 billions worth of infrastructure which PLDT has built
over several decades. The vaunted payment of compensation everytime an ETCI phone taps into a PLDT line is illusory. There can be no
adequate payment for the use of billions of pesos of investments built up over 60 years. Moreover, it is actually the phone owner or
consumer who pays the fee. The rate will be fixed by Government and will be based on the consumer's best interests and capacity, ignoring
or subordinating the petitioner's investments. Payment will depend on how much the phone user should be charged for making a single
phone call and will disregard the millions of pesos that ETCI will earn through its use of billions of pesos worth of another company's
investments and properties.
The "hated monopoly" and "improved services" arguments are not only misleading but also illusory.
To sustain the questioned NTC order will not in any way improve telephone services nor would any monopoly be dismantled. The answer to
inadequate telephone facilities is better administrative supervision. The NTC should pay attention to its work and compel PLDT to improve its
services instead of saddling with the burden of carrying another company's system.
For better services, what the country needs is to improve the existing system and provide enough telephone lines for all who really need
them. The proposed ETCI cellular phones will serve mostly those who can afford to tide in expensive cars and who already have two or three
telephones in their offices and residences. Cellular phones should legally and fairly be provided by PLDT as just another facet of its expansion
program.
The mass of applicants for new telephones will not benefit from cellular phones. In fact, if PLDT is required by NTC to open up new exchanges
or interconnections for the rich ETCI consumers, this will mean an equivalent number of low income or middle income applicants who will
have to wait longer for their own PLDT lines. The Court's resolution favors the conveniences of the rich at the expense of the necessities of
the poor. *
I agree with the petitioner that what NTC granted is not merely provisional authority but what is in effect a regular certificate of public
convenience and necessity or "CPCN".
Starting with seven cell sites for 3,000 subscribers in Metro Manila, the cellular mobile system will establish 67 cell sites beginning October
1991. The initial expenses alone will amount to P130 million. At page 8 of its Comment, ETCI admits that that "the provisional authority to

operate will be useless to ETCI if it does not put up the system and interconnnect said system with the existing PLDT network."(Emphasis
supplied) The completion of interconnection arrangements, the setting up of expensive installations, the requirements as to maintenance
and operation, and other conditions found in the NTC order are anything but provisional.
The authority given to ETCI is entirely different from the provisional authority given to MERALCO or oil companies to increase the price of oil
or electricity or to bus and jeepney operators to raise fares a few centavos. In these cases the need for increases is not only urgent but is
usually a foregone conclusion dictated by pressing circumstances. Further hearings are needed only to fix the amount which will be finally
authorized. The NTC orders can also be easily revoked. Increased prices of oil or rates of transportation services can be lowered or struck
down if the preliminary determinations are wrong. In the instant case, NTC has authorized a new company to start operations even if the
issues have not been thoroughly threshed out. There is no urgent need which warrants operations before a final permit is granted. Once in
operation, there can be no cancelling or revocation of the authority to operate, no dismantling of thousands of cellular phones and throwing
to waste of over P100 million worth of investments in fixed facilities. Theoretically, it can be done but it is clear from the records that what
was granted is really a CPCN.
There is no dispute that a legislative franchise is necessary for the operation of a telephone system. The NTC has no jurisdiction to grant the
authority. The fact that ETCI has to rely on a 1958 legislative franchise shows that only Congress can give the franchise which will empower
NTC to issue the certificate or CPCN.
Rep. Act No. 2090 is a franchise for the construction and operation of radio stations. Felix Alberto and Co. Inc. (FACI) was authorized in
the operation of those radio stations to acquire and handle transmitters, receivers, electrical machinery and other related devises. The use of
radio telephone was never intended or envisioned for a regular telephone company. "Radio telephony" is governed and circumscribed by the
basic purpose of operating radio stations. Telephony may be used only to enable communications between the stations, to transmit a radio
message to a station where it would be transcribed into a form suitable for delivery to the intended recipient. FACI was authorized to
communicate to, between, and among its radio stations. There is no authority for thousands of customers to be talking to PLDT subscribers
directly. FACI was never given authority by Rep. Act 2090 to operate switching facilities, wire-line transmissions, and telecommunication
stations of a telephone company. The entire records can be scrutinized and they will show that ETCI has all but ignored and kept silent about
the purpose of its alleged franchise-which is for the real operation of radio stations. There can be no equating of "radio stations" with a
complete cellular mobile telephone system. The two are poles apart.
The most liberal interpretation can not possibly read in a 1958 franchise for radio stations, the authority for a mobile cellular system vintage
1990. No amount of liberal interpretation can supply the missing requirement. And besides, we are not interpreting a Constitution which is
intended to cover changing situations and must be read liberally. Legislative franchises are always construed strictly against the franchise.
The remedy is for ETCI to go to Congress. I regret that in dismissing this petition, we may be withholding from Congress the courtesy we owe
to it as a co-equal body and denigrating its power to examine whether or not ETCI really deserves a legislative franchise.
My third point has to do with the sudden resurrection of a dead franchise and its coming to life in an entirely different form-no longer a radio
station but a modern telephone company.
I have searched the records in vain for any plan of ETCI to operate radio stations. It has not operated and does not plan to operate radio
stations. Its sole objective is to set up a telephone company. For that purpose, it should go to Congress and get a franchise for a telephone
company. NTC cannot give it such a franchise.
Section 10 of Rep. Act No. 2090 prohibits the transfer of the franchise and the rights and privileges under that franchise without the express
approval of Congress. No amount of legal niceties can cloak the fact that ETCI is not FACI, that the franchise was sold by FACI to ETCI, and that
the permit given by NTC to ETCI is based on a purchased franchise.
When the owners of FACI sold out their stocks, the 3,900 shares were on paper worth only 35 centavos each. The company had no assets and
physical properties. All it had was the franchise, for whatever it was worth. The buyers paid P4,618,185.00 for the company's stocks, almost
all of the amount intended for the franchise. It was, therefore, a sale or transfer of the franchise in violation of the express terms of Rep. Act
No. 2090 which call for approval by Congress.
ETCI tried to show a series of transactions involving the sales of almost all of its stocks. Not only are the circumstances surrounding the
transfers quite suspicious, but they were effected without the approval and authorization of the Commission as required by law.
Sec. 4 of Rep. Act No. 2090 also provides that the franchise shall be void unless the construction of radio stations is begun within two years or
June 22, 1960 and completed within ten years or June 22, 1968.
As of April 14, 1987, ETCI formally admitted that it was still in the pre-operating stage. Almost 30 years later, it had not even started the
business authorized by the franchise. It is only now that it proposes to construct, not radio stations, but a telephone system.
During the oral arguments and in its memorandum, ETCI presented proof of several radio station construction permits. A construction permit
authorizes a construction but does not prove it. There is no proof that the entire construction of all stations was completed within ten years.
In fact, there is not the slightest intimation that ETCI, today, is operating radio stations. What it wants is to set up a telephone system.
In addition to the franchise being void under its own charter, P.D. 36 on November 2, 1972, cancelled all unused or dormant legislative
franchises. Rep. Act No. 2090, having been voided by its own Section 4, suffered a second death if that is at all possible.
The violations of law-(1) the giving of life to an already dead franchise, (2) the transfer of ownership against an express statutory provision,
and (3) the use of a franchise for radio stations to justify the setting up of a cellular mobile telephone system are too glaring for us to ignore

on the basis of "respect" for a questionable NTC order and other purely technical considerations. We should not force PLDT to open its lines
to enable a competitor to operate a system which cannot survive unless it uses PLDT properties.
The NTC bases its order on alleged grounds of public need, public interest, and the common good. There is no showing that these
considerations will be satisfied, at least sufficient to warrant a strained interpretation of legal provisions. Any slight improvement which the
expensive ETCI project will accomplish cannot offset its violation of law and fair dealing.
I, THEREFORE, VOTE to GRANT the petition.
Fernan, C.J., Narvasa, Gancayco, Bidin and Medialdea, JJ., concur.

CRUZ, J., concurring and dissenting:

As one of the many dissatisfied customers of PLDT, I should have no objection to the grant of the provisional authority to ETCI. I have none.
Its admission will improve communication facilities in the country conformably to the constitutional objective. It will also keep PLDT on its
toes and encourage it to correct its deficient service in view of the competition.
I fully agree with all the rulings in the ponencia except the approval of the requirement for PLDT to interconnect with ETCI. I think it violates
due process. It reminds me of the story of the little red hen who found some rice and asked who would help her plant it. None of the animals
in the farm was willing and neither did they help in watering, harvesting and finally cooking it. But when she asked, "Who will help me eat the
rice?" everyone wanted to join in. The little red hen is like PLDT.
If ETCI wants to operate its own telephone system, it should rely on its own resources instead of riding piggy-back on PLDT. It seems to me
rather unfair for the Government to require PLDT to share with a newcomer and potential rival what it took PLDT tremendous effort and long
years and billions of pesos to build .
The case of Republic of the Philippines v. PLDT, 26 SCRA 620, is not applicable because it was the Government itself that was there seeking
interconnection of its own telephone system, with PLDT. The Court recognized the obvious public purpose that justified the special exercise
(by the Government of the power of eminent domain. But in the case before us, the intended beneficiary is a private enterprise primarily
organized for profit and, indeed, to compete with PLDT. In effect, the Government is forcing PLDT to surrender its competitive advantage and
share its resources with ETCI, which may not only supplement but, possibly, even ultimately supplant PLDT. I do not think government
authority extends that far.
The majority disposes of the question of due process by simply saying that PLDT will have frill opportunity to be heard in the ascertainment of
the just compensation ETCI will have to pay for the interconnection. That is not the issue. What PLDT is objecting to is not the amount of the
just compensation but the interconnection itself that is being forced upon it.
I feel there is no due process where private property is taken by the Government from one private person and given to another private
person for the latter's direct benefit. The fact that compensation is paid is immaterial; the flaw lies in the taking itself (Davidson v. New
Orleans, 90 U.S. 97). The circumstance that PLDT is a public utility is no warrant for taking undue liberties with its property, which is
protected by the Bill of Rights. "Public need" cannot be a blanket justification for favoring one investor against another in contravention of
the system of free enterprise. If PLDT has misused its franchise, I should think the solution is to revoke its authority, not to force it to share its
resources with its private competitors.
The rule is that where it is the legislature itself that directly calls for the expropriation of private property, its determination of the thing to be
condemned and the purpose of the taking is conclusive on the courts (City of Manila v. Chinese Community, 40 Phil. 349). But where the
power of eminent domain is exercised only by a delegate of the legislature, like ETCI, the courts may inquire into the necessity or propriety of
the expropriation and, when warranted, pronounce its invalidity (Republic of the Philippines v. La Orden de PO Benedictinos de Filipinas, 1
SCRA 649). I think this is what the Court should do in the case at bar.
A final point. It is argued that requiring ETCI to start from scratch (as PLDT did) and import its own equipment would entail a tremendous
outflow of foreign currency we can ill afford at this time. Perhaps so. But we must remember that the Bill of Rights is not a marketable
commodity, like a piece of machinery. Due process is an indispensable requirement that cannot be assessed in dollar and cents.
Fernan, C.J., and Narvasa, J., concur.

G.R. Nos. 100264-81 January 29, 1993

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, ONG PENG, ET. AL., respondents.
In this petition for certiorari, petitioner Development Bank of the Philippines (DBP) asserts its preferential right as a foreclosing creditor over
private respondents' claims for separation pay against Republic Hardwood, Inc. (RHI).

On November 14, 1986, the private respondents filed with the Provincial Extension Office of the Department of Labor and Employment
(DOLE) in Daet, Camarines Norte seventeen individual complaints against RHI for unpaid wages and separation pay. These complaints were
thereafter endorsed to the Regional Arbitration Branch (Branch V of Legaspi City) of the National Labor Relations Commission (NLRC) since
the petitioners had already been terminated from employment.
In its position paper dated March 1987, RHI alleged that it had ceased to operate in 1983 due to the government ban against tree-cutting. It
further alleged that in May 24, 1981, its sawmill was totally burned resulting in enormous losses and that due to its financial setbacks, RHI
failed to pay its loan with the DBP. RHI contended that since DBP foreclosed its mortgaged assets on September 24, l985, then any
adjudication of monetary claims in favor of its former employees must be satisfied against DBP.
On April 29, 1987, the private respondents filed a motion to implead DBP. On July 13, 1987, DBP filed its opposition to said motion.
On October 28, 1988, Executive Labor Arbiter Gelacio Rivera rendered a joint decision on the complaints, the relevant and dispositive
portions of which read:
To say that workers of bankrupt or insolvent employers must first file an insolvency or bankruptcy proceeding against the
latter before their unpaid workers may be satisfied will cause additional burden, unnecessary expenses, unwanted hardship
which are conditions not so intended under the Social Justice policy of the State. . . . .
. . . To require petitioners to file insolvency proceedings against RHI and later file against DBP their claims is to prolong the
agony of petitioners. To give a technical and legal meaning to the words of Art. 110 is to subvert the rights of the
petitioners. We hold therefore that as against the contention of respondent DBP, Art. 4 of the Labor Code is the answer.
The social justice clause of the Constitution is our guide.
xxx xxx xxx
WHEREFORE, premises considered, judgment is hereby rendered in favor of petitioners and adversely against respondent
Republic Hardwood, Inc. and Development Bank of the Philippines, ordering the latter to jointly and severally pay
petitioners the amount of P59,610.00 as separation pay within ten (10) days upon receipt of this Decision through this
Regional Arbitration Branch. Further, respondents are ordered to pay the amount of P308.00 as deposit fee pursuant to PD
1177 under Budget Circular No. 304 and Secs. 4 and 8 of Batas Pambansa Blg. 230. (Rollo, pp. 38, 40-41)
DBP appealed to the NLRC which rendered a decision on April 15, 1991 affirming the labor arbiter's judgment. DBP filed a motion for
reconsideration which was likewise dismissed by the NLRC on May 17, 1991.
Hence, this petition for certiorari.
The petitioner alleges that the NLRC committed grave abuse of discretion in issuing the assailed decision dated April 15, 1991 and its
resolution of May 17, 1991 and raises the following issues:
1. Whether or not the Joint Decision of Executive Labor Arbiter Gelacio L. Rivera is violative of procedural due process on
the part of DBP;
2. Whether or not the complainant-private respondents are entitled to separation pay;
3. Whether or not there was retroactive application of Executive Order No. 81 in this case;
4. Whether or not Executive Labor Arbiter Gelacio L. Rivera and the NLRC correctly applied Article 110 of the Labor Code in
this case; and
5. Whether or not there is a basis for the NLRC (Labor Arbiter Rivera) to order the payment of deposit fee. (Rollo, pp. 17-18)
DBP asserts that it was deprived of due process since there was no formal order impleading it in the complaints against RHI. Moreover, DBP
points out, the cases were never set for hearing thus depriving it of the opportunity to peruse the documentary evidence of the complainants
and to confront the complainants' witnesses. Additionally, DBP was not given an opportunity to present its own evidence.
There is no merit to this contention of DBP. Denial of due process means the total lack of opportunity to be heard. There is no denial of due
process where a party is given an opportunity to be heard and to present his case. The petitioner in this case filed an opposition to the
motion to implead it as a party defendant. It likewise filed a motion for reconsideration of the labor arbiter's decision. Thereafter, DBP filed
an appeal with the NLRC and, later on, a motion for reconsideration of the NLRC decision. The petitioner, thus, was given ample opportunity
to present its case. It was not denied due process.
There is no merit to DBP's contention that the workers are not entitled to separation pay. Despite the enormous losses incurred by RHI due
to the fire that gutted the sawmill in 1981 and despite the logging ban in 1983, the uncontroverted claims for separation pay show that most
of the private respondents still worked up to the end of 1985 (See Rollo, p. 39). RHI would still have continued its business had not the
petitioner foreclosed all of its assets and properties on September 24, 1985. Thus, the closure of RHI's business was not primarily brought
about by serious business losses. Such closure was a consequence of DBP's foreclosure of RHI's assets. We therefore apply Article 283 which
provides:

. . . 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. . . .
However, because of the petitioner's assertion that the labor arbiter and respondent NLRC incorrectly applied the provisions of Article 110 of
the Labor Code, we are constrained to grant the petition for certiorari.
Article 110, prior to its amendment by Republic Act No. 6715, reads:
Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an employer's business,
his workers shall enjoy first preference as regards wages due them for services rendered during the period prior to the
bankruptcy or liquidation, any provision of law to the contrary notwithstanding. Unpaid wages shall be paid in full before
other creditors may establish any claim to a share in the assets of the employer.
Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code states:
Sec. 10. Payment of wages in case of bankruptcy. Unpaid wages earned by the employees before the declaration of
bankruptcy or judicial liquidation of the employer's business shall be given first preference and shall be paid in full before
other creditors may establish any claim to a share in the assets of the employer.
In Republic v. Peralta, 150 SCRA 37 (1987), the Court held that the term "wages" includes separation pay. But the Court declared:
Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must
be read in relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits,
which provisions find particular application in insolvency proceedings where the claims of all creditors, preferred or nonpreferred, may be adjudicated in a binding manner.
We have repeatedly stressed that before the workers' preference provided by Article 110 may be invoked, there must first be a declaration of
bankruptcy or a judicial liquidation of the employer's business. (See DBP v. Minister of Labor, 195 SCRA 463 [1991]; DBP v. NLRC, 186 SCRA
841 [1990]; DBP v. NLRC, 183 SCRA 328 [1990]; DBP v. Secretary of Labor, 179 SCRA 630 [1989]; DBP v. Santos, 171 SCRA 138 [1989]; Republic
v. Peralta, supra).
In DBP v. Santos, supra, the Court discussed the import of Article 110 and Section 10 of Rule VIII, Book III and stated:
It is quite clear from the provisions that a declaration of bankruptcy or a judicial liquidation must be present before the
worker's preference may be enforced. Thus, Article 110 of the Labor Code and its implementing rule cannot be invoked by
the respondents in this case absent a formal declaration of bankruptcy or a liquidation order.
xxx xxx xxx
Moreover, the reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and
preference of credits may be applied was explained by this Court in the case ofPhilippines Savings Bank v. Lantin (124 SCRA
476 [1983]). We said:
The proceedings in the court below do not partake of the nature of the insolvency proceedings or
settlement of a decedent's estate. The action filed by Ramos was only to collect the unpaid cost of the
construction of the duplex apartment. It is far from being a general liquidation of the estate of the
Tabligan spouses.
Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are
binding against the whole world. All persons having interest in the subject matter involved, whether they
were notified or not, are equally bound. Consequently, a liquidation of similar import or other equivalent
general liquidation must also necessarily be a proceeding in rem so that all interested persons whether
known to the parties or not may be bound by such proceeding.
In the case at bar, although the lower court found that "there were no known creditors other than the
plaintiff and the defendant herein", this can not be conclusive. It will not bar other creditors in the event
they show up and present their claims against the petitioner bank, claiming that they also have preferred
liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in favor
of the bank which is supposed to be indefeasible would remain constantly unstable and questionable.
Such could not have been the intention of Article 2243 of the Civil Code although it considers claims and
credits under Article 2242 as statutory liens. Neither does the De Barreto case . . . .
The claims of all creditors whether preferred or non-preferred, the identification of the preferred ones and the totality of
the employer's asset should be brought into the picture. There can then be an authoritative, fair, and binding adjudication
instead of the piece meal settlement which would result from the questioned decision in this case. (At pp. 144-145).
The NLRC, therefore, committed grave abuse of discretion when it affirmed the labor arbiter's ruling that the workers' preference espoused
in Article 110 may be applied even in the absence of a declaration of bankruptcy or a liquidation order.

We must also emphasize that DBP's lien on RHI's mortgaged assets, being a mortgage credit, is a special preferred credit under Article 2242
of the Civil Code while the workers' preference is an ordinary preferred credit under Article 2244.
Thus, in DBP v. NLRC, (supra) it was held:
4. A distinction should be made between a preference of credit and a lien. A preference applies only to claims which do not
attach to specific properties. A lien creates a charge on a particular property. The right of first preference as regards unpaid
wages recognized by Article 110 does not constitute a lien on the property of the insolvent debtor in favor of workers. It is
but a preference of credit in their favor, a preference in application. It is a method adopted to determine and specify the
order in which credits should be paid in the final distribution of the proceeds of the insolvent's assets. It is a right to a first
preference in the discharge of the funds of the judgment debtor.
In the words of Republic v. Peralta, supra.
Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for
unpaid wages either upon all of the properties or upon any particular property owned by their employer.
Claims for unpaid wages do not therefore fall at all within the category of specially preferred claims
established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for
unpaid wages are already covered Article 2241, number 6: "claims for laborers" wages, on the goods
manufactured or the work done; or by Article 2242, number 3: "claims of laborers and other workers
engaged in the construction, reconstruction or repair of buildings, canals and other works, upon said
buildings, canals and other works. To the extent that claims for unpaid wages fall outside the scope of
Article 2241, number 6 and 2242, number 3, they would come within the ambit of the category of
ordinary preferred credits under Article 2244.
5. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the property upon which it
is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted (Article
2176, Civil Code). It creates a real right which is enforceable against the whole world. It is a lien on an identified immovable
property, which a preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5) of the
Civil Code on classification of credits. The preference given by Article 110, when not falling within Article 2241 (6) and
Article 2242 (3) of the Civil Code and not attached to any specific property, is an ordinary preferred credit although its
impact is to move it from second priority to first priority in the order of preference established by Article 2244 of the Civil
Code (Republic v. Peralta, supra).
Clearly, even if DBP and the private respondents assert their preferred credits in a judicial proceeding, the former's claim must first be
satisfied.
Article 110 of the Labor Code has been amended by R.A. No. 6715 and now reads:
Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an employer's business,
his workers shall enjoy first preference as regards their unpaid wages and other monetary claims, any provision of law to
the contrary notwithstanding. Such unpaid wages, andmonetary claims shall be paid in full before the claims of the
Government and other creditors may be paid. (Emphasis ours.)
We ruled in DBP v. NLRC, supra, that the amendment "expands worker preference to cover not only unpaid wages but also other monetary
claims to which even claims of the Government must be deemed subordinate." Hence, under the new law, even mortgage credits are
subordinate to workers' claims.
In this connection, respondent NLRC ruled:
Lastly, while we are cognizant of the pronouncement of the Supreme Court with respect to Art. 110 and while we hold in
respect said pronouncements, we are of the earnest view that considering that Art. 110 has been amended by RA 6715,
complainants' preference over government claims and other creditors be adhered to. (Rollo, p. 65)
R.A. No. 6715, however, took effect only on March 21, 1989. The amendment cannot therefore be retroactively applied to, nor can it affect,
the mortgage credit which was secured by the petitioner several years prior to its effectivity.
This was our pronouncement in DBP v. NLRC, supra:
6. Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean "absolute preference," the
same should be given only prospective effect in line with the cardinal rule that laws shall have no retroactive effect, unless
the contrary is provided (Article 4, Civil Code). Thereby, any infringement on the constitutional guarantee on
non-impairment of the obligation of contracts (Section 10, Article III, 1987 Constitution) is also avoided. In point of fact,
DBP's mortgage credit antedated by several years the amendatory law, RA No. 6715. To give Article 110 retroactive effect
would be to wipe out the mortgage in DBP's favor and expose it to a risk which it sought to protect itself against by
requiring a collateral in the form of real property.
The public respondent, therefore, committed grave abuse of discretion when it retroactively applied the amendment introduced by R.A. No.
6715 to the case at bar.

With the foregoing discussion, we no longer find it necessary to discuss the two other issues raised by the petitioner.
WHEREFORE, the petition is hereby GRANTED. The assailed decision of public respondent National Labor Relations Commission dated April
15, 1991 and its resolution dated May 17, 1991 are SET ASIDE. The temporary restraining order issued by the Court on July 29, 1991 is made
PERMANENT.

G.R. No. L-68097 January 16, 1986

EDWARD A. KELLER & CO., LTD., petitioner-appellant,
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOEZ, TRINIDAD C.
ORDOEZ, MAGNO C. ORDOEZ, ADORACION C. ORDOEZ, TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO, ASUNCION
MANAHAN and INTERMEDIATE APPELLATE COURT, respondents-appellees.
This case is about the liability of a marketing distributor under its sales agreements with the owner of the products. The petitioner presented
its evidence before Judges Castro Bartolome and Benipayo. Respondents presented their evidence before Judge Tamayo who decided the
case.
A review of the record shows that Judge Tamayo acted under a misapprehension of facts and his findings are contradicted by the evidence.
The Appellate Court adopted the findings of Judge Tamayo. This is a case where this Court is not bound by the factual findings of the
Appellate Court. (See Director of Lands vs. Zartiga, L-46068-69, September 30, 1982, 117 SCRA 346, 355).
Edward A. Keller & Co., Ltd. appointed COB Group Marketing, Inc. as exclusive distributor of its household products, Brite and Nuvan in Panay
and Negros, as shown in the sales agreement dated March 14, 1970 (32-33 RA). Under that agreement Keller sold on credit its products to
COB Group Marketing.
As security for COB Group Marketing's credit purchases up to the amount of P35,000, one Asuncion Manahan mortgaged her land to Keller.
Manahan assumed solidarily with COB Group Marketing the faithful performance of all the terms and conditions of the sales agreement (Exh.
D).
In July, 1970 the parties executed a second sales agreement whereby COB Group Marketing's territory was extended to Northern and
Southern Luzon. As security for the credit purchases up to P25,000 of COB Group Marketing for that area, Tomas C. Lorenzo, Jr. and his father
Tomas, Sr. (now deceased) executed a mortgage on their land in Nueva Ecija. Like Manahan, the Lorenzos were solidarily liable with COB
Group Marketing for its obligations under the sales agreement (Exh. E).
The credit purchases of COB Group Marketing, which started on October 15, 1969, limited up to January 22, 1971. On May 8, the board of
directors of COB Group Marketing were apprised by Jose E. Bax the firm's president and general manager, that the firm owed Keller about
P179,000. Bax was authorized to negotiate with Keller for the settlement of his firm's liability (Exh. 1, minutes of the meeting).
On the same day, May 8, Bax and R. Oefeli of Keller signed the conditions for the settlement of COB Group Marketing's liability, Exhibit J,
reproduced as follows:
This formalizes our conditions for the settlement of C.O.B.'s account with Edward Keller Ltd.
1. Increase of mortgaged collaterals to the full market value (estimated by Edak at P90,000.00).
2. Turn-over of receivables (estimated outstandings P70,000.00 to P80,000.00).
3. Turn-over of 4 (four) trucks for outright sale to Edak, to be credited against C.0.B.'s account.
4. Remaining 8 (eight) trucks to be assigned to Edak, C.O.B will continue operation with these 8 trucks. They win be
returned to COB after settlement of full account.
5. C.O.B has to put up securities totalling P200,000.00. P100,000.00 has to be liquidated within one year. The remaining
P100,000.00 has to be settled within the second year.
6. Edak wig agree to allow C.O.B. to buy goods to the value of the difference between P200,000.00 and their outstandings,
provided C.O.B. is in a position to put up securities amounting to P200,000.00.
Discussion held on May 8, 1971.
Twelve days later, or on May 20, COB Group Marketing, through Bax executed two second chattel mortgages over its 12 trucks (already
mortgaged to Northern Motors, Inc.) as security for its obligation to Keller amounting to P179,185.16 as of April 30, 1971 (Exh. PP and QQ).
However, the second mortgages did not become effective because the first mortgagee, Northern Motors, did not give its consent. But the
second mortgages served the purpose of being admissions of the liability COB Group Marketing to Keller.

The stockholders of COB Group Marketing, Moises P. Adao and Tomas C. Lorenzo, Jr., in a letter dated July 24, 1971 to Keller's counsel,
proposed to pay Keller P5,000 on November 30, 1971 and thereafter every thirtieth day of the month for three years until COB Group
Marketing's mortgage obligation had been fully satisfied. They also proposed to substitute the Manahan mortgage with a mortgage on
Adao's lot at 72 7th Avenue, Cubao, Quezon City (Exh. L).
These pieces of documentary evidence are sufficient to prove the liability of COB Group Marketing and to justify the foreclosure of the two
mortgages executed by Manahan and Lorenzo (Exh. D and E).
Section 22, Rule 130 of the Rules of Court provides that the act, declaration or omission of a party as to a relevant fact may be given in
evidence against him "as admissions of a party".
The admissions of Bax are supported by the documentary evidence. It is noteworthy that all the invoices, with delivery receipts, were
presented in evidence by Keller, Exhibits KK-1 to KK-277-a and N to N-149-a, together with a tabulation thereof, Exhibit KK, covering the
period from October 15, 1969 to January 22, 1971. Victor A. Mayo, Keller's finance manager, submitted a statement of account showing that
COB Group Marketing owed Keller P184,509.60 as of July 31, 1971 (Exh. JJ). That amount is reflected in the customer's ledger, Exhibit M.
On the other hand, Bax although not an accountant, presented his own reconciliation statements wherein he showed that COB Group
Marketing overpaid Keller P100,596.72 (Exh. 7 and 8). He claimed overpayment although in his answer he did not allege at all that there was
an overpayment to Keller.
The statement of the Appellate Court that COB Group Marketing alleged in its answer that it overpaid Keller P100,596.72 is manifestly
erroneous first, because COB Group Marketing did not file any answer, having been declared in default, and second, because Bax and the
other stockholders, who filed an answer, did not allege any overpayment. As already stated, even before they filed their answer, Bax
admitted that COB Group Marketing owed Keller around P179,000 (Exh. 1).
Keller sued on September 16, 1971 COB Group Marketing, its stockholders and the mortgagors, Manahan and Lorenzo.
COB Group Marketing, Trinidad C. Ordonez and Johnny de la Fuente were declared in default (290 Record on Appeal).
After trial, the lower court (1) dismissed the complaint; (2) ordered Keller to pay COB Group Marketing the sum of P100,596.72 with 6%
interest a year from August 1, 1971 until the amount is fully paid: (3) ordered Keller to pay P100,000 as moral damages to be allocated among
the stockholders of COB Group Marketing in proportion to their unpaid capital subscriptions; (4) ordered the petitioner to pay Manahan
P20,000 as moral damages; (5) ordered the petitioner to pay P20,000 as attomey's fees to be divided among the lawyers of all the answering
defendants and to pay the costs of the suit; (6) declared void the mortgages executed by Manahan and Lorenzo and the cancellation of the
annotation of said mortgages on the Torrens titles thereof, and (7) dismissed Manahan's cross-claim for lack of merit.
The petitioner appealed. The Appellate Court affirmed said judgment except the award of P20,000 as moral damages which it eliminated. The
petitioner appealed to this Court.
Bax and the other respondents quoted the six assignments of error made by the petitioner in the Appellate Court, not the four assignments
of error in its brief herein. Manahan did not file any appellee's brief.
We find that the lower courts erred in nullifying the admissions of liability made in 1971 by Bax as president and general manager of COB
Group Marketing and in giving credence to the alleged overpayment computed by Bax .
The lower courts not only allowed Bax to nullify his admissions as to the liability of COB Group Marketing but they also erroneously rendered
judgment in its favor in the amount of its supposed overpayment in the sum of P100,596.72 (Exh. 8-A), in spite of the fact that COB Group
Marketing was declared in default and did not file any counterclaim for the supposed overpayment.
The lower courts harped on Keller's alleged failure to thresh out with representatives of COB Group Marketing their "diverse statements of
credits and payments". This contention has no factual basis. In Exhibit J, quoted above, it is stated by Bax and Keller's Oefeli that "discussion
(was) held on May 8, 1971."
That means that there was a conference on the COB Group Marketing's liability. Bax in that discussion did not present his reconciliation
statements to show overpayment. His Exhibits 7 and 8 were an afterthought. He presented them long after the case was filed. The petitioner
regards them as "fabricated" (p. 28, Appellant's Brief).
Bax admitted that Keller sent his company monthly statements of accounts (20-21 tsn, September 2, 1976) but he could not produce any
formal protest against the supposed inaccuracy of the said statements (22). He lamely explained that he would have to dig up his company's
records for the formal protest (23-24). He did not make any written demand for reconciliation of accounts (27-28).
As to the liability of the stockholders, it is settled that a stockholder is personally liable for the financial obligations of a corporation to the
extent of his unpaid subscription (Vda. de Salvatierra vs. Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).
While the evidence shows that the amount due from COB Group Marketing is P184,509.60 as of July 31, 1971 or P186,354.70 as of August 31,
1971 (Exh. JJ), the amount prayed for in Keller's complaint is P182,994.60 as of July 31, 1971 (18-19 Record on Appeal). This latter amount
should be the one awarded to Keller because a judgment entered against a party in default cannot exceed the amount prayed for (Sec. 5,
Rule 18, Rules of Court).

WHEREFORE, the decisions of the trial court and the Appellate Court are reversed and set aside.
COB Group marketing, Inc. is ordered to pay Edward A. Keller & Co., Ltd. the sum of P182,994.60 with 12% interest per annum from August 1,
1971 up to the date of payment plus P20,000 as attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are ordered to pay solidarity with COB Group Marketing the sums of P35,000 and P25,000,
respectively.
The following respondents are solidarity liable with COB Group Marketing up to the amounts of their unpaid subscription to be applied to the
company's liability herein: Jose E. Bax P36,000; Francisco C. de Castro, P36,000; Johnny de la Fuente, P12,000; Sergio C. Ordonez, P12,000;
Trinidad C. Ordonez, P3,000; Magno C. Ordonez, P3,000; Adoracion C. Ordonez P3,000; Tomas C. Lorenzo, Jr., P3,000 and Luz M. AguilarAdao, P6,000.
If after ninety (90) days from notice of the finality of the judgment in this case the judgment against COB Group Marketing has not been
satisfied fully, then the mortgages executed by Manahan and Lorenzo should be foreclosed and the proceeds of the sales applied to the
obligation of COB Group Marketing. Said mortgage obligations should bear six percent legal interest per annum after the expiration of the
said 90-day period. Costs against the private respondents.
SO ORDERED.
G.R. No. 129459 September 29, 1998
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner,
vs.
COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND
DEVELOPMENT CORP., respondents.
May corporate treasurer, by herself and without any authorization from he board of directors, validly sell a parcel of land owned by the
corporation?. May the veil of corporate fiction be pierced on the mere ground that almost all of the shares of stock of the corporation are
owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition for Review on Certioraribefore us, assailing the March 18,
1
2
1997 Decision of the Court of Appeals in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the Regional Trial Court
3
of Makati, Metro Manila, Branch 63 in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the Counterclaim filed by the
parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION ordering defendant-appellee
Nenita Lee Gruenberg to REFUND or return to plaintiff-appellant the downpayment of P100,000.00 which she received
4
from plaintiff-appellant. There is no pronouncement as to costs.
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.

The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.'s amended complaint alleged that on 14 February 1989,
plaintiff-appellant entered into an agreement with defendant-appellee Motorich Sales Corporation for the transfer to it of a
parcel of land identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon
City. Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876:
that as stipulated in the Agreement of 14 February 1989, plaintiff-appellant paid the downpayment in the sum of One
Hundred Thousand (P100,000.00) Pesos, the balance to be paid on or before March 2, 1989; that on March 1, 1989. Mr.
Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales Corporation
requesting for a computation of the balance to be paid: that said letter was coursed through defendant-appellee's broker.
Linda Aduca, who wrote the computation of the balance: that on March 2, 1989, plaintiff-appellant was ready with the
amount corresponding to the balance, covered by Metrobank Cashier's Check No. 004223, payable to defendant-appellee
Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to
meet in the office of plaintiff-appellant but defendant-appellee's treasurer, Nenita Lee Gruenberg, did not appear; that
defendant-appellee Motorich Sales Corporation despite repeated demands and in utter disregard of its commitments had
refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer the certificate of title; that
defendant ACL Development Corp. is impleaded as a necessary party since Transfer Certificate of Title No. (362909) 2876 is
still in the name of said defendant; while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary
party in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales Corporation: that on
April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation entered into a Deed of Absolute
Sale whereby the former transferred to the latter the subject property; that by reason of said transfer, the Registry of
Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented by defendant-appellee
Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of
defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporation's bad faith in refusing to execute a formal

Transfer of Rights/Deed of Assignment, plaintiff-appellant suffered moral and nominal damages which may be assessed
against defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a result of defendantsappellees Nenita Lee Gruenberg and Motorich Sales Corporation's unjustified and unwarranted failure to execute the
required Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiff-appellant, defendants-appellees
should be assessed exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that by reason of
defendants-appellees' bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiffappellant, the latter lost the opportunity to construct a residential building in the sum of One Hundred Thousand
(P100,000.00) Pesos; and that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporation's bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it has been constrained to obtain
the services of counsel at an agreed fee of One Hundred Thousand (P100,000.00) Pesos plus appearance fee for every
appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as affirmative
defense that the President and Chairman of Motorich did not sign the agreement adverted to in par. 3 of the amended
complaint; that Mrs. Gruenberg's signature on the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind
Motorich. The other signature, that of Mr. Reynaldo Gruenberg, President and Chairman of Motorich, is required: that
plaintiff knew this from the very beginning as it was presented a copy of the Transfer of Rights (Annex B of amended
complaint) at the time the Agreement (Annex B of amended complaint) was signed; that plaintiff-appellant itself drafted
the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting, without
admitting, the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the
stipulated period (up to March 2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that
the Transfer of Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus they agreed that if the
payment be in check, they will meet at a bank designated by plaintiff-appellant where they will encash the check and sign
the Transfer of Rights/Deed. However, plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check,
by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,] dismissing plaintiff-appellant's
complaint, ruling that:
The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of
absolute sale in accordance with the agreement of February 14, 1989: and if so, whether plaintiff is
entitled to damage.
As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was indeed
authorized by defendant corporation. Motorich Sales, to dispose of that property covered by T.C.T. No.
(362909) 2876. Since the property is clearly owned by the corporation. Motorich Sales, then its disposition
should be governed by the requirement laid down in Sec. 40. of the Corporation Code of the Philippines,
to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on
illegal combination and monopolies, a corporation may by a majority vote of its board of
directors . . . sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets including its goodwill . . . when authorized by
the vote of the stockholders representing at least two third (2/3) of the outstanding
capital stock . . .
No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale[;] neither was
there evidence to show that the supposed transaction was ratified by the corporation. Plaintiff should
have been on the look out under these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial evidence to hold
defendant Nenita Lee Gruenberg liable considering that she did not in anyway misrepresent herself to be
authorized by the corporation to sell the property to plaintiff (tsn dated September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at instance for
lack of merit.
"Defendants" counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
This Agreement, made and entered into by and between:
MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of
Philippine Laws, with principal office address at 5510 South Super Hi-way cor. Balderama St., Pio del Pilar.

Makati, Metro Manila, represented herein by its Treasurer, NENITA LEE GRUENBERG, hereinafter referred
to as the TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and by
virtue of the laws of the Philippines, with principal office address at Sumulong Highway, Barrio
Mambungan, Antipolo, Rizal, represented herein by its President, ANDRES T. CO, hereinafter referred to
as the TRANSFEREE.
WITNESSETH, That:
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the ACROPOLIS GREENS
SUBDIVISION located at the District of Murphy, Quezon City, Metro Manila, containing an area of FOUR HUNDRED
FOURTEEN (414) SQUARE METERS, covered by a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor
and Motorich Sales Corp. as the Transferee;
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as follows:
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square
meter; subject to the following terms:
a. Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be
paid upon the execution of this agreement and shall form part of the total purchase
price;
b. Balance shall be payable on or before March 2, 1989;
2. That the monthly amortization for the month of February 1989 shall be for the account of the
Transferor; and that the monthly amortization starting March 21, 1989 shall be for the account of the
Transferee;
The transferor warrants that he [sic] is the lawful owner of the above-described property and that there [are] no existing
liens and/or encumbrances of whatsoever nature;
In case of failure by the Transferee to pay the balance on the date specified on 1, (b), the earnest money shall be forfeited
in favor of the Transferor.
That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT
in favor of the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at Greenhills, San Juan,
Metro Manila, Philippines.
MOTORICH SALES CORPORATION SAN JUAN STRUCTURAL & STEEL FABRICATORS
TRANSFEROR TRANSFEREE
[SGD.] [SGD.]
By. NENITA LEE GRUENBERG By: ANDRES T. CO
Treasurer President
Signed In the presence of:
[SGD.] [SGD.]

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

1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in accordance with the
Agreement of February 14, 1989,
2. Plaintiff is entitled to damages.

As stated earlier, the Court of Appeals debunked petitioner's arguments and affirmed the Decision of the RTC with the modification that
Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount remitted as "downpayment" or "earnest
8
money." Hence, this petition before us.
The Issues
Before this Court, petitioner raises the following issues:
I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case
II. Whether or not the appellate court may consider matters which the parties failed to raise in the lower
court
III. Whether or not there is a valid and enforceable contract between the petitioner and the respondent
corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution of
answer in the transcript of stenographic note[s].
V. Whether or not respondents are liable for damages and attorney's fees

The Court synthesized the foregoing and will thus discuss them seriatim as follows:
1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenberg's testimony as recorded in the transcript of stenographic notes
material to the disposition of this case?
4. Are respondents liable for damages and attorney's fees?
The Court's Ruling
The petition is devoid of merit.
First Issue: Validity of Agreement
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its president, Andres Co, into
the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee
Gruenberg. Petitioner insists that "[w]hen Gruenberg and Co affixed their signatures on the contract they both consented to be bound by the
terms thereof." Ergo, petitioner contends that the contract is binding on the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement, according to which a lot owned by Motorich Sales Corporation was
purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is not
the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from the
10
corporation's board of directors. Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who shall hold office for one (1) year and until their successors are
elected and qualified.
Indubitably, a corporation may act only through its board of directors or, when authorized either by its bylaws or by its board resolution,
through its officers or agents in the normal course of business. The general principles of agency govern the relation between the corporation
11
and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law. Thus, this Court has held that "a
corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that the authority to do so
has been conferred upon him, and this includes powers which have been intentionally conferred, and also such powers as, in the usual course
of the particular business, are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage,
as usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons dealing with the
12
officer or agent to believe that it has conferred."
Furthermore, the Court has also recognized the rule that "persons dealing with an assumed agent, whether the assumed agency be a general
or special one bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v. Rodriguez, 4 Phil.
13
14
19)." Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its assets.

