contract between the two companies, bearing date of March 9,

G.R. No. L-37331

March 18, 1933
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in 1927. The complaint was afterwards amended so as to include a
their own behalf and in that all other stockholders of the prayer for the annulment of this contract. Shortly prior to the
Balatoc
Mining
Company,
etc., plaintiffs-appellants, institution of this lawsuit, the Benguet Consolidated Mining Co.,
transferred to H. E. Renz, as trustee, the certificate for 600,000

vs.

BALATOC shares of the Balatoc Mining Co. which constitute the principal
subject matter of the action. This was done apparently to
MINING COMPANY, H. E. RENZ, JOHN W. JAUSSERMANN, and
facilitate the splitting up to the shares in the course of the sale or
A. W. BEAM, defendants-appellees.
distribution. To prevent this the plaintiffs, upon filing their
Gibbs and McDonough and Roman Ozaeta for appellants.
original complaint, procured a preliminary injunction restraining
DeWitt,
Perkins
and
Brady
for
appellees.
the defendants, their agents and servants, from selling, assigning
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
or transferring the 600,000 shares of the Balatoc Mining Co., or
BENGUET

CONSOLIDATED

MINING

COMPANY,

any part thereof, and from removing said shares from the
Philippine Islands. This explains the connection of Renz with the
case. The other individual defendants are made merely as officials
DECISION
of the Benguet Consolidated Mining Co. Upon hearing the case
STREET, J.:
This action was originally instituted in the Court of First Instance the trial court dismissed the complaint and dissolved the
of the City of Manila by F. M. Harden, acting in his own behalf preliminary injunction, with costs against the plaintiffs. From
and that of all other stockholders of the Balatoc Mining Co. who this judgment the plaintiffs appealed.
might join in the action and contribute to the expense of the suit. The facts which have given rise this lawsuit are simple, as the
With the plaintiff Harden two others, J. D. Highsmith and John financial interests involve are immense. Briefly told these facts are
C. Hart, subsequently associated themselves. The defendants are as follows: The Benguet Consolidated Mining Co. was organized in
the Benguet Consolidated Mining Co., the Balatoc Mining Co., H. June, 1903, as a sociedad anonima in conformity with the
E. Renz, John W. Haussermann, and A. W. Beam. The principal provisions of Spanish law; while the Balatoc Mining Co. was
purpose of the original action was to annul a certificate covering organized in December 1925, as a corporation, in conformity with
600,000 shares of the stock of the Balatoc Mining Co., which have the provisions of the Corporation Law (Act No. 1459). Both
been issued to the Benguet Consolidated Mining Co., and to entities were organized for the purpose of engaging in the mining
secure to the Balatoc Mining Co., the restoration of a large sum of of gold in the Philippine Islands, and their respective properties
money alleged to have been unlawfully collected by the Benguet are located only a few miles apart in the subprovince of Benguet.
Consolidated Mining Co., with legal interest, after deduction The capital stock of the Balatoc Mining Co. consists of one million
therefrom of the amount expended by the latter company under a shares of the par value of one peso (P1) each.

When the Balatoc Mining Co. was first organized the properties stockholders, and at the time of the filing of the complaint the
acquired by it were largely undeveloped; and the original value of its shares had increased in the market from a nominal
stockholders were unable to supply the means needed for valuation to more than eleven pesos per share. While the Benguet
profitable operation. For this reason, the board of directors of the Company was pouring its million and a half into the Balatoc
corporation ordered a suspension of all work, effective July 31, property, the arrangements made between the two companies
1926. In November of the same year a general meeting of the appear to have been viewed by the plaintiff Harden with
companys stockholders appointed a committee for the purpose of complacency, he being the owner of many thousands of the
interesting outside capital in the mine. Under the authority of shares of the Balatoc Company. But as soon as the success of the
this resolution the committee approached A. W. Beam, then development had become apparent, he began this litigation in
president and general manager of the Benguet Company, to which he has been joined by two others of the eighty shareholders
secure the capital necessary to the development of the Balatoc of the Balatoc Company.
property. As a result of the negotiations thus begun, a contract, Briefly, the legal point upon which the action is planted is that it
formally authorized by the management of both companies, was is unlawful for the Benguet Company to hold any interest in a
executed on March 9, 1927, the principal features of which were mining corporation and that the contract by which the interest

that the Benguet Company was to proceed with the development here in question was acquired must be annulled, with the
and construct a milling plant for the Balatoc mine, of a capacity consequent obliteration of the certificate issued to the Benguet

of 100 tons of ore per day, and with an extraction of at least 85 Company and the corresponding enrichment of the shareholders
per cent of the gold content. The Benguet Company also agreed to of the Balatoc Company.
erect an appropriate power plant, with the aerial tramlines and When the Philippine Islands passed to the sovereignty of the
such other surface buildings as might be needed to operate the United States, in the attention of the Philippine Commission was
mine. In return for this it was agreed that the Benguet Company early drawn to the fact that there is no entity in Spanish law

should receive from the treasurer of the Balatoc Company shares exactly corresponding to the notion of the corporation in English
of a par value of P600,000, in payment for the first P600,000 be and American law; and in the Philippine Bill, approved July 1,

1902, the Congress of the United States inserted certain

thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May provisions, under the head of Franchises, which were intended to
31, 1929, the Benguet Company had spent upon the development control the lawmaking power in the Philippine Islands in the
the sum of P1,417,952.15. In compensation for this work a matter of granting of franchises, privileges and concessions.
certificate for six hundred thousand shares of the stock of the These provisions are found in Sections 74 and 75 of the Act. The
Balatoc Company has been delivered to the Benguet Company, provisions of Section 74 have been superseded by Section 28 of
and the excess value of the work in the amount of P817,952.15 the Act of Congress of August 29, 1916, but in Section 75 there is

has been returned to the Benguet Company in cash. Meanwhile a provision referring to mining corporations, which still remains
dividends of the Balatoc Company have been enriching its the law, as amended. This provisions, in its original form, reads

as follows: it shall be unlawful for any member of a by the word or. This latter device was adopted in Sections 75
corporation engaged in agriculture or mining and for any and 191 of the Corporation Law.
corporation organized for any purpose except irrigation to be in In drafting the Corporation Law the Philippine Commission
any wise interested in any other corporation engaged in inserted bodily, in subsection (5) of section 13 of that Act (No.
1459) the words which we have already quoted from Section 75 of
agriculture or in mining.

Under the guidance of this and certain other provisions thus the Act of Congress of July 1, 1902 (Philippine Bill); and it is of
enacted by Congress, the Philippine Commission entered upon course obvious that whatever meaning originally attached to this
the enactment of a general law authorizing the creation of provision in the Act of Congress, the same significance should be
corporations in the Philippine Islands. This rather elaborate piece attached to it in Section 13 of our Corporation Law.
of legislation is embodied in what is called our Corporation Law As it was the intention of our lawmakers to stimulate the

(Act No. 1459 of the Philippine Commission). The evident purpose introduction of the American Corporation into Philippine law in
of the commission was to introduce the American corporation the place of the sociedad anonima, it was necessary to make
into the Philippine Islands as the standard commercial entity and certain adjustments resulting from the continued co-existence, for
to hasten the day when the sociedad anonima of the Spanish law a time, of the two forms of commercial entities. Accordingly, in
would be obsolete. That statute is a sort of codification of Section 75 of the Corporation Law, a provision is found making
the sociedad anonima subject to the provisions of the Corporation
American corporate law.
For the purposes of general description only, it may be stated that Law so far as such provisions may be applicable, and giving to

the sociedad anonima is something very much like the English the sociedades anonimas previously created in the Islands the
joint stock company, with features resembling those of both the option to continue business as such or to reform and organize
partnership is shown in the fact that sociedad, the generic under the provisions of the Corporation Law. Again, in Section
component of its name in Spanish, is the same word that is used 191 of the Corporation Law, the Code of Commerce is repealed in
in that language to designate other forms of partnership, and in so far as it relates to sociedades anonimas. The purpose of the
its organization it is constructed along the same general lines as commission in repealing this part of the Code of Commerce was
the ordinary partnership. It is therefore not surprising that for to compel commercial entities thereafter organized to incorporate
purposes

of

loose

translation

the

expression sociedad under the Corporation Law, unless they should prefer to adopt

anonima has not infrequently the other hand, the affinity of this some form or other of the partnership. To this provision was
entity to the American corporation has not escaped notice, and added another to the effect that existing sociedades anonimas,
the expression sociedad anonima is now generally translated by which elected to continue their business as such, instead of
the word corporation. But when the word corporation is used in reforming and reorganizing under the Corporation Law, should
the sense of sociedad anonima and close discrimination is continue to be governed by the laws that were in force prior to the
necessary,

it

should

be

associated

with

the

Spanish passage of this Act in relation to their organization and method

expression sociedad anonima either in a parenthesis or connected of transacting business and to the rights of members thereof as

between themselves, but their relations to the public and public effective upon approval by the Governor-General, on December 3,
officials shall be governed by the provisions of this Act.
1928, and it was therefore in full force when the contract now in
As already observed, the provision above quoted from Section 75 question was made.
of the Act Congress of July 1, 1902 (Philippine Bill), generally This provision was inserted as a new section in the Corporation
prohibiting corporations engaged in mining and members of such Law, forming Section 1990 (A) of said Act as it now stands.
from being interested in any other corporation engaged in mining, Omitting the proviso, which seems not to be pertinent to the
was amended by Section 7 of Act No. 3518 of the Philippine present controversy, said provision reads as follows:
Legislature, approved by Congress March 1, 1929. The change in SEC. 190 (A). Penalties. The violation of any of the provisions of
the law effected by this amendment was in the direction of this Act and its amendments not otherwise penalized therein,
liberalization. Thus, the inhibition contained in the original shall be punished by a fine of not more than five thousand pesos
in and by imprisonment for not more than five years, in the
agriculture or mining from being interested in other corporations discretion of the court. If the violation is committed by a
engaged in agriculture or in mining was so modified as merely to corporation, the same shall, upon such violation being proved, be
provision

against

members

of

corporation

engaged

prohibit any such member from holding more than fifteen per dissolved by quo warranto proceedings instituted by the Attorneycentum of the outstanding capital stock of another such General or by any provincial fiscal by order of said Attorneycorporation. Moreover, the explicit prohibition against the holding General: . . . .
by any corporation (except for irrigation) of an interest in any Upon a survey of the facts sketched above it is obvious that there

other corporation engaged in agriculture or in mining was so are two fundamental questions involved in this controversy. The
modified as to limit the restriction to corporations organized for first is whether the plaintiffs can maintain an action based upon

the violation of law supposedly committed by the Benguet

the purpose of engaging in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not Company in this case. The second is whether, assuming the first
contain any appropriate clause directly penalizing the act of a question to be answered in the affirmative, the Benguet Company,
corporation, a member of a corporation , in acquiring an interest which was organized as a sociedad anonima, is a corporation
contrary to paragraph (5) of Section 13 of the Act. The Philippine within the meaning of the language used by the Congress of the
Legislature undertook to remedy this situation in Section 3 of Act United States, and later by the Philippine Legislature, prohibiting
No. 2792 of the Philippine Legislature, approved on February 18, a mining corporation from becoming interested in another mining
1919, but this provision was declared invalid by this court corporation. It is obvious that, if the first question be answered in
in Government of the Philippine Islands vs. El Hogar Filipino (50 the negative, it will be unnecessary to consider the second
Phil., 399), for lack of an adequate title to the Act. Subsequently question in this lawsuit.
the Legislature reenacted substantially the same penal provision Upon the first point it is at once obvious that the provision

in Section 21 of Act No. 3518, under a title sufficiently broad to referred to was adopted by the lawmakers with a sole view to the
comprehend the subject matter. This part of Act No. 3518 became public policy that should control in the granting of mining rights.

Furthermore, the penalties imposed in what is now Section 190 contract may recover anything he may have given, while he is not
(A) of the Corporation Law for the violation of the prohibition in bound to fulfill any promise he may have made. But, supposing
question are of such nature that they can be enforced only by a that the first hurdle can be safely vaulted, the general remedy
criminal prosecution or by an action of quo warranto. But these supplied in Article 1305 of the Civil Code cannot be invoked
proceedings can be maintained only by the Attorney-General in where an adequate special remedy is supplied in a special law. It
has been so held by this court in Go Chioco vs. Martinez (45 Phil.,
representation of the Government.
What room then is left for the private action which the plaintiffs 256, 280), where we refused to apply that article to a case of
seek to assert in this case? The defendant Benguet Company has nullity arising upon a usurious loan. The reason given for the
committed no civil wrong against the plaintiffs, and if a public decision on this point was that the Usury Act, as amended,
wrong has been committed, the directors of the Balatoc Company, contains all the provisions necessary for the effectuation of its
and the plaintiff Harden himself, were the active inducers of the purposes, with the result that the remedy given in Article 1305 of

commission of that wrong. The contract, supposing it to have the Civil Code is unnecessary. Much more is that idea applicable
been unlawful in fact, has been performed on both sides, by the to the situation now before us, where the special provisions give
building of the Balatoc plant by the Benguet Company and the ample remedies for the enforcement of the law by action in the
delivery to the latter of the certificate of 600,000 shares of the name of the Government, and where no civil wrong has been done
Balatoc Company. There is no possibility of really undoing what to the party here seeking redress.

has been done. Nobody would suggest the demolition of the mill. The view of the case presented above rest upon considerations
The Balatoc Company is secure in the possession of that arising upon our own statutes; and it would seem to be
improvement, and talk about putting the parties in status quo unnecessary to ransack the American decisions for analogies
ante by restoring the consideration with interest, while the pertinent to the case. We may observe, however, that the situation
Balatoc Company remains in possession of what it obtained by involved is not unlike that which has frequently arisen in the
the use of that money, does not quite meet the case. Also, to United States under provisions of the National Bank Act
mulct the Benguet Company in many millions of dollars in favor prohibiting banks organized under that law from holding real
of individuals who have not the slightest equitable right to that property. It has been uniformly held that a trust deed or
money in a proposition to which no court can give a ready assent. mortgaged conveying property of this kind to a bank, by way of
The most plausible presentation of the case of the plaintiffs security, is valid until the transaction is assailed in a direct
proceeds on the assumption that only one of the contracting proceeding instituted by the Government against the bank, and
parties has been guilty of a misdemeanor, namely, the Benguet the illegality of such tenure supplies no basis for an action by the
Company, and that the other party, the Balatoc Company, is former private owner, or his creditor, to annul the conveyance.
wholly innocent to participation in that wrong. The plaintiffs (National Bank vs. Matthews, 98 U. S., 621; Kerfoot vs. Farmers
would then have us apply the second paragraph of Article 1305 of & M. Bank, 218 U. S., 281.) Other analogies point in the same
the Civil Code which declares that an innocent party to an illegal direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc.

Mining Co., 29 Mont., 428; Holmes & Griggs Mfg. Co. vs. Holmes G.R. No. L-18216
October 30, 1962
& Wessell Metal Co., 127 N. Y., 252; Oelbermann vs. N. Y. & N. R. STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitionersCo., 77 Hun., 332.)
appellants,
Most suggestive perhaps of all the cases in Compaia Azucarera vs.
de Carolina vs. Registrar (19 Porto Rico, 143), for the reason that REGISTER OF DEEDS OF MANILA, respondent-appellee.
this case arose under a provision of the Foraker Act, a law Ramon
C.
Fernando
for
petitioners-appellants.
analogous to our Philippine Bill. It appears that the registrar had Office of the Solicitor General for respondent-appellee.
refused to register two deeds in favor of the Compaia Azucarera BAUTISTA ANGELO, J.:
on the ground that the land thereby conveyed was in excess of the On September 19, 1960, the five stockholders of the F. Guanzon
area permitted by law to the company. The Porto Rican court and Sons, Inc. executed a certificate of liquidation of the assets of
reversed the ruling of the registrar and ordered the registration of the corporation reciting, among other things, that by virtue of a
resolution of the stockholders adopted on September 17, 1960,
the deeds, saying:
Thus it may be seen that a corporation limited by the law or by its dissolving the corporation, they have distributed among
charter has until the State acts every power and capacity that any themselves in proportion to their shareholdings, as liquidating
other individual capable of acquiring lands, possesses. The dividends, the assets of said corporation, including real properties
corporation may exercise every act of ownership over such lands; located in Manila.
it may sue in ejectment or unlawful detainer and it may demand The certificate of liquidation, when presented to the Register of
specific performance. It has an absolute title against all the world Deeds of Manila, was denied registration on seven grounds, of
except the State after a proper proceeding is begun in a court of which the following were disputed by the stockholders:
3. The number of parcels not certified to in the
law. The Attorney General is the exclusive officer in whom is
confided the right to initiate proceedings for escheat or attack the
right of a corporation to hold land.
Having shown that the plaintiffs in this case have no right of
action against the Benguet Company for the infraction of law
supposed to have been committed, we forego any discussion of
the further question whether a sociedad anonima created under
Spanish law, such as the Benguet Company, is a corporation
within the meaning of the prohibitory provision already so many
times mentioned. That important question should, in our opinion,

acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the

document;
7. The judgment of the Court approving the dissolution
and

directing

the

disposition

of

the

assets

of

the

corporation need be presented (Rules of Court, Rule 104,

Sec. 3).
Deciding the consulta elevated

by

the

stockholders,

the

Commissioner of Land Registration overruled ground No. 7 and

be left until it is raised in an action brought by the Government.
sustained requirements Nos. 3, 5 and 6.
The judgment which is the subject of his appeal will therefore be
The stockholders interposed the present appeal.
affirmed, and it is so ordered, with costs against the appellants.

As correctly stated by the Commissioner of Land Registration, the A share of stock only typifies an aliquot part of the corporation's
propriety or impropriety of the three grounds on which the denial property, or the right to share in its proceeds to that extent when
of the registration of the certificate of liquidation was predicated distributed according to law and equity (Hall & Faley v. Alabama
hinges on whether or not that certificate merely involves a Terminal, 173 Ala 398, 56 So., 235), but its holder is not the
distribution of the corporation's assets or should be considered a owner of any part of the capital of the corporation (Bradley v.
transfer or conveyance.
Bauder 36 Ohio St., 28). Nor is he entitled to the possession of
Appellants contend that the certificate of liquidation is not a any definite portion of its property or assets (Gottfried v. Miller,
conveyance or transfer but merely a distribution of the assets of 104 U.S., 521; Jones v. Davis, 35 Ohio St., 474). The stockholder

the corporation which has ceased to exist for having been is not a co-owner or tenant in common of the corporate property
dissolved. This is apparent in the minutes for dissolution (Halton v. Hohnston, 166 Ala 317, 51 So 992).
attached to the document. Not being a conveyance the certificate On the basis of the foregoing authorities, it is clear that the act of
need not contain a statement of the number of parcel of land liquidation made by the stockholders of the F. Guanzon and Sons,
involved in the distribution in the acknowledgment appearing Inc. of the latter's assets is not and cannot be considered a
therein. Hence the amount of documentary stamps to be affixed partition of community property, but rather a transfer or
thereon should only be P0.30 and not P940.45, as required by the conveyance of the title of its assets to the individual stockholders.
register of deeds. Neither is it correct to require appellants to pay Indeed, since the purpose of the liquidation, as well as the
the amount of P430.50 as registration fee.
distribution of the assets of the corporation, is to transfer their
The Commissioner of Land Registration, however, entertained a title from the corporation to the stockholders in proportion to
different opinion. He concurred in the view expressed by the their shareholdings, and this is in effect the purpose which

register of deed to the effect that the certificate of liquidation in they seek to obtain from the Register of Deeds of Manila, that
question, though it involves a distribution of the corporation's transfer cannot be effected without the corresponding deed of
assets, in the last analysis represents a transfer of said assets conveyance from the corporation to the stockholders. It is,
from the corporation to the stockholders. Hence, in substance it therefore, fair and logical to consider the certificate of liquidation
is a transfer or conveyance.
as one in the nature of a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a WHEREFORE, we affirm the resolution appealed from, with costs
juridical person distinct from the members composing it. against appellants.
Properties registered in the name of the corporation are owned by Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon, Regala and

it as an entity separate and distinct from its members. While Makalintal, JJ., concur.
August 31, 1962
shares of stock constitute personal property they do not represent G.R. No. L-15121
property of the corporation. The corporation has property of its GREGORIO PALACIO, in his own behalf and in behalf of his
own which consists chiefly of real estate (Nelson v. Owen, 113 minor
Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). MARIO

child,
PALACIO, plaintiffs-appellants,

vs.

Palacio's) child was in the hospital and who said child was

FELY TRANSPORTATION COMPANY, defendant-appellee.

Antonio
A.
Saba
for
plaintiffs-appellants.

under treatment for five months in order to meet the needs

Mercado, Ver and Reyes for defendant-appellee.

REGALA, J.:
This is an appeal by the plaintiffs from the decision of the Court

(heavy duty) and one heavy duty electric drill, for a

of First Instance of Manila which dismissed their complaint.

Originally taken to the Court of Appeals, this appeal was certified

the driver Alfredo Carillo of the herein defendant company,

to this Court on the ground that it raises purely questions of law.

The parties in this case adopt the following findings of fact of the
lower court:
In their complaint filed with this Court on May 15, 1954,
plaintiffs

allege,

among

other

things,

"that

about

December, 1952, the defendant company hired Alfredo

Carillo as driver of AC-787 (687) (a registration for 1952)
owned and operated by the said defendant company; that
on December 24, 1952, at about 11:30 a.m., while the
driver Alfonso (Alfredo) Carillo was driving AC-687 at
Halcon Street, Quezon City, wilfully, unlawfully and
feloniously and in a negligent, reckless and imprudent
manner, run over a child Mario Palacio of the herein
plaintiff Gregorio Palacio; that on account of the aforesaid
injuries, Mario Palacio suffered a simple fracture of the
right tenor (sic), complete third, thereby hospitalizing him
at the Philippine Orthopedic Hospital from December 24,
1952, up to January 8, 1953, and continued to be treated
for a period of five months thereafter; that the plaintiff
Gregorio Palacio herein is a welder by occupation and
owner of a small welding shop and because of the injuries
of his child he has abandoned his shop where he derives
income of P10.00 a day for the support of his big family;
that during the period that the plaintiff's (Gregorio

of his big family, he was forced to sell one air compressor

sacrifice sale of P150.00 which could easily sell at P350.00;
that as a consequence of the negligent and reckless act of
the herein plaintiffs were forced to litigate this case in
Court for an agreed amount of P300.00 for attorney's fee;
that the herein plaintiffs have now incurred the amount of
P500.00 actual expenses for transportation, representation
and similar expenses for gathering evidence and witnesses;
and that because of the nature of the injuries of plaintiff
Mario Palacio and the fear that the child might become a
useless invalid, the herein plaintiff Gregorio Palacio has
suffered moral damages which could be conservatively
estimated at P1,200.00.
On May 23, 1956, defendant Fely Transportation Co., filed
a Motion to Dismiss on the grounds (1) that there is no
cause of action against the defendant company, and (2)
that the cause of action is barred by prior judgment..
In its Order, dated June 8, 1956, this Court deferred the
determination of the grounds alleged in the Motion to
Dismiss until the trial of this case.
On June 20, 1956, defendant filed its answer. By way of
affirmative defenses, it alleges (1) that complaint states no
cause of action against defendant, and (2) that the sale and
transfer of the jeep AC-687 by Isabelo Calingasan to the
Fely Transportation was made on December 24, 1955, long
after the driver Alfredo Carillo of said jeep had been
convicted and had served his sentence in Criminal Case
No. Q-1084 of the Court of First Instance of Quezon City,

in

which

both

the

civil

and

criminal

cases

were

case to prove the agreed attorney's fees between him and

simultaneously tried by agreement of the parties in said

plaintiff Gregorio Palacio and the expenses allegedly

case. In the Counterclaim of the Answer, defendant alleges

incurred by the herein plaintiffs in connection with that

that in view of the filing of this complaint which is a clearly

case. During the trial of this case, plaintiff Gregorio Palacio

unfounded civil action merely to harass the defendant, it

was compelled to engage the services of a lawyer for an

testified substantially to the same facts.

The Court of First Instance of Quezon City in its decision

agreed amount of P500.00.

During the trial, plaintiffs presented the transcript of the

in Criminal Case No. 1084 (Exhibit "2") determined and

thoroughly discussed the civil liability of the accused in

stenographic notes of the trial of the case of "People of the

that case. The dispositive part thereof reads as follows:

IN VIEW OF THE FOREGOING, the Court finds the

Philippines vs. Alfredo Carillo, Criminal Case No. Q-1084,"

in the Court of First Instance of Rizal, Quezon City (Branch

accused Alfredo Carillo y Damaso guilty beyond reasonable

IV), as Exhibit "A".1wph1.t

It appears from Exhibit "A" that Gregorio Palacio, one of

doubt of the crime charged in the information and he is

hereby sentenced to suffer imprisonment for a period of

the herein plaintiffs, testified that Mario Palacio, the other

Two Months & One Day of Arresto Mayor; to indemnify the

plaintiff, is his son; that as a result of the reckless driving

offended party, by way of consequential damages, in the

of accused Alfredo Carillo, his child Mario was injured and

sum of P500.00 which the Court deems reasonable; with

hospitalized from December 24, 1952, to January 8, 1953;

subsidiary imprisonment in case of insolvency but not to

that during all the time that his child was in the hospital,

exceed /3 of the principal penalty imposed; and to pay the

costs.
day; that during that period of time he could not work as On the basis of these facts, the lower court held action is barred
he slept during the day; that before his child was injured, by the judgment in the criminal case and, that under Article 103
he used to earn P10.00 a day on ordinary days and on of the Revised Penal Code, the person subsidiarily liable to pay
he watched him during the night and his wife during the

Sundays from P20 to P50 a Sunday; that to meet his damages is Isabel Calingasan, the employer, and not the
expenses he had to sell his compressor and electric drill for defendant corporation.
P150 only; and that they could have been sold for P300 at Against that decision the plaintiffs appealed, contending that:
THE LOWER COURT ERRED IN NOT SUSTAINING THAT
the lowest price.
THE DEFENDANT-APPELLEE IS SUBSIDIARILY LIABLE
During the trial of the criminal case against the driver of
FOR DAMAGES AS A RESULT OF CRIMINAL CASE NO. Qthe jeep in the Court of First Instance of Quezon City
(Criminal Case No. Q-1084) an attempt was unsuccessfully
made by the prosecution to prove moral damages allegedly
suffered by herein plaintiff Gregorio Palacio. Likewise an
attempt was made in vain by the private prosecutor in that

1084 OF THE COURT OF FIRST INSTANCE OF QUEZON

CITY FOR THE REASON THAT THE INCORPORATORS OF
THE

FELY

TRANSPORTATION

COMPANY,

THE

DEFENDANT-APPELLEE

HEREIN,

ARE

ISABELO shield to further an end subversive of justice. (La Campana Coffee

CALINGASAN HIMSELF, HIS SON AND DAUGHTERS;

Factory, et al. v. Kaisahan ng mga Manggagawa, etc., et al., G.R.
THE LOWER COURT ERRED IN NOT CONSIDERING THAT No. L-5677, May 25, 1953) Furthermore, the failure of the
THE
INTENTION
OF
ISABELO
CALINGASAN
IN defendant corporation to prove that it has other property than the
INCORPORATING

THE

FELY

TRANSPORTATION jeep (AC-687) strengthens the conviction that its formation was
COMPANY, THE DEFENDANT-APPELLEE HEREIN, WAS TO for the purpose above indicated.
EVADE HIS CIVIL LIABILITY AS A RESULT OF THE And while it is true that Isabelo Calingasan is not a party in this

CONVICTION OF HIS DRIVER OF VEHICLE AC-687 THEN case, yet, is held in the case of Alonso v. Villamor, 16 Phil. 315,
OWNED BY HIM:
this Court can substitute him in place of the defendant
THE LOWER COURT ERRED IN HOLDING THAT THE corporation as to the real party in interest. This is so in order to
CAUSE OF ACTION OF THE PLAINTIFFS-APPELLANTS IS avoid multiplicity of suits and thereby save the parties

BARRED BY PRIOR JUDGMENT.

unnecessary expenses and delay. (Sec. 2, Rule 17, Rules of Court;
With respect to the first and second assignments of errors, Cuyugan v. Dizon. 79 Phil. 80; Quison v. Salud, 12 Phil. 109.)
plaintiffs contend that the defendant corporate should be made Accordingly, defendants Fely Transportation and Isabelo
subsidiarily liable for damages in the criminal case because the Calingasan should be held subsidiarily liable for P500.00 which
sale to it of the jeep in question, after the conviction of Alfred Alfredo Carillo was ordered to pay in the criminal case and which
Carillo in Criminal Case No. Q-1084 of the Court of First Instance amount he could not pay on account of insolvency.
of Quezon City was merely an attempt on the part of Isabelo We also sustain plaintiffs' third assignment of error and hold that

Calingasan its president and general manager, to evade his the present action is not barred by the judgment of the Court of
subsidiary civil liability.
First Instance of Quezon City in the criminal case. While there
The Court agrees with this contention of the plaintiffs. Isabelo seems to be some confusion on part of the plaintiffs as to the
Calingasan and defendant Fely Transportation may be regarded theory on which the is based whether ex-delito or quasi ex-

as one and the same person. It is evident that Isabelo delito (culpa aquiliana) We are convinced, from the discussion
Calingasan's main purpose in forming the corporation was to prayer in the brief on appeal, that they are insisting the
evade his subsidiary civil liability 1 resulting from the conviction of subsidiary civil liability of the defendant. As a matter of fact, the
his driver, Alfredo Carillo. This conclusion is borne out by the fact record shows that plaintiffs merely presented the transcript of the
that the incorporators of the Fely Transportation are Isabelo stenographic notes (Exhibit "A") taken at the hearing of the
Calingasan, his wife, his son, Dr. Calingasan, and his two criminal case, which Gregorio Palacio corroborated, in support of

daughters. We believe that this is one case where the defendant their claim for damages. This rules out the defense of res judicata,
corporation should not be heard to say that it has a personality because such liability proceeds precisely from the judgment in
separate and distinct from its members when to allow it to do so the criminal action, where the accused was found guilty and
would be to sanction the use of the fiction of corporate entity as a ordered to pay an indemnity in the sum P500.00.

WHEREFORE, the decision of the lower court is hereby reversed some of those who signed the receipts for delivery thereof were his
and defendants Fely Transportation and Isabelo Calingasan are employees cannot overcome the evidence for the plaintiff.
ordered to pay, jointly and severally, the plaintiffs the amount of
P500.00 and the costs.
[G.R.

No.

DECISION

42420.

November

20,

1936.]

WALTER A. SMITH CO., INC., Plaintiff-Appellee, v. J. W.

FORD, Defendant-Appellant.
J.W.
Anatolio

The defendant J.W. Ford appeals to this court from the judgment
for Appellant. of the Court of First Instance of Manila the dispositive part of
which

Ferrier
G.

VILLA-REAL, J.:

Alcoba

for Appellee.

"Wherefore, the court orders the herein defendant to pay to the

plaintiff Walter A. Smith Co., Inc., the sum of two thousand four
SYLLABUS
hundred eighty-nine pesos and ninety-two centavos (P2,489.92),
1. ALLEGATIONS; JURISDICTION; WAIVER OF RIGHT TO with interest thereon at 1 per cent a month from the dates of the
OBJECT TO VENUE. Even granting that the plaintiff company invoices in question, with costs. So ordered."
had no branch in the City of Manila at the time of the filing of the
complaint, the existence thereof not having been proven, the In support of his appeal, the appellant assigns the following
Court of First Instance of Manila did not thereby lack jurisdiction alleged errors as committed by the court a quo in its decision in
to take cognizance of said complaint because when said question, to wit:
defendants demurrer had been overruled and he was ordered to
answer the complaint, he filed an answer wherein, aside from "1. In overruling defendants demurrer and motion to dismiss.
denying generally and specifically the allegations contained in
each and every paragraph of the complaint in question, he "2. In declaring that defendant had not only failed to deny but
interposed two special defenses. This is equivalent to a waiver of had admitted that he had received all the merchandise described
his right to object to the jurisdiction of the court a quo over his in the inovices.
person and a submission to the jurisdiction of said court (67
Corpus
Juris,
131). "3. In condemning the defendant to pay plaintiff the sum of
P2,489.92 with interest thereon at 1 per cent per annum from the
2. ID.; SUFFICIENCY OF EVIDENCE IN SUPPORT OF THE respective dates of the invoices, and to pay the costs.
COMPLAINT. It having been proven that all the lumber the
value of which is claimed by the plaintiff company was invoiced in "4. In not absolving the defendant from the complaint particularly
the defendants name or delivered at his address, the mere for the reason that plaintiff no longer has any claim against said
answer that he neither knew nor remembered whether or not

defendant.
"5. In denying defendants motion for a new trial."
From the record the following facts may be inferred:
By resolution of December 31, 1931, of the board of directors of
the corporation, Walter A. Smith Co., Inc., with official residence
in Iloilo, Iloilo, the president thereof, Walter A. Smith, was
authorized to open and he did open a branch of the corporation
in the City of Manila. From December 6, 1927, to May 17, 1930,
both dates inclusive, there were delivered on different dates at the
defendants address in Iloilo, Iloilo, various kinds of lumber the
total value of which amounted to P2,489.92 (Exhibits A, A-3, B,
B-3, C, C-2, C-4, D, E, E- 2, E-4, F, F-3, G, H, I, J, J-3, K, K-3, K6 and L-1), the corresponding receipts having been signed as
follows: Exhibit A-1 by Nicolas Dignadice, Exhibit A-4 by Manuel
Solatorio, Exhibit B-1 by Manuel Solatorio, Exhibit B-4 by Geo.
G. Martin, Exhibit C-1 by J.W. Ford, Exhibit C-3 by a person the
signature of which is illegible, Exhibit C-5 by Andres Velez,
Exhibits D-1, E-1, and E-3 by J.W. Ford himself, Exhibit F-5 by
Cornelio Flores, Exhibit H-1 by J.W. Ford himself, Exhibit I-1 by
Thick Ford, Exhibit I-2 by Frank F. Ford, Exhibits J-1 and EJ-4
by Gabino Pullantis, Exhibit K by Frank Ford, Exhibit K-4 by
Juan Salazar, Exhibit K-7 by Mariano Moquera, Exhibit L-1 by
Mrs. Marcela Ford. Some of said receipts, those signed by the
defendant J. W. Ford, bear under the signature thereof the words
"on account" (Exhibit E-1), "Act. Loan & Asia Lumber Co."
(Exhibit E-3), "On Act." (Exhibit F-1), "On Act. Note from Asia
Lumber Co." (Exhibit H-1). The value of said lumber had not yet
been paid either totally or partially on the date of the filing of the
amended complaint.
The defendant J.W. Ford denies having received all said lumber.
He admits having received only that appearing in Exhibits A-1
signed by Nicolas Dignadice; A-4 signed by Manuel Solatario; B-1
also signed by Manuel Solatario; B-4 signed by Geo G. Martin; C-

1 signed by J.W. Ford; C-5 signed by Andres Velez; D-1, E-1 and
E-3 signed by J.W. Ford; E-5 signed by Frank Ford; F-1 signed by
J.W. Ford; F-2 signed by Frank Ford; F-4 signed by J.W. Ford; F-5
signed by Cornelio Flores; H- 1 signed by J.W. Ford; I-2 signed by
Frank F. Ford; J-1 signed by Gabino Pullantis; K signed by Frank
Ford; K-7 signed by Mariano Moquera; L-1 signed by Marcela de
Ford. The lumber consigned in the receipts Exhibits C-3 with an
illegible signature; G and G-1 which are unsigned; J-3 also
unsigned; J-4 signed by Gabino Pullantis, and K-3 and K-4
signed by Juan Salazar, was not received by him inasmuch as he
does not know the persons whose signatures appear in said
receipts. Upon being questioned by his attorney regarding the
signature of Nicolas Dignadice in Exhibit A-1, the defendant J.W.
Ford stated that he did not remember said name but that it must
be that of one of his employees. With respect to Manuel Solatario
whose signature appears in the receipt Exhibit A-4, Geo. G.
Martin whose signature appears in the receipt Exhibit B-4; and
Andres Velez whose signature appears in Exhibit C-5, the
defendant J.W. Ford, upon being asked if he had employees by
those names, answered that he did not know or that he did not
remember.
In view of the foregoing facts, the first question to be decided is
that procedural question raised by the appellant in his first
assignment of alleged error, consisting in that the court a quo
erred in overruling the demurrer filed by him and denying his
motion to dismiss on the ground of improper venue.
Even granting that the plaintiff company had no branch in the
City of Manila at the time of the filing of the complaint, the
existence thereof not having been conclusively proven, the Court
of First Instance of Manila did not thereby lack jurisdiction to
take cognizance of said complaint because when said defendants
demurrer had been overruled and he was ordered to answer the
complaint, he filed an answer wherein, aside from denying
generally and specifically the allegations contained in each and

every paragraph of the complaint in question, he interposed two

special defenses one of which is that all the items enumerated in
said complaint, with the exception of the last two amounting to
P278.40, have already prescribed; the other being that Walter A.
Smith, the biggest stockholder of the plaintiff corporation was
indebted and continued to be indebted to the defendant for a
considerable amount of money the total of which is very much
more than that claimed by the plaintiff entity, which amount
must be applied to the payment of Walter A. Smiths debt to said
defendant, and he prays for the dismissal of the complaint. All of
this is equivalent to a waiver of his right to object to the
jurisdiction of the court a quo over his person and a submission
to the jurisdiction of said court (67 Corpus Juris, 131). The facts
of the case of Cohen and Cohen v. Benguet Commercial Co. (34
Phil., 526), cited by the appellant, are that the defendant
company appeared specially and objected to the jurisdiction of
the Court of First Instance of Manila over the company in
question and the subject matter of the action on the ground that
the venue had been improperly laid by the plaintiff as the trial,
under the provisions of the Code of Civil Procedure, must take
place in the province where either the plaintiff or the defendant
resided or was found at the time the summons was served. The
prayer of the motion was that the above entitled cause be
dismissed. The motion was denied by the court on the ground
that the motion, especially the prayer, constituted a voluntary
general appearance in the action, and that such an appearance
was a waiver of the objection to the venue. The motion filed by the
defendant company, Benguet Commercial Co., Ltd., reads: "Now
come the undersigned attorneys appearing specially in behalf of
the defendant in the above entitled case for the sole purpose of
objecting to the venue of the action." This court, through Justice
Moreland, said:

appearance. The mere fact that the prayer of the motion was for a
dismissal of the action is not sufficient to constitute such waiver,
or even a general appearance, having in mind the limitation
stated in the body of the motion. A prayer in a motion, like a
prayer in a complaint, is not conclusive as to the character of the
motion. Indeed, under the Code of Civil Procedure dismissal of
the action is one of the remedies for an improper venue. Improper
venue is a ground of demurrer and it may be made the basis of a
plea in abatement; and, as the ordinary effect of sustaining a
demurrer is to dismiss the complaint, if it is not amended, and,
as the result of a plea in abatement is to terminate the action, it
necessarily follows that the remedy prayed for was one of the
remedies to which defendant was entitled if its motion was
proper.
"Section 377 provides that the defendant may enter a general
appearance in the action without waiving his rights, even where
the venue is improperly laid, provided he, at the same time, files
an objection to the venue. The distinction between a general and
special appearance does not seem to have been preserved, at least
in words, by the Code of Civil Procedure, it appearing to have
been the purpose of the legislature, in enacting section 377, to
require the courts to look at the intent and purpose of the
appearing party and to deal with him accordingly, leaving out of
account all technicalities which would deprive him of that which
he really desired to secure by his appearance. Furthermore, there
does not seem to be any provision in the Code of Civil Procedure
with respect to change of venue in cases like the present, the
remedy appearing to be a dismissal of the action on the ground
that the jurisdiction, if any, which the court obtained over the
person of the defendant by the service of the summons within the
jurisdiction of the court, is divested by objection in conformity
with the provisions of section 377."