In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject parcel
15
of land. Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich
in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court contained no proof of such
16
authority. It has not shown any provision of said respondent's articles of incorporation, bylaws or board resolution to prove that Nenita
Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the extent of her authority
to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property of the
corporation. Selling is obviously foreign to a corporate treasurer's function, which generally has been described as "to receive and keep the
funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly authorized
17
officers."
Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of Motorich is marketing,
18
distribution, export and import in relation to a general merchandising business. Unmistakably, its treasurer is not cloaked with actual or
apparent authority to buy or sell real property, an activity which falls way beyond the scope of her general authority.
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
Art. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in
writing: otherwise, the sale shall be void.
Art. 1878. Special powers of attorney are necessary in the following case:
xxx xxx xxx
(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a
valuable consideration;
xxx xxx xxx.
Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its "acceptance of benefits," as evidenced
19
by the receipt issued by Respondent Gruenberg. Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But when these officers
20
exceed their authority, their actions "cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming them."
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to any third person that she
had the authority, to sell its land or to receive the earnest money. Neither was there any proof that Motorich ratified, expressly or impliedly,
the contract. Petitioner rests its argument on the receipt which, however, does not prove the fact of ratification. The document is a handwritten one, not a corporate receipt, and it bears only Nenita Gruenberg's signature. Certainly, this document alone does not prove that her
acts were authorized or ratified by Motorich.
Art. 1318 of the Civil Code lists the requisites of a valid and perfected contract: "(1) consent of the contracting parties; (2) object certain
21
which is the subject matter of the contract; (3) cause of the obligation which is established." As found by the trial court and affirmed by the
22
Court of Appeals, there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the said contract was
23
ratified by Motorich. This factual finding of the two courts is binding on this Court. As the consent of the seller was not obtained, no
contract to bind the obligor was perfected. Therefore, there can be no valid contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we hold that the February 14,
1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the
24
beginning, said contract cannot be ratified.
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close corporation. Since
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital
25
26
stock" of Motorich, petitioner argues that Gruenberg needed no authorization from the board to enter into the subject contract. It adds
that, being solely owned by the Spouses Gruenberg, the company can treated as a close corporation which can be bound by the acts of its
principal stockholder who needs no specific authority. The Court is not persuaded.
27

First, petitioner itself concedes having raised the issue belatedly, not having done so during the trial, but only when it filed its sur-rejoinder
28
before the Court of Appeals. Thus, this Court cannot entertain said issue at this late stage of the proceedings. It is well-settled the points of
law, theories and arguments not brought to the attention of the trial court need not be, and ordinarily will not be, considered by a reviewing
29
court, as they cannot be raised for the first time on appeal. Allowing petitioner to change horses in midstream, as it were, is to run
roughshod over the basic principles of fair play, justice and due process.
Second, even if the above mentioned argument were to be addressed at this time, the Court still finds no reason to uphold it. True, one of the
30
advantages of a corporate form of business organization is the limitation of an investor's liability to the amount of the investment. This
feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However, the statutorily granted

31

privilege of a corporate veil may be used only for legitimate purposes. On equitable considerations, the veil can be disregarded when it is
utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues; or serve as a mere alter ego or
32
business conduit of a person or an instrumentality, agency or adjunct of another corporation.
Thus, the Court has consistently ruled that "[w]hen the fiction is used as a means of perpetrating a fraud or an illegal act or as vehicle for the
evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of
knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be
33
lifted to allow for its consideration merely as an aggregation of individuals."
We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality or inequity committed on
third persons. The question of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the
Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that said corporation was
formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the
said veil was used to conceal fraud, illegality or inequity at the expense of third persons like petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close corporation as
follows:
Sec. 96. Definition and Applicability of Title. A close corporation, within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all
classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and (3) The corporation
shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the
foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. . . . .
34

The articles of incorporation of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders shall
not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a close
35
corporation. Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its
subscribed capital stock. The "[m]ere ownership by a single stockholder or by another corporation of all or capital stock of a corporation is
36
not of itself sufficient ground for disregarding the separate corporate personalities." So, too, a narrow distribution of ownership does not,
by itself, make a close corporation.
37

Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals wherein the Court ruled that ". . . petitioner corporation is classified as
a close corporation and, consequently, a board resolution authorizing the sale or mortgage of the subject property is not necessary to bind
38
the corporation for the action of its president." But the factual milieu in Dulay is not on all fours with the present case. In Dulay, the sale of
39
real property was contracted by the president of a close corporation with the knowledge and acquiescence of its board of directors. In the
present case, Motorich is not a close corporation, as previously discussed, and the agreement was entered into by the corporate treasurer
without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where "an action by a director, who singly is the controlling stockholder, may be
40
considered as a binding corporate act and a board action as nothing more than a mere formality." The present case, however, is not one of
them.
41

As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own "almost 99.866%" of Respondent Motorich. Since Nenita is not the
sole controlling stockholder of Motorich, the aforementioned exception does not apply. Grantingarguendo that the corporate veil of
Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the
same was acquired during their marriage. There being no indication that said spouses, who appear to have been married before the
effectivity of the Family Code, have agreed to a different property regime, their property relations would be governed by conjugal
42
partnership of gains. As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because "[t]here is no coownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in favor of another
his or interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties before the
43
partnership has been legally dissolved."
Assuming further, for the sake of argument, that the spouses' property regime is the absolute community of property, the sale would still be
invalid. Under this regime, "alienation of community property must have the written consent of the other spouse or he authority of the court
44
without which the disposition or encumbrance is void." Both requirements are manifestly absent in the instant case.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic notes (TSN):
Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?
A Yes, sir.

45

46

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

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

[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent that you were authorized to sell the
property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the property, you did not tell that to Mr.
Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
A I just told them that I was the treasurer of the corporation and it [was] also the president who [was]
also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were authorized?
A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest
money at that time. That was our first meeting. 47
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand, her testimony
demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw caution to the wind by offering and
paying the earnest money without first verifying Gruenberg's authority to sell the lot.
Fourth Issue:
Damages and Attorney's Fees
Finally, petitioner prays for damages and attorney's fees, alleging that "[i]n an utter display of malice and bad faith, respondents attempted
and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did not represent herself as authorized by
Respondent Motorich despite the receipt issued by the former specifically indicating that she was signing on behalf of Motorich Sales
Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize Respondent Gruenberg and that the
48
contract [was] not binding, [insofar] as it [was] concerned, despite receipt and enjoyment of the proceeds of Gruenberg's act." Assuming
that Respondent Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg should be held liable
49
because she "acted fraudulently and in bad faith [in] representing herself as duly authorized by [R]espondent [C]orporation."
As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack factual bases. Hence,
an award of damages or attorney's fees cannot be justified. The amount paid as "earnest money" was not proven to have redounded to the
benefit of Respondent Motorich. Petitioner claims that said amount was deposited to the account of Respondent Motorich, because "it was
50
deposited with the account of Aren Commercial c/o Motorich Sales Corporation." Respondent Gruenberg, however, disputes the
allegations of petitioner. She testified as follows:
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was
encashed.
A Yes. sir, the check was paid in my name and I deposit[ed] it.
Q In your account?
A Yes, sir.

51

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

52

Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president of Petitioner Corporation
53
for more than ten years and has also served as chief executive of two other corporate entities. Co cannot feign ignorance of the scope of
the authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of Gruenberg's
authorization to enter into a contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably, petitioner appears to be the
victim of its own officer's negligence in entering into a contract with and paying an unauthorized officer of another corporation.

As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the amount she received as
54
55
earnest money, as "no one shall enrich himself at the expense of another." a principle embodied in Article 2154 of Civil Code. Although
there was no binding relation between them, petitioner paid Gruenberg on the mistaken belief that she had the authority to sell the property
56
of Motorich. Article 2155 of Civil Code provides that "[p]ayment by reason of a mistake in the contruction or application of a difficult
question of law may come within the scope of the preceding article."
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
[G.R. No. 127181. September 4, 2001]
LAND BANK OF THE PHILIPPINES, petitioner, vs. THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and EMMANUEL C.
OATE, respondents.

[1]

This petition for review on certiorari seeks to reverse and set aside the decision promulgated on June 17, 1996 in CA-GR No. CV-43239
[2]
[3]
of public respondent and its resolution dated November 29, 1996 denying petitioners motion for reconsideration.
The facts of this case as found by the Court of Appeals and which we find supported by the records are as follows:
On various dates in September, October, and November, 1980, appellant Land Bank of the Philippines (LBP) extended a series of credit
accommodations to appellee ECO, using the trust funds of the Philippine Virginia Tobacco Administration (PVTA) in the aggregate amount of
P26,109,000.00. The proceeds of the credit accommodations were received on behalf of ECO by appellee Oate.
On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written demands were made, but ECO was unable to
pay. ECO claims that the company was in financial difficulty for it was unable to collect its investments with companies which were affected
by the financial crisis brought about by the Dewey Dee scandal.
xxx
On October 20, 1981, ECO proposed and submitted to LBP a Plan of Payment whereby the former would set up a financing company which
would absorb the loan obligations. It was proposed that LBP would participate in the scheme through the conversion of P9,000,000.00 which
was part of the total loan, into equity.
On March 4, 1982, LBP informed ECO of the action taken by the formers Trust Committee concerning the Plan of Payment which reads in
part, as follows:
xxx
Please be informed that the Banks Trust Committee has deliberated on the plan of payment during its meetings on November 6, 1981 and
February 23, 1982. The Committee arrived at a decision that you may proceed with your Plan of Payment provided Land Bank shall not
participate in the undertaking in any manner whatsoever.
In view thereof, may we advise you to make necessary revision in the proposed Plan of Payment and submit the same to us as soon as
possible. (Records, p. 428)
On May 5, 1982, ECO submitted to LBP a Revised Plan of Payment deleting the latters participation in the proposed financing
company. The Trust Committee deliberated on the Revised Plan of Payment and resolved to reject it. LBP then sent a letter to the PVTA
for the latters comments. The letter stated that if LBP did not hear from PVTA within five (5) days from the latters receipt of the letter, such
silence would be construed to be an approval of LBPs intention to file suit against ECO and its corporate officers. PVTA did not respond to
the letter.
On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and Emmanuel C. Oate before the Regional Trial
Court of Manila, Branch 50.
After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oate was absolved from personal liability for
insufficiency of evidence.
Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that there was an error in computation in the
amounts to be paid. LBP also questioned the dismissal of the case with regard to Oate.
On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order of the court, both parties submitted
Supplemental Motions for Reconsideration and their respective Oppositions to each others Motions.
On February 3, 1993, the trial court rendered an Amended Decision, the dispositive portion of which reads as follows:
ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified to read as follows:
WHEREFORE, judgment is rendered ordering defendant Eco Management Corporation to pay plaintiff Land Bank of the Philippines:

A. The sum of P26,109,000.00 representing the total amount of the ten (10) loan accommodations plus 16% interest per annum
computed from the dates of their respective maturities until fully paid, broken down as follows:
1. the principal amount of P4,000,000.00 with interest at 16% computed from September 18, 1981;
2. the principal amount of P5,000,000.00 with interest at 16% computed from September 21, 1981;
3. the principal amount of P1,000,000.00 with interest rate at 16% computed from September 28, 1981;
4. the principal amount of P1,000,000.00 with interest at 15% computed from October 5, 1981;
5. the principal amount of P2,000,000.00 with interest rate at of 16% computed from October 8, 1981;
6. the principal amount of P2,000,000.00 with interest rate at of 16% from October 23, 1981;
7. the principal amount of P814,000.00 with interest rate at of 16% computed from November 1, 1981;
8. the principal amount of P2,295,000.00 with interest rate at of 16% computed from November 6, 1981;
9. the principal amount of P3,000,000.00 with interest rate at of 16% computed from November 7, 1981;
10. the principal amount of P5,000,000.00 with interest rate at 16% computed from November 9, 1981;
B. The sum of P260,000.00 as attorneys fees; and
C. The costs of the suit.
The case as against defendant Emmanuel Oate is dismissed for insufficiency of evidence.
SO ORDERED. (Records, p. 608)

[4]

The Court of Appeals affirmed in toto the amended decision of the trial court.

[5]

On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a resolution dated November 29, 1996. Hence, this
present petition, assigning the following errors allegedly committed by the Court of Appeals:
A
THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON THE FACTS AS ESTABLISHED BY EVIDENCE, THERE EXISTS A
SUBSTANTIAL AND JUSTIFIABLE GROUND UPON WHICH THE LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT ECO
MANAGEMENT CORPORATION MAY BE PIERCED.
B
THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY TO RESPONDENT EMMANUEL C. OATE JOINTLY AND SEVERALLY
WITH RESPONDENT ECO MANAGEMENT CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST THEREON.
C
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF THE LOWER COURT THE SAME NOT BEING SUPPORTED BY THE
[6]
EVIDENCE AND APPLICABLE LAWS AND JURISPRUDENCE.
The primary issues for resolution here are (1) whether or not the corporate veil of ECO Management Corporation should be pierced;
and (2) whether or not Emmanuel C. Oate should be held jointly and severally liable with ECO Management Corporation for the loans
incurred from Land Bank.
Petitioner contends that the personalities of Emmanuel Oate and of ECO Management Corporation should be treated as one, for the
particular purpose of holding respondent Oate liable for the loans incurred by corporate respondent ECO from Land Bank. According to
petitioner, the said corporation was formed ostensibly to allow Oate to acquire loans from Land Bank which he used for his personal
advantage.
Petitioner submits the following arguments to support its stand: (1) Respondent Oate owns the majority of the interest holdings in
respondent corporation, specifically during the crucial time when appellees applied for and obtained the loan from LANDBANK, sometime in
September to November, 1980. (2) The acronym ECO stands for the initials of Emmanuel C. Oate, which is the logical, sensible and concrete
explanation for the name ECO, in the absence of evidence to the contrary. (3) Respondent Oate has always referred to himself as the
debtor, not merely as an officer or a representative of respondent corporation. (4) Respondent Oate personally paid P1 Million taken from
trust accounts in his name. (5) Respondent Oate made a personal offering to pay his personal obligation. (6) Respondent Oate controlled
respondent corporation by simultaneously holding two (2) corporate positions, viz., as Chairman and as treasurer, beginning from the time of
respondent corporations incorporation and continuously thereafter without benefit of election. (7) Respondent corporation had not held
any meeting of the stockholders or of the Board of Directors, as shown by the fact that no proceeding of such corporate activities was filed
with or borne by the record of the Securities and Exchange Commission (SEC). The only corporate records respondent corporation filed with

the SEC were the following: Articles of Incorporation, Treasurers Affidavit, Undertaking to Change Corporate Name, Statement of Assets and
[7]
Liabilities.
Private respondents, in turn, contend that Oates only participation in the transaction between petitioner and respondent ECO was his
execution of the loan agreements and promissory notes as Chairman of the corporations Board of Directors. There was nothing in the loan
agreement nor in the promissory notes which would indicate that Oate was binding himself jointly and severally with ECO. Respondents
likewise deny that ECO stands for Emmanuel C. Oate. Respondents also note that Oate is no longer a majority stockholder of ECO and that
the payment by a third person of the debt of another is allowed under the Civil Code. They also alleged that there was no fraud and/or bad
faith in the transactions between them and Land Bank. Hence, private respondents conclude, there is no legal ground to pierce the veil of
[8]
respondent corporations personality.
At the outset, we find the matters raised by petitioner in his argumentation are mainly questions of fact which are not proper in a
[9]
petition of this nature. Petitioner is basically questioning the evaluation made by the Court of Appeals of the evidence submitted at the
trial. The Court of Appeals had found that petitioners evidence was not sufficient to justify the piercing of ECOs corporate
[10]
personality. Petitioner contended otherwise. It is basic that where what is being questioned is the sufficiency of evidence, it is a question
[11]
of fact. Nevertheless, even if we regard these matters as tendering an issue of law, we still find no reason to reverse the findings of the
Court of Appeals.
A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it
[12]
as well as from any other legal entity to which it may be related. By this attribute, a stockholder may not, generally, be made to answer for
[13]
acts or liabilities of the said corporation, and vice versa. This separate and distinct personality is, however, merely a fiction created by law
[14]
for convenience and to promote the ends of justice. For this reason, it may not be used or invoked for ends subversive to the policy and
[15]
[16]
purpose behind its creation or which could not have been intended by law to which it owes its being. This is particularly true when the
[17]
fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial
[18]
[19]
issues, perpetrate deception or otherwise circumvent the law. This is likewise true where the corporate entity is being used as an alter
[20]
ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In all these cases, the notion of
[21]
corporate entity will be pierced or disregarded with reference to the particular transaction involved.
The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the personality of the corporation as a
means to perpetrate fraud and/or escape a liability and responsibility demanded by law. In order to disregard the separate juridical
[22]
personality of a corporation, the wrongdoing must be clearly and convincingly established. In the absence of any malice or bad faith, a
[23]
stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.
The mere fact that Oate owned the majority of the shares of ECO is not a ground to conclude that Oate and ECO is one and the
same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for
[24]
disregarding the fiction of separate corporate personalities. Neither is the fact that the name ECO represents the first three letters of
Oates name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Oate. A
corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the
initials of one of its shareholders.
That respondent corporation in this case was being used as a mere alter ego of Oate to obtain the loans had not been shown. Bad
faith or fraud on the part of ECO and Oate was not also shown. As the Court of Appeals observed, if shareholders of ECO meant to defraud
[25]
petitioner, then they could have just easily absconded instead of going out of their way to propose Plans of Payment. Likewise, Oate
[26]
volunteered to pay a portion of the corporations debt. This offer demonstrated good faith on his part to ease the debt of the corporation
of which he was a part. It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes
in the said corporation are secured. In this case, it was established that the P1 Million did not come solely from Oate. It was taken from a
[27]
trust account which was owned by Oate and other investors. It was likewise proved that the P1 Million was a loan granted by Oate and
[28]
his co-depositors to alleviate the plight of ECO. This circumstance should not be construed as an admission that he was really the debtor
and not ECO.
In sum, we agree with the Court of Appeals conclusion that the evidence presented by the petitioner does not suffice to hold
respondent Oate personally liable for the debt of co-respondent ECO. No reversible error could be attributed to respondent courts
decision and resolution which petitioner assails.
WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the Court of Appeals in CA-G.R. CV No. 43239 are
AFFIRMED. Costs against petitioner.
SO ORDERED.

G.R. No. 124715

January 24, 2000
RUFINA LUY LIM, petitioner,
vs.
COURT OF APPEALS, AUTO TRUCK TBA CORPORATION, SPEED DISTRIBUTING, INC., ACTIVE DISTRIBUTORS, ALLIANCE MARKETING
CORPORATION, ACTION COMPANY, INC. respondents.
May a corporation, in its universality, be the proper subject of and be included in the inventory of the estate of a deceased person?
1

Petitioner disputes before us through the instant petition for review on certiorari, the decision of the Court of Appeals promulgated on 18
2
3
April 1996, in CA-GR SP No. 38617, which nullified and set aside the orders dated 04 July 1995 , 12 September 1995 and 15 September
4
1995 of the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court.
Petitioner Rufina Luy Lim is the surviving spouse of late Pastor Y. Lim whose estate is the subject of probate proceedings in Special
Proceedings Q-95-23334, entitled, "In Re: Intestate Estate of Pastor Y. Lim Rufina Luy Lim, represented by George Luy,
Petitioner".1wphi1.nt

Private respondents Auto Truck Corporation, Alliance Marketing Corporation, Speed Distributing, Inc., Active Distributing, Inc. and Action
Company are corporations formed, organized and existing under Philippine laws and which owned real properties covered under the Torrens
system.
On 11 June 1994, Pastor Y. Lim died intestate. Herein petitioner, as surviving spouse and duly represented by her nephew George Luy, fried
5
on 17 March 1995, a joint petition for the administration of the estate of Pastor Y. Lim before the Regional Trial Court of Quezon City.
6

Private respondent corporations, whose properties were included in the inventory of the estate of Pastor Y. Lim, then filed a motion for the
7
lifting of lis pendens and motion for exclusion of certain properties from the estate of the decedent.
8

In an order dated 08 June 1995, the Regional Trial Court of Quezon City, Branch 93, sitting as a probate court, granted the private
respondents' twin motions, in this wise:
Wherefore, the Register of Deeds of Quezon City is hereby ordered to lift, expunge or delete the annotation of lis pendens on
Transfer Certificates of Title Nos. 116716, 116717, 116718, 116719 and 5182 and it is hereby further ordered that the properties
covered by the same titles as well as those properties by (sic) Transfer Certificate of Title Nos. 613494, 363123, 236236 and 263236
are excluded from these proceedings.
SO ORDERED.
9

Subsequently, Rufina Luy Lim filed a verified amended petition which contained the following averments:
3. The late Pastor Y. Lim personally owned during his lifetime the following business entities, to wit:
Business Entity
xxx
Alliance
Marketing, Inc.
xxx
Speed
Distributing
Inc.

Address:
xxx

xxx

Block 3, Lot 6, Dacca BF Homes,

Paraaque, Metro Manila.
xxx

xxx

910 Barrio Niog, Aguinaldo

Highway, Bacoor, Cavite.
xxx

Auto Truck TBA

Corp.
xxx
Active
Distributors,
Inc.

xxx

xxx

2251 Roosevelt Avenue, Quezon

City.
xxx

xxx

Block 3, Lot 6, Dacca BF Homes,

Paraaque, Metro Manila.
xxx

Action
Company

xxx

xxx

100 20th Avenue Murphy,

Quezon City or 92-D Mc-Arthur
Highway Valenzuela Bulacan.

3.1 Although the above business entities dealt and engaged in business with the public as corporations, all their capital,
assets and equity were however, personally owned by the late Pastor Y Lim. Hence the alleged stockholders and officers
appearing in the respective articles of incorporation of the above business entities were mere dummies of Pastor Y. Lim,
and they were listed therein only for purposes of registration with the Securities and Exchange Commission.
4. Pastor Lim, likewise, had Time, Savings and Current Deposits with the following banks: (a) Metrobank, Grace Park, Caloocan City
and Quezon Avenue, Quezon City Branches and (b) First Intestate Bank (formerly Producers Bank), Rizal Commercial Banking
Corporation and in other banks whose identities are yet to be determined.
5. That the following real properties, although registered in the name of the above entities, were actually acquired by Pastor Y. Lim
during his marriage with petitioner, to wit:
Corporation

Title
xxx

k. Auto Truck

xxx

Location
xxx

TCT No. 617726 Sto. Domingo TBA

Corporation Cainta, Rizal

q. Alliance Marketing TCT No. 27896

Prance, Metro Manila

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

xxx

xxx

7. The aforementioned properties and/or real interests left by the late Pastor Y. Lim, are all conjugal in nature, having been acquired
by him during the existence of his marriage with petitioner.
8. There are other real and personal properties owned by Pastor Y. Lim which petitioner could not as yet identify. Petitioner,
however will submit to this Honorable Court the identities thereof and the necessary documents covering the same as soon as
possible.
10

On 04 July 1995, the Regional Trial Court acting on petitioner's motion issued an order , thus:
Wherefore, the order dated 08 June 1995 is hereby set aside and the Registry of Deeds of Quezon City is hereby directed to reinstate
the annotation of lis pendens in case said annotation had already been deleted and/or cancelled said TCT Nos. 116716, 116717,
116718, 116719 and 51282.
Further more (sic), said properties covered by TCT Nos. 613494, 365123, 236256 and 236237 by virtue of the petitioner are included
in the instant petition.
SO ORDERED.
11

On 04 September 1995, the probate court appointed Rufina Lim as special administrator and Miguel Lim and Lawyer Donald Lee, as cospecial administrators of the estate of Pastor Y. Lim, after which letters of administration were accordingly issued.
12

In an order dated 12 September 1995, the probate court denied anew private respondents' motion for exclusion, in this wise:
The issue precisely raised by the petitioner in her petition is whether the corporations are the mere alter egos or instrumentalities of
Pastor Lim, Otherwise (sic) stated, the issue involves the piercing of the corporate veil, a matter that is clearly within the jurisdiction
of this Honorable Court and not the Securities and Exchange Commission. Thus, in the case of Cease vs. Court of Appeals, 93 SCRA
483, the crucial issue decided by the regular court was whether the corporation involved therein was the mere extension of the
decedent. After finding in the affirmative, the Court ruled that the assets of the corporation are also assets of the estate.
A reading of P.D. 902, the law relied upon by oppositors, shows that the SEC's exclusive (sic) applies only to intra-corporate
controversy. It is simply a suit to settle the intestate estate of a deceased person who, during his lifetime, acquired several
properties and put up corporations as his instrumentalities.
SO ORDERED.
13

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

xxx

xxx

SO ORDERED.
14

Private respondent filed a special civil action for certiorari , with an urgent prayer for a restraining order or writ of preliminary injunction,
before the Court of Appeals questioning the orders of the Regional Trial Court, sitting as a probate court.
15

On 18 April 1996, the Court of Appeals, finding in favor of herein private respondents, rendered the assailed decision , the decretal portion
of which declares:
Wherefore, premises considered, the instant special civil action for certiorari is hereby granted, The impugned orders issued by
respondent court on July 4, 1995 and September 12, 1995 are hereby nullified and set aside. The impugned order issued by
respondent on September 15, 1995 is nullified insofar as petitioner corporations" bank accounts and records are concerned.
SO ORDERED.
Through the expediency of Rule 45 of the Rules of Court, herein petitioner Rufina Luy Lim now comes before us with a lone assignment of
16
error :

The respondent Court of Appeals erred in reversing the orders of the lower court which merely allowed the preliminary or
provisional inclusion of the private respondents as part of the estate of the late deceased (sic) Pastor Y. Lim with the respondent
Court of Appeals arrogating unto itself the power to repeal, to disobey or to ignore the clear and explicit provisions of Rules 81,83,84
and 87 of the Rules of Court and thereby preventing the petitioner, from performing her duty as special administrator of the estate
as expressly provided in the said Rules.
Petitioner's contentions tread on perilous grounds.
In the instant petition for review, petitioner prays that we affirm the orders issued by the probate court which were subsequently set aside
by the Court of Appeals.
Yet, before we delve into the merits of the case, a review of the rules on jurisdiction over probate proceedings is indeed in order.
17

The provisions of Republic Act 7691 , which introduced amendments to Batas Pambansa Blg. 129, are pertinent:
Sec. 1. Section 19 of Batas Pambansa Blg. 129, otherwise known as the "Judiciary Reorganization Act of 1980", is hereby amended to
read as follows:
Sec. 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive jurisdiction:
xxx

xxx

xxx

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

xxx

xxx

Sec. 3. Section 33 of the same law is hereby amended to read as follows:

Sec. 33. Jurisdiction of Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in Civil Cases.
Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts shall exercise:
1. Exclusive original jurisdiction over civil actions and probate proceedings, testate and intestate, including the grant of
provisional remedies in proper cases, where the value of the personal property, estate or amount of the demand does not
exceed One Hundred Thousand Pesos (P100,000) or, in Metro Manila where such personal property, estate or amount of
the demand does not exceed Two Hundred Thousand Pesos (P200,000), exclusive of interest, damages of whatever kind,
attorney's fees, litigation expenses and costs, the amount of which must be specifically alleged, Provided, that interest,
damages of whatever kind, attorney's, litigation expenses and costs shall be included in the determination of the filing
fees, Provided further, that where there are several claims or causes of actions between the same or different parties,
embodied in the same complaint, the amount of the demand shall be the totality of the claims in all the causes of action,
irrespective of whether the causes of action arose out of the same or different transactions;
xxx

xxx

xxx

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

This Court, in PASTOR, JR. vs. COURT OF APPEALS, held:

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

We reiterated the rule in PEREIRA vs. COURT OF APPEALS :

. . . The function of resolving whether or not a certain property should be included in the inventory or list of properties to be
administered by the administrator is one clearly within the competence of the probate court. However, the court's determination is
only provisional in character, not conclusive, and is subject to the final decision in a separate action which may be instituted by the
parties.
20

21

Further, in MORALES vs. CFI OF CAVITE citing CUIZON vs. RAMOLETE , We made an exposition on the probate court's limited jurisdiction:

It is a well-settled rule that a probate court or one in charge of proceedings whether testate or intestate cannot adjudicate or
determine title to properties claimed to be a part of the estate and which are equally claimed to belong to outside parties. All that
the said court could do as regards said properties is to determine whether they should or should not be included in the inventory or
list of properties to be administered by the administrator. If there is no dispute, well and good; but if there is, then the parties, the
administrator and the opposing parties have to resort to an ordinary action for a final determination of the conflicting claims of title
because the probate court cannot do so.
22

23

Again, in VALERA vs. INSERTO , We had occasion to elucidate, through Mr. Justice Andres Narvasa :
Settled is the rule that a Court of First Instance (now Regional Trial Court), acting as a probate court, exercises but limited
jurisdiction, and thus has no power to take cognizance of and determine the issue of title to property claimed by a third person
adversely to the decedent, unless the claimant and all other parties having legal interest in the property consent, expressly or
impliedly, to the submission of the question to the probate court for adjudgment, or the interests of third persons are not thereby
prejudiced, the reason for the exception being that the question of whether or not a particular matter should be resolved by the
court in the exercise of its general jurisdiction or of its limited jurisdiction as a special court (e.g. probate, land registration, etc.), is in
reality not a jurisdictional but in essence of procedural one, involving a mode of practice which may be waived. . . .
. . . . These considerations assume greater cogency where, as here, the Torrens title is not in the decedent's name but in others, a
situation on which this Court has already had occasion to rule . . . . (emphasis Ours)
Petitioner, in the present case, argues that the parcels of land covered under the Torrens system and registered in the name of private
respondent corporations should be included in the inventory of the estate of the decedent Pastor Y. Lim, alleging that after all the
determination by the probate court of whether these properties should be included or not is merely provisional in nature, thus, not
conclusive and subject to a final determination in a separate action brought for the purpose of adjudging once and for all the issue of title.
Yet, under the peculiar circumstances, where the parcels of land are registered in the name of private respondent corporations, the
24
jurisprudence pronounced in BOLISAY vs., ALCID is of great essence and finds applicability, thus:
It does not matter that respondent-administratrix has evidence purporting to support her claim of ownership, for, on the other
hand, petitioners have a Torrens title in their favor, which under the law is endowed with incontestability until after it has been set
aside in the manner indicated in the law itself, which of course, does not include, bringing up the matter as a mere incident in special
proceedings for the settlement of the estate of deceased persons. . . .
. . . . In regard to such incident of inclusion or exclusion, We hold that if a property covered by Torrens title is involved, the
presumptive conclusiveness of such title should be given due weight, and in the absence of strong compelling evidence to the
contrary, the holder thereof should be considered as the owner of the property in controversy until his title is nullified or modified in
an appropriate ordinary action, particularly, when as in the case at bar, possession of the property itself is in the persons named in
the title. . . .
A perusal of the records would reveal that no strong compelling evidence was ever presented by petitioner to bolster her bare assertions as
to the title of the deceased Pastor Y. Lim over the properties. Even so, P.D. 1529, otherwise known as, "The Property Registration Decree",
proscribes collateral attack on Torrens Title, hence:
xxx

xxx

xxx

Sec. 48. Certificate not subject to collateral attack. A certificate of title shall not be subject to collateral attack. It cannot be
altered, modified or cancelled except in a direct proceeding in accordance with law.
In CUIZON vs. RAMOLETE, where similarly as in the case at bar, the property subject of the controversy was duly registered under the Torrens
system, We categorically stated:
. . . Having been apprised of the fact that the property in question was in the possession of third parties and more important,
covered by a transfer certificate of title issued in the name of such third parties, the respondent court should have denied the
motion of the respondent administrator and excluded the property in question from the inventory of the property of the estate. It
had no authority to deprive such third persons of their possession and ownership of the property. . . .
Inasmuch as the real properties included in the inventory of the estate of the Late Pastor Y. Lim are in the possession of and are registered in
the name of private respondent corporations, which under the law possess a personality separate and distinct from their stockholders, and in
the absence of any cogency to shred the veil of corporate fiction, the presumption of conclusiveness of said titles in favor of private
respondents should stand undisturbed.
Accordingly, the probate court was remiss in denying private respondents' motion for exclusion. While it may be true that the Regional Trial
Court, acting in a restricted capacity and exercising limited jurisdiction as a probate court, is competent to issue orders involving inclusion or
exclusion of certain properties in the inventory of the estate of the decedent, and to adjudge, albeit, provisionally the question of title over
properties, it is no less true that such authority conferred upon by law and reinforced by jurisprudence, should be exercised judiciously, with
due regard and caution to the peculiar circumstances of each individual case.
Notwithstanding that the real properties were duly registered under the Torrens system in the name of private respondents, and as such
were to be afforded the presumptive conclusiveness of title, the probate court obviously opted to shut its eyes to this gleamy fact and still
proceeded to issue the impugned orders.

By its denial of the motion for exclusion, the probate court in effect acted in utter disregard of the presumption of conclusiveness of title in
favor of private respondents. Certainly, the probate court through such brazen act transgressed the clear provisions of law and infringed
settled jurisprudence on this matter.
Moreover, petitioner urges that not only the properties of private respondent corporations are properly part of the decedent's estate but
also the private respondent corporations themselves. To rivet such flimsy contention, petitioner cited that the late Pastor Y. Lim during his
25
lifetime, organized and wholly-owned the five corporations, which are the private respondents in the instant case. Petitioner thus attached
26
27
as Annexes "F" and "G" of the petition for review affidavits executed by Teresa Lim and Lani Wenceslao which among others, contained
averments that the incorporators of Uniwide Distributing, Inc. included on the list had no actual and participation in the organization and
incorporation of the said corporation. The affiants added that the persons whose names appeared on the articles of incorporation of Uniwide
Distributing, Inc., as incorporators thereof, are mere dummies since they have not actually contributed any amount to the capital stock of the
corporation and have been merely asked by the late Pastor Y. Lim to affix their respective signatures thereon.
It is settled that a corporation is clothed with personality separate and distinct from that of the persons composing it. It may not generally be
held liable for that of the persons composing it. It may not be held liable for the personal indebtedness of its stockholders or those of the
28
entities connected with it.
Rudimentary is the rule that a corporation is invested by law with a personality distinct and separate from its stockholders or members. In the
same vein, a corporation by legal fiction and convenience is an entity shielded by a protective mantle and imbued by law with a character
alien to the persons comprising it.
29

Nonetheless, the shield is not at all times invincible. Thus, in FIRST PHILIPPINE INTERNATIONAL BANK vs.COURT OF APPEALS , We
enunciated:
. . . When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or
crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be
lifted to allow for its consideration merely as an aggregation of individuals. . . .
Piercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities
that ordinarily, they could be subject to, or distinguishes one corporation from a seemingly separate one, were it not for the existing
30
corporate fiction.
The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist, where public convenience is defeated; where a wrong is sought to be justified thereby, the
31
corporate fiction or the notion of legal entity should come to naught.
Further, the test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows: 1) Control, not mere
majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; (2) Such
control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiffs legal right; and (3) The aforesaid control and breach of duty must proximately
32
cause the injury or unjust loss complained of. The absence of any of these elements prevent "piercing the corporate veil".
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a
33
sufficient reason for disregarding the fiction of separate corporate personalities.
Moreover, to disregard the separate juridical personality of a corporation, the wrong-doing must be clearly and convincingly established. It
34
cannot be presumed.
Granting arguendo that the Regional Trial Court in this case was not merely acting in a limited capacity as a probate court, petitioner
nonetheless failed to adduce competent evidence that would have justified the court to impale the veil of corporate fiction. Truly, the
reliance reposed by petitioner on the affidavits executed by Teresa Lim and Lani Wenceslao is unavailing considering that the
aforementioned documents possess no weighty probative value pursuant to the hearsay rule. Besides it is imperative for us to stress that
such affidavits are inadmissible in evidence inasmuch as the affiants were not at all presented during the course of the proceedings in the
lower court. To put it differently, for this Court to uphold the admissibility of said documents would be to relegate from Our duty to apply
such basic rule of evidence in a manner consistent with the law and jurisprudence.
35

Our pronouncement in PEOPLE BANK AND TRUST COMPANY vs. LEONIDAS finds pertinence:
Affidavits are classified as hearsay evidence since they are not generally prepared by the affiant but by another who uses his own
language in writing the affiant's statements, which may thus be either omitted or misunderstood by the one writing them.
Moreover, the adverse party is deprived of the opportunity to cross-examine the affiants. For this reason, affidavits are generally
rejected for being hearsay, unless the affiant themselves are placed on the witness stand to testify thereon.
36

As to the order of the lower court, dated 15 September 1995, the Court of Appeals correctly observed that the Regional Trial Court, Branch
93 acted without jurisdiction in issuing said order; The probate court had no authority to demand the production of bank accounts in the
name of the private respondent corporations.

WHEREFORE, in view of the foregoing disquisitions, the instant petition is hereby DISMISSED for lack of merit and the decision of the Court of
Appeals which nullified and set aside the orders issued by the Regional Trial Court, Branch 93, acting as a probate court, dated 04 July 1995
and 12 September 1995 is AFFIRMED.1wphi1.nt
SO ORDERED.
G.R. No. 82558 August 20, 1990
WESTERN AGRO INDUSTRIAL CORPORATION and ANTONIO RODRIGUEZ, petitioners
vs.
HON. COURT OF APPEALS and SIA'S AUTOMOTIVE AND DIESEL PARTS, INC., respondents.
The petitioners question the binding effect of the pre-trial order in this case and the liability imposed upon an officer solidarily with the
corporation he represented. The petitioners were ordered by both the trial court and the Court of Appeals to pay, jointly and severally, the
sum of P84,626.70, the interests thereon from June 6,1983 until paid, twenty-five percent (25%) of the amounts awarded as attorney's fees,
and costs.
On June 6, 1983 respondent SIA Automotive and Diesel Parts, Inc. (SIA) filed with the Regional Trial Court of Caloocan City a complaint for
"sum of money and damages" against petitioners Western Agro Industrial Corporation (WESGRO) and/or Antonio Rodriguez. The complaint
alleged that WESGRO is doing business through Antonio Rodriguez and on different occasions in 1980, 1981 and 1982, Rodriguez,
representing WESGRO bought on credit different automotive spare parts from the private respondent amounting to P100,753.80; that the
said amount has long become over due and yet the petitioners refused to pay despite repeated demands. The complaint prayed among
others that the defendants jointly and severally pay the plaintiff: (a) the principal sum of P100,753.80 plus legal interest and the sum
equivalent to 25% in the form of attorney's fees as stipulated in the invoices covering the accounts.
In its answer with counterclaim, WESGRO admitted that it bought on credit various automotive spare parts from the respondent corporation
on different occasions in 1980, 1981 and 1982, represented by Antonio Rodriguez but denied that its total obligation was P100,753.80.
WESGRO alleged that this amount is bloated because it had already made various payments on different dates.
For his part, Antonio Rodriguez filed a motion to dismiss on the ground that the complaint states no cause of action against him. He alleged
that he is a director and officer of WESGRO and that he entered into the purchase contract with the respondent corporation in his capacity as
officer or agent of WESGRO and therefore such contract was with WESGRO as a distinct legal entity and did not confer rights much less
liabilities on him.
The trial court denied the motion to dismiss in its order dated November 23, 1983. The trial court ruled:
xxx xxx xxx
While it is true that contracts entered into by authorized officers or agents of a Corporation are contracts of the
Corporation as a distinct entity, yet under the circumstances above-mentioned, the Court finds it necessary to include
defendant, Antonio Rodriguez, as party defendant, for the Court to arrive at a judicious adjudication on the matter. (Rollo,
p.43)
Rodriguez filed with the then Intermediate Appellate Court a petition for certoriari, prohibition and mandamus for the review of the
aforestated order. The petition (docketed as Case No. AC-62562) was, however, denied.
In his answer with counterclaim, Rodriguez denied that "... WESGRO is doing business through answering defendant such allegation, being
misleading as he is only one of the officers representing WESGRO in various business transactions ..." (Rollo p. 45) and that "... his dealings
with the plaintiff were always in the name of WESGRO, a fact which is recognized by the plaintiff." (Rollo, p. 46). He, however, admitted that
he had represented WESGRO in purchasing certain spare parts on credit.
After several postponements, the pre-trial was held on April 9, 1984. On this same date, the trial court issued a Pre-Trial Order, to wit:
Parties agreed that the defendant, Western Agro Industrial Corporation ordered from the plaintiff, automotive spare parts
which have not been paid. Payment was agreed by Western Agro Industrial Corporation and Sia's Automotive and Diesel
Parts, Inc. that the defendant agreed to pay the plaintiff the sum of P85,000.00, more or less. The only question now
remaining in litigation is the remaining sum of P15,000.00, more or less. (Original Records, p. 68)
The initial hearing of the case was held on May 24, 1984. Upon agreement of the parties, the pre-trial order was amended to change the sum
of P85000.00 to P84,626.70. Upon the initiative of the petitioners' counsel, the order was further amended to show that ... it is only
defendant Western Agro Industrial Corporation that is admitting the liability not the defendant Antonio Rodriguez. (TSN page 15, May 24,
1984). During the same hearing, the respondent corporation rested its case after presenting the corporation's manager Juanito V. Lim, as its
sole witness together with several documents.
On the other hand, the petitioners manifested that after a review of the nature of the plaintiff's evidence they decided not to present any
evidence. Instead, they would simply file a memorandum. The motion was granted by the trial court in its order dated July 5, 1984.
On October 51,1984, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendants, ordering defendants to pay jointly
and severally to the plaintiff the sum of P84,626.70 with legal rate of interest from the filing of the complaint on June 6,
1983 until fully paid; to pay, jointly and severally 25% of the amount awarded to plaintiff as attorney's fees; and to pay the
costs.
The Counterclaim is DISMISSED (Original Records, pp. 101-102)
As stated earlier, the trial court's decision was affirmed by the Court of Appeals. A motion for reconsideration was denied. Hence, this
petition.
The issues raised can be categorized into the following: first, whether or not the petitioner are bound by the PRE-TRIAL ORDER of the trial
court; and second, whether or not petitioner Antonio Rodriguez can be made solidarily liable with the petitioner corporation for debts
incurred by the latter.
Anent the first issue, the petitioners capitalize on the fact that a copy of the pre-trial Order was not served on them. They theorize that since
the Pre-trial order was promulgated by the trial court without the direct participation of the parties, the latter, are not bound by the order
until such time that the same is served upon them, otherwise, admissions may be stated in the pre-trial order which were not made at, all
during the Pre-Trial Conference. The petitioners contend that the trial court erroneously stated that the petitioner corporation admitted its
liability.
The petitioners are correct in stating that notice to the parties of a Pre-Trial Order is indispensable, to afford them an opportunity to check
the accuracy of what transpired during a pre-trial conference. Procedural due process demands that such notice be served upon the parties
in the same manner as other orders, resolution and decision of the court in order that they may become binding upon the parties.
We, however take exception to the literal application of the rule in the instant case. The record shows that the petitioners knew all along the
existence of the Pre-trial Order and that the petitioner's counsel actively participated in the amendment of the order to change the amount
of the corporation's liability which was P85,00.00 in the Pre-Trial Order to P84,626.70 as agreed upon by the parties. The petitioner asked
that the admitted amount be amended to make the obligation reflect the truth. This can be gleaned from the tenor of the proceedings during
the trial of the case on May 24, 1984 where Atty. Benjamin C. Santos the petitioners' counsel was present and where the following
transpired:
Atty. Bonifacio:
I will connect the materiality of this, Your Honor, because that is included in our complaint in the claim of
one hundred thousand something like that more or less. This amount is deemed included because
Western Agro Industrial Corporation only admitted more or less eighty-five thousand which is now the...
Court:
What is involved here according to you is fifteen thousand.
Atty. Bonifacio:
Yes, Your Honor.
Court:
Only fifteen thousand pesos (P15,000.00).
Atty. Bonifacio:
Because of your agreement stating to remand this to the lower court for hearing because that is the only
amount involved now.
Court:
As matter of fact, I have issued an order to the effect.
Atty. Bonifacio:
Yes, Your Honor. We have read it. But we are just marking more or less the admitted amount of
P85,000.00.
Atty. Santos:
To be exact, it would appear to be eighty-four thousand...
Court:

I have issued an order. Let me see the records. Pre-trial Order-Parties agreed that the defendant Western
Agro Industrial Corporation ordered from the plaintiff, automotive spare parts, which have not been paid.
Payment was agreed by Western Agro Industrial Corporation and Sia's Automotive and Diesel Part
Incorporated that the defendant agreed to pay the plaintiff the sum of P85,000.00 more or less. The only
question now remaining in litigation is the remaining sum of P15.000.00 more or less. Why do you have to
prove the P85,000,00?
Atty. Bonifacio:
We are just marking those exhibits, Your Honor.
Court:
This is the pre-trial order. Just mark those exhibits.
Atty. Bonifacio:
The admitted amount is actually P84,626.70, Your Honor. We are not proving the controverted portion of
P15,000.00.
Court:
What is the use when the defendant had admitted?
Atty. Bonifacio:
This is the controverted portion, Your Honor.
Court:
Precisely, I am asking you to show evidence on the P15,000.00 which is the controversy.
Atty. Bonifacio:
We are now going to that, Your Honor. Court: What about this Worth Tucking?
Atty. Bonifacio:
The Worthy Trucking is the sister company of he defendant, Your Honor.
Court:
But that is already admitted by them. They will pay you already. They agreed to pay you, is it not? You
read your pre-trial older and that has not been questioned by any of the paties.
Atty. Santos:
Except for the exact amount. The order says P85,000.00 more or less.The order is still correct. Court: You
now correct the amount.
Atty. Santos:
Based on the document of plaintiff it is P84,626.70, Your Honor This is the amount admitted by defendant
Western Agro Industrial only.
Court:
Is that correct?
Atty. Bonifacio:
Is that correct? Yes, Your Honor. It is because in the pre-trial order it is P85,000.00 more or less. But the
exact amount is P84,626.70.
Court:
Order At the hearing today, the parties agreed that the defendants Western Agro Industrial Corporation
and Antonio Rodriguez are indebted tothe plaintiff in the amount of P84,626.70.

Atty. Santos:
May we interrupt at this juncture, Your Honor, it is only defendant Western Agro Industrial Corporation
that is admitting the liability, not the defendant Antonio Rodriguez.
Court:
Remove that Antonio Rodriguez. WHEREFORE, the pre-trial order dated April 9, 1984 is hereby amended
so as to correct the sum of P85,000.00 to P84,626.70.
Atty.
Bonifacio: Yes, Your Honor. (TSN, May 24, 1984, p. 10-15)
The petitioners are bound by their own admissions during the trial. Section 2, Rule 129 of the Rules of Court povides that "Admissions made
by the parties in the pleadings, or in the course of the trial or other proceedings do not require proof and cannot be contradicted unless
previously shown to have been made through palpable mistake." The petitioners have not shown that their admissions were tainted by
palpable mistake. They cannot claim that they had no notice of the pre-trial order.
It should be noted, however, that the admission regarding the amount of liability stated in the Pre-Trial Order pertained only to the petitioner
corporation. This was clarified during the trial. Hence, the parties agreed during the pre-trial order's amendment that it was only the
petitioner corporation which admitted its indebtedness to the respondent corporation in the amount of P84,626.70.
This brings us to the issue as to whether or not Antonio Rodriguez was correctly made solidarily liable with the petitioner corporation for the
P84,626.70 debt incurred by the latter.
In deciding this issue the appellate court ruled:
xxx xxx xxx
While it is true that contracts entered into the authorized officers or agents of a corporation are contracts of the corporation as a distinct
entity, yet the admission of appellant Rodriguez that he represented the corporation on different occasions in 1980, 1981, and 1982 and by
reason of this presentation defendant WESGRO bought on credit spare parts amounting to P100,000.00. more or less, laid the basis for
impleadinghim. The Court a quo was correct to include him as a proper party to arrive at a 'judicious adjudication on the matter.'
It should also be mentioned here that in defendant's (Rodriguez) Answer (par. 3), he admitted having represented WESGRO
in various business transactions. However, defendant WESGRO admitted they are only liable for P47,727.60. Since there is
the problem of who should shoulder the total obligation, the court was right in impleading defendant Rodriguez.
Moreover, defendant's (Rodriguez) motion to dismiss was denied by the court a quo and its petition for certiorari based on
such denial was likewise dismissed by this Court in AC GR Sp No. 02562. This Court in its decision dated April 30,1984 ruled
as follows:
Considered in that light, we fail to see how respondent Judge could have acted with grave abuse of
discretion in denying petitioner's motion to dismiss. It was clearly alleged in the complaint in Case No. C10798 that petitioner acting for and in behalf of defendant corporation, incurred the obligation involved.
He directly dealt and transacted with plaintiff corporation, which, trusting in his representations, agreed
to deliver and in fact, delivered the goods on credit. Petitioner is therefore a proper party whose inclusion
as defendant in this case is necessary if complete relief is to be accorded to party plaintiff.
In the foregoing instances, it is likewise pertinent to cite Section 13, Rule 3 of the Rules of Court, which provides:
Section 13. Alternative defendants where the plaintiff is uncertain against which of several persons he is
entitled to relief, he may join any or all of them as defendants in the alternative although a right to relief
against one may be inconsistent with a right to relief against the other. (Rollo, p. 28-29)
It appears, therefore, that the appellate courts ruling that Antonio Rodriguez is solidarily liable with WESGRO for the latter's P84,626.70
obligation to SIA is based principally on the ground that Rodriguez represented WESGRO in its dealings with SIA.
It is significant to note that SIA never questioned the legal personality of WESGRO. Hence, we can assume that WESGRO is a bona
fide corporation. Therefore, as a bona fide corporation, WESGRO should alone be liable for its corporate acts as duly authorized by its officers
and directors. (Caram Jr. v. Court of Appeals, 151 SCRA 372 [1987]). This is so, because a corporation "is invested by law with a separate
personality, separate and distinct from that of the persons composing it as well as from any other legal entity to which it may be related."
(Tan Boon Bee & Co Inc. v. Jarencio, 163 SCRA 205 [1988] citing Yutivo and Sons Hardware Company v. Court of Tax Appeals, 1 SCRA 160
[1961]; Emilio Cano Enterprises, Inc. v. Court of Industrial Relations, 13 SCRA 290 [1965]). A corporation is an artificial person and can
transact its business only through its officers or agents. Necessarily, somebody has to act for it. The separate personality of the corporation
may be disregarded, or the veil of corporate fiction pierced and the individual stockholders may be personally liable to obligations of the
corporation only when the corporation is used "as a cloak or cover for fraud or illegality, or to work an injustice, or where necessary to

achieve equity or when necessary for the protection of creditors." (Sulo ng Bayan, Inc. v. Araneta, Inc., 72 SCRA 347 [1976] cited in Tan Boon
Bee & Co., Inc. v. Jarencio, supra).
In the case at bar, there is no showing that Antonio Rodriguez, a director and officer of WESGRO was not authorized by the corporation to
enter into purchase contracts with SIA. Moreover, the respondent corporation has not shown any circumstances which would necessitate the
piercing of the corporate veil so as to make Rodriguez personally liable for the obligations incurred by the petitioner. Hence, the inevitable
conclusion is that he was acting in behalf of the corporation when he executed the purchase contracts with the respondent corporation. In
other words, Rodriguez' acts in representing the petitioner corporation in its dealings with the respondent corporation are corporate acts for
which only the corporation should be made liable for any obligations arising from them.
WHEREFORE, the instant petition is hereby PARTLY GRANTED. The questioned decision of the Court of Appeals is modified in that petitioner
Antonio Rodriguez is declared not liable jointly and severally or otherwise with petitioner WESTERN AGRO INDUSTRIAL CORPORATION for the
money awards in favor of respondent Sia's Automotive and Diesel Parts, Inc. The decision is affirmed in other respects.
SO ORDERED.
G.R. No. L-78412 September 26, 1989
TRADERS ROYAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS, HON. BALTAZAR M. DIZON, Presiding Judge, Regional Trial Court, Branch 113, Pasay City and
ALFREDO CHING, respondents.
This petition for certiorari assails the Court of Appeals' decision dated April 29, 1987 in CA-G.R. SP No. 03593, entitled "Alfredo Ching vs. Hon.
Baltazar M. Dizon and Traders Royal Bank" nullifying the Regional Trial Court's orders dated August 15,1983 and May 24,1984 and prohibiting
it from further proceeding in Civil Case No. 1028-P.
On March 30,1982, the Philippine Blooming Mills, Inc. (PBM) and Alfredo Ching jointly submitted to the Securities and Exchange Commission
a petition for suspension of payments (SEC No. 2250) where Alfredo Ching was joined as co-petitioner because under the law, he was
allegedly entitled, as surety, to avail of the defenses of PBM and he was expected to raise most of the stockholders' equity of Pl00 million
being required under the plan for the rehabilitation of PBM. Traders Royal Bank was included among PBM's creditors named in Schedule A
accompanying PBM's petition for suspension of payments.
On May 13, 1983, the petitioner bank filed Civil Case No. 1028-P in the Regional Trial Court, Branch CXIII in Pasay City, against PBM and
Alfredo Ching, to collect P22,227,794.05 exclusive of interests, penalties and other bank charges representing PBM's outstanding obligation
to the bank. Alfredo Ching, a stockholder of PBM, was impleaded as co-defendant for having signed as a surety for PBM's obligations to the
extent of ten million pesos (Pl0,000,000) under a Deed of Suretyship dated July 21, 1977.
In its en banc decision in SEC-EB No. 018 (Chung Ka Bio, et al. vs. Hon. Antonio R. Manabat, et al.), the SEC declared that it had assumed
jurisdiction over petitioner Alfredo Ching pursuant to Section 6, Rule 3 of the new Rules of Procedure of the SEC providing that "parties in
interest without whom no final determination can be had of an action shall be joined either as complainant, petitioner or respondent" to
prevent multiplicity of suits.
On July 9, 1982, the SEC issued an Order placing PBM's business, including its assets and liabilities, under rehabilitation receivership, and
ordered that "all actions for claims listed in Schedule A of the petition pending before any court or tribunal are hereby suspended in
whatever stage the same may be, until further orders from the Commission" (p. 22, Rollo). As directed by the SEC, said order was published
once a week for three consecutive weeks in the Bulletin Today, Philippine Daily Express and Times Journal at the expense of PBM and Alfredo
Ching.
PBM and Ching jointly filed a motion to dismiss Civil Case No. 1028-P in the RTC, Pasay City, invoking the pendency in the SEC of PBM's
application for suspension of payments (which Ching co-signed) and over which the SEC had already assumed jurisdiction.
Before the motion to dismiss could be resolved, the court dropped PBM from the complaint, on motion of the plaintiff bank, for the reason
that the SEC had already placed PBM under rehabilitation receivership.
On August 15, 1983, the trial court denied Ching's motion to dismiss the complaint against himself. The court pointed out that "P.D. 1758 is
only concerned with the activities of corporations, partnerships and associations. Never was it intended to regulate and/or control activities
of individuals" (p.11, Rollo). Ching's motion for reconsideration of that order was denied on May 24,1984. Respondent Judge argued that
under P ' D. 902-A, as amended, the SEC may not validly acquire jurisdiction over an individual, like Ching (p. 62, Rollo).
Ching filed a petition for certiorari and prohibition in the Court of Appeals (CA-G.R. SP No. 03593) to annul the orders of respondent Judge
and to prohibit him from further proceeding in the civil case.
The main issue raised in the petition was whether the court a quo could acquire jurisdiction over Ching in his personal and individual capacity
as a surety of PBM in the collection suit filed by the bank, despite the fact that PBM's obligation to the bank had been placed under
receivership by the SEC.
On April 29, 1987, the Court of Appeals granted the writs prayed for. It nullified the questioned orders of respondent Judge and prohibited
him from further proceeding in Civil Case No. 1028-P, except to enter an order dismissing the case. The pertinent ruling of the Court of
Appeals reads:

In sum, since the SEC had assumed jurisdiction over petitioner in SEC Case No. 2250 and reiterating the propriety of such
assumption in SEC-EB No. 018; and since under PD 902-A, as amended by PD 1758, ... upon appointment of a ...
rehabilitation receiver... pursuant to this Decree, all actions for claims against corporation ... under management or
receivership pending before any court, tribunal, board or body shall be suspended accordingly ... respondent judge clearly
acted without jurisdiction in taking cognizance of the civil case in the court a quo brought by respondent bank to enforce
the surety agreement against petitioner for the purpose of collecting payment of PBM's outstanding obligations.
Respondent bank should have questioned the SEC's assumption of jurisdiction over petitioner in an appellate forum and not
in the court a quo, a tribunal with which the SEC enjoys a co-equal and coordinate rank. (p. 27, Rollo.)
The Bank assails that decision in this petition for review alleging that the appellate court erred;
1. in holding that jurisdiction over respondent Alfredo Ching was assumed by the SEC because he was a co-signer or surety
of PBM and that the lower court may not assume jurisdiction over him so as to avoid multiplicity of suits; and
2. in holding that the jurisdiction assumed by the SEC over Ching was to the exclusion of courts or tribunals of coordinate
rank.
The petition for review is meritorious.
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume jurisdiction over his person and
properties. The Securities and Exchange Commission was empowered, as rehabilitation receiver, to take custody and control of the assets
and properties of PBM only, for the SEC has jurisdiction over corporations only not over private individuals, except stockholders in an intracorporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Ching's properties were not
included in the rehabilitation receivership that the SEC constituted to take custody of PBM's assets. Therefore, the petitioner bank was not
barred from filing a suit against Ching, as a surety for PBM. An anomalous situation would arise if individual sureties for debtor corporations
may escape liability by simply co- filing with the corporation a petition for suspension of payments in the SEC whose jurisdiction is limited
only to corporations and their corporate assets.
The term "parties-in-interest" in Section 6, Rule 3 of the SEC's New Rules of Procedure contemplates only private individuals sued or suing as
stockholders, directors, or officers of a corporation.
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article 1216 of the New Civil Code:
ART. 1216. The creditor may proceed against any of the solidary debtors or all of them simultaneously. The demand made
against one of them shall not be an obstacle to those which may subsequently be directed against the others, as long as the
debt has not been fully collected.
It is elementary that a corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or
stockholder of a corporation does not make one's property the property also of the corporation, for they are separate entities (Adelio Cruz
vs. Quiterio Dalisay, 152 SCRA 482).
Ching's act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction over his person or property, for
jurisdiction does not depend on the consent or acts of the parties but upon express provision of law (Tolentino vs. Social Security System, 138
SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408).
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals in CA-G.R. SP No. 03593 is set aside. Respondent Judge
of the Regional Trial Court in Pasay City is ordered to reinstate Civil Case No. 1028-P and to proceed therein against the private respondent
Alfredo Ching. Costs against the private respondent.
SO ORDERED.

G.R. No. 132403

September 28, 2007
HI-CEMENT CORPORATION, Petitioner,
vs.
INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI
BANK) Respondent.
x-----------------------x
G.R. No. 132419
E.T. HENRY & CO. and SPOUSES ENRIQUE TAN and LILIA TAN, Petitioners,
vs.
INSULAR BANK OF ASIA AND AMERICA (later PHILIPPINE COMMERCIAL INTERNATIONAL BANK and now, EQUITABLE-PCI
BANK), Respondent.
At bar are consolidated petitions assailing the decision of the Court of Appeals (CA) dated January 21, 1998 in CA-G.R. CV No. 31600
1
entitled Insular Bank of Asia and America [now Philippine Commercial International Bank/(PCIB)] v. E.T. Henry & Co., et al.
The antecedent facts follow.

Petitioners Enrique Tan and Lilia Tan (spouses Tan) were the controlling stockholders of E.T. Henry & Co., Inc. (E.T. Henry), a company
2
engaged in the business of processing and distributing bunker fuel. Among E.T. Henry's customers were petitioner Hi-Cement Corporation
3
(Hi-Cement), Riverside Mills Corporation (Riverside) and Kanebo Cosmetics Philippines, Inc. (Kanebo). For their purchases, these
corporations issued postdated checks to E.T. Henry.
Sometime in 1979, respondent Insular Bank of Asia and America (later PCIB and now Equitable PCI-Bank) granted E.T. Henry a credit facility
known as "Purchase of Short Term Receivables." Through this arrangement, E.T. Henry was able to encash, with pre-deducted interest, the
postdated checks of its clients. In other words, E.T. Henry and respondent were into "re-discounting" of checks.
For every transaction, respondent required E.T. Henry to execute a promissory note and a deed of assignment bearing the conformity of the
4
client to the re-discounting.
From 1979 to 1981, E.T. Henry was able to re-discount its clients' checks (with deeds of assignment) with respondent. However, in February
5
1981, 20 checks of Hi-Cement (which were crossed and which bore the restriction "deposit to payees account only") were dishonored. So
6
were the checks of Riverside and Kanebo.
7

Respondent filed a complaint for sum of money in the then Court of First Instance of Rizal against E.T. Henry, the spouses Tan, Hi-Cement
9
10
11
(including its general manager and its treasurer as signatories of the postdated crossed checks), Riverside and Kanebo.
In its complaint, respondent claimed that, due to the dishonor of the checks, it suffered actual damages equivalent to their value, exclusive of
accrued and accruing interests, charges and penalties such as attorneys fees and expenses of litigation, as follows:
1. Riverside Mills Corporation P 115,312.50
2. Kanebo Cosmetics Philippines, Inc. 5,811,750.00
3. Hi-Cement Corporation 10,000,000.00
Respondent also sought to collect from E.T. Henry and the spouses Tan other loan obligations (amounting toP1,661,266.51 and P4,900,805,
12
respectively) as deficiencies resulting from the foreclosure of the real estate mortgage on E.T. Henry's property in Sucat, Paraaque.
Hi-Cement filed its answer alleging, among others, that: (1) its general manager and treasurer were not authorized to issue the postdated
crossed checks in E.T. Henry's favor; (2) the deed of assignment purportedly executed by Hi-Cement assigning them to respondent only bore
the conformity of its treasurer and (3) respondent was not a holder in due course as it should not have discounted them for being "crossed
13
checks."
14

In their answer (with counterclaim against respondent and cross-claims against Hi-Cement, Riverside and Kanebo), E.T. Henry and the
spouses Tan claimed that: (1) the drawers of the postdated checks failed to honor them due to the adverse economic conditions prevailing at
the time respondent presented them for payment; (2) the extra-judicial sale of the mortgaged Sucat property was void due to gross
15
inadequacy of the bid price and (3) their loans were subjected to a usurious interest rate of 21% p.a.
For their part, Riverside and Kanebo sought the dismissal of the case against them, arguing that they were not privy to the re-discounting
arrangement between respondent and E.T. Henry.
On June 30, 1989, the trial court rendered a decision which read:
WHEREFORE, in view of the foregoing, and as a consequence of the preponderance of evidence, this Court hereby renders judgment in favor
of [respondent] and against [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], to wit:
1. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo], jointly and severally, to pay [respondent] damages
represented by the face value of the postdated checks as follows:
(a) Riverside Mills Corporation P 115,312.50
(b) Kanebo Cosmetics Philippines, Inc. 5,811,750.00
(c) Hi-Cement Corporation 10,000,000.00
plus interests, services, charges and penalties until fully paid;
2. Ordering [E.T. Henry] and/or [spouses Tan] to pay to [respondent] the sum of P4,900,805.00 plus accrued interests, charges,
penalties until fully paid;
3. Ordering [E.T. Henry and spouses Tan] to pay [respondent] the sum of P1,661,266.51 plus interests, charges, and penalties until
fully paid;
4. Ordering [E.T. Henry, spouses Tan, Hi-Cement, Riverside and Kanebo] to pay [respondent] [a]ttorneys fees and expenses of
16
litigation in the amount of P200,000.00 and pay the cost of this suit.

SO ORDERED.

17

Only petitioners appealed the decision to the CA which affirmed it in toto. Hence, these petitions.
In G.R. No. 132403, petitioner Hi-Cement disclaims liability for the postdated crossed checks because (1) it did not authorize their issuance;
(2) respondent was not a holder in due course and (3) there was no basis for the lower courts holding that it was solidarily liable for the face
18
value of Riversides and Kanebos checks.
In G.R. No. 132419, on the other hand, E.T. Henry and the spouses Tan essentially contend that the lower courts erred in: (1) applying the
doctrine of piercing the veil of the corporate entity to make the spouses Tan solidarily liable with E.T. Henry; (2) not ruling on their cross19
claims and counterclaims, and (3) not declaring the foreclosure of E.T. Henry's Sucat property as void.
(A) G.R. 132403
20

As a rule, an appeal by certiorari under Rule 45 of the Rules of Court is limited to review of errors of law. The factual findings of the trial
court, specially when affirmed by the appellate court, are generally binding on us unless there was a misapprehension of facts or when the
21
inference drawn from the facts was manifestly mistaken. This case falls within the exception.
Authority of Hi-Cements General Manager and Treasurer to Issue the Postdated Crossed Checks
Both the trial court and the CA concluded that Hi-Cement authorized its general manager and treasurer to issue the subject postdated
crossed checks. They both held that Hi-Cement was already estopped from denying such authority since it never objected to the signatories'
issuance of all previous checks to E.T. Henry which the latter, in turn, was able to re-discount with respondent.
We agree with the lower courts that both the general manager and treasurer of Hi-Cement were authorized to issue the subjects checks.
However, notwithstanding such fact, respondent could not be considered a holder in due course.
Respondent Bank Not a Holder In Due Course
22

The Negotiable Instruments Law (NIL), specifically Section 191, provides:

"Holder" means the payee or indorsee of a bill or a note, or the person who is in possession of it, or the bearer thereof.
23

On the other hand, Section 52 states:

A holder in due course is a holder who has taken the instrument under the following conditions: (a) it is complete and regular on its face; (b)
he became the holder of it before it was overdue, and without notice that it has previously been dishonored, if such was the fact; (c) he took
it in good faith and for value and (d) at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the
title of the person negotiating it.
Absent any of the elements set forth in Section 52, the holder is not a holder in due course. In the case at bar, the last two requirements were
not met.
24

In Bataan Cigar and Cigarette Factory, Inc. (BCCF) v. CA, we held that the holder of crossed checks was not a holder in due course. There,
the drawer (BCCF) issued postdated crossed checks in favor of one of its suppliers (George King) who promised to deliver bales of tobacco
leaf but failed. George King, however, sold the checks on discount to State Investment House, Inc. (SIHI) and upon the latters presentment to
the drawee bank, BCCF ordered a "stop payment." Thereafter, SIHI filed a collection case against it. In ruling that SIHI was not a holder in due
course, we explained:
In order to preserve the credit worthiness of checks, jurisprudence has pronounced that crossing of a check should have the following effects:
(a) the check may not be encashed but only deposited in the bank; (b) the check may be negotiated only once to one who has an account
with a bank [and]; (c) the act of crossing the checks serves as warning to the holder that the check has been issued for a definite purpose so
that he must inquire if he has received the check pursuant to that purpose, otherwise, he is not a holder in due course.
25

26

Likewise, in Atrium Management Corporation v. CA, where E.T. Henry, Hi-Cement and its treasurer again engaged in a legal scuffle over
four postdated crossed checks, we held that Atrium (with which the checks were re-discounted) was not a holder in due course. In that case,
E.T. Henry was the payee of four Hi-Cement postdated checks which it endorsed to Atrium. When the latter presented the crossed checks to
27
the drawee bank, Hi-Cement stopped payment. We held that Atrium was not a holder in due course:
In the instant case, the checks were crossed and specifically indorsed for deposit to payees account only. From the beginning, Atrium was
aware of the fact that the checks were all for deposit only to payees account, meaning E.T. Henry. Clearly, then, Atrium could not be
considered a holder in due course.
In the case at bar, respondent's claim that it acted in good faith when it accepted and discounted Hi-Cements postdated crossed checks from
E.T. Henry (as payee therein) fails to convince us. Good faith becomes inconsequential amidst proof of respondent's grossly negligent
conduct in dealing with the subject checks.
Respondent was all too aware that subject checks were crossed and bore restrictions that they were for deposit to payee's account only;
hence, they could not be further negotiated to it. The records likewise reveal that respondent completely disregarded a telling sign of

irregularity in the re-discounting of the checks when the general manager did not acquiesce to it as only the treasurer's signature appeared
28
on the deed of assignment. As a banking institution, it behooved respondent to act with extraordinary diligence in every transaction. Its
business is impressed with public interest, thus, it was not expected to be careless and negligent, specially so where the checks it dealt with
29
were crossed. In Bataan Cigar and Cigarette Factory, Inc., we ruled:
It is then settled that crossing of checks should put the holder on inquiry and upon him devolves the duty to ascertain the indorsers title
to the check or the nature of his possession. Failing in this respect, the holder is declared guilty of gross negligence amounting to legal
absence of good faithand as such*,+ the consensus of authority is to the effect that the holder of the check is not a holder in due course.
(emphasis supplied)
The next query is whether Hi-Cement can still be made liable for the checks. We answer in the negative.
30

In State Investment House, Inc. (SIHI) v. Intermediate Appellate Court, SIHI re-discounted crossed checks and was declared not a holder in
due course. As a result, when it presented the checks for deposit, we deemed that its presentment to the drawee bank was not proper,
hence, the liability did not attach to the drawer of the checks. We ruled that:
The three subject checks in the case at bar had been crossedwhich could only mean that the drawer had intended the same for deposit only
by the rightful person, i.e., the payee named therein. Apparently, it was not the payee who presented the same for payment and therefore,
there was no proper presentment, and the liability did not attach to the drawer. Thus, in the absence of due presentment, the drawer did not
31
become liable.
32

Our resolution in the foregoing case was reiterated in Atrium Management Corporation v. CA, where we affirmed the CA ruling that the
drawer of the postdated crossed checks was not liable to the holder who was deemed not a holder in due course.
We note, however, that in the two aforementioned cases, we made it clear that the NIL does not absolutely bar a holder who is not a holder
in due course from recovering on the checks. In both, we ruled that it may recover from the party who indorsed/encashed the checks "if the
latter has no valid excuse for refusing payment." Here, there was no doubt that it was E.T. Henry that re-discounted Hi-Cement's checks and
received their value from respondent. Since E.T. Henry had no justification to refuse payment, it should pay respondent.
Solidary Liability of Hi-Cement for The Face Value of Riverside's and Kanebo's Checks
Hi-Cement could not also be made solidarily liable with Riverside and Kanebo for the face value of their checks. Hi-Cement had nothing to do
with the checks of these two corporations. However, although the language of the trial court decision's dispositive portion seemed confusing,
a reading of the decision in its entirety reveals that thefallo was for each corporation to be liable solidarily with E.T. Henry and/or the spouses
Tan for the respective values of their checks.
Furthermore, solidary liability cannot be presumed but must be established by law or contract. Neither is present here. Articles 1207 and
1208 of the Civil Code provide:
Art. 1207. The concurrence of two or more debtors in one and the same obligation does not imply that each one of the former has a right to
demand, or that each one of the latter is bound to render, entire compliance with the presentation. There is solidary liability only when the
obligation expressly so states, or when the obligation requires solidarity. (emphasis supplied)
Art. 1208. If from the law, or the nature of the wording of the obligations to which the preceding article refers to the contrary does not
appear, the credit or debt shall be presumed to be divided into as many equal shares as there are creditors or debtors, the credits or debts
being considered distinct from one another, subject to the Rules governing the multiplicity of suits.
At any rate, the issue has become moot in view of our ruling that Hi-Cement is not liable for the checks.
(B) G.R. No. 132419
Doctrine of Piercing the
Veil of Corporate Entity
In their petition, E.T. Henry and the spouses Tan argue that the lower courts erred in applying the "piercing the veil of corporate entity"
doctrine to their case. They claim that both the trial and appellate courts failed to cite the reasons why the doctrine was relevant to them.
We agree with petitioners E.T. Henry and the spouses Tan in this respect.
If any general rule can be laid down, it is that the corporation will be looked upon as a legal entity until sufficient reasons to the contrary
33
appear. It is only when the fiction or notion of legal entity is used to defeat public convenience, justify wrong, perpetuate fraud or defend
34
crime that the law will shred the corporate legal veil and regard it as a mere association of persons. This is referred to as the doctrine of
piercing the veil of corporate entity.
After a careful study of the records, we hold that E.T. Henry's corporate veil should not have been pierced at all.
First, the trial court failed to provide a clear ground why the doctrine was used. It merely stated that it agreed with respondents arguments
but did not explain why the doctrine was relevant to petitioner E.T. Henry's and the spouses Tans case. On the other hand, the CA held:

It appears that spouses Tan are controlling stockholders of E.T. Henry & Co., Inc. as well as its authorized signatories. The business of the
corporation was conducted solely for the benefit of the spouses Tan who colluded with [Hi-Cement] in defrauding [respondent]. As the lower
court cited*I+t is a settled law in this and other jurisdictions that when the corporation is a mere alter ego of a person, same being true
35
when the corporation is controlled, and its affairs are so conducted to make it merely an instrumentality, agency or conduit of another.
Similarly, the CA left a gaping hole by failing to provide the basis for its ruling that E.T. Henry and the spouses Tan defrauded respondent. It
36
did not also state what act constituted the fraud. Fraud is an allegation of fact that demands clear and convincing evidence. It is never
37
presumed.
Second, the 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
38
itself sufficient ground for disregarding the separate corporate personality. For this ground to stand in this case, there must be proof that
the spouses Tan: (1) had control or complete domination of E.T. Henrys finances and that the latter had no separate existence with respect
to the act complained of; (2) used such control to commit fraud or wrong and (3) the control was the proximate cause of the loss or injury
39
complained of by respondent. The records of this case do not show that these elements were present.
Inadequacy of the Bid Price to Annul Foreclosure Proceeding
With respect to the allegation that foreclosure was void due to the inadequacy of the bid price, we agree with the CA that the "mere
inadequacy of the price obtained at the *s+heriffs sale, unless shocking to the conscience, (was) not sufficient to set aside the sale if there
40
(was) no showing that, in the event of a regular sale, a better price (could) be obtained." 1wphi1
Furthermore, in the absence of any irregularity in the foreclosure proceeding or proof that it was carried out without strict observance of the
procedure, we will continue to assume its regularity and strike down any attempt to vitiate it. In this case, E.T. Henry and the spouses Tan
made no mention of any anomaly to support the nullification of the foreclosure sale but merely alleged a disparity in the bid price and the
propertys fair market value.
Counterclaims and Cross-claims
Lastly, E.T. Henry and the spouses Tan call this Court's attention to the alleged failure of the lower court to pass upon their counterclaim
against respondent or cross-claims against Hi-Cement, Riverside and Kanebo. They ask us now to hold these parties liable on the basis of said
claims. We decline to do so.
First, E.T. Henry and the spouses Tan failed to implead Hi-Cement, Riverside and Kanebo as parties in the case at bar. Under Rule 3 of the
Rules of Court, every action, including a counterclaim (or a cross-claim), must be prosecuted or defended in the name of the real party in
41
interest. The term "defendant" may refer to the original defending party, the defendant in a counterclaim, the cross-defendant or the third
42
(fourth, etc.) party defendant. Hence, for this technical lapse, we are constrained not to pass on E.T. Henry's and the spouses Tan's crossclaims.
Second, E.T. Henry and the spouses Tan filed the counterclaim against respondent on the basis of an alleged void foreclosure proceeding on
E.T. Henry's Sucat property due to an inadequate bid price. It is no longer necessary to delve into this matter in view of our finding that the
mere inadequacy of the bid price on the property did not automatically render the foreclosure sale irregular or void.
Incidentally, the petition in G.R. No. 132419 posed no contest on the lower courts ruling on E.T. Henrys and the spouses Tans solidary
43
liability with Riverside and Kanebo vis-a-vis their checks. To be consistent, however, with our dictum on the separate personality of E.T.
Henry and the spouses Tan, the solidarity liability arising from the checks of Riverside and Kanebo shall only be enforced against E.T. Henry.
WHEREFORE, the assailed decision of the Court of Appeals in CA-G.R. CV No. 31600 is hereby AFFIRMED withMODIFICATION. Accordingly,
petitioner Hi-Cement Corporation is discharged from any liability. Only petitioner E.T. Henry & Co. is ORDERED to pay respondent Insular
Bank of Asia and America (later Philippine Commercial International Bank and now Equitable PCI-Bank) the following:
1. P10,000,000 representing the value of Hi-Cement's checks it received from respondent plus accrued interests, charges and
penalties until fully paid, and
2. the loans for P1,661,266.51 and P4,900,805 plus accrued interests, charges and penalties until fully paid.
Let the records of this case be remanded to the trial court for the proper computation of E.T. Henry's, Riverside's and Kanebo's liabilities for
the checks, attorney's fees and costs of litigation.

G.R. No. 170689

March 17, 2009

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

G.R. No. 170705

March 17, 2009

PHILIPPINE NATIONAL BANK, Petitioner,

vs.
PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO), PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND
PANTRANCO ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL., PHILIPPINE NATIONAL BANK-MANAGEMENT DEVELOPMENT
CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY HOLDINGS, INC., Respondents.
1

Before us are two consolidated petitions assailing the Court of Appeals (CA) Decision dated June 3, 2005 and its Resolution dated December
7, 2005 in CA-G.R. SP No. 80599.
In G.R. No. 170689, the Pantranco Employees Association (PEA) and Pantranco Retrenched Employees Association (PANREA) pray that the CA
decision be set aside and a new one be entered, declaring the Philippine National Bank (PNB) and PNB Management and Development
Corporation (PNB-Madecor) jointly and solidarily liable for the P722,727,150.22 National Labor Relations Commission (NLRC) judgment in
3
favor of the Pantranco North Express, Inc. (PNEI) employees; while in G.R. No. 170705, PNB prays that the auction sale of the Pantranco
4
properties be declared null and void.
5

The facts of the case, as found by the CA, and established in Republic of the Phils. v. NLRC, Pantranco North Express, Inc. v. NLRC, and PNB
8
MADECOR v. Uy, follow:
The Gonzales family owned two corporations, namely, the PNEI and Macris Realty Corporation (Macris). PNEI provided transportation
services to the public, and had its bus terminal at the corner of Quezon and Roosevelt Avenues in Quezon City. The terminal stood on four
9
valuable pieces of real estate (known as Pantranco properties) registered under the name of Macris. The Gonzales family later incurred huge
financial losses despite attempts of rehabilitation and loan infusion. In March 1975, their creditors took over the management of PNEI and
Macris. By 1978, full ownership was transferred to one of their creditors, the National Investment Development Corporation (NIDC), a
subsidiary of the PNB.
Macris was later renamed as the National Realty Development Corporation (Naredeco) and eventually merged with the National
Warehousing Corporation (Nawaco) to form the new PNB subsidiary, the PNB-Madecor.
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a company owned by Gregorio Araneta III. In 1986, PNEI was among the
several companies placed under sequestration by the Presidential Commission on Good Government (PCGG) shortly after the historic events
in EDSA. In January 1988, PCGG lifted the sequestration order to pave the way for the sale of PNEI back to the private sector through the
Asset Privatization Trust (APT). APT thus took over the management of PNEI.
In 1992, PNEI applied with the Securities and Exchange Commission (SEC) for suspension of payments. A management committee was
thereafter created which recommended to the SEC the sale of the company through privatization. As a cost-saving measure, the committee
likewise suggested the retrenchment of several PNEI employees. Eventually, PNEI ceased its operation. Along with the cessation of business
came the various labor claims commenced by the former employees of PNEI where the latter obtained favorable decisions.
10

On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of Execution commanding the NLRC Sheriffs to levy on the assets of PNEI in
order to satisfy the P722,727,150.22 due its former employees, as full and final satisfaction of the judgment awards in the labor cases. The
11
sheriffs were likewise instructed to proceed against PNB, PNB-Madecor and Mega Prime. In implementing the writ, the sheriffs levied upon
the four valuable pieces of real estate located at the corner of Quezon and Roosevelt Avenues, on which the former Pantranco Bus Terminal
stood. These properties were covered by Transfer Certificate of Title (TCT) Nos. 87881-87884, registered under the name of PNB12
Madecor. Subsequently, Notice of Sale of the foregoing real properties was published in the newspaper and the sale was set on July 31,
2002. Having been notified of the auction sale, motions to quash the writ were separately filed by PNB-Madecor and Mega Prime, and PNB.
13
They likewise filed their Third-Party Claims. PNB-Madecor anchored its motion on its right as the registered owner of the Pantranco
properties, and Mega Prime as the successor-in-interest. For its part, PNB sought the nullification of the writ on the ground that it was not a
14
party to the labor case. In its Third-Party Claim, PNB alleged that PNB-Madecor was indebted to the former and that the Pantranco
properties
would answer for such debt. As such, the scheduled auction sale of the aforesaid properties was not legally in order.

15

On September 10, 2002, the Labor Arbiter declared that the subject Pantranco properties were owned by PNB-Madecor. It being a
corporation with a distinct and separate personality, its assets could not answer for the liabilities of PNEI. Considering, however, that PNBMadecor executed a promissory note in favor of PNEI forP7,884,000.00, the writ of execution to the extent of the said amount was
16
concerned was considered valid.
PNBs third-party claim to nullify the writ on the ground that it has an interest in the Pantranco properties being a creditor of PNB-Madecor,
17
on the other hand, was denied because it only had an inchoate interest in the properties.
The dispositive portion of the Labor Arbiters September 10, 2002 Resolution is quoted hereunder:
WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega Prime Holdings, Inc. is hereby GRANTED and concomitantly the levies made
by the sheriffs of the NLRC on the properties of PNB Madecor should be as it (sic) is hereby LIFTED subject to the payment by PNB Madecor to
the complainants the amount of P7,884,000.00.
The Motion to Quash and Third Party Claim of PNB is hereby DENIED.

The Motion to Quash of PNB Madecor and Mega Prime Holdings, Inc. is hereby PARTIALLY GRANTED insofar as the amount of the writ
exceeds P7,884,000.00.
The Motion for Recomputation and Examination of Judgment Awards is hereby DENIED for want of merit.
The Motion to Expunge from the Records claimants/complainants Opposition dated August 3, 2002 is hereby DENIED for lack of merit.
SO ORDERED.