"This limited the character of the appearance in that motion

unless, by some subsequent act, the defendant waived the It will be seen that in said case the defendant company only
limitation or exceeded it by acts which constitute a general appeared specially to object to the jurisdiction of the court as to

the place where the complaint was filed and its person. It neither
filed any answer, not set up any defense whether general or
special with a prayer for relief. In the present case the defendant
answered the complaint by denying generally and specifically all
the allegations contained therein and interposed special defenses
praying that the plaintiff companys claim against him be
compensated by what the manager of the company, Walter A.
Smith, owed him. In the case of Marquez Lim Cay v. Del Rosario
(55 Phil., 962), this court laid down the following doctrine:
"The filing of a demurrer on the ground that the complaint does
not allege facts sufficient to constitute a cause of action; the filing
of a motion praying for the dissolution of an attachment without
objecting to the jurisdiction of the court over the place where the
property is situated, by means of a special appearance; the giving
of a bond for the dissolution of said attachment; and the filing of
a motion praying for the assessment of damages caused by the
undue and unjust issuance of said attachment, imply a
submission to the jurisdiction of the court and a waiver of the
privilege to impugn such jurisdiction. (Manila Railroad Company
v. Attorney-General, 20 Phil., 523.)" (See also Samson v.
Carratala, 50 Phil., 647.)
As to the second assignment of alleged error, while it is true that
not all the receipts for delivery of lumber were signed by the
defendant, upon being asked by his own attorney whether those
who signed the other receipts of delivery were his employees, he
answered that he did not know or that he did not remember. It
having been proven that all the lumber the value of which is
claimed by the plaintiff company was invoiced in the name of the
defendant or delivered at his address, the mere answer that he
neither knew nor remembered whether or not some of those who
signed the receipts for delivery thereof were his employees cannot
overcome the evidence for the plaintiff.
With respect to the question whether or not the defendant is

entitled to the compensation of the amount claimed by the

plaintiff company by the alleged indebtedness to him of the
president and manager thereof, Walter A. Smith, it not appearing
that the amounts which the defendant claims Walter A. Smith
owes him were invested or used in connection with the business
of said corporation, the corporation cannot be held responsible
for the payment thereof as the mere fact that Walter A. Smith is
president and manager of Walter A. Smith Co., Inc., does not
make the latter responsible for any personal obligation contracted
by said manager.
As to the question raised in the fourth assignment of alleged error
that the court a quo erred in not absolving the defendant from
the complaint inasmuch as said plaintiff no longer has any claim
against said defendant, Exhibit LL provides that the Manila
Lumber Inc. would take charge of collecting certain accounts due
Walter A. Smith Co., Inc., with official residence in the City of
Iloilo, on condition that said Manila Lumber Inc. should defray all
expenses incurred in the collection of the accounts delivered to it
for collection and that 10 per cent of the amount collected, after
deducting all the expenses for collection including costs, sheriffs
fees and attorneys fees, would be delivered to said Walter A.
Smith Co., Inc., said Manila Lumber Inc., retaining 90 per cent of
the net amount collected. It will be seen that under said contract
Walter A. Smith Co., Inc., has not transferred its rights over its
uncollected accounts to the Manila Lumber Inc., but simply
entrusted the collection thereof from its debtors. The fact that the
Manila Lumber Inc. retained 90 per cent of the net amount of the
collections, delivering only 10 per cent thereof to Walter A. Smith,
Inc., has nothing to do with Walter A. Smiths personal debt
which, as already stated, cannot be imputed to Walter A. Smith
Co., Inc., on the ground that Walter A. Smiths personality is
separate from and independent of the juridical personality of
Walter A. Smith Co., Inc., notwithstanding the fact that Walter A.
Smith is the biggest stockholder of the corporation.

In view of the foregoing considerations, and not finding any error McConnel, Rodriguez and Cochrane. Whereupon, the lot owners
in the appealed judgment, it is affirmed in toto with costs to the filed against it a complaint for forcible entry in the Municipal
appellant. So ordered.
Court of Manila on 7 October 1947 (Civil Case No. 4031).
Judgment was rendered in due course on 13 November 1947,
G.R. No. L-10510
March 17, 1961
ordering the Park Rite Co., Inc. to pay P7,410.00 plus legal
M. MC CONNEL, W. P. COCHRANE, RICARDO RODRIGUEZ, ET
interest as damages from April 15, 1947 until return of the lot.
AL., petitioners,
Restitution not having been made until 31 January 1948, the
vs.
entire judgment amounted to P11,732.50. Upon execution, the
THE COURT OF APPEALS and DOMINGA DE LOS REYES, corporation was found without any assets other than P550.00
assisted by her husband, SABINO PADILLA,respondents.
deposited in Court. After their application to the judgment credit,
Jesus B. Santos and Cornelio Antiquera for petitioners. there remained a balance of P11,182.50 outstanding and
Teodoro Padilla for respondents.
unsatisfied.
REYES, J.B.L., J.:
The judgment creditors then filed suit in the Court of First
The issue before us in the correctness of the decision of the Court Instance of Manila against the corporation and its past and
of Appeals that, under the circumstances of record, there was present stockholders, to recover from them, jointly and severally,

justification for disregarding the corporate entity of the Park Rite the unsatisfied balance of the judgment, plus legal interest and
Co., Inc., and holding its controlling stockholders personally costs. The Court of First Instance denied recovery; but on appeal,

responsible for a judgment against the corporation.

the Court of Appeals (CA-G.R. No. 8434-R) reversed, finding that
The Court of Appeals found that the Park Rite Co., Inc., a
the corporation was a mere alter ego or business conduit of the
Philippine corporation, was originally organized on or about April
principal stockholders that controlled it for their own benefit, and
15, 1947, with a capital stock of 1,500 shares at P1.00 a share.
adjudged them responsible for the amounts demanded by the lot
The corporation leased from Rafael Perez Rosales y Samanillo a
owners, as follows:
vacant lot on Juan Luna street (Manila) which it used for parking
WHEREFORE, premises considered, the decision appealed
motor vehicles for a consideration.
from is reversed. Defendants-appellees Cirilo Paredes and
It turned out that in operating its parking business, the
Ursula Tolentino are hereby declared liable to the plaintiffscorporation occupied and used not only the Samanillo lot it had
appellants for the rentals due on the lot in question from
leased but also an adjacent lot belonging to the respondentsAugust 22, 1947 to January 31, 1948 at the rate of
appellees Padilla, without the owners' knowledge and consent.
P1,235.00 a month, with legal interest thereon from the
When the latter discovered the truth around October of 1947,
time of the filing of the complaint. Deducting the P550.00
they demanded payment for the use and occupation of the lot.
which was paid at the time when the corporation was
The corporation (then controlled by petitioners Cirilo Parades and
already acquired by the said defendants-appellees Cirilo
Ursula Tolentino, who had purchased and held 1,496 of its 1,500
Paredes and Ursula Tolentino, they are hereby ordered to
shares) disclaimed liability, blaming the original incorporators,

pay to plaintiffs-appellants Dominga de los Reyes and

Tolentino, and before them the defendants M. McConnel,

Sabino Padilla the sum of P6,036.66 with legal interest

W. P. Cochrane, and Ricardo Rodriguez. The evidence

therein from the time of the filing of the complaint until

clearly shows that these persons completely dominated and

fully paid.
Defendant-appellee

controlled the corporation and that the functions of the

RICARDO

RODRIGUEZ

is

hereby

ordered to pay to the plaintiffs-appellants Dominga de los

corporation were solely for their benefits.

When it was originally organized on or about April 15,

Reyes and Sabino Padilla the sum of P1,742.64 with legal

1947, the original incorporators were M. McConnel, W. P.

interest thereon from the time of the filing of the complaint

Cochrane, Ricardo Rodriguez, Benedicto M. Dario and

and until it is fully paid. In addition thereto the

Aurea Ordrecio with a capital stock of P1,500.00 divided

defendants-appellees Cirilo Paredes, Ursula Tolentino and

into 1,500 shares at P1.00 a share. McConnel and

Ricardo Rodriguez shall pay the costs proportionately in

Cochrane each owned 500 shares, Ricardo Rodriguez 408

both instances.
IT IS SO ORDERED.
Cirilo Paredes and Ursula Tolentino then resorted to this court.

shares, and Dario and Ordrecio 1 share each. It is obvious

We granted certiorari.
On the main issue whether the individual stockholders maybe

defendants Cirilo Paredes and Ursula Tolentino purchased

held liable for obligations contracted by the corporation, this

Court has already answered the question in the affirmative
wherever circumstances have shown that the corporate entity is
being used as an alter ego or business conduit for the sole benefit
of the stockholders, or else to defeat public convenience, justify
wrong, protect fraud, or defend crime (Koppel [Phil.] Inc. vs. Yatco,
77 Phil. 496; Arnold vs. Willits and Patterson, 44 Phil. 364).
The Court of Appeals has made express findings to the following
effect:

There is no question that a wrong has been committed by

the so-called Park Rite Co., Inc., upon the plaintiffs when it
occupied the lot of the latter without its prior knowledge
and consent and without paying the reasonable rentals for
the occupation of said lot. There is also no doubt in our
mind that the corporationwas a mere alter ego or business
conduit of the defendants Cirilo

Paredes and Ursula

that the shares of the last two named persons were merely
qualifying shares. Then or about August 22, 1947 the
1,496 shares of the said corporation and the remaining
four shares were acquired by Bienvenido J. Claudio,
Quintin C. Paredes, Segundo Tarictican, and Paulino
Marquez at one share each. It is obvious that the last four
shares bought by these four persons were merely qualifying
shares and that to all intents and purposes the spouses
Cirilo Paredes and Ursula Tolentino composed the so-called
Park Rite Co., Inc. That the corporation was a mere
extension of their personality is shown by the fact that the
office of Cirilo Paredes and that of Park Rite Co., Inc. were
located in the same building, in the same floor and in the
same room at 507 Wilson Building. This is further shown
by the fact that the funds of the corporation were kept by
Cirilo Paredes in his own name (p. 14, November 8, 1950,
T.S.N.) The corporation itself had no visible assets, as
correctly found by the trial court, except perhaps the toll
house, the wire fence around the lot and the signs thereon. It

was for this reason that the judgment against it could not be G.
C.
ARNOLD, plaintiff-appellant,
vs.
fully satisfied. (Emphasis supplied).
The facts thus found can not be varied by us, and conclusively WILLITS & PATTERSON, LTD., defendant-appellee.
show that the corporation is a mere instrumentality of the

DeWitt,
Perkins
and
individual stockholder's, hence the latter must individually Fisher,
Ross and Lawrence for appellee.
answer for the corporate obligations. While the mere ownership of

Brady

for

appellant.

all or nearly all of the capital stock of a corporation is a mere STATEMENT

business conduit of the stockholder, that conclusion is amply
justified where it is shown, as in the case before us, that the For a number of years prior to the times alleged in the complaint,
operations of the corporation were so merged with those of the the plaintiff was in the employ of the International Banking
stockholders as to be practically indistinguishable from them. To Corporation of Manila, and it is conceded that he is a competent
and experienced business man. July 31, 1916, C. D. Willits and I.
hold the latter liable for the corporation's obligations is not to
L. Patterson were partners doing business in San Francisco,
ignore the corporation's separate entity, but merely to apply the
California, under the name of Willits & Patterson. The plaintiff
established principle that such entity can not be invoked or used was then in San Francisco, and as a result of negotiations the
for purposes that could not have been intended by the law that plaintiff and the firm entered into a written contract, known in
the record as Exhibit A, by which the plaintiff was employed as
created that separate personality.
The petitioners-appellants insist that the Court could have no the agent of the firm in the Philippine Islands for certain
jurisdiction over an action to enforce a judgment within five (5) purposes for the period of five years at a minimum salary of $200
years from its rendition, since the Rules of Court provide for per month and travelling expenses. The plaintiff returned to
Manila and entered on the discharge of his duties under the
enforcement by mere motion during those five years. The error of
contract. As a result of plaintiff's employment and the world war
this stand is apparent, because the second action, originally conditions, the business of the firm in the Philippines very
begun in the Court of First Instance, was not an action to enforce rapidly increased and grew beyond the fondest hopes of either
the judgment of the Municipal Court, but an action to have non- party. A dispute arose between the plaintiff and the firm as to the
construction of Exhibit A as to the amount which plaintiff should
parties to the judgment held responsible for its payment.
Finding no error in the judgment appealed from, the same is receive for his services. Meanwhile Patterson retired from the firm
hereby affirmed, with costs against petitioners-appellants Cirilo and Willits became the sole owner of its assets. For convenience of
operation and to serve his own purpose, Willits organized a
Paredes and Ursula Tolentino.
corporation under the laws of California with its principal office
at San Francisco, in and by which he subscribed for, and became
the exclusive owner of all the capital stock except a few shares for
organization purposes only, and the name of the firm was used as
G.R. No. L-20214
March 17, 1923
the name of the corporation. A short time after that Willits came
to Manila and organized a corporation here known as Willits &

Patterson, Ltd., in and to which he again subscribed for all of the

capital stock except the nominal shares necessary to qualify the
directors. In legal effect, the San Francisco corporation took over
and acquired all of the assets and liabilities of the Manila
corporation. At the time that Willits was in Manila and while to all
intents and purposes he was the sole owner of the stock of
corporations, there was a conference between him and the
plaintiff over the disputed construction of Exhibit A. As a result of
which another instrument, known in the record as Exhibit B, was
prepared in the form of a letter which the plaintiff addressed to
Willits at Manila on November 10, 1919, the purpose of which
was to more clearly define and specify the compensation which
the plaintiff was to receive for his services. Willits received and
confirmed this letter by signing the name of Willits & Patterson,
By C.d. Willits. At the time both corporations were legally
organized, and there is nothing in the corporate minutes to show
that Exhibit B was ever formally ratified or approved by either
corporation. After its organization, the Manila corporation
employed a regular accountant whose duty it was to audit the
accounts of the company and render financial statements both for
the use of the local banks and the local and parent corporations
at San Francisco. From time to time and in the ordinary course of
business such statements of account were prepared by the
accountant and duly forwarded to the home office, and among
other things was a statement of July 31, 1921, showing that there
was due and owing the plaintiff under Exhibit B the sum of
P106,277.50. A short time previous to that date, the San
Francisco corporation became involved in financial trouble, and
all of its assets were turned over to a "creditors' committee." When
this statement was received, the "creditors' committee"
immediately protested its allowance. An attempt was made
without success to adjust the matter on a friendly basis and
without litigation. January 10, 1922, the plaintiff brought this
action to recover from the defendant the sum of P106,277.50 with
legal interest and costs, and written instruments known in the

record as Exhibits A and B were attached to, and made a part of,
the complaint.
For answer, the defendant admits the formal parts of the
complaint, the execution of Exhibit A and denies each and every
other allegation, except as specifically admitted, and alleges that
what is known as Exhibit B was signed by Willits without the
authority of the defendant corporation or the firm of Willits &
Patterson, and that it is not an agreement which was ever entered
into with the plaintiff by the defendant or the firm, and, as a
separate defense and counterclaim, it alleges that on the 30th of
June, 1920, there was a balance due and owing the plaintiff from
the defendant under the contract Exhibit A of the sum of
P8,741.05. That his salary from June 30, 1920, to July 31, 1921,
under Exhibit A was $400 per month, or a total of P10,400. That
about July 6, 1921, the plaintiff wrongfully took P30,000 from the
assets of the firm, and that he is now indebted to the firm in the
sum of P10,858.95, with interest and costs, from which it prays
judgement.
The plaintiff admits that he withdrew the P30,000, but alleges
that it was with the consent and authority of the defendant, and
denies all other new matter in the answer.
Upon such issues a trial was had, and the lower court rendered
judgment in favor of the defendant as prayed for in its
counterclaim, from which the plaintiff appeals, contending that
the trial court erred in not holding that the contract between the
parties is that which is embodied in Exhibits A and B, and that
the defendant assumed all partnership obligations, and in failing
to render judgment for the plaintiff, as prayed for, and in
dismissing his complaint, and denying plaintiff's motion for a new
trial.

JOHNS, J.:

WILLITS & PATTERSON, LTD.

MANILA, P. I., Nov. 10, 1919.

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

business we may undertake as agents or managers,

half the profits are to be credited to my account and
half to the Profit & Loss account of Willits &
Patterson, Ltd., Manila.
Where Willits & Patterson, San Francisco, or Willits
& Patterson, Ltd., Manila, have their own funds
invested in the capital stock or a corporation, I of
course do not participate in the earnings of such
stock, any more than Willits & Patterson would
participate in the earnings of stock held by me on
my account.
If the foregoing conforms to your understanding of
our agreement, please confirm below.
Yours faithfully,
(Sgd.) G. C. ARNOLD
Confirmed:
WILLITS & PATTERSON
By (Sgd.) CHAS. D. WILLITS
There is no dispute about any of the following facts: That at the
inception C.D. Willits and I. L. Patterson constituted the firm of
Willits & Patterson doing business in the City of San Francisco;
that later Patterson retired from the firm, and Willits acquired all
of his interests and thereafter continued the business under the
name and style of Willits & Patterson; that the original contract
Exhibit A was made between the plaintiff and the old firm at San
Francisco on July 31, 1916, to cover a period of five years from
that date; that plaintiff entered upon the discharged of his duties
and continued his services in the Philippine Islands to someone
for the period of five years; that on November 10, 1919, and as a

result of conferences between Willits and the plaintiff, Exhibit B

was addressed and signed in the manner and form above stated
in the City of Manila. A short time prior to that date Willits
organized a corporation in San Francisco, in the State of
California, which took over and acquired all of the assets of the
firm's business in California then being conducted under the
name and style of Willits & Patterson; that he subscribed for all of
the capital stock of the corporation, and that in truth and in fact
he was the owner of all of its capital stock. After this was done he
caused a new corporation to be organized under the laws of the
Philippine Islands with principal office at Manila, which took over
and acquired all the business and assets of the firm of Willits &
Patterson in the Philippine Islands, in and to which, in legal
effect, he subscribed for all of its capital stock, and was the owner
of all of its stock. After both corporations were organized the
above letter was drafted and signed. The plaintiff contends that
the signing of Exhibit B in the manner and under the conditions
in which it was signed, and through the subsequent acts and
conduct of the parties, was ratified and, in legal effect, became
and is now binding upon the defendant.
It will be noted that Exhibit B was executed in Manila, and that at
the time it was signed by Willits, he was to all intents and
purposes the legal owner of all the stock in both corporations. It
also appears from the evidence that the parent corporation at San
Francisco took over and acquired all of the assets and liabilities of
the local corporation at Manila. That after it was organized the
Manila corporation kept separate records and account books of
its own, and that from time to time financial statements were
made and forwarded to the home office, from which it
conclusively appears that plaintiff was basing his claim for
services upon Exhibit A, as it was modified by Exhibit B. That at
no time after Exhibit B was signed was there ever any dispute
between plaintiff and Willits as to the compensation for plaintiff's
services. That is to say, as between the plaintiff and Willits,
Exhibit B was approved, followed and at all times in force and

effect, after it was signed November 10, 1919. It appears from an

analysis of Exhibit B that it was for the mutual interest of both
parties. From a small beginning, the business was then in a very
flourishing conditions and growing fast, and the profits were very
large and were running into big money.
Among other things, Exhibit A provided: "(a) That the net profits
from said coconut oil business shall be divided in equal shares
between the said parties hereto; (b) that Arnold should receive a
brokerage of 1 per cent from all purchases and sales of
merchandise, except for the account of the coconut mills; (c) that
the net profits from all other business should be divided in equal
half shares between the parties hereto."
Under the above provisions, the plaintiff might well contend that
he was entitled to one-half of all the profits and a brokerage of 1
per cent from all purchases and sales, except those for the
account of the coconut oil mills, which under the volume of
business then existing would run into a very large sum of money.
It was for such reason and after personal conferences between
them, and to settle all disputed questions, that Exhibit B was
prepared and signed.
The record recites that "the defendant admits that from July 31,
1916 to July 31, 1921, the plaintiff faithfully performed all the
duties incumbent upon him under his contract of employment, it
being understood, however, that this admission does not include
an admission that the plaintiff placed a proper interpretation
upon his right to remuneration under said contract of
employment."
It being admitted that the plaintiff worked "under his contract of
employment" for the period of five years, the question naturally
arises, for whom was he working? His contract was made with the
original firm of Willits & Patterson, and that firm was dissolved
and it ceased to exist, and all of its assets were merged in, and

taken over by, the parent corporation at San Francisco. In the

very nature of things, after the corporation was formed, the
plaintiff could not and did not continue to work for the firm, and,
yet, he continued his employment for the full period of five years.
For whom did he work after the partnership was merged in the
corporation and ceased to exist?
It is very apparent that, under the conditions then existing, the
signing of Exhibit B was for the mutual interests of both parties,
and that if the contract Exhibit A was to be enforced according to
its terms, that Arnold might well contend for a much larger sum
of money for his services. In truth and in fact Willits and both
corporations recognized his employment and accepted the
benefits of his services. He continued his employment and
rendered his services after the corporation were organized and
Exhibit B was signed just the same as he did before, and both
corporations recognized and accepted his services. Although the
plaintiff was president of the local corporation, the testimony is
conclusive that both of them were what is known as a one man
corporation, and Willits, as the owner of all of the stock, was the
force and dominant power which controlled them. After Exhibit B
was signed it was recognized by Willits that the plaintiff's services
were to be performed and measured by its term and provisions,
and there never was any dispute between plaintiff and Willits
upon that question.
The controversy first arose after the corporation was in financial
trouble and the appointment of what is known in the record as a
"creditors' committee." There is no claim or pretense that there
was any fraud or collusion between plaintiff and Willits, and it is
very apparent that Exhibit B was to the mutual interest of both
parties. It is elementary law that if Exhibit B is a binding contract
between the plaintiff and Willits and the corporations, it is equally
binding upon the creditors' committee. It would not have any
higher or better legal right than the corporation itself, and could
not make any defense which it could not make. It is very

significant that the claim or defense which is now interposed by

the creditors' committee was never made or asserted at any
previous time by the defendant, and that it never was made by
Willits, and it is very apparent that if he had remained in control
of the corporation, it would never have made the defense which is
now made by the creditors' committee. The record is conclusive
that at the time he signed Exhibit B, Willits was, in legal effect,
the owner and holder of all the stock in both corporations, and
that he approved it in their interest, and to protect them from the
plaintiff having and making a much larger claim under Exhibit A.
As a matter of fact, it appears from the statement of Mr. Larkin,
the accountant, in the record that if plaintiff's cause of action was
now founded upon Exhibit A, he would have a claim for more
than P160,000.
Thompson on Corporations, 2d ed., vol. I, section 10, says:

harmless, and, because convenient, should not be called in

question; but where it is urged to an end subversive of its
policy, or such is the issue, the fiction must be ignored,
and the question determined whether the act in question,
though done by shareholders, that is to say, by the
persons uniting in one body, was done simply as
individuals, and with respect to their individual interest as
shareholders, or was done ostensibly as such, but, as a
matter of fact, to control the corporation, and affect the
transaction of its business, in the same manner as if the
act had been clothed with all the formalities of a corporate
act. This must be so, because, the stockholders having a
dual capacity, and capable of acting in either, and a
possible interest to conceal their character when acting in
their corporate capacity, the absence of the formal evidence
of the character of the act cannot preclude judicial inquiry
on the subject. If it were otherwise, then in that
department of the law fraud would enjoy an immunity
awarded to it in no other."

The proposition that a corporation has an existence

separate and distinct from its membership has its
limitations. It must be noted that this separate existence is
for particular purposes. It must also be remembered that
Where the stock of a corporation is owned by one person
there can be no corporate existence without persons to
whereby the corporation functions only for the benefit of
compose it; there can be no association without associates.
such individual owner, the corporation and the individual
This separate existence is to a certain extent a legal fiction.
should be deemed to be the same. (U. S. Gypsum Co. vs.
Whenever necessary for the interests of the public or for
Mackay Wall Plaster Co., 199 Pac., 249.)
the protection or enforcement of the rights of the
membership, courts will disregard this legal fiction and Ruling Case Law, vol. 7, section 663, says:
operate upon both the corporation and the persons
While of course a corporation cannot ratify a contract
composing it.
which is strictly ultra vires, and which it in the first
In the same section, the author quotes from a decision in 49 Ohio
instance could not have made, it may by ratification render
1
State, 137 ; 15 L. R. A., 145, in which the Supreme Court of Ohio
binding on it a contract, entered into on its behalf by its
says:
officers or agents without authority. As a general rule such
ratification need not be manifested by any voted or formal
"So long as a proper use is made of the fiction that a
resolution of the corporation or be authenticated by the
corporation is an entity apart from its shareholders, it is
corporate seal; no higher degree of evidence is requisite in

establishing ratification on the part of a corporation, than

is requisite in showing an antecedent authorization.
xxx

xxx

xxx

SEC. 666. The assent or approval of a corporation to acts

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

xxx

xxx

SEC. 669. So, when, in the usual course of business of a

corporation, an officer has been allowed in his official
capacity to manage its affair, his authority to represent the
corporation may be inferred from the manner in which he
has been permitted by the directors to transact its
business.
SEC. 656. In accordance with a well-known rule of the law
of agency, notice to corporate officers or agents within the
scope or apparent scope of their authority is attributed to
the corporation.

corporation receives and retains property under it, and as

a general rule where a corporation, through its proper
officers or board, takes and retains the benefits of the
unauthorized act or contract of an officer or agent, with
full knowledge of all the material facts, it thereby ratifies
and becomes bound by such act of contract, together with
all the liabilities and burdens resulting therefrom, and in
some jurisdiction this rule is, in effect, declared by statute.
Thus the corporation is liable on the ground of ratification
where, with knowledge of the facts, it accepts the benefit of
services rendered under an unauthorized contract of
employment . . . .
Applying the law to the facts.
Mr. Larkin, an experienced accountant, was employed by the local
corporation, and from time to time and in the ordinary course of
business made and prepared financial statements showing its
assets and liabilities, true copies of which were sent to the home
office in San Francisco. It appears upon their face that plaintiff's
compensation was made and founded on Exhibit B, and that
such statements were made and prepared by the accountant on
the assumption that Exhibit B was in full force and effect as
between the plaintiff and the defendant. In the course of business
in the early part of 1920, plaintiff, as manager of the defendant,
sold 500 tons of oil for future delivery at P740 per ton. Due to
break in the market, plaintiff was able to purchase the oil at P380
per ton or a profit of P180,000.

SEC. 667. As a general rule, if a corporation with

knowledge of its agents unauthorized act received and It appears from Exhibit B under the heading of "Profits" that:
enjoys the benefits thereof, it impliedly ratifies the
unauthorized act if it is one capable of ratification by parol.
On all the business transacted between Willits & Patterson,
Ltd. and others than Willits & Patterson, San Francisco,
In its article on corporations, Corpus Juris, in section 2241 says:
half the profit are to be credited to may account and half to
the Profit & Loss account Willits & Patterson, Ltd., Manila.
Ratification by a corporation of a transaction not
previously authorized is more easily inferred where the

The purchasers paid P105,000 on the contracts and gave their

notes for P75,000, and it was agreed that all of the oil purchased
should be held as security for the full payment of the purchase
price. As a result, the defendant itself received the P105,000 in
cash, P75,000 in notes, and still holds the 500 tons of oil as
security for the balance of the purchase price. This transaction
was shown in the semi-annual financial statement for the period
ending December 31, 1920. That is to say, the business was
transacted by and through the plaintiff, and the defendant
received and accepted all of the profits on the deal, and the
statement which was rendered gave him a credit for P90,737.88,
or half the profit as provided in the contract Exhibit B, with
interest.
Although the previous financial statements show upon their face
that the account of plaintiff was credit with several small items
on the same basis, it was not until the 23d of March, 1921, that
any objection was ever made by anyone, and objection was made
for the first time by the creditors' committee in a cable of that
date.
As we analyze the facts Exhibit B was, in legal effect, ratified and
approved and is now binding upon the defendant corporation,
and the plaintiff is entitled to recover for his services on that
writing as it modified the original contract Exhibit A.

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

It appears from the statement prepared by accountant Larkin Araullo, C. J., Street, Malcolm, Avancea, Ostrand, and Romualdez,
founded upon Exhibit B that the plaintiff is entitled to recover JJ., concur.
P106,277.50. It is very apparent that his statement was based
upon the assumption that there was a net profit of P180,000 on G.R. No. L-13203
January 28, 1961
the 500 tons of oil, of which the plaintiff was entitled to one-half.
YUTIVO
SONS
HARDWARE
COMPANY, petitioner,
In the absence of any other proof, we have the right to assume vs.
that the 500 tons of oil was worth the amount which the COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
defendant paid for them at the time of the purchase or P380 per REVENUE, respondents.
ton, and the record shows that the defendant took and now has

Sycip, Quisumbing, Salazar & Associates

Office of the Solicitor General for respondents.

for

petitioner. At the time of its incorporation 2,500 shares worth P250,000

appear to have been subscribed into equal proportions by Yu Khe
Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington
Sycip. The first three named subscribers are brothers, being sons
GUTIERREZ DAVID, J.:
of Yu Tiong Yee, one of Yutivo's founders. The latter two are
This is a petition for review of a decision of the Court of Tax respectively sons of Yu Tiong Sin and Albino Sycip, who are
Appeals ordering petitioner to pay to respondent Collector of among the founders of Yutivo.
Internal Revenue the sum of P1,266,176.73 as sales tax
deficiency for the third quarter of 1947 to the fourth quarter of After the incorporation of SM and until the withdrawal of GM
1950; inclusive, plus 75% surcharge thereon, equivalent to from the Philippines in the middle of 1947, the cars and tracks
P349,632.54, or a sum total of P2,215,809.27, plus costs of the purchased by Yutivo from GM were sold by Yutivo to SM which, in
turn, sold them to the public in the Visayas and Mindanao.
suit.
From the stipulation of facts and the evidence adduced by both
parties, it appears that petitioner Yutivo Sons Hardware Co.
(hereafter referred to as Yutivo) is a domestic corporation,
organized under the laws of the Philippines, with principal office
at 404 Dasmarias St., Manila. Incorporated in 1916, it was
engaged, prior to the last world war, in the importation and sale
of hardware supplies and equipment. After the liberation, it
resumed its business and until June of 1946 bought a number of
cars and trucks from General Motors Overseas Corporation
(hereafter referred to as GM for short), an American corporation
licensed to do business in the Philippines. As importer, GM paid
sales tax prescribed by sections 184, 185 and 186 of the Tax
Code on the basis of its selling price to Yutivo. Said tax being
collected only once on original sales, Yutivo paid no further sales
tax on its sales to the public.
On June 13, 1946, the Southern Motors, Inc. (hereafter referred
to as SM) was organized to engage in the business of selling cars,
trucks and spare parts. Its original authorized capital stock was
P1,000,000 divided into 10,000 shares with a par value of P100
each.

When GM decided to withdraw from the Philippines in the middle

of 1947, the U.S. manufacturer of GM cars and trucks appointed
Yutivo as importer for the Visayas and Mindanao, and Yutivo
continued its previous arrangement of selling exclusively to SM.
In the same way that GM used to pay sales taxes based on its
sales to Yutivo, the latter, as importer, paid sales tax prescribed
on the basis of its selling price to SM, and since such sales tax,
as already stated, is collected only once on original sales, SM paid
no sales tax on its sales to the public.
On November 7, 1950, after several months of investigation by
revenue officers started in July, 1948, the Collector of Internal
Revenue made an assessment upon Yutivo and demanded from
the latter P1,804,769.85 as deficiency sales tax plus surcharge
covering the period from the third quarter of 1947 to the fourth
quarter of 1949; or from July 1, 1947 to December 31, 1949,
claiming that the taxable sales were the retail sales by SM to the
public and not the sales at wholesale made by, Yutivo to the latter
inasmuch as SM and Yutivo were one and the same corporation,
the former being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a
reinvestigation of the case having been made by the agents of the

Bureau of Internal Revenue, the respondent Collector in his letter

dated November 15, 1952 countermanded his demand for sales
tax deficiency on the ground that "after several investigations
conducted into the matter no sufficient evidence could be
gathered to sustain the assessment of this Office based on the
theory that Southern Motors is a mere instrumentality or
subsidiary of Yutivo." The withdrawal was subject, however, to the
general power of review by the now defunct Board of Tax Appeals.
The Secretary of Finance to whom the papers relative to the case
were endorsed, apparently not agreeing with the withdrawal of the
assessment, returned them to the respondent Collector for
reinvestigation.

Total amount demanded per P1,266,176. P949,632. P2,215,8

letter of December 16, 1954
73
54
27

This second assessment was contested by the petitioner Yutivo

before the Court of Tax Appeals, alleging that there is no valid
ground to disregard the corporate personality of SM and to hold
that it is an adjunct of petitioner Yutivo; (2) that assuming the
separate personality of SM may be disregarded, the sales tax
already paid by Yutivo should first be deducted from the selling
price of SM in computing the sales tax due on each vehicle; and
(3) that the surcharge has been erroneously imposed by
After another investigation, the respondent Collector, in a letter to respondent. Finding against Yutivo and sustaining the respondent
petitioner dated December 16, 1954, redetermined that the Collector's theory that there was no legitimate or bona
aforementioned tax assessment was lawfully due the government fide purpose in the organization of SM the apparent objective of
and in addition assessed deficiency sales tax due from petitioner its organization being to evade the payment of taxes and that it
for the four quarters of 1950; the respondents' last demand was was owned (or the majority of the stocks thereof are owned) and
in the total sum of P2,215,809.27 detailed as follows:
controlled by Yutivo and is a mere subsidiary, branch, adjunct,
conduit, instrumentality or alter ego of the latter, the Court of Tax
Appeals with Judge Roman Umali not taking part
Total
disregarded its separate corporate existence and on April 27,
Deficiency
75%
Amount
1957, rendered the decision now complained of. Of the two
Sales Tax
Surcharge Due
Judges who signed the decision, one voted for the modification of
the computation of the sales tax as determined by the respondent
Collector in his decision so as to give allowance for the reduction
of the tax already paid (resulting in the reduction of the
Assessment (First) of November
assessment to P820,509.91 exclusive of surcharges), while the
7, 1950 for deficiency sales Tax
other voted for affirmance. The dispositive part of the decision,
for the period from 3rd Qrtr P1,031,296. P773,473. P1,804,769.
1947 to 4th Qrtr 1949 inclusive 60
45
05 however, affirmed the assessment made by the Collector.
Reconsideration of this decision having been denied, Yutivo
brought the case to this Court thru the present petition for
review.
Additional
Assessment
for
period from 1st to 4th Qrtr
1950, inclusive
234,880.13

176,160.0
It is an elementary and fundamental principle of corporation law
9
411,040.22
that a corporation is an entity separate and distinct from its

stockholders and from other corporation petitions to which it may

be connected. However, "when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend
crime," the law will regard the corporation as an association of
persons, or in the case of two corporations merge them into one.
(Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher
Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States
vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per
Sanborn, J.) Another rule is that, when the corporation is the
"mere alter ego or business conduit of a person, it may be
disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.)
After going over the voluminous record of the present case, we are
inclined to rule that the Court of Tax Appeals was not justified in
finding that SM was organized for no other purpose than to
defraud the Government of its lawful revenues. In the first place,
this corporation was organized in June, 1946 when it could not
have caused Yutivo any tax savings. From that date up to June
30, 1947, or a period of more than one year, GM was the importer
of the cars and trucks sold to Yutivo, which, in turn resold them
to SM. During that period, it is not disputed that GM as importer,
was the one solely liable for sales taxes. Neither Yutivo or SM was
subject to the sales taxes on their sales of cars and trucks. The
sales tax liability of Yutivo did not arise until July 1, 1947 when it
became the importer and simply continued its practice of selling
to SM. The decision, therefore, of the Tax Court that SM was
organized purposely as a tax evasion device runs counter to the
fact that there was no tax to evade.
Making the observation from a newspaper clipping (Exh. "T") that
"as early as 1945 it was known that GM was preparing to leave
the Philippines and terminate its business of importing vehicles,"
the court below speculated that Yutivo anticipated the withdrawal
of GM from business in the Philippines in June, 1947. This
observation, which was made only in the resolution on the motion
for reconsideration, however, finds no basis in the record. On the

other hand, GM had been an importer of cars in the Philippines

even before the war and had but recently resumed its operation in
the Philippines in 1946 under an ambitious plan to expand its
operation by establishing an assembly plant here, so that it could
not have been expected to make so drastic a turnabout of not
merely abandoning the assembly plant project but also totally
ceasing to do business as an importer. Moreover, the newspaper
clipping, Exh. "T", was published on March 24, 1947, and
clipping, merely reported a rumored plan that GM would abandon
the assembly plant project in the Philippines. There was no
mention of the cessation of business by GM which must not be
confused with the abandonment of the assembly plant project.
Even as respect the assembly plant, the newspaper clipping was
quite explicit in saying that the Acting Manager refused to confirm
that rumor as late as March 24, 1947, almost a year after SM was
organized.
At this juncture, it should be stated that the intention to
minimize taxes, when used in the context of fraud, must be
proved to exist by clear and convincing evidence amounting to
more than mere preponderance, and cannot be justified by a mere
speculation. This is because fraud is never lightly to be presumed.
(Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d)
786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs.
Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs.
Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833;
Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F.
(2d) 548; Moore vs. Commr., 37 BTA 378; National City Bank of
New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA
316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud
Under Federal Law, pp. 301-302, citing numerous authorities:
Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed
and the courts never sustain findings of fraud upon
circumstances which, at the most, create only suspicion.
(Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769;
Dalone vs. Commr., 100 F (2d) 507).

In the second place, SM was organized and it operated, under

circumstance that belied any intention to evade sales taxes. "Tax
evasion" is a term that connotes fraud thru the use of pretenses
and forbidden devices to lessen or defeat taxes. The transactions
between Yutivo and SM, however, have always been in the open,
embodied in private and public documents, constantly subject to
inspection by the tax authorities. As a matter of fact, after Yutivo
became the importer of GM cars and trucks for Visayas and
Mindanao, it merely continued the method of distribution that it
had initiated long before GM withdrew from the Philippines.
On the other hand, if tax saving was the only justification for the
organization of SM, such justification certainly ceased with the
passage of Republic Act No. 594 on February 16, 1951, governing
payment of advance sales tax by the importer based on the
landed cost of the imported article, increased by mark-ups of
25%, 50%, and 100%, depending on whether the imported article
is taxed under sections 186, 185 and 184, respectively, of the Tax
Code. Under Republic Act No. 594, the amount at which the
article is sold is immaterial to the amount of the sales tax. And
yet after the passage of that Act, SM continued to exist up to the
present and operates as it did many years past in the promotion
and pursuit of the business purposes for which it was organized.
In the third place, sections 184 to 186 of the said Code provides
that the sales tax shall be collected "once only on every original
sale, barter, exchange . . , to be paid by the manufacturer,
producer or importer." The use of the word "original" and the
express provision that the tax was collectible "once only" evidently
has made the provisions susceptible of different interpretations.
In this connection, it should be stated that a taxpayer has the
legal right to decrease the amount of what otherwise would be his
taxes or altogether avoid them by means which the law permits.
(U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S.
465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr
194 F (2d) 380). Any legal means by the taxpayer to reduce taxes

are all right Benry vs. Commr. 25 T. Cl. 78). A man may,
therefore, perform an act that he honestly believes to be sufficient
to exempt him from taxes. He does not incur fraud thereby even if
the act is thereafter found to be insufficient. Thus in the case
ofCourt Holding Co. vs. Commr. 2 T. Cl. 531, it was held that
though an incorrect position in law had been taken by the
corporation there was no suppression of the facts, and a fraud
penalty was not justified.
The evidence for the Collector, in our opinion, falls short of the
standard of clear and convincing proof of fraud. As a matter of
fact, the respondent Collector himself showed a great deal of
doubt or hesitancy as to the existence of fraud. He even doubted
the validity of his first assessment dated November 7, 1959. It
must be remembered that the fraud which respondent Collector
imputed to Yutivo must be related to its filing of sales tax returns
of less taxes than were legally due. The allegation of fraud,
however, cannot be sustained without the showing that Yutivo, in
filing said returns, did so fully knowing that the taxes called for
therein called for therein were less than what were legally due.
Considering that respondent Collector himself with the aid of his
legal staff, and after some two years of investigation and duty of
investigation and study concluded in 1952 that Yutivo's sales tax
returns were correct only to reverse himself after another two
years it would seem harsh and unfair for him to say in 1954
that Yutivo fully knew in October 1947 that its sales tax returns
were inaccurate.
On this point, one other consideration would show that the intent
to save taxes could not have existed in the minds of the organizers
of SM. The sales tax imposed, in theory and in practice, is passed
on to the vendee, and is usually billed separately as such in the
sales invoice. As pointed out by petitioner Yutivo, had not SM
handled the retail, the additional tax that would have been
payable by it, could have been easily passed off to the consumer,
especially since the period covered by the assessment was a

"seller's market" due to the post-war scarcity up to late 1948, and founders of Yutivo. According to the Articles of Incorporation of
the imposition of controls in the late 1949.
the said subscriptions, the amount of P62,500 was paid by the
aforenamed subscribers, but actually the said sum was advanced
It is true that the arrastre charges constitute expenses of Yutivo by Yutivo. The additional subscriptions to the capital stock of SM
and its non-inclusion in the selling price by Yutivo cost the and subsequent transfers thereof were paid by Yutivo itself. The
Government P4.00 per vehicle, but said non-inclusion was payments were made, however, without any transfer of funds from
explained to have been due to an inadvertent accounting Yutivo to SM. Yutivo simply charged the accounts of the
omission, and could hardly be considered as proof of willful subscribers for the amount allegedly advanced by Yutivo in
channelling and fraudulent evasion of sales tax. Mere payment of the shares. Whether a charge was to be made against
understatement of tax in itself does not prove fraud. (James the accounts of the subscribers or said subscribers were to
Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's subscribe shares appears to constitute a unilateral act on the
Sec. 55.11 p. 21) The amount involved, moreover, is extremely part of Yutivo, there being no showing that the former initiated
small inducement for Yutivo to go thru all the trouble of the subscription.
organizing SM. Besides, the non-inclusion of these small arrastre
charges in the sales tax returns of Yutivo is clearly shown in the The transactions were made solely by and between SM and
records of Yutivo, which is uncharacteristic of fraud (See Insular Yutivo. In effect, it was Yutivo who undertook the subscription of
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
shares, employing the persons named or "charged" with
corresponding account as nominal stockholders. Of course, Yu
We are, however, inclined to agree with the court below that SM Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were
was actually owned and controlled by petitioner as to make it a manifestly aware of these subscriptions, but considering that they
mere subsidiary or branch of the latter created for the purpose of were the principal officers and constituted the majority of the
selling the vehicles at retail and maintaining stores for spare Board of Directors of both Yutivo and SM, their subscriptions
parts as well as service repair shops. It is not disputed that the could readily or easily be that of Yutivo's Moreover, these persons
petitioner, which is engaged principally in hardware supplies and were related to death other as brothers or first cousins. There was
equipment, is completely controlled by the Yutivo, Young or Yu every reason for them to agree in order to protect their common
family. The founders of the corporation are closely related to each interest in Yutivo and SM.
other either by blood or affinity, and most of its stockholders are
members of the Yu (Yutivo or Young) family. It is, likewise, The issued capital stock of SM was increased by additional
admitted that SM was organized by the leading stockholders of subscriptions made by various person's but except Ng Sam Bak
Yutivo headed by Yu Khe Thai. At the time of its incorporation and David Sycip, "payments" thereof were effected by merely
2,500 shares worth P250,000.00 appear to have been subscribed debiting 'or charging the accounts of said stockholders and
in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe crediting the corresponding amounts in favor of SM, without
Jin, Yu Eng Poh and Washington Sycip. The first three named actually transferring cash from Yutivo. Again, in this instance,
subscribers are brothers, being the sons of Yu Tien Yee, one of the "payments" were Yutivo, by effected by the mere unilateral act
Yutivo's founders. Yu Eng Poh and Washington Sycip are of Yutivo a accounts of the virtue of its control over the individual
respectively sons of Yu Tiong Sing and Alberto Sycip who are co- persons charged, would necessarily exercise preferential rights

and control directly or indirectly, over the shares, it being the Another aspect relative to Yutivo's control over SM operations
party which really undertook to pay or underwrite payment relates to its cash transactions. All cash assets of SM were
thereof.
handled by Yutivo and all cash transactions of SM were actually
maintained thru Yutivo. Any and all receipts of cash by SM
The shareholders in SM are mere nominal stockholders holding including its branches were transmitted or transferred
the shares for and in behalf of Yutivo, so even conceding that the immediately and directly to Yutivo in Manila upon receipt thereof.
original subscribers were stockholders bona fide Yutivo was at all Likewise, all expenses, purchases or other obligations incurred by
times in control of the majority of the stock of SM and that the SM are referred to Yutivo which in turn prepares the
latter was a mere subsidiary of the former.
corresponding disbursement vouchers and payments in relation
there, the payment being made out of the cash deposits of SM
True, petitioner and other recorded stockholders transferred their with Yutivo, if any, or in the absence thereof which occurs
shareholdings, but the transfers were made to their immediate generally, a corresponding charge is made against the account of
relatives, either to their respective spouses and children or SM in Yutivo's books. The payments for and charges against SM
sometimes brothers or sisters. Yutivo's shares in SM were are made by Yutivo as a matter of course and without need of any
transferred to immediate relatives of persons who constituted its further request, the latter would advance all such cash
controlling stockholders, directors and officers. Despite these requirements for the benefit of SM. Any and all payments and
purported changes in stock ownership in both corporations, the cash vouchers are made on Yutivo stationery and made under
Board of Directors and officers of both corporations remained authority of Yutivo's corporate officers, without any copy thereof
unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin being furnished to SM. All detailed records such as cash
and Yu Eng Poll (all of the Yu or Young family) continued to disbursements, such as expenses, purchases, etc. for the account
constitute the majority in both boards. All these, as observed by of SM, are kept by Yutivo and SM merely keeps a summary record
the Court of Tax Appeals, merely serve to corroborate the fact thereof on the basis of information received from Yutivo.
that there was a common ownership and interest in the two
corporations.
All the above plainly show that cash or funds of SM, including
those of its branches which are directly remitted to Yutivo, are
SM is under the management and control of Yutivo by virtue of a placed in the custody and control of Yutivo, resources and subject
management contract entered into between the two parties. In to withdrawal only by Yutivo. SM's being under Yutivo's control,
fact, the controlling majority of the Board of Directors of Yutivo is the former's operations and existence became dependent upon
also the controlling majority of the Board of Directors of SM. At the latter.
the same time the principal officers of both corporations are
identical. In addition both corporations have a common Consideration of various other circumstances, especially when
comptroller in the person of Simeon Sy, who is a brother-in-law of taken together, indicates that Yutivo treated SM merely as its
Yutivo's president, Yu Khe Thai. There is therefore no doubt that department or adjunct. For one thing, the accounting system
by virtue of such control, the business, financial and maintained by Yutivo shows that it maintained a high degree of
management policies of both corporations could be directed control over SM accounts. All transactions between Yutivo and
towards common ends.
SM are recorded and effected by mere debit or credit entries

against the reciprocal account maintained in their respective therefore a liability reserve and not an income account. This
books of accounts and indicate the dependency of SM as branch reserve for bonus were subsequently distributed directly to and
upon Yutivo.
credited in favor of the employees and directors of Yutivo, thereby
clearly showing that the management fees were paid directly to
Apart from the accounting system, other facts corroborate or Yutivo officers and employees.
independently show that SM is a branch or department of Yutivo.
Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Briefly stated, Yutivo financed principally, if not wholly, the
Yutivo Manila as their "Head Office" or "Home Office" as shown business of SM and actually extended all the credit to the latter
by their letters of remittances or other correspondences. These not only in the form of starting capital but also in the form of
correspondences were actually received by Yutivo and the credits extended for the cars and vehicles allegedly sold by Yutivo
reference to Yutivo as the head or home office is obvious from the to SM as well as advances or loans for the expenses of the latter
fact that all cash collections of the SM's branches are remitted when the capital had been exhausted. Thus, the increases in the
directly to Yutivo. Added to this fact, is that SM may freely use capital stock were made in advances or "Guarantee" payments by
forms or stationery of Yutivo
Yutivo and credited in favor of SM. The funds of SM were all
merged in the cash fund of Yutivo. At all times Yutivo thru officers
The fact that SM is a mere department or adjunct of Yutivo is and directors common to it and SM, exercised full control over the
made more patent by the fact that arrastre conveying, and cash funds, policies, expenditures and obligations of the latter.
charges paid for the "operation of receiving, loading or unloading"
of imported cars and trucks on piers and wharves, were charged Southern Motors being but a mere instrumentality, or adjunct of
against SM. Overtime charges for the unloading of cars and Yutivo, the Court of Tax Appeals correctly disregarded the
trucks as requested by Yutivo and incurred as part of its technical defense of separate corporate entity in order to arrive at
acquisition cost thereof, were likewise charged against and treated the true tax liability of Yutivo.
as expenses of SM. If Yutivo were the importer, these arrastre and
overtime charges were Yutivo's expenses in importing goods and Petitioner contends that the respondent Collector had lost his
not SM's. But since those charges were made against SM, it right or authority to issue the disputed assessment by reason of
plainly appears that Yutivo had sole authority to allocate its prescription. The contention, in our opinion, cannot be sustained.
expenses even as against SM in the sense that the latter is a mere It will be noted that the first assessment was made on November
7, 1950 for deficiency sales tax from 1947 to 1949. The
adjunct, branch or department of the former.
corresponding returns filed by petitioner covering the said period
Proceeding to another aspect of the relation of the parties, the was made at the earliest on October 1, as regards the third
management fees due from SM to Yutivo were taken up as quarter of 1947, so that it cannot be claimed that the assessment
expenses of SM and credited to the account of Yutivo. If it were to was not made within the five-year period prescribed in section
be assumed that the two organizations are separate juridical 331 of the Tax Code invoked by petitioner. The assessment, it is
entities, the corresponding receipts or receivables should have admitted, was withdrawn by the Collector on insufficiency of
been treated as income on the part of Yutivo. But such evidence, but November 15, 1952 due to insufficiency of evidence,
management fees were recorded as "Reserve for Bonus" and were but the withdrawal was made subject to the approval of the

Secretary of Finance and the Board of Tax Appeals, pursuant to

the provisions of section 9 of Executive Order No. 401-A, series of
1951. The decision of the previous assessment of November 7,
Collector countermanding the as 1950 was forwarded to the
Board of Tax Appeals through the Secretary of Finance but that
official, apparently disagreeing with the decision, sent it back for
re-investigation. Consequently, the assessment of November 7,
1950 cannot be considered to have been finally withdrawn. That
the assessment was subsequently reiterated in the decision of
respondent Collector on December 16, 1954 did not alter the fact
that it was made seasonably. In this connection, it would appear
that a warrant of distraint and levy had been issued on March 28,
1951 in relation with this case and by virtue thereof the
properties of Yutivo were placed under constructive distraint. Said
warrant and constructive distraint have not been lifted up to the
present, which shows that the assessment of November 7, 1950
has always been valid and subsisting.
Anent the deficiency sale tax for 1950, considering that the
assessment thereof was made on December 16, 1954, the same
was assessed well within the prescribed five-year period.
Petitioner argues that the original assessment of November 7,
1950 did not extend the prescriptive period on assessment. The
argument is untenable, for, as already seen, the assessment was
never finally withdrawn, since it was not approved by the
Secretary of Finance or of the Board of Tax Appeals. The
authority of the Secretary to act upon the assessment cannot be
questioned, for he is expressly granted such authority under
section 9 of Executive Order No. 401-And under section 79 (c) of
the Revised Administrative Code, he has "direct control, direction
and supervision over all bureaus and offices under his
jurisdiction and may, any provision of existing law to the contrary
not withstanding, repeal or modify the decision of the chief of said
Bureaus or offices when advisable in public interest."

It should here also be stated that the assessment in question was

consistently protested by petitioner, making several requests for
reinvestigation thereof. Under the circumstances, petitioner may
be considered to have waived the defense of prescription.
"Estoppel has been employed to prevent the application of
the statute of limitations against the government in certain
instances in which the taxpayer has taken some
affirmative action to prevent the collection of the tax within
the statutory period. It is generally held that a taxpayer is
estopped to repudiate waivers of the statute of limitations
upon which the government relied. The cases frequently
involve dissolved corporations. If no waiver has been given,
the cases usually show come conduct directed to a
postponement of collection, such, for example, as some
variety of request to apply an overassessment. The taxpayer
has 'benefited' and 'is not in a position to contest' his tax
liability. A definite representation of implied authority may
be involved, and in many cases the taxpayer has received
the 'benefit' of being saved from the inconvenience, if not
hardship of immediate collection. "
Conceivably even in these cases a fully informed
Commissioner may err to the sorrow of the revenues, but
generally speaking, the cases present a strong combination
of equities against the taxpayer, and few will seriously
quarrel with their application of the doctrine of estoppel."
(Mertens Law of Federal Income Taxation, Vol. 10-A, pp.
159-160.)
It is also claimed that section 9 of Executive Order No. 401-A,
series of 1951 es involving an original assessment of more than
P5,000 refers only to compromises and refunds of taxes, but
not to total withdrawal of the assessment. The contention is
without merit. A careful examination of the provisions of both
sections 8 and 9 of Executive Order No. 401-A, series of 1951,

reveals the procedure prescribed therein is intended as a check or

control upon the powers of the Collector of Internal Revenue in
respect to assessment and refunds of taxes. If it be conceded that
a decision of the Collector of Internal Revenue on partial
remission of taxes is subject to review by the Secretary of Finance
and the Board of Tax Appeals, then with more reason should the
power of the Collector to withdraw totally an assessment be
subject to such review.

document of sale, the Millers announced that their attorney had

called their attention to the large corporate tax which would have
to be paid if the sale was made by the corporation itself. So
instead of proceeding with the sale as planned, the Millers
approved a resolution to declare a dividend to themselves "payable
in the assets of the corporation, in complete liquidation and
surrender of all the outstanding corporate stock." The building,
which as above stated was the only property of the corporation,
was then transferred to Mr. and Mrs. Miller who in turn sold it to
We find merit, however, in petitioner's contention that the Court Mr. and Mrs. Fine for exactly the same price and under the same
of Tax Appeals erred in the imposition of the 5% fraud surcharge. terms as had been previously agreed upon between the
As already shown in the early part of this decision, no element of corporation and the Fines.
fraud is present.
The return filed by the Court Holding Co. with the respondent
Pursuant to Section 183 of the National Internal Revenue Code Commissioner of Internal Revenue reported no taxable gain as
the 50% surcharge should be added to the deficiency sales tax "in having been received from the sale of its assets. The Millers, of
case a false or fraudulent return is willfully made." Although the course, reported a long term capital gain on the exchange of their
sales made by SM are in substance by Yutivo this does not corporate stock with the corporate property. The Commissioner of
necessarily establish fraud nor the willful filing of a false or Internal Revenue contended that the liquidating dividend to
fraudulent return.
stockholders had no purpose other than that of tax avoidance and
that, therefore, the sale by the Millers to the Fines of the
The case of Court Holding Co. v. Commissioner of Internal corporation's property was in substance a sale by the corporation
Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The itself, for which the corporation is subject to the taxable profit
petitioner Court Holding Co. was a corporation consisting of only thereon. In requiring the corporation to pay the taxable profit on
two stockholders, to wit: Minnie Miller and her husband Louis account of the sale, the Commissioner of Internal Revenue,
Miller. The only assets of third husband and wife corporation imposed a surcharge of 25% for delinquency, plus an additional
consisted of an apartment building which had been acquired for a surcharge as fraud penalties.
very low price at a judicial sale. Louis Miller, the husband, who
directed the company's business, verbally agreed to sell this The U. S. Court of Tax Appeals held that the sale by the Millers
property to Abe C. Fine and Margaret Fine, husband and wife, for was for no other purpose than to avoid the tax and was, in
the sum of $54,000.00, payable in various installments. He substance, a sale by the Court Holding Co., and that, therefore,
received $1,000.00 as down payment. The sale of this property for the said corporation should be liable for the assessed taxable
the price mentioned would have netted the corporation a profit thereon. The Court of Tax Appeals also sustained the
handsome profit on which a large corporate income tax would Commissioner of Internal Revenue on the delinquency penalty of
have to be paid. On the afternoon of February 23, 1940, when the 25%. However, the Court of Tax Appeals disapproved the fraud
Millers and the Fines got together for the execution of the penalties, holding that an attempt to avoid a tax does not

necessarily establish fraud; that it is a settled principle that a

taxpayer may diminish his tax liability by means which the law
permits; that if the petitioner, the Court Holding Co., was of the
opinion that the method by which it attempted to effect the sale in
question was legally sufficient to avoid the imposition of a tax
upon it, its adoption of that methods not subject to censure; and
that in taking a position with respect to a question of law, the
substance of which was disclosed by the statement indorsed on it
return, it may not be said that that position was taken
fraudulently. We quote in full the pertinent portion of the decision
of the Court of Tax Appeals: .

fraudulently. The determination of the fraud penalties is

reversed."

When GM was the importer and Yutivo, the wholesaler, of the cars
and trucks, the sales tax was paid only once and on the original
sales by the former and neither the latter nor SM paid taxes on
their subsequent sales. Yutivo might have, therefore, honestly
believed that the payment by it, as importer, of the sales tax was
enough as in the case of GM Consequently, in filing its return on
the basis of its sales to SM and not on those by the latter to the
public, it cannot be said that Yutivo deliberately made a false
return for the purpose of defrauding the government of its
". . . The respondent's answer alleges that the petitioner's revenues which will justify the imposition of the surcharge
failure to report as income the taxable profit on the real penalty.
estate sale was fraudulent and with intent to evade the tax.
The petitioner filed a reply denying fraud and averring that We likewise find meritorious the contention that the Tax Court
the loss reported on its return was correct to the best of its erred in computing the alleged deficiency sales tax on the selling
knowledge and belief. We think the respondent has not price of SM without previously deducting therefrom the sales tax
sustained the burden of proving a fraudulent intent. We due thereon. The sales tax provisions (sees. 184.186, Tax Code)
have concluded that the sale of the petitioner's property impose a tax on original sales measured by "gross selling price" or
was in substance a sale by the petitioner, and that the "gross value in money". These terms, as interpreted by the
liquidating dividend to stockholders had no purpose other respondent Collector, do not include the amount of the sales tax,
than that of tax avoidance. But the attempt to avoid tax if invoiced separately. Thus, General Circular No. 431 of the
does not necessarily establish fraud. It is a settled principle Bureau of Internal Revenue dated July 29, 1939, which
that a taxpayer may diminish his liability by any means implements sections 184.186 of the Tax Code provides: "
which the law permits. United States v. Isham, 17 Wall.
. . .'Gross selling price' or gross value in money' of the
496; Gregory
v.
Helvering,
supra;
Chrisholm
v.
articles sold, bartered, exchanged, transferred as the term
Commissioner, 79 Fed. (2d) 14. If the petitioner here was of
is used in the aforecited sections (sections 184, 185 and
the opinion that the method by which it attempted to effect
186) of the National Internal Revenue Code, is the total
the sale in question was legally sufficient to avoid the
amount of money or its equivalent which the purchaser
imposition of tax upon it, its adoption of that method is not
pays to the vendor to receive or get the goods. However, if a
subject to censure. Petitioner took a position with respect
manufacturer, producer, or importer, in fixing the gross
to a question of law, the substance of which was disclosed
selling price of an article sold by him has included an
by the statement endorsed on its return. We can not say,
amount intended to cover the sales tax in the gross selling
under the record before us, that that position was taken
price of the articles, the sales tax shall be based on the

gross selling price less the amount intended to cover the If the taxes based on the sales of SM are computed in accordance
tax, if the same is billed to the purchaser as a separate with Gen. Circulars Nos. 431 and 440 the total deficiency sales
item.
taxes, exclusive of the 25% and 50% surcharges for late payment
and for fraud, would amount only to P820,549.91 as shown in the
General Circular No. 440 of the same Bureau reads:
following computation:
Amount intended to cover the tax must be billed as a
separate em so as not to pay a tax on the tax. On sales
made after he third quarter of 1939, the amount intended
to cover the sales tax must be billed to the purchaser as
separate items in the, invoices in order that the reduction
thereof from the gross ailing price may be allowed in the
computation of the merchants' percentage tax on the sales.
Unless billed to the purchaser as a separate item in the
invoice, the amounts intended to cover the sales tax shall
be considered as part of the gross selling price of the
articles sold, and deductions thereof will not be allowed,
(Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II,
pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and
as separately billed, the sales taxes did not form part of the "gross
selling price" as the measure of the tax. Since Yutivo had
previously billed the sales tax separately in its sales invoices to
SM General Circulars Nos. 431 and 440 should be deemed to
have been complied. Respondent Collector's method of
computation, as opined by Judge Nable in the decision
complained of
. . . is unfair, because . . .(it is) practically imposing tax on
a tax already paid. Besides, the adoption of the procedure
would in certain cases elevate the bracket under which the
tax is based. The late payment is already penalized, thru
the imposition of surcharges, by adopting the theory of the
Collector, we will be creating an additional penalty not
contemplated by law."

Sales
Taxes
Gross Sales of
Rates of
Due
and
Vehicles
Sales
Computed
Exclusive
of
Tax
under Gen. Cir
Sales Tax
Nos. 431 & 400

Total
Gross
Selling
Price
Charged to the
Public

5%

P11,912,219.5
7
P595,610.98

P12,507,83055

7%

909,559.50

63,669.16

973,228.66

10%

2,618,695.28

261,869.53

2,880,564.81

15%

3,602,397.65

540,359.65

4,142,757.30

20%

267,150.50

53,430.10

320,580.60

30%

837,146.97

251,114.09

1,088,291.06

50%

74,244.30

37,122.16

111,366.46

75%

TOTAL

8,000.00

6,000.00

14,000.00

P20,220,413.7
P22,038,619.4
7
P1,809,205.67 4

Less Taxes Paid by 988,655.7

Yutivo
6

Deficiency Tax still P820,549.

due
91

opinion, apparently, is merely an expression of his general or

"private sentiment" on the particular issue, for he concurred the
dispositive part of the decision. At any rate, assuming that there
is no valid decision for lack of concurrence of two judges, the case
was submitted for decision of the court below on March 28, 1957
and under section 13 of Republic Act 1125, cases brought before
said court hall be decided within 30 days after submission
thereof. "If no decision is rendered by the Court within thirty days
from the date a case is submitted for decision, the party adversely
affected by said ruling, order or decision, may file with said Court
a notice of his intention to appeal to the Supreme Court, and if no
decision has as yet been rendered by the Court, the aggrieved
party may file directly with the Supreme Court an appeal from
said ruling, order or decision, notwithstanding the foregoing
provisions of this section." The case having been brought before
us on appeal, the question raised by petitioner as become purely
academic.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax

Appeals under review is hereby modified in that petitioner shall
This is the exact amount which, according to Presiding Judge be ordered to pay to respondent the sum of P820,549.91, plus
Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of 25% surcharge thereon for late payment.
the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or
acted in excess of its jurisdiction in promulgating judgment for
the affirmance of the decision of respondent Collector by less
than the statutory requirement of at least two votes of its judges.
Anent this contention, section 2 of Republic Act No. 1125,
creating the Court of Tax Appeals, provides that "Any two judges
of the Court of Tax Appeals shall constitute a quorum, and the
concurrence of two judges shall be necessary to promulgate
decision thereof. . . . " It is on record that the present case was
heard by two judges of the lower court. And while Judge Nable
expressed his opinion on the issue of whether or not the amount
of the sales tax should be excluded from the gross selling price in
computing the deficiency sales tax due from the petitioner, the

So ordered without costs.

G.R. No. L-17618

August 31, 1964

COMMISSIONER
OF
INTERNAL
REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
Office
of
the
Solicitor
Pio Joven for respondent.
PAREDES, J.:

General

for

petitioner.

This is an appeal interposed by the Commissioner of Internal procedure that the sale of concrete blocks manufactured by
Revenue against the following judgment of the Court of Tax Jackbilt was conducted until May 1, 1953, when the agency
Appeals:
agreement was terminated and a management agreement between
the parties was entered into. The management agreement
IN VIEW OF THE FOREGOING, we find no legal basis to provided that Norton would sell concrete blocks for Jackbilt, for a
support the assessment in question against petitioner. If at fixed monthly fee of P2,000.00, which was later increased to
all, the assessment should have been directed against P5,000.00.
JACKBILT, the manufacturer. Accordingly, the decision
appealed from is reversed, and the surety bond filed to During the existence of the distribution or agency agreement, or
guarantee payment of said assessment is ordered on June 10, 1949, Norton & Harrison acquired by purchase all
cancelled. No pronouncement as to costs.
the outstanding shares of stock of Jackbilt. Apparently, due to
this transaction, the Commissioner of Internal Revenue, after
Norton and Harrison is a corporation organized in 1911, (1) to conducting an investigation, assessed the respondent Norton &
buy and sell at wholesale and retail, all kinds of goods, wares, Harrison for deficiency sales tax and surcharges in the amount of
and merchandise; (2) to act as agents of manufacturers in the P32,662.90, making as basis thereof the sales of Norton to the
United States and foreign countries; and (3) to carry on and Public. In other words, the Commissioner considered the sale of
conduct a general wholesale and retail mercantile establishment Norton to the public as the original sale and not the transaction
in the Philippines. Jackbilt is, likewise, a corporation organized from Jackbilt. The period covered by the assessment was from
on February 16, 1948 primarily for the purpose of making, July 1, 1949 to May 31, 1953. As Norton and Harrison did not
producing and manufacturing concrete blocks. Under date of July conform with the assessment, the matter was brought to the
27, 1948. Norton and Jackbilt entered into an agreement whereby Court of Tax Appeals.
Norton was made the sole and exclusive distributor of concrete
blocks manufactured by Jackbilt. Pursuant to this agreement, The Commissioner of Internal Revenue contends that since
whenever an order for concrete blocks was received by the Norton Jackbilt was owned and controlled by Norton & Harrison, the
& Harrison Co. from a customer, the order was transmitted to corporate personality of the former (Jackbilt) should be
Jackbilt which delivered the merchandise direct to the customer. disregarded for sales tax purposes, and the sale of Jackbilt
Payment for the goods is, however, made to Norton, which in turn blocks by petitioner to the public must be considered as
pays Jackbilt the amount charged the customer less a certain the original sales from which the sales tax should be computed.
amount, as its compensation or profit. To exemplify the sales The Norton & Harrison Company contended otherwise that is,
procedures adopted by the Norton and Jackbilt, the following may the transaction subject to tax is the sale from Jackbilt to Norton.
be cited. In the case of the sale of 420 pieces of concrete blocks to
the American Builders on April 1, 1952, the purchaser paid to Wherefore, the parties respectfully pray that the foregoing
Norton the sum of P189.00 the purchase price. Out of this stipulation of facts be admitted and approved by this Honorable
amount Norton paid Jackbilt P168.00, the difference obviously Court, without prejudice to the parties adducing other evidence to
being its compensation. As per records of Jackbilt, the prove their case not covered by this stipulation of
transaction was considered a sale to Norton. It was under this facts. 1wph1.t

The majority of the Tax Court, in relieving Norton & Harrison of

liability under the assessment, made the following observations:

xxx

xxx

xxx

Therefore, the taxable selling price of JACKBILT blocks

The law applicable to the case is Section 186 of the
under the aforesaid agreement is the price charged to the
National Internal Revenue Code which imposes a
public and not the amount billed by JACKBILT to
percentage tax of 7% on every original sale of goods, wares
petitioner. The deficiency sales tax should have been
or merchandise, such tax to be based on the gross selling
assessed against JACKBILT and not against petitioner
price of such goods, wares or merchandise. The term
which merely acted as the former's agent.
"original sale" has been defined as the first sale by every
xxx
xxx
xxx
manufacturer, producer or importer. (Sec. 5, Com. Act No.
503.) Subsequent sales by persons other than the
manufacturer, producer or importer are not subject to the Presiding Judge Nable of the same Court expressed a partial
dissent, stating:
sales tax.
If JACKBILT actually sold concrete blocks manufactured by
it to petitioner under the distributorship or agency
agreement of July 27, 1948, such sales constituted the
original sales which are taxable under Section 186 of the
Revenue Code, while the sales made to the public by
petitioner are subsequent sales which are not taxable. But
it appears to us that there was no such sale by JACKBILT
to petitioner. Petitioner merely acted as agent for JACKBILT
in the marketing of its products. This is shown by the fact
that petitioner merely accepted orders from the public for
the purchase of JACKBILT blocks. The purchase orders
were transmitted to JACKBILT which delivered the blocks
to the purchaser directly. There was no instance in which
the blocks ordered by the purchasers were delivered to the
petitioner. Petitioner never purchased concrete blocks from
JACKBILT so that it never acquired ownership of such
concrete blocks. This being so, petitioner could not have
sold JACKBILT blocks for its own account. It did so merely
as agent of JACKBILT. The distributorship agreement of
July 27, 1948, is denominated by the parties themselves as
an "agency for marketing" JACKBILT products. ... .

Upon the aforestated circumstances, which disclose

Norton's control over and direction of Jackbilt's affairs, the
corporate personality of Jackbilt should be disregarded,
and the transactions between these two corporations
relative to the concrete blocks should be ignored in
determining the percentage tax for which Norton is liable.
Consequently, the percentage tax should be computed on
the basis of the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the
Commissioner of Internal Revenue, on four (4) assigned errors, all
of which pose the following propositions: (1) whether the
acquisition of all the stocks of the Jackbilt by the Norton &
Harrison Co., merged the two corporations into a single
corporation; (2) whether the basis of the computation of the
deficiency sales tax should be the sale of the blocks to the public
and not to Norton.
It has been settled that the ownership of all the stocks of a
corporation by another corporation does not necessarily breed an
identity of corporate interest between the two companies and be
considered as a sufficient ground for disregarding the distinct
personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June

30, 1961). However, in the case at bar, we find sufficient grounds

to support the theory that the separate identities of the two
companies should be disregarded. Among these circumstances,
which we find not successfully refuted by appellee Norton are: (a)
Norton and Harrison owned all the outstanding stocks of Jackbilt;
of the 15,000 authorized shares of Jackbilt on March 31, 1958,
14,993 shares belonged to Norton and Harrison and one each to
seven others; (b) Norton constituted Jackbilt's board of directors
in such a way as to enable it to actually direct and manage the
other's affairs by making the same officers of the board for both
companies. For instance, James E. Norton is the President,
Treasurer, Director and Stockholder of Norton. He also occupies
the same positions in Jackbilt corporation, the only change being,
in the Jackbilt, he is merely a nominal stockholder. The same is
true with Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert
Golden and Gerardo Garcia, while they are merely employees of
the North they are Directors and nominal stockholders of the
Jackbilt (c) Norton financed the operations of the Jackbilt, and
this is shown by the fact that the loans obtained from the RFC
and Bank of America were used in the expansion program of
Jackbilt, to pay advances for the purchase of equipment,
materials rations and salaries of employees of Jackbilt and other
sundry expenses. There was no limit to the advances given to
Jackbilt so much so that as of May 31, 1956, the unpaid
advances amounted to P757,652.45, which were not paid in cash
by Jackbilt, but was offset by shares of stock issued to Norton,
the absolute and sole owner of Jackbilt; (d) Norton treats Jackbilt
employees as its own. Evidence shows that Norton paid the
salaries of Jackbilt employees and gave the same privileges as
Norton employees, an indication that Jackbilt employees were also
Norton's employees. Furthermore service rendered in any one of
the two companies were taken into account for purposes of
promotion; (e) Compensation given to board members of Jackbilt,
indicate that Jackbilt is merely a department of Norton. The
income tax return of Norton for 1954 shows that as President and
Treasurer of Norton and Jackbilt, he received from Norton

P56,929.95, but received from Jackbilt the measly amount of

P150.00, a circumstance which points out that remuneration of
purported officials of Jackbilt are deemed included in the salaries
they received from Norton. The same is true in the case of
Eduardo Garcia, an employee of Norton but a member of the
Board of Jackbilt. His Income tax return for 1956 reveals that he
received from Norton in salaries and bonuses P4,220.00, but
received from Jackbilt, by way of entertainment, representation,
travelling and transportation allowances P3,000.00. However, in
the withholding statement (Exh. 28-A), it was shown that the
total of P4,200.00 and P3,000.00 (P7,220.00) was received by
Garcia from Norton, thus portraying the oneness of the two
companies. The Income Tax Returns of Albert Golden and
Dioscoro Ramos both employees of Norton but board members of
Jackbilt, also disclose the game method of payment of
compensation and allowances. The offices of Norton and Jackbilt
are located in the same compound. Payments were effected by
Norton of accounts for Jackbilt and vice versa. Payments were
also made to Norton of accounts due or payable to Jackbilt and
vice versa.
Norton and Harrison, while not denying the presence of the set
up stated above, tried to explain that the control over the affairs
of Jackbilt was not made in order to evade payment of taxes; that
the loans obtained by it which were given to Jackbilt, were
necessary for the expansion of its business in the manufacture of
concrete blocks, which would ultimately benefit both
corporations; that the transactions and practices just mentioned,
are not unusual and extraordinary, but pursued in the regular
course of business and trade; that there could be no confusion in
the present set up of the two corporations, because they have
separate Boards, their cash assets are entirely and strictly
separate; cashiers and official receipts and bank accounts are
distinct and different; they have separate income tax returns,
separate balance sheets and profit and loss statements. These
explanations notwithstanding an over-all appraisal of the

circumstances presented by the facts of the case, yields to the

conclusion that the Jackbilt is merely an adjunct, business
conduit or alter ego, of Norton and Harrison and that the fiction
of corporate entities, separate and distinct from each, should be
disregarded. This is a case where the doctrine of piercing the veil
of corporate fiction, should be made to apply. In the case
of Liddell & Co. Inc. v. Coll. of Int. Rev., supra, it was held:

held in another case, "where a corporation is a dummy, is

unreal or a sham and serves no business purpose and is
intended only as a blind, the corporate form may be
ignored for the law cannot countenance a form that is bald
and a mischievous fictions".
... a taxpayer may gain advantage of doing business thru a
corporation if he pleases, but the revenue officers in proper
cases, may disregard the separate corporate entity where it
serves but as a shield for tax evasion and treat the person
who actually may take benefits of the transactions as the
person accordingly taxable.