18

19

On appeal to the NLRC, the same was denied and the Labor Arbiters disposition was affirmed. Specifically, the NLRC concluded as follows:
(1) PNB-Madecor and Mega Prime contended that it would be impossible for them to comply with the requirement of the labor
arbiter to pay to the PNEI employees the amount of P7.8 million as a condition to the lifting of the levy on the properties, since the
credit was already garnished by Gerardo Uy and other creditors of PNEI. The NLRC found no evidence that Uy had satisfied his
judgment from the promissory note, and opined that even if the credit was in custodia legis, the claim of the PNEI employees should
enjoy preference under the Labor Code.
(2) The PNEI employees contested the finding that PNB-Madecor was indebted to the PNEI for only P7.8 million without considering
the accrual of interest. But the NLRC said that there was no evidence that demand was made as a basis for reckoning interest.
(3) The PNEI employees further argued that the labor arbiter may not properly conclude from a decision of Judge Demetrio
Macapagal Jr. of the RTC of Quezon City that PNB-Madecor was the owner of the properties as his decision was reconsidered by the
next presiding judge, nor from a decision of the Supreme Court that PNEI was a mere lessee of the properties, the fact being that the
transfer of the properties to PNB-Madecor was done to avoid satisfaction of the claims of the employees with the NLRC and that as a
result of a civil case filed by Mega Prime, the subsequent sale of the properties by PNB to Mega Prime was rescinded. The NLRC
pointed out that while the Macapagal decision was set aside by Judge Bruselas and hence, his findings could not be invoked by the
labor arbiter, the titles of PNB-Madecor are conclusive and there is no evidence that PNEI had ever been an owner. The Supreme
Court had observed in its decision that PNEI owed back rentals of P8.7 million to PNB-Madecor.
(4) The PNEI employees faulted the labor arbiter for not finding that PNEI, PNB, PNB-Madecor and Mega Prime were all jointly and
severally liable for their claims. The NLRC underscored the fact that PNEI and Macris were subsidiaries of NIDC and had passed
through and were under the Asset Privatization Trust (APT) when the labor claims accrued. The labor arbiter was correct in not
granting PNBs third-party claim because at the time the causes of action accrued, the PNEI was managed by a management
committee appointed by the PNB as the new owner of PNRI (sic) and Macris through a deed of assignment or transfer of ownership.
20
The NLRC says at length that the same is not true with PNB-Madecor which is now the registered owner of the properties.
21

The parties separate motions for reconsideration were likewise denied. Thereafter, the matter was elevated to the CA by PANREA, PEAPTGWO and the Pantranco Association of Concerned Employees. The latter group, however, later withdrew its petition. The former
employees petition was docketed as CA-G.R. SP No. 80599.
PNB-Madecor and Mega Prime likewise filed their separate petition before the CA which was docketed as CA-G.R. SP No. 80737, but the
22
same was dismissed.
In view of the P7,884,000.00 debt of PNB-Madecor to PNEI, on June 23, 2004, an auction sale was conducted over the Pantranco properties
23
to satisfy the claim of the PNEI employees, wherein CPAR Realty was adjudged as the highest bidder.
On June 3, 2005, the CA rendered the assailed decision affirming the NLRC resolutions.
The appellate court pointed out that PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from PNEI.
As such, there being no cogent reason to pierce the veil of corporate fiction, the separate personalities of the above corporations should be
maintained. The CA added that the Pantranco properties were never owned by PNEI; rather, their titles were registered under the name of
PNB-Madecor. If PNB and PNB-Madecor could not answer for the liabilities of PNEI, with more reason should Mega Prime not be held liable
being a mere successor-in-interest of PNB-Madecor.
24

25

Unsatisfied, PEA-PTGWO and PANREA filed their motion for reconsideration; while PNB filed its Partial Motion for Reconsideration. PNB
pointed out that PNB-Madecor was made to answer for P7,884,000.00 to the PNEI employees by virtue of the promissory note it (PNBMadecor) earlier executed in favor of PNEI. PNB, however, questioned the June 23, 2004 auction sale as the P7.8 million debt had already
26
been satisfied pursuant to this Courts decision in PNB MADECOR v. Uy.
Both motions were denied by the appellate court.

27

In two separate petitions, PNB and the former PNEI employees come up to this Court assailing the CA decision and resolution. The former
PNEI employees raise the lone error, thus:
The Honorable Court of Appeals palpably departed from the established rules and jurisprudence in ruling that private respondents Pantranco
North Express, Inc. (PNEI), Philippine National Bank (PNB), Philippine National Bank Management and Development Corporation (PNBMADECOR), Mega Prime Realty and Holdings, Inc. (Mega Prime) are not jointly and severally answerable to the P722,727,150.22 Million NLRC
28
money judgment awards in favor of the 4,000 individual members of the Petitioners.

They claim that PNB, through PNB-Madecor, directly benefited from the operation of PNEI and had complete control over the funds of PNEI.
29
Hence, they are solidarily answerable with PNEI for the unpaid money claims of the employees. Citing A.C. Ransom Labor Union-CCLU v.
30
NLRC, the employees insist that where the employer corporation ceases to exist and is no longer able to satisfy the judgment awards in
31
favor of its employees, the owner of the employer corporation should be made jointly and severally liable. They added that malice or bad
faith need not be proven to make the owners liable.
On the other hand, PNB anchors its petition on this sole assignment of error, viz.:
THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO. 87884 INTENDED TO PARTIALLY SATISFY THE CLAIMS OF FORMER WORKERS OF
PNEI IN THE AMOUNT OFP7,884,000.00 (THE AMOUNT OF PNB-MADECORS PROMISSORY NOTE IN FAVOR OF PNEI) IS NOT IN ORDER AS THE
SAID PROPERTY IS NOT OWNED BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY BEEN GARNISHED IN FAVOR OF GERARDO C.
UY WHICH LED TO THREE (3) PROPERTIES UNDER THE NAME OF PNB-MADECOR, NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED
AND SOLD ON EXECUTION IN THE "PNB-MADECOR VS. UY" CASE (363 SCRA 128 [2001]) AND "GERARDO C. UY VS. PNEI" (CIVIL CASE NO. 9532
72685, RTC MANILA, BRANCH 38).
PNB insists that the Pantranco properties could no longer be levied upon because the promissory note for which the Labor Arbiter held PNBMadecor liable to PNEI, and in turn to the latters former employees, had already been satisfied in favor of Gerardo C. Uy. It added that the
properties were in fact awarded to the highest bidder. Besides, says PNB, the subject properties were not owned by PNEI, hence, the
33
execution sale thereof was not validly effected.
Both petitions must fail.
G.R. No. 170689
Stripped of the non-essentials, the sole issue for resolution raised by the former PNEI employees is whether they can attach the properties
(specifically the Pantranco properties) of PNB, PNB-Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI.
We answer in the negative.
First, the subject property is not owned by the judgment debtor, that is, PNEI. Nowhere in the records was it shown that PNEI owned the
Pantranco properties. Petitioners, in fact, never alleged in any of their pleadings the fact of such ownership. What was established, instead, in
34
35
PNB MADECOR v. Uy and PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB was
that the properties were owned by Macris, the predecessor of PNB-Madecor. Hence, they cannot be pursued against by the creditors of PNEI.
We would like to stress the settled rule that the power of the court in executing judgments extends only to properties unquestionably
36
37
belonging to the judgment debtor alone. To be sure, one mans goods shall not be sold for another mans debts. A sheriff is not authorized
to attach or levy on property not belonging to the judgment debtor, and even incurs liability if he wrongfully levies upon the property of a
38
third person.
Second, PNB, PNB-Madecor and Mega Prime are corporations with personalities separate and distinct from that of PNEI. PNB is sought to be
held liable because it acquired PNEI through NIDC at the time when PNEI was suffering financial reverses. PNB-Madecor is being made to
answer for petitioners labor claims as the owner of the subject Pantranco properties and as a subsidiary of PNB. Mega Prime is also included
for having acquired PNBs shares over PNB-Madecor.
The general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it
39
40
may be connected. This is a fiction created by law for convenience and to prevent injustice. Obviously, PNB, PNB-Madecor, Mega Prime,
and PNEI are corporations with their own personalities. The "separate personalities" of the first three corporations had been recognized by
41
this Court in PNB v. Mega Prime Realty and Holdings Corporation/Mega Prime Realty and Holdings Corporation v. PNB where we stated that
PNB was only a stockholder of PNB-Madecor which later sold its shares to Mega Prime; and that PNB-Madecor was the owner of the
Pantranco properties. Moreover, these corporations are registered as separate entities and, absent any valid reason, we maintain their
separate identities and we cannot treat them as one.
Neither can we merge the personality of PNEI with PNB simply because the latter acquired the former. Settled is the rule that where one
corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts
42
and liabilities of the transferor.
Lastly, while we recognize that there are peculiar circumstances or valid grounds that may exist to warrant the piercing of the corporate
43
veil, none applies in the present case whether between PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of "piercing the veil of corporate fiction," the court looks at the corporation as a mere collection of individuals or an
aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the corporation unifying the
44
group. Another formulation of this doctrine is that when two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third parties, disregard the legal fiction that two corporations are
45
distinct entities and treat them as identical or as one and the same.
Whether the separate personality of the corporation should be pierced hinges on obtaining facts appropriately pleaded or proved. However,
any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
46
misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.

As between PNB and PNEI, petitioners want us to disregard their separate personalities, and insist that because the company, PNEI, has
already ceased operations and there is no other way by which the judgment in favor of the employees can be satisfied, corporate officers can
be held jointly and severally liable with the company. Petitioners rely on the pronouncement of this Court in A.C. Ransom Labor Union-CCLU
47
48
v. NLRC and subsequent cases.
This reliance fails to persuade. We find the aforesaid decisions inapplicable to the instant case.
For one, in the said cases, the persons made liable after the companys cessation of operations were the officers and agents of the
corporation. The rationale is that, since the corporation is an artificial person, it must have an officer who can be presumed to be the
49
employer, being the person acting in the interest of the employer. The corporation, only in the technical sense, is the employer. In the
instant case, what is being made liable is another corporation (PNB) which acquired the debtor corporation (PNEI).
50

51

Moreover, in the recent cases Carag v. National Labor Relations Commission and McLeod v. National Labor Relations Commission, the
Court explained the doctrine laid down in AC Ransom relative to the personal liability of the officers and agents of the employer for the debts
of the latter. In AC Ransom, the Court imputed liability to the officers of the corporation on the strength of the definition of an employer in
Article 212(c) (now Article 212[e]) of the Labor Code. Under the said provision, employer includes any person acting in the interest of an
employer, directly or indirectly, but does not include any labor organization or any of its officers or agents except when acting as employer. It
was clarified in Carag and McLeod that Article 212(e) of the Labor Code, by itself, does not make a corporate officer personally liable for the
debts of the corporation. It added that the governing law on personal liability of directors or officers for debts of the corporation is still
52
Section 31 of the Corporation Code.
More importantly, as aptly observed by this Court in AC Ransom, it appears that Ransom, foreseeing the possibility or probability of payment
of backwages to its employees, organized Rosario to replace Ransom, with the latter to be eventually phased out if the strikers win their case.
The execution could not be implemented against Ransom because of the disposition posthaste of its leviable assets evidently in order to
53
evade its just and due obligations. Hence, the Court sustained the piercing of the corporate veil and made the officers of Ransom personally
liable for the debts of the latter.
Clearly, what can be inferred from the earlier cases is that the doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of an existing obligation; 2) fraud
cases or when the corporate entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its
54
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. In the absence of
malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for
55
corporate liabilities.
Applying the foregoing doctrine to the instant case, we quote with approval the CA disposition in this wise:
It would not be enough, then, for the petitioners in this case, the PNEI employees, to rest on their laurels with evidence that PNB was the
owner of PNEI. Apart from proving ownership, it is necessary to show facts that will justify us to pierce the veil of corporate fiction and hold
PNB liable for the debts of PNEI. The burden undoubtedly falls on the petitioners to prove their affirmative allegations. In line with the basic
jurisprudential principles we have explored, they must show that PNB was using PNEI as a mere adjunct or instrumentality or has exploited or
misused the corporate privilege of PNEI.
We do not see how the burden has been met. Lacking proof of a nexus apart from mere ownership, the petitioners have not provided us with
56
the legal basis to reach the assets of corporations separate and distinct from PNEI.
Assuming, for the sake of argument, that PNB may be held liable for the debts of PNEI, petitioners still cannot proceed against the Pantranco
properties, the same being owned by PNB-Madecor, notwithstanding the fact that PNB-Madecor was a subsidiary of PNB. The general rule
remains that PNB-Madecor has a personality separate and distinct from PNB. The mere fact that a corporation owns all of the stocks of
another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a
subsidiarys separate existence shall be respected, and the liability of the parent corporation as well as the subsidiary will be confined to
57
those arising in their respective businesses.
58

In PNB v. Ritratto Group, Inc., we outlined the circumstances which are useful in the determination of whether a subsidiary is but a mere
instrumentality of the parent-corporation, to wit:
1. The parent corporation owns all or most of the capital stock of the subsidiary;
2. The parent and subsidiary corporations have common directors or officers;
3. The parent corporation finances the subsidiary;
4. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation;
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses or losses of the subsidiary;
7. The subsidiary has substantially no business except with the parent corporation or no assets except those conveyed to or by the
parent corporation;

8. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division
of the parent corporation, or its business or financial responsibility is referred to as the parent corporations own;
9. The parent corporation uses the property of the subsidiary as its own;
10. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary, but take their orders from
the parent corporation;
11. The formal legal requirements of the subsidiary are not observed.
None of the foregoing circumstances is present in the instant case. Thus, piercing of PNB-Madecors corporate veil is not warranted. Being a
mere successor-in-interest of PNB-Madecor, with more reason should no liability attach to Mega Prime.
G.R. No. 170705
In its petition before this Court, PNB seeks the annulment of the June 23, 2004 execution sale of the Pantranco properties on the ground that
the judgment debtor (PNEI) never owned said lots. It likewise contends that the levy and the eventual sale on execution of the subject
properties was null and void as the promissory note on which PNB-Madecor was made liable had already been satisfied.
It has been repeatedly stated that the Pantranco properties which were the subject of execution sale were owned by Macris and later, the
PNB-Madecor. They were never owned by PNEI or PNB. Following our earlier discussion on the separate personalities of the different
corporations involved in the instant case, the only entity which has the right and interest to question the execution sale and the eventual
right to annul the same, if any, is PNB-Madecor or its successor-in-interest. Settled is the rule that proceedings in court must be instituted by
the real party in interest.
A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the
59
suit. "Interest" within the meaning of the rule means material interest, an interest in issue and to be affected by the decree, as
60
distinguished from mere interest in the question involved, or a mere incidental interest. The interest of the party must also be personal and
61
not one based on a desire to vindicate the constitutional right of some third and unrelated party. Real interest, on the other hand, means a
62
present substantial interest, as distinguished from a mere expectancy or a future, contingent, subordinate, or consequential interest.
Specifically, in proceedings to set aside an execution sale, the real party in interest is the person who has an interest either in the property
63
sold or the proceeds thereof. Conversely, one who is not interested or is not injured by the execution sale cannot question its validity.
In justifying its claim against the Pantranco properties, PNB alleges that Mega Prime, the buyer of its entire stockholdings in PNB-Madecor
was indebted to it (PNB). Considering that said indebtedness remains unpaid, PNB insists that it has an interest over PNB-Madecor and Mega
Primes assets.
Again, the contention is bereft of merit. While PNB has an apparent interest in Mega Primes assets being the creditor of the latter for a
substantial amount, its interest remains inchoate and has not yet ripened into a present substantial interest, which would give it the standing
to maintain an action involving the subject properties. As aptly observed by the Labor Arbiter, PNB only has an inchoate right to the
properties of Mega Prime in case the latter would not be able to pay its indebtedness. This is especially true in the instant case, as the debt
64
being claimed by PNB is secured by the accessory contract of pledge of the entire stockholdings of Mega Prime to PNB-Madecor.
The Court further notes that the Pantranco properties (or a portion thereof ) were sold on execution to satisfy the unpaid obligation of PNBMadecor to PNEI. PNB-Madecor was thus made liable to the former PNEI employees as the judgment debtor of PNEI. It has long been
established in PNB-Madecor v. Uy and other similar cases that PNB-Madecor had an unpaid obligation to PNEI amounting to more or less P7
million which could be validly pursued by the creditors of the latter. Again, this strengthens the proper parties right to question the validity
of the execution sale, definitely not PNB.
Besides, the issue of whether PNB has a substantial interest over the Pantranco properties has already been laid to rest by the Labor
65
Arbiter. It is noteworthy that in its Resolution dated September 10, 2002, the Labor Arbiter denied PNBs Third-Party Claim primarily
66
because PNB only has an inchoate right over the Pantranco properties. Such conclusion was later affirmed by the NLRC in its Resolution
67
dated June 30, 2003. Notwithstanding said conclusion, PNB did not elevate the matter to the CA via a petition for review. Hence it is
68
presumed to be satisfied with the adjudication therein. That decision of the NLRC has become final as against PNB and can no longer be
69
reviewed, much less reversed, by this Court. This is in accord with the doctrine that a party who has not appealed cannot obtain from the
70
appellate court any affirmative relief other than the ones granted in the appealed decision.
WHEREFORE, premises considered, the petitions are hereby DENIED for lack of merit.
SO ORDERED.

G.R. No. 154975

January 29, 2007

GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE CORPORATION), Petitioner,

vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC EQUITY CORPORATION,Respondents.

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner General Credit Corporation, now known as Penta
1
2
Capital Finance Corporation, seeks to annul and set aside the Decision and Resolution dated April 11, 2002 and August 20, 2002,
respectively, of the Court of Appeals (CA) in CA-G.R. CV No. 31801,affirming the November 8, 1990 decision of the Regional Trial Court (RTC)
of Makati City in its Civil Case No. 12707, an action for a sum of money thereat instituted by the herein respondent Alsons Development and
Investment Corporation against the petitioner and respondent CCC Equity Corporation.
The facts:
Shortly after its incorporation in 1957 as a finance and investment company, petitioner General Credit Corporation (GCC, for short), then
3
known as Commercial Credit Corporation (CCC), established CCC franchise companies in different urban centers of the country. In
furtherance of its business, GCC had, as early as 1974, applied for and was able to secure license from the then Central Bank (CB) of the
4
Philippines and the Securities and Exchange Commission (SEC) to engage also in quasi-banking activities. On the other hand, respondent CCC
Equity Corporation (EQUITY, for brevity) was organized in November 1994 by GCC for the purpose of, among other things, taking over the
operations and management of the various franchise companies. At a time material hereto, respondent Alsons Development and Investment
Corporation (ALSONS, hereinafter) and Conrado, Nicasio, Editha and Ladislawa, all surnamed Alcantara, and Alfredo de Borja (hereinafter the
Alcantara family, for convenience), each owned, just like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC Davao and CCC
Cebu.
In December 1980, ALSONS and the Alcantara family, for a consideration of Two Million (P2,000,000.00) Pesos, sold their shareholdings a
total of 101,953 shares, more or less in the CCC franchise companies to EQUITY.[5] On January 2, 1981, EQUITY issued ALSONS et al., a
"bearer" promissory note for P2,000,000.00 with a one-year maturity date, at 18% interest per annum, with provisions for damages and
6
litigation costs in case of default.
Some four years later, the Alcantara family assigned its rights and interests over the bearer note to ALSONS which thenceforth became the
7
holder thereof. But even before the execution of the assignment deal aforestated, letters of demand for interest payment were already sent
to EQUITY, through its President, Wilfredo Labayen, who pleaded inability to pay the stipulated interest, EQUITY no longer then having assets
or property to settle its obligation nor being extended financial support by GCC.
What happened next, as narrated in the assailed Decision of the CA, may be summarized, as follows:
1. On January 14, 1986, before the RTC of Makati, ALSONS, having failed to collect on the bearer note aforementioned, filed a
8
complaint for a sum of money against EQUITY and GCC. The case, docketed as Civil Case No. 12707, was eventually raffled to Branch
58 of the court. As stated in par. 4 of the complaint, GCC is being impleaded as party-defendant for any judgment ALSONS might
secure against EQUITY and, under the doctrine of piercing the veil of corporate fiction, against GCC, EQUITY having been organized
as a tool and mere conduit of GCC.
2. Answering with a cross-claim against GCC, EQUITY stated by way of special and affirmative defenses that it (EQUITY):
a) was purposely organized by GCC for the latter to avoid CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it acted merely as intermediary or bridge for loan transactions and
other dealings of GCC to its franchises and the investing public; and
b) is solely dependent upon GCC for its funding requirements, to settle, among others, equity purchases made by investors
on the franchises; hence, GCC is solely and directly liable to ALSONS, the former having failed to provide EQUITY the
necessary funds to meet its obligations to ALSONS.
3. GCC filed its ANSWER to Cross-claim, stressing that it is a distinct and separate entity from EQUITY and alleging, in essence that
the business relationships with each other were always at arms length. And following the denial of its motion to dismiss ALSONS
complaint, on the ground of lack of jurisdiction and want of cause of action, GCC filed its Answer thereto and set up affirmative
defenses with counterclaim for exemplary damages and attorneys fees.
Issues having been joined, trial ensued. Presented by ALSONS, but testifying as adverse witnesses, were CB and GCC officers. Among other
things, ALSONS evidence, which included the EQUITY-issued "bearer" promissory note marked as Exhibit "K" and over sixty (60) other
9
marked and subsequently admitted documents, were to the effect that five (5) incorporators, each contributing P100,000.00 as the initial
paid up capital of the company, organized EQUITY to manage, as it did manage, various GCC franchises through management contracts.
Before EQUITYs incorporation, however, GCC was already into the financing business as it was in fact managing and operating various CCC
franchises. Presented in evidence, too, was the September 29, 1982 letter-reply of one G. Villanueva, then GCC President, to EQUITY
President Wilfredo Labayen, bearing on the sale of EQUITY shares to third parties, part of the proceeds of which the Alcantaras wanted
applied to liquidate the promissory note in question. In said letter, Mr. Villanueva explained that the GCC Board denied the Alcantaras
request to be paid out of such proceeds, but nonetheless authorized EQUITY to pay them interest out of EQUITYs operation income, in
10
preference over what was due GCC.
Albeit EQUITY presented its president, it opted to adopt the testimony of some of ALSONS witnesses, inclusive of the documentary exhibits
testified to by each of them, as its evidence.
For its part, GCC called only Wilfredo Labayen to testify. It stuck to its underlying defense of separateness and presented documentary
evidence detailing the organizational structures of both GCC and EQUITY. And in a bid to negate the notion that it was conducting its business
illegally, GCC presented CB and SEC-issued licenses authoring it to engage in financing and quasi-banking activities. It also adduced evidence
to prove that it was never a party to any of the actionable documents ALSONS and its predecessors-in-interest had in their possession and
that the November 27, 1985 deed of assignment of rights over the promissory note was unenforceable.

Eventually, the trial court, on its finding that EQUITY was but an instrumentality or adjunct of GCC and considering the legal consequences
and implications of such relationship, came out with its decision on November 8, 1990, rendering judgment for ALSONS, to wit:
WHEREFORE, the foregoing premises considered, judgment is hereby rendered in favor of plaintiff [ALSONS] and against the defendants
[EQUITY and GCC] who are hereby ordered, jointly and severally, to pay plaintiff:
1. the principal sum of Two Million Pesos (P2,000,000.00) together with the interest due thereon at the rate of eighteen percent
(18%) annually computed from Jan. 2, 1981 until the obligation is fully paid;
2. liquidated damages due thereon equivalent to three percent (3%) monthly computed from January 2, 1982 until the obligation is
fully paid;
3. attorneys fees in an amount equivalent to twenty four percent (24%) of the total obligation due; and
4. the costs of suit.
IT IS SO ORDERED. (Words in brackets added.)
Therefrom, GCC went on appeal to the CA where its appellate recourse was docketed as CA-G.R. CV No. 31801, ascribing to the trial court the
commission of the following errors:
1. In holding that there is a "Parent-Subsidiary" corporate relationship between EQUITY and GCC;
2. In not holding that EQUITY and GCC are distinct and separate corporate entities;
3. In applying the doctrine of "Piercing the Veil of Corporate Fiction" in the case at bar; and
4. In not holding ALSONS in estoppel to question the corporate personality of EQUITY.
11

On April 11, 2002, the appellate court rendered the herein assailed Decision, affirming that of the trial court, thus:
WHEREFORE, premises considered, the Decision of the Regional Trial Court, Branch 58, Makati in Civil Case No. 12707 is hereby AFFIRMED.
SO ORDERED.
In time, GCC moved for reconsideration followed by a motion for oral argument, but both motions were denied by the CA in its equally
12
assailed Resolution of August 20, 2002.
Hence, GCCs present recourse anchored on the following arguments, issues and/or submissions:
1. The motion for oral argument with motion for reconsideration and its supplement were perfunctorily denied by the CA without
justifiable basis;
2. There is absolutely no basis for piercing the veil of corporate fiction;
3. Respondent Alsons is not a real party-in-interest as the promissory note payable to bearer subject of the collection suit is but a
simulated document and/or refers to another party. Moreover, the subject promissory note is not admissible in evidence because it
has not been duly authenticated and it is an altered document;
4. The fact of full payment stated in the ten (10) deeds of sale of the shares of stock is conclusive on the sellers, and by the patrol
evidence rule, the alleged fact of its non-payment cannot be introduced in evidenced; and
5. The counter-claim filed by GCC against Alsons should be granted in the interest of justice.
The petition and the arguments and/or issues holding it together are without merit. The desired reversal of the assailed decision and
resolution of the appellate court is accordingly DENIED.
Instead of raising distinctly formulated questions of law, as is expected of one seeking a review under Rule 45 of the Rules of Court of a final
13
CA judgment, petitioner GCC starts off by voicing disappointment over the "perfunctory" denial by the CA of its twin motions for
reconsideration and oral argument. Petitioner, to be sure, cannot plausibly expect a reversal action premised on the cursory way its motions
were denied, if such indeed were the case. Such manner of denial, while perhaps far from ideal, is not even a recognized ground for appeal
by certiorari, unless a denial of due process ensues, which is not the case here. And lest it be overlooked, the CA prefaced its assailed denial
resolution with the clause: "[F]inding no reversible error committed to warrant the modification and/or reversal of the April 11, 2002
Decision," suggesting that the appellate court gave the petitioners motion for reconsideration the attention it deserved. At the very least,
the petitioner was duly apprised of the reasons why reconsideration could not be favorably considered. An extended resolution was not
really necessary to dispose of the motion for reconsideration in question.
Petitioners lament about being deprived of procedural due process owing to the denial of its motion for oral argument is simply specious.
Under the CA Internal Rules, the appellate court may tap any of the three (3) alternatives therein provided to aid the court in resolving

appealed cases before it. It may rely on available records alone, require the submission of memoranda or set the case for oral argument. The
option the Internal Rules thus gives the CA necessarily suggests that the appellate court may, at its sound discretion, dispense with a tedious
oral argument exercise. Rule VI, Section 6 of the 2002 Internal Rules of the CA, provides:
SEC. 6 Judicial Action on Certain Petitions.- (a) In petitions for review, after the receipt of the respondents comment on the petition, the
Court [of Appeals] may dismiss the petition if it finds the same to be patently without merit , otherwise, it shall give due course to it.
xxx xxx xxx
If the petition is given due course, the Court may consider the case submitted for decision or require the parties to submit their
memorandum or set the case for oral argument. xxx. After the oral argument or upon submission of the memoranda the case shall be
deemed submitted for decision.
In the case at bench, records reveal that the appellate court, in line with the prescription of its own rules, required the parties to just submit,
as they did, their respective memoranda to properly ventilate their separate causes. Under this scenario, the petitioner cannot be validly
heard, having been deprived of due process.
Just like the first, the last three (3) arguments set forth in the petition will not carry the day for the petitioner. In relation therewith, the Court
notes that these arguments and the issues behind them were not raised before the trial court. This appellate maneuver cannot be allowed.
14
For, well-settled is the rule that issues or grounds not raised below cannot be resolved on review in higher courts. Springing surprises on the
opposing party is antithetical to the sporting idea of fair play, justice and due process; hence, the proscription against a party shifting from
one theory at the trial court to a new and different theory in the appellate level. On the same rationale, points of law, theories, issues not
15
brought to the attention of the lower court or, in fine, not interposed during the trial cannot be raised for the first time on appeal.
There are, to be sure, exceptions to the rule respecting what may be raised for the first time on appeal. Lack of jurisdiction over when the
16
issues raised present a matter of public policy comes immediately to mind. None of the well-recognized exceptions obtain in this case,
however.
Lest it be overlooked vis--vis the same last three arguments thus pressed, both the trial court and the CA, based on the evidence adduced,
adjudged the petitioner and respondent EQUITY jointly and severally liable to pay what respondent ALSONS is entitled to under the "bearer"
promissory note. The judgment argues against the notion of the note being simulated or altered or that respondent ALSONS has no standing
to sue on the note, not being the payee of the "bearer" note. For, the declaration of liability not only presupposes the duly established
authenticity and due execution of the promissory note over which ALSONS, as the holder in due course thereof, has interest, but also the
untenability of the petitioners counterclaim for attorneys fees and exemplary damages against ALSONS. At bottom, the petitioner
predicated such counter-claim on the postulate that respondent ALSONS had no cause of action, the supposed promissory note being,
according to the petitioner, either a simulated or an altered document.
In net effect, the definitive conclusion of the appellate court affirmatory of that of the trial court was that the bearer promissory note
(Exh. "K") was a genuine and authentic instrument payable to the holder thereof. This factual determination, as a matter of long and sound
17
appellate practice, deserves great weight and shall not be disturbed on appeal, save for the most compelling reasons, such as when that
18
determination is clearly without evidentiary support or when grave abuse of discretion has been committed. This is as it should be since the
Court, in petitions for review of CA decisions under Rule 45 of the Rules of Court, usually limits its inquiry only to questions of law. Stated
otherwise, it is not the function of the Court to analyze and weigh all over again the evidence or premises supportive of the factual holdings
19
of lower courts.
As nothing in the record indicates any of the exceptions adverted to above, the factual conclusion of the CA that the P2 Million promissory
note in question was authentic and was issued at the first instance to respondent ALSONS and the Alcantara family for the amount stated on
its face, must be affirmed. It should be stressed in this regard that even the issuing entity, i.e., respondent EQUITY, never challenged the
genuineness and due execution of the note.
This brings us to the remaining but core issue tendered in this case and aptly raised by the petitioner, to wit: whether there is absolutely no
basis for piercing GCCs veil of corporate identity.
20

A corporation is an artificial being vested by law with a personality distinct and separate from those of the persons composing it as well as
21
from that of any other entity to which it may be related. The first consequence of the doctrine of legal entity of the separate personality of
the corporation is that a corporation may not be made to answer for acts and liabilities of its stockholders or those of legal entities to which it
22
may be connected or vice versa.
The notion of separate personality, however, may be disregarded under the doctrine "piercing the veil of corporate fiction" as in fact the
court will often look at the corporation as a mere collection of individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the group. Another formulation of this doctrine is that when two
(2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when necessary to protect the
23
rights of third parties, disregard the legal fiction that two corporations are distinct entities and treat them as identical or one and the same.
Whether the separate personality of the corporation should be pierced hinges on obtaining facts, appropriately pleaded or proved. However,
any piercing of the corporate veil has to be done with caution, albeit the Court will not hesitate to disregard the corporate veil when it is
24
misused or when necessary in the interest of justice. After all, the concept of corporate entity was not meant to promote unfair objectives.
Authorities are agreed on at least three (3) basic areas where piercing the veil, with which the law covers and isolates the corporation from
25
26
any other legal entity to which it may be related, is allowed. These are: 1) defeat of public convenience, as when the corporate fiction is

27

used as vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate entity is used to justify a wrong, protect
28
fraud, or defend a crime; or 3) alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality,
29
agency, conduit or adjunct of another corporation.
The CA found valid grounds to pierce the corporate veil of petitioner GCC, there being justifiable basis for such action. When the appellate
court spoke of a justifying factor, the reference was to what the trial court said in its decision, namely: the existence of "certain
circumstances [which], taken together, gave rise to the ineluctable conclusion that *respondent+ EQUITY is but an instrumentality or
adjunct of [petitioner] GCC."
The Court agrees with the disposition of the appellate court on the application of the piercing doctrine to the transaction subject of this case.
Per the Courts count, the trial court enumerated no less than 20 documented circumstances and transactions, which, taken as a package,
indeed strongly supported the conclusion that respondent EQUITY was but an adjunct, an instrumentality or business conduit of petitioner
GCC. This relation, in turn, provides a justifying ground to pierce petitioners corporate existence as to ALSONS claim in question. Foremost
of what the trial court referred to as "certain circumstances" are the commonality of directors, officers and stockholders and even sharing of
office between petitioner GCC and respondent EQUITY; certain financing and management arrangements between the two, allowing the
petitioner to handle the funds of the latter; the virtual domination if not control wielded by the petitioner over the finances, business policies
and practices of respondent EQUITY; and the establishment of respondent EQUITY by the petitioner to circumvent CB rules. For a
perspective, the following are some relevant excerpts from the trial courts decision setting forth in some detail the tipping circumstances
adverted to therein:
It must be noted that as characterized by their business relationship, [respondent] EQUITY and [petitioner] GCC had common directors
and/or officers as well as stockholders. This is revealed by the proceedings recorded in SEC Case No. 25-81 entitled "Avelina Ramoso, et al.,
vs. GCC, et al., where it was established, thru the testimony of EQUITYs own President that more than 90% of the stockholders of
EQUITY were also stockholders of GCC .. Disclosed likewise is the fact that when *EQUITYs President+ Labayen sold the shareholdings of
EQUITY in said franchise companies, practically the entire proceeds thereof were surrendered to GCC, and not received by EQUITY (EXHIBIT
"RR") xxx.
It was likewise shown by a preponderance of evidence that not only had GCC financed EQUITY and that the latter was heavily indebted to
the former but EQUITY was, in fact, a wholly owned subsidiary of GCC. Thus, as affirmed by EQUITYs President, the funds invested by
EQUITY in the CCC franchise companies actually came from CCC Phils. or GCC (Exhibit "Y-5"). that, as disclosed by the Auditors report for
1982, past due receivables alone of GCC exceeded P101,000,000.00 mostly to GCC affiliates especially CCC EQUITY. ; that *CBs+ Report of
Examination dated July 14, 1977 shows that EQUITY which has a paid-up capital of only P500,000.00 was the biggest borrower of GCC with
a total loan of P6.70 Million .
xxx xxx xxx
It has likewise been amply substantiated by *respondent ALSONS+ evidence that not only did GCC cause the incorporation of EQUITY,
but, the latter had grossly inadequate capital for the pursuit of its line of business to the extent that its business affairs were considered as
GCCs own business endeavors. xxx.
xxx xxx xxx
ALSONS has likewise shown that the bonuses of the officers and directors of EQUITY was based on its total financial performance
together with all its affiliates both firms were sharing one and the same office when both were still operational and that the directors and
executives of EQUITY never acted independently but took their orders from GCC.
The evidence has also indubitably established that EQUITY was organized by GCC for the purpose of circumventing *CB+ rules and
regulations and the Anti-Usury Law. Thus, as disclosed by the Advance Report on the result of Central Banks Operations Examination
conducted on GCC as of March 31, 1977 (EXHIBITS "FFF" etc.), the latter violated [CB] rules and regulations by : (a) using as a conduit its
non-quasi bank affiliates . (b) issuing without recourse facilities to enable GCC to extend credit to affiliates like EQUITY which go beyond
the single borrowers limit without the need of showing outstanding balance in the book of accounts. (Emphasis over words in brackets
added.)
It bears to stress at this point that the facts and the inferences drawn therefrom, upon which the two (2) courts below applied the piercing
doctrine, stand, for the most part, undisputed. Among these is, to reiterate, the matter of EQUITY having been incorporated to serve, as it did
serve, as an instrumentality or adjunct of GCC. With the view we take of this case, GCC did not adduce any evidence, let alone rebut the
testimonies and documents presented by ALSONS, to establish the prevailing circumstances adverted to that provided the justifying occasion
to pierce the veil of corporate fiction between GCC and EQUITY. We quote the trial court:
Verily, indeed, as the relationships binding herein [respondent EQUITY and petitioner GCC] have been that of "parent-subsidiary
corporations" the foregoing principles and doctrines find suitable applicability in the case at bar; and, it having been satisfactorily and
indubitably shown that the said relationships had been used to perform certain functions not characterized with legitimacy, this Court feels
amply justified to "pierce the veil of corporate entity" and disregard the separate existence of the percent (sic) and subsidiary the latter
having been so controlled by the parent that its separate identity is hardly discernible thus becoming a mere instrumentality or alter ego of
the former. Consequently, as the parent corporation, [petitioner] GCC maybe (sic) held responsible for the acts and contracts of its subsidiary
[respondent] EQUITY - most especially if the latter (who had anyhow acknowledged its liability to ALSONS) maybe (sic) without sufficient
property with which to settle its obligations. For, after all, GCC was the entity which initiated and benefited immensely from the fraudulent
scheme perpetrated in violation of the law. (Words in parenthesis in the original; emphasis and bracketed words added).

Given the foregoing considerations, it behooves the petitioner, as a matter of law and equity, to assume the legitimate financial obligation of
a cash-strapped subsidiary corporation which it virtually controlled to such a degree that the latter became its instrument or agent. The facts,
as found by the courts a quo, and the applicable law call for this kind of disposition. Or else, the Court would be allowing the wrong use of the
fiction of corporate veil.
WHEREFORE, the instant petition is DENIED and the appealed Decision and Resolution of the Court of Appeals are accordingly AFFIRMED.
Costs against the petitioner.
SO ORDERED.

G.R. No. 142435

April 30, 2003

ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners,

vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D.
TRINIDAD, respondents.
1

This petition for review on certiorari seeks the reversal of the Decision dated October 21, 1999 of the Court of Appeals in CA-G.R. CV No.
2
41536 which dismissed herein petitioners' appeal from the Decision dated February 10, 1993 of the Regional Trial Court (RTC) of Quezon
City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed petitioners' complaint for annulment of real estate mortgage and
3
the extra-judicial foreclosure thereof. Likewise brought for our review is the Resolution dated February 23, 2000 of the Court of Appeals
which denied petitioners' motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's Export Trading" (BET), a single proprietorship with principal
office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of garments for domestic and foreign
consumption. The Lipats also owned the "Mystical Fashions" in the United States, which sells goods imported from the Philippines through
BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was managing "Mystical Fashions" in
the United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed on December 14, 1978, a special power of attorney appointing
Teresita Lipat as her attorney-in-fact to obtain loans and other credit accommodations from respondent Pacific Banking Corporation (Pacific
Bank). She likewise authorized Teresita to execute mortgage contracts on properties owned or co-owned by her as security for the
obligations to be extended by Pacific Bank including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able to secure for and in behalf of her mother, Mrs. Lipat
and BET, a loan from Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to "Mystical Fashions" in
the United States. As security therefor, the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage over their property
located at No. 814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure "other additional or new loans, discounting
lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part of said original, additional or new loans,
discounting lines, overdrafts and other credit accommodations, including interest and expenses or other obligations of the Mortgagor and/or
Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary, as appears in the accounts, books and records of the
4
Mortgagee."
On September 5, 1979, BET was incorporated into a family corporation named Bela's Export Corporation (BEC) in order to facilitate the
management of the business. BEC was engaged in the business of manufacturing and exportation of all kinds of garments of whatever kind
5
and description and utilized the same machineries and equipment previously used by BET. Its incorporators and directors included the Lipat
spouses who owned a combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares, and other close relatives
6
and friends of the Lipats. Estelita Lipat was named president of BEC, while Teresita became the vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent loans were obtained by BEC with the corresponding
promissory notes duly executed by Teresita on behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O.
Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the corresponding trust receipt therefor. Export bills were also
executed in favor of Pacific Bank for additional finances. These transactions were all secured by the real estate mortgage over the Lipats'
property.
The promissory notes, export bills, and trust receipt eventually became due and demandable. Unfortunately, BEC defaulted in its payments.
After receipt of Pacific Bank's demand letters, Estelita Lipat went to the office of the bank's liquidator and asked for additional time to enable
her to personally settle BEC's obligations. The bank acceded to her request but Estelita failed to fulfill her promise.
Consequently, the real estate mortgage was foreclosed and after compliance with the requirements of the law the mortgaged property was
sold at public auction. On January 31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a complaint for annulment of the real estate mortgage,
extrajudicial foreclosure and the certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad. The complaint,

which was docketed as Civil Case No. Q-89-4152, alleged, among others, that the promissory notes, trust receipt, and export bills were
all ultra vires acts of Teresita as they were executed without the requisite board resolution of the Board of Directors of BEC. The Lipats also
averred that assuming said acts were valid and binding on BEC, the same were the corporation's sole obligation, it having a personality
distinct and separate from spouses Lipat. It was likewise pointed out that Teresita's authority to secure a loan from Pacific Bank was
specifically limited to Mrs. Lipat's sole use and benefit and that the real estate mortgage was executed to secure the Lipats' and BET's
P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that petitioners Lipat cannot evade payments of the value of the
promissory notes, trust receipt, and export bills with their property because they and the BEC are one and the same, the latter being a family
corporation. Respondent Trinidad further claimed that he was a buyer in good faith and for value and that petitioners are estopped from
denying BEC's existence after holding themselves out as a corporation.
After trial on the merits, the RTC dismissed the complaint, thus:
WHEREFORE, this Court holds that in view of the facts contained in the record, the complaint filed in this case must be, as is hereby,
dismissed. Plaintiffs however has five (5) months and seventeen (17) days reckoned from the finality of this decision within which to
exercise their right of redemption. The writ of injunction issued is automatically dissolved if no redemption is effected within that
period.
The counterclaims and cross-claim are likewise dismissed for lack of legal and factual basis.
No costs.
IT IS SO ORDERED.

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

10

Hence, this petition, with petitioners submitting that the court a quo erred
1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE FICTION APPLIES IN THIS CASE.
2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE
AMOUNT OF P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS OF BELA'S
EXPORT CORPORATION.
3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN THE EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS
COURT'S JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS APPEAL."
4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS
AND TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE
NOT BINDING TO HIM.
5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND IN HOLDING THAT SAID MOTION FOR RECONSIDERATION IS
"AN UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE TO
11
APPELLANTS."
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case;

2. Whether or not petitioners' property under the real estate mortgage is liable not only for the amount of P583,854.00 but also for the value
of the promissory notes, trust receipt, and export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorney's fees stipulated in the deed of real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts erred in holding them liable for the obligations incurred by BEC
through the application of the doctrine of piercing the veil of corporate fiction absent any clear showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to show fraud on part of petitioners given the findings of the trial court, as
affirmed by the Court of Appeals, that BEC was organized as a business conduit for the benefit of petitioners.
Petitioners' contentions fail to persuade this Court. A careful reading of the judgment of the RTC and the resolution of the appellate court
show that in finding petitioners' mortgaged property liable for the obligations of BEC, both courts below relied upon the alter ego doctrine or
instrumentality rule, rather than fraud in piercing the veil of corporate fiction. When the corporation is the mere alter ego or business
12
conduit of a person, the separate personality of the corporation may be disregarded. This is commonly referred to as the "instrumentality
rule" or the alter ego doctrine, which the courts have applied in disregarding the separate juridical personality of corporations. As held in one
case,
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or
adjunct of the other, the fiction of the corporate entity of the 'instrumentality' may be disregarded. The control necessary to invoke
the rule is not majority or even complete stock control but such domination of finances, policies and practices that the controlled
13
corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. x x x .
We find that the evidence on record demolishes, rather than buttresses, petitioners' contention that BET and BEC are separate business
14
entities. Note that Estelita Lipat admitted that she and her husband, Alfredo, were the owners of BET and were two of the incorporators
15
and majority stockholders of BEC. It is also undisputed that Estelita Lipat executed a special power of attorney in favor of her daughter,
16
Teresita, to obtain loans and credit lines from Pacific Bank on her behalf. Incidentally, Teresita was designated as executive-vice president
17
and general manager of both BET and BEC, respectively. We note further that: (1) Estelita and Alfredo Lipat are the owners and majority
18
19
shareholders of BET and BEC, respectively; (2) both firms were managed by their daughter, Teresita; (3) both firms were engaged in the
garment business, supplying products to "Mystical Fashion," a U.S. firm established by Estelita Lipat; (4) both firms held office in the same
20
building owned by the Lipats; (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the business operations of the
BEC were so merged with those of Mrs. Lipat such that they were practically indistinguishable; (7) the corporate funds were held by Estelita
Lipat and the corporation itself had no visible assets; (8) the board of directors of BEC was composed of the Burgos and Lipat family
21
22
members; (9) Estelita had full control over the activities of and decided business matters of the corporation; and that (10) Estelita Lipat
23
had benefited from the loans secured from Pacific Bank to finance her business abroad and from the export bills secured by BEC for the
24
account of "Mystical Fashion." It could not have been coincidental that BET and BEC are so intertwined with each other in terms of
ownership, business purpose, and management. Apparently, BET and BEC are one and the same and the latter is a conduit of and merely
succeeded the former. Petitioners' attempt to isolate themselves from and hide behind the corporate personality of BEC so as to evade their
liabilities to Pacific Bank is precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent and remedy. In our
view, BEC is a mere continuation and successor of BET, and petitioners cannot evade their obligations in the mortgage contract secured
under the name of BEC on the pretext that it was signed for the benefit and under the name of BET. We are thus constrained to rule that the
Court of Appeals did not err when it applied the instrumentality doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their mortgaged property should not be made liable for the subsequent credit lines and loans
incurred by BEC because, first, it was not covered by the mortgage contract of BET which only covered the loan of P583,854.00 and which
allegedly had already been paid; and, second, it was secured by Teresita Lipat without any authorization or board resolution of BEC.
We find petitioners' contention untenable. As found by the Court of Appeals, the mortgaged property is not limited to answer for the loan of
P583,854.00. Thus:
Finally, the extent to which the Lipats' property can be held liable under the real estate mortgage is not limited to P583,854.00. It
can be held liable for the value of the promissory notes, trust receipt and export bills as well. For the mortgage was executed not
only for the purpose of securing the Bela's Export Trading's original loan of P583,854.00, but also for "other additional or new loans,
discounting lines, overdrafts and credit accommodations, of whatever amount, which the Mortgagor and/or Debtor may
subsequently obtain from the mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole or part
of said original, additional or new loans, discounting lines, overdrafts and other credit accommodations, including interest and
expenses or other obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly principal or
25
secondary, as appears in the accounts, books and records of the mortgagee.
As a general rule, findings of fact of the Court of Appeals are final and conclusive, and cannot be reviewed on appeal by the Supreme Court,
26
provided they are borne out by the record or based on substantial evidence. As noted earlier, BEC merely succeeded BET as
petitioners' alter ego; hence, petitioners' mortgaged property must be held liable for the subsequent loans and credit lines of BEC.
Further, petitioners' contention that the original loan had already been paid, hence, the mortgaged property should not be made liable to the
loans of BEC, is unsupported by any substantial evidence other than Estelita Lipat's self-serving testimony. Two disputable presumptions
27
under the rules on evidence weigh against petitioners, namely: (a) that a person takes ordinary care of his concerns; and (b) that things
28
have happened according to the ordinary course of nature and the ordinary habits of life. Here, if the original loan had indeed been paid,
then logically, petitioners would have asked from Pacific Bank for the required documents evidencing receipt and payment of the loans and,
as owners of the mortgaged property, would have immediately asked for the cancellation of the mortgage in the ordinary course of things.
However, the records are bereft of any evidence contradicting or overcoming said disputable presumptions.

Petitioners contend further that the mortgaged property should not bind the loans and credit lines obtained by BEC as they were secured
without any proper authorization or board resolution. They also blame the bank for its laxity and complacency in not requiring a board
resolution as a requisite for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution since per admissions by both petitioner Estelita Lipat and Alice
Burgos, petitioners' rebuttal witness, no business or stockholder's meetings were conducted nor were there election of officers held since its
29
incorporation. In fact, not a single board resolution was passed by the corporate board and it was Estelita Lipat and/or Teresita Lipat who
30
decided business matters.
Secondly, the principle of estoppel precludes petitioners from denying the validity of the transactions entered into by Teresita Lipat with
Pacific Bank, who in good faith, relied on the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both BET and
BEC. While the power and responsibility to decide whether the corporation should enter into a contract that will bind the corporation is
lodged in its board of directors, subject to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural person
may authorize another to do certain acts for and on his behalf, the board of directors may validly delegate some of its functions and powers
to officers, committees, or agents. The authority of such individuals to bind the corporation is generally derived from law, corporate by-laws,
31
or authorization from the board, either expressly or impliedly by habit, custom, or acquiescence in the general course of business. Apparent
authority, is derived not merely from practice. Its existence may be ascertained through (1) the general manner in which the corporation
holds out an officer or agent as having the power to act or, in other words, the apparent authority to act in general, with which it clothes him;
or (2) the acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof, whether within or beyond the scope
32
of his ordinary powers.
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue of a special power of attorney executed by Estelita
Lipat. Recall that Teresita Lipat acted as the manager of both BEC and BET and had been deciding business matters in the absence of Estelita
33
Lipat. Further, the export bills secured by BEC were for the benefit of "Mystical Fashion" owned by Estelita Lipat. Hence, Pacific Bank cannot
be faulted for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power of attorney. It is a familiar
doctrine that if a corporation knowingly permits one of its officers or any other agent to act within the scope of an apparent authority, it
holds him out to the public as possessing the power to do those acts; thus, the corporation will, as against anyone who has in good faith dealt
34
with it through such agent, be estopped from denying the agent's authority.
We find no necessity to extensively deal with the liability of Alfredo Lipat for the subsequent credit lines of BEC. Suffice it to state that Alfredo
Lipat never disputed the validity of the real estate mortgage of the original loan; hence, he cannot now dispute the subsequent loans
obtained using the same mortgage contract since it is, by its very terms, a continuing mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of Appeals for not taking cognizance of the issue on attorney's fees on
the ground that it was raised for the first time on appeal. We find the conclusion of the Court of Appeals to be in accord with settled
35
jurisprudence. Basic is the rule that matters not raised in the complaint cannot be raised for the first time on appeal. A close perusal of the
complaint yields no allegations disputing the attorney's fees imposed under the real estate mortgage and petitioners cannot now allege that
they have impliedly disputed the same when they sought the annulment of the contract.
In sum, we find no reversible error of law committed by the Court of Appeals in rendering the decision and resolution herein assailed by
petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the Resolution dated February 23, 2000 of the Court of
Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs against petitioners.
SO ORDERED.

G.R. No. 164846

June 18, 2008

STA. MONICA INDUSTRIAL AND DEVELOPMENT CORPORATION, petitioner,

vs.
THE DEPARTMENT OF AGRARIAN REFORM REGIONAL DIRECTOR FOR REGION III, PROVINCIAL AGRARIAN REFORM OFFICER OF BULACAN,
MUNICIPAL AGRARIAN REFORM OFFICER OF CALUMPIT, BULACAN, and BASILIO DE GUZMAN, respondent.
ANG Malawak na Batas sa Repormang Pangsakahan ay binuo upang makalaya ang mga magsasaka mula sa tali ng kahirapan at paghahari
ng may-ari ng lupa.
Kapag ang kathang-isip na korporasyon ay ginamit na tabing sa katulad na pyudal na pang-aalipin, ang matayog na hangarin ng batas
pambukid ay nabibigo at ang mismong suliranin na nais lunasan nito ay nananatili.
Ang belo ng kathang-isip na korporasyon ay pupunitin kapag ito ay ginamit sa maling hangarin at di-tapat na layunin.
1

The Comprehensive Agrarian Reform Law was designed precisely to liberate peasant-farmers from the clutches of landlordism and poverty.

When corporate fiction is used as a mere smokescreen to the same form of feudal servitude, the lofty aim of the agrarian law is thwarted and
the very problem which the law seeks to solve is perpetrated.
The veil of corporate fiction will be pierced when used for improper purposes and unfair objectives.
2

Before Us is a petition for review on certiorari of the Decision of the Court of Appeals (CA) dismissing the petition of Sta. Monica Industrial
3
and Development Corporation (Sta. Monica) to annul the Order of the Regional Director, Region III, Department of Agrarian Reform (DAR)
4
placing the landholdings of Asuncion Trinidad under the Comprehensive Agrarian Reform Program (CARP).
The Facts
Trinidad is the owner of five parcels of land with a total area of 4.69 hectares in Iba Este, Calumpit, Bulacan. Private respondent Basilio De
Guzman is the agricultural leasehold tenant of Trinidad.
On April 29, 1976, a leasehold contract denominated as "Kasunduan ng Buwisan sa Sakahan" was executed between Trinidad and De
5
6
Guzman. As an agricultural leasehold tenant, De Guzman was issued Certificates of Land Transfer on July 22, 1981.
Desiring to have an emancipation patent over the land under his tillage, De Guzman filed a petition for the issuance of patent in his name
7
with the Office of the Regional Director of the DAR. The Legal Services Division of the DAR duly sent notices to Trinidad requiring her to
8
comment. Instead of complying, Trinidad filed a motion for bill of particulars.
9

After due proceedings, the Regional Director issued the Order granting the petition of De Guzman, with the following disposition:
WHEREFORE, in light of the foregoing analysis and the reasons indicated thereon, an ORDER is hereby issued as follows:
1. PLACING under the coverage of Operation Land Transfer (OLT) pursuant to PD 27/Executive Order No. 228 the landholdings of
Asuncion Trinidad with an area of 10.6800 hectares, more or less, located at Iba Este, Calumpit, Bulacan, without prejudice to the
exercise of her retention rights if qualified under the law.
2. DIRECTING the MARO of Calumpit, Bulacan and the PARO of Baliuag, Bulacan to cause the generation and issuance of
Emancipation Patent in favor of the petitioner and other qualified farmer-beneficiaries over the said landholding in accordance with
10
the actual area of tillages.
Trinidad filed a motion for reconsideration but her motion was denied.

11

A year later, petitioner Sta. Monica filed a petition for certiorari and prohibition with the CA assailing the order of the Regional Director. In its
petition, Sta. Monica claimed that while it is true that Asuncion Trinidad was the former registered owner of a parcel of land with an area of
12
83,689 square meters, the said landholding was sold on January 27, 1986.
Petitioner was able to acquire 39,547 square meters of the Trinidad property. After the sale, petitioner sought the registration of the portion
pertaining to it before the Register of Deeds of the Province of Bulacan. Consequently, a corresponding Transfer Certificate of Title, with No.
13
301408 (now TCT No. RT 70512) was issued in favor of petitioner.
It was asserted that there was a denial of due process of law because it was not furnished a notice of coverage under the CARP law.

14

In his comment on the petition, De Guzman argued that the alleged sale of the landholding is illegal due to the lack of requisite clearance
15
from the DAR. The said clearance is required under P.D. No. 27, the Tenant Emancipation Decree, which prohibits transfer of covered lands
except to tenant-beneficiaries. According to De Guzman, since no clearance was sought from, and granted by, the DAR, the sale in favor of
petitioner by Trinidad is inexistent and void. Hence, Trinidad remained the owner of the disputed property.
CA Disposition
On May 26, 2004, the CA rendered a decision dismissing the petition of Sta. Monica, disposing as follows:
WHEREFORE, premises considered, the instant petition is hereby DENIED for lack of merit.
SO ORDERED.

16

The CA held that Sta. Monica is not a real party-in-interest because it cannot be considered as an owner of the land it bought from Trinidad,
17
thus:
It appears from the records of this case that the sale between Trinidad and the petitioner is enjoined by Department Memorandum
Circular No. 2-A, implementing the provisions of Presidential Decree (P.D.) No. 27, which prohibits the transfer of ownership of
landholdings covered by P.D. No. 27 after 21 October 1972 without the requisite clearance from the DAR except to the tenantbeneficiary. Thus, the title to the subject landholding remained with the previous owner, Asuncion Trinidad. This effectively deprives
the petitioner of interest to question the orders of the Regional Director of the DAR relative to the latters directive placing the
subject landholding under the coverage of Operation Land Transfer and the subsequent issuance of an Emancipation Patent in favor
of private respondent De Guzman. One having no right or interest to protect cannot invoke the jurisdiction of the court as a party

plaintiff (in this case petitioner) in an action. A real party in interest is the party who stands to be benefited or injured by the
18
judgment in the suit, or the party entitled to the avails of the suit. (Citations omitted)
The CA added that even assuming that Sta. Monica is a real party-in-interest, it was not denied due process because it had constructive
notice of the proceeding which involved its property:
Even assuming, without admitting, that petitioner is the real party in interest by reason of the sale of the subject landholding in its
favor, it cannot be said that petitioner was denied due process because of lack of notice of the proceedings before the DAR. It is
significant to note that Asuncion Trinidad is the treasurer of petitioner, based on the corporations General Information Sheet. While
it cannot be said that there was proper notice to the corporation, being a corporate officer of the petitioner, there was at least
constructive notice of the fact that there was a proceeding which involved the property of the corporation of which it may be
19
deprived should an adverse decision be rendered by the DAR.
The CA also ruled that the assailed orders of the Regional Director have already attained finality because it was not appealed to the DAR
Secretary.
Furthermore, the assailed orders have long become final and executory, there being no appeal undertaken to the Secretary of the
Department of Agrarian Reform. Citing Fortich vs. Corona, et al., the Supreme Court aptly ruled in this wise:
"The orderly administration of justice requires that the judgments/resolutions of a court or quasi-judicial body must reach a
point of finality set by law, rules and regulations. The noble purpose is to write finis to disputes once and for all. This is a
fundamental principle in our justice system, without which there would be no end to litigations. Utmost respect and
adherence to this principle must always be maintained by those who wield the power of adjudication. Any act which
violates such principle must immediately be struck down."
The rule on finality of decisions, orders or resolutions of a judicial, quasi-judicial, or administrative body is not a question of
technicality but of substance and merit, the underlying consideration therefore being the protection of the substantive rights of the
winning party. Just as a losing party has the right to file an appeal within the prescribed period, the winning party also has the
20
correlative right to enjoy the finality of the resolution of his/her case.
Sta. Monica sought reconsideration but it was denied. Hence, the present recourse.

21

Issue
Sta. Monica seeks reversal of the CA decision on the lone ground that THE ASSAILED DECISION AND RESOLUTION OF THE COURT OF APPEALS
22
ARE CONTRARY TO EXISTING LAWS, RELEVANT JURISPRUDENCE ON THE MATTER AND THE FACTUAL CIRCUMSTANCES.
Our Ruling
The petition is bereft of merit.
Trinidad is still deemed the owner of the agricultural land sold to Sta. Monica; no need for separate notice of coverage under the CARP
law.
The crux of the petition lies in the requirement of notice of coverage under the CARP law. The statute requires a notice of coverage to be
23
furnished and sent to the landowner. Notice is part of the constitutional right to due process of law. It informs the landowner of the States
intention to acquire a private land upon payment of just compensation and gives him the opportunity to present evidence that his
landholding is not covered or is otherwise excused from the agrarian law.
There is no dispute that a notice of coverage was duly sent to Trinidad. Records show that she participated in the DAR proceedings. As to her,
the constitutional requirement of due process was met and satisfied.
Petitioner Sta. Monica, however, claims that it is the owner of the agricultural land awarded to De Guzman. It acquired the land from Trinidad
by sale in 1986 and it was issued a transfer certificate of title. Sta. Monica claims denial of due process of law because it was not furnished
the required notice of coverage under the CARP law.
Respondent De Guzman, on the other hand, contends that the sale between Trinidad and Sta. Monica is null and void because it is a
24
prohibited transaction under Presidential Decree No. 27 (P.D. No. 27), as amended. De Guzman also claims that Trinidad is a corporate
25
officer of Sta. Monica. It was her duty to inform Sta. Monica of the pending proceeding with the DAR. He maintains that Sta. Monica was
26
not denied due process because there was constructive notice. Sta. Monica was sufficiently informed of the pending DAR proceedings.
Records disclose that there was indeed a deed of sale between Trinidad and Sta. Monica over the agricultural land awarded to De Guzman.
Sta. Monica was also issued a new transfer certificate of title over the land. If We rely solely on the sale, it is a foregone conclusion that Sta.
Monica was denied due process of law. As the owner on record of the agricultural land, it should have been given a notice of coverage.
However, there is much to be said of the attendant circumstances that lead Us to conclude that notice of coverage to Trinidad is also
sufficient notice to Sta. Monica. Moreover, We find that the sale between Trinidad and Sta. Monica was a mere ruse to frustrate the
implementation of the agrarian law.

First, the sale to Sta. Monica is prohibited. P.D. No. 27, as amended, forbids the transfer or alienation of covered agricultural lands after
October 21, 1972 except to the tenant-beneficiary. The agricultural land awarded to De Guzman is covered by P.D. No. 27. He was awarded a
27
certificate of land transfer in July 22, 1981. The sale to Sta. Monica in 1986 is void for being contrary to law. Trinidad remained the owner of
the agricultural land.
28

In Heirs of Batongbacal v. Court of Appeals, involving the similar issue of sale of a covered agricultural land under P.D. No. 27, this Court
held:
Clearly, therefore, Philbanking committed breach of obligation as an agricultural lessor. As the records show, private respondent was
not informed about the sale between Philbanking and petitioner, and neither was he privy to the transfer of ownership from Juana
Luciano to Philbanking. As an agricultural lessee, the law gives him the right to be informed about matters affecting the land he tills,
without need for him to inquire about it.
xxxx
In other words, transfer of ownership over tenanted rice and/or corn lands after October 21, 1972 is allowed only in favor of the
actual tenant-tillers thereon. Hence, the sale executed by Philbanking on January 11, 1985 in favor of petitioner was in violation of
29
the aforequoted provision of P.D. 27 and its implementing guidelines, and must thus be declared null and void. (Underscoring
supplied)
Second, buyer Sta. Monica is owned and controlled by Trinidad and her family. Records show that Trinidad, her husband and two sons own
30
31
more than 98% of the outstanding capital stock of Sta. Monica. They are all officers of the corporation. There are only two non-related
incorporators who own less than one percent of the outstanding capital stock of Sta. Monica and who are not officers of the corporation.
To be sure, Trinidad and her family exercise absolute control of the corporate affairs of Sta. Monica. As owners of 98% of the outstanding
capital stock, they are the beneficial owners of all the assets of the company, including the agricultural land sold by Trinidad to Sta. Monica.
Third, Trinidad and her counsel failed to notify the DAR of the prior sale to Sta. Monica during the administrative proceedings. Worse,
Trinidad feigned ignorance of the sale by filing a motion for bill of particulars seeking specifics from De Guzman of her alleged landholdings
which are subject of his petition with the DAR.
It is highly unusual and unbelievable for her not to know, or at least be aware, of the sale to Sta. Monica. She herself signed the deed of sale
as seller. She is also a stockholder and officer of Sta. Monica. More importantly, she cannot feign ignorance of De Guzmans claim because he
was her agricultural tenant since the 1970s. She knows, or at least ought to know, that the subject matter of the petition with the DAR was
her own landholding, which she sold to Sta. Monica in direct violation of P.D. No. 27.
The apparent lack of candor is heightened by the fact that both Trinidad and Sta. Monica are represented by the same counsel, Atty. Ramon
Gutierrez. We cannot stretch Our credulity on how Trinidad filed a motion for bill of particulars with the DAR seeking specifics on the sale to
Sta. Monica when she herself signed for the vendor as a party to the transaction.
It is the duty of Atty. Gutierrez to inform the DAR, at the very first opportunity, of the sale to Sta. Monica. He was utterly remiss of this duty.
Instead of informing the DAR, Trinidad and her counsel engaged in wild goose chase and stonewalling, feigning ignorance when they ought to
have informed the DAR of the sale to Sta. Monica. Atty. Gutierrez is reminded that, as an officer of the court, he owes it the duty of candor,
32
honesty and fairness.
Fourth, it was only after an adverse decision against Trinidad that Sta. Monica suddenly filed a petition forcertiorari with the CA questioning
the lack of notice of coverage under the CARP law. It is highly unlikely that Sta. Monica, an artificial being acting only through its duly
authorized representatives, was not sufficiently informed or had no constructive knowledge of the DAR proceedings.
Trinidad and by extension, her family members, were informed or should be sufficiently aware of the DAR proceedings. They are all
stockholders and corporate officers of Sta. Monica. They knew, they ought to know, that Sta. Monica would suffer damage should the DAR
award, as it awarded, the agricultural land to De Guzman.
As directors and corporate officers, they owe a duty of care to the corporation to inform it of the pending proceedings with the DAR.
Fifth, the ultimate factor that betrays Trinidad and Sta. Monica is the continued payment of lease rentals by De Guzman. Records show that
33
De Guzman paid and continued to pay lease rentals to Trinidad even after she sold the land to Sta. Monica. The receipt dated May 30, 2002
discloses that De Guzman paid 40 cavans of palay to Clodinaldo dela Cruz, the authorized representative of Trinidad, as lease rentals for the
agricultural land.
It is incredible that Trinidad would still continue to collect lease rentals from De Guzman if she had long sold the agricultural land to Sta.
Monica in 1986. The continued payment of lease rentals indicates that Trinidad never sold the agricultural land to Sta. Monica. Evidently, the
sale was a mere ruse to skirt coverage under the comprehensive agrarian reform law.
All these circumstances indicate that Trinidad has remained as the real owner of the agricultural land sold to Sta. Monica. The sale to Sta.
Monica is not valid because it is prohibited under P.D. No. 27. More importantly, it must be deemed as a mere ploy to evade the applicable
provisions of the agrarian law.
But it is a fiat that the corporate vehicle cannot be used as a shield to protect fraud or justify wrong. Thus, the veil of corporate fiction will be
pierced when it is used to defeat public convenience and subvert public policy.

Considering that Trinidad remained to be the true and legal owner of the agricultural land, there is no need for another notice of coverage to
be sent or furnished to Sta. Monica. At the very least, the notice to her is already notice to Sta. Monica because the corporation acted as a
mere conduit of Trinidad. The CA correctly dismissed the petition of Sta. Monica to annul the orders of the Regional Director placing the
agricultural land of Trinidad under the agrarian reform law.
Final Note
This case can be viewed as a microcosm of the persistent agrarian reform problem in Our country. For one, it illustrates the arduous legal
battle that tenant-farmers have to endure in order to be finally freed from the bondage of the soil. De Guzman battled for almost eight years
to acquire the agricultural land from Trinidad. Others are not as equally lucky. For another, it shows the subtle but illegal measures taken by
landowners to evade coverage under the CARP law.
Of course, there are also tales of landowners who unduly suffer either the abuse of some farmers or the harsh consequences of the law.
In hindsight, it is quite ironic that We are still faced with the same agrarian reform problem which We have sought to eradicate several years
ago when the CARP law was first introduced. Feudal system of land ownership still persists in the countryside and most farmers are still tied
to their bondage. It is more ironic when the problem is taken in its historical context, the CARP law being the fifth land reform law passed
since President Quezon.
To Our mind, part of the problem lies with the CARP law itself. As crafted, the law has its own loopholes. It provides for a long list of
exclusions. Some landowners used these exclusions to go around the law. There is now a growing trend of land conversion in the countryside
suspiciously to evade coverage under the CARP law. Of course, the solution to this problem lies with Congress. It is high time We sounded the
call for a more realistic, rational comprehensive agrarian reform law.
The dubious use of seemingly legal means to sidestep the CARP law persists. Corporate law is resorted to by way of circling around the
agrarian law. As this case illustrates, agricultural lands are being transferred, simulated or otherwise, to corporations which are fully or at
least predominantly controlled by former landowners, now called stockholders. Through this strategy, it is anticipated that the corporation,
by virtue of its corporate fiction, will shield the landowners from agricultural claims of tenant-farmers.
The use of corporate fiction as a means to evade legal liability is not new. This scheme or device has long been perceived to be used in other
fields of law, notably taxation to minimize payment of tax with varying degrees of success and acceptability. But the continued employment
of the scheme in agrarian cases is not only deplorable; it is alarming. It is time to put a lid on the cap.
WHEREFORE, the petition is DENIED. The appealed Decision of the Court of Appeals is AFFIRMED.
SO ORDERED.

G.R. No. 131673

September 10, 2004

RUBEN MARTINEZ, substituted by his heirs, MENA CONSTANTINO MARTINEZ, WILFRIDO C. MARTINEZ, EMMA M. NAVA, and EDNA M.
SAKHRANI, petitioners,
vs.
COURT OF APPEALS and BPI INTERNATIONAL FINANCE, respondents.
1

Before us is a petition for review on certiorari of the Decision of the Court of Appeals, in CA-G.R. CV No. 43985, modifying the Decision of
the Regional Trial Court of Kalookan City, Branch 122, in Civil Case No. C-10811.
The antecedents are as follows:
3

Respondent BPI International Finance is a foreign corporation not doing business in the Philippines, with office address at the Bank of
America Tower, 12 Harcourt Road, Central Hongkong. It was a deposit-taking company organized and existing under and by virtue of the laws
of Hongkong, and was also engaged in investment banking operations therein.
Cintas Largas, Ltd. (CLL) was also a foreign corporation, established in Hongkong, with a paid-up capital of HK$10,000. The registered
shareholders of the CLL in Hongkong were the Overseas Nominee, Ltd. and Shares Nominee, Ltd., which were mainly nominee shareholders.
In Hongkong, the nominee shareholder of CLL was Baker & McKenzie Nominees, Ltd., a leading solicitor firm. However, beneficially, the
4
company was equally owned by Messrs. Ramon Siy, Ricardo Lopa, Wilfrido C. Martinez, and Miguel J. Lacson. The registered office address
of CLL in Hongkong was 22/F, Princes Building, also the office address of Price Waterhouse & Co., a large accounting firm in Hongkong.
The bulk of the business of the CLL was the importation of molasses from the Philippines, principally from the Mar Tierra Corporation, and
5
6
the resale thereof in the international market. However, Mar Tierra Corporation also sold molasses to its customers. Wilfrido C. Martinez
was the president of Mar Tierra Corporation, while its executive vice-president was Blamar Gonzales. The business operations of both the CLL
and Mar Tierra Corporation were run by Wilfrido Martinez and Gonzales.
About 42% of the capital stock of Mar Tierra Corporation was owned by RJL Martinez Fishing Corporation (RJL), the leading tuna fishing outfit
in the Philippines. Petitioner Ruben Martinez was the president of RJL and a member of the board of directors thereof. The majority

stockholders of RJL were Ruben Martinez and his brothers, Jose and Luis Martinez. Sixty-eight (68) percent of the total assets of Ruben
Martinez were in the RJL.
In 1979, respondent BPI International Finance (then AIFL) granted CLL a letter of credit in the amount of US$3,000,000. Wilfrido Martinez
signed the letter agreement with the respondent for the CLL. The respondent and the CLL had made the following arrangements:
Cintas Largas, Ltd. will purchase molasses from the Philippines, mainly from Mar Tierra Corporation, and then sell the molasses to
foreign countries. Both the purchase of the molasses from the Philippines and the subsequent sale thereof to foreign customers
were effected by means of Letters of Credit. A Letter of Credit would be opened by Cintas Largas, Ltd. in favour of Mar Tierra
Corporation or any other seller in the Philippines. Upon the sale of the molasses to foreign buyers, a Letter of Credit would then be
opened by such buyers, in favour of Cintas Largas, Ltd. The Letters of Credit were effected through the Letter of Credit Facility of
Cintas Largas, Ltd. in plaintiff. The profits of Cintas Largas, Ltd. from these transactions were then deposited in either the deposit
account of Cintas Largas, Ltd. with plaintiff or the Money Market Placement Account Nos. 063 and 084, depending upon the
7
instructions of Wilfrido C. Martinez and Blamar C. Gonzales, principally.
On January 24, 1979, the CLL opened a money market placement with the respondent bearing MMP No. 063, with an initial placement of
8
US$390,000. The CLL also opened and maintained a foreign currency account and a deposit account with the respondent. The authorized
signatory in both accounts of CLL was Wilfrido C. Martinez. Some instructions also came from Gonzales, to be confirmed by Wilfrido
9
Martinez. On March 21, 1980, petitioner Ruben Martinez and/or his son Wilfrido C. Martinez and/or Miguel J. Lacson affixed their signatures
on the two signature cards furnished by the respondent which became MMP No. 063 and MMP No. 084. On the face of the cards, the
10
signatories became joint account holders of the said money market placements.
On March 25, 1980, the CLL opened a money market placement account with the respondent bearing MMP No. 084 with an initial placement
11
of US$68,768.60, transferred from MMP No. 063. At times, funds in MMP Nos. 063 and 084 were transferred to the CLLs deposit account,
and vice versa.
On May 19, 1980, the CLL, through Wilfrido Martinez, and the respondent, through Senen L. Matoto and Michael Sung, Senior Manager of
the Money Management Division of the respondent, executed a letter-agreement in which the existing back-to-back credit facility granted to
the CLL way back in 1979 was extended up to July 1980, and increased to US$5,000,000. The credit facility was to be secured as follows:
SECURITY: (i) Back-to-Back L/C to be secured by an L/C issued, by a bank acceptable to AFHK, in favor of Cintas Largas.
(ii) AFHK L/C issued prior to receipt of Backing L/C to be secured by a 10% margin by way of a hold out on cash deposit with AFHK
with interest at LIBOR. The Backing L/C, however, shall be opened not later than 120 days after the issuance of AFHKs L/C.
(iii) JSS of Messrs. Ramon Siy, Wilfrido C. Martinez, Ricardo Lopa and Miguel J. Lacson for both of the above cases.
DOCUMENTATION: Standard AFHK L/C documentation.

12

The facility was designed to finance the purchases of molasses made by the CLL from the Philippines for re-export.

13

In compliance with the letter-agreement, Wilfrido C. Martinez, Miguel J. Lacson, Ricardo Lopa, and Ramon Siy executed a continuing
suretyship agreement in which they bound and obliged themselves, jointly and severally, with the CLL to pay the latters obligation under the
14
said credit facility.
15

As of September 26, 1980, the balance of the deposit account of the CLL with the respondent was US$1,025,052.06. On the other hand, the
16
balance of the money placement in MMP No. 063, as of September 25, 1980 was US$312,708.43, while the balance of the money market
17
placement in MMP No. 084 as of September 8, 1980 stood at US$768,258.24.
On October 10, 1980, Blamar Gonzales, acting for Mar Tierra Corporation, sent to the respondent a telex confirming his telephone
conversation with Michael Sung/Bing Matoto requesting the respondent to transfer US$340,000 to Account No. FCD SA 18402-7, registered
in the name of Mar Tierra Corporation, Philippine Banking Corporation, Union Cement Building, Port Area, Manila, as payee, with the
following specific instructions: (a) there should be no mention of Wilfrido Martinez or Mar Tierra Corporation; (b) the telex instruction should
be signed only by Wilfrido Martinez and sent only through the telex machine of Mar Tierra Corporation; and, (c) the final confirmation of the
18
transfer should be made by telephone call. Gonzales requested the respondent, in the same telex, to confirm its total available account so
19
that instructions on the transfer of the funds to FCD SA 18402-7 could be formalized.
On October 13, 1980, Sung sent a telex to Gonzales informing the latter of the balances of the MMP Nos. 063 and 084 and in the CLL account
deposit, with the corresponding maturity dates thereof, thus:
1. DETAIL OF PLACEMENT IN VARIOUS A/C.
MMP 063
VALUE DATE

MATURITY DATE

DATE

AMOUNT

MATURITY VALUE

25/9/80

28/11/80

12-1/4

USD306,043.48

USD 312,708.43

MMP 084

25/09/80

28/11/80

12-1/4

USD751,883.88

USD 768,258.24
-------------USD1080,966.67
==============

CINTAS LARGAS
VALUE DATE

MATURITY DATE

DATE

AMOUNT

15/9/80

1 DAY CALL

10-7/8

USD 46,131.26

25/9/80

1 DAY CALL

11-1/4

USD500,000.00

12-1/4

USD420,831.45

MATURITY VALUE

(RATE ADJ: TO 12-1/4 VALUE 7/10/80)

26/9/80

31/10/80

USD 425,843.44

2. ACCORDING TO AIDC, O/S OF PESO LOAN IS 10,930,000.00, AND THE HOLDOUT REQUIRED IS 120 PCT
COMPUTATION:

PESO 10,930,000.00
7.89 (EXCHANGE RATE)
1.20 (120 PCT)
----------------1,662,357.00
==========

3. ACCORDINGLY, THE FUND AVAILABLE IS APPROX. USD340,000.00. PLS REVERT.

20

Sung informed Gonzales that the account available was approximately US$340,000, considering the CLL deposit account and the money
21
market placements. On October 14, 1980, the respondent received a telex from Wilfrido C. Martinez requesting that the transfer of
US$340,000 from the deposit account of the CLL or any deposit available be effected by telegraphic transfer as soon as possible to their
22
account, payee FCD SA 18402-7, Philippine Banking Corporation, Port Area, Manila. On October 21, 1980, Wilfrido Martinez wrote the
respondent confirming his request for the transfer of US$340,000 to "their" account, FCD SA 18402-7, with the Philippine Banking
23
Corporation, through Wells Fargo Bank of New York, Philippine Banking Corporation Account No. FCDU SA No. 003-019205.
The respondent complied with the request of the CLL, through Wilfrido Martinez and Gonzales, and remitted US$340,000 as
24
instructed. However, instead of deducting the amount from the funds in the CLL foreign currency or deposit accounts and/or MMP Nos. 063
and 084, the respondent merely "posted" the US$340,000 as an account receivable of the CLL since, at that time, the money market
25
placements had not yet matured. When the money market placements matured, however, the respondent did not collect the US$340,000
therefrom. Instead, the respondent allowed the CLL and/or Wilfrido C. Martinez to withdraw, up to July 3, 1981, the bulk of the CLL deposit
26
account and MMP Nos. 084 and 063; hence, it failed to secure reimbursement for the US$340,000 from the said deposit account and/or
money market placements.
In the meantime, problems ensued in the reconciliation of the transactions involving the funds of the CLL, including the MMP Nos. 063 and
084 with the respondent, as well as the receivables of Mar Tierra Corporation. There was also a need to audit the said funds. Sometime in
July 1982, conferences were held between the executive committee of Mar Tierra Corporation and some of its officers, including Miguel J.
Lacson, where the means to reduce the administrative expenses and accountants fees, and the possibility of placing the CLL on an "inactive
27
status" were discussed. The respondent pressured the CLL, Wilfrido Martinez, and Gonzales to pay the US$340,000 it remitted to Account
28
No. FCD SA 18402-7. Eventually, Wilfrido C. Martinez and Blamar Gonzales engaged the services of the auditing firm, the Jacinto, Belano,
Castro & Co., to review the flow of the CLLs funds and the receivables of Mar Tierra Corporation.
On August 16, 1982, the CLL, through its certified public accountant, wrote the respondent requesting the latter to furnish its accountant
29
with a copy of the financial report prepared by its auditors. An audit was, thereafter, conducted by the Jacinto, Belano, Castro & Co.,
certified public accountants of the CLL and Mar Tierra Corporation. Based on their report, the auditors found that the CLL owed the
30
respondent US$340,000.
In the meantime, the respondent demanded from the CLL, Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, the payment
of the US$340,000 remitted by it to FCD SA 18402-7, per instructions of Gonzales and Wilfrido Martinez. No remittance was made to the
respondent. Petitioner Ruben Martinez denied knowledge of any such remittance, as well as any liability for the amount thereof.
On June 17, 1983, the respondent filed a complaint against the CLL, Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez, with
the RTC of Kaloocan City for the collection of the principal amount of US$340,000, with a plea for a writ of preliminary attachment. Two
alternative causes of action against the defendants were alleged therein, viz:
FIRST ALTERNATIVE CAUSE OF ACTION
2.1 The allegations contained in the foregoing paragraphs are repleaded herein by reference.

2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained in the foregoing paragraphs was made upon the
express instructions of defendants GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf of the defendant CINTAS,
defendants GONZALES and WILFRIDO C. MARTINEZ being the duly authorized representatives of defendant CINTAS to transact any
and all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to advance the said amount and for defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff all such monies so advanced to said defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing defendants in meeting the latters liability to the
recipient/s of the amount so remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just, binding and lawful obligation of the defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee shareholders in Hongkong. The real and beneficial
shareholders of the foregoing defendants are the defendants LACSON and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or business conduit for their sole benefit and/or to
defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing defendants, has no corporate personality
distinct and separate from that of its beneficial shareholders and, likewise, has no substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made upon the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance made for the benefit of the beneficial shareholders of defendant
CINTAS.
2.10 Any and all obligations of defendant CINTAS are the obligations of its beneficial shareholders since the former is being used by
the latter as an alter ego or business conduit for their sole benefit and/or to defeat public convenience.
SECOND ALTERNATIVE CAUSE OF ACTION
3.1 The allegations contained in the foregoing paragraphs are incorporated herein by reference.
3.2 Defendants RUBEN MARTINEZ, WILFRIDO C. MARTINEZ and LACSON are joint account holders of Money Market Placement
Account Nos. 063 and 084 (hereinafter referred to as MMP 063 and 084 for brevity) opened and maintained by said defendants with
the plaintiff.
3.3 Said money market placement accounts, although nominally opened and maintained by said defendants, were in reality for the
account and benefit of all the defendants.
3.4 Defendant CINTAS likewise opened and maintained a deposit account with plaintiff.
3.5 Defendants W.C. Martinez and Gonzales upon giving instructions to plaintiff to remit the amount of US$340,000.00 as previously
discussed also instructed plaintiff to reimburse itself from available funds in MMP Account Nos. 063 and 084 and the defendant
CINTAS deposit account.
3.6 Due to excusable mistake, plaintiff was unable to obtain reimbursement for the remittance it made from MMP Account Nos.
063, 084 and from the deposit account of defendant CINTAS.
3.7 As a consequence of said mistake, plaintiff delivered to the foregoing defendants and/or to third parties upon orders of the
defendants substantially all the funds in MMP Account Nos. 063, 084 and the deposit account of defendant CINTAS.
3.8 The amount of US$340,000.00 delivered by plaintiff to the foregoing defendants constituted an overpayment and/or erroneous
payment as defendants had no right to demand the same; further, said amount having been unduly delivered by mistake, the
foregoing defendants were obliged to return it.
3.9 Since the foregoing defendants had no legal right to the overpayment or erroneous payment of US$340,000.00 they, therefore,
hold said money in trust for the plaintiff.
3.10 Despite numerous demands to the defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ, LACSON and CINTAS for restitution
31
of the funds erroneously paid or overpaid to said defendants, they have failed and continue to fail to make any restitution.
The respondent prayed therein that, after due proceedings, judgment be rendered in its favor, viz:
ON THE FIRST ALTERNATIVE CAUSE OF ACTION
4.1 Ordering defendants GONZALES, WILFRIDO C. MARTINEZ and CINTAS, jointly and severally, liable to pay plaintiff the amount of
US$340,000.00 with interests thereon from February 20, 1982 until fully paid.