There are quite a series of conspicuous circumstances that

militates against the separate and distinct personality of
Liddell Motors Inc., from Liddell & Co. We notice that the
bulk of the business of Liddell & Co. was channel Red
through Liddell Motors, Inc. On the other hand, Liddell
... to allow a taxpayer to deny tax liability on the ground
Motors Inc. pursued no activities except to secure cars,
that the sales were made through another and distinct
trucks, and spare parts from Liddell & Co., Inc. and then
corporation when it is proved that the latter is virtually
sell them to the general public. These sales of vehicles by
owned by the former or that they are practically one and
Liddell & Co, to Liddell Motors. Inc. for the most part were
the same is to sanction a circumvention of our tax laws.
shown to have taken place on the same day that Liddell
(and cases cited therein.)
Motors, Inc. sold such vehicles to the public. We may even
say that the cars and trucks merely touched the hands of
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals,
Liddell Motors, Inc. as a matter of formality.
L-13203, Jan. 28, 1961, this Court made a similar ruling where
the circumstances of unity of corporate identities have been
xxx
xxx
xxx
shown and which are identical to those obtaining in the case
Accordingly, the mere fact that Liddell & Co. and Liddell under consideration. Therein, this Court said:
Motors, Inc. are corporations owned and controlled by
We are, however, inclined to agree with the court below
Frank Liddell directly or indirectly is not by itself sufficient
that SM was actually owned and controlled by petitioner as
to justify the disregard of the separate corporate identity of
to make it a mere subsidiary or branch of the latter created
one from the other. There is however, in this instant case, a
for the purpose of selling the vehicles at retail (here
peculiar sequence of the organization and activities of
concrete blocks) ... .
Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal
right of a tax payer to decrease the amount of what
otherwise would be his taxes, or altogether avoid them, by
means which the law permits, cannot be doubted". But as

It may not be amiss to state in this connection, the advantages to

Norton in maintaining a semblance of separate entities. If the
income of Norton should be considered separate from the income
of Jackbilt, then each would declare such earning separately for

income tax purposes and thus pay lesser income tax. The
combined taxable Norton-Jackbilt income would subject Norton
to a higher tax. Based upon the 1954-1955 income tax return of
Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of
them are operating on the same fiscal basis and their returns are
accurate, we would have the following result: Jackbilt declared a
taxable net income of P161,202.31 in which the income tax due
was computed at P37,137.00 (Exh. 8); whereas Norton declared
as taxable, a net income of P120,101.59, on which the income tax
due was computed at P25,628.00. The total of these liabilities is
P50,764.84. On the other hand, if the net taxable earnings of
both corporations are combined, during the same taxable year,
the tax due on their total which is P281,303.90 would be
P70,764.00. So that, even on the question of income tax alone, it
would be to the advantages of Norton that the corporations
should be regarded as separate entities.
WHEREFORE, the decision appealed from should be as it is
hereby reversed and another entered making the appellee Norton
& Harrison liable for the deficiency sales taxes assessed against it
by the appellant Commissioner of Internal Revenue, plus 25%
surcharge thereon. Costs against appellee Norton & Harrison.
G.R. No. L-20502

February 26, 1965

In a complaint for unfair labor practice filed before the Court of

Industrial Relations on June 6, 1956 by a prosecutor of the latter
court, Emilio, Ariston and Rodolfo, all surnamed Cano, were
made respondents in their capacity as president and proprietor,
field supervisor and manager, respectively, of Emilio Cano
Enterprises, Inc.
After trial, Presiding Judge Jose S. Bautista rendered decision
finding Emilio Cano and Rodolfo Cano guilty of the unfair labor
practice charge, but absolved Ariston for insufficiency of evidence.
As a consequence, the two were ordered, jointly and severally, to
reinstate Honorata Cruz, to her former position with payment of
backwages from the time of her dismissal up to her
reinstatement, together with all other rights and privileges
thereunto appertaining.
Meanwhile, Emilio Cano died on November 14, 1958, and the
attempt to have the case dismissed against him having failed, the
case was appealed to the court en banc, which in due course
affirmed the decision of Judge Bautista. An order of execution
was issued on August 23, 1961 the dispositive part of which
reads: (1) to reinstate Honorata Cruz to her former position as
ordered in the decision; and (2) to deposit with the court the
amount of P7,222.58 within ten days from receipt of the order,
failing which the court will order either a levy on respondents'
properties or the filing of an action for contempt of court.

EMILIO
CANO
ENTERPRISES,
INC., petitioner,
vs.
The order of execution having been directed against the properties
COURT OF INDUSTRIAL RELATIONS, ET AL., respondents.
of Emilio Cano Enterprises, Inc. instead of those of the
D.
T.
Reyes
and
Associates
for
petitioner. respondents named in the decision, said corporation filed an ex
Mariano B. Tuason for respondent Court of Industrial Relations. parte motion to quash the writ on the ground that the judgment
sought to be enforced was not rendered against it which is a
C. E. Santiago for respondent Honorata Cruz.
juridical entity separate and distinct from its officials. This
motion was denied. And having failed to have it reconsidered, the
BAUTISTA ANGELO, J.:
corporation
interposed
the
present
petition
for certiorari.1wph1.t

remanded to the court a quo merely in response to a technical

substitution of parties for such would only cause an unwarranted
delay that would work to Honorata's prejudice. This is contrary to
the spirit of the law which enjoins a speedy adjudication of labor
cases disregarding as much as possible the technicalities of
procedure. We, therefore, find unmeritorious the relief herein
The answer must be in the affirmative. While it is an undisputed prayed for.
rule that a corporation has a personality separate and distinct
from its members or stockholders because of a fiction of the law, WHEREFORE, petition is dismissed, with costs.
here we should not lose sight of the fact that the Emilio Cano
Enterprises, Inc. is a closed family corporation where the Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon,
incorporators and directors belong to one single family. Thus, the Regala, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur.
following are its incorporators: Emilio Cano, his wife Juliana, his
sons Rodolfo and Carlos, and his daughter-in-law Ana D. Cano.
Here is an instance where the corporation and its members can
June 19, 1967
be considered as one. And to hold such entity liable for the acts of G.R. No. L-19550
its members is not to ignore the legal fiction but merely to give HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J.
meaning to the principle that such fiction cannot be invoked if its BROOKS
and
KARL
BECK, petitioners,
purpose is to use it as a shield to further an end subversive of
vs.
justice. 1 And so it has been held that while a corporation is a
legal entity existing separate and apart from the persons HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF
composing it, that concept cannot be extended to a point beyond JUSTICE; JOSE LUKBAN, in his capacity as Acting Director,
its reason and policy, and when invoked in support of an end National Bureau of Investigation; SPECIAL PROSECUTORS
subversive of this policy it should be disregarded by the courts
PEDRO D. CENZON, EFREN I. PLANA and MANUEL
(12 Am. Jur. 160-161).
VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES;
The issue posed before us is: Can the judgment rendered against
Emilio and Rodolfo Cano in their capacity as officials of the
corporation Emilio Cano Enterprises, Inc. be made effective
against the property of the latter which was not a party to the
case?

A factor that should not be overlooked is that Emilio and Rodolfo

Cano are here indicted, not in their private capacity, but as
president and manager, respectively, of Emilio Cano Enterprises,
Inc. Having been sued officially their connection with the case
must be deemed to be impressed with the representation of the
corporation. In fact, the court's order is for them to reinstate
Honorata Cruz to her former position in the corporation and
incidentally pay her the wages she had been deprived of during
her separation. Verily, the order against them is in effect against
the corporation. No benefit can be attained if this case were to be

JUDGE AMADO ROAN, Municipal Court of Manila; JUDGE

ROMAN

CANSINO,

Municipal

Court

of

Manila;

JUDGE

HERMOGENES CALUAG, Court of First Instance of RizalQuezon

City

Branch,

and

JUDGE

DAMIAN

JIMENEZ,

Municipal Court of Quezon City, respondents.

Paredes, Poblador, Cruz and Nazareno and Meer, Meer and Meer
and

Juan

T.

David

for

petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor

General Pacifico P. de Castro, Assistant Solicitor General Frine C.

Zaballero, Solicitor Camilo D. Quiason and Solicitor C. Padua for documents, papers and cash money seized were not delivered to
the courts that issued the warrants, to be disposed of in
respondents.
CONCEPCION, C.J.:
accordance with law on March 20, 1962, said petitioners filed
Upon application of the officers of the government named on the with the Supreme Court this original action for certiorari,
margin1 hereinafter referred to as Respondents-Prosecutors prohibition, mandamus and injunction, and prayed that, pending
several judges2 hereinafter referred to as Respondents-Judges final disposition of the present case, a writ of preliminary
issued, on different dates,3 a total of 42 search warrants injunction be issued restraining Respondents-Prosecutors, their
against petitioners herein4 and/or the corporations of which they agents and /or representatives from using the effects seized as
were officers,5 directed to the any peace officer, to search the aforementioned or any copies thereof, in the deportation cases
persons above-named and/or the premises of their offices, already adverted to, and that, in due course, thereafter, decision
warehouses and/or residences, and to seize and take possession be rendered quashing the contested search warrants and
of the following personal property to wit:
Books
of
accounts,
financial

declaring the same null and void, and commanding the

vouchers, respondents, their agents or representatives to return to
correspondence, receipts, ledgers, journals, portfolios, petitioners herein, in accordance with Section 3, Rule 67, of the
credit journals, typewriters, and other documents and/or Rules of Court, the documents, papers, things and cash moneys
papers

showing

all

business

records,

transactions

including seized or confiscated under the search warrants in question.

disbursements receipts, balance sheets and profit and loss In their answer, respondents-prosecutors alleged, 6 (1) that the
statements and Bobbins (cigarette wrappers).
contested search warrants are valid and have been issued in
as "the subject of the offense; stolen or embezzled and proceeds accordance with law; (2) that the defects of said warrants, if any,
or fruits of the offense," or "used or intended to be used as the were cured by petitioners' consent; and (3) that, in any event, the
means of committing the offense," which is described in the effects seized are admissible in evidence against herein
applications adverted to above as "violation of Central Bank Laws, petitioners, regardless of the alleged illegality of the
Tariff and Customs Laws, Internal Revenue (Code) and the aforementioned searches and seizures.
Revised Penal Code."
On March 22, 1962, this Court issued the writ of preliminary
Alleging that the aforementioned search warrants are null and injunction prayed for in the petition. However, by resolution dated
void, as contravening the Constitution and the Rules of Court June 29, 1962, the writ was partially lifted or dissolved, insofar
because, inter alia: (1) they do not describe with particularity the as the papers, documents and things seized from the offices of
documents, books and things to be seized; (2) cash money, not the corporations above mentioned are concerned; but, the
mentioned in the warrants, were actually seized; (3) the warrants injunction was maintained as regards the papers, documents and
were issued to fish evidence against the aforementioned things found and seized in the residences of petitioners herein. 7

petitioners in deportation cases filed against them; (4) the Thus, the documents, papers, and things seized under the alleged
searches and seizures were made in an illegal manner; and (5) the authority of the warrants in question may be split into two (2)

affect

the aforementioned corporations, and (b) those found and seized

property had not been seized or the privacy of whose homes

in the residences of petitioners herein.

As regards the first group, we hold that petitioners herein

had

have no cause of action to assail the legality of the contested

its violation, if any, was with reference to the rights

warrants and of the seizures made in pursuance thereof, for the

simple reason that said corporations have their respective
personalities, separate and distinct from the personality of herein
petitioners, regardless of the amount of shares of stock or of the
interest of each of them in said corporations, and whatever the
offices they hold therein may be.8 Indeed, it is well settled that the
legality of a seizure can be contested only by the party whose
rights have been impaired thereby, and that the objection to an
9

the
not

constitutional
been

disturbed;

rights
nor

of

defendants whose

major groups, namely: (a) those found and seized in the offices of

could

they

claim

for

themselves the benefits of the Fourth Amendment, when

of another. Remus vs. United States (C.C.A.)291 F. 501,
511. It follows, therefore, that the question of the
admissibility of the evidence based on an alleged unlawful
search

and

defendants

seizure
but

does not extend

to

the

personal

embraces only the corporation whose

property was taken. . . . (A Guckenheimer & Bros. Co. vs.

United States, [1925] 3 F. 2d. 786, 789, Emphasis

supplied.)
unlawful search and seizure is purely personal and cannot be With respect to the documents, papers and things seized in the
availed of by third parties. 10 Consequently, petitioners herein may residences of petitioners herein, the aforementioned resolution of
not validly object to the use in evidence against them of the June 29, 1962, lifted the writ of preliminary injunction previously
documents, papers and things seized from the offices and issued by this Court,12 thereby, in effect, restraining herein
premises of the corporations adverted to above, since the right to Respondents-Prosecutors from using them in evidence against
object to the admission of said papers in evidence petitioners herein.
belongsexclusively to the corporations, to whom the seized effects In connection with said documents, papers and things, two (2)
belong, and may not be invoked by the corporate officers in important questions need be settled, namely: (1) whether the
proceedings against them in their individual capacity. 11 Indeed, it search warrants in question, and the searches and seizures made
under the authority thereof, are valid or not, and (2) if the answer
has been held:
. . . that the Government's action in gaining possession of to the preceding question is in the negative, whether said
papers belonging to the corporation did not relate to nor did documents, papers and things may be used in evidence against
it affect the personal defendants. If these papers were petitioners herein.1wph1.t
unlawfully seized and thereby the constitutional rights of Petitioners maintain that the aforementioned search warrants are
or any one were invaded, they were the rights of in the nature of general warrants and that accordingly, the
the corporation and not the rights of the other defendants. seizures effected upon the authority there of are null and void. In
13
Next, it is clear that a question of the lawfulness of a this connection, the Constitution provides:
The right of the people to be secure in their persons,
seizure can be raised only by one whose rights have been

invaded. Certainly, such a seizure, if unlawful, could not

houses, papers, and effects against unreasonable searches

and seizures shall not be violated, and no warrants shall To uphold the validity of the warrants in question would be to
issue but upon probable cause, to be determined by the wipe out completely one of the most fundamental rights
judge after examination under oath or affirmation of the guaranteed in our Constitution, for it would place the sanctity of
complainant and the witnesses he may produce, and the

domicile

and

the

privacy

of

communication

and

particularly describing the place to be searched, and the correspondence at the mercy of the whims caprice or passion of
peace officers. This is precisely the evil sought to be remedied by
this the constitutional provision above quoted to outlaw the soconstitutional mandate, namely: (1) that no warrant shall issue called general warrants. It is not difficult to imagine what would
Two

persons or things to be seized.

points must be stressed in

connection

with

but upon probable cause, to be determined by the judge in the happen, in times of keen political strife, when the party in power
manner set forth in said provision; and (2) that the warrant feels that the minority is likely to wrest it, even though by legal

shall particularly describe the things to be seized.

means.
None of these requirements has been complied with in the Such is the seriousness of the irregularities committed in
contested warrants. Indeed, the same were issued upon connection with the disputed search warrants, that this Court
applications stating that the natural and juridical person therein deemed it fit to amend Section 3 of Rule 122 of the former Rules
named had committed a "violation of Central Ban Laws, Tariff and of Court 14 by providing in its counterpart, under the Revised
Customs Laws, Internal Revenue (Code) and Revised Penal Code." Rules of Court 15 that "a search warrant shall not issue but upon
In other words, nospecific offense had been alleged in said probable cause in connection with one specific offense." Not
applications. The averments thereof with respect to the offense satisfied with this qualification, the Court added thereto a
committed were abstract. As a consequence, it was impossible for paragraph, directing that "no search warrant shall issue for more
the judges who issued the warrants to have found the existence of than one specific offense."
probable cause, for the same presupposes the introduction of The grave violation of the Constitution made in the application for
competent proof that the party against whom it is sought has the contested search warrants was compounded by the
performed particular acts,
or
committed specific omissions, description therein made of the effects to be searched for and
violating a given provision of our criminal laws. As a matter of seized, to wit:
Books of accounts, financial records, vouchers, journals,
fact, the applications involved in this case do not allege any
specific acts performed by herein petitioners. It would be the legal
heresy, of the highest order, to convict anybody of a "violation of
Central Bank Laws, Tariff and Customs Laws, Internal Revenue
(Code)

and

Revised

aforementioned

Penal

applications

Code,"

determinate provision of said laws or

without

as

alleged

in

the

reference

to

any

correspondence,

receipts,

ledgers,

portfolios,

credit

journals, typewriters, and other documents and/or papers

showing all business transactions including disbursement
receipts, balance sheets and related profit and loss
statements.
Thus, the warrants authorized the search for and seizure of
records pertaining to all business transactions of petitioners

herein,

regardless

of

whether

the

transactions

acquired, is that exclusion is the only practical way of

were legal or illegal. The warrants sanctioned the seizure of all

enforcing the constitutional privilege. In earlier times the

records of the petitioners and the aforementioned corporations,

action of trespass against the offending official may have

whatever their nature, thus openly contravening the explicit

been protection enough; but that is true no longer. Only in

command of our Bill of Rights that the things to be seized

case the prosecution which itself controls the seizing

be particularly described as well as tending to defeat its major

officials, knows that it cannot profit by their wrong will that

objective: the elimination of general warrants.

Relying upon Moncado vs. People's Court (80

Phil.

wrong be repressed.18
1), In fact, over thirty (30) years before, the Federal Supreme Court

Respondents-Prosecutors maintain that, even if the searches and had already declared:
If letters and private documents can thus be seized and
seizures under consideration were unconstitutional, the
documents, papers and things thus seized are admissible in
evidence against petitioners herein. Upon mature deliberation,
however, we are unanimously of the opinion that the position
taken in the Moncado case must be abandoned. Said position was
in line with the American common law rule, that the criminal
should not be allowed to go free merely "because the constable

held and used in evidence against a citizen accused of an

offense, the protection of the 4th Amendment, declaring

his rights to be secure against such searches and seizures,
is of no value, and, so far as those thus placed are
concerned,

might

as

well

be

stricken

from

the

Constitution. The efforts of the courts and their officials to

the constitutional

bring the guilty to punishment, praiseworthy as they are,

prohibition against unreasonable searches and seizures is

are not to be aided by the sacrifice of those great principles

protected by means other than the exclusion of evidence

established by years of endeavor and suffering which have

unlawfully obtained,

resulted in their embodiment in the fundamental law of the

has blundered,"

16

upon

17

the theory that

such as the common-law action for

land.19
procured the issuance of the search warrant and against those This view was, not only reiterated, but, also, broadened in
20
assisting in the execution of an illegal search, their criminal subsequent decisions on the same Federal Court. After
punishment, resistance, without liability to an unlawful seizure, reviewing previous decisions thereon, said Court held, in Mapp
damages against the searching officer, against the party who

vs. Ohio (supra.):

and such other legal remedies as may be provided by other laws.
. . . Today we once again examine the Wolf's constitutional
However, most common law jurisdictions have already given up
documentation of the right of privacy free from
this approach and eventually adopted the exclusionary rule,
realizing that this is the only practical means of enforcing the

unreasonable state intrusion, and after its dozen years on

and

our books, are led by it to close the only courtroom door

seizures. In the language of Judge Learned Hand:

As we understand it, the reason for the exclusion of

remaining open to evidence secured by official lawlessness

in flagrant abuse of that basic right, reserved to all persons

evidence competent as such, which has been unlawfully

as a specific guarantee against that very same unlawful

constitutional

injunction against

unreasonable

searches

conduct. We hold that all evidence obtained by searches

of the right to privacy be also insisted upon as an

and seizures in violation of the Constitution is, by that

essential ingredient of the right newly recognized by the

same authority, inadmissible in a State.

Since the Fourth Amendment's right of privacy has been

Wolf Case. In short, the admission of the new constitutional

declared enforceable against the States through the Due

constitutional

Process Clause of the Fourteenth, it is enforceable against

them by the same sanction of exclusion as it used against
the Federal Government. Were it otherwise, then just as
without

the

Weeks

rule

the

assurance

against

unreasonable federal searches and seizures would be "a

form of words," valueless and underserving of mention in a
perpetual charter of inestimable human liberties, so
too, without that rule the freedom from state invasions of

Right by Wolf could not tolerate denial of its most important

privilege,

namely,

the

exclusion

of

the

evidence which an accused had been forced to give by

reason of the unlawful seizure. To hold otherwise is to grant
the right but in reality to withhold its privilege and
enjoyment. Only last year the Court itself recognized
that the purpose of the exclusionary rule to "is to deter to
compel respect for the constitutional guaranty in the only
effectively available way by removing the incentive to

privacy would be so ephemeral and so neatly severed from

disregard it" . . . .
The ignoble shortcut to conviction left open to the State

its conceptual nexus with the freedom from all brutish

tends to destroy the entire system of constitutional

means of coercing evidence as not to permit this Court's high

restraints on which the liberties of the people rest. Having

regard as a freedom "implicit in the concept of ordered

once recognized that the right to privacy embodied in the

liberty." At the time that the Court held in Wolf that the

Fourth Amendment is enforceable against the States, and

amendment was applicable to the States through the Due

that the right to be secure against rude invasions of

Process Clause, the cases of this Court as we have seen,

privacy by state officers is, therefore constitutional in

had steadfastly held that as to federal officers the Fourth

origin, we can no longer permit that right to remain an

Amendment included the exclusion of the evidence seized

empty promise. Because it is enforceable in the same

in violation of its provisions. Even Wolf "stoutly adhered" to

manner and to like effect as other basic rights secured by

that proposition. The right to when conceded operatively

its Due Process Clause, we can no longer permit it to be

enforceable against the States, was not susceptible of

revocable at the whim of any police officer who, in the name

destruction by avulsion of the sanction upon which its

of law enforcement itself, chooses to suspend its enjoyment.

protection

deemed

Our decision, founded on reason and truth, gives to the

dependent under the Boyd, Weeks and Silverthorne Cases.

individual no more than that which the Constitution

and

enjoyment

had

always

been

Therefore, in extending the substantive protections of due

process to all constitutionally unreasonable searches
state or federal it was logically and constitutionally
necessarily that the exclusion doctrine an essential part

guarantees him to the police officer no less than that to

which honest law enforcement is entitled, and, to the courts,

that judicial integrity so necessary in the true administration that Rooms Nos. 81 and 91 of Carmen Apartments, House No.
2008, Dewey Boulevard, House No. 1436, Colorado Street, and
of justice. (emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the Room No. 304 of the Army-Navy Club, should be included among
letter, but also, to the spirit of the constitutional injunction the premises considered in said Resolution as residences of
against unreasonable searches and seizures. To be sure, if the herein petitioners, Harry S. Stonehill, Robert P. Brook, John J.
applicant for a search warrant has competent evidence to Brooks and Karl Beck, respectively, and that, furthermore, the
establish probable cause of the commission of a given crime by records, papers and other effects seized in the offices of the
the party against whom the warrant is intended, then there is no corporations above referred to include personal belongings of said
reason why the applicant should not comply with the petitioners and other effects under their exclusive possession and
requirements of the fundamental law. Upon the other hand, if he control, for the exclusion of which they have a standing under the
has no such competent evidence, then it is not possible for the latest rulings of the federal courts of federal courts of the United
Judge to find that there is probable cause, and, hence, no States. 22
justification for the issuance of the warrant. The only possible We note, however, that petitioners' theory, regarding their alleged
explanation (not justification) for its issuance is the necessity possession of and control over the aforementioned records, papers
of fishing evidence of the commission of a crime. But, then, this and effects, and the alleged "personal" nature thereof, has Been
fishing expedition is indicative of the absence of evidence to Advanced, notin their petition or amended petition herein, but in
the Motion for Reconsideration and Amendment of the Resolution
establish a probable cause.
Moreover, the theory that the criminal prosecution of those who of June 29, 1962. In other words, said theory would appear to be
secure an illegal search warrant and/or make unreasonable readjustment of that followed in said petitions, to suit the
searches or seizures would suffice to protect the constitutional approach intimated in the Resolution sought to be reconsidered
guarantee under consideration, overlooks the fact that violations and amended. Then, too, some of the affidavits or copies of
thereof are, in general, committed By agents of the party in power, alleged affidavits attached to said motion for reconsideration, or
for, certainly, those belonging to the minority could not possibly submitted in support thereof, contain either inconsistent
abuse a power they do not have. Regardless of the handicap allegations, or allegations inconsistent with the theory now
under which the minority usually but, understandably finds advanced by petitioners herein.
itself in prosecuting agents of the majority, one must not lose Upon the other hand, we are not satisfied that the allegations of
sight of the fact that the psychological and moral effect of the said petitions said motion for reconsideration, and the contents of
possibility 21 of securing their conviction, is watered down by the the aforementioned affidavits and other papers submitted in
pardoning power of the party for whose benefit the illegality had support of said motion, have sufficiently established the facts or
conditions contemplated in the cases relied upon by the
been committed.
In their Motion for Reconsideration and Amendment of the petitioners; to warrant application of the views therein expressed,
Resolution of this Court dated June 29, 1962, petitioners allege should we agree thereto. At any rate, we do not deem it necessary

to express our opinion thereon, it being best to leave the matter "malfeasance

in

office,

corrupt

practices

and

serious

open for determination in appropriate cases in the future.

irregularities" allegedly committed as follows:
We hold, therefore, that the doctrine adopted in the Moncado case 1. Respondent sheriff attached and/or levied the money belonging
must be, as it is hereby, abandoned; that the warrants for the to complainant Cruz when he was not himself the judgment
search of three (3) residences of herein petitioners, as specified in debtor in the final judgment of NLRC NCR Case No. 8-12389-91
the Resolution of June 29, 1962, are null and void; that the sought to be enforced but rather the company known as
searches and seizures therein made are illegal; that the writ of "Qualitrans

Limousine

Service,

Inc.,"

duly

registered

preliminary injunction heretofore issued, in connection with the corporation; and,

documents, papers and other effects thus seized in said 2. Respondent likewise caused the service of the alias writ of
residences of herein petitioners is hereby made permanent; that execution upon complainant who is a resident of Pasay City,
the writs prayed for are granted, insofar as the documents, despite knowledge that his territorial jurisdiction covers Manila

papers and other effects so seized in the aforementioned only and does not extend to Pasay City.
residences are concerned; that the aforementioned motion for In his Comments, respondent Dalisay explained that when he
Reconsideration and Amendment should be, as it is hereby, garnished complainant's cash deposit at the Philtrust bank, he
denied; and that the petition herein is dismissed and the writs was merely performing a ministerial duty. While it is true that

prayed for denied, as regards the documents, papers and other said writ was addressed to Qualitrans Limousine Service, Inc., yet
effects seized in the twenty-nine (29) places, offices and other it is also a fact that complainant had executed an affidavit before
premises enumerated in the same Resolution, without special the Pasay City assistant fiscal stating that he is the
owner/president of said corporation and, because of that
pronouncement as to costs.

declaration, the counsel for the plaintiff in the labor case advised
It is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar and him to serve notice of garnishment on the Philtrust bank.
On November 12, 1984, this case was referred to the Executive
Sanchez, JJ., concur.
Adm. Matter No. R-181-P
ADELIO
C.
vs.
QUITERIO

L.

Manila, respondents.
RESOLUTION

DALISAY,

Judge of the Regional Trial Court of Manila for investigation,

July 31, 1987
CRUZ, complainant, report and recommendation.
Prior to the termination of the proceedings, however, complainant

Deputy

Sheriff,

RTC, executed an affidavit of desistance stating that he is no longer

interested in prosecuting the case against respondent Dalisay and
that it was just a "misunderstanding" between them. Upon
respondent's motion, the Executive Judge issued an order dated

May 29, 1986 recommending the dismissal of the case.

FERNAN, J.:
In a sworn complaint dated July 23, 1984, Adelio C. Cruz charged It has been held that the desistance of complainant does not
Quiterio L. Dalisay, Senior Deputy Sheriff of Manila, with preclude the taking of disciplinary action against respondent.

Neither does it dissuade the Court from imposing the appropriate of Administrative Circular No. 12 which restrains a sheriff from
corrective sanction. One who holds a public position, especially enforcing a court writ outside his territorial jurisdiction without
an office directly connected with the administration of justice and first notifying in writing and seeking the assistance of the sheriff
the execution of judgments, must at all times be free from the of the place where execution shall take place.
ACCORDINGLY, we find Respondent Deputy Sheriff Quiterio L.
appearance of impropriety.1

We hold that respondent's actuation in enforcing a judgment Dalisay NEGLIGENT in the enforcement of the writ of execution in
against complainant who is not the judgment debtor in the case NLRC Case-No. 8-12389-91, and a fine equivalent to three [3]
calls for disciplinary action. Considering the ministerial nature of months salary is hereby imposed with a stern warning that the
his duty in enforcing writs of execution, what is incumbent upon commission of the same or similar offense in the future will merit
him is to ensure that only that portion of a decision ordained or a heavier penalty. Let a copy of this Resolution be filed in the
decreed in the dispositive part should be the subject of personal record of the respondent.
execution.2 No more, no less. That the title of the case specifically SO ORDERED.
names complainant as one of the respondents is of no moment as G.R. No. L-67626 April 18, 1989
REMO,
execution must conform to that directed in the dispositive portion JOSE

JR., petitioner,

vs.
and not in the title of the case.
The tenor of the NLRC judgment and the implementing writ is THE HON. INTERMEDIATE APPELLATE COURT and E.B.
clear enough. It directed Qualitrans Limousine Service, Inc. to MARCHA TRANSPORT COMPANY, INC., represented by
reinstate the discharged employees and pay them full backwages. APIFANIO B. MARCHA, respondents.
Respondent, however, chose to "pierce the veil of corporate entity" Orbos, Cabusora, Dumlao & Sta. Ana for petitioner.
usurping a power belonging to the court and assumed
improvidently that since the complainant is the owner/president GANCAYCO, J.:
of Qualitrans Limousine Service, Inc., they are one and the same. A corporation is an entity separate and distinct from its
It is a well-settled doctrine both in law and in equity that as a stockholders. While not in fact and in reality a person, the law
legal entity, a corporation has a personality distinct and separate treats a corporation as though it were a person by process of

from its individual stockholders or members. The mere fact that fiction or by regarding it as an artificial person distinct and
one is president of a corporation does not render the property he separate from its individual stockholders. 1
owns or possesses the property of the corporation, since the However, the corporate fiction or the notion of legal entity may be

president, as individual, and the corporation are separate disregarded when it "is used to defeat public convenience, justify
wrong, protect fraud, or defend crime" in which instances "the law
entities.3
Anent the charge that respondent exceeded his territorial will regard the corporation as an association of persons, or in
jurisdiction, suffice it to say that the writ of execution sought to case of two corporations, will merge them into one." The corporate
be implemented was dated July 9, 1984, or prior to the issuance fiction may also be disregarded when it is the "mere alter ego or

business conduit of a person." 2 There are many occasions when The obligation is further secured by a promissory note executed
this Court pierced the corporate veil because of its use to protect by Coprada in favor of Akron. It is stated in the promissory note
fraud and to justify wrong. 3 The herein petition for review of a. that the balance shall be paid from the proceeds of a loan
resolution of the Intermediate Appellate Court dated February 8, obtained from the Development Bank of the Philippines (DBP)

1984 seeking the reversal thereof and the reinstatement of its within sixty (60) days. 8 After the lapse of 90 days, private
earlier decision dated June 30, 1983 in AC-G.R. No. 68496- respondent tried to collect from Coprada but the latter promised
to pay only upon the release of the DBP loan. Private respondent
R 4 calls for the application of the foregoing principles.
In the latter part of December, 1977 the board of directors of sent Coprada a letter of demand dated May 10, 1978. 9 In his
Akron Customs Brokerage Corporation (hereinafter referred to as reply to the said letter, Coprada reiterated that he was applying
Akron), composed of petitioner Jose Remo, Jr., Ernesto Baares, for a loan from the DBP from the proceeds of which payment of
Feliciano Coprada, Jemina Coprada, and Dario Punzalan with the obligation shall be made. 10

Lucia Lacaste as Secretary, adopted a resolution authorizing the Meanwhile, two of the trucks were sold under a pacto de retro sale
purchase of thirteen (13) trucks for use in its business to be paid to a certain Mr. Bais of the Perpetual Loans and Savings Bank at
out of a loan the corporation may secure from any lending Baclaran. The sale was authorized by a board resolution made in
institution. 5
Feliciano Coprada,

a meeting held on March 15, 1978. 11

and Chairman of Akron, Upon inquiry, private respondent found that no loan application
purchased thirteen trucks from private respondent on January was ever filed by Akron with DBP. 12
as President

25, 1978 for and in consideration of P525,000.00 as evidenced by In the meantime, Akron paid rentals of P500.00 a day pursuant

a deed of absolute sale. 6 In a side agreement of the same date, to a subsequent agreement, from April 27, 1978 (the end of the
the parties agreed on a downpayment in the amount of 90-day period to pay the balance) to May 31, 1978. Thereafter, no
P50,000.00 and that the balance of P475,000.00 shall be paid more rental payments were made.
within sixty (60) days from the date of the execution of the On June 17, 1978, Coprada wrote private respondent begging for
agreement. The parties also agreed that until said balance is fully a grace period of until the end of the month to pay the balance of
paid, the down payment of P50,000.00 shall accrue as rentals of the purchase price; that he will update the rentals within the

the 13 trucks; and that if Akron fails to pay the balance within week; and in case he fails, then he will return the 13 units should
the period of 60 days, then the balance shall constitute as a private respondent elect to get back the same. 13 Private
chattel mortgage lien covering said cargo trucks and the parties respondent, through counsel, wrote Akron on August 1, 1978
may allow an extension of 30 days and thereafter private demanding the return of the 13 trucks and the payment of
respondent may ask for a revocation of the contract and the P25,000.00 back rentals covering the period from June 1 to
August 1, 1978. 14
reconveyance of all said trucks. 7
Again, Coprada wrote private respondent on August 8, 1978
asking for another grace period of up to August 31, 1978 to pay

the balance, stating as well that he is expecting the approval of

the filing of the complaint until the full amount is

his loan application from a certain financing company, and that

paid;
b rentals of Bagbag property at P1,000.00 a

ten (10) trucks have been returned to Bagbag, Novaliches. 15 On

December 9, 1978, Coprada informed private respondent anew

month from August 1978 until the premises is

cleared of the said trucks;

c attorneys fees of P10,000.00, and
resolution was passed by the board of directors confirming the
d costs of suit.
deed of assignment to private respondent of P475,000 from the
The P50,000.00 given as down payment shall pertain as rentals of
proceeds of a loan obtained by Akron from the State Investment
the trucks from June 1 to August 1, 1978 which is P25,000.00
House, Inc. 16
(see demand letter of Atty. Aniano Exhibit "T") and the remaining
In due time, private respondent filed a compliant for the recovery
P25,000.00 shall be from August 1, 1978 until the trucks are
of P525,000.00 or the return of the 13 trucks with damages
removed totally from the place." 17
against Akron and its officers and directors, Feliciano Coprada,
A motion for new trial filed by petitioner was denied so he
Dario D. Punzalan, Jemina Coprada, Lucia Lacaste, Wilfredo
appealed to the then Intermediate Appellate Court (IAC) wherein
Layug, Arcadio de la Cruz, Francisco Clave, Vicente Martinez,
in due course a decision was rendered on June 30, 1 983 setting
Pacifico Dollario and petitioner with the then Court of First
aside the said decision as far as petitioner is concemed. However,
Instance of Rizal. Only petitioner answered the complaint denying
upon a motion for reconsideration filed by private respondent
any participation in the transaction and alleging that Akron has a
dent, the IAC, in a resolution dated February 8,1984, set aside
distinct corporate personality. He was, however, declared in
the decision dated June 30, 1983. The appellate court entered
default for his failure to attend the pre-trial.
another decision affirming the appealed decision of the trial
In the meanwhile, petitioner sold all his shares in Akron to
court, with costs against petitioner.
Coprada. It also appears that Akron amended its articles of
Hence, this petition for review wherein petitioner raises the
incorporation thereby changing its name to Akron Transport
following issues:
International, Inc. which assumed the liability of Akron to private
I. The Intermediate Appellate Court (IAC) erred in
respondent.
disregarding the corporate fiction and in holding the
After an ex parte reception of the evidence of the private
petitioner personally liable for the obligation of the
respondent, a decision was rendered on October 28, 1980, the
Corporation which decision is patently contrary to
dispositive part of which reads as follows:
law and the applicable decision thereon.
Finding the evidence sufficient to prove the case of the plaintiff,
II. The Intermediate Appellate Court (IAC) committed
judgment is hereby rendered in favor of the plaintiff and against
grave error of law in its decision by sanctioning the
the defendants, ordering them jointly and severally to pay;
merger of the personality of the corporation with
a the purchase price of the trucks in the amount
that he had returned ten (10) trucks to Bagbag and that a

of P525,000.00 with ... legal rate (of interest) from

that of the petitioner when the latter was held liable stipulated that in case of default in payment to private
for the corporate debts. 18

respondent of the balance of the consideration, a chattel mortgage

We reverse.
lien shag be constituted on the 13 units. Nevertheless, said
The environmental facts of this case show that there is no cogent mortgage is a prior lien as against the pacto de retro sale of the 2
basis to pierce the corporate veil of Akron and hold petitioner units.
personally liable for its obligation to private respondent. While it As to the amendment of the articles of incorporation of Akron
is true that in December, 1977 petitioner was still a member of thereby changing its name to Akron Transport International, Inc.,
the board of directors of Akron and that he participated in the petitioner alleges that the change of corporate name was in order
adoption of a resolution authorizing the purchase of 13 trucks for to include trucking and container yard operations in its customs
the use in the brokerage business of Akron to be paid out of a brokerage of which private respondent was duly informed in a
loan to be secured from a lending institution, it does not appear letter. 19Indeed, the new corporation confirmed and assumed the
that said resolution was intended to defraud anyone and more obligation of the old corporation. There is no indication of an
particularly private respondent. It was Coprada, President and attempt on the part of Akron to evade payment of its obligation to
Chairman of Akron, who negotiated with said respondent for the private respondent.