4.2 Declaring that defendant CINTAS is a mere alter ego or business conduit of defendants LACSON and WILFRIDO C. MARTINEZ;
hence, the foregoing defendants are, jointly and severally, liable to pay plaintiff the amount of US$340,000.00 with interests
thereon.
4.3 Ordering the foregoing defendants to be, jointly and severally, liable for the amount of P100,000.00 as and for attorneys fees;
and
4.4 Ordering the foregoing defendants to be, jointly and severally, liable to plaintiff for actual damages in an amount to be proved at
the trial. Or ON THE SECOND ALTERNATIVE CAUSE OF ACTION
5.1 Declaring that plaintiff made an erroneous payment in the amount of US$340,000.00 to defendants LACSON, WILFRIDO C.
MARTINEZ, RUBEN MARTINEZ and CINTAS.
5.2 Declaring the foregoing defendants to be, jointly and severally, liable to reimburse plaintiff the amount of US$340,000.00 with
interest thereon from February 20, 1982 until fully paid.
5.3 Ordering defendants to be, jointly and severally, liable for the amount of P100,000.00 as and for attorneys fees; and
5.4 Ordering defendants to be, jointly and severally, liable to plaintiff for actual damages in an amount to be proved at the trial.
5.5 A writ of preliminary attachment be issued against the properties of the defendants WILFRIDO C. MARTINEZ, RUBEN MARTINEZ,
LACSON and CINTAS as a security for the satisfaction of any judgment that may be recovered.
Plaintiff further prays for such other relief as may be deemed just and equitable in the premises.

32

In his answer to the complaint, petitioner Ruben Martinez interposed the following special and affirmative defenses:
BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, answering defendant respectfully states:

2. Defendant is not the holder, owner, depositor, trustee and has no interest whatsoever in the account in Philippine Banking
Corporation (FCD SA 18402-7) where the plaintiff remitted the amount sought to be recovered. Hence, he did not benefit directly or
indirectly from the said remittance;
3. Defendant did not participate in any manner whatsoever in the remittance of funds from the plaintiff to the alleged FCD Account
in the Philippine Banking Corporation;
4. Defendant has not received nor benefited from the alleged remittance, "payment," "overpayment" or "erroneous payment"
allegedly made by plaintiff; hence, insofar as he is concerned, there is nothing to return to or to "hold in trust" for the plaintiff;
5. Plaintiffs alleged remittance of the amount by mere telex or telephone instruction was highly irregular and questionable
considering that the undertaking was that no remittance or transfer could be done without the prior signature of the authorized
signatories;
6. The alleged telex instructions to the plaintiff was for it to confirm the amounts that are "free and available" which it did;
7. Plaintiff is guilty of estoppel or laches by making it appear that the funds so remitted are "free and available" and by not acting
within reasonable time to correct the alleged mistake;
8. The alleged remittance, "overpayment" and "erroneous payment" was manipulated by plaintiffs own employees, officers or
representatives without connivance or collusion on the part of the answering defendant; hence, plaintiff has only itself to blame for
the same; likewise, its recourse is not against answering defendant;
9. Plaintiffs Complaint is defective in that it has failed to state the facts constituting the "mistake" regarding its failure to obtain
reimbursement from MMP 063 and 084;
10. Plaintiff is guilty of gross negligence and it only has itself to blame for its alleged loss;
11. Sometime on or about 1980, defendant was made to sign blank forms concerning opening of money market placements and
perhaps, this is how he became a "joint account holder" of MMP 063 and 084; defendant at that time did not realize the import or
significance of his act; afterwards, defendant did not do any act or omission by which he could be implicated in this case;
12. Assuming that defendant is a "joint account holder" of said MMP 063 and 084, plaintiff has failed to plead defendants
obligations, if any, by being said "joint account holder;" likewise, the Complaint fails to attach the corresponding documents showing
33
defendants being a "joint account holder."

The CLL was declared in default for its failure to file an answer to the complaint.
After trial, the RTC rendered its decision, the dispositive portion of which reads as follows:
PREMISES CONSIDERED, judgment is hereby rendered as follows:
1. Ordering all the defendants, jointly and severally, to pay plaintiff the amount of US$340,000.00 or its equivalent in
Philippine currency measured at the Central Bank prevailing rate of exchange in October 1980 and with legal interest
thereon computed from the filing of plaintiffs complaint on June 17, 1983 until fully paid;
2. Declaring that defendant Cintas Largas Ltd. is a mere business conduit and alter ego of the individual defendants, thereby
holding the individual defendants, jointly and severally, liable to pay plaintiff the aforesaid amount of US$340,000.00 or its
equivalent in Philippine Currency measured at the Central Bank prevailing rate of exchange in October 1980, with interest
thereon as above-stated;
3. Ordering all defendants to, jointly and severally, pay unto plaintiff the amount of P50,000.00 as and for attorneys fees,
plus costs.
All counterclaims and cross-claims are dismissed for lack of merit.
SO ORDERED.

34

The trial court ruled that the CLL was a mere paper company with nominee shareholders in Hongkong. It ruled that the principle of piercing
the veil of corporate entity was applicable in this case, and held the defendants liable, jointly and severally, for the claim of the respondent,
on its finding that the defendants merely used the CLL as their business conduit. The trial court declared that the majority shareholder of Mar
Tierra Corporation was the RJL, controlled by petitioner Ruben Martinez and his brothers, Jose and Luis Martinez, as majority shareholders
thereof. Moreover, petitioner Ruben Martinez was a joint account holder of MMP Nos. 063 and 084. The trial court, likewise, found that the
auditors of Mar Tierra Corporation and the CLL confirmed that the defendants owed US$340,000. The trial court concluded that the
respondent had established its causes of action against Wilfrido Martinez, Lacson, Gonzales, and petitioner Ruben Martinez; hence, held all
of them liable for the claim of the respondent.
The decision was appealed to the CA. On June 27, 1997, the CA rendered its decision, the dispositive portion of which reads:
WHEREFORE, the decision of the Court a quo dated December [19], 1991 is hereby MODIFIED, by exonerating appellant Blamar
Gonzales from any liability to appellee and the complaint against him isDISMISSED. The decision appealed from is AFFIRMED in all
other respect.
SO ORDERED.

35

The appellate court exonerated Gonzales of any liability, reasoning that he was not a stockholder of the CLL nor of Mar Tierra Corporation,
36
but was a mere employee of the latter corporation. Petitioner Ruben Martinez sought a reconsideration of the decision of the CA, to no
37
avail.
Dissatisfied with the decision and resolution of the appellate court, the petitioner, filed the petition at bar, on the following grounds:
I
RESPONDENT COURT OF APPEALS ERRED IN FINDING THAT HEREIN PETITIONER RUBEN MARTINEZ IS LIABLE TO RESPONDENT BPI
INTERNATIONAL FINANCE FOR REIMBURSEMENT OF THE US$340,000.00 REMITTED BY SAID RESPONDENT BPI INTERNATIONAL
FINANCE TO FCD SA ACCOUNT NO. 18402-7 AT THE PHILIPPINE BANKING CORPORATION, PORT AREA BRANCH.
II
RESPONDENT COURT OF APPEALS ERRED IN NOT GRANTING THE COUNTER-CLAIM OF PETITIONER RUBEN MARTINEZ CONSIDERING
38
THE EVIDENCE ON RECORD THAT PROVES THE SAME.
The paramount issue posed for resolution is whether or not the petitioner is obliged to reimburse to the respondent the principal amount of
US$340,000.
The petitioner asserts that the trial and appellate courts erred when they held him liable for the reimbursement of US$340,000 to the
respondent. He contends that he is not in actuality a stockholder of Mar Tierra Corporation, nor a stockholder of the CLL. He was not involved
in any way in the operations of the said corporations. He added that while he may have signed the signature cards of MMP Nos. 063 and 084
in blank, he never had any involvement in the management and disposition of the said accounts, nor of any deposits in or withdrawals from
either or both accounts. He was not aware of any transactions between the respondent, Wilfrido Martinez, and Gonzales, with reference to
the remittance of the US$340,000 to FCD SA 18402-7; nor did he oblige himself to pay the said amount to the respondent. According to the
petitioner, there is no evidence that he had benefited from any of the following: (a) the remittance by the respondent of the US$340,000 to
Account No. FCD SA 18402-7 owned by Mar Tierra Corporation; (b) the money market placements in MMP Nos. 063 and 084, or, (c) from any
deposits in or withdrawals from the said account and money market placements.

On the other hand, the appellate court found the petitioner and his co-defendants, jointly and severally, liable to the respondent for the
payment of the US$340,000 based on the following findings of the trial court:
The Court finds that defendant Cintas Largas (Ltd.) with capitalization of $10,000.00 divided into 1,000 shares at HK$10 per share, is
a mere paper company with nominee shareholders in Hongkong, namely: Overseas Nominees Ltd. and Shares Nominees Ltd., with
defendants Wilfrido and Miguel J. Lacson as the sole directors (Exh. A). Since the said shareholders are mere nominee companies, it
would appear that the said defendants Wilfrido and Miguel J. Lacson who are the sole directors are the real and beneficial
shareholders (t.s.n., 9-1-87, p. 5). Further, defendant Cintas Largas Ltd. has no real office in Hongkong as it is merely being
accommodated by Price Waterhouse, a large accounting office in Hongkong (t.s.n., 9-1-87, pp. 7-8).
Defendant Cintas Largas Ltd., being a mere alter ego or business conduit for the individual defendants with no corporate personality
distinct and separate from that of its beneficial shareholders and with no substantial assets in its own name, it is safe to conclude
that the remittance of US$340,000.00 was, in fact, a remittance made for the benefit of the individual defendants. Plaintiff was
supposed to deduct the US$340,000.00 remitted to the foreign currency deposit account from Cintas Largas (Ltd.) funds or from
money market placement account Nos. 063 and 084 as well as Cintas Largas Ltd. deposit account (Exh. FF-24).

Defendant Cintas Largas Ltd. was established only for financing (t.s.n., 12-19-88, pp. 25-26) and the active owners of Cintas are
defendants Miguel Lacson and Wilfrido C. Martinez (t.s.n., 12-19-88, p. 22). Mar Tierra Corporation of which defendant Wilfrido
Martinez is the President and one of its owners and defendant Blamar Gonzales as the Vice President, sells molasses to defendant
Cintas Largas Ltd. Defendant Miguel J. Lacson is a business partner in purchasing molasses for Mar Tierra Corporation. Mar Tierra
Corporation was selling molasses to Cintas Largas Ltd. which were purchased by Miguel Lacson and Wilfrido C. Martinez (t.s.n., 1219-88, pp. 23-24). The majority owner of Mar Tierra Corporation is RJL Martinez Fishing Corporation which is owned by brothers
Ruben Martinez, Jose Martinez and Luis Martinez (t.s.n., 12-19-88, pp. 24-25; t.s.n., 6-20-88, pp. 11-12). The FCD SA-18402-7
account at Philippine Banking Corporation, Port Area Branch, where the US$340,000.00 was remitted by the plaintiff is the account
of Mar Tierra Corporation, and with the interlapping connection of the defendants to each other, these could be the reason why the
funds of Cintas Largas Ltd. were being co-mingled and controlled by defendants more particularly defendants Blamar Gonzales and
Wilfrido C. Martinez (Exhs. D, E, F, G, H, I, J, L, M, N, O, P, R, S, and T).
On the basis of the evidence, the Court finds and so holds that the cause of action of the plaintiff against the defendants has been
39
established.
We do not agree with the trial court and appellate court.
40

We note that the question of whether or not a corporation is merely an alter ego is purely one of fact. So is the question of whether or not
a corporation is a paper company or a sham or subterfuge or whether the respondent adduced the requisite quantum of evidence warranting
41
the piercing of the veil of corporate entity of the CLL. The Court is not a trier of facts. Hence, the factual findings of the trial court, as
42
affirmed by the appellate court, are generally conclusive upon this Court. However, the rule is subject to the following exceptions: (a) where
the conclusion is a finding grounded entirely on speculation, surmise and conjectures; (b) where the information made is manifestly
mistaken; (c) where there is grave abuse of discretion; (d) where the judgment is based on a misapplication of facts, and the findings of facts
of the trial court and the appellate court are contradicted by the evidence on record; and (e) when certain material facts and circumstances
had been overlooked by the trial court which, if taken into account, would alter the result of the case.
We have reviewed the records and find that some substantial factual findings of the trial court and the appellate court and, consequently,
their conclusions based on the said findings, are not supported by the evidence on record.
The general rule is that a corporation is clothed with a personality separate and distinct from the persons composing it. Such corporation may
43
not be held liable for the obligation of the persons composing it; and neither can its stockholders be held liable for such obligation. A
44
corporation has a separate personality distinct from its stockholders and from other corporation to which it may be connected. This
45
separate and distinct personality of a corporation is a fiction created by law for convenience and to prevent injustice.
Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit sparingly, the disregard of its
46
independent being and the piercing of the corporate veil. Thus, the veil of separate corporate personality may be lifted when such
personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate
issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation or where the corporation is so
organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
47
corporation; or when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to achieve
48
equity or for the protection of the creditors. In such cases where valid grounds exist for piercing the veil of corporate entity, the corporation
49
50
will be considered as a mere association of persons. The liability will directly attach to them.
However, mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks of a corporation is not by
itself a sufficient ground to disregard the separate corporate personality. The substantial identity of the incorporators of two or more
51
corporations does not warrantly imply that there was fraud so as to justify the piercing of the writ of corporate fiction. To disregard the said
52
separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly.
The test in determining the application of the instrumentality or alter ego doctrine is as follows:

1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind,
will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine,
the courts are concerned with reality and not form, with how the corporation operated and the individual defendants relationship to that
53
operation.
In this case, the respondent failed to adduce the quantum of evidence necessary to prove any valid ground for the piercing of the veil of
corporate entity of Mar Tierra Corporation, or of RJL for that matter, and render the petitioner liable for the respondents claim, jointly and
severally, with Wilfrido Martinez and Lacson. The mere fact that the majority stockholder of Mar Tierra Corporation is the RJL, and that the
petitioner, along with Jose and Luis Martinez, owned about 42% of the capital stock of RJL, do not constitute sufficient evidence that the
latter corporation, and/or the petitioner and his brothers, had complete domination of Mar Tierra Corporation. It does not automatically
follow that the said corporation was used by the petitioner for the purpose of committing fraud or wrong, or to perpetrate an injustice on the
respondent. There is no evidence on record that the petitioner had any involvement in the purchases of molasses by Wilfrido Martinez,
Gonzales and Lacson, and the subsequent sale thereof to the CLL, through Mar Tierra Corporation. On the contrary, the evidence on record
shows that the CLL purchased molasses from Mar Tierra Corporation and paid for the same through the credit facility granted by the
respondent to the CLL. The CLL, thereafter, made remittances to Mar Tierra Corporation from its deposit account and MMP Nos. 063 and 084
with the respondent. The close business relationship of the two corporations does not warrant a finding that Mar Tierra Corporation was but
a conduit of the CLL.
Likewise, the respondent failed to adduce preponderant evidence to prove that the Mar Tierra Corporation and the RJL were so organized
and controlled, its affairs so conducted as to make the latter corporation merely an instrumentality, agency, conduit or adjunct of the former
or of Wilfrido Martinez, Gonzales, and Lacson for that matter, or that such corporations were organized to defraud their creditors, including
the respondent. The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for
disregarding their separate personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud
54
creditors and third persons of their rights.
Also, the mere fact that part of the proceeds of the sale of molasses made by Mar Tierra Corporation to the CLL may have been used by the
latter as deposits in its deposit account with the respondent or in the money market placements in MMP Nos. 063 and 084, or that the funds
of Mar Tierra Corporation and the CLL with the respondent were mingled, and their disposition controlled by Wilfrido Martinez, does not
constitute preponderant evidence that the petitioner, Wilfrido Martinez and Lacson used the Mar Tierra Corporation and the RJL to defraud
the respondent. The respondent treated the CLL and Mar Tierra Corporation as separate entities and considered them as one and the same
entity only when Wilfrido C. Martinez and/or Blamar Gonzales failed to pay the US$340,000 remitted by the respondent to FCD SA 18402-7.
This being the case, there is no factual and legal basis to hold the petitioner liable to the respondent for the said amount.
Contrary to the ruling of the trial court and the appellate court, the auditors of the CLL and the Mar Tierra Corporation, in their report, did
not find the petitioner liable for the respondents claim in their report. The auditors, in fact, found the CLL alone liable for the said
55
amount. Even a cursory reading of the report will show that the name of the petitioner was not mentioned therein.
The respondent failed to adduce evidence that the petitioner had any involvement in the transactions between the CLL, through Wilfrido
Martinez and Gonzales, and the respondent, with reference to the remittance of the US$340,000 to FCD SA 18402-7. In fact, the said
transaction was so confidential that Gonzales even suggested to the respondent that the name of Wilfrido Martinez or Mar Tierra
Corporation be not made of record, and to authorize only Wilfrido Martinez to sign the telex instruction:
OCT. 10, 1980
TO: AYALA FINANCE
ATTN: MICHAEL SUNG/BING MATOTO
FR: B. GONZALES
RE: TRANSFER OF FUNDS
THIS IS TO CONFRM OUR TELEPHONE CONVERSATION THAT WE WLD LIKE TO SUGGEST THE FF PROCEDURES FOR FUND TRANSFER.
1. TLX INSTRUCTION THAT FUNDS BE TRANSFERRED TO OUR FCD ACCT BY TELEGRAPHIC TRANSFER.
2. WE WILL ONLY USE ONE ACCT W/C IS FCD SA 18402-7 OF PHILBANKING CORPORATION, PORT AREA BRANCH, UNION
CEMENT BLDG, BONIFACIO DRIVE, PORT AREA, METRO MANILA, PHILS.
3. PAYEE SHLD BE FCD SA 18402-7 AND NO MENTION OF W.C. MARTINEZ OR MAR TIERRA CORP. TLX INSTRUCTION SHLD BE
SIGNED BY W.C. MARTINEZ AND WILL BE SENT ONLY THRU TLX MACHINE OF MAR TIERRA CORP.

4. FINAL CONFIRMATION OF THE TRANSFER BY TELEPHONE CALL.

PLS CONFRM TODAY TOTAL AMT. THAT IS FREE AND AVAILABLE SO WE CAN FORMALIZE INSTRUCTION OF TRANSFER IF THE ABOVE
PROCEDURE IS APPROVED BY YOU. PLS CONFRM ALSO LIST OF CORRESPONDENT BANK IN HK.
IN CASE OF WELLS FARGO HK, WE WLD LIKE TO SUGGEST THE FF PROCEDURE:
1. WELLS FARGO HK WIL SEND A TLX TO MANILA INSTRUCTING PHIL BANKING CORP TO CREDIT FCD SA 18402-7.
2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME WELLS FARGO HK WIL REQUEST WELLS FARGO NEW YORK TO
56
CREDIT FCDU NO. 003-019205 FOR THE ACCT OF PHIL BANKING CORP.
Even the respondent admitted, in its complaint, that the CLL, Gonzales, and Wilfrido Martinez, bound and obliged themselves to repay the
US$340,000, viz:
2.2 The remittance by plaintiff of the sum of US$340,000.00 as previously explained in the foregoing paragraphs was made upon the
express instructions of defendants GONZALES and WILFRIDO C. MARTINEZ acting for and in behalf of the defendant CINTAS,
defendants GONZALES and WILFRIDO C. MARTINEZ being the duly authorized representatives of defendant CINTAS to transact any
and all of its business with plaintiff.
2.3 The remittance of US$340,000.00 was made under an agreement for plaintiff to advance the said amount and for defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS to repay plaintiff all such monies so advanced to said defendants or to their order.
2.4 In making said remittance, plaintiff acted as the agent of the foregoing defendants in meeting the latters liability to the
recipient/s of the amount so remitted.
2.5 The remittance of US$340,000.00 which remains unsettled to date is a just, binding and lawful obligation of the defendants
GONZALES, WILFRIDO C. MARTINEZ and CINTAS.
2.6 Defendant CINTAS is a reinvoicing or paper company with nominee shareholders in Hongkong. The real and beneficial
shareholders of the foregoing defendants are the defendants LACSON, and WILFRIDO C. MARTINEZ.
2.7 Defendant CINTAS is being used by the foregoing defendants as an alter ego or business conduit for their sole benefit and/or to
defeat public convenience.
2.8 Defendant CINTAS, being a mere alter ego or business conduit for the foregoing defendants, has no corporate personality
distinct and separate from that of its beneficial shareholders and likewise has no substantial assets in its own name.
2.9 The remittance of US$340,000.00 as referred to previously, although made upon the instructions of defendants GONZALES,
WILFRIDO C. MARTINEZ and CINTAS, was in fact a remittance made for the benefit of the beneficial shareholders of defendant
57
CINTAS.
The admissions made by the respondent in its complaint are judicial admissions which cannot be contradicted unless there is a showing that
58
it was made through palpable mistake or that no such admission was made.
The respondent impleaded the petitioner only in its second alternative cause of action, on its allegation that the latter was a joint account
holder of MMP Nos. 063 and 084, simply because he signed the signature cards with Wilfrido Martinez and/or Lacson in blank. The trial court
found the submission of the respondent duly established, based on Wilfrido Martinezs answer to the complaint, and held the petitioner
liable for the said amount based on the signature cards in this language:
Defendants Ruben Martinez, Wilfrido C. Martinez and Miguel Lacson are joint account holders of the money market placement
account Nos. 063 and 084 (par. 17 page 4 Answer of defendant Wilfrido C. Martinez; par. 2, page 5, Amended Answer of defendant
59
Lacson; t.s.n., 4-18-88, p. 7).
The appellate court affirmed the ruling of the trial court without making any specific reference to the aforequoted ruling of the trial court.
61

60

We do not agree. The judicial admissions made by Wilfrido Martinez in his answer to the complaint are not binding on the petitioner. The
evidence on record shows that the petitioner affixed his signatures on the signature cards merely upon the request of his son, Wilfrido
Martinez. The signature cards were printed forms of the respondent with the names of the signatories and the supposed account holders
typewritten thereon and, except for the account number, were similarly worded, viz:
SIGNATURE CARD
Account Name:

Mr. Ruben Martinez and/or

Mr. Wilfrido C. Martinez
and/or Mr. Miguel J. Lacson

Account Number: MMP-063

I.D. Card/Passport No.: _____________________________________________

Residence Address: ________________________________________________

_________________________________________ Tel.: ___________________
Office Address: ____________________________________________________
_________________________________________ Tel.: ___________________
Number of signature required to withdraw funds: _________________________
Confirmation/Correspondence to be mailed to:

___ Office
___ Residence
___ Others: ________________
__________________________

Other Instructions: _______________________________________________

_________________________________________________________________
_________________________________________________________________
Specimen of signature:
1. Sgd.

(Ruben Martinez)

3. Sgd.

(Wilfrido Martinez)

SIGNATURE

NAME

SIGNATURE

NAME

2. Sgd.

(Ruben Martinez)

4. Sgd.

(Miguel J. Lacson)

SIGNATURE

NAME

SIGNATURE

NAME

62

63

The respondent failed to adduce any evidence, testimonial or documentary, including the relevant laws of Hongkong where the placements
were made to hold the petitioner liable for the respondents claims. Other than the signature cards, the respondent failed to adduce a shred
of evidence to prove (a) the terms and conditions of the money market placements of the CLL in MMP Nos. 063 and 084; and, (b) the rights
and obligations of the petitioner, Wilfrido Martinez and Lacson, over the money market placements. In light of the evidence on record, the
CLL and/or Wilfrido Martinez never surrendered their ownership over the funds in favor of the petitioner when the latter co-signed the
signature cards. The CLL and/or Wilfrido Martinez retained complete control and dominion over the funds.
By merely affixing his signatures on the signature cards, the petitioner did not necessarily become a joint and solidary creditor of the
respondent over the said placements. Neither did the petitioner bind himself to pay to the respondent the US$340,000 which was borrowed
by the CLL and/or Wilfrido Martinez, and later remitted to FCD SA 18402-7.
The respondent has no one but itself to blame for its failure to deduct the US$340,000 from the foreign currency and deposit accounts and
money market placements of the CLL. The evidence on record shows that the respondent was supposed to deduct the said amount from the
money market placements of the CLL in MMP Nos. 063 and 084, but failed to do so. The respondent remitted the amount from its own funds
and, by its negligence, merely posted the amount in the account of the CLL. Worse, the respondent allowed the CLL and Wilfrido Martinez to
withdraw the entirety of the deposits in the said accounts, without first deducting the US$340,000. By the time the respondent realized its
mistakes, the funds in the said accounts had already been withdrawn solely by the CLL and/or Wilfrido Martinez. This was the testimony of
Michael Sung, the witness for the respondent.
Q: Do you know whether this US$340,000 was really transferred to Foreign Currency Deposit Account No. 18402-7 of the Philippine
Banking Corporation in Manila?
A: Yes.
Q: Pursuant to the procedure for fund transfer as contained in Exhs. B, C, D and E, after having made such remittance of
US$340,000.00, what was plaintiff supposed to do, if any, in order to get reimbursement for such transfer?
A: Plaintiff was supposed to deduct the US$340,000.00 remitted to the foreign currency deposit account from the Cintas Largas
funds or from Money Market Placement Account Nos. 063 and 084 as well as the Cintas Largas, Ltd. deposit account.
Q: Do you know if plaintiff was able to obtain reimbursement of the US$340,000 remitted to the Philippine Banking Corporation in
Manila?
A: No, because instead of deducting the remittance of US$340,000 from the funds in the money market placement accounts and/or
the Cintas Largas Deposit Account, we posted the US$340,000 remittance as an account receivable of Cintas Largas, Ltd. since at that
time the money market placement deposits have not yet matured. Subsequently, we failed to charge the deposit and MMP accounts

when they matured and Cintas Largas, Ltd. and/or Wilfrido C. Martinez had already withdrawn the bulk of the funds contained in
Money Market Placement Account No. 063 and the Cintas Largas, Ltd. Deposit Account thus, we were unable to obtain
64
reimbursement therefrom.
It cannot even be argued that if the petitioner would not be adjudged liable for the respondents claim, he would thereby be enriching
himself at the expense of the respondent. There is no evidence on record that the petitioner withdrew a single centavo from or was
personally benefited by the funds in MMP Nos. 063 and 084. The testimonial and documentary evidence of the respondent clearly shows that
the CLL and/or Wilfrido Martinez used and disposed of the said funds without the knowledge, involvement, and consent of the petitioner.
Furthermore, the documentary evidence of the respondent shows the following:
MMP 063
Statement of Accounts (Deposit)
Value
Date

Funds In

Funds Out

Remarks

28/11/80

6,664.95

29/12/80

4,779.66

"

"

21/01/81

4,024.83

"

"

21/01/81
13/02/81

Interests earned

119,478.51 Purchase HK$632,041.33 @5.29 & transferred to its

statement A/C
2,321.99

"

Interests earned
100,015.00 Transfer to Cintas Largas A/C Receivable.

17/02/81

55.07

18/03/81

1,317.27

"

Interests earned
"

"

100,000.00 Purchase HK$525,000.00 @5.25 cheque made payable

to Grand Solid Enterprises Co., Ltd.

"

5,713.74 Transfer to A/C Receivable

(MMP-063)
_____________
US$443,975.85
============

_____________
US$443,975.85
============

65

MMP 084
Statement of Accounts (Deposit)
Value
Date

Funds In

Funds Out

Remarks

28/11/80

16,374.36

01/12/80

488.16

"

"

04/12/80

1,089.06

"

"

"
09/12/80

US$250,000.00 Transfer to A/C of Cintas Largas

1,290.56

"
18/12/80

Interests earned

Interests earned
200,000.00 Transfer to Cintas Largas A/R.

1,545.42

"

Interests earned
200,000.00 T/T to Chase Manhattan NY for
Credit A/C Allied Capital F/O
Frank Chan B/O Grand Solid.

02/03/81
"

4,608.27

Interests earned
20,470.74 Transfer to A/C of Grand Solid

09/03/81

321.91

"
20/03/81

Interests earned
60,000.00 Transfer to A/C of Trinisia Ltd.

213.40

"

Interests earned
45,286.26 T/T to Nitto Trading & Josho
Ind. Co., Ltd., Japan.

"

2,028.02 Transfer to A/C Receivable

(MMP-084)

"

30.00 Cable Charges

_____________
US$777,815.02
============

_____________
US$777,815.02
============

66

CINTAS LARGAS
Statement of Accounts (Deposit)
Value
Date

Funds In

Funds Out

Remarks

31/10/80

5,011.99

Interests earned

17/11/80

8,067.70

"

"
09/11/80

350,000.00 Transfer to A/C of Grand Solid

3,062.23

"
26/11/80

3,264.34

1,299.80

2,445.49

143,000.00 Transfer from CLs Statement A/C

456.81

"

Interests earned
50,000.00 Purchase HK$267,150.00 @5.343, Cheque made payable
to Grand Solid.

13/04/81

US$ 40.89 Interests earned

311.66

"
28/04/81

Interests earned
129,529.26 Transfer to Grand Solids A/C Receivable

02/04/81

21/04/81

Interests earned
81,415.00 Remittance from C. Itoh & Co., NY

"

10/04/81

Interests earned
300,000.00 Purchase HK$1,535,100.00 @5.117, Cheque made
payable to Grand Solid

"
02/03/81

Interests earned
350,000.00 Purchase HK$1,789,200.00 @5.112, Cheque made
payable to Grand Solid.

"
21/01/81

"

"

"

US$ 50,000.00 Purchase HK$268,850.00 @5.377, cheque made payable

to Grand Solid.
132.04

"

Interests earned
40,000.00 Purchase HK$214,480.00 @5.362, cheque made payable
to Grand Solid.

"

52,692.00

19/05/81

178,465.18

22/05/81

46,472.00

Remittance from Dai Ichi Kangyo Bank NY. REF.

KOMEIMARU
Transfer from CLs A/C Receivable
Remittance from C. Itoh & Co., NY Re. Pacific Geory.

26/05/81

28.40

04/06/81

1,242.80

"
11/06/81

Interests earned
"

"

50,000.00 Purchase HK$275,750.00 @5.515, Cheque made payable

to Grand Solid
2,252.36

"

Interests earned
66,400.00 T/T to Security Pacific Natl Bank LA for A/C of Twentieth
Century Fox Intl Corp.

"

15.00

Cable Charge

"

31.65

Purchase HK$175.00 @5.53 for payment of Business

Registration Fee.

25/06/81

1,192.24

Interests earned

"

60,000.00 Purchase HK$331,500.00 @5.525, cheque made payable

to Grand Solid.

"

22,656.88 T/T to Daiwa Bank, Los Angeles for A/C of OAC

Equipment Corp.

"

45,800.00 T/T to Josho Ind. Co. Ltd., Japan

"
03/07/81

15.00 Cable Charge

165.47

"

11,870.00 T/T to Bank of Tokyo, Kobe Branch for A/C of Furuno

Electric Co. Ref.: Mar Tierra Takashiro Maru, Eatelite
Nav. and Radar.

"

15.00 Cable Charge

06/07/81

17.60

07/07/81

14.83

"

US$ 482.29

"

Interests earned
US$ 1,250.00 Reimbursement of expenses paid to Price Waterhouse &
Co.

11.91

"

Interests earned
237.43 Purchase HK$1,421.50 for cheque payment to Price
Waterhouse & Co.

08/01/82

70,360.00

19/01/82

268.74

"

Remittance from C. Itoh & Co., NY

Interests earned
3,064.81 Transfer to CLs Margin A/C

"

50,000.00 Purchase HK$295,100.00, cheque made payable to

Grand Solid.

"
TOTAL :

"

15.00 Cable Charge

"
17/09/81

Interests earned

16,000.00 T/T to Dai Ichi Kangyo Bank, Shimizu Branch for A/C of
Takashiro Maru.

"
15/09/81

Interests earned

5,952.38 Transfer to A/C of Trinisia Ltd.

_____________ ______________
US$1,756,387.32 US$1,732,103.25
-

24,284.07 Outstanding deposits

______________ ______________
US$1,756,387.32 US$1,756,387.32
============== ==============

67

Clearly from the foregoing, the withdrawals from the deposit and foreign currency accounts and MMP Nos. 063 and 084 of the CLL, after the
respondent remitted the US$340,000, were for the account of the CLL and/or Wilfrido Martinez, and not of the petitioner.

IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the Court of Appeals is REVERSED AND SET ASIDE. The complaint
of the respondent against the petitioner in Civil Case No. C-10811 is DISMISSED. No costs.
SO ORDERED.
G.R. No. 142936

April 17, 2002

PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners,

vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
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 semigovernment 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 VicePresident 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
4
the business of another corporation, while disavowing or repudiating any responsibility, 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 Edward J. Nell Co. v. Pacific
6
Farms, 15 SCRA 415."
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to respondent.
This Courts Ruling
The Petition is meritorious.
Main Issue:

Liability for Corporate Debts

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 this rule, however,
8
there are some exceptions enumerated in Fuentes v. Court of Appeals. After a careful scrutiny of the records and the pleadings submitted by
9
the parties, we find that the lower courts misappreciated the evidence presented. Overlooked by the CA were certain relevant facts that
10
would justify a conclusion different from that 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
11
fraudulently entered into in order to 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, attributes, and
12
properties expressly authorized by law or incident to its existence. It has a personality separate and distinct from the persons composing it,
13
as well as from any other legal entity to which it may be related. This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an
14
alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably
15
16
be impaled only when it becomes a shield for fraud, illegality or inequity 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 mindful of the milieu
18
where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
19
committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
20
21
presumed. Otherwise, an injustice that was never unintended 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 of the estate of the
23
24
25
decedent, to escape liability arising from a debt, or to perpetuate fraud and/or confuse legitimate issues either to promote or to shield
26
27
unfair objectives or to cover up an otherwise blatant violation of the prohibition against forum-shopping. Only in these and similar
28
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;
30
and (3) the said control 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 over it warrants the disregard of corporate
31
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
32
corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person. Third, respondent
33
was not defrauded or injured 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 convincing evidence to
34
35
justify the setting aside of the separate corporate personality rule. However, it utterly failed to discharge this burden; it failed to establish
36
by competent evidence that petitioners separate corporate veil had been used to conceal fraud, illegality or inequity.
While we agree with respondents claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced to
37
PASUMIL, we are not convinced that the transfer of the latters assets to petitioners was fraudulently entered into in order to escape
38
liability for its debt to respondent.
A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest bidder
39
at the public auction conducted. The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred arrearages
40
of more than 20 percent of the total outstanding obligation. Thus, DBP had not only a right, but also a duty under the law to foreclose the
41
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 operation of such assets either by itself or through a
44
subsidiary corporation.

45

PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135. These assets
46
were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement. PNB, as successor-in47
48
interest, stepped into the shoes of DBP as PASUMILs creditor. By 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 fact evidencing bad
51
faith on the part of PNB and its transferee. The corporate fiction was not used to defeat public convenience, justify a wrong, protect fraud
52
53
or defend crime. None of the foregoing exceptions was shown to exist in the present case. On the contrary, the lifting of the corporate veil
would result in manifest injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and 311,
which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of the
operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity as a
corporation.
A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other
hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined
54
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 creditors, there must be an
56
express provision of law authorizing them. For a valid merger or consolidation, the approval by the Securities and Exchange Commission
57
(SEC) of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective
58
stockholders of the constituent corporations.
In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under Title
59
IX of the Corporation Code was not followed.
60

In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally extinguished or terminated. Further, prior to
PNBs acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the formers obligation in the
amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another
P14,000.
61

Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. LOI No. 11 explicitly provides that PNB
62
shall study and submit recommendations on the claims of PASUMILs creditors. Clearly, the corporate separateness between PASUMIL and
63
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.

[G.R. No. 160039. June 29, 2004]

RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD WAREHOUSING and PORT SERVICES, INCORPORATED, petitioners, vs. HEIRS
OF ERWIN SUAREZ FRANCISCO, respondents.

[1]

This is a petition for review under Rule 45 of the Rules of Court seeking the reversal of the decision of the Court of Appeals
[2]
dated February 27, 2003 in CA-G.R. CV No. 61868, which affirmed in toto the June 19, 1998 decision of Branch 20 of the Regional Trial Court
of Manila in Civil Case No. 96-79554.
The facts are as follows:
On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen year old third year physical therapy student of
the Manila Central University, was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard Gate in the City of Manila. At the
same time, petitioner, Raymundo Odani Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the same road. The truck
was owned by petitioner, Dassad Warehousing and Port Services, Inc.
Traveling behind the motorcycle driven by Francisco was a sand and gravel truck, which in turn was being tailed by the Isuzu truck
driven by Secosa. The three vehicles were traversing the southbound lane at a fairly high speed. When Secosa overtook the sand and gravel
truck, he bumped the motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then ran over Francisco, which resulted in his
[3]
instantaneous death. Fearing for his life, petitioner Secosa left his truck and fled the scene of the collision.

Respondents, the parents of Erwin Francisco, thus filed an action for damages against Raymond Odani Secosa, Dassad Warehousing and
Port Services, Inc. and Dassads president, El Buenasucenso Sy. The complaint was docketed as Civil Case No. 96-79554 of the RTC of Manila,
Branch 20.
On June 19, 1998, after a full-blown trial, the court a quo rendered a decision in favor of herein respondents, the dispositive portion of
which states:
WHEREFORE, premised on the foregoing, judgment is hereby rendered in favor of the plaintiffs ordering the defendants to pay plaintiffs
jointly and severally:
1.

The sum of P55,000.00 as actual and compensatory damages;

2.

The sum of P20,000.00 for the repair of the motorcycle;

3.

The sum of P100,000.00 for the loss of earning capacity;

4.

The sum of P500,000.00 as moral damages;

5.

The sum of P50,000.00 as exemplary damages;

6.

The sum of P50,000.00 as attorneys fees plus cost of suit.

SO ORDERED.
Petitioners appealed the decision to the Court of Appeals, which affirmed the appealed decision in toto.