purchase of 13 cargo trucks on January 25, 1978. It was There is the fact that petitioner sold his shares in Akron to
Coprada who signed a promissory note to guarantee the payment Coprada during the pendency of the case. Since petitioner has no
of the unpaid balance of the purchase price out of the proceeds of personal obligation to private respondent, it is his inherent right
a loan he supposedly sought from the DBP. The word "WE' in the as a stockholder to dispose of his shares of stock anytime he so
said promissory note must refer to the corporation which Coprada desires.
represented in the execution of the note and not its stockholders Mention is also made of the alleged "dumping" of 10 units in the
or directors. Petitioner did not sign the said promissory note so he premises of private respondent at Bagbag, Novaliches which to
the mind of the Court does not prove fraud and instead appears
cannot be personally bound thereby.
Thus, if there was any fraud or misrepresentation that was foisted to be an attempt on the part of Akron to attend to its obligations
on private respondent in that there was a forthcoming loan from as regards the said trucks. Again petitioner has no part in this.
the DBP when it fact there was none, it is Coprada who should If the private respondent is the victim of fraud in this transaction,
it has not been clearly shown that petitioner had any part or
account for the same and not petitioner.
As to the sale through pacto de retro of the two units to a third participation in the perpetration of the same. Fraud must be
person by the corporation by virtue of a board resolution, established by clear and convincing evidence. If at all, the
petitioner asserts that he never signed said resolution. Be that as principal character on whom fault should be attributed is
it may, the sale is not inherently fraudulent as the 13 units were Feliciano Coprada,

the President

of Akron, whom private

sold through a deed of absolute sale to Akron so that the respondent dealt with personally all through out. Fortunately,
corporation is free to dispose of the same. Of course, it was private respondent obtained a judgment against him from the

trial court and the said judgment has long been final and shareholder of CLL was Baker & McKenzie Nominees, Ltd., a
leading solicitor firm. However, beneficially, the company was
executory.
WHEREFORE, the petition is GRANTED. The questioned equally owned by Messrs. Ramon Siy, Ricardo Lopa, Wilfrido C.
[4]
resolution of the Intermediate Appellate Court dated February Martinez, and Miguel J. Lacson. The registered office address of
CLL in Hongkong was 22/F, Princes Building, also the office
8,1984 is hereby set aside and its decision dated June 30,1983
address of Price Waterhouse & Co., a large accounting firm in
setting aside the decision of the trial court dated October 28,
Hongkong.
1980 insofar as petitioner is concemed is hereby reinstated and
The bulk of the business of the CLL was the importation of
affirmed, without costs.
molasses from the Philippines, principally from the Mar Tierra
SO ORDERED.
Corporation, and the resale thereof in the international market.
[5]
However, Mar Tierra Corporation also sold molasses to its
customers.[6] Wilfrido C. Martinez was the president of Mar Tierra
[G.R. No. 131673. September 10, 2004]
RUBEN MARTINEZ,* substituted by his heirs, MENA Corporation, while its executive vice-president was Blamar
CONSTANTINO MARTINEZ, WILFRIDO C. MARTINEZ, Gonzales. The business operations of both the CLL and Mar
EMMA M. NAVA, and EDNA M. SAKHRANI,petitioners, Tierra Corporation were run by Wilfrido Martinez and Gonzales.
About 42% of the capital stock of Mar Tierra Corporation was
vs. COURT OF APPEALS and BPI INTERNATIONAL
owned by RJL Martinez Fishing Corporation (RJL), the leading
FINANCE, respondents.
tuna fishing outfit in the Philippines. Petitioner Ruben Martinez
DECISION
was the president of RJL and a member of the board of directors
CALLEJO, SR., J.:
thereof. The majority stockholders of RJL were Ruben Martinez
Before us is a petition for review on certiorari of the and his brothers, Jose and Luis Martinez. Sixty-eight (68) percent
Decision[1] of the Court of Appeals, in CA-G.R. CV No. 43985, of the total assets of Ruben Martinez were in the RJL.
modifying the Decision[2] of the Regional Trial Court of Kalookan
In 1979, respondent BPI International Finance (then AIFL)
City, Branch 122, in Civil Case No. C-10811.
granted CLL a letter of credit in the amount of US$3,000,000.
The antecedents are as follows:
Wilfrido Martinez signed the letter agreement with the respondent
Respondent BPI International Finance[3] is a foreign for the CLL. The respondent and the CLL had made the following
corporation not doing business in the Philippines, with office arrangements:
address at the Bank of America Tower, 12 Harcourt Road, Central Cintas Largas, Ltd. will purchase molasses from the Philippines,
Hongkong. It was a deposit-taking company organized and mainly from Mar Tierra Corporation, and then sell the molasses
existing under and by virtue of the laws of Hongkong, and was to foreign countries. Both the purchase of the molasses from the
also engaged in investment banking operations therein.
Philippines and the subsequent sale thereof to foreign customers
Cintas Largas, Ltd. (CLL) was also a foreign corporation, were effected by means of Letters of Credit. A Letter of Credit
established in Hongkong, with a paid-up capital of HK$10,000. would be opened by Cintas Largas, Ltd. in favour of Mar Tierra
The registered shareholders of the CLL in Hongkong were the Corporation or any other seller in the Philippines. Upon the sale
Overseas Nominee, Ltd. and Shares Nominee, Ltd., which were of the molasses to foreign buyers, a Letter of Credit would then be
mainly nominee shareholders. In Hongkong, the nominee 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 instructions of Wilfrido C. Martinez and Blamar C. Gonzales,
principally.[7]
On January 24, 1979, the CLL opened a money market
placement with the respondent bearing MMP No. 063, with an
initial placement of US$390,000.[8] 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 Martinez. [9] 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
signatories became joint account holders of the said money
market placements.[10]
On March 25, 1980, the CLL opened a money market
placement account with the respondent bearing MMP No. 084
with an initial placement of US$68,768.60, transferred from MMP
No. 063.[11] 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 said credit facility.[14]
As of September 26, 1980, the balance of the deposit account
of the CLL with the respondent was US$1,025,052.06. [15] On the
other hand, the balance of the money placement in MMP No. 063,
as of September 25, 1980 was US$312,708.43, [16] while the
balance of the money market placement in MMP No. 084 as of
September 8, 1980 stood at US$768,258.24.[17]
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 transfer should be made by telephone call. [18]Gonzales
requested the respondent, in the same telex, to confirm its total
available account so that instructions on the transfer of the funds
to FCD SA 18402-7 could be formalized.[19]
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 MATURITY
VALUE
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
(RATE ADJ: TO 12-1/4 VALUE 7/10/80)
26/9/80 31/10/80 12-1/4 USD420,831.45 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 market placements. [21] 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 account, payee FCD SA 18402-7,
Philippine Banking Corporation, Port Area, Manila.[22] 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 Corporation, through Wells
Fargo Bank of New York, Philippine Banking Corporation Account
No. FCDU SA No. 003-019205.[23]
The respondent complied with the request of the CLL,
through Wilfrido Martinez and Gonzales, and remitted
US$340,000 as instructed.[24] 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 placements had not yet matured.
[25]
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 account
and MMP Nos. 084 and 063; [26] 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 status were
discussed.[27] The respondent pressured the CLL, Wilfrido
Martinez, and Gonzales to pay the US$340,000 it remitted to
Account No. FCD SA 18402-7.[28] 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 with a copy of the financial report prepared by its
auditors.[29] 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 respondent US$340,000.[30]
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 of the funds erroneously paid or overpaid to said
defendants, they have failed and continue to fail to make any
restitution.[31]

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 defendants being a joint account holder.[33]
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, but was a mere employee of the latter
corporation.[36] Petitioner
Ruben
Martinez
sought
a
[37]
reconsideration of the decision of the CA, to no 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 THE EVIDENCE ON RECORD THAT PROVES THE
SAME.[38]
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., 12-1988, 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., 12-19-88, 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., 620-88, 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 established.[39]
We do not agree with the trial court and appellate court.
We note that the question of whether or not a corporation is
merely an alter ego is purely one of fact. [40] 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 the piercing of the veil of
corporate entity of the CLL. [41] The Court is not a trier of facts.
Hence, the factual findings of the trial court, as affirmed by the
appellate court, are generally conclusive upon this Court.
[42]
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 not be held liable for the obligation of the
persons composing it; and neither can its stockholders be held
liable for such obligation.[43] A corporation has a separate
personality distinct from its stockholders and from other
corporation to which it may be connected. [44] This separate and
distinct personality of a corporation is a fiction created by law for
convenience and to prevent injustice.[45]
Nevertheless, being a mere fiction of law, peculiar situations
or valid grounds can exist to warrant, albeit sparingly, the
disregard of its independent being and the piercing of the
corporate veil.[46] 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 corporation;[47] or when the corporation is used as a cloak
or cover for fraud or illegality, or to work injustice, or where
necessary to achieve equity or for the protection of the creditors.
[48]
In such cases where valid grounds exist for piercing the veil of
corporate entity, the corporation will be considered as a mere
association of persons.[49] The liability will directly attach to them.

corporation is not by itself a sufficient ground to disregard the

separate corporate personality. The substantial identity of the
incorporators of two or more corporations does not warrantly
imply that there was fraud so as to justify the piercing of the writ
of corporate fiction.[51] To disregard the said separate juridical
personality of a corporation, the wrongdoing must be proven
clearly and convincingly.[52]
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 operation.[53]
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,
[50]
do not constitute sufficient evidence that the latter corporation,
However, mere ownership by a single stockholder or by and/or the petitioner and his brothers, had complete domination
another corporation of all or nearly all of the capital stocks of a 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
creditors and third persons of their rights.[54]
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 amount.[55] 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 184027.
2. REIMBURSEMENT INSTRUCTION, AT THE SAME TIME
WELLS FARGO HK WIL REQUEST WELLS FARGO NEW YORK TO
CREDIT FCDU NO. 003-019205 FOR THE ACCT OF PHIL
BANKING CORP.[56]
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
CINTAS.[57]
The admissions made by the respondent in its complaint are
judicial admissions which cannot be contradicted unless there is
a showing that it was made through palpable mistake or that no
such admission was made.[58]
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 Lacson; t.s.n., 4-18-88, p. 7).[59]
The appellate court affirmed the ruling of the trial court
without making any specific reference to the aforequoted ruling of
the trial court.[60]
We do not agree. The judicial admissions made by Wilfrido
Martinez in his answer to the complaint are not binding on the
petitioner.[61] 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 Account Number:
MMP-063
Mr. Wilfrido C. Martinez
and/or Mr. Miguel J. Lacson
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]
The respondent failed to adduce any evidence, testimonial or
documentary, including the relevant laws [63] 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 reimbursement
therefrom.[64]
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
Funds In
Funds Out
Remarks
Date
28/11/8
0
29/12/8
0
21/01/8
1
21/01/8
1

6,664.95
4,779.66

Interests
earned
""

4,024.83

""

13/02/8
1
"

2,321.99

119,478.51

100,015.00

Purchase
HK$632,041.3
3
@5.29
&
transferred to
its
statement
A/C
Interests
earned
Transfer
to
Cintas Largas

17/02/8
1
18/03/8
1

A/C
Receivable.
Interests
earned
""

55.07
1,317.27
100,000.00

5,713.74

____________
US$443,975.8
5
===========

____________
US$443,975.85[65]
============

MMP 084
Statement of Accounts (Deposit)
Value Date
Funds In
Funds Out
28/11/8
0
01/12/8
0
04/12/8
0
"

09/12/8

Purchase
HK$525,000.0
0
@5.25
cheque
made
payable
to
Grand
Solid
Enterprises
Co., Ltd.
Transfer to A/C
Receivable
(MMP-063)

16,374.36

Remarks

0
"

18/12/8
0

1,545.42

02/03/8
1
"

4,608.27

321.91

213.40

488.16

Interests
earned
""

1,089.06

""

09/03/8
1
"

Transfer
to A/C of
Cintas
Largas
Interests

20/03/8
1
"

US$250,000.00

1,290.56

200,000.00

200,000.00

20,470.74

60,000.00

45,286.26

earned
Transfer
to Cintas
Largas
A/R.
Interests
earned
T/T
to
Chase
Manhatta
n NY for
Credit
A/C
Allied
Capital
F/O
Frank
Chan
B/O
Grand
Solid.
Interests
earned
Transfer
to A/C of
Grand
Solid
Interests
earned
Transfer
to A/C of
Trinisia
Ltd.
Interests
earned
T/T
to

"

2,028.02

"

30.00

Nitto
Trading &
Josho
Ind. Co.,
Ltd.,
Japan.
Transfer
to
A/C
Receivabl
e (MMP084)
Cable
Charges

26/11
/80
"

3,264.34

21/01
/81
"

1,299.80

02/03
/81
"

2,445.49

Interests
earned
""

02/04
/81

143,000.0
0

Transfer
to
A/C
of
Grand Solid
Interests
earned
Purchase
HK$1,789,20
0.00 @5.112,
Cheque
made

10/04
/81
"

456.81

13/04

US$ 40.89

____________
_____________
US$777,815.0 US$777,815.02[6
6]
2
===========
============
CINTAS LARGAS
Statement of Accounts (Deposit)
Value
Funds In
Funds Out
Remarks
Date
31/10
/80
17/11
/80
"

09/11
/80
"

5,011.99
8,067.70
350,000.00

3,062.23
350,000.00

300,000.00

81,415.00

129,529.26

50,000.00

payable
to
Grand Solid.
Interests
earned
Purchase
HK$1,535,10
0.00 @5.117,
Cheque
made
payable
to
Grand Solid
Interests
earned
Remittance
from C. Itoh
& Co., NY
Interests
earned
Transfer
to
Grand Solids
A/C
Receivable
Transfer from
CLs
Statement
A/C
Interests
earned
Purchase
HK$267,150.
00 @5.343,
Cheque
made
payable
to
Grand Solid.
Interests

/81
21/04
/81
"

28/04
/81
"

earned
""

311.66
US$ 50,000.00

132.04
40,000.00

"

52,692.00

19/05
/81

178,465.1
8

22/05
/81

46,472.00

26/05
/81
04/06
/81
"

28.40
1,242.80
50,000.00

Purchase
HK$268,850.
00 @5.377,
cheque made
payable
to
Grand Solid.
Interests
earned
Purchase
HK$214,480.
00 @5.362,
cheque made
payable
to
Grand Solid.
Remittance
from Dai Ichi
Kangyo Bank
NY.
REF.
KOMEIMARU
Transfer from
CLs
A/C
Receivable
Remittance
from C. Itoh
& Co., NY
Re.
Pacific
Geory.
Interests
earned
""
Purchase
HK$275,750.

11/06
/81
"

2,252.36
66,400.00

"
"

25/06
/81
"

"

15.00
31.65

1,192.24
60,000.00

22,656.88

00 @5.515,
Cheque
made
payable
to
Grand Solid
Interests
earned
T/T
to
Security
Pacific Natl
Bank LA for
A/C
of
Twentieth
Century Fox
Intl Corp.
Cable Charge
Purchase
HK$175.00
@5.53
for
payment
of
Business
Registration
Fee.
Interests
earned
Purchase
HK$331,500.
00 @5.525,
cheque made
payable
to
Grand Solid.
T/T to Daiwa
Bank,
Los
Angeles
for
A/C of OAC
Equipment

"

45,800.00

"
03/07
/81
"

15.00

"
06/07
/81
07/07
/81
"

"
15/09
/81
"

165.47

11,870.00

17.60

15.00

14.83
16,000.00

US$ 482.29

15.00

US$ 1,250.00

Corp.
T/T to Josho
Ind. Co. Ltd.,
Japan
Cable Charge
Interests
earned
T/T to Bank
of
Tokyo,
Kobe Branch
for A/C of
Furuno
Electric Co.
Ref.:
Mar
Tierra
Takashiro
Maru,
Eatelite Nav.
and Radar.
Cable Charge
Interests
earned
""
T/T to Dai
Ichi Kangyo
Bank,
Shimizu
Branch
for
A/C
of
Takashiro
Maru.
Cable Charge
Interests
earned
Reimbursem

17/09
/81
"

11.91

08/01
/82

70,360.00

19/01
/82
"

268.74

237.43

3,064.81

"

50,000.00

"

5,952.38

TOTAL
:

_____________
US$1,756,38
7.32
-

_____________
US$1,732,103.
25
24,284.07

ent
of
expenses
paid to Price
Waterhouse
& Co.
Interests
earned
Purchase
HK$1,421.50
for
cheque
payment to
Price
Waterhouse
& Co.
Remittance
from C. Itoh
& Co., NY
Interests
earned
Transfer
to
CLs Margin
A/C
Purchase
HK$295,100.
00,
cheque
made
payable
to
Grand Solid.
Transfer
to
A/C
of
Trinisia Ltd.

Outstanding
deposits

_____________
_____________
US$1,756,38
US$1,756,387.
7.32
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.

one entity only. A suit by the employees against one corporation

should be deemed as a suit against the other. Also, the rights and
claims of workers should not be prejudiced by the acts of the
employer that tend to confuse them about its corporate identity.
The corporate fiction must yield to truth and justice.
The Case
Before us is a Petition for Review [1] under Rule 45 of the Rules
of Court, seeking to annul the January 31, 2003 Decision [2] and
the June 17, 2003 Resolution[3] of the Court of Appeals (CA) in
CA-GR SP No. 62813. The assailed Decision disposed as follows:
WHEREFORE, in view of the foregoing, the petition is GRANTED.
The assailed decision of public respondent NLRC dated 19 July

[G.R. No. 159121. February 3, 2005]

2000

[is] REVERSED and SET

ASIDE and

new

one

PAMPLONA PLANTATION COMPANY, INC. and/or JOSE LUIS enteredDIRECTING private respondents to reinstate petitioners,
BONDOC, petitioners,
vs.
RODEL
TINGHIL, except Rufino Bacubac, Felix Torres and Antonio Canolas, to their
MARYGLENN SABIHON, ESTANISLAO BOBON, CARLITO
TINGHIL, BONIFACIO TINGHIL, NOLI TINGHIL, EDGAR
TINGHIL,

ERNESTO

ESTOMANTE,

SALLY

TOROY,

BENIGNO TINGHIL JR., ROSE ANN NAPAO, DIOSDADO

former positions without loss of seniority rights plus payment of

full backwages. However, if reinstatement is no longer feasible, a
one-month salary for every year of service shall be paid the
petitioners as ordered by the Labor Arbiter in his decision dated

31 August 1998 plus payment of full backwages computed from

TINGHIL, ALBERTO TINGHIL, ANALIE TINGHIL, and date of illegal dismissal to the finality of this decision.[4]
ANTONIO ESTOMANTE, respondents.
The Decision[5] of the National Labor Relations Commission
DECISION

(NLRC),[6] reversed by the CA, disposed as follows:

PANGANIBAN, J.:

WHEREFORE, premises considered, the decision appealed from is

hereby REVERSED, and another one entered DISMISSING the

To protect the rights of labor, two corporations with identical complaint.[7]

directors, management, office and payroll should be treated as

The June 17, 2003 Resolution denied petitioners Motion for VII, Dumaguete City against [petitioners] for unfair labor practice,
Reconsideration.

illegal dismissal, underpayment, overtime pay, premium pay for

rest day and holidays, service incentive leave pay, damages,

The Facts

attorneys fees and 13th month pay.

On 09 October 1997, [respondent] Carlito Tinghil amended his

The CA summarized the antecedents as follows:

complaint to implead Pamplona Plantation Leisure Corporation x

x x.
Sometime in 1993, [Petitioner] Pamplona Plantations Company, On 31 August 1998, Labor Arbiter Jose G. Gutierrez rendered a
Inc. (company for brevity) was organized for the purpose of taking decision finding [respondents], except Rufino Bacubac, Antonio
over the operations of the coconut and sugar plantation of Caolas and Felix Torres who were complainants in another case,
Hacienda Pamplona located in Pamplona, Negros Oriental. It to be entitled to separation pay.
appears that Hacienda Pamplona was formerly owned by a certain

xxxxxxxxx
[Petitioners] appealed the Labor Arbiters decision to [the] NLRC.

Mr. Bower who had in his employ several agricultural workers.

When the company took over the operation of Hacienda Pamplona In the assailed decision dated 19 July 2000, the NLRCs Fourth
in 1993, it did not absorb all the workers of Hacienda Pamplona. Division reversed the Labor Arbiter, ruling that [respondents],
Some, however, were hired by the company during harvest season except Carlito Tinghil, failed to implead Pamplona Plantation
as coconut hookers or sakador, coconut filers, coconut haulers, Leisure Corporation, an indispensable party and that there exist
coconut scoopers or lugiteros, and charcoal makers.
no employer-employee relation between the parties.
Sometime in 1995, Pamplona Plantation Leisure Corporation was
xxxxxxxxx
[Respondents]
filed
a motion for reconsideration which was denied
established for the purpose of engaging in the business of
[8]
operating tourist resorts, hotels, and inns, with complementary by [the] NLRC in a Resolution dated 06 December 2000.
facilities, such as restaurants, bars, boutiques, service shops,
entertainment, golf courses, tennis courts, and other land and
aquatic sports and leisure facilities.
On 15 December 1996, the Pamplona

Plantation

Respondents elevated the case to the CA via a Petition for

Certiorari under Rule 65 of the Rules of Court.

Labor

Independent Union (PAPLIU) conducted an organizational meeting Ruling of the Court of Appeals
wherein several [respondents] who are either union members or

Guided by the fourfold test for determining the existence of an

officers participated in said meeting.
Upon learning that some of the [respondents] attended the said employer-employee relationship, the CA held that respondents
meeting, [Petitioner] Jose Luis Bondoc, manager of the company, were employees of petitioner-company. Finding there was a power

to hire, the appellate court considered the admission of

did not allow [respondents] to work anymore in the plantation.
Thereafter, on various dates, [respondents] filed their respective petitioners in their Comment that they had hired respondents as
complaints with the NLRC, Sub-Regional Arbitration Branch No. coconut filers, coconut scoopers, charcoal makers, or as

pieceworkers. The fact that respondents were paid by piecework

abuse of discretion in ordering reinstatement or payment of

did not mean that they were not employees of the company.

separation

Further, the CA ruled that petitioners necessarily exercised

considering the lack of employer-employee relationship

control over the work they performed, since the latter were

between petitioner and respondents.[10]

working within the premises of the plantation. According to the

pay

and

backwages

to

the

respondents,

The main issue raised is whether the case should be

CA, the mere existence -- not necessarily the actual exercise -- of

the right to control the manner of doing work sufficed to meet the dismissed for the non-joinder of the Pamplona Plantation Leisure
Corporation. The other issues will be taken up in the discussion
fourth element of an employer-employee relation.
The appellate court also held that respondents were regular of the main question.

employees, because the tasks they performed were necessary and

indispensable to the operation of the company. Since there was The Courts Ruling
no compliance with the twin requirements of a valid and/or

The Petition lacks merit.

authorized cause and of procedural due process, their dismissal

was illegal.
Hence, this Petition.[9]

Preliminary Issue:
Factual Matters

Issues

Section 1 of Rule 45 of the Rules of Court states that only

In their Memorandum, petitioners submit the following issues questions of law are entertained in appeals by certiorari to the
Supreme Court. However, jurisprudence has recognized several
for our consideration:
exceptions in which factual issues may be resolved by this Court:
1. Whether or not the finding of the Court of Appeals that

[11]

(1) the legal conclusions made by the lower tribunal are

herein respondents are employees of Petitioner Pamplona speculative;[12] (2) its inferences are manifestly mistaken,
Plantation Company, Inc. is contrary to the admissions of [13] absurd, or impossible; (3) the lower court committed grave abuse
of discretion; (4) the judgment is based on a misapprehension of
the respondents themselves.
2. Whether or not the Court of Appeals has decided in a way facts;[14] (5) the findings of fact of the lower tribunals are conflicting;
not in accord with law and jurisprudence, and with grave [15] (6) the CA went beyond the issues; (7) the CAs findings are
abuse of discretion, in not dismissing the respondents contrary to the admissions of the parties;[16] (8) the CA manifestly
complaint for failure to implead Pamplona Plantation overlooked facts not disputed which, if considered, would justify a
Leisure Corp., which is an indispensable party to this different conclusion; (9) the findings of fact are conclusions without
case.
citation of the specific evidence on which they are based; and (10)
3. Whether or not the Court of Appeals has decided in a way when the findings of fact of the CA are premised on the absence of
not in accord with law and jurisprudence, and with grave

evidence but such findings are contradicted by the evidence on which the laborers deal with regarding their work. [20] A portion of
record.[17]
the plantation (also called Hacienda Pamplona) had actually been
The very same reason that constrained the appellate court to converted into a golf course and other recreational facilities. The
review the factual findings of the NLRC impels this Court to take weekly payrolls issued by petitioner-company bore the name
its own look at the facts. Normally, the Supreme Court is not a Pamplona Plantation Co., Inc.[21] It is also a fact that respondents
trier of facts.[18] However, since the findings of the CA and the all received their pay from the same person, Petitioner Bondoc -NLRC on this point were conflicting, we waded through the the managing director of the company. Since the workers were
records to find out if there was basis for the formers reversal of working for a firm known as Pamplona Plantation Co., Inc., the
the NLRCs Decision. We shall discuss our factual findings reason they sued their employer through that name was natural
together with our review of the main issue.

and understandable.
True, the Petitioner Pamplona Plantation Co., Inc., and the

Main Issue:
Piercing the Corporate Veil

Pamplona Plantation Leisure Corporation appear to be separate

corporate entities. But it is settled that this fiction of law cannot

be invoked to further an end subversive of justice.[22]

Petitioners contend that the CA should have dismissed the
The principle requiring the piercing of the corporate veil
case for the failure of respondents (except Carlito Tinghil) to mandates courts to see through the protective shroud that
implead

an distinguishes one corporation from a seemingly separate one.

indispensable party, for being the true and real employer. [23]The corporate mask may be removed and the corporate veil
Allegedly, respondents admitted in their Affidavits dated February pierced when a corporation is the mere alter ego of another.
3,

the

Pamplona

1998,[19] that

they

Plantation

had

been

Leisure

employed

Corporation,

by

the

leisure

Where badges of fraud exist, where public convenience is

corporation and/or engaged to perform activities that pertained to defeated, where a wrong is sought to be justified thereby, or where
its business.
a separate corporate identity is used to evade financial obligations
Further, as the NLRC allegedly noted in their individual to employees or to third parties, [25] the notion of separate legal
[24]

Complaints, respondents specifically averred that they had entity should be set aside[26] and the factual truth upheld. When
worked in the golf course and performed related jobs in the that happens, the corporate character is not necessarily
recreational facilities of the leisure corporation. Hence, petitioners abrogated.[27] It continues for other legitimate objectives. However,
claim that, as a sugar and coconut plantation company separate it may be pierced in any of the instances cited in order to promote
and distinct from the Pamplona Plantation Leisure Corporation, substantial justice.

the petitioner-company is not the real party in interest.

In the present case, the corporations have basically the same
We are not persuaded.
incorporators and directors and are headed by the same official.
An examination of the facts reveals that, for both the coconut
Both use only one office and one payroll and are under one
plantation and the golf course, there is only one management
management. In their individual Affidavits, respondents allege

that they worked under the supervision and control of Petitioner distinct corporations. Except for Carlito Tinghil the complainants
Bondoc -- the common managing director of both the petitioner- have the wrong party respondent. Pamplona Leisure Corporation
company and the leisure corporation. Some of the laborers of the is an indispensable party without which there could be no final
plantation also work in the golf course. [28] Thus, the attempt to determination of the case.[32]
make

the

two

corporations

appear

as

two

separate

entities, insofar as the workers are concerned, should be viewed as

Indeed, it was only after this NLRC Decision was issued that

a devious but obvious means to defeat the ends of the law. Such a the petitioners harped on the separate personality of the
ploy should not be permitted to cloud the truth and perpetrate an Pamplona Plantation Co., Inc., vis--vis the Pamplona Plantation
Leisure Corporation.
injustice.
As cited above, the NLRC dismissed the Complaints because
We note that this defense of separate corporate identity was
not raised during the proceedings before the labor arbiter. The of the alleged admission of respondents in their Affidavits that
main argument therein raised by petitioners was their alleged they had been working at the golf course. However, it failed to
lack of employer-employee relationship with, and power of control appreciate the rest of their averments. Just because they worked
over, the means and methods of work of respondents because of at the golf course did not necessarily mean that they were not
employed to do other tasks, especially since the golf course was
the seasonal nature of the latters work.[29]

Neither was the issue of non-joinder of indispensable parties merely a portion of the coconut plantation. Even petitioners
raised in petitioners appeal before the NLRC. [30] Nevertheless, in admitted that respondents had been hired as coconut filers,
[33]
its Decision[31] dated July 19, 2000, the Commission concluded coconut scoopers or charcoal makers. Consequently, NLRCs
that the plantation company and the leisure corporation were two conclusion derived from the Affidavits of respondents stating that

separate and distinct corporations, and that the latter was an they were employees of the Pamplona Plantation Leisure
indispensable party that should have been impleaded. We quote Corporation alone was the result of an improper selective
appreciation of the entire evidence.
Furthermore, we note that, contrary to the NLRCs findings,

below pertinent portions of that Decision:

Respondent posits that it is engaged in operating and maintaining some

respondents

indicated

that

their

employer

was

the

sugar and coconut plantation. The positions of complainants Pamplona Plantation Leisure Corporation, while others said that
could only be determined through their individual complaints. Yet it was the Pamplona Plantation Co., Inc. But in all these
all complainants alleged in their affidavits x x x that they were Affidavits, both the leisure corporation and petitioner-company
working at the golf course. Worthy to note that only Carlito were

identified

or

described

as

entities

engaged

in

the

Tinghil amended his complaint to include Pamplona Leisure development and operation of sugar and coconut plantations, as
Corporation,

which

respondents

maintain

is

separate well as recreational facilities such as a golf course. These

corporation established in 1995. Thus, xxx Pamplona Plantation allegations reveal that petitioner successfully confused the
Co., Inc. and Pamplona Leisure Corporation are two separate and workers as to who their true and real employer was. All things

considered, their faulty belief that the plantation company and There is nothing sacred about processes or pleadings, their forms
the leisure corporation were one and the same can be attributed or contents. Their sole purpose is to facilitate the application of
solely to petitioners. It would certainly be unjust to prejudice the justice to the rival claims of contending parties. They were
claims of the workers because of the misleading actions of their created, not to hinder and delay, but to facilitate and promote, the
employer.

administration of justice. They do not constitute the thing itself,

which courts are always striving to secure to litigants. They are

Non-Joinder of Parties

designed as the means best adapted to obtain that thing. In other

words, they are a means to an end. When they lose the character
Granting for the sake of argument that the Pamplona of the one and become the other, the administration of justice is
Plantation Leisure Corporation is an indispensable party that at fault and courts are correspondingly remiss in the performance

should be impleaded, NLRCs outright dismissal of the Complaints of their obvious duty.
was still erroneous.
The non-joinder of indispensable parties is not a ground for
The controlling principle in the interpretation of procedural
[34]
the dismissal of an action. At any stage of a judicial proceeding rules is liberality, so that they may promote their object and
and/or at such times as are just, parties may be added on the assist the parties in obtaining just, speedy and inexpensive

motion of a party or on the initiative of the tribunal concerned. determination of every action and proceeding. [39] When the rules
[35]
If the plaintiff refuses to implead an indispensable party are applied to labor cases, this liberal interpretation must be
despite the order of the court, that court may dismiss the upheld with even greater vigor. [40] Without in any way depriving
complaint for the plaintiffs failure to comply with the order. The the employer of its legal rights, the thrust of statutes and rules
remedy is to implead the non-party claimed to be indispensable. governing labor cases has been to benefit workers and avoid
[36]
In this case, the NLRC did not require respondents to implead subjecting them to great delays and hardships. This intent holds
the Pamplona Plantation Leisure Corporation as respondent; especially in this case, in which the plaintiffs are poor laborers.
instead, the Commission summarily dismissed the Complaints.
In any event, there is no need to implead the leisure Employer-Employee Relationship
corporation because, insofar as respondents are concerned, the
leisure corporation and petitioner-company are one and the same
entity. Salvador v. Court of Appeals

Petitioners insist that respondents are not their employees,

has held that this Court has because the former exercised no control over the latters work
full powers, apart from that power and authority which is hours and method of performing tasks. Thus, petitioners contend
[37]

inherent, to amend the processes, pleadings, proceedings and that under the control test, the workers were independent
decisions by substituting as party-plaintiff the real party-in- contractors.
We disagree. As shown by the evidence on record, petitioners
interest.
[38]
In Alonso v. Villamor, we had the occasion to state thus:
hired respondents, who performed tasks assigned by their

respective officers-in-charge, who in turn were all under the

SO ORDERED.

direct supervision and control of Petitioner Bondoc. These

allegations are contained in the workers Affidavits, which were [G.R. No. 155173. November 23, 2004]
never disputed by petitioners. Also uncontroverted are the

payrolls bearing the name of the plantation company and signed LAFARGE CEMENT PHILIPPINES, INC., (formerly Lafarge
by Petitioner Bondoc. Some of these payrolls include the time

Philippines,

records of the employees. These documents prove that petitioner-

CORPORATION,

company exercised control and supervision over them.

To operate against the employer, the power of control need not

CORPORATION and PHILIP ROSEBERG, petitioners, vs.

have been actually exercised. Proof of the existence of such power

is enough.[41] Certainly, petitioners wielded that power to hire or
dismiss, as well as to check on the progress and the quality of
work of the laborers.
Jurisprudence
considerations

[42]

provides

other

equally

important

that support the conclusion that respondents

were not independent contractors. First, they cannot be said to

have carried on an independent business or occupation. [43] They
are not engaged in the business of filing, scooping and hauling
coconuts and/or operating and maintaining a plantation and a

Inc.),

LUZON

CONTINENTAL

CONTINENTAL

LAND

OPERATING

CONTINENTAL CEMENT CORPORATION, GREGORY T.

LIM and ANTHONY A. MARIANO, respondents.
DECISION
PANGANIBAN, J.:
May defendants in civil cases implead in their counterclaims
persons who were not parties to the original complaints? This is
the main question to be answered in this controversy.

golf course. Second, they do not have substantial capital or The Case
investment in the form of tools, equipment, machinery, work
premises, and other implements needed to perform the job, work

Before us is a Petition for Review [1] under Rule 45 of the Rules

or service under their own account or responsibility. [44] Third, they of Court, seeking to nullify the May 22, 2002 [2] and the September
have been working exclusively for petitioners for several 3, 2002 Orders[3] of the Regional Trial Court (RTC) of Quezon City
years. Fourth, there is no dispute that petitioners are in the (Branch 80) in Civil Case No. Q-00-41103. The decretal portion of
business of growing coconut trees for commercial purposes. There the first assailed Order reads:
is no question, either, that a portion of the plantation was
converted into a golf course and other recreational facilities. WHEREFORE, in the light of the foregoing as earlier stated, the
Clearly, respondents performed usual, regular and necessary plaintiffs motion to dismiss claims is granted. Accordingly, the
defendants claims against Mr. Lim and Mr. Mariano captioned as
services for petitioners business.
WHEREFORE, the Petition is DENIED, and the assailed their counterclaims are dismissed.[4]
Decision AFFIRMED. Costs against the petitioners.

The second challenged Order denied petitioners Motion for a Complaint with Application for Preliminary Attachment against
Reconsideration.

petitioners.

Docketed

as

Civil

Case

No.

Q-00-41103,

the

Complaint prayed, among others, that petitioners be directed to

The Facts

pay the APT Retained Amount referred to in Clause 2 (c) of the

SPA.
Briefly, the origins of the present controversy can be traced to
Petitioners moved to dismiss the Complaint on the ground
the Letter of Intent (LOI) executed by both parties on August 11, that it violated the prohibition on forum-shopping. Respondent
1998, whereby Petitioner Lafarge Cement Philippines, Inc. CCC had allegedly made the same claim it was raising in Civil
(Lafarge) -- on behalf of its affiliates and other qualified entities, Case No. Q-00-41103 in another action, which involved the same
including Petitioner Luzon Continental Land Corporation (LCLC) parties and which was filed earlier before the International
-- agreed to purchase the cement business of Respondent Chamber of Commerce. After the trial court denied the Motion to
Continental Cement Corporation (CCC). On October 21, 1998, Dismiss in its November 14, 2000 Order, petitioners elevated the
both parties entered into a Sale and Purchase Agreement (SPA). matter before the Court of Appeals in CA-GR SP No. 68688.
At the time of the foregoing transactions, petitioners were well

In the meantime, to avoid being in default and without

aware that CCC had a case pending with the Supreme Court. The prejudice to the outcome of their appeal, petitioners filed their
case was docketed as GR No. 119712, entitled Asset Privatization Answer and Compulsory Counterclaims ad Cautelam before the
Trust

(APT)

v.

Court

of

Appeals

and

Continental

Cement trial court in Civil Case No. Q-00-41103. In their Answer, they

denied the allegations in the Complaint. They prayed -- by way of

Corporation.
In anticipation of the liability that the High Tribunal might compulsory counterclaims against Respondent CCC, its majority
adjudge against CCC, the parties, under Clause 2 (c) of the SPA, stockholder and president Gregory T. Lim, and its corporate
allegedly agreed to retain from the purchase price a portion of the secretary Anthony A. Mariano -- for the sums of (a) P2,700,000
contract price in the amount of P117,020,846.84 -- the equivalent each as actual damages, (b) P100,000,000 each as exemplary
of US$2,799,140. This amount was to be deposited in an interest- damages, (c) P100,000,000 each as moral damages, and
bearing account in the First National City Bank of New York (d) P5,000,000 each as attorneys fees plus costs of suit.
Petitioners alleged that CCC, through Lim and Mariano, had
(Citibank) for payment to APT, the petitioner in GR No. 119712.
However, petitioners allegedly refused to apply the sum to the filed the baseless Complaint in Civil Case No. Q-00-41103 and
payment to APT, despite the subsequent finality of the Decision in procured the Writ of Attachment in bad faith. Relying on this
GR No. 119712 in favor of the latter and the repeated instructions Courts pronouncement in Sapugay v. CA,[5] petitioners prayed
of Respondent CCC. Fearful that nonpayment to APT would result that both Lim and Mariano be held jointly and solidarily liable
in the foreclosure, not just of its properties covered by the SPA with Respondent CCC.
with Lafarge but of several other properties as well, CCC filed

On behalf of Lim and Mariano who had yet to file any

before the Regional Trial Court of Quezon City on June 20, 2000, responsive

pleading,

CCC

moved

to

dismiss

petitioners

compulsory

counterclaims

on

grounds

that

essentially

constituted the very issues for resolution in the instant Petition.

[b] Whether or not the RTC gravely erred in ruling that

(i) petitioners counterclaims against Respondents
Lim and Mariano are not compulsory; (ii) Sapugay

Ruling of the Trial Court

v. Court of Appeals is inapplicable here; and (iii)

On May 22, 2002, the Regional Trial Court of Quezon City

(Branch 80) dismissed petitioners counterclaims for several
reasons, among which were the following: a) the counterclaims

petitioners violated the rule on joinder of causes of

action.[9]
For clarity and coherence, the Court will resolve the foregoing

against Respondents Lim and Mariano were not compulsory; b) in reverse order.
the ruling in Sapugay was not applicable; and c) petitioners
Answer with Counterclaims violated procedural rules on the The Courts Ruling
proper joinder of causes of action.[6]
Acting on the Motion for Reconsideration filed by petitioners,

The Petition is meritorious.

the trial court -- in an Amended Order dated September 3,

2002[7] -- admitted some errors in its May 22, 2002 Order, First Issue:
particularly in its pronouncement that their counterclaim had Counterclaims and
been pleaded against Lim and Mariano only. However, the RTC Joinder of Causes of Action.
clarified that it was dismissing the counterclaim insofar as it Petitioners Counterclaims
Compulsory
impleaded Respondents Lim and Mariano, even if it included
CCC.
Hence this Petition.[8]

Counterclaims are defined in Section 6 of Rule 6 of the Rules

of Civil Procedure as any claim which a defending party may have
against an opposing party. They are generally allowed in order to

Issues

avoid a multiplicity of suits and to facilitate the disposition of the

In their Memorandum, petitioners raise the following issues whole controversy in a single action, such that the defendants
demand may be adjudged by a counterclaim rather than by an
for our consideration:
independent suit. The only limitations to this principle are (1)
[a] Whether or not the RTC gravely erred in refusing to
that the court should have jurisdiction over the subject matter of
rule that Respondent CCC has no personality to

the counterclaim, and (2) that it could acquire jurisdiction over

move

counterclaims on Respondents Lim and Marianos

third parties whose presence is essential for its adjudication.[10]

A counterclaim may either be permissive or compulsory. It is

behalf.

permissive if it does not arise out of or is not necessarily

to

dismiss

petitioners

compulsory

connected with the subject matter of the opposing partys claim.

[11]

A permissive counterclaim is essentially an independent claim

Petitioners

base

their

counterclaim

on

the

following

that may be filed separately in another case.

allegations:
A counterclaim is compulsory when its object arises out of or
is necessarily connected with the transaction or occurrence Gregory T. Lim and Anthony A. Mariano were the persons
constituting the subject matter of the opposing partys claim and responsible for making the bad faith decisions for, and causing
does not require for its adjudication the presence of third parties plaintiff to file this baseless suit and to procure an unwarranted
writ of attachment, notwithstanding their knowledge that plaintiff
of whom the court cannot acquire jurisdiction.[12]
Unlike permissive counterclaims, compulsory counterclaims has no right to bring it or to secure the writ. In taking such bad
should be set up in the same action; otherwise, they would be faith actions, Gregory T. Lim was motivated by his personal
Namarco interests as one of the owners of plaintiff while Anthony A.
Distributors laid down the following criteria to determine Mariano was motivated by his sense of personal loyalty to Gregory
whether a counterclaim is compulsory or permissive: 1) Are T. Lim, for which reason he disregarded the fact that plaintiff is
barred

forever. NAMARCO

v.

Federation

of

United

[13]

issues of fact and law raised by the claim and by the counterclaim without any valid cause.
largely the same? 2) Would res judicata bar a subsequent suit on Consequently, both Gregory T. Lim and Anthony A. Mariano are
defendants claim, absent the compulsory counterclaim rule? 3) the plaintiffs co-joint tortfeasors in the commission of the acts
Will substantially the same evidence support or refute plaintiffs complained of in this answer and in the compulsory
claim as well as defendants counterclaim? 4) Is there any logical counterclaims pleaded below. As such they should be held jointly
relation between the claim and the counterclaim? A positive and solidarily liable as plaintiffs co-defendants to those
answer to all four questions would indicate that the counterclaim compulsory counterclaims pursuant to the Supreme Courts
decision in Sapugay v. Mobil.
is compulsory.
[14]
Adopted in Quintanilla v. CA and reiterated in Alday v. FGU x x x x x x x x x
Insurance Corporation,[15] the compelling test of compulsoriness The plaintiffs, Gregory T. Lim and Anthony A. Marianos bad faith
characterizes a counterclaim as compulsory if there should exist filing of this baseless case has compelled the defendants to
a logical relationship between the main claim and the engage the services of counsel for a fee and to incur costs of

counterclaim. There exists such a relationship when conducting litigation, in amounts to be proved at trial, but in no case less
separate trials of the respective claims of the parties would entail than P5 million for each of them and for which plaintiff Gregory T.

substantial duplication of time and effort by the parties and the Lim and Anthony A. Mariano should be held jointly and solidarily
court; when the multiple claims involve the same factual and liable.
The plaintiffs, Gregory T. Lims and Anthony A. Marianos actions
legal issues; or when the claims are offshoots of the same basic
have damaged the reputations of the defendants and they should
controversy between the parties.
We shall now examine the nature of petitioners counterclaims be held jointly and solidarily liable to them for moral damages
of P100 million each.
against respondents with the use of the foregoing parameters.

In order to serve as an example for the public good and to deter evidence that sustains petitioners counterclaim that will refute
similar baseless, bad faith litigation, the plaintiff, Gregory T. Lim private respondents own claim for damages. This is an additional
and Anthony A. Mariano should be held jointly and solidarily factor that characterizes petitioners counterclaim as compulsory.
liable to the defendants for exemplary damages of P100 million
each.

[18]

[16]

Moreover, using the compelling test of compulsoriness, we

The above allegations show that petitioners counterclaims for find that, clearly, the recovery of petitioners counterclaims is
damages were the result of respondents (Lim and Mariano) act of contingent upon the case filed by respondents; thus, conducting
filing the Complaint and securing the Writ of Attachment in bad separate trials thereon will result in a substantial duplication of
faith. Tiu Po v. Bautista[17] involved the issue of whether the the time and effort of the court and the parties.
Since the counterclaim for damages is compulsory, it must be
counterclaim that sought moral, actual and exemplary damages
and attorneys fees against respondents on account of their set up in the same action; otherwise, it would be barred forever. If
malicious and unfounded complaint was compulsory. In that it is filed concurrently with the main action but in a different

proceeding, it would be abated on the ground of litis pendentia; if

case, we held as follows:

filed subsequently, it would meet the same fate on the ground

Petitioners counterclaim for damages fulfills the necessary of res judicata.[19]

requisites of a compulsory counterclaim. They are damages
claimed to have been suffered by petitioners as a consequence of Sapugay v. Court of Appeals
the action filed against them. They have to be pleaded in the same Applicable to the Case at Bar
action; otherwise, petitioners would be precluded by the judgment
from

invoking

the

same

in

an

independent

action.

The

Sapugay v. Court of Appeals finds application in the present

pronouncement in Papa vs. Banaag (17 SCRA 1081) (1966) is in case. In Sapugay, Respondent Mobil Philippines filed before the
trial court of Pasig an action for replevin against Spouses Marino
point:
and Lina Joel Sapugay. The Complaint arose from the supposed

Compensatory, moral and exemplary damages, allegedly suffered failure of the couple to keep their end of their Dealership
by the creditor in consequence of the debtors action, are also Agreement. In their Answer with Counterclaim, petitioners alleged
compulsory counterclaim barred by the dismissal of the debtors that after incurring expenses in anticipation of the Dealership
action. They cannot be claimed in a subsequent action by the Agreement, they requested the plaintiff to allow them to get gas,
creditor against the debtor.

but that it had refused. It claimed that they still had to post a

surety bond which, initially fixed at P200,000, was later raised

Aside from the fact that petitioners counterclaim for damages to P700,000.
cannot be the subject of an independent action, it is the same

The spouses exerted all efforts to secure a bond, but the

The prerogative of bringing in new parties to the action at any

bonding companies required a copy of the Dealership Agreement, stage before judgment is intended to accord complete relief to all
which respondent continued to withhold from them. Later, of them in a single action and to avert a duplicity and even a
petitioners discovered that respondent and its manager, Ricardo multiplicity of suits thereby.
In insisting on the inapplicability of Sapugay, respondents
P. Cardenas, had intended all along to award the dealership to
argue that new parties cannot be included in a counterclaim,
Island Air Product Corporation.
In their Answer, petitioners impleaded in the counterclaim except when no complete relief can be had. They add that [i]n the
Mobil Philippines and its manager -- Ricardo P. Cardenas -- as present case, Messrs. Lim and Mariano are not necessary for
defendants. They prayed that judgment be rendered, holding both petitioners to obtain complete relief from Respondent CCC as
jointly and severally liable for pre-operation expenses, rental, plaintiff in the lower court. This is because Respondent CCC as a
storage, guarding fees, and unrealized profit including damages. corporation with a separate [legal personality] has the juridical
After both Mobil and Cardenas failed to respond to their Answer capacity to indemnify petitioners even without Messrs. Lim and
to the Counterclaim, petitioners filed a Motion to Declare Plaintiff Mariano.[21]
We disagree.
and its Manager Ricardo P. Cardenas in Default on Defendants

The

inclusion

of

corporate

officer

or

stockholder -- Cardenas in Sapugay or Lim and Mariano in the

Counterclaim.
Among the issues raised in Sapugay was whether Cardenas, instant case -- is not premised on the assumption that the
who was not a party to the original action, might nevertheless be plaintiff corporation does not have the financial ability to answer
impleaded in the counterclaim. We disposed of this issue as for damages, such that it has to share its liability with individual
follows:

defendants. Rather, such inclusion is based on the allegations of

fraud and bad faith on the part of the corporate officer or

A counterclaim is defined as any claim for money or other relief stockholder. These allegations may warrant the piercing of the veil
which a defending party may have against an opposing party. of corporate fiction, so that the said individual may not seek

However, the general rule that a defendant cannot by a refuge therein, but may be held individually and personally liable
counterclaim bring into the action any claim against persons for his or her actions.
other than the plaintiff admits of an exception under Section 14,

In Tramat Mercantile v. Court of Appeals,[22] the Court held

Rule 6 which provides that when the presence of parties other that generally, it should only be the corporation that could
than those to the original action is required for the granting of properly be held liable. However, circumstances may warrant the
complete relief in the determination of a counterclaim or cross- inclusion of the personal liability of a corporate director, trustee,
claim, the court shall order them to be brought in as defendants, or officer, if the said individual is found guilty of bad faith or
if jurisdiction over them can be obtained. The inclusion, therefore, gross negligence in directing corporate affairs.
Remo Jr. v. IAC[23] has stressed that while a corporation is an
of Cardenas in petitioners counterclaim is sanctioned by the
rules.[20]

entity separate and distinct from its stockholders, the corporate

fiction may be disregarded if used to defeat public convenience, of the court. A contrary ruling would result in mischievous
justify a wrong, protect fraud, or defend crime. In these instances, consequences whereby a party may be indiscriminately impleaded
the law will regard the corporation as an association of persons, as a defendant in a compulsory counterclaim; and judgment
or in case of two corporations, will merge them into one. Thus, rendered against it without its knowledge, much less participation
there is no debate on whether, in alleging bad faith on the part of in the proceedings, in blatant disregard of rudimentary due
Lim and Mariano the counterclaims had in effect made them process requirements.
The correct procedure in instances such as this is for the trial
indispensable parties thereto; based on the alleged facts, both are

court, per Section 12 of Rule 6 of the Rules of Court, to order

clearly parties in interest to the counterclaim.[24]
Respondents further assert that Messrs. Lim and Mariano [such impleaded parties] to be brought in as defendants, if
cannot be held personally liable [because their assailed acts] are jurisdiction over them can be obtained, by directing that
within the powers granted to them by the proper board summons be served on them. In this manner, they can be
resolutions; therefore, it is not a personal decision but rather that properly appraised of and answer the charges against them. Only
of the corporation as represented by its board of directors. [25] The upon service of summons can the trial court obtain jurisdiction
foregoing assertion, however, is a matter of defense that should be over them.
In Sapugay, Cardenas was furnished a copy of the Answer
threshed out during the trial; whether or not fraud is extant
under the circumstances is an issue that must be established by with Counterclaim, but he did not file any responsive pleading to
the counterclaim leveled against him. Nevertheless, the Court
convincing evidence.[26]
Suability and liability are two distinct matters. While the gave

due

consideration

to

certain

factual

circumstances,

Court does rule that the counterclaims against Respondent CCCs particularly the trial courts treatment of the Complaint as the
president and manager may be properly filed, the determination Answer of Cardenas to the compulsory counterclaim and of his
of whether both can in fact be held jointly and severally liable seeming acquiescence thereto, as evidenced by his failure to make
with respondent corporation is entirely another issue that should any objection despite his active participation in the proceedings.
be ruled upon by the trial court.
It was held thus:
However, while a compulsory counterclaim may implead
persons not parties to the original complaint, the general rule -- a It is noteworthy that Cardenas did not file a motion to dismiss the
defendant in a compulsory counterclaim need not file any counterclaim against him on the ground of lack of jurisdiction.
responsive pleading, as it is deemed to have adopted the While it is a settled rule that the issue of jurisdiction may be
allegations in the complaint as its answer -- does not apply. The raised even for the first time on appeal, this does not obtain in the
filing of a responsive pleading is deemed a voluntary submission instant case. Although it was only Mobil which filed an opposition
to the jurisdiction of the court; a new party impleaded by the to the motion to declare in default, the fact that the trial court
plaintiff in a compulsory counterclaim cannot be considered to denied said motion, both as to Mobil and Cardenas on the ground
have automatically and unknowingly submitted to the jurisdiction that Mobils complaint should be considered as the answer to

petitioners compulsory counterclaim, leads us to the inescapable based on a contract, the counterclaim for damages was based on
conclusion that the trial court treated the opposition as having the tortuous acts of respondents.[28] In its Motion to Dismiss, CCC
been filed in behalf of both Mobil and Cardenas and that the cites Section 5 of Rule 2 and Section 6 of Rule 3 of the Rules of
latter had adopted as his answer the allegations raised in the Civil Procedure, which we quote:
complaint of Mobil. Obviously, it was this ratiocination which led

the trial court to deny the motion to declare Mobil and Cardenas Section 5. Joinder of causes of action. A party may in one pleading
in default. Furthermore, Cardenas was not unaware of said assert, in the alternative or otherwise, as many causes of action
incidents and the proceedings therein as he testified and was as he may have against an opposing party, subject to the following
present during trial, not to speak of the fact that as manager of conditions:
Mobil he would necessarily be interested in the case and could (a) The party joining the causes of action shall comply with the

readily have access to the records and the pleadings filed therein. rules on joinder of parties; x x x
By adopting as his answer the allegations in the complaint which Section 6. Permissive joinder of parties. All persons in whom or
seeks affirmative relief, Cardenas is deemed to have recognized against whom any right to relief in respect to or arising out of
the jurisdiction of the trial court over his person and submitted the same transaction or series of transactions is alleged to exist
thereto. He may not now be heard to repudiate or question that whether jointly, severally, or in the alternative, may, except as
jurisdiction.[27]

otherwise provided in these Rules, join as plaintiffs or be joined

as defendants in one complaint, where any question of law or fact

Such factual circumstances are unavailing in the instant common to all such plaintiffs or to all such defendants may arise
case. The records do not show that Respondents Lim and Mariano in the action; but the court may make such orders as may be just
are either aware of the counterclaims filed against them, or that to prevent any plaintiff or defendant from being embarrassed or
they have actively participated in the proceedings involving them. put to expense in connection with any proceedings in which he
Further, in dismissing the counterclaims against the individual may have no interest.
respondents, the court a quo -- unlike in Sapugay -- cannot be
said to have treated Respondent CCCs Motion to Dismiss as

The foregoing procedural rules are founded on practicality

having been filed on their behalf.

and convenience. They are meant to discourage duplicity and

Rules on Permissive Joinder of Causes

of Action or Parties Not Applicable

court a quo has done -- that the compulsory counterclaim for

multiplicity of suits. This objective is negated by insisting -- as the

damages be dismissed, only to have it possibly re-filed in a
separate proceeding. More important, as we have stated earlier,

Respondent CCC contends that petitioners counterclaims Respondents Lim and Mariano are real parties in interest to the
violated the rule on joinder of causes of action. It argues that compulsory counterclaim; it is imperative that they be joined
while the original Complaint was a suit for specific performance therein. Section 7 of Rule 3 provides:

Compulsory joinder of indispensable parties. Parties in interest

c. Attorneys fees and costs of suit of

at least P5 million each.

without whom no final determination can be had of an action

shall be joined either as plaintiffs or defendants.
Moreover, in joining Lim and Mariano in the compulsory
counterclaim, petitioners are being consistent with the solidary

Other reliefs just and equitable are likewise prayed for.[29]

Obligations may be classified as either joint or solidary. Joint

nature of the liability alleged therein.

or jointly or conjoint means mancum or mancomunada or pro

Second Issue:
CCCs Personality to Move to Dismiss
the Compulsory Counterclaims

used interchangeably with joint and several or several. Thus,

Characterizing

their

counterclaim

rata obligation; on the other hand, solidary obligations may be

petitioners usage of the term joint and solidary is confusing and
ambiguous.
The ambiguity in petitioners counterclaims notwithstanding,
for

damages

against respondents liability, if proven, is solidary. This characterization

Respondents CCC, Lim and Mariano as joint and solidary, finds basis in Article 1207 of the Civil Code, which provides that
petitioners prayed:
obligations are generally considered joint, except when otherwise
expressly stated or when the law or the nature of the obligation
WHEREFORE, it is respectfully prayed that after trial judgment requires solidarity. However, obligations arising from tort are, by
be rendered:
their nature, always solidary. We have assiduously maintained this
legal principle as early as 1912 in Worcester v. Ocampo,[30] in which

1. Dismissing the complaint in its entirety;

we held:
2. Ordering the plaintiff, Gregory T. Lim and Anthony A.
Mariano jointly and solidarily to pay defendant actual
damages in the sum of at least P2,700,000.00;
3. Ordering the plaintiff, Gregory T. Lim and
Anthony A, Mariano jointly and solidarily to
pay the defendants LPI, LCLC, COC and
Roseberg:
a. Exemplary damages of P100 million
each;
b. Moral damages of P100 million each;
and

x x x The difficulty in the contention of the appellants is that they

fail to recognize that the basis of the present action is tort. They
fail to recognize the universal doctrine that each joint tort feasor
is not only individually liable for the tort in which he participates,
but is also jointly liable with his tort feasors. x x x
It may be stated as a general rule that joint tort feasors are all the
persons who command, instigate, promote, encourage, advise,
countenance, cooperate in, aid or abet the commission of a tort,
or who approve of it after it is done, if done for their benefit. They
are each liable as principals, to the same extent and in the same

manner as if they had performed the wrongful act themselves. x x that sought against the individual respondents is based solely on
x
tort does not negate the solidary nature of their liability for
Joint tort feasors are jointly and severally liable for the tort which tortuous acts alleged in the counterclaims. Article 1211 of the
they commit. The persons injured may sue all of them or any Civil Code is explicit on this point:
number less than all. Each is liable for the whole damages caused

by all, and all together are jointly liable for the whole damage. It is Solidarity may exist although the creditors and the debtors may
no defense for one sued alone, that the others who participated in not be bound in the same manner and by the same periods and
the wrongful act are not joined with him as defendants; nor is it conditions.
any excuse for him that his participation in the tort was

The solidary character of respondents alleged liability is

insignificant as compared to that of the others. x x x
Joint tort feasors are not liable pro rata. The damages can not be precisely why credence cannot be given to petitioners assertion.
apportioned among them, except among themselves. They cannot According to such assertion, Respondent CCC cannot move to
insist upon an apportionment, for the purpose of each paying an dismiss the counterclaims on grounds that pertain solely to its
[32]
aliquot part. They are jointly and severally liable for the whole individual co-debtors. In cases filed by the creditor, a solidary
debtor may invoke defenses arising from the nature of the
amount. x x x
A payment in full for the damage done, by one of the joint tort obligation, from circumstances personal to it, or even from those
feasors, of course satisfies any claim which might exist against personal to its co-debtors. Article 1222 of the Civil Code provides:
the others. There can be but satisfaction. The release of one of the

joint tort feasors by agreement generally operates to discharge all. A solidary debtor may, in actions filed by the creditor, avail itself
of all defenses which are derived from the nature of the obligation
xxx
Of course the court during trial may find that some of the alleged and of those which are personal to him, or pertain to his own

tort feasors are liable and that others are not liable. The courts share. With respect to those which personally belong to the
may release some for lack of evidence while condemning others of others, he may avail himself thereof only as regards that part

the alleged tort feasors. And this is true even though they are of the debt for which the latter are responsible. (Emphasis
charged jointly and severally.
supplied).
In a joint obligation, each obligor answers only for a part of

The act of Respondent CCC as a solidary debtor -- that of

the whole liability; in a solidary or joint and several obligation, filing a motion to dismiss the counterclaim on grounds that
the relationship between the active and the passive subjects is so pertain only to its individual co-debtors -- is therefore allowed.
close that each of them must comply with or demand the

However, a perusal of its Motion to Dismiss the counterclaims

fulfillment of the whole obligation.[31] The fact that the liability shows that Respondent CCC filed it on behalf of Co-respondents
sought against the CCC is for specific performance and tort, while Lim and Mariano; it did not pray that the counterclaim against it

be dismissed. Be that as it may, Respondent CCC cannot be

Dismiss,

declared in default. Jurisprudence teaches that if the issues

nevertheless, the same Motion cannot be deemed to have

raised in the compulsory counterclaim are so intertwined with the

been filed on behalf of the said co-defendants.

4. Summons must be served on Respondents Lim and

allegations

in

the

automatically joined.

complaint,
[33]

such

issues

are

deemed

Counterclaims that are only for damages

and attorneys fees and that arise from the filing of the complaint
shall be considered as special defenses and need not be
answered.[34]

available

to

their

co-defendants;

Mariano before the trial court can obtain jurisdiction over

them.
WHEREFORE, the Petition is GRANTED and the assailed
Orders REVERSED. The court of origin is hereby ORDERED to
take cognizance of the counterclaims pleaded in petitioners

CCCs Motion to Dismiss the

Counterclaim on Behalf of
Respondents Lim and
Mariano Not Allowed
While

defenses

Respondent

CCC

Answer with Compulsory Counterclaims and to cause the service

of summons on Respondents Gregory T. Lim and Anthony A.
Mariano. No costs.
can

move

to

dismiss

the

SO ORDERED.

counterclaims against it by raising grounds that pertain to

individual defendants Lim and Mariano, it cannot file the same JARDINE DAVIES, INC., G.R. No. 151438
Motion on their behalf for the simple reason that it lacks the Petitioner,
requisite authority to do so. A corporation has a legal personality Present:
entirely separate and distinct from that of its officers and cannot
act for and on their behalf, without being so authorized. Thus,
unless expressly adopted by Lim and Mariano, the Motion to
Dismiss the compulsory counterclaim filed by Respondent CCC
has no force and effect as to them.
In summary, we make the following pronouncements:
1. The counterclaims against Respondents CCC, Gregory T.
Lim and Anthony A. Mariano are compulsory.
2. The counterclaims may properly implead Respondents
Gregory T. Lim and Anthony A. Mariano, even if both were
not parties in the original Complaint.
3. Respondent CCC or any of the three solidary debtors
(CCC, Lim or Mariano) may include, in a Motion to

PUNO, J., Chairman,

AUSTRIA-MARTINEZ,
versus CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
JRB REALTY, INC.,
Respondent. Promulgated:
July 15, 2005
x---------------------------------------------x
DECISION

CALLEJO, SR., J.:

Before us is a petition for review of the Decision [1] of the

Court of Appeals (CA) in CA-G.R. CV No. 54201 affirming in
toto that of the Regional Trial Court (RTC) in Civil Case No. 90237 for specific performance; and the Resolution dated January
11, 2002 denying the motion for reconsideration thereof.

The facts are as follows:

In 1979-1980, respondent JRB Realty, Inc. built a ninestorey building, named Blanco Center, on its parcel of land
located at 119 Alfaro St., Salcedo Village, Makati City. An air
conditioning system was needed for the Blanco Law Firm housed
at the second floor of the building. On March 13, 1980, the
respondents Executive Vice-President, Jose R. Blanco, accepted
the contract quotation of Mr. A.G. Morrison, President of Aircon
and Refrigeration Industries, Inc. (Aircon), for two (2) sets of
Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning
equipment with a net total selling price of P99,586.00.
[2]
Thereafter, two (2) brand new packaged air conditioners of 10
tons capacity each to deliver 30,000 kcal or 120,000 BTUH [3] were
installed by Aircon. When the units with rotary compressors were
installed, they could not deliver the desired cooling temperature.
Despite several adjustments and corrective measures, the
respondent conceded that Fedders Air Conditioning USAs
technology for rotary compressors for big capacity conditioners
like those installed at the Blanco Center had not yet been
perfected. The parties thereby agreed to replace the units with
reciprocating/semi-hermetic compressors instead. In a Letter
dated March 26, 1981,[4] Aircon stated that it would be replacing
the units currently installed with new ones using rotary
compressors, at the earliest possible time. Regrettably, however, it
could not specify a date when delivery could be effected.
TempControl Systems, Inc. (a subsidiary of Aircon until
1987) undertook the maintenance of the units, inclusive of parts
and services. In October 1987, the respondent learned, through
newspaper ads,[5] that Maxim Industrial and Merchandising
Corporation (Maxim, for short) was the new and exclusive licensee
of Fedders Air Conditioning USA in the Philippines for the
manufacture, distribution, sale, installation and maintenance of
Fedders air conditioners. The respondent requested that Maxim
honor the obligation of Aircon, but the latter refused. Considering

that the ten-year period of prescription was fast approaching, to

expire on March 13, 1990, the respondent then instituted, on
January 29, 1990, an action for specific performance with
damages against Aircon & Refrigeration Industries, Inc., Fedders
Air Conditioning USA, Inc., Maxim Industrial & Merchandising
Corporation and petitioner Jardine Davies, Inc. [6] The latter was
impleaded as defendant, considering that Aircon was a subsidiary
of the petitioner. The respondent prayed that judgment be
rendered, as follows:

1. Ordering the defendants to jointly and

severally at their account and expense deliver,
install and place in operation two brand new units
of each 10-tons capacity Fedders unitary packaged
air conditioners with Fedders USAs technology
perfected rotary compressors to always deliver
30,000 kcal or 120,000 BTUH to the second floor
of the Blanco Center building at 119 Alfaro St.,
Salcedo Village, Makati, Metro Manila;
2. Ordering defendants to jointly and
severally reimburse plaintiff not only the sums
of P415,118.95 for unsaved electricity from
21st October
1981
to
7th January
1990
andP99,287.77 for repair costs of the two service
units from 7th March 1987 to 11th January 1990,
with legal interest thereon from the filing of this
Complaint until fully reimbursed, but also like
unsaved electricity costs and like repair costs
therefrom until Prayer No. 1 above shall have been
complied with;
3. Ordering defendants to jointly and
severally pay plaintiffs P150,000.00 attorneys fees
and other costs of litigation, as well as exemplary
damages in an amount not less than or equal to
Prayer 2 above; and
4. Granting plaintiff such other and further
relief as shall be just and equitable in the
premises.[7]
Of the four defendants, only the petitioner filed its Answer.
The court did not acquire jurisdiction over Aircon because the
latter ceased operations, as its corporate life ended on December

31, 1986.[8] Upon motion, defendants Fedders Air Conditioning

USA and Maxim were declared in default.[9]
On May 17, 1996, the RTC rendered its Decision, the
dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered
ordering defendants Jardine Davies, Inc., Fedders
Air Conditioning USA, Inc. and Maxim Industrial
and Merchandising Corporation, jointly and
severally:
1.

To deliver, install and place

into operation the two (2) brand new
units of Fedders unitary packaged
airconditioning units each of 10 tons
capacity with rotary compressors to
deliver 30,000 kcal or 120,000 BTUH
to the second floor of the Blanco
Center building, or to pay plaintiff
the current price for two such units;

2.

To reimburse plaintiff the

amount of P556,551.55 as and for
the unsaved electricity bills from
October 21, 1981 up to April 30,
1995;
and
another
amount
of P185,951.67 as and for repair
costs;

3.

To pay plaintiff P50,000.00 as

and for attorneys fees; and

4.

Cost of suit.[10]

The petitioner filed its notice of appeal with the CA,

alleging that the trial court erred in holding it liable because it
was not a party to the contract between JRB Realty, Inc. and
Aircon, and that it had a personality separate and distinct from
that of Aircon.
On March 23, 2000, the CA affirmed the trial courts
ruling in toto; hence, this petition.
The petitioner raises the following assignment of errors:
I.
THE COURT OF APPEALS ERRED IN HOLDING
JARDINE
LIABLE
FOR
THE
ALLEGED
CONTRACTUAL
BREACH
OF
AIRCON SOLELY BECAUSE THE LATTER WAS
FORMERLY JARDINES SUBSIDIARY.
II.
ASSUMING ARGUENDO THAT AIRCON MAY BE
CONSIDERED AS JARDINES MERE ALTER EGO,
THE COURT OF APPEALS ERRED IN NOT
DECLARING AIRCONS OBLIGATION TO DELIVER
THE TWO (2) AIRCONDITIONING UNITS TO JRB
AS HAVING BEEN SUBSTANTIALLY COMPLIED
WITH IN GOOD FAITH.

III.
ASSUMING ARGUENDO THAT AIRCON MAY BE
CONSIDERED AS JARDINES MERE ALTER EGO,
THE COURT OF APPEALS ERRED IN NOT
DECLARING JRBS CAUSES OF ACTION AS
HAVING BEEN BARRED BY LACHES.
IV.
ASSUMING ARGUENDO THAT AIRCON MAY BE
CONSIDERED AS JARDINES MERE ALTER EGO,
THE COURT OF APPEALS ERRED IN FINDING
JRB
ENTITLED
TO
RECOVER
ALLEGED
UNSAVED ELECTRICITY EXPENSES.
V.
THE COURT OF APPEALS ERRED IN HOLDING
JARDINE LIABLE TO PAY ATTORNEYS FEES.
VI.
THE COURT OF APPEALS ERRED IN NOT
HOLDING JRB LIABLE TO JARDINE FOR
DAMAGES.[11]

It is the well-settled rule that factual findings of the trial

court, as affirmed by the CA, are accorded high respect, even
finality at times. However, considering that the factual findings of
the CA and the RTC were based on speculation and conjectures,
unsupported by substantial evidence, the Court finds that the
instant case falls under one of the excepted instances. There is,
thus, a need to correct the error.
The trial court ruled that Aircon was a subsidiary of the
petitioner, and concluded, thus:
Plaintiffs documentary evidence shows that
at the time it contracted with Aircon on March 13,

1980 (Exhibit D) and on the date the revised

agreement was reached on March 26, 1981, Aircon
was a subsidiary of Jardine. The phrase A
subsidiary of Jardine Davies, Inc. was printed on
Aircons letterhead of its March 13, 1980 contract
with plaintiff (Exhibit D-1), as well as the Aircons
letterhead of Jardines Director and Senior VicePresident A.G. Morrison and Aircons President in
his March 26, 1981 letter to plaintiff (Exhibit J-2)
confirming the revised agreement. Aircons
newspaper ads of April 12 and 26, 1981 and a
press release on August 30, 1982 (Exhibits E, F
and L) also show that defendant Jardine publicly
represented Aircon to be its subsidiary.
Records from the Securities and Exchange
Commission (SEC) also reveal that as per Jardines
December 31, 1986 and 1985 Financial
Statements that The company acts as general
manager of its subsidiaries (Exhibit P). Jardines
Consolidated Balance Sheet as of December 31,
1979 filed with the SEC listed Aircon as its
subsidiary by owning 94.35% of Aircon (Exhibit P1). Also, Aircons reportorial General Information
Sheet as of April 1980 and April 1981 filed with
the SEC show that Jardine was 94.34% owner of
Aircon (Exhibits Q and R) and that out of seven
members of the Board of Directors of Aircon, four
(4) are also of Jardine.
Defendant Jardines witness, Atty. Fe delos
Santos-Quiaoit admitted that defendant Aircon,
renamed Aircon & Refrigeration Industries, Inc. is
one of the subsidiaries of Jardine Davies (TSN,
September 22, 1995, p. 12). She also testified that
Jardine nominated, elected, and appointed the

controlling majority of the Board of Directors and

the highest officers of Aircon (Ibid, pp. 10,13-14).
The
foregoing
circumstances
provide
justifiable basis for this Court to disregard the
fiction of corporate entity and treat defendant
Aircon as part of the instrumentality of codefendant Jardine.[12]

The respondent court arrived at the same conclusion

basing its ruling on the following documents, to wit:
(a) Contract/Quotation #78-No.
dated March 03, 1980 (Exh. D-1);

80-1639

(b) Newspaper Advertisements (Exhs. E-1

and F-1);
(c) Letter dated March 26, 1981 of A.G.
Morrison, President of Aircon, to Atty. J.R. Blanco
(Exh. J);
(d) News items of Bulletin Today dated
August 30, 1982 (Exh. L);
(e) Balance Sheet of Jardine Davies, Inc. as
of December 31, 1979 listing Aircon as one of its
subsidiaries (Exh. P);
(f) Financial Statement of Aircon as of
December 31, 1982 and 1981 (Exh. S);
(g) Financial Statement of Aircon as of
December 31, 1981 (Exh. S-1).[13]

Applying the doctrine of piercing the veil of corporate

fiction, both the respondent and trial courts conveniently held the
petitioner liable for the alleged omissions of Aircon, considering
that the latter was its instrumentality or corporate alter ego. The
petitioner is now before us, reiterating its defense of separateness,
and the fact that it is not a party to the contract.
We find merit in the petition.