[4]

Hence the present petition, based on the following arguments:

I.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT THAT PETITIONER DASSAD DID NOT
EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE AND RELATED JURISPRUDENCE ON THE MATTER.
II.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE DECISION OF THE TRIAL COURT IN HOLDING PETITIONER EL
BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD AND SECOSA IN VIOLATION OF THE CORPORATION LAW AND RELATED
JURISPRUDENCE ON THE MATTER.
III.
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT OF APPEALS AWARDING P500,000.00 AS MORAL DAMAGES IS
[5]
MANIFESTLY ABSURD, MISTAKEN AND UNJUST.
The petition is partly impressed with merit.
On the issue of whether petitioner Dassad Warehousing and Port Services, Inc. exercised the diligence of a good father of a family in the
selection and supervision of its employees, we find the assailed decision to be in full accord with pertinent provisions of law and established
jurisprudence.
Article 2176 of the Civil Code provides:
Whoever by act or omission causes damage to another, there being fault or negligence, is obliged to pay for the damage done. Such fault or
negligence, if there is no pre-existing contractual relation between the parties, is called a quasi-delict and is governed by the provisions of this
Chapter.
On the other hand, Article 2180, in pertinent part, states:
The obligation imposed by article 2176 is demandable not only for ones own acts or omissions, but also for those of persons for whom one is
responsible x x x.
Employers shall be liable for the damages caused by their employees and household helpers acting within the scope of their assigned tasks,
even though the former are not engaged in any business or industry x x x.
The responsibility treated of in this article shall cease when the persons herein mentioned prove that they observed all the diligence of a
good father of a family to prevent damage.
Based on the foregoing provisions, when an injury is caused by the negligence of an employee, there instantly arises a presumption that
there was negligence on the part of the employer either in the selection of his employee or in the supervision over him after such
selection. The presumption, however, may be rebutted by a clear showing on the part of the employer that it exercised the care and

diligence of a good father of a family in the selection and supervision of his employee. Hence, to evade solidary liability for quasi-delict
[6]
committed by an employee, the employer must adduce sufficient proof that it exercised such degree of care.
How does an employer prove that he indeed exercised the diligence of a good father of a family in the selection and supervision of his
[7]
employee? The case of Metro Manila Transit Corporation v. Court of Appeals is instructive:
In fine, the party, whether plaintiff or defendant, who asserts the affirmative of the issue has the burden of presenting at the trial such
[8]
amount of evidence required by law to obtain a favorable judgment . . . In making proof in its or his case, it is paramount that the best and
[9]
most complete evidence is formally entered.
Coming now to the case at bar, while there is no rule which requires that testimonial evidence, to hold sway, must be corroborated by
documentary evidence, inasmuch as the witnesses testimonies dwelt on mere generalities, we cannot consider the same as sufficiently
persuasive proof that there was observance of due diligence in the selection and supervision of employees. Petitioners attempt to prove its
deligentissimi patris familias in the selection and supervision of employees through oral evidence must fail as it was unable to buttress the
[10]
same with any other evidence, object or documentary, which might obviate the apparent biased nature of the testimony.
Our view that the evidence for petitioner MMTC falls short of the required evidentiary quantum as would convincingly and undoubtedly
prove its observance of the diligence of a good father of a family has its precursor in the underlying rationale pronounced in the earlier case
[11]
of Central Taxicab Corp. vs. Ex-Meralco Employees Transportation Co., et al., set amidst an almost identical factual setting, where we held
that:
The failure of the defendant company to produce in court any record or other documentary proof tending to establish that it had exercised
all the diligence of a good father of a family in the selection and supervision of its drivers and buses, notwithstanding the calls therefor by
both the trial court and the opposing counsel, argues strongly against its pretensions.
We are fully aware that there is no hard-and-fast rule on the quantum of evidence needed to prove due observance of all the diligence of a
good father of a family as would constitute a valid defense to the legal presumption of negligence on the part of an employer or master
whose employee has by his negligence, caused damage to another. x x x (R)educing the testimony of Albert to its proper proportion, we do
not have enough trustworthy evidence left to go by. We are of the considered opinion, therefore, that the believable evidence on the degree
of care and diligence that has been exercised in the selection and supervision of Roberto Leon y Salazar, is not legally sufficient to overcome
the presumption of negligence against the defendant company.
The above-quoted ruling was reiterated in a recent case again involving the Metro Manila Transit Corporation,

[12]

thus:

In the selection of prospective employees, employers are required to examine them as to their qualifications, experience, and service
[13]
records. On the other hand, with respect to the supervision of employees, employers should formulate standard operating procedures,
monitor their implementation, and impose disciplinary measures for breaches thereof. To establish these factors in a trial involving the issue
of vicarious liability, employers must submit concrete proof, including documentary evidence.
In this case, MMTC sought to prove that it exercised the diligence of a good father of a family with respect to the selection of employees by
presenting mainly testimonial evidence on its hiring procedure. According to MMTC, applicants are required to submit professional driving
licenses, certifications of work experience, and clearances from the National Bureau of Investigation; to undergo tests of their driving skills,
concentration, reflexes, and vision; and, to complete training programs on traffic rules, vehicle maintenance, and standard operating
procedures during emergency cases.
xxx

xxx

xxx

Although testimonies were offered that in the case of Pedro Musa all these precautions were followed, the records of his interview, of the
results of his examinations, and of his service were not presented. . . [T]here is no record that Musa attended such training programs and
passed the said examinations before he was employed. No proof was presented that Musa did not have any record of traffic violations. Nor
were records of daily inspections, allegedly conducted by supervisors, ever presented. . . The failure of MMTC to present such documentary
proof puts in doubt the credibility of its witnesses.
Jurisprudentially, therefore, the employer must not merely present testimonial evidence to prove that he observed the diligence of a
good father of a family in the selection and supervision of his employee, but he must also support such testimonial evidence with concrete or
[14]
documentary evidence. The reason for this is to obviate the biased nature of the employers testimony or that of his witnesses.
Applying the foregoing doctrines to the present case, we hold that petitioner Dassad Warehousing and Port Services, Inc. failed to
conclusively prove that it had exercised the requisite diligence of a good father of a family in the selection and supervision of its employees.
Edilberto Duerme, the lone witness presented by Dassad Warehousing and Port Services, Inc. to support its position that it had
exercised the diligence of a good father of a family in the selection and supervision of its employees, testified that he was the one who
recommended petitioner Raymundo Secosa as a driver to Dassad Warehousing and Port Services, Inc.; that it was his duty to scrutinize the
capabilities of drivers; and that he believed petitioner to be physically and mentally fit for he had undergone rigid training and attended the
[15]
PPA safety seminar.
Petitioner Dassad Warehousing and Port Services, Inc. failed to support the testimony of its lone witness with documentary evidence
which would have strengthened its claim of due diligence in the selection and supervision of its employees. Such an omission is fatal to its
position, on account of which, Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo Secosa for the damages suffered
by the heirs of Erwin Francisco.

However, we find that petitioner El Buenasenso Sy cannot be held solidarily liable with his co-petitioners. While it may be true that Sy is
the president of petitioner Dassad Warehousing and Port Services, Inc., such fact is not by itself sufficient to hold him solidarily liable for the
liabilities adjudged against his co-petitioners.
It is a settled precept in this jurisdiction that a corporation is invested by law with a personality separate from that of its stockholders or
[16]
members. It has 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
[17]
corporation is not in itself sufficient ground for disregarding the separate corporate personality. A corporations authority to act and its
[18]
liability for its actions are separate and apart from the individuals who own it.
The so-called veil of corporation fiction treats as separate and distinct the affairs of a corporation and its officers and stockholders. As a
general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. When the notion
of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
[19]
association of persons. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work
inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have
been fraud and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and
[20]
[21]
convincingly established. It cannot be presumed.
The records of this case are bereft of any evidence tending to show the presence of any grounds enumerated above that will justify the
piercing of the veil of corporate fiction such as to hold the president of Dassad Warehousing and Port Services, Inc. solidarily liable with it.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the name of Dassad Warehousing and Port Services, Inc., and not
in the name of El Buenasenso Sy. Raymundo Secosa is an employee of Dassad Warehousing and Port Services, Inc. and not of El Buenasenso
Sy. All these things, when taken collectively, point toward El Buenasenso Sys exclusion from liability for damages arising from the death of
Erwin Francisco.
Having both found Raymundo Secosa and Dassad Warehousing and Port Services, Inc. liable for negligence for the death of Erwin
Francisco on June 27, 1996, we now consider the question of moral damages which his parents, herein respondents, are entitled to
recover. Petitioners assail the award of moral damages of P500,000.00 for being manifestly absurd, mistaken and unjust. We are not
persuaded.
Under Article 2206, the spouse, legitimate and illegitimate descendants and ascendants of the deceased may demand moral damages
for mental anguish for the death of the deceased. The reason for the grant of moral damages has been explained in this wise:
. . . the award of moral damages is aimed at a restoration, within the limits possible, of the spiritual status quo ante; and therefore, it must be
proportionate to the suffering inflicted. The intensity of the pain experienced by the relatives of the victim is proportionate to the intensity of
[22]
affection for him and bears no relation whatsoever with the wealth or means of the offender.
In the instant case, the spouses Francisco presented evidence of the searing pain that they felt when the premature loss of their son
was relayed to them. That pain was highly evident in the testimony of the father who was forever deprived of a son, a son whose untimely
death came at that point when the latter was nearing the culmination of every parents wish to educate their children. The death of Francis
has indeed left a void in the lives of the respondents. Antonio Francisco testified on the effect of the death of his son, Francis, in this manner:
Q: (Atty. Balanag): What did you do when you learned that your son was killed on June 27, 1996?
A: (ANTONIO FRANCISCO): I boxed the door and pushed the image of St. Nio telling why this happened to us.
Q: Mr. Witness, how did you feel when you learned of the untimely death of your son, Erwin Suares (sic)?
A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that my son is dead.
xxx

xxx

xxx

Q: How did your family react to the death of Erwin Suarez Francisco?
A: All of my family and relatives were felt (sic) sorrow because they knew that my son is (sic) good.
Q: We know that it is impossible to put money terms(s) [on] the life of [a] human, but since you are now in court and if you were
to ask this court how much would you and your family compensate? (sic)
A: Even if they pay me millions, they cannot remove the anguish of my son (sic).

[23]

Moral damages are emphatically not intended to enrich a plaintiff at the expense of the defendant. They are awarded to allow the
former to obtain means, diversion or amusements that will serve to alleviate the moral suffering he has undergone due to the defendants
[24]
culpable action and must, perforce, be proportional to the suffering inflicted. We have previously held as proper an award of P500,000.00
as moral damages to the heirs of a deceased family member who died in a vehicular accident. In our 2002 decision in Metro Manila Transit
[25]
Corporation v. Court of Appeals, et al., we affirmed the award of moral damages of P500,000.00 to the heirs of the victim, a mother, who
died from injuries she sustained when a bus driven by an employee of the petitioner hit her. In the case at bar, we likewise affirm the portion
of the assailed decision awarding the moral damages.
Since the petitioners did not question the other damages adjudged against them by the court a quo, we affirm the award of these
damages to the respondents.
WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED with the MODIFICATION that petitioner El Buenasenso Sy
is ABSOLVED from any liability adjudged against his co-petitioners in this case.
Costs against petitioners.
SO ORDERED.

G.R. No. 131889

March 12, 2001

VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN EFANN, LOUISE Y. GOCHAN, ESTEBAN Y. GOCHAN JR., DOMINIC Y.GOCHAN,
FELIX 0. GOCHAN III, MERCEDES R. GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO
R. GOCHAN JR., MARION R. GOCHAN, MACTAN REALTY DEVELOPMENT CORPORATION and FELIX GOCHAN & SONS REALTY
CORPORATION, petitioner,
vs.
RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR., MARY G. YOUNG-HSU and ALEXANDER THOMAS G.
YOUNG as heirs of Alice Gochan; the INTESTATE ESTATE OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY, for
themselves and on behalf and for the benefit of FELIX GOCHAN & SONS REALTY CORPORATION, respondents.
A court or tribunal's jurisdiction over the subject matter is determined by the allegations in the complaint. The fact that certain persons are
not registered as stockholders in the books of the corporation will not bar them from filing a derivative suit, if it is evident from the
allegations in the complaint that they are bona fide stockholders. In view of RA 8799, intra-corporate controversies are now within the
jurisdiction of courts of general jurisdiction, no longer of the Securities and Exchange Commission. 1wphi1.nt
The Case
1

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Petition assails the February 28, 1996 Decision of the
Court of Appeals (CA), as well as its December 18, 1997 Resolution denying petitioner's Motion for Reconsideration. The dispositive part of
the CA Decision reads as follows:
"WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without prejudice to filing the same in the regular
courts.
SO ORDERED."

In dismissing the Complaint before the SEC regarding only Alice Gochan's heirs but not the other complainants, the CA effectively modified
3
the December 9, 1994 Order of the hearing officer of the Securities and Exchange Commission (SEC). The Order, which was affirmed in full
by the SEC en banc, dismissed the entire case.
The Facts
The undisputed facts are summarized by the Court of Appeals as follows:
"Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the SEC on June, 1951, with Felix
Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators.
"Felix Gochan Sr.'s daughter, Alice, mother of [herein respondents], inherited 50 shares of stock in Gochan Realty from the former.
"Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.
"In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein [respondents] Richard Young,
David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young.
"Having earned dividends, these stocks numbered 179 by 20 September 1979.
"Five days later (25 September), at which time all the children had reached the age of majority, their father John Sr., requested
Gochan Realty to partition the shares of his late wife by cancelling the stock certificates in his name and issuing in lieu thereof, new
stock certificates in the names of [herein respondents].
"On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first refusal granted to the remaining
stockholders by the Articles of Incorporation.
"On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].
"On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for issuance of shares of stock
to the rightful owners, nullification of shares of stock, reconveyance of property impressed with trust, accounting, removal of
officers and directors and damages against respondents. A Notice of Lis Pendens was annotated as [sic] real properties of the
corporation.
"On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the SEC ha[d] no jurisdiction over the
nature of the action; (2) the [respondents] [were] not the real parties-in-interest and ha[d] no capacity to sue; and (3) [respondents']
causes of action [were] barred by the Statute of Limitations.
"The motion was opposed by herein [respondents].

"On 29 March 1994, [petitioners'] filed a Motion for cancellation of Notice of Lis Pendens. [Respondents] opposed the said motion.
"On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss and ordered the cancellation of the notice
of lis pendens annotated upon the titles of the corporate lands. In its order, the SEC opined:
'In the instant case, the complaint admits that complainants Richard G. Young, David G. Young, Jane G. Young Llaban, John
D. Young, Jr., Mary G. Young Hsu and Alexander Thomas G. Young, who are the children of the late Alice T. Gochan and the
late John D. Young, Sr. are suing in their own right and as heirs of and/or as the beneficial owners of the shares in the
capital stock of FGSRC held in trust for them during his lifetime by the late John D. Young. Moreover, it has been shown that
said complainants ha[d] never been x x x stockholder[s] of record of FGSRC to confer them with the legal capacity to bring
and maintain their action. Conformably, the case cannot be considered as an intra-corporate controversy within the
jurisdiction of this Commission.
'The complainant heirs base what they perceived to be their stockholders' rights upon the fact of their succession to all the
rights, property and interest of their father, John D. Young, Sr. While their heirship is not disputed, their right to compel the
corporation to register John D. Young's Sr. shares of stock in their names cannot go unchallenged because the devolution of
property to the heirs by operation of law in succession is subject to just obligations of the deceased before such property
passes to the heirs. Conformably, until therefore the estate is settled and the payment of the debts of the deceased is
accomplished, the heirs cannot as a matter of right compel the delivery of the shares of stock to them and register such
transfer in the books of the corporation to recognize them as stockholders. The complainant heirs succeed to the estate of
[the] deceased John D. Young, Sr. but they do not thereby become stockholders of the corporation.
'Moreover, John D. [Young Sr.'s] shares of stocks form part of his estate which is the subject of Special Proceedings No.
3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par. 4 of the complaint]. As complainants clearly claim[,] the
Intestate Estate of John D. Young, Sr. has an interest in the subject matter of the instant case. However, actions for the
recovery or protection of the property [such as the shares of stock in question] may be brought or defended not by the
heirs but by the executor or administrator thereof.
'Complainants further contend that the alleged wrongful acts of the corporation and its directors constitute fraudulent
devices or schemes which may be detrimental to the stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have
been suffered by complainants as stockholders, which they are not. Admittedly, the SEC has no jurisdiction over a
controversy wherein one of the parties involved is not or not yet a stockholder of the corporation. [SEC vs. CA, 201 SCRA
134].
'Further, by the express allegation of the complaint, herein complainants bring this action as [a] derivative suit on their own
behalf and on behalf of respondent FGSRC.
'Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange Commission provides:
'Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a corporation unless the
complainant was a stockholder at the time the questioned transaction occurred as well as at the time the action
was filed and remains a stockholder during the pendency of the action. x x x.'
'The rule is in accord with well settled jurisprudence holding that a stockholder bringing a derivative action must have been
[so] at the time the transaction or act complained of [took] place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19
SCRA 671; San Miguel Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory, strict compliance
with the terms thereof thus being a condition precedent, a jurisdictional requirement to the filing of the instant action.
'Otherwise stated, proof of compliance with the requirement must be sufficiently established for the action to be given due
course by this Commission. The failure to comply with this jurisdictional requirement on derivative action must necessarily
result in the dismissal of the instant complaint.' (pp. 77-79, Rollo)
"[Respondents] moved for a reconsideration but the same was denied for being pro-forma.
"[Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d] jurisdiction over the case.
"[Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30-day period for appeals.
"On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the [respondents'] motion for reconsideration did not
4
interrupt the 30-day period for appeal because said motion was pro-forma."
Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.
Ruling of the Court of Appeals
The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the heirs of Alice Gochan were concerned, because they
were not yet stockholders of the corporation. On the other hand, it upheld the capacity of Respondents Cecilia Gochan Uy and her spouse,
Miguel Uy. It also held that the Intestate Estate of John Young Sr. was an indispensable party.

The appellate court further ruled that the cancellation of the notice of lis pendens on the titles of the corporate real estate was not justified.
Moreover, it declared that respondents' Motion for Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal
period.
Hence, this Petition.

The Issues
These are the issues presented before us:
"A. Whether or not the Spouses Uy have the personality to file an action before the SEC against Gochan Realty Corporation.
"B. Whether or not the Spouses Uy could properly bring a derivative suit in the name of Gochan Realty to redress wrongs allegedly
committed against it for which the directors refused to sue.
"C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party in the SEC case considering that the individual
heirs' shares are still in the decedent stockholder's name.
"D. Whether or not the cancellation of [the] notice of lis pendens was justified considering that the suit did not involve real
6
properties owned by Gochan Realty."
7

In addition, the Court will determine the effect of Republic Act No.8799 on this case.
The Court's Ruling
The Petition has no merit. In view of the effectivity of RA 8799, however, the case should be remanded to the proper regional trial court, not
to the Securities and Exchange Commission.
First Issue:
Personality of the Spouses Uy to File a Suit Before the SEC
Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the suit before the SEC on February 8, 1994,
because the latter were no longer stockholders at the time. Allegedly, the stocks had already been purchased by the corporation. Petitioners
further assert that, being allegedly a simple contract of sale cognizable by the regular courts, the purchase by Gochan Realty of Cecilia
Gochan Uy's 210 shares does not come within the purview of an intra-corporate controversy.
8

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint. For
purposes of resolving a motion to dismiss, Cecilia Uy's averment in the Complaint -that the purchase of her stocks by the corporation was null
and void ab initio - is deemed admitted. It is elementary that a void contract produces no effect either against or in favor of anyone; it cannot
9
create, modify or extinguish the juridical relation to which it refers. Thus, Cecilia remains a stockholder of the corporation in view of the
nullity of the Contract of Sale. Although she was no longer registered as a stockholder in the corporate records as of the filing of the case
before the SEC, the admitted allegations in the Complaint made her still a bona fide stockholder of Felix Gochan & Sons Realty Corporation
(FGSRC), as between said parties.
In any event, the present controversy, whether intra-corporate or not, is no longer cognizable by the SEC, in view of RA 8799, which
transferred to regional trial courts the former's jurisdiction over cases involving intra-corporate disputes.
Action Has Not Prescribed
Petitioners contend that the statute of limitations already bars the Uy spouses' action, be it one for annulment of a voidable contract or one
based upon a written contract. The Complaint, however, contains respondents' allegation that the sale of the shares of stock was not merely
voidable, but was void ab initio. Below we quote its relevant portion:
"38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not have unrestricted retained earnings in
its books to cover the purchase price of the 208 shares of stock it was then buying from complainant Cecilia Gochan Uy, thereby
rendering said purchase null and void ab initio for being violative of the trust fund doctrine and contrary to law, morals good
customs, public order and public policy;"
Necessarily, petitioners' contention that the action has prescribed cannot be sustained. Prescription cannot be invoked as a ground if the
10
contract is alleged to be void ab initio. It is axiomatic that the action or defense for the declaration of nullity of a contract does not
11
prescribe.
Second Issue:
Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because the spouses and not the corporation were
the injured parties. The Court is not convinced. The following quoted portions of the Complaint readily shows allegations of injury to the
corporation itself:
"16. That on information and belief, in further pursuance of the said conspiracy and for the fraudulent purpose of depressing the
value of the stock of the Corporation and to induce the minority stockholders to sell their shares of stock for an inadequate
consideration as aforesaid, respondent Esteban T. Gochan . . ., in violation of their duties as directors and officers of the Corporation
. . ., unlawfully and fraudulently appropriated [for] themselves the funds of the Corporation by drawing excessive amounts in the
form of salaries and cash advances. . . and by otherwise charging their purely personal expenses to the Corporation."
xxx

xxx

xxx

"41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for her shares of stock constituted an
unlawful, premature and partial liquidation and distribution of assets to a stockholder, resulting in the impairment of the capital of
the Corporation and prevented it from otherwise utilizing said amount for its regular and lawful business, to the damage and
12
prejudice of the Corporation, its creditors, and of complainants as minority stockholders;"
As early as 1911, this Court has recognized the right of a single stockholder to file derivative suits. In its words:
"[W]here corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the
corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf
of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the
13
corporation and indirectly to the stockholders."
In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury to the Spouses Uy can coexist with
those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf
of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also
included in the Complaint filed before the SEC.
The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the corporation. The reason is that, as earlier
discussed, the allegations of the Complaint make them out as stockholders at the time the questioned transaction occurred, as well as at the
time the action was filed and during the pendency of the action.
Third Issue:
Capacity of the Intestate Estate of John D. Young Sr.
Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable party, as there is no showing that it stands to be
benefited or injured by any court judgement.
It would be useful to point out at this juncture that one of the causes of action stated in the Complaint filed with the SEC refers to the
registration, in the name of the other heirs of Alice Gochan Young, of 6/14th of the shares still registered under the name of John D. Young
Sr. Since all the shares that belonged to Alice are still in his name, no final determination can be had without his estate being impleaded in
the suit. His estate is thus an indispensable party with respect to the cause of action dealing with the registration of the shares in the names
of the heirs of Alice.
Petitioners further claim that the Estate of John Young Sr. was not properly represented. They claim that "when the estate is under
administration, suits for the recovery or protection of the property or rights of the deceased may be brought only by the administrator or
14
executor as approved by the court." The rules relative to this matter do not, however, make any such categorical and confining statement.
Section 3 of Rule 3 of the Rules of Court, which is cited by petitioners in support of their position, reads:
"Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended by a representative or someone
acting in a fiduciary capacity, the beneficiary shall be included in the title of the case and shall be deemed to be the real party in
interest. A representative may be a trustee of an express trust, a guardian, an executor or administrator, or a party authorized by
law or these Rules. An agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without
joining the principal except when the contract involves things belonging to the principal."
Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:
"Sec. 2. Executor or administrator may bring or defend actions which survive. -For the recovery or protection of the property or
rights of the deceased, an executor or administrator may bring or defend, in the right of the deceased, actions for causes which
survive."
The above-quoted rules, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do
not prohibit the heirs from representing the deceased. These rules are easily applicable to cases in which an administrator has already been
appointed. But no rule categorically addresses the situation in which special proceedings for the settlement of an estate have already been
instituted, yet no administrator has been appointed. In such instances, the heirs cannot be expected to wait for the appointment of an
administrator; then wait further to see if the administrator appointed would care enough to file a suit to protect the rights and the interests
of the deceased; and in the meantime do nothing while the rights and the properties of the decedent are violated or dissipated.1wphi1.nt

The Rules are to be interpreted liberally in order to promote their objective of securing a just, speedy and inexpensive disposition of every
15
action and proceeding. They cannot be interpreted in such a way as to unnecessarily put undue hardships on litigants. For the protection of
16
the interests of the decedent, this Court has in previous instances recognized the heirs as proper representatives of the decedent, even
when there is already an administrator appointed by the court. When no administrator has been appointed, as in this case, there is all the
more reason to recognize the heirs as the proper representatives of the deceased. Since the Rules do not specifically prohibit them from
representing the deceased, and since no administrator had as yet been appointed at the time of the institution of the Complaint with the
SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr. who represented his estate in the case filed before the SEC.
Fourth Issue
Notice of Lis Pendens
On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties of the corporation and the other respondents, we
still find no reason to disturb the ruling of the Court of Appeals.
Under the third, fourth and fifth causes of action of the Complaint, there are allegations of breach of trust and confidence and usurpation of
business opportunities in conflict with petitioners' fiduciary duties to the corporation, resulting in damage to the Corporation. Under these
causes of action, respondents are asking for the delivery to the Corporation of possession of the parcels of land and their corresponding
certificates of title. Hence, the suit necessarily affects the title to or right of possession of the real property sought to be reconveyed. The
17
18
Rules of Court allows the annotation of a notice of lis pendens in actions affecting the title or right of possession of real property. Thus, the
Court of Appeals was correct in reversing the SEC Order for the cancellation of the notice oflis pendens.
The fact that respondents are not stockholders of the Mactan Realty Development Corporation and the Lapu-Lapu Real Estate Corporation
does not make them non-parties to this case. To repeat, the jurisdiction of a court or tribunal over the subject matter is determined by the
allegations in the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners,
and that the former acquired the properties sought to be re conveyed to FGSRC in violation of the directors-petitioners' fiduciary duty to
19
FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical if, as
alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an
alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.
Effect of RA 8799
While we sustain the appellate court, the case can no longer be remanded to the SEC. As earlier stated, RA 8799, which became effective on
August 8, 2000, transferred SEC's jurisdiction over cases involving intra-corporate disputes to courts of general jurisdiction or to the regional
20
trial courtS. Section 5.2 thereof reads as follows:
"5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred
to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its
authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved
within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed."
21

In the light of the Resolution issued by this Court in AM No. 00-8-10-SC, the Court Administrator and the Securities and Exchange
Commission should be directed to cause the transfer of the records of SEC Case No. 02-94-4674 to the appropriate court of general
jurisdiction.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED, subject to the modification that the case be remanded to
the proper regional trial court. The December 9, 1994 Order of Securities and Exchange Commission hearing officer dismissing the Complaint
and directing the cancellation of the notice of lis pendens, as well as the March 3, 1995 Order denying complainants' motion for
reconsideration are REVERSEDand SET ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court Administrator and the SEC
areDIRECTED to cause the actual transfer of the records of SEC Case No.02-94-467 4 to the appropriate regional trial court.
SO ORDERED.
G.R. No. 93397 March 3, 1997
TRADERS ROYAL BANK, petitioner,
vs.
COURT OF APPEALS, FILRITERS GUARANTY ASSURANCE CORPORATION and CENTRAL BANK of the PHILIPPINES, respondents.
1

Assailed in this Petition for Review on Certiorari is the Decision of the respondent Court of Appeals dated January 29, 1990, affirming the
2
nullity of the transfer of Central Bank Certificate of Indebtedness (CBCI) No. D891, with a face value of P500,000.00, from the Philippine
3
Underwriters Finance Corporation (Philfinance) to the petitioner Trader's Royal Bank (TRB), under a Repurchase Agreement dated February
4
4, 1981, and a Detached Assignment dated April 27, 1981.
Docketed as Civil Case No. 83-17966 in the Regional Trial Court of Manila, Branch 32, the action was originally filed as a Petition
5
for Mandamus under Rule 65 of the Rules of Court, to compel the Central Bank of the Philippines to register the transfer of the subject CBCI
to petitioner Traders Royal Bank (TRB).

In the said petition, TRB stated that:

3. On November 27, 1979, Filriters Guaranty Assurance Corporation (Filriters) executed a "Detached Assignment" . . .,
whereby Filriters, as registered owner, sold, transferred, assigned and delivered unto Philippine Underwriters Finance
Corporation (Philfinance) all its rights and title to Central Bank Certificates of Indebtedness of PESOS: FIVE HUNDRED
THOUSAND (P500,000) and having an aggregate value of PESOS: THREE MILLION FIVE HUNDRED THOUSAND
(P3,500,000.00);
4. The aforesaid Detached Assignment (Annex "A") contains an express authorization executed by the transferor intended
to complete the assignment through the registration of the transfer in the name of PhilFinance, which authorization is
specifically phrased as follows: '(Filriters) hereby irrevocably authorized the said issuer (Central Bank) to transfer the said
bond/certificates on the books of its fiscal agent;
5. On February 4, 1981, petitioner entered into a Repurchase Agreement with PhilFinance . . ., whereby, for and in
consideration of the sum of PESOS: FIVE HUNDRED THOUSAND (P500,000.00), PhilFinance sold, transferred and delivered
to petitioner CBCI 4-year, 8th series, Serial No. D891 with a face value of P500,000.00 . . ., which CBCI was among those
previously acquired by PhilFinance from Filriters as averred in paragraph 3 of the Petition;
6. Pursuant to the aforesaid Repurchase Agreement (Annex "B"), Philfinance agreed to repurchase CBCI Serial No. D891
(Annex "C"), at the stipulated price of PESOS: FIVE HUNDRED NINETEEN THOUSAND THREE HUNDRED SIXTY-ONE & 11/100
(P519,361.11) on April 27, 1981;
7. PhilFinance failed to repurchase the CBCI on the agreed date of maturity, April 27, 1981, when the checks it issued in
favor of petitioner were dishonored for insufficient funds;
8. Owing to the default of PhilFinance, it executed a Detached Assignment in favor of the Petitioner to enable the latter to
have its title completed and registered in the books of the respondent. And by means of said Detachment, Philfinance
transferred and assigned all, its rights and title in the said CBCI (Annex "C") to petitioner and, furthermore, it did thereby
"irrevocably authorize the said issuer (respondent herein) to transfer the said bond/certificate on the books of its fiscal
agent." . . .
9. Petitioner presented the CBCI (Annex "C"), together with the two (2) aforementioned Detached Assignments (Annexes
"B" and "D"), to the Securities Servicing Department of the respondent, and requested the latter to effect the transfer of
the CBCI on its books and to issue a new certificate in the name of petitioner as absolute owner thereof;
10. Respondent failed and refused to register the transfer as requested, and continues to do so notwithstanding
petitioner's valid and just title over the same and despite repeated demands in writing, the latest of which is hereto
attached as Annex "E" and made an integral part hereof;
11. The express provisions governing the transfer of the CBCI were substantially complied with the petitioner's request for
registration, to wit:
"No transfer thereof shall be valid unless made at said office (where the Certificate has been registered)
by the registered owner hereof, in person or by his attorney duly authorized in writing, and similarly
noted hereon, and upon payment of a nominal transfer fee which may be required, a new Certificate shall
be issued to the transferee of the registered holder thereof."
and, without a doubt, the Detached Assignments presented to respondent were sufficient authorizations in writing
executed by the registered owner, Filriters, and its transferee, PhilFinance, as required by the above-quoted provision;
12. Upon such compliance with the aforesaid requirements, the ministerial duties of registering a transfer of ownership
over the CBCI and issuing a new certificate to the transferee devolves upon the respondent;
Upon these assertions, TRB prayed for the registration by the Central Bank of the subject CBCI in its name.
On December 4, 1984, the Regional Trial Court the case took cognizance of the defendant Central Bank of the Philippines' Motion for
6
Admission of Amended Answer with Counter Claim for Interpleader thereby calling to fore the respondent Filriters Guaranty Assurance
Corporation (Filriters), the registered owner of the subject CBCI as respondent.
For its part, Filriters interjected as Special Defenses the following:
11. Respondent is the registered owner of CBCI No. 891;
12. The CBCI constitutes part of the reserve investment against liabilities required of respondent as an insurance company
under the Insurance Code;
13. Without any consideration or benefit whatsoever to Filriters, in violation of law and the trust fund doctrine and to the
prejudice of policyholders and to all who have present or future claim against policies issued by Filriters, Alfredo Banaria,
then Senior Vice-President-Treasury of Filriters, without any board resolution, knowledge or consent of the board of

directors of Filriters, and without any clearance or authorization from the Insurance Commissioner, executed a detached
assignment purportedly assigning CBCI No. 891 to Philfinance;
xxx xxx xxx
14. Subsequently, Alberto Fabella, Senior Vice-President-Comptroller are Pilar Jacobe, Vice-President-Treasury of Filriters
(both of whom were holding the same positions in Philfinance), without any consideration or benefit redounding to Filriters
and to the grave prejudice of Filriters, its policy holders and all who have present or future claims against its policies,
executed similar detached assignment forms transferring the CBCI to plaintiff;
xxx xxx xxx
15. The detached assignment is patently void and inoperative because the assignment is without the knowledge and
consent of directors of Filriters, and not duly authorized in writing by the Board, as requiring by Article V, Section 3 of CB
Circular No. 769;
16. The assignment of the CBCI to Philfinance is a personal act of Alfredo Banaria and not the corporate act of Filriters and
such null and void;
a) The assignment was executed without consideration and for that reason, the assignment is void from the beginning
(Article 1409, Civil Code);
b) The assignment was executed without any knowledge and consent of the board of directors of Filriters;
c) The CBCI constitutes reserve investment of Filriters against liabilities, which is a requirement under the Insurance Code
for its existence as an insurance company and the pursuit of its business operations. The assignment of the CBCI is illegal act
in the sense of malum in se or malum prohibitum, for anyone to make, either as corporate or personal act;
d) The transfer of dimunition of reserve investments of Filriters is expressly prohibited by law, is immoral and against public
policy;
e) The assignment of the CBCI has resulted in the capital impairment and in the solvency deficiency of Filriters (and has in
fact helped in placing Filriters under conservatorship), an inevitable result known to the officer who executed assignment.
17. Plaintiff had acted in bad faith and with knowledge of the illegality and invalidity of the assignment.
a) The CBCI No. 891 is not a negotiable instrument and as a certificate of indebtedness is not payable to bearer but is a
registered in the name of Filriters;
b) The provision on transfer of the CBCIs provides that the Central Bank shall treat the registered owner as the absolute
owner and that the value of the registered certificates shall be payable only to the registered owner; a sufficient notice to
plaintiff that the assignments do not give them the registered owner's right as absolute owner of the CBCI's;
c) CB Circular 769, Series of 1980 (Rules and Regulations Governing CBCIs) provides that the registered certificates are
payable only to the registered owner (Article II, Section 1).
18. Plaintiff knew full well that the assignment by Philfinance of CBCI No. 891 by Filriters is not a regular transaction made
in the usual of ordinary course of business;
a) The CBCI constitutes part of the reserve investments of Filriters against liabilities requires by the Insurance Code and its
assignment or transfer is expressly prohibited by law. There was no attempt to get any clearance or authorization from the
Insurance Commissioner;
b) The assignment by Filriters of the CBCI is clearly not a transaction in the usual or regular course of its business;
c) The CBCI involved substantial amount and its assignment clearly constitutes disposition of "all or substantially all" of the
7
assets of Filriters, which requires the affirmative action of the stockholders (Section 40, Corporation [sic] Code.
8

In its Decision dated April 29, 1988, the Regional Trial Court of Manila, Branch XXXIII found the assignment of CBCI No. D891 in favor of
Philfinance, and the subsequent assignment of the same CBCI by Philfinance in favor of Traders Royal Bank null and void and of no force and
effect. The dispositive portion of the decision reads:
ACCORDINGLY, judgment is hereby rendered in favor of the respondent Filriters Guaranty Assurance Corporation and
against the plaintiff Traders Royal Bank:
(a) Declaring the assignment of CBCI No. 891 in favor of PhilFinance, and the subsequent assignment of CBCI by PhilFinance
in favor of the plaintiff Traders Royal Bank as null and void and of no force and effect;

(b) Ordering the respondent Central Bank of the Philippines to disregard the said assignment and to pay the value of the
proceeds of the CBCI No. D891 to the Filriters Guaranty Assurance Corporation;
(c) Ordering the plaintiff Traders Royal Bank to pay respondent Filriters Guaranty Assurance Corp. The sum of P10,000 as
attorney's fees; and
(d) to pay the costs.
SO ORDERED.

10

The petitioner assailed the decision of the trial court in the Court of Appeals , but their appeals likewise failed. The findings of the fact of the
said court are hereby reproduced:
The records reveal that defendant Filriters is the registered owner of CBCI No. D891. Under a deed of assignment dated
November 27, 1971, Filriters transferred CBCI No. D891 to Philippine Underwriters Finance Corporation (Philfinance).
Subsequently, Philfinance transferred CBCI No. D891, which was still registered in the name of Filriters, to appellant Traders
Royal Bank (TRB). The transfer was made under a repurchase agreement dated February 4, 1981, granting Philfinance the
right to repurchase the instrument on or before April 27, 1981. When Philfinance failed to buy back the note on maturity
date, it executed a deed of assignment, dated April 27, 1981, conveying to appellant TRB all its right and the title to CBCI
No. D891.
Armed with the deed of assignment, TRB then sought the transfer and registration of CBCI No. D891 in its name before the
Security and Servicing Department of the Central Bank (CB). Central Bank, however, refused to effect the transfer and
registration in view of an adverse claim filed by defendant Filriters.
Left with no other recourse, TRB filed a special civil action for mandamus against the Central Bank in the Regional Trial
Court of Manila. The suit, however, was subsequently treated by the lower court as a case of interpleader when CB prayed
in its amended answer that Filriters be impleaded as a respondent and the court adjudge which of them is entitled to the
11
ownership of CBCI No. D891. Failing to get a favorable judgment. TRB now comes to this Court on appeal.
In the appellate court, petitioner argued that the subject CBCI was a negotiable instrument, and having acquired the said certificate from
Philfinance as a holder in due course, its possession of the same is thus free fro any defect of title of prior parties and from any defense
available to prior parties among themselves, and it may thus, enforce payment of the instrument for the full amount thereof against all
12
parties liable thereon.
In ignoring said argument, the appellate court that the CBCI is not a negotiable instrument, since the instrument clearly stated that it was
payable to Filriters, the registered owner, whose name was inscribed thereon, and that the certificate lacked the words of negotiability which
serve as an expression of consent that the instrument may be transferred by negotiation.
Obviously, the assignment of the certificate from Filriters to Philfinance was fictitious, having made without consideration, and did not
conform to Central Bank Circular No. 769, series of 1980, better known as the "Rules and Regulations Governing Central Bank Certificates of
Indebtedness", which provided that any "assignment of registered certificates shall not be valid unless made . . . by the registered owner
thereof in person or by his representative duly authorized in writing."
Petitioner's claimed interest has no basis, since it was derived from Philfinance whose interest was inexistent, having acquired the certificate
through simulation. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters, a sister corporation, to guarantee its
financing operations.
Said the Court:
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of Filriters, did not
have the necessary written authorization from the Board of Directors of Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind Filriters and violated as the same time Central Bank Circular No. 769 which
has the force and effect of a law, resulting in the nullity of the transfer (People v. Que Po Lay, 94 Phil. 640; 3M Philippines,
Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank
and which the latter can register with the Central Bank.
WHEREFORE, the judgment appealed from is AFFIRMED, with costs against plaintiff-appellant.
SO ORDERED.

13

Petitioner's present position rests solely on the argument that Philfinance owns 90% of Filriters equity and the two corporations have
identical corporate officers, thus demanding the application of the doctrine or piercing the veil of corporate fiction, as to give validity to the
14
transfer of the CBCI from registered owner to petitioner TRB. This renders the payment by TRB to Philfinance of CBCI, as actual payment to
Filriters. Thus, there is no merit to the lower court's ruling that the transfer of the CBCI from Filriters to Philfinance was null and void for lack
of consideration.