It is an elementary and fundamental principle of

corporation law that a corporation is an artificial being invested
by law with a personality separate and distinct from its
stockholders and from other corporations to which it may be
connected. While a corporation is allowed to exist solely for a
lawful purpose, the law will regard it as an association of persons
or in case of two corporations, merge them into one, when this
corporate legal entity is used as a cloak for fraud or illegality.
[14]
This is the doctrine of piercing the veil of corporate fiction
which applies only when such corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime.
[15]
The rationale behind piercing a corporations identity is to
remove the barrier between the corporation from the persons
comprising it to thwart the fraudulent and illegal schemes of
those who use the corporate personality as a shield for
undertaking certain proscribed activities.[16]
While it is true that Aircon is a subsidiary of the petitioner,
it does not necessarily follow that Aircons corporate legal
existence can just be disregarded. In Velarde v. Lopez, Inc.,[17] the
Court categorically held that a subsidiary has an independent
and separate juridical personality, distinct from that of its parent
company; hence, any claim or suit against the latter does not bind
the former, and vice versa. In applying the doctrine, the following
requisites must be established: (1) control, not merely majority or
complete stock control; (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
acts 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.[18]

The records bear out that Aircon is a subsidiary of the

buying, selling, and dealing in the aforesaid
petitioner only because the latter acquired Aircons majority of
appliances, accessories and products. [23]
capital stock. It, however, does not exercise complete control over
Aircon; nowhere can it be gathered that the petitioner manages
the business affairs of Aircon. Indeed, no management agreement
The existence of interlocking directors, corporate officers
exists between the petitioner and Aircon, and the latter is an and shareholders, which the respondent court considered, is not
entirely different entity from the petitioner.[19]
enough justification to pierce the veil of corporate fiction, in the
absence of fraud or other public policy considerations.[24] But even
Jardine Davies, Inc., incorporated as early as June 28, when there is dominance over the affairs of the subsidiary, the
[20]
1946, is primarily a financial and trading company. Its Articles doctrine of piercing the veil of corporate fiction applies only when
of Incorporation states among many others that the purposes for such fiction is used to defeat public convenience, justify wrong,
which the said corporation was formed, are as follows:
protect fraud or defend crime. [25] To warrant resort to this
extraordinary remedy, there must be proof that the corporation is
(a) To carry on the business of merchants,
being used as a cloak or cover for fraud or illegality, or to work
commission
merchants,
brokers,
factors,
injustice.[26] Any piercing of the corporate veil has to be done with
manufacturers, and agents;
caution.[27] The wrongdoing must be clearly and convincingly
established. It cannot just be presumed.[28]
(b) Upon complying with the requirements of
law applicable thereto, to act as agents of companies
and underwriters doing and engaging in any and all
kinds of insurance business.[21]
On the other hand, Aircon, incorporated on December 27,
1952, is a manufacturing firm. Its Articles of Incorporation
states that its purpose is mainly [22]

To carry on the business of manufacturers of

commercial and household appliances and
accessories
of
any
form,
particularly
to
manufacture, purchase, sell or deal in air
conditioning and refrigeration products of every
class and description as well as accessories and
parts thereof, or other kindred articles; and to
erect, or buy, lease, manage, or otherwise acquire
manufactories, warehouses, and depots for
manufacturing, assemblage, repair and storing,

In the instant case, there is no evidence that Aircon was

formed or utilized with the intention of defrauding its creditors or
evading its contracts and obligations. There was nothing
fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air conditioners, complied with its
obligation of providing two air conditioning units for the second
floor of the Blanco Center in good faith, pursuant to its contract
with the respondent. Unfortunately, the performance of the air
conditioning units did not satisfy the respondent despite several
adjustments and corrective measures. In a Letter[29] dated October
22, 1980, the respondent even conceded that Fedders Air
Conditioning USA has not yet perhaps perfected its technology of
rotary compressors, and agreed to change the compressors with
the semi-hermetic type. Thus, Aircon substituted the units with
serviceable ones which delivered the cooling temperature needed
for the law office. After enjoying ten (10) years of its cooling power,
respondent cannot now complain about the performance of these
units, nor can it demand a replacement thereof.

First. The respondent merely relied on the newspaper

advertisements
showing
the
Fedders
window-type
air
conditioners, which are far different from the big capacity air
conditioning units installed at Blanco Center.
Second. After such print advertisements, the respondent
informed Aircon that it was going to install an electric meter to
register its electric consumption so as to determine the electric
costs not saved by the presently installed units with semihermetic compressors. Contrary to the allegations of the
respondent that this was in pursuance to their Revised
Agreement, no proof was adduced that Aircon agreed to the
respondents proposition. It was a unilateral act on the part of the
respondent, which Aircon did not oblige or commit itself to pay.

Third. Needless to state, the amounts computed are mere

estimates representing the respondents self-serving claim of
unsaved electricity cost, which is too speculative and conjectural
Moreover, it was reversible error to award the respondent to merit consideration. No other proofs, reports or bases of
the amount of P556,551.55 representing the alleged 30% unsaved comparison showing that Fedders Air Conditioning USA could
electricity costs and P185,951.67 as maintenance cost without indeed cut down electricity cost by 30% were adduced.
showing any basis for such award. To justify a grant of actual or
compensatory damages, it is necessary to prove with a reasonable
Likewise, there is no basis for the award of P185,951.67
degree of certainty, premised upon competent proof and on the representing maintenance cost. The respondent merely submitted
best evidence obtainable by the injured party, the actual amount a schedule[31] prepared by the respondents accountant, listing the
of loss.[30] The respondent merely based its cause of action on alleged repair costs from March 1987 up to June 1994. Such
Aircons alleged representation that Fedders air conditioners with evidence is self-serving and can not also be given probative
rotary compressors can save as much as 30% on electricity weight, considering that there are no proofs of receipts,
compared to other brands. Offered in evidence were newspaper vouchers, etc., which would substantiate the amounts paid for
advertisements published on April 12 and 26, 1981. The such services. Absent any more convincing proof, the Court finds
respondent then recorded its electricity consumption from that the respondents claims are without basis, and cannot,
October 21, 1981 up to April 3, 1995 and computed 30% thereof, therefore, be awarded.
which amounted to P556,551.55. The Court rules that this
amount is highly speculative and merely hypothetical, and for
which the petitioner can not be held accountable.

We sustain the petitioners separateness from that of Aircon

in this case. It bears stressing that the petitioner was never a
party to the contract. Privity of contracts take effect only between
parties, their successors-in-interest, heirs and assigns. [32] The
petitioner, which has a separate and distinct legal personality
from that of Aircon, cannot, therefore, be held liable.
IN VIEW OF THE FOREGOING, the petition is GRANTED.
The assailed decision of the Court of Appeals, affirming the
decision of the Regional Trial Court isREVERSED and SET
ASIDE. The complaint of the respondent is DISMISSED. Costs
against the respondent.
SO ORDERED.
[G.R. No. 141994. January 17, 2005]
FILIPINAS BROADCASTING NETWORK, INC., petitioner,
vs. AGO MEDICAL AND EDUCATIONAL CENTER-BICOL
CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) and
ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999
Decision[2] and 26 January 2000 Resolution of the Court of
Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed
with modification the 14 December 1992 Decision [3] of the
Regional Trial Court of Legazpi City, Branch 10, in Civil Case No.
8236. The Court of Appeals held Filipinas Broadcasting Network,
Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima
liable for libel and ordered them to solidarily pay Ago Medical and
Educational Center-Bicol Christian College of Medicine moral
damages, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary [4] program hosted by Carmelo
Mel Rima (Rima) and Hermogenes Jun Alegre (Alegre).[5] Expos is

aired every morning over DZRC-AM which is owned by Filipinas

Broadcasting Network, Inc. (FBNI). Expos is heard over Legazpi
City, the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima and
Alegre exposed various alleged complaints from students,
teachers and parents against Ago Medical and Educational
Center-Bicol Christian College of Medicine (AMEC) and its
administrators. Claiming that the broadcasts were defamatory,
AMEC and Angelita Ago (Ago), as Dean of AMECs College of
Medicine, filed a complaint for damages [7] against FBNI, Rima and
Alegre on 27 February 1990. Quoted are portions of the allegedly
libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children
taking medical course at AMEC-BCCM, advise them to pass
all subjects because if they fail in any subject they will repeat
their year level, taking up all subjects including those they
have passed already. Several students had approached me
stating that they had consulted with the DECS which told them
that there is no such regulation. If [there] is no such regulation
why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had
complained that the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject
even if the subject does not have an instructor - such greed
for money on the part of AMECs administration. Take the
subject Anatomy: students would pay for the subject upon
enrolment because it is offered by the school. However there
would be no instructor for such subject. Students would be
informed that course would be moved to a later date because the
school is still searching for the appropriate instructor.
xxx
It is a public knowledge that the Ago Medical and Educational
Center has survived and has been surviving for the past few years

since its inception because of funds support from foreign

foundations. If you will take a look at the AMEC premises youll
find out that the names of the buildings there are foreign
soundings. There is a McDonald Hall. Why not Jose Rizal or
Bonifacio Hall? That is a very concrete and undeniable evidence
that the support of foreign foundations for AMEC is substantial,
isnt it? With the report which is the basis of the expose in DZRC
today, it would be very easy for detractors and enemies of the Ago
family to stop the flow of support of foreign foundations who
assist the medical school on the basis of the latters purpose. But
if the purpose of the institution (AMEC) is to deceive students at
cross purpose with its reason for being it is possible for these
foreign foundations to lift or suspend their donations temporarily.
[8]

xxx
On the other hand, the administrators of AMEC-BCCM, AMEC
Science High School and the AMEC-Institute of Mass
Communication in their effort to minimize expenses in terms
of salary are absorbing or continues to accept rejects. For
example how many teachers in AMEC are former teachers of
Aquinas University but were removed because of immorality?
Does it mean that the present administration of AMEC have the
total definite moral foundation from catholic administrator of
Aquinas University. I will prove to you my friends, that AMEC is a
dumping ground, garbage, not merely of moral and physical
misfits. Probably they only qualify in terms of intellect. The Dean
of Student Affairs of AMEC is Justita Lola, as the family name
implies. She is too old to work, being an old woman. Is the AMEC
administration exploiting the very [e]nterprising or compromising
and undemanding Lola? Could it be that AMEC is just patiently
making use of Dean Justita Lola were if she is very old. As in
atmospheric situation zero visibility the plane cannot land,
meaning she is very old, low pay follows. By the way, Dean Justita
Lola is also the chairman of the committee on scholarship in
AMEC. She had retired from Bicol University a long time ago but
AMEC has patiently made use of her.

xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground
for moral and physically misfit people. What does this mean?
Immoral and physically misfits as teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The
truth is this, that your are no longer fit to teach. You are too old.
As an aviation, your case is zero visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and
chairman of the scholarship committee at that. The reason is
practical cost saving in salaries, because an old person is not
fastidious, so long as she has money to buy the ingredient of
beetle juice. The elderly can get by thats why she (Lola) was taken
in as Dean.
xxx
xxx On our end our task is to attend to the interests of students.
It is likely that the students would be influenced by evil. When
they become members of society outside of campus will be
liabilities rather than assets. What do you expect from a doctor
who while studying at AMEC is so much burdened with
unreasonable imposition? What do you expect from a student who
aside from peculiar problems because not all students are rich in
their struggle to improve their social status are even more
burdened with false regulations. xxx[9] (Emphasis supplied)
The complaint further alleged that AMEC is a reputable
learning institution. With the supposed exposs, FBNI, Rima and
Alegre transmitted malicious imputations, and as such, destroyed
plaintiffs (AMEC and Ago) reputation. AMEC and Ago included
FBNI as defendant for allegedly failing to exercise due diligence in
the selection and supervision of its employees, particularly Rima
and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil
Lozares, filed an Answer[10] alleging that the broadcasts against
AMEC were fair and true. FBNI, Rima and Alegre claimed that
they were plainly impelled by a sense of public duty to report the

goings-on in AMEC, [which is] an institution imbued with public

interest.
Thereafter, trial ensued. During the presentation of the
evidence for the defense, Atty. Edmundo Cea, collaborating
counsel of Atty. Lozares, filed a Motion to Dismiss [11] on FBNIs
behalf. The trial court denied the motion to dismiss.
Consequently, FBNI filed a separate Answer claiming that it
exercised due diligence in the selection and supervision of Rima
and Alegre. FBNI claimed that before hiring a broadcaster, the
broadcaster should (1) file an application; (2) be interviewed; and
(3) undergo an apprenticeship and training program after passing
the interview. FBNI likewise claimed that it always reminds its
broadcasters to observe truth, fairness and objectivity in their
broadcasts and to refrain from using libelous and indecent
language. Moreover, FBNI requires all broadcasters to pass
the Kapisanan ng mga Brodkaster sa Pilipinas (KBP) accreditation
test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a
Decision[12] finding FBNI and Alegre liable for libel except Rima.
The trial court held that the broadcasts are libelous per se. The
trial court rejected the broadcasters claim that their utterances
were the result of straight reporting because it had no factual
basis. The broadcasters did not even verify their reports before
airing them to show good faith. In holding FBNI liable for libel,
the trial court found that FBNI failed to exercise diligence in the
selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that
Rimas only participation was when he agreed with Alegres expos.
The trial court found Rimas statement within the bounds of
freedom of speech, expression, and of the press. The dispositive
portion of the decision reads:
WHEREFORE, premises considered, this court finds for the
plaintiff. Considering the degree of damages caused by the
controversial utterances, which are not found by this court to
be really very serious and damaging, and there being no
showing that indeed the enrollment of plaintiff school

dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas

Broadcasting Network (owner of the radio station DZRC), are
hereby jointly and severally ordered to pay plaintiff Ago Medical
and Educational Center-Bicol Christian College of Medicine
(AMEC-BCCM) the amount of P300,000.00 moral damages,
plus P30,000.00 reimbursement of attorneys fees, and to pay the
costs of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand,
and AMEC and Ago, on the other, appealed the decision to the
Court of Appeals. The Court of Appeals affirmed the trial courts
judgment with modification. The appellate court made Rima
solidarily liable with FBNI and Alegre. The appellate court denied
Agos claim for damages and attorneys fees because the
broadcasts were directed against AMEC, and not against her. The
dispositive portion of the Court of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED,
subject to the modification that broadcaster Mel Rima
is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes
Alegre.
SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for reconsideration
which the Court of Appeals denied in its 26 January 2000
Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the
questioned broadcasts are libelous per se and that FBNI, Rima
and Alegre failed to overcome the legal presumption of malice. The
Court of Appeals found Rima and Alegres claim that they were
actuated by their moral and social duty to inform the public of
the students gripes as insufficient to justify the utterance of the
defamatory remarks.
Finding no factual basis for the imputations against AMECs
administrators, the Court of Appeals ruled that the broadcasts
were made with reckless disregard as to whether they were true

or false. The appellate court pointed out that FBNI, Rima and
Alegre failed to present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely gave a single
name when asked to identify the students. According to the Court
of Appeals, these circumstances cast doubt on the veracity of the
broadcasters claim that they were impelled by their moral and
social duty to inform the public about the students gripes.
The Court of Appeals found Rima also liable for libel since he
remarked that (1) AMEC-BCCM is a dumping ground for morally
and physically misfit teachers; (2) AMEC obtained the services of
Dean Justita Lola to minimize expenses on its employees salaries;
and (3) AMEC burdened the students with unreasonable
imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to exercise due
diligence in the selection and supervision of its employees for
allowing Rima and Alegre to make the radio broadcasts without
the proper KBP accreditation. The Court of Appeals denied Agos
claim for damages and attorneys fees because the libelous
remarks were directed against AMEC, and not against her. The
Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable
to pay AMEC moral damages, attorneys fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS
PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND
ALEGRE FOR PAYMENT OF MORAL DAMAGES,
ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly
defamatory remarks of Rima and Alegre against AMEC. [17] While
AMEC did not point out clearly the legal basis for its complaint, a
reading of the complaint reveals that AMECs cause of action is

based on Articles 30 and 33 of the Civil Code. Article

30[18] authorizes a separate civil action to recover civil liability
arising from a criminal offense. On the other hand, Article
33[19] particularly provides that the injured party may bring a
separate civil action for damages in cases of defamation, fraud,
and physical injuries. AMEC also invokes Article 19 [20] of the Civil
Code to justify its claim for damages. AMEC cites Articles
2176[21] and 2180[22] of the Civil Code to hold FBNI solidarily liable
with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of
a vice or defect, real or imaginary, or any act or omission,
condition, status, or circumstance tending to cause the dishonor,
discredit, or contempt of a natural or juridical person, or to
blacken the memory of one who is dead.[24]
There is no question that the broadcasts were made public
and imputed to AMEC defects or circumstances tending to cause
it dishonor, discredit and contempt. Rima and Alegres remarks
such as greed for money on the part of AMECs administrators;
AMEC is a dumping ground, garbage of xxx moral and physical
misfits; and AMEC students who graduate will be liabilities rather
than assets of the society are libelous per se. Taken as a whole,
the broadcasts suggest that AMEC is a money-making institution
where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not
malicious. FBNI claims that Rima and Alegre were plainly
impelled by their civic duty to air the students gripes. FBNI
alleges that there is no evidence that ill will or spite motivated
Rima and Alegre in making the broadcasts. FBNI further points
out that Rima and Alegre exerted efforts to obtain AMECs side
and gave Ago the opportunity to defend AMEC and its
administrators. FBNI concludes that since there is no malice,
there is no libel.
FBNIs contentions are untenable.

Every defamatory imputation is presumed malicious. [25] Rima

and Alegre failed to show adequately their good intention and
justifiable motive in airing the supposed gripes of the students.
As hosts of a documentary or public affairs program, Rima and
Alegre should have presented the public issues free
from inaccurate and
misleading
information.[26] Hearing
the
[27]
students alleged complaints a month before the expos, they had
sufficient time to verify their sources and information. However,
Rima and Alegre hardly made a thorough investigation of the
students alleged gripes. Neither did they inquire about nor
confirm the purported irregularities in AMEC from the
Department of Education, Culture and Sports. Alegre testified
that he merely went to AMEC to verify his report from an alleged
AMEC official who refused to disclose any information. Alegre
simply relied on the words of the students because they were
many and not because there is proof that what they are saying is
true.[28] This plainly shows Rima and Alegres reckless disregard of
whether their report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result
of straight reporting. Significantly, some courts in the United
States apply the privilege of neutral reportage in libel cases
involving matters of public interest or public figures. Under this
privilege, a republisher who accurately and disinterestedly reports
certain defamatory statements made against public figures is
shielded from liability, regardless of the republishers subjective
awareness of the truth or falsity of the accusation. [29] Rima and
Alegre cannot invoke the privilege of neutral reportage because
unfounded comments abound in the broadcasts. Moreover, there
is no existing controversy involving AMEC when the broadcasts
were made. The privilege of neutral reportage applies where the
defamed person is a public figure who is involved in an existing
controversy, and a party to that controversy makes the
defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not
apply to this case. Citing Borjal v. Court of Appeals,[31] FBNI
contends that the broadcasts fall within the coverage of

qualifiedly privileged communications for being commentaries on

matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed
to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court
elucidated on the doctrine of fair comment, thus:
[F]air commentaries on matters of public interest are privileged
and constitute a valid defense in an action for libel or slander. The
doctrine of fair comment means that while in general every
discreditable imputation publicly made is deemed false, because
every man is presumed innocent until his guilt is judicially
proved, and every false imputation is deemed malicious,
nevertheless, when the discreditable imputation is directed
against a public person in his public capacity, it is not necessarily
actionable. In order that such discreditable imputation to a
public official may be actionable, it must either be a false
allegation of fact or a comment based on a false supposition.
If the comment is an expression of opinion, based on
established facts, then it is immaterial that the opinion happens
to be mistaken, as long as it might reasonably be inferred from
the facts.[32] (Emphasis supplied)
True, AMEC is a private learning institution whose business
of educating students is genuinely imbued with public interest.
The welfare of the youth in general and AMECs students in
particular is a matter which the public has the right to know.
Thus, similar to the newspaper articles in Borjal, the subject
broadcasts dealt with matters of public interest. However, unlike
inBorjal,
the
questioned
broadcasts
are not based
on established facts. The record supports the following findings
of the trial court:
xxx Although defendants claim that they were motivated by
consistent reports of students and parents against plaintiff, yet,
defendants have not presented in court, nor even gave name of a
single student who made the complaint to them, much less
present written complaint or petition to that effect. To accept this

defense of defendants is too dangerous because it could easily

give license to the media to malign people and establishments
based on flimsy excuses that there were reports to them although
they could not satisfactorily establish it. Such laxity would
encourage careless and irresponsible broadcasting which is
inimical to public interests.
Secondly, there is reason to believe that defendant radio
broadcasters, contrary to the mandates of their duties, did not
verify and analyze the truth of the reports before they aired it, in
order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not
accredited to offer Physical Therapy courses. Yet, plaintiff
produced a certificate coming from DECS that as of Sept. 22,
1987 or more than 2 years before the controversial broadcast,
accreditation to offer Physical Therapy course had already been
given the plaintiff, which certificate is signed by no less than the
Secretary of Education and Culture herself, Lourdes R.
Quisumbing (Exh. C-rebuttal). Defendants could have easily
known this were they careful enough to verify. And yet,
defendants were very categorical and sounded too positive when
they made the erroneous report that plaintiff had no permit to
offer Physical Therapy courses which they were offering.
The allegation that plaintiff was getting tremendous aids from
foreign foundations like Mcdonald Foundation prove not to be
true also. The truth is there is no Mcdonald Foundation existing.
Although a big building of plaintiff school was given the name
Mcdonald building, that was only in order to honor the first
missionary in Bicol of plaintiffs religion, as explained by Dr. Lita
Ago. Contrary to the claim of defendants over the air, not a single
centavo appears to be received by plaintiff school from the
aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though
denied by Dra. Ago, that when medical students fail in one
subject, they are made to repeat all the other subject[s], even
those they have already passed, nor their claim that the school
charges laboratory fees even if there are no laboratories in the

school. No evidence was presented to prove the bases for these

claims, at least in order to give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for
misfits, and immoral teachers, defendant[s] singled out Dean
Justita Lola who is said to be so old, with zero visibility already.
Dean Lola testified in court last Jan. 21, 1991, and was found to
be 75 years old. xxx Even older people prove to be effective
teachers like Supreme Court Justices who are still very much in
demand as law professors in their late years. Counsel for
defendants is past 75 but is found by this court to be still very
sharp and effective. So is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit
yet, nor mentally infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather
than assets of our society is a mere conclusion. Being from the
place himself, this court is aware that majority of the medical
graduates of plaintiffs pass the board examination easily and
become prosperous and responsible professionals.[33]
Had the comments been an expression of opinion based on
established facts, it is immaterial that the opinion happens to be
mistaken, as long as it might reasonably be inferred from the
facts.[34] However, the comments of Rima and Alegre were not
backed up by facts. Therefore, the broadcasts are not privileged
and remain libelous per se.
The
broadcasts
also
violate
the
Radio
Code [35] of
the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. (Radio Code).
Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues
free from personal bias, prejudice and inaccurate
and misleading information. x x x Furthermore, the
station shall strive to present balanced discussion of
issues. x x x.
xxx

7. The station shall be responsible at all times in the

supervision of public affairs, public issues and
commentary programs so that they conform to the
provisions and standards of this code.
8. It shall be the responsibility of the newscaster,
commentator, host and announcer to protect public
interest, general welfare and good order in the
presentation of public affairs and public issues. [36]
(Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the
Radio Code, which lays down the code of ethical conduct
governing practitioners in the radio broadcast industry. The Radio
Code is a voluntary code of conduct imposed by the radio
broadcast industry on its own members. The Radio Code is a
public warranty by the radio broadcast industry that radio
broadcast practitioners are subject to a code by which their
conduct are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio
broadcast practitioners live up to the code of conduct of their
profession, just like other professionals. A professional code of
conduct provides the standards for determining whether a person
has acted justly, honestly and with good faith in the exercise of
his rights and performance of his duties as required by Article
19[37] of the Civil Code. A professional code of conduct also
provides the standards for determining whether a person who
willfully causes loss or injury to another has acted in a manner
contrary to morals or good customs under Article 21 [38] of the Civil
Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages
because it is a corporation.[39]
A juridical person is generally not entitled to moral damages
because, unlike a natural person, it cannot experience physical
suffering or such sentiments as wounded feelings, serious
anxiety, mental anguish or moral shock. [40] The Court of Appeals

cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award

of
moral
damages.
However,
the
Courts
statement
inMambulao that a corporation may have a good reputation
which, if besmirched, may also be a ground for the award of moral
damages is an obiter dictum.[42]
Nevertheless, AMECs claim for moral damages falls under
item 7 of Article 2219[43] of the Civil Code. This provision expressly
authorizes the recovery of moral damages in cases of libel,
slander or any other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for
moral damages.[44]
Moreover, where the broadcast is libelous per se, the law
implies damages.[45] In such a case, evidence of an honest mistake
or the want of character or reputation of the party libeled goes
only in mitigation of damages. [46] Neither in such a case is the
plaintiff required to introduce evidence of actual damages as a
condition precedent to the recovery of some damages. [47] In this
case, the broadcasts are libelous per se. Thus, AMEC is entitled
to moral damages.
However, we find the award of P300,000 moral damages
unreasonable. The record shows that even though the broadcasts
were libelous per se, AMEC has not suffered any substantial or
material damage to its reputation. Therefore, we reduce the award
of moral damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral
damages, there is no basis for the award of attorneys fees. FBNI
adds that the instant case does not fall under the enumeration in
Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC
failed to justify satisfactorily its claim for attorneys fees. AMEC
did not adduce evidence to warrant the award of attorneys fees.
Moreover, both the trial and appellate courts failed to explicitly

state in their respective decisions the rationale for the award of

attorneys fees.[49] In Inter-Asia Investment Industries, Inc. v.
Court of Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of
damages is the exception rather than the rule, and counsels fees
are not to be awarded every time a party wins a suit. The power
of the court to award attorneys fees under Article 2208 of the
Civil Code demands factual, legal and equitable justification,
without which the award is a conclusion without a premise,
its basis being improperly left to speculation and conjecture.
In all events, the court must explicitly state in the text of the
decision, and not only in the decretal portion thereof, the legal
reason for the award of attorneys fees.[51](Emphasis supplied)
While it mentioned about the award of attorneys fees by
stating that it lies within the discretion of the court and depends
upon the circumstances of each case, the Court of Appeals failed
to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with Rima and
Alegre for the payment of damages and attorneys fees because it
exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI maintains that its
broadcasters, including Rima and Alegre, undergo a very
regimented process before they are allowed to go on air. Those
who apply for broadcaster are subjected to interviews,
examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are
irrelevant to his competence as a broadcaster. FBNI points out
that the minor deficiencies in the KBP accreditation of Rima and
Alegre do not in any way prove that FBNI did not exercise the
diligence of a good father of a family in selecting and supervising
them. Rimas accreditation lapsed due to his non-payment of the

KBP annual fees while Alegres accreditation card was delayed

allegedly for reasons attributable to the KBP Manila Office. FBNI
claims that membership in the KBP is merely voluntary and not
required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are
jointly and severally liable for the tort which they commit. [52] Joint
tort feasors are all the persons who command, instigate, promote,
encourage, advise, countenance, cooperate in, aid or abet the
commission of a tort, or who approve of it after it is done, if done
for their benefit.[53] Thus, AMEC correctly anchored its cause of
action against FBNI on Articles 2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre,
FBNI is solidarily liable to pay for damages arising from the
libelous broadcasts. As stated by the Court of Appeals, recovery
for defamatory statements published by radio or television may be
had from the owner of the station, a licensee, the operator of
the station, or a person who procures, or participates in, the
making of the defamatory statements.[54] An employer and
employee are solidarily liable for a defamatory statement by the
employee within the course and scope of his or her employment,
at least when the employer authorizes or ratifies the defamation.
[55]
In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they
aired the broadcasts. FBNI neither alleged nor proved that Rima
and Alegre went beyond the scope of their work at that time.
There was likewise no showing that FBNI did not authorize and
ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI
exercised due diligence in the selection and supervision of its
employees, particularly Rima and Alegre. FBNI merely showed
that it exercised diligence in the selection of its broadcasters
without introducing any evidence to prove that it observed the
same diligence in the supervision of Rima and Alegre. FBNI did
not show how it exercised diligence in supervising its
broadcasters. FBNIs alleged constant reminder to its broadcasters

to observe truth, fairness and objectivity and to refrain from

using libelous and indecent language is not enough to prove due
diligence in the supervision of its broadcasters. Adequate training
of the broadcasters on the industrys code of conduct, sufficient
information on libel laws, and continuous evaluation of the
broadcasters performance are but a few of the many ways of
showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in
the selection of Rima and Alegre as broadcasters, bearing in
mind their qualifications. However, no clear and convincing
evidence shows that Rima and Alegre underwent FBNIs
regimented process of application. Furthermore, FBNI admits
that Rima and Alegre had deficiencies in their KBP accreditation,
[56]
which is one of FBNIs requirements before it hires a
broadcaster. Significantly, membership in the KBP, while
voluntary, indicates the broadcasters strong commitment to
observe the broadcast industrys rules and regulations. Clearly,
these circumstances show FBNIs lack of diligence in
selecting and supervising Rima and Alegre. Hence, FBNI is
solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the
Decision of 4 January 1999 and Resolution of 26 January 2000
of the Court of Appeals in CA-G.R. CV No. 40151 with the
MODIFICATION that the award of moral damages is reduced
from P300,000 to P150,000 and the award of attorneys fees is
deleted. Costs against petitioner.
SO ORDERED.
G.R. No. L-12719
May 31, 1962
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
vs.
THE CLUB FILIPINO, INC. DE CEBU, respondent.
Office
of
the
Solicitor
General
for
petitioner.
V. Jaime and L. E. Petilla for respondent.
PAREDES, J.:

This is a petition to review the decision of the Court of Tax

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

the gross receipts of its bar and restaurant, although it secured

B-4, B-9(a) and B-7 licenses. In a letter dated December 22, 1852,
the Collector of Internal Revenue assessed against and demanded
from the Club, the following sums:
As percentage tax on its gross receipts
during the tax years 1946 to 1951

P9,599.07

Surcharge therein

2,399.77

As fixed tax for the years 1946 to 1952

70.00

Compromise penalty

500.00

The Club wrote the Collector, requesting for the cancellation of

the assessment. The request having been denied, the Club filed
the instant petition for review.
The dominant issues involved in this case are twofold:
1. Whether the respondent Club is liable for the payment of the
sum of 12,068.84, as fixed and percentage taxes and surcharges
prescribed in sections 182, 183 and 191 of the Tax Code, under
which the assessment was made, in connection with the
operation of its bar and restaurant, during the periods mentioned
above; and
2. Whether it is liable for the payment of the sum of P500.00 as
compromise penalty.
Section 182, of the Tax Code states, "Unless otherwise provided,
every person engaging in a business on which the percentage tax
is imposed shall pay in full a fixed annual tax of ten pesos for
each calendar year or fraction thereof in which such person shall
engage in said business." Section 183 provides in general that
"the percentage taxes on business shall be payable at the end of
each calendar quarter in the amount lawfully due on the business
transacted during each quarter; etc." And section 191, same Tax
Code, provides "Percentage tax . . . Keepers of restaurants,
refreshment parlors and other eating places shall pay a tax
three per centum, and keepers of bar and cafes where wines or
liquors are served five per centum of their gross receipts . . .". It
has been held that the liability for fixed and percentage taxes, as

provided by these sections, does not ipso factoattach by mere

reason of the operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur. The plain and ordinary meaning
of business is restricted to activities or affairs where profit is the
purpose or livelihood is the motive, and the term business when
used without qualification, should be construed in its plain and
ordinary meaning, restricted to activities for profitor livelihood
(The Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE
[Manila Elks Club] & Court of Tax Appeals, G.R. No. L-11176,
June 29, 1959, giving full definitions of the word "business"; Coll.
of Int. Rev. v. Sweeney, et al. [International Club of Iloilo, Inc.],
G.R. No. L-12178, Aug. 21, 1959, the facts of which are similar to
the ones at bar; Manila Polo Club v. B. L. Meer, etc., No. L-10854,
Jan. 27, 1960).
Having found as a fact that the Club was organized to develop and
cultivate sports of all class and denomination, for the healthful
recreation and entertainment of its stockholders and members;
that upon its dissolution, its remaining assets, after paying debts,
shall be donated to a charitable Philippine Institution in Cebu;
that it is operated mainly with funds derived from membership
fees and dues; that the Club's bar and restaurant catered only to
its members and their guests; that there was in fact no cash
dividend distribution to its stockholders and that whatever was
derived on retail from its bar and restaurant was used to defray
its overall overhead expenses and to improve its golf-course (costplus-expenses-basis), it stands to reason that the Club is not
engaged in the business of an operator of bar and restaurant
(same authorities, cited above).
It is conceded that the Club derived profit from the operation of
its bar and restaurant, but such fact does not necessarily convert
it into a profit-making enterprise. The bar and restaurant are
necessary adjuncts of the Club to foster its purposes and the
profits derived therefrom are necessarily incidental to the primary
object of developing and cultivating sports for the healthful
recreation and entertainment of the stockholders and members.

That a Club makes some profit, does not make it a profit-making

Club. As has been remarked a club should always strive,
whenever possible, to have surplus (Jesus Sacred Heart College v.
Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of
Int. Rev. v. Sinco Educational Corp., G.R. No. L-9276, Oct. 23,
1956).1wph1.t
It is claimed that unlike the two cases just cited (supra), which
are non-stock, the appellee Club is a stock corporation. This is
unmeritorious. The facts that the capital stock of the respondent
Club is divided into shares, does not detract from the finding of
the trial court that it is not engaged in the business of operator of
bar and restaurant. What is determinative of whether or not the
Club is engaged in such business is its object or purpose, as
stated in its articles and by-laws. It is a familiar rule that the
actual purpose is not controlled by the corporate form or by the
commercial aspect of the business prosecuted, but may be shown
by extrinsic evidence, including the by-laws and the method of
operation. From the extrinsic evidence adduced, the Tax Court
concluded that the Club is not engaged in the business as a
barkeeper and restaurateur.
Moreover, for a stock corporation to exist, two requisites must be
complied with, to wit: (1) a capital stock divided into shares and
(2) an authority to distribute to the holders of such shares,
dividends or allotments of the surplus profits on the basis of the
shares held (sec. 3, Act No. 1459). In the case at bar, nowhere in
its articles of incorporation or by-laws could be found an
authority for the distribution of its dividends or surplus profits.
Strictly speaking, it cannot, therefore, be considered a stock
corporation, within the contemplation of the corporation law.
A tax is a burden, and, as such, it should not be deemed imposed
upon fraternal, civic, non-profit, nonstock organizations, unless
the intent to the contrary is manifest and patent" (Collector v.
BPOE Elks Club, et al., supra), which is not the case in the
present appeal.
Having arrived at the conclusion that respondent Club is not
engaged in the business as an operator of a bar and restaurant,

and therefore, not liable for fixed and percentage taxes, it follows
that it is not liable for any penalty, much less of a compromise
penalty.
WHEREFORE, the decision appealed from is affirmed without
costs.
G.R. No. L-33320 May 30, 1983
RAMON
A.

GONZALES, petitioner,

vs.
THE PHILIPPINE NATIONAL BANK, respondent.
Ramon A. Gonzales in his own behalf.
Juan Diaz for respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of
First Instance of Manila a special civil action for mandamus
against the herein respondent praying that the latter be ordered
to allow him to look into the books and records of the respondent
bank in order to satisfy himself as to the truth of the published
reports that the respondent has guaranteed the obligation of
Southern Negros Development Corporation in the purchase of a
US$ 23 million sugar-mill to be financed by Japanese suppliers
and financiers; that the respondent is financing the construction
of the P 21 million Cebu-Mactan Bridge to be constructed by V.C.
Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by
the Honiron Philippines, Inc., as well as to inquire into the
validity of Id transactions. The petitioner has alleged hat his
written request for such examination was denied by the
respondent. The trial court having dismissed the petition for
mandamus, the instant appeal to review the said dismissal was
filed.

The facts that gave rise to the subject controversy have been set

l. On October l8,1967, Civil Case No. 71044 versus

forth by the trial court in the decision herein sought to be

the Board of Directors of the Bank; the National

reviewed, as follows:
Briefly stated, the following facts gathered from the

Investment and Development Corp., Marubeni Iida

stipulation of the parties served as the backdrop of

Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;

2. On May 11, 1968, Civil Case No. 72936 versus

this proceeding.
Previous to the present action, the petitioner

Roberto Benedicto and other Directors of the Bank,

instituted several cases in this Court questioning

Sugar Mill Integrated Farming, Inc., Talog sugar

different transactions entered into by the Bark with

other parties. First among them is Civil Case No.

Passi (Iloilo) Sugar Central, Inc., Calinog-Lambunao

Milling Co., Inc., Safary Central, Inc., and Batangas

69345 filed on April 27, 1967, by petitioner as a

Sugar Central Inc.;

3. On May 8, 1969, Civil Case No. 76427 versus

taxpayer versus Sec. Antonio Raquiza of Public

Alfredo Montelibano and the Directors of both the

Works and Communications, the Commissioner of

PNB and DBP;

On January 11, 1969, however, petitioner addressed

Public Highways, the Bank, Continental Ore Phil.,

Inc., Continental Ore, Huber Corporation, Allis
Chalmers and General Motors Corporation In the
course of the hearing of said case on August 3,
1967, the personality of herein petitioner to sue the
bank and question the letters of credit it has
extended for the importation by the Republic of the
Philippines of public works equipment intended for
the massive development program of the President
was raised. In view thereof, he expressed and made
known his intention to acquire one share of stock
from Congressman Justiniano Montano which, on

a letter to the President of the Bank (Annex A, Pet.),

requesting submission to look into the records of its
transactions covering the purchase of a sugar
central by the Southern Negros Development Corp.
to be financed by Japanese suppliers and financiers;
its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction
of the Passi Sugar Mills in Iloilo. On January 23,
1969, the Asst. Vice-President and Legal Counsel of
the Bank answered petitioner's letter denying his
request for being not germane to his interest as a

the following day, August 30, 1967, was transferred

one-share stockholder and for the cloud of doubt as

in his name in the books of the Bank.