Admittedly, the subject CBCI is not a negotiable instrument in the absence of words of negotiability within the meaning of the negotiable
instruments law (Act 2031).
The pertinent portions of the subject CBCI read:
xxx xxx xxx
The Central Bank of the Philippines (the Bank) for value received, hereby promises to pay bearer, of if this Certificate of
indebtedness be registered, to FILRITERS GUARANTY ASSURANCE CORPORATION, the registered owner hereof, the principal
sum of FIVE HUNDRED THOUSAND PESOS.
xxx xxx xxx
Properly understood, a certificate of indebtedness pertains to certificates for the creation and maintenance of a permanent improvement
revolving fund, is similar to a "bond," (82 Minn. 202). Being equivalent to a bond, it is properly understood as acknowledgment of an
obligation to pay a fixed sum of money. It is usually used for the purpose of long term loans.
The appellate court ruled that the subject CBCI is not a negotiable instrument, stating that:
As worded, the instrument provides a promise "to pay Filriters Guaranty Assurance Corporation, the registered owner
hereof." Very clearly, the instrument is payable only to Filriters, the registered owner, whose name is inscribed thereon. It
lacks the words of negotiability which should have served as an expression of consent that the instrument may be
15
transferred by negotiation.
A reading of the subject CBCI indicates that the same is payable to FILRITERS GUARANTY ASSURANCE CORPORATION, and to no one else,
thus, discounting the petitioner's submission that the same is a negotiable instrument, and that it is a holder in due course of the certificate.
The language of negotiability which characterize a negotiable paper as a credit instrument is its freedom to circulate as a substitute for
money. Hence, freedom of negotiability is the touchtone relating to the protection of holders in due course, and the freedom of negotiability
is the foundation for the protection which the law throws around a holder in due course (11 Am. Jur. 2d, 32). This freedom in negotiability is
totally absent in a certificate indebtedness as it merely to pay a sum of money to a specified person or entity for a period of time.
16

As held in Caltex (Philippines), Inc. v. Court of Appeals, :

The accepted rule is that the negotiability or non-negotiability of an instrument is determined from the writing, that is, from
the face of the instrument itself. In the construction of a bill or note, the intention of the parties is to control, if it can be
legally ascertained. While the writing may be read in the light of surrounding circumstance in order to more perfectly
understand the intent and meaning of the parties, yet as they have constituted the writing to be the only outward and
visible expression of their meaning, no other words are to be added to it or substituted in its stead. The duty of the court in
such case is to ascertain, not what the parties may have secretly intended as contradistinguished from what their words
express, but what is the meaning of the words they have used. What the parties meant must be determined by what they
said.
Thus, the transfer of the instrument from Philfinance to TRB was merely an assignment, and is not governed by the negotiable instruments
law. The pertinent question then is, was the transfer of the CBCI from Filriters to Philfinance and subsequently from Philfinance to TRB, in
accord with existing law, so as to entitle TRB to have the CBCI registered in its name with the Central Bank?
The following are the appellate court's pronouncements on the matter:
Clearly shown in the record is the fact that Philfinance's title over CBCI No. D891 is defective since it acquired the
instrument from Filriters fictitiously. Although the deed of assignment stated that the transfer was for "value received",
there was really no consideration involved. What happened was Philfinance merely borrowed CBCI No. D891 from Filriters,
a sister corporation. Thus, for lack of any consideration, the assignment made is a complete nullity.
What is more, We find that the transfer made by Filriters to Philfinance did not conform to Central Bank Circular No. 769,
series of 1980, otherwise known as the "Rules and Regulations Governing Central Bank Certificates of Indebtedness", under
which the note was issued. Published in the Official Gazette on November 19, 1980, Section 3 thereof provides that any
assignment of registered certificates shall not be valid unless made . . . by the registered owner thereof in person or by his
representative duly authorized in writing.
In the case at bar, Alfredo O. Banaria, who signed the deed of assignment purportedly for and on behalf of Filriters, did not
have the necessary written authorization from the Board of Directors of Filriters to act for the latter. For lack of such
authority, the assignment did not therefore bind Filriters and violated at the same time Central Bank Circular No. 769 which
has the force and effect of a law, resulting in the nullity of the transfer (People vs. Que Po Lay, 94 Phil. 640; 3M Philippines,
Inc. vs. Commissioner of Internal Revenue, 165 SCRA 778).
In sum, Philfinance acquired no title or rights under CBCI No. D891 which it could assign or transfer to Traders Royal Bank
and which the latter can register with the Central Bank

Petitioner now argues that the transfer of the subject CBCI to TRB must upheld, as the respondent Filriters and Philfinance, though separate
corporate entities on paper, have used their corporate fiction to defraud TRB into purchasing the subject CBCI, which purchase now is
refused registration by the Central Bank.
Says the petitioner;
Since Philfinance own about 90% of Filriters and the two companies have the same corporate officers, if the principle of
piercing the veil of corporate entity were to be applied in this case, then TRB's payment to Philfinance for the CBCI
purchased by it could just as well be considered a payment to Filriters, the registered owner of the CBCI as to bar the latter
from claiming, as it has, that it never received any payment for that CBCI sold and that said CBCI was sold without its
authority.
xxx xxx xxx
We respectfully submit that, considering that the Court of Appeals has held that the CBCI was merely borrowed by
Philfinance from Filriters, a sister corporation, to guarantee its (Philfinance's) financing operations, if it were to be
consistent therewith, on the issued raised by TRB that there was a piercing a veil of corporate entity, the Court of Appeals
should have ruled that such veil of corporate entity was, in fact, pierced, and the payment by TRB to Philfinance should be
17
construed as payment to Filriters.
We disagree with Petitioner.
Petitioner cannot put up the excuse of piercing the veil of corporate entity, as this merely an equitable remedy, and may be awarded only in
cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where a corporation is
18
a mere alter ego or business conduit of a person.
Peiercing the veil of corporate entity requires the court to see through the protective shroud which exempts its stockholders from liabilities
that ordinarily, they could be subject to, or distinguished one corporation from a seemingly separate one, were it not for the existing
corporate fiction. But to do this, the court must be sure that the corporate fiction was misused, to such an extent that injustice, fraud, or
crime was committed upon another, disregarding, thus, his, her, or its rights. It is the protection of the interests of innocent third persons
dealing with the corporate entity which the law aims to protect by this doctrine.
The corporate separateness between Filriters and Philfinance remains, despite the petitioners insistence on the contrary. For one, other than
the allegation that Filriters is 90% owned by Philfinance, and the identity of one shall be maintained as to the other, there is nothing else
which could lead the court under circumstance to disregard their corporate personalities.
Though it is true that when valid reasons exist, the legal fiction that a corporation is an entity with a juridical personality separate from its
19
stockholders and from other corporations may be disregarded, in the absence of such grounds, the general rule must upheld. The fact that
Filfinance owns majority shares in Filriters is not by itself a ground to disregard the independent corporate status of Filriters. In Liddel &
20
Co., Inc. vs. Collector of Internal Revenue, the mere ownership by a single stockholder or by another corporation of all or nearly all of the
capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities.
In the case at bar, there is sufficient showing that the petitioner was not defrauded at all when it acquired the subject certificate of
indebtedness from Philfinance.
On its face the subject certificates states that it is registered in the name of Filriters. This should have put the petitioner on notice, and
prompted it to inquire from Filriters as to Philfinance's title over the same or its authority to assign the certificate. As it is, there is no showing
to the effect that petitioner had any dealings whatsoever with Filriters, nor did it make inquiries as to the ownership of the certificate.
The terms of the CBCI No. D891 contain a provision on its TRANSFER. Thus:
TRANSFER. This Certificate shall pass by delivery unless it is registered in the owner's name at any office of the Bank or any
agency duly authorized by the Bank, and such registration is noted hereon. After such registration no transfer thereof shall
be valid unless made at said office (where the Certificates has been registered) by the registered owner hereof, in person,
or by his attorney, duly authorized in writing and similarly noted hereon and upon payment of a nominal transfer fee which
may be required, a new Certificate shall be issued to the transferee of the registered owner thereof. The bank or any
agency duly authorized by the Bank may deem and treat the bearer of this Certificate, or if this Certificate is registered as
herein authorized, the person in whose name the same is registered as the absolute owner of this Certificate, for the
purpose of receiving payment hereof, or on account hereof, and for all other purpose whether or not this Certificate shall
be overdue.
This is notice to petitioner to secure from Filriters a written authorization for the transfer or to require Philfinance to submit such an
authorization from Filriters.
Petitioner knew that Philfinance is not registered owner of the CBCI No. D891. The fact that a non-owner was disposing of the registered CBCI
owned by another entity was a good reason for petitioner to verify of inquire as to the title Philfinance to dispose to the CBCI.
21

Moreover, CBCI No. D891 is governed by CB Circular No. 769, series of 1990 , known as the Rules and Regulations Governing Central Bank
Certificates of Indebtedness, Section 3, Article V of which provides that:

Sec. 3. Assignment of Registered Certificates. Assignment of registered certificates shall not be valid unless made at the
office where the same have been issued and registered or at the Securities Servicing Department, Central Bank of the
Philippines, and by the registered owner thereof, in person or by his representative, duly authorized in writing. For this
purpose, the transferee may be designated as the representative of the registered owner.
Petitioner, being a commercial bank, cannot feign ignorance of Central Bank Circular 769, and its requirements. An entity which deals with
corporate agents within circumstances showing that the agents are acting in excess of corporate authority, may not hold the corporation
22
liable. This is only fair, as everyone must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone
23
his due, and observe honesty and good faith.
The transfer made by Filriters to Philfinance did not conform to the said. Central Bank Circular, which for all intents, is considered part of the
law. As found by the courts a quo, Alfredo O. Banaria, who had signed the deed of assignment from Filriters to Philfinance, purportedly for
and in favor of Filriters, did not have the necessary written authorization from the Board of Directors of Filriters to act for the latter. As it is,
the sale from Filriters to Philfinance was fictitious, and therefore void and inexistent, as there was no consideration for the same. This is fatal
to the petitioner's cause, for then, Philfinance had no title over the subject certificate to convey the Traders Royal Bank. Nemo potest nisi
quod de jure potest no man can do anything except what he can do lawfully.
24

Concededly, the subject CBCI was acquired by Filriters to form part of its legal and capital reserves, which are required by law to be
maintained at a mandated level. This was pointed out by Elias Garcia, Manager-in-Charge of respondent Filriters, in his testimony given
before the court on May 30, 1986.
Q Do you know this Central Bank Certificate of Indebtedness, in short, CBCI No. D891 in the face value of
P5000,000.00 subject of this case?
A Yes, sir.
Q Why do you know this?
A Well, this was CBCI of the company sought to be examined by the Insurance Commission sometime in
early 1981 and this CBCI No. 891 was among the CBCI's that were found to be missing.
Q Let me take you back further before 1981. Did you have the knowledge of this CBCI No. 891 before
1981?
A Yes, sir. This CBCI is an investment of Filriters required by the Insurance Commission as legal reserve of
the company.
Q Legal reserve for the purpose of what?
A Well, you see, the Insurance companies are required to put up legal reserves under Section 213 of the
Insurance Code equivalent to 40 percent of the premiums receipt and further, the Insurance Commission
requires this reserve to be invested preferably in government securities or government binds. This is how
this CBCI came to be purchased by the company.
It cannot, therefore, be taken out of the said funds, without violating the requirements of the law. Thus, the anauthorized use or distribution
of the same by a corporate officer of Filriters cannot bind the said corporation, not without the approval of its Board of Directors, and the
maintenance of the required reserve fund.
Consequently, the title of Filriters over the subject certificate of indebtedness must be upheld over the claimed interest of Traders Royal
Bank.
ACCORDINGLY, the petition is DISMISSED and the decision appealed from dated January 29, 1990 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 89561 September 13, 1990
BUENAFLOR C. UMALI, MAURICIA M. VDA. DE CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA C. ABAEZ, LEOVINA C.
JALBUENA and SANTIAGO M. RIVERA, petitioners,
vs.
COURT OF APPEALS, BORMAHECO, INC. and PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC., respondents.
This is a petition to review the decision of respondent Court of Appeals, dated August 3, 1989, in CA-GR CV No. 15412, entitled "Buenaflor M.
1
Castillo Umali, et al. vs. Philippine Machinery Parts Manufacturing Co., Inc., et al.," the dispositive portion whereof provides:
WHEREFORE, viewed in the light of the entire record, the judgment appealed from must be, as it is hereby REVERSED. In
lieu thereof, a judgment is hereby rendered1) Dismissing the complaint, with cost against plaintiffs;

2) Ordering plaintiffs-appellees to vacate the subject properties; and

3) Ordering plaintiffs-appellees to pay upon defendants' counterclaims:
a) To defendant-appellant PM Parts: (i) damages consisting of the value of the fruits in the subject parcels
of land of which they were deprived in the sum of P26,000.00 and (ii) attorney's fees of P15,000.00
b) To defendant-appellant Bormaheco: (i) expenses of litigation in the amount of P5,000.00 and (ii)
attorney's fees of P15,000.00.
SO ORDERED.
The original complaint for annulment of title filed in the court a quo by herein petitioners included as party defendants the Philippine
Machinery Parts Manufacturing Co., Inc. (PM Parts), Insurance Corporation of the Philippines (ICP), Bormaheco, Inc., (Bormaheco) and
Santiago M. Rivera (Rivera). A Second Amended Complaint was filed, this time impleading Santiago M. Rivera as party plaintiff.
During the pre-trial conference, the parties entered into the following stipulation of facts:
As between all parties: Plaintiff Buenaflor M. Castillo is the judicial administratrix of the estate of Felipe
Castillo in Special Proceeding No. 4053, pending before Branch IX, CFI of Quezon (per Exhibit A) which
intestate proceedings was instituted by Mauricia Meer Vda. de Castillo, the previous administratrix of the
said proceedings prior to 1970 (per exhibits A-1 and A-2) which case was filed in Court way back in 1964;
b) The four (4) parcels of land described in paragraph 3 of the Complaint were originally covered by TCT
No. T-42104 and Tax Dec. No. 14134 with assessed value of P3,100.00; TCT No. T 32227 and Tax Dec. No.
14132, with assessed value of P5,130,00; TCT No. T-31762 and Tax Dec. No. 14135, with assessed value of
P6,150.00; and TCT No. T-42103 with Tax Dec. No. 14133, with assessed value of P3,580.00 (per Exhibits
A-2 and B, B-1 to B-3 C, C-1 -to C3
c) That the above-enumerated four (4) parcels of land were the subject of the Deed of Extra-Judicial
Partition executed by the heirs of Felipe Castillo (per Exhibit D) and by virtue thereof the titles thereto has
(sic) been cancelled and in lieu thereof, new titles in the name of Mauricia Meer Vda. de Castillo and of
her children, namely: Buenaflor, Bertilla, Victoria, Marietta and Leovina, all surnamed Castillo has (sic)
been issued, namely: TCT No. T-12113 (Exhibit E ); TCT No. T-13113 (Exhibit F); TCT No. T-13116 (Exhibit G
) and TCT No. T13117 (Exhibit H )
d) That mentioned parcels of land were submitted as guaranty in the Agreement of Counter-Guaranty
with Chattel-Real Estate Mortgage executed on 24 October 1970 between Insurance Corporation of the
Philippines and Slobec Realty Corporation represented by Santiago Rivera (Exhibit 1);
e) That based on the Certificate of Sale issued by the Sheriff of the Province of Quezon in favor of
Insurance Corporation of the Philippines it was able to transfer to itself the titles over the lots in question,
namely: TCT No. T-23705 (Exhibit M), TCT No. T 23706 (Exhibit N ), TCT No. T-23707 (Exhibit 0) and TCT
No. T 23708 (Exhibit P);
f) That on 10 April 1975, the Insurance Corporation of the Philippines sold to PM Parts the immovables in
question (per Exhibit 6 for PM Parts) and by reason thereof, succeeded in transferring unto itself the titles
over the lots in dispute, namely: per TCT No. T-24846 (Exhibit Q ), per TCT No. T-24847 (Exhibit R ), TCT
No. T-24848 (Exhibit), TCT No. T-24849 (Exhibit T );
g) On 26 August l976, Mauricia Meer Vda. de Castillo' genther letter to Modesto N. Cervantes stating that
she and her children refused to comply with his demands (Exhibit V-2);
h) That from at least the months of October, November and December 1970 and January 1971, Modesto
N. Cervantes was the Vice-President of Bormaheco, Inc. later President thereof, and also he is one of the
Board of Directors of PM Parts; on the other hand, Atty. Martin M. De Guzman was the legal counsel of
Bormaheco, Inc., later Executive Vice-President thereof, and who also is the legal counsel of Insurance
Corporation of the Philippines and PM Parts; that Modesto N. Cervantes served later on as President of
PM Parts, and that Atty. de Guzman was retained by Insurance Corporation of the Philippines specifically
for foreclosure purposes only;
i) Defendant Bormaheco, Inc. on November 25, 1970 sold to Slobec Realty and Development, Inc.,
represented by Santiago Rivera, President, one (1) unit Caterpillar Tractor D-7 with Serial No. 281114
evidenced by a contract marked Exhibit J and Exhibit I for Bormaheco, Inc.;
j) That the Surety Bond No. 14010 issued by co-defendant ICP was likewise secured by an Agreement with
Counter-Guaranty with Real Estate Mortgage executed by Slobec Realty & Development, Inc., Mauricia
Castillo Meer, Buenaflor Castillo, Bertilla Castillo, Victoria Castillo, Marietta Castillo and Leovina Castillo,
as mortgagors in favor of ICP which document was executed and ratified before notary public Alberto R.
Navoa of the City of Manila on October 24,1970;

k) That the property mortgaged consisted of four (4) parcels of land situated in Lucena City and covered
by
TCT
Nos.
T-13114,
T13115,
T-13116 and T-13117 of the Register of Deeds of Lucena City;
l) That the tractor sold by defendant Bormaheco, Inc. to Slobec Realty & Development, Inc. was delivered
to Bormaheco, Inc. on or about October 2,1973, by Mr. Menandro Umali for purposes of repair;
m) That in August 1976, PM Parts notified Mrs. Mauricia Meer about its ownership and the assignment of
Mr. Petronilo Roque as caretaker of the subject property;
n) That plaintiff and other heirs are harvest fruits of the property (daranghita) which is worth no less than
Pl,000.00 per harvest.
As
defendant Bormaheco, Inc

between

plaintiffs

and

o) That on 25 November 1970, at Makati, Rizal, Same Rivera, in representation of the Slobec Realty &
Development Corporation executed in favor of Bormaheco, Inc., represented by its Vice-President
Modesto N. Cervantes a Chattel Mortgage concerning one unit model CAT D7 Caterpillar Crawler Tractor
as described therein as security for the payment in favor of the mortgagee of the amount of P180,000.00
(per Exhibit K) that Id document was superseded by another chattel mortgage dated January 23, 1971
(Exhibit 15);
p) On 18 December 1970, at Makati, Rizal, the Bormaheco, Inc., represented by its Vice-President
Modesto Cervantes and Slobec Realty Corporation represented by Santiago Rivera executed the sales
agreement concerning the sale of one (1) unit Model CAT D7 Caterpillar Crawler Tractor as described
therein for the amount of P230,000.00 (per Exhibit J) which document was superseded by the Sales
Agreement dated January 23,1971 (Exhibit 16);
q) Although it appears on the document entitled Chattel Mortgage (per Exhibit K) that it was executed on
25 November 1970, and in the document entitled Sales Agreement (per Exhibit J) that it was executed on
18 December 1970, it appears in the notarial register of the notary public who notarized them that those
two documents were executed on 11 December 1970. The certified xerox copy of the notarial register of
Notary Public Guillermo Aragones issued by the Bureau of Records Management is hereto submitted as
Exhibit BB That said chattel mortgage was superseded by another document dated January 23, 1971;
r) That on 23 January 1971, Slobec Realty Development Corporation, represented by Santiago Rivera,
received from Bormaheco, Inc. one (1) tractor Caterpillar Model D-7 pursuant to Invoice No. 33234
(Exhibits 9 and 9-A, Bormaheco, Inc.) and delivery receipt No. 10368 (per Exhibits 10 and 10-A for
Bormaheco, Inc
s) That on 28 September 1973, Atty. Martin M. de Guzman, as counsel of Insurance Corporation of the
Philippines purchased at public auction for said corporation the four (4) parcels of land subject of tills case
(per Exhibit L), and which document was presented to the Register of Deeds on 1 October 1973;
t) Although it appears that the realties in issue has (sic) been sold by Insurance Corporation of the
Philippines in favor of PM Parts on 1 0 April 1975, Modesto N. Cervantes, formerly Vice- President and
now President of Bormaheco, Inc., sent his letter dated 9 August 1976 to Mauricia Meer Vda. de Castillo
(Exhibit V), demanding that she and her children should vacate the premises;
u) That the Caterpillar Crawler Tractor Model CAT D-7 which was received by Slobec Realty Development
2
Corporation was actually reconditioned and repainted. "
We cull the following antecedents from the decision of respondent Court of Appeals:
Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de Castillo. The Castillo family are the owners of a
parcel of land located in Lucena City which was given as security for a loan from the Development Bank of the Philippines.
For their failure to pay the amortization, foreclosure of the said property was about to be initiated. This problem was made
known to Santiago Rivera, who proposed to them the conversion into subdivision of the four (4) parcels of land adjacent to
the mortgaged property to raise the necessary fund. The Idea was accepted by the Castillo family and to carry out the
project, a Memorandum of Agreement (Exh. U p. 127, Record) was executed by and between Slobec Realty and
Development, Inc., represented by its President Santiago Rivera and the Castillo family. In this agreement, Santiago Rivera
obliged himself to pay the Castillo family the sum of P70,000.00 immediately after the execution of the agreement and to
pay the additional amount of P400,000.00 after the property has been converted into a subdivision. Rivera, armed with the
agreement, Exhibit U , approached Mr. Modesto Cervantes, President of defendant Bormaheco, and proposed to purchase
from Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales Agreement was executed on December 28,1970
(Exh. J, p. 22, Record).
On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development, Inc., represented by its President, Santiago
Rivera, executed a Sales Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114, as evidenced by the

contract marked Exhibit '16'. As shown by the contract, the price was P230,000.00 of which P50,000.00 was to constitute a
down payment, and the balance of P180,000.00 payable in eighteen monthly installments. On the same date, Slobec,
through Rivera, executed in favor of Bormaheco a Chattel Mortgage (Exh. K, p. 29, Record) over the said equipment as
security for the payment of the aforesaid balance of P180,000.00. As further security of the aforementioned unpaid
balance, Slobec obtained from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance Corporation of the
Phil.) as surety and Slobec as principal, in favor of Bormaheco, as borne out by Exhibit '8' (p. 111, Record). The aforesaid
surety bond was in turn secured by an Agreement of Counter-Guaranty with Real Estate Mortgage (Exhibit I, p. 24, Record)
executed by Rivera as president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo Umali, Bertilla CastilloRada, Victoria Castillo, Marietta Castillo and Leovina Castillo Jalbuena, as mortgagors and Insurance Corporation of the
Philippines (ICP) as mortgagee. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco in the amount
of P180,000.00. In giving the bond, ICP required that the Castillos mortgage to them the properties in question, namely,
four parcels of land covered by TCTs in the name of the aforementioned mortgagors, namely TCT Nos. 13114, 13115, 13116
and 13117 all of the Register of Deeds for Lucena City.
On the occasion of the execution on January 23, 1971, of the Sales Agreement Exhibit '16', Slobec, represented by Rivera
received from Bormaheco the subject matter of the said Sales Agreement, namely, the aforementioned tractor Caterpillar
Model D-7 as evidenced by Invoice No. 33234 (Exhs. 9 and 9-A, p. 112, Record) and Delivery Receipt No. 10368 (Exhs. 10
and 10-A, p. 113). This tractor was known by Rivera to be a reconditioned and repainted one [Stipulation of Facts, Pre-trial
Order, par. (u)].
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement (Exh. 1), the properties of the
Castillos were foreclosed by ICP As the highest bidder with a bid of P285,212.00, a Certificate of Sale was issued by the
Provincial Sheriff of Lucena City and Transfer Certificates of Title over the subject parcels of land were issued by the
Register of Deeds of Lucena City in favor of ICP namely, TCT Nos. T-23705, T 23706, T-23707 and T-23708 (Exhs. M to P, pp.
38-45). The mortgagors had one (1) year from the date of the registration of the certificate of sale, that is, until October 1,
1974, to redeem the property, but they failed to do so. Consequently, ICP consolidated its ownership over the subject
parcels of land through the requisite affidavit of consolidation of ownership dated October 29, 1974, as shown in Exh.
'22'(p. 138, Rec.). Pursuant thereto, a Deed of Sale of Real Estate covering the subject properties was issued in favor of ICP
(Exh. 23, p. 139, Rec.).
On April 10, 1975, Insurance Corporation of the Phil. ICP sold to Phil. Machinery Parts Manufacturing Co. (PM Parts) the
four (4) parcels of land and by virtue of said conveyance, PM Parts transferred unto itself the titles over the lots in dispute
so that said parcels of land are now covered by TCT Nos. T-24846, T-24847, T-24848 and T-24849 (Exhs. Q-T, pp. 46-49,
Rec.).
Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a letter dated August 9,1976 addressed to
plaintiff Mrs. Mauricia Meer Castillo requesting her and her children to vacate the subject property, who (Mrs. Castillo) in
turn sent her reply expressing her refusal to comply with his demands.
On September 29, 1976, the heirs of the late Felipe Castillo, particularly plaintiff Buenaflor M. Castillo Umali as the
appointed administratrix of the properties in question filed an action for annulment of title before the then Court of First
Instance of Quezon and docketed thereat as Civil Case No. 8085. Thereafter, they filed an Amended Complaint on January
10, 1980 (p. 444, Record). On July 20, 1983, plaintiffs filed their Second Amended Complaint, impleading Santiago M. Rivera
as a party plaintiff (p. 706, Record). They contended that all the aforementioned transactions starting with the Agreement
of Counter-Guaranty with Real Estate Mortgage (Exh. I), Certificate of Sale (Exh. L) and the Deeds of Authority to Sell, Sale
and the Affidavit of Consolidation of Ownership (Annexes F, G, H, I) as well as the Deed of Sale (Annexes J, K, L and M) are
void for being entered into in fraud and without the consent and approval of the Court of First Instance of Quezon, (Branch
IX) before whom the administration proceedings has been pending. Plaintiffs pray that the four (4) parcels of land subject
hereof be declared as owned by the estate of the late Felipe Castillo and that all Transfer Certificates of Title Nos.
13114,13115,13116,13117, 23705, 23706, 23707, 23708, 24846, 24847, 24848 and 24849 as well as those appearing as
encumbrances at the back of the certificates of title mentioned be declared as a nullity and defendants to pay damages and
attorney's fees (pp. 71071 1, Record).
In their amended answer, the defendants controverted the complaint and alleged, by way of affirmative and special
defenses that the complaint did not state facts sufficient to state a cause of action against defendants; that plaintiffs are
not entitled to the reliefs demanded; that plaintiffs are estopped or precluded from asserting the matters set forth in the
Complaint; that plaintiffs are guilty of laches in not asserting their alleged right in due time; that defendant PM Parts is an
3
innocent purchaser for value and relied on the face of the title before it bought the subject property (p. 744, Record).
After trial, the court a quo rendered judgment, with the following decretal portion:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and against the defendants, declaring the following
documents:
Agreement of Counter-Guaranty with Chattel-Real Estate Mortgage dated October 24,1970 (Exhibit 1);
Sales Agreement dated December 28, 1970 (Exhibit J)
Chattel Mortgage dated November 25, 1970 (Exhibit K)

Sales Agreement dated January 23, 1971 (Exhibit 16);

Chattel Mortgage dated January 23, 1971 (Exhibit 17);
Certificate of Sale dated September 28, 1973 executed by the Provincial Sheriff of Quezon in favor of
Insurance Corporation of the Philippines (Exhibit L);
null and void for being fictitious, spurious and without consideration. Consequently, Transfer Certificates of Title Nos. T
23705, T-23706, T23707 and T-23708 (Exhibits M, N, O and P) issued in the name of Insurance Corporation of the
Philippines, are likewise null and void.
The sale by Insurance Corporation of the- Philippines in favor of defendant Philippine Machinery Parts Manufacturing Co.,
Inc., over Id four (4) parcels of land and Transfer Certificates of Title Nos. T 24846, T-24847, T-24848 and T-24849
subsequently issued by virtue of said sale in the name of Philippine Machinery Parts Manufacturing Co., Inc., are similarly
declared null and void, and the Register of Deeds of Lucena City is hereby directed to issue, in lieu thereof, transfer
certificates of title in the names of the plaintiffs, except Santiago Rivera.
Orders the defendants jointly and severally to pay the plaintiffs moral damages in the sum of P10,000.00, exemplary
damages in the amount of P5,000.00, and actual litigation expenses in the sum of P6,500.00.
Defendants are likewise ordered to pay the plaintiffs, jointly and severally, the sum of P10,000.00 for and as attomey's fees.
With costs against the defendants.
SO ORDERED.

As earlier stated, respondent court reversed the aforequoted decision of the trial court and rendered the judgment subject of this petitionPetitioners contend that respondent Court of Appeals erred:
1. In holding and finding that the actions entered into between petitioner Rivera with Cervantes are all fair and regular and
therefore binding between the parties thereto;
2. In reversing the decision of the lower court, not only based on erroneous conclusions of facts, erroneous presumptions
not supported by the evidence on record but also, holding valid and binding the supposed payment by ICP of its obligation
to Bormaheco, despite the fact that the surety bond issued it had already expired when it opted to foreclose extrajudically
the mortgage executed by the petitioners;
3. In aside the finding of the lower court that there was necessity to pierce the veil of corporate existence; and
4. In reversing the decision of the lower court of affirming the same

I. Petitioners aver that the transactions entered into between Santiago M. Rivera, as President of Slobec Realty and Development Company
6
7
(Slobec) and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales Agreement, Chattel Mortgage and the Agreement of
8
Counter-Guaranty with Chattel/Real Estate Mortgage, are all fraudulent and simulated and should, therefore, be declared nun and void.
Such allegation is premised primarily on the fact that contrary to the stipulations agreed upon in the Sales Agreement (Exhibit J), Rivera never
made any advance payment, in the alleged amount of P50,000.00, to Bormaheco; that the tractor was received by Rivera only on January 23,
1971 and not in 1970 as stated in the Chattel Mortgage (Exhibit K); and that when the Agreement of Counter-Guaranty with Chattel/Real
Estate Mortgage was executed on October 24, 1970, to secure the obligation of ICP under its surety bond, the Sales Agreement and Chattel
Mortgage had not as yet been executed, aside from the fact that it was Bormaheco, and not Rivera, which paid the premium for the surety
bond issued by ICP
At the outset, it will be noted that petitioners submission under the first assigned error hinges purely on questions of fact. Respondent Court
of Appeals made several findings to the effect that the questioned documents are valid and binding upon the parties, that there was no fraud
employed by private respondents in the execution thereof, and that, contrary to petitioners' allegation, the evidence on record reveals that
petitioners had every intention to be bound by their undertakings in the various transactions had with private respondents. It is a general rule
in this jurisdiction that findings of fact of said appellate court are final and conclusive and, thus, binding on this Court in the absence of
sufficient and convincing proof, inter alia, that the former acted with grave abuse of discretion. Under the circumstances, we find no
compelling reason to deviate from this long-standing jurisprudential pronouncement.
In addition, the alleged failure of Rivera to pay the consideration agreed upon in the Sales Agreement, which clearly constitutes a breach of
the contract, cannot be availed of by the guilty party to justify and support an action for the declaration of nullity of the contract. Equity and
fair play dictates that one who commits a breach of his contract may not seek refuge under the protective mantle of the law.
The evidence of record, on an overall calibration, does not convince us of the validity of petitioners' contention that the contracts entered
into by the parties are either absolutely simulated or downright fraudulent.
9

There is absolute simulation, which renders the contract null and void, when the parties do not intend to be bound at all by the same. The
basic characteristic of this type of simulation of contract is the fact that the apparent contract is not really desired or intended to either
produce legal effects or in any way alter the juridical situation of the parties. The subsequent act of Rivera in receiving and making use of the

tractor subject matter of the Sales Agreement and Chattel Mortgage, and the simultaneous issuance of a surety bond in favor of Bormaheco,
concomitant with the execution of the Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage, conduce to the conclusion that
petitioners had every intention to be bound by these contracts. The occurrence of these series of transactions between petitioners and
private respondents is a strong indication that the parties actually intended, or at least expected, to exact fulfillment of their respective
obligations from one another.
Neither will an allegation of fraud prosper in this case where petitioners failed to show that they were induced to enter into a contract
through the insidious words and machinations of private respondents without which the former would not have executed such contract. To
10
set aside a document solemnly executed and voluntarily delivered, the proof of fraud must be clear and convincing. We are not persuaded
that such quantum of proof exists in the case at bar.
The fact that it was Bormaheco which paid the premium for the surety bond issued by ICP does not per se affect the validity of the bond.
Petitioners themselves admit in their present petition that Rivera executed a Deed of Sale with Right of Repurchase of his car in favor of
11
Bormaheco and agreed that a part of the proceeds thereof shall be used to pay the premium for the bond. In effect, Bormaheco accepted
the payment of the premium as an agent of ICP The execution of the deed of sale with a right of repurchase in favor of Bormaheco under
such circumstances sufficiently establishes the fact that Rivera recognized Bormaheco as an agent of ICP Such payment to the agent of ICP is,
therefore, binding on Rivera. He is now estopped from questioning the validity of the suretyship contract.
II. Under the doctrine of piercing the veil of corporate entity, when valid grounds therefore exist, the legal fiction that a corporation is an
entity with a juridical personality separate and distinct from its members or stockholders may be disregarded. In such cases, the corporation
will be considered as a mere association of persons. The members or stockholders of the corporation will be considered as the corporation,
12
that is, liability will attach directly to the officers and stockholders. The doctrine applies when the corporate fiction is used to defeat public
13
14
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues or where a
corporation is the mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are
15
so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.
In the case at bar, petitioners seek to pierce the V621 Of corporate entity of Bormaheco, ICP and PM Parts, alleging that these corporations
employed fraud in causing the foreclosure and subsequent sale of the real properties belonging to petitioners While we do not discount the
possibility of the existence of fraud in the foreclosure proceeding, neither are we inclined to apply the doctrine invoked by petitioners in
granting the relief sought. It is our considered opinion that piercing the veil of corporate entity is not the proper remedy in order that the
foreclosure proceeding may be declared a nullity under the circumstances obtaining in the legal case at bar.
In the first place, the legal corporate entity is disregarded only if it is sought to hold the officers and stockholders directly liable for a
corporate debt or obligation. In the instant case, petitioners do not seek to impose a claim against the individual members of the three
corporations involved; on the contrary, it is these corporations which desire to enforce an alleged right against petitioners. Assuming that
petitioners were indeed defrauded by private respondents in the foreclosure of the mortgaged properties, this fact alone is not, under the
circumstances, sufficient to justify the piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or members
of respondent corporations personally liable therefor. Petitioners are merely seeking the declaration of the nullity of the foreclosure sale,
which relief may be obtained without having to disregard the aforesaid corporate fiction attaching to respondent corporations. Secondly,
petitioners failed to establish by clear and convincing evidence that private respondents were purposely formed and operated, and
thereafter transacted with petitioners, with the sole intention of defrauding the latter.
The mere fact, therefore, that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate
16
personalities, absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors and third persons of
their rights.
III. The main issue for resolution is whether there was a valid foreclosure of the mortgaged properties by ICP Petitioners argue that the
foreclosure proceedings should be declared null and void for two reasons, viz.: (1) no written notice was furnished by Bormaheco to ICP
anent the failure of Slobec in paying its obligation with the former, plus the fact that no receipt was presented to show the amount allegedly
paid by ICP to Bormaheco; and (b) at the time of the foreclosure of the mortgage, the liability of ICP under the surety bond had already
expired.
Respondent court, in finding for the validity of the foreclosure sale, declared:
Now to the question of whether or not the foreclosure by the ICP of the real estate mortgage was in the exercise of a legal
right, We agree with the appellants that the foreclosure proceedings instituted by the ICP was in the exercise of a legal
right. First, ICP has in its favor the legal presumption that it had indemnified Bormaheco by reason of Slobec's default in the
payment of its obligation under the Sales Agreement, especially because Bormaheco consented to ICPs foreclosure of the
mortgage. This presumption is in consonance with pars. R and Q Section 5, Rule 5, * New Rules of Court which provides that
it is disputably presumed that private transactions have been fair and regular. likewise, it is disputably presumed that the
ordinary course of business has been followed: Second, ICP had the right to proceed at once to the foreclosure of the
mortgage as mandated by the provisions of Art. 2071 Civil Code for these further reasons: Slobec, the principal debtor, was
admittedly insolvent; Slobec's obligation becomes demandable by reason of the expiration of the period of payment; and
its authorization to foreclose the mortgage upon Slobec's default, which resulted in the accrual of ICPS liability to
Bormaheco. Third, the Agreement of Counter-Guaranty with Real Estate Mortgage (Exh. 1) expressly grants to ICP the right
to foreclose the real estate mortgage in the event of 'non-payment or non-liquidation of the entire indebtedness or fraction
thereof upon maturity as stipulated in the contract'. This is a valid and binding stipulation in the absence of showing that it
17
is contrary to law, morals, good customs, public order or public policy. (Art. 1306, New Civil Code).
1. Petitioners asseverate that there was no notice of default issued by Bormaheco to ICP which would have entitled Bormaheco to demand
payment from ICP under the suretyship contract.

Surety Bond No. B-1401 0 which was issued by ICP in favor of Bormaheco, wherein ICP and Slobec undertook to guarantee the payment of
the balance of P180,000.00 payable in eighteen (18) monthly installments on one unit of Model CAT D-7 Caterpillar Crawler Tractor,
pertinently provides in part as follows:
1. The liability of INSURANCE CORPORATION OF THE PHILIPPINES, under this BOND will expire Twelve (I 2) months from
date hereof. Furthermore, it is hereby agreed and understood that the INSURANCE CORPORATION OF THE PHILIPPINES will
not be liable for any claim not presented in writing to the Corporation within THIRTY (30) DAYS from the expiration of this
BOND, and that the obligee hereby waives his right to bring claim or file any action against Surety and after the termination
18
of one (1) year from the time his cause of action accrues.
The surety bond was dated October 24, 1970. However, an annotation on the upper part thereof states: "NOTE: EFFECTIVITY DATE
19
OF THIS BOND SHALL BE ON JANUARY 22, 1971."
On the other hand, the Sales Agreement dated January 23, 1971 provides that the balance of P180,000.00 shall be payable in eighteen (18)
20
monthly installments. The Promissory Note executed by Slobec on even date in favor of Bormaheco further provides that the obligation
shall be payable on or before February 23, 1971 up to July 23, 1972, and that non-payment of any of the installments when due shall make
21
the entire obligation immediately due and demandable.
It is basic that liability on a bond is contractual in nature and is ordinarily restricted to the obligation expressly assumed therein. We have
repeatedly held that the extent of a surety's liability is determined only by the clause of the contract of suretyship as well as the conditions
22
stated in the bond. It cannot be extended by implication beyond the terms the contract.
Fundamental likewise is the rule that, except where required by the provisions of the contract, a demand or notice of default is not required
23
to fix the surety's liability. Hence, where the contract of suretyship stipulates that notice of the principal's default be given to the surety,
generally the failure to comply with the condition will prevent recovery from the surety. There are certain instances, however, when failure
to comply with the condition will not extinguish the surety's liability, such as a failure to give notice of slight defaults, which are waived by the
obligee; or on mere suspicion of possible default; or where, if a default exists, there is excuse or provision in the suretyship contract
24
exempting the surety for liability therefor, or where the surety already has knowledge or is chargeable with knowledge of the default.
In the case at bar, the suretyship contract expressly provides that ICP shag not be liable for any claim not filed in writing within thirty (30)
days from the expiration of the bond. In its decision dated May 25 1987, the court a quocategorically stated that '(n)o evidence was
presented to show that Bormaheco demanded payment from ICP nor was there any action taken by Bormaheco on the bond posted by ICP to
guarantee the payment of plaintiffs obligation. There is nothing in the records of the proceedings to show that ICP indemnified Bormaheco
25
for the failure of the plaintiffs to pay their obligation. " The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's
supposed default released ICP from liability under its surety bond. Consequently, ICP could not validly foreclose that real estate mortgage
executed by petitioners in its favor since it never incurred any liability under the surety bond. It cannot claim exemption from the required
written notice since its case does not fall under any of the exceptions hereinbefore enumerated.
Furthermore, the allegation of ICP that it has paid Bormaheco is not supported by any documentary evidence. Section 1, Rule 131 of the
Rules of Court provides that the burden of evidence lies with the party who asserts an affirmative allegation. Since ICP failed to duly prove
the fact of payment, the disputable presumption that private transactions have been fair and regular, as erroneously relied upon by
respondent Court of Appeals, finds no application to the case at bar.
2. The liability of a surety is measured by the terms of his contract, and, while he is liable to the full extent thereof, such liability is strictly
26
limited to that assumed by its terms. While ordinarily the termination of a surety's liability is governed by the provisions of the contract of
suretyship, where the obligation of a surety is, under the terms of the bond, to terminate at a specified time, his obligation cannot be
27
enlarged by an unauthorized extension thereof. This is an exception to the general rule that the obligation of the surety continues for the
28
same period as that of the principal debtor.
It is possible that the period of suretyship may be shorter than that of the principal obligation, as where the principal debtor is required to
29
make payment by installments. In the case at bar, the surety bond issued by ICP was to expire on January 22, 1972, twelve (1 2) months
from its effectivity date, whereas Slobec's installment payment was to end on July 23, 1972. Therefore, while ICP guaranteed the payment by
Slobec of the balance of P180,000.00, such guaranty was valid only for and within twelve (1 2) months from the date of effectivity of the
surety bond, or until January 22, 1972. Thereafter, from January 23, 1972 up to July 23, 1972, the liability of Slobec became an unsecured
obligation. The default of Slobec during this period cannot be a valid basis for the exercise of the right to foreclose by ICP since its surety
contract had already been terminated. Besides, the liability of ICP was extinguished when Bormaheco failed to file a written claim against it
within thirty (30) days from the expiration of the surety bond. Consequently, the foreclosure of the mortgage, after the expiration of the
surety bond under which ICP as surety has not incurred any liability, should be declared null and void.
3. Lastly, it has been held that where The guarantor holds property of the principal as collateral surety for his personal indemnity, to which he
may resort only after payment by himself, until he has paid something as such guarantor neither he nor the creditor can resort to such
30
collaterals.
The Agreement of Counter-Guaranty with Chattel/Real Estate Mortgage states that it is being issued for and in consideration of the
obligations assumed by the Mortgagee-Surety Company under the terms and conditions of ICP Bond No. 14010 in behalf of Slobec Realty
31
Development Corporation and in favor of Bormaheco, Inc. There is no doubt that said Agreement of Counter-Guaranty is issued for the
personal indemnity of ICP Considering that the fact of payment by ICP has never been established, it follows, pursuant to the doctrine above
adverted to, that ICP cannot foreclose on the subject properties,

IV. Private respondent PM Parts posits that it is a buyer in good faith and, therefore, it acquired a valid title over the subject properties. The
submission is without merit and the conclusion is specious
We have stated earlier that the doctrine of piercing the veil of corporate fiction is not applicable in this case. However, its inapplicability has
no bearing on the good faith or bad faith of private respondent PM Parts. It must be noted that Modesto N. Cervantes served as VicePresident of Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot be said that PM Parts had no knowledge of the
aforesaid several transactions executed between Bormaheco and petitioners. In addition, Atty. Martin de Guzman, who is the Executive VicePresident of Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were admitted without qualification in the stipulation of
facts submitted by the parties before the trial court. Hence, the defense of good faith may not be resorted to by private respondent PM Parts
which is charged with knowledge of the true relations existing between Bormaheco, ICP and herein petitioners. Accordingly, the transfer
certificates of title issued in its name, as well as the certificate of sale, must be declared null and void since they cannot be considered
altogether free of the taint of bad faith.
WHEREFORE, the decision of respondent Court of Appeals is hereby REVERSED and SET ASIDE, and judgment is hereby rendered declaring the
following as null and void: (1) Certificate of Sale, dated September 28,1973, executed by the Provincial Sheriff of Quezon in favor of the
Insurance Corporation of the Philippines; (2) Transfer Certificates of Title Nos. T-23705, T-23706, T-23707 and T-23708 issued in the name of
the Insurance Corporation of the Philippines; (3) the sale by Insurance Corporation of the Philippines in favor of Philippine Machinery Parts
Manufacturing Co., Inc. of the four (4) parcels of land covered by the aforesaid certificates of title; and (4) Transfer Certificates of Title Nos. T24846, T-24847, T-24848 and T24849 subsequently issued by virtue of said sale in the name of the latter corporation.
The Register of Deeds of Lucena City is hereby directed to cancel Transfer Certificates of Title Nos. T-24846, T-24847, T24848 and T-24849 in
the name of Philippine Machinery Parts Manufacturing Co., Inc. and to issue in lieu thereof the corresponding transfer certificates of title in
the name of herein petitioners, except Santiago Rivera.
The foregoing dispositions are without prejudice to such other and proper legal remedies as may be available to respondent Bormaheco, Inc.
against herein petitioners.
SO ORDERED.