Subsequent to his aforementioned acquisition of one

to his real intention and purpose in acquiring said

share. (Annex B, Pet.) In view of the Bank's refusal

share of stock of the Bank, petitioner, in his dual

the petitioner instituted this action.' (Rollo, pp. 16-

capacity as a taxpayer and stockholder, filed the

18.)

following cases involving the bank or the members of

its Board of Directors to wit:

The petitioner has adopted the above finding of facts made by the it is intended for an improper motive or purpose, the law having
trial court in its brief which he characterized as having been granted such right to a stockholder in clear and unconditional
"correctly stated." (Petitioner-Appellant"s Brief, pp. 57.)
terms. He further argues that, assuming that a proper motive or
The court a quo denied the prayer of the petitioner that he be purpose for the desired examination is necessary for its exercise,
allowed to examine and inspect the books and records of the there is nothing improper in his purpose for asking for the
respondent bank regarding the transactions mentioned on the examination and inspection herein involved.
grounds that the right of a stockholder to inspect the record of Petitioner may no longer insist on his interpretation of Section 51
the business transactions of a corporation granted under Section of Act No. 1459, as amended, regarding the right of a stockholder
51 of the former Corporation Law (Act No. 1459, as amended) is to inspect and examine the books and records of a corporation.
not absolute, but is limited to purposes reasonably related to the The former Corporation Law (Act No. 1459, as amended) has been
interest of the stockholder, must be asked for in good faith for a replaced by Batas Pambansa Blg. 68, otherwise known as the
specific and honest purpose and not gratify curiosity or for "Corporation Code of the Philippines."
speculative or vicious purposes; that such examination would The right of inspection granted to a stockholder under Section 51
violate the confidentiality of the records of the respondent bank of Act No. 1459 has been retained, but with some modifications.
as provided in Section 16 of its charter, Republic Act No. 1300, as The second and third paragraphs of Section 74 of Batas

amended; and that the petitioner has not exhausted his Pambansa Blg. 68 provide the following:
The records of all business transactions of the
administrative remedies.
Assailing the conclusions of the lower court, the petitioner has
assigned the single error to the lower court of having ruled that
his alleged improper motive in asking for an examination of the
books and records of the respondent bank disqualifies him to
exercise the right of a stockholder to such inspection under
Section 51 of Act No. 1459, as amended. Said provision reads in
part as follows:
Sec. 51. ... The record of all business transactions of
the corporation and the minutes of any meeting
shall be open to the inspection of any director,

corporation and the minutes of any meeting shag be

open

to

inspection

stockholder

or

by

member

any
of

director,

the

trustee,

corporation

at

reasonable hours on business days and he may

demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who shall
refuse to allow any director, trustee, stockholder or
member of the corporation to examine and copy
excerpts from its records or minutes, in accordance

at

with the provisions of this Code, shall be liable to

reasonable hours.
Petitioner maintains that the above-quoted provision does not

such director, trustee, stockholder or member for

damages, and in addition, shall be guilty of an

justify the qualification made by the lower court that the

offense which shall be punishable under Section

inspection of corporate records may be denied on the ground that

144 of this Code: Provided, That if such refusal is

member

or

stockholder

of

the

corporation

made pursuant to a resolution or order of the board the former Corporation Law should not be dependent on the
of directors or trustees, the liability under this propriety of his motive or purpose in asking for the inspection of
section for such action shall be imposed upon the the books of the respondent bank loses whatever validity it might
directors or trustees who voted for such refusal; and have had before the amendment of the law. If there is any doubt
Provided, further, That it shall be a defense to any in the correctness of the ruling of the trial court that the right of
action

under

this

section

that

the

person inspection granted under Section 51 of the old Corporation Law

demanding to examine and copy excerpts from the must be dependent on a showing of proper motive on the part of
corporation's records and minutes has improperly the stockholder demanding the same, it is now dissipated by the
used any information secured through any prior clear language of the pertinent provision contained in Section 74
examination of the records or minutes of such of Batas Pambansa Blg. 68.
corporation or of any other corporation, or was not Although the petitioner has claimed that he has justifiable

acting in good faith or for a legitimate purpose in motives in seeking the inspection of the books of the respondent
bank, he has not set forth the reasons and the purposes for
making his demand.

As may be noted from the above-quoted provisions, among the which he desires such inspection, except to satisfy himself as to

changes introduced in the new Code with respect to the right of the truth of published reports regarding certain transactions
inspection granted to a stockholder are the following the records entered into by the respondent bank and to inquire into their
must be kept at the principal office of the corporation; the validity. The circumstances under which he acquired one share of
inspection must be made on business days; the stockholder may stock in the respondent bank purposely to exercise the right of
demand a copy of the excerpts of the records or minutes; and the inspection do not argue in favor of his good faith and proper
refusal to allow such inspection shall subject the erring officer or motivation. Admittedly he sought to be a stockholder in order to
agent of the corporation to civil and criminal liabilities. However, pry into transactions entered into by the respondent bank even
while seemingly enlarging the right of inspection, the new Code before he became a stockholder. His obvious purpose was to arm
has prescribed limitations to the same. It is now expressly himself with materials which he can use against the respondent
required as a condition for such examination that the one bank for acts done by the latter when the petitioner was a total
requesting it must not have been guilty of using improperly any stranger to the same. He could have been impelled by a laudable
information through a prior examination, and that the person sense of civic consciousness, but it could not be said that his
asking for such examination must be "acting in good faith and for purpose is germane to his interest as a stockholder.
We also find merit in the contention of the respondent bank that
a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously the inspection sought to be exercised by the petitioner would be

contained in Section 51, Act No. 1459, as amended, no longer violative of the provisions of its charter. (Republic Act No. 1300,
holds true under the provisions of the present law. The argument as amended.) Sections 15, 16 and 30 of the said charter provide
of the petitioner that the right granted to him under Section 51 of respectively as follows:

Sec. 15. Inspection by Department of Supervision

charters

and Examination of the Central Bank. The

provisions of the special law or charter creating

National Bank shall be subject to inspection by the

them or applicable to them. supplemented by the

Department of Supervision and Examination of the

provisions

shall

of

be

this

governed

Code,

primarily

insofar

as

by

they

the

are

applicable.
information.
The The provision of Section 74 of Batas Pambansa Blg. 68 of the new
Superintendent of Banks and the Auditor General, Corporation Code with respect to the right of a stockholder to
or other officers designated by law to inspect or demand an inspection or examination of the books of the
Central Bank'
Sec.
16. Confidential

investigate the condition of the National Bank, shall corporation may not be reconciled with the abovequoted
not reveal to any person other than the President of provisions of the charter of the respondent bank. It is not correct
the Philippines, the Secretary of Finance, and the to claim, therefore, that the right of inspection under Section 74
Board of Directors the details of the inspection or of the new Corporation Code may apply in a supplementary
investigation, nor shall they give any information capacity to the charter of the respondent bank.
relative to the funds in its custody, its current WHEREFORE, the petition is hereby DISMISSED, without costs.
accounts or deposits belonging to private G.R. No. 129459 September 29, 1998
individuals, corporations, or any other entity, except SAN JUAN STRUCTURAL AND STEEL FABRICATORS,
INC., petitioner,
by order of a Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of vs.

this Act. Any director, officer, employee, or agent of COURT OF APPEALS, MOTORICH SALES CORPORATION,
the Bank, who violates or permits the violation of NENITA LEE GRUENBERG, ACL DEVELOPMENT CORP. and
any of the provisions of this Act, or any person JNM REALTY AND DEVELOPMENT CORP., respondents.
aiding or abetting the violations of any of the
provisions of this Act, shall be punished by a fine PANGANIBAN, J.:
not to exceed ten thousand pesos or by May corporate treasurer, by herself and without any authorization
imprisonment of not more than five years, or both from he board of directors, validly sell a parcel of land owned by
the corporation?. May the veil of corporate fiction be pierced on
such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation. the mere ground that almost all of the shares of stock of the
Having a charter of its own, it is not governed, as a rule, by the corporation are owned by said treasurer and her husband?
The Case
Corporation Code of the Philippines. Section 4 of the said Code
These questions are answered in the negative by this Court in
provides:

SEC. 4. Corporations created by special laws or resolving the Petition for Review on Certioraribefore us, assailing
charters. Corporations created by special laws or the March 18, 1997 Decision

of the Court of Appeals

in CA GR

CV No. 46801 which, in turn, modified the July 18, 1994

letter

to

defendant-appellee

Motorich

Sales

Decision of the Regional Trial Court of Makati, Metro Manila,

Corporation requesting for a computation of the

Branch 63 in Civil Case No. 89-3511. The RTC dismissed both

balance to be paid: that said letter was coursed

the Complaint and the Counterclaim filed by the parties. On the

through defendant-appellee's broker. Linda Aduca,

other hand, the Court of Appeals ruled:

WHEREFORE, premises considered, the appealed

who wrote the computation of the balance: that on

decision

is

AFFIRMED

WITH

March 2, 1989, plaintiff-appellant was ready with

MODIFICATION

the amount corresponding to the balance, covered

ordering defendant-appellee Nenita Lee Gruenberg

by Metrobank Cashier's Check No. 004223, payable

to REFUND or return to plaintiff-appellant the

to defendant-appellee Motorich Sales Corporation;

downpayment of P100,000.00 which she received

that

from plaintiff-appellant. There is no pronouncement

Motorich Sales Corporation were supposed to meet

as to costs.
The petition also challenges the June 10, 1997 CA Resolution
5

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

plaintiff-appellant

and

defendant-appellee

in the office of plaintiff-appellant but defendantappellee'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,

defendant-appellee

In its answer, defendants-appellees Motorich Sales

Nenita Lee Gruenberg and Reynaldo L. Gruenberg,

Corporation and Nenita Lee Gruenberg interposed

under Transfer Certificate of Title No. 3571; that as

as affirmative defense that the President and

Lee

Chairman of Motorich did not sign the agreement

Gruenberg and Motorich Sales Corporation's bad

adverted to in par. 3 of the amended complaint; that

faith in refusing to execute a formal Transfer of

Mrs. Gruenberg's signature on the agreement (ref:

Rights/Deed

plaintiff-appellant

par. 3 of Amended Complaint) is inadequate to bind

suffered moral and nominal damages which may be

Motorich. The other signature, that of Mr. Reynaldo

assessed against defendants-appellees in the sum of

Gruenberg, President and Chairman of Motorich, is

Five Hundred Thousand (500,000.00) Pesos; that as

required: that plaintiff knew this from the very

Lee

beginning as it was presented a copy of the Transfer

Corporation's

of Rights (Annex B of amended complaint) at the

unjustified and unwarranted failure to execute the

time the Agreement (Annex B of amended complaint)

required Transfer of Rights/Deed of Assignment or

was signed; that plaintiff-appellant itself drafted the

formal deed of sale in favor of plaintiff-appellant,

Agreement and insisted that Mrs. Gruenberg accept

defendants-appellees should be assessed exemplary

the P100,000.00 as earnest money; that granting,

damages in the sum of One Hundred Thousand

without

(P100,000.00) Pesos; that by reason of defendants-

agreement, plaintiff-appellant nonetheless failed to

appellees' bad faith in refusing to execute a Transfer

pay in legal tender within the stipulated period (up

of Rights/Deed of Assignment in favor of plaintiff-

to March 2, 1989); that it was the understanding

appellant,

to

between Mrs. Gruenberg and plaintiff-appellant that

construct a residential building in the sum of One

the Transfer of Rights/Deed of Assignment will be

Hundred Thousand (P100,000.00) Pesos; and that

signed only upon receipt of cash payment; thus they

as a consequence of defendants-appellees Nenita Lee

agreed that if the payment be in check, they will

Gruenberg and Motorich Sales Corporation's bad

meet at a bank designated by plaintiff-appellant

faith in refusing to execute a deed of sale in favor of

where they will encash the check and sign the

plaintiff-appellant, it has been constrained to obtain

Transfer of Rights/Deed. However, plaintiff-appellant

the services of counsel at an agreed fee of One

informed Mrs. Gruenberg of the alleged availability

Hundred

appearance fee for every appearance in court

of the check, by phone, only after banking hours.

On the basis of the evidence, the court a

hearings.

quo rendered

result

result

Gruenberg

represented

of

by

defendants-appellees

of

of

defendants-appellees

and

the

Assignment,

Motorich

latter

Thousand

lost

Sales

the

Nenita

Nenita

opportunity

(P100,000.00)

Pesos

plus

admitting,

the

the

enforceability

judgment

appealed

of

the

from[,]

dismissing plaintiff-appellant's complaint, ruling

substantially

that:

property

The issue to be resolved is: whether

plaintiff

had

defendants

the

to

right

execute

to
a

representing at least two

agreement of February 14, 1989: and if

third

so, whether plaintiff is entitled to

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,

assets

vote of the stockholders

absolute sale in accordance with the

evidence to show that defendant Nenita

and

its

when authorized by the

of

damage.
As to the first question, there is no

of

including its goodwill . . .

compel
deed

all

(2/3)

of

outstanding
No

stock . . .
vote was

such

the
capital

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

circumstances.

More

himself

several

[owns]

under
so,

these
plaintiff

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,

or

1991, p. 8).
In the light of the foregoing, the Court

otherwise dispose of all or

hereby renders judgment DISMISSING

mortgage,

pledge

the complaint at instance for lack of

WHEREAS, the TRANSFEROR is the owner of a

merit.
"Defendants"

counterclaim

parcel of land identified as Lot 30 Block 1 of the

DISMISSED

for

lack

is
of

also
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
existing

duly

under

organized

and

by

and

virtue

of

Philippine Laws, with principal office

address at 5510 South Super Hi-way
cor.

Balderama

Makati,

Metro

St.,

Pio

Manila,

del

Pilar.

represented

herein by its Treasurer, NENITA LEE

GRUENBERG, hereinafter referred to
as the TRANSFEROR;
and
SAN JUAN STRUCTURAL & STEEL
FABRICATORS,

corporation

duly

organized and existing under and by

virtue of the laws of the Philippines,
with

principal

Sumulong
Mambungan,

office

address

Highway,
Antipolo,

at

Barrio
Rizal,

represented herein by its President,

ANDRES T. CO, hereinafter referred to
as the TRANSFEREE.
WITNESSETH, That:

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
amounting

to

HUNDRED
PESOS

money
ONE

THOUSAND
(P100,000.00),

will be paid upon the

execution

of

this

agreement and shall form

part of the total purchase
price;
b. Balance

shall

payable

or

on

be

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 modification that Respondent Nenita Lee Gruenberg was ordered
account of the Transferee;
to refund P100,000 to petitioner, the amount remitted as
The transferor warrants that he [sic] is the lawful "downpayment" or "earnest money." Hence, this petition before
owner of the above-described property and that us. 8
there [are] no existing liens and/or encumbrances of

The Issues
Before this Court, petitioner raises the following issues:
whatsoever nature;
I. Whether or not the doctrine of
In case of failure by the Transferee to pay the
piercing the veil of corporate fiction is
balance on the date specified on 1, (b), the earnest
applicable in the instant case
money shall be forfeited in favor of the Transferor.
II. Whether or not the appellate court
That upon full payment of the balance, the
TRANSFEROR agrees to execute a TRANSFER OF

may

RIGHTS/DEED OF ASSIGNMENT in favor of the

parties failed to raise in the lower court

III. Whether or not there is a valid and

TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto

consider

enforceable

set their hands this 14th day of February, 1989 at

petitioner

Greenhills, San Juan, Metro Manila, Philippines.

MOTORICH SALES CORPORATION SAN JUAN

corporation
IV. Whether

matters

contract
and
or

between

the
not

which

the

the

respondent
the

Court

of

Appeals erred in holding that there is a

STRUCTURAL & STEEL FABRICATORS
TRANSFEROR TRANSFEREE
valid correction/substitution of answer
[SGD.] [SGD.]
in the transcript of stenographic
By. NENITA LEE GRUENBERG By: ANDRES T. CO
note[s].
Treasurer President
V. Whether or not respondents are
Signed In the presence of:
liable for damages and attorney's fees 9
[SGD.] [SGD.]
The Court synthesized the foregoing and will thus discuss
6
them seriatim as follows:
In its recourse before the Court of Appeals, petitioner insisted:
1. Was there a valid contract of sale
1. Appellant is entitled to compel the
between petitioner and Motorich?
appellees to execute a Deed of Absolute
2. May the doctrine of piercing the veil
Sale in accordance with the Agreement
of corporate fiction be applied to
of February 14, 1989,
Motorich?
2. Plaintiff is entitled to damages. 7
3. Is the alleged alteration of
As stated earlier, the Court of Appeals debunked petitioner's
Gruenberg's testimony as recorded in
arguments and affirmed the Decision of the RTC with the

the transcript of stenographic notes

property of such corporations controlled and held by

material to the disposition of this case?

4. Are respondents liable for damages

the board of directors or trustees to be elected from

among the holders of stocks, or where there is no

and attorney's fees?

stock, from among the members of the corporation,
The Court's Ruling
who shall hold office for one (1) year and until their
The petition is devoid of merit.
successors are elected and qualified.
First Issue: Validity of Agreement
Indubitably, a corporation may act only through its board of
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges
directors or, when authorized either by its bylaws or by its board
that on February 14, 1989, it entered through its president,
resolution, through its officers or agents in the normal course of
Andres Co, into the disputed Agreement with Respondent
business. The general principles of agency govern the relation
Motorich Sales Corporation, which was in turn allegedly
between the corporation and its officers or agents, subject to the
represented by its treasurer, Nenita Lee Gruenberg. Petitioner
articles of incorporation, bylaws, or relevant provisions of
insists that "[w]hen Gruenberg and Co affixed their signatures on
law. 11 Thus, this Court has held that "a corporate officer or agent
the contract they both consented to be bound by the terms
may represent and bind the corporation in transactions with
thereof." Ergo, petitioner contends that the contract is binding on
third persons to the extent that the authority to do so has been
the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the conferred upon him, and this includes powers which have been
Agreement, according to which a lot owned by Motorich Sales intentionally conferred, and also such powers as, in the usual
Corporation was purportedly sold. Such contract, however, course of the particular business, are incidental to, or may be
cannot bind Motorich, because it never authorized or ratified implied from, the powers intentionally conferred, powers added by

custom and usage, as usually pertaining to the particular officer

such sale.
A corporation is a juridical person separate and distinct from its or agent, and such apparent powers as the corporation has
stockholders or members. Accordingly, the property of the caused persons dealing with the officer or agent to believe that it
12
corporation is not the property of its stockholders or members has conferred."
and may not be sold by the stockholders or members without Furthermore, the Court has also recognized the rule that

of "persons dealing with an assumed agent, whether the assumed

directors. 10 Section 23 of BP 68, otherwise known as the 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
Corporation Code of the Philippines, provides;
Sec. 23. The Board of Directors or Trustees. Unless agency but also the nature and extent of authority, and in case
otherwise provided in this Code, the corporate either is controverted, the burden of proof is upon them to
express

authorization

from

the

corporation's

board

powers of all corporations formed under this Code establish it (Harry Keeler v. Rodriguez, 4 Phil. 19)."
shall be exercised, all business conducted and all

13

Unless duly

authorized, a treasurer, whose powers are limited, cannot bind

the latter shall be in writing: otherwise, the sale

the corporation in a sale of its assets. 14

In the case at bar, Respondent Motorich categorically denies that

shall be void.
Art. 1878. Special powers of attorney are necessary

it ever authorized Nenita Gruenberg, its treasurer, to sell the

in the following case:

xxx xxx xxx
(5) To enter any contract by which the ownership of

subject parcel of land.

15

Consequently, petitioner had the burden

of proving that Nenita Gruenberg was in fact authorized to

represent and bind Motorich in the transaction. Petitioner failed

an immovable is transmitted or acquired either

gratuitously or for a valuable consideration;

xxx xxx xxx.
court contained no proof of such authority. 16 It has not shown Petitioner further contends that Respondent Motorich has ratified
any provision of said respondent's articles of incorporation, said contract of sale because of its "acceptance of benefits," as
to discharge this burden. Its offer of evidence before the trial

bylaws or board resolution to prove that Nenita Gruenberg evidenced

by
the
receipt
issued
by
Respondent
19
possessed such power.
Gruenberg. Petitioner is clutching at straws.
That Nenita Gruenberg is the treasurer of Motorich does not free As a general rule, the acts of corporate officers within the scope
petitioner from the responsibility of ascertaining the extent of her of their authority are binding on the corporation. But when these
authority to represent the corporation. Petitioner cannot assume officers exceed their authority, their actions "cannot bind the
that she, by virtue of her position, was authorized to sell the corporation, unless it has ratified such acts or is estopped from
property of the corporation. Selling is obviously foreign to a

disclaiming them." 20
corporate treasurer's function, which generally has been In this case, there is a clear absence of proof that Motorich ever
described as "to receive and keep the funds of the corporation, authorized Nenita Gruenberg, or made it appear to any third

and to disburse them in accordance with the authority given him person that she had the authority, to sell its land or to receive the
by the board or the properly authorized officers." 17
earnest money. Neither was there any proof that Motorich ratified,
Neither was such real estate sale shown to be a normal business expressly or impliedly, the contract. Petitioner rests its argument
activity of Motorich. The primary purpose of Motorich is on the receipt which, however, does not prove the fact of
marketing, distribution, export and import in relation to a general ratification. The document is a hand-written one, not a corporate
merchandising business. 18 Unmistakably, its treasurer is not receipt, and it bears only Nenita Gruenberg's signature. Certainly,
cloaked with actual or apparent authority to buy or sell real this document alone does not prove that her acts were authorized
property, an activity which falls way beyond the scope of her or ratified by Motorich.

general authority.
Art. 1318 of the Civil Code lists the requisites of a valid and
Art. 1874 and 1878 of the Civil Code of the Philippines provides:
perfected contract: "(1) consent of the contracting parties; (2)
Art. 1874. When a sale of a piece of land or any
object certain which is the subject matter of the contract; (3)
interest therein is through an agent, the authority of
cause of the obligation which is established." As found by the trial

court

21

and affirmed by the Court of Appeals,

22

there is no be, and ordinarily will not be, considered by a reviewing court, as

evidence that Gruenberg was authorized to enter into the they cannot be raised for the first time on appeal.

29

Allowing

contract of sale, or that the said contract was ratified by petitioner to change horses in midstream, as it were, is to run
Motorich. This factual finding of the two courts is binding on this roughshod over the basic principles of fair play, justice and due
As the consent of the seller was not obtained, no process.
contract to bind the obligor was perfected. Therefore, there can be Second, even if the above mentioned argument were to be
addressed at this time, the Court still finds no reason to uphold
no valid contract of sale between petitioner and Motorich.
Court.

23

Because Motorich had never given a written authorization to it. True, one of the advantages of a corporate form of business
Respondent Gruenberg to sell its parcel of land, we hold that the organization is the limitation of an investor's liability to the
February 14, 1989 Agreement entered into by the latter with amount of the investment.

30

This feature flows from the legal

petitioner is void under Article 1874 of the Civil Code. Being theory that a corporate entity is separate and distinct from its
inexistent and void from the beginning, said contract cannot be stockholders. However, the statutorily granted privilege of a
ratified. 24
Second

corporate veil may be used only for legitimate purposes.

31

On
Issue: equitable considerations, the veil can be disregarded when it is

Piercing the Corporate Veil Not Justified

utilized as a shield to commit fraud, illegality or inequity; defeat
Petitioner also argues that the veil of corporate fiction of Motorich public convenience; confuse legitimate issues; or serve as a mere
should be pierced, because the latter is a close corporation. Since alter ego or business conduit of a person or an instrumentality,
"Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned

agency or adjunct of another corporation. 32

all or almost all or 99.866% to be accurate, of the subscribed Thus, the Court has consistently ruled that "[w]hen the fiction is
capital stock" 25 of Motorich, petitioner argues that Gruenberg used as a means of perpetrating a fraud or an illegal act or as

needed no authorization from the board to enter into the subject vehicle for the evasion of an existing obligation, the circumvention
contract. 26 It adds that, being solely owned by the Spouses of statutes, the achievement or perfection of a monopoly or
Gruenberg, the company can treated as a close corporation which generally the perpetration of knavery or crime, the veil with which
can be bound by the acts of its principal stockholder who needs the law covers and isolates the corporation from the members or
no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised
belatedly,

27

the

stockholders who compose it will be lifted to allow for its

issue consideration merely as an aggregation of individuals." 33

not having done so during the trial, but only when it We stress that the corporate fiction should be set aside when it
28

Thus, this becomes a shield against liability for fraud, illegality or inequity
Court cannot entertain said issue at this late stage of the committed on third persons. The question of piercing the veil of
proceedings. It is well-settled the points of law, theories and corporate fiction is essentially, then, a matter of proof. In the
arguments not brought to the attention of the trial court need not present case, however, the Court finds no reason to pierce the
filed its sur-rejoinder before the Court of Appeals.

corporate veil of Respondent Motorich. Petitioner utterly failed to

establish that said corporation was formed, or that it is operated, does not become one either, just because Spouses Reynaldo and
for the purpose of shielding any alleged fraudulent or illegal Nenita Gruenberg owned 99.866% of its subscribed capital stock.
activities of its officers or stockholders; or that the said veil was The "[m]ere ownership by a single stockholder or by another
used to conceal fraud, illegality or inequity at the expense of third corporation of all or capital stock of a corporation is not of itself
persons like petitioner.
sufficient ground for disregarding the separate corporate
Petitioner claims that Motorich is a close corporation. We rule personalities." 36 So, too, a narrow distribution of ownership does
that it is not. Section 96 of the Corporation Code defines a close not, by itself, make a close corporation.

corporation as follows:
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of
Sec. 96. Definition and Applicability of Title. A Appeals 37 wherein the Court ruled that ". . . petitioner
close corporation, within the meaning of this Code, corporation is classified as a close corporation and, consequently,
is one whose articles of incorporation provide that: a board resolution authorizing the sale or mortgage of the subject
(1) All of the corporation's issued stock of all classes, property is not necessary to bind the corporation for the action of
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

its president."

38

But the factual milieu in Dulay is not on all fours

with the present case. In Dulay, the sale of real property was
contracted by the president of a close corporation with the
knowledge and acquiescence of its board of directors.

39

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 considered as a binding corporate act and a board action
as nothing more than a mere formality."

40

The present case,

however, is not one of them.

the meaning of this Code. . . . .
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg
The articles of incorporation 34 of Motorich Sales Corporation does
own "almost 99.866%" of Respondent Motorich. 41 Since Nenita is
not contain any provision stating that (1) the number of
not the sole controlling stockholder of Motorich, the
stockholders shall not exceed 20, or (2) a preemption of shares is
aforementioned exception does not apply. Grantingarguendo that
restricted in favor of any stockholder or of the corporation, or (3)
the corporate veil of Motorich is to be disregarded, the subject
listing its stocks in any stock exchange or making a public
parcel of land would then be treated as conjugal property of
offering of such stocks is prohibited. From its articles, it is clear
Spouses Gruenberg, because the same was acquired during their
that Respondent Motorich is not a close corporation. 35 Motorich

marriage. There being no indication that said spouses, who

Q So, you signed in your capacity as

appear to have been married before the effectivity of the Family

the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that

Code, have agreed to a different property regime, their property

relations
gains.

42

would

be

governed

by

conjugal

partnership

of

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

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

properties before the partnership has been legally dissolved." 43

Assuming further, for the sake of argument, that the spouses'

were

property regime is the absolute community of property, the sale

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

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

without

which

the

disposition

or

not

authorized

to

sell

the

property, you did not tell that to Mr.

Both requirements are manifestly absent

treasurer of the corporation and it

in the instant case.

Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the

authorized to sign on behalf of the

encumbrance is void."

44

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
Petitioner claims that the answer "Yes" was crossed out, and, in
its place was written a "No" with an initial scribbled above

[was] also the president who [was] also

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
was authorized to represent Respondent Motorich in the sale of Clearly then, Nenita Gruenberg did not testify that Motorich had
its immovable property. Said excerpt be understood in the context authorized her to sell its property. On the other hand, her
of her whole testimony. During her cross-examination. testimony demonstrates that the president of Petitioner
it.

46

This, however, is insufficient to prove that Nenita Gruenberg

Respondent Gruenberg testified:

Corporation, in his great desire to buy the property, threw caution

to the wind by offering and paying the earnest money without

was

first verifying Gruenberg's authority to sell the lot.

Fourth

encashed.
A Yes. sir, the check was paid in my

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

encashed,

the

check

was

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

authorized by Respondent Motorich despite the receipt issued by Moreover, we note that Andres Co is not a neophyte in the world
the former specifically indicating that she was signing on behalf of corporate business. He has been the president of Petitioner
of Motorich Sales Corporation. Respondent Motorich likewise Corporation for more than ten years and has also served as chief
[the] Court of Appeals that Gruenberg did not represent herself as

53
acted in bad faith when it claimed it did not authorize executive of two other corporate entities. Co cannot feign
Respondent Gruenberg and that the contract [was] not binding, ignorance of the scope of the authority of a corporate treasurer

[insofar] as it [was] concerned, despite receipt and enjoyment of such as Gruenberg. Neither can he be oblivious to his duty to
the proceeds of Gruenberg's act." 48Assuming that Respondent ascertain the scope of Gruenberg's authorization to enter into a

Motorich was not a party to the alleged fraud, petitioner contract to sell a parcel of land belonging to Motorich.
Indeed, petitioner's claim of fraud and bad faith is
maintains that Respondent Gruenberg should be held liable
unsubstantiated and fails to persuade the Court. Indubitably,
because she "acted fraudulently and in bad faith [in] representing
petitioner appears to be the victim of its own officer's negligence
herself as duly authorized by [R]espondent [C]orporation." 49
in entering into a contract with and paying an unauthorized
As already stated, we sustain the findings of both the trial and
officer of another corporation.
the appellate courts that the foregoing allegations lack factual
As correctly ruled by the Court of Appeals, however, Nenita
bases. Hence, an award of damages or attorney's fees cannot be
Gruenberg should be ordered to return to petitioner the amount
justified. The amount paid as "earnest money" was not proven to
she received as earnest money, as "no one shall enrich himself at
have redounded to the benefit of Respondent Motorich. Petitioner
the expense of another." 54 a principle embodied in Article 2154 of
claims that said amount was deposited to the account of
55
Respondent Motorich, because "it was deposited with the account Civil Code. Although there was no binding relation between

Sales them, petitioner paid Gruenberg on the mistaken belief that she
56
Corporation." 50 Respondent Gruenberg, however, disputes the had the authority to sell the property of Motorich. Article 2155
of Civil Code provides that "[p]ayment by reason of a mistake in
allegations of petitioner. She testified as follows:
Q You voluntarily accepted the the contruction or application of a difficult question of law may
P100,000.00, as a matter of fact, that come within the scope of the preceding article."
of

Aren

Commercial

c/o

Motorich

WHEREFORE, the petition is hereby DENIED and the assailed (4) On March 22, 1948, pending action on the articles of
Decision is AFFIRMED.
SO ORDERED.
G.R. No. L-2598
June 29, 1950
C. ARNOLD HALL and BRADLEY P.
vs.

incorporation

by

the

aforesaid

governmental

office,

the

respondents Fred Brown, Emma Brown, Hipolita D. Chapman

and Ceferino S. Abella filed before the Court of First Instance of
HALL, petitioners, Leyte the civil case numbered 381, entitled "Fred Brown et al. vs.

Arnold C. Hall et al.", alleging among other things that the Far
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Eastern Lumber and Commercial Co. was an unregistered
Leyte, FRED BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, partnership; that they wished to have it dissolved because of
in his capacity as receiver of the Far Eastern Lumber and bitter dissension among the members, mismanagement and fraud
Commercial Co., Inc.,respondents.
Claro
M.
Recto

for

by the managers and heavy financial losses.

petitioners. (5) The defendants in the suit, namely, C. Arnold Hall and Bradley
P. Hall, filed a motion to dismiss, contesting the court's

Ramon Diokno and Jose W. Diokno for respondents.

jurisdiction and the sufficiently of the cause of action.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case (6) After hearing the parties, the Hon. Edmund S. Piccio ordered
No. 381 of the Court of First Instance of Leyte and to enjoin the the dissolution of the company; and at the request of plaintiffs,
appointed of the properties thereof, upon the filing of a P20,000
respondent judge from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and bond.
Bradley P. Hall, and the respondents Fred Brown, Emma Brown, (7) The defendants therein (petitioners herein) offered to file a
Hipolita D. Chapman and Ceferino S. Abella, signed and counter-bond for the discharge of the receiver, but the respondent
acknowledged in Leyte, the article of incorporation of the Far judge refused to accept the offer and to discharge the receiver.
Eastern Lumber and Commercial Co., Inc., organized to engage in Whereupon, the present special civil action was instituted in this
a general lumber business to carry on as general contractors, court. It is based upon two main propositions, to wit:
operators and managers, etc. Attached to the article was an (a) The court had no jurisdiction in civil case No. 381 to decree

affidavit of the treasurer stating that 23,428 shares of stock had the dissolution of the company, because it being ade
been subscribed and fully paid with certain properties transferred facto corporation, dissolution thereof may only be ordered in
to the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles

a quo warranto proceeding instituted in accordance with section

of 19 of the Corporation Law.

incorporation, the corporation proceeded to do business with the (b) Inasmuch as respondents Fred Brown and Emma Brown had
signed the article of incorporation but only a partnership.
adoption of by-laws and the election of its officers.
(3) On December 2, 1947, the said articles of incorporation were Discussion: The second proposition may at once be dismissed. All

filed in the office of the Securities and Exchange Commissioner, the parties are informed that the Securities and Exchange
for the issuance of the corresponding certificate of incorporation. Commission has not, so far, issued the corresponding certificate

of incorporation. All of them know, or sought to know, that the

is

compatible

personality of a corporation begins to exist only from the moment

irregularities; but not with a total or substantial disregard

such certificate is issued not before (sec. 11, Corporation Law).

of the law. Unless there has been an evident attempt to

The complaining associates have not represented to the others

comply with the law the claim to be a corporation "under

that they were incorporated any more than the latter had made

this act" could not be made "in good faith." (Fisher on the

similar representations to them. And as nobody was led to believe

Philippine

Law

with

of

the

Stock

existence

of

Corporations,

errors

p.

and

75. See

anything to his prejudice and damage, the principle of estoppel

also Humphreys vs. Drew, 59 Fla., 295; 52 So., 362.)

does not apply. Obviously this is not an instance requiring the Second, this is not a suit in which the corporation is a party. This
enforcement of contracts with the corporation through the rule of is a litigation between stockholders of the alleged corporation, for
the purpose of obtaining its dissolution. Even the existence of
estoppel.
The first proposition above stated is premised on the theory that, a de jure corporation may be terminated in a private suit for its
inasmuch as the Far Eastern Lumber and Commercial Co., is dissolution between stockholders, without the intervention of the
a de facto corporation, section 19 of the Corporation Law applies, state.
and therefore the court had not jurisdiction to take cognizance of There might be room for argument on the right of minority
stockholders to sue for dissolution;1 but that question does not
said civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in affect the court's jurisdiction, and is a matter for decision by the
good faith to be a corporation under this Act and its right judge, subject to review on appeal. Whkch brings us to one
to exercise corporate powers shall not be inquired into principal reason why this petition may not prosper, namely: the
collaterally in any private suit to which the corporation petitioners have their remedy by appealing the order of
may be a party, but such inquiry may be had at the suit of dissolution at the proper time.
the Insular Government on information of the Attorney- There is a secondary issue in connection with the appointment of
a receiver. But it must be admitted that receivership is proper in
General.
There are least two reasons why this section does not govern the proceedings for dissolution of a company or corporation, and it
situation. Not having obtained the certificate of incorporation, the was no error to reject the counter-bond, the court having declared
Far Eastern Lumber and Commercial Co. even its stockholders the dissolution. As to the amount of the bond to be demanded of
may not probably claim "in good faith" to be a corporation.
the receiver, much depends upon the discretion of the trial court,
Under our statue it is to be noted (Corporation Law, sec. which in this instance we do not believe has been clearly abused.

11) that it is the issuance of a certificate of incorporation Judgment: The petition will, therefore, be dismissed, with costs.
by the Director of the Bureau of Commerce and Industry The preliminary injunction heretofore issued will be dissolved.
which calls a corporation into being. The immunity if

collateral attack is granted to corporations "claiming in [G.R. No. 141735. June 8, 2005]
good faith to be a corporation under this act." Such a claim

SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE Million Pesos (P5,000,000.00). The properties consisted of two
COURT
OF
APPEALS,
THE
CIVIL
SERVICE parcels of land covered by Transfer Certificates of Title (TCTs) No.

COMMISSION and AL-AMANAH INVESTMENT BANK OF N-130671 and No. C-52576. On the basis of his Inspection and
Appraisal Report,[4] the PAB granted the loan application. When
THE PHILIPPINES, respondents.
the loan matured on 17 May 1989, CAMEC requested an
extension of 180 days, but was granted only 120 days to repay the

DECISION

loan.[5]
In the meantime, Sawadjaan was promoted to Loans Analyst I

CHICO-NAZARIO, J.:
This is a petition for certiorari under Rule 65 of the Rules of
Court of the Decision[1] of the Court of Appeals of 30 March 1999
affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil
Service Commission (CSC) dated 11 August 1994 and 11 April
1995, respectively, which in turn affirmed Resolution No. 2309 of
the Board of Directors of the Al-Amanah Islamic Investment Bank
of the Philippines (AIIBP) dated 13 December 1993, finding
petitioner guilty of Dishonesty in the Performance of Official
Duties and/or Conduct Prejudicial to the Best Interest of the
Service

and

dismissing

him

from

the

service,

and

its

Resolution[2] of 15 December 1999 dismissing petitioners Motion

for Reconsideration.
The records show that petitioner Sappari K. Sawadjaan was
among the first employees of the Philippine Amanah Bank (PAB)
when it was created by virtue of Presidential Decree No. 264 on
02 August 1973. He rose through the ranks, working his way up
from his initial designation as security guard, to settling clerk,
bookkeeper,

credit

investigator,

project

analyst,

inspector, and eventually, loans analyst.

In
February
1988,
while
still

appraiser/

[3]

designated

as

appraiser/investigator, Sawadjaan was assigned to inspect the

properties offered as collaterals by Compressed Air Machineries
and Equipment Corporation (CAMEC) for a credit line of Five

on 01 July 1989.[6]
In January 1990, Congress passed Republic Act 6848
creating the AIIBP and repealing P.D. No. 264 (which created the
PAB). All assets, liabilities and capital accounts of the PAB were
transferred to the AIIBP,[7] and the existing personnel of the PAB
were to continue to discharge their functions unless discharged.
[8]

In the ensuing reorganization, Sawadjaan was among the

personnel retained by the AIIBP.

When CAMEC failed to pay despite the given extension, the
bank, now referred to as the AIIBP, discovered that TCT No. N130671 was spurious, the property described therein nonexistent, and that the property covered by TCT No. C-52576 had a
prior existing mortgage in favor of one Divina Pablico.
On 08 June 1993, the Board of Directors of the AIIBP created
an Investigating Committee to look into the CAMEC transaction,
which had cost the bank Six Million Pesos (P6,000,000.00) in
losses.[9] The subsequent events, as found and decided upon by
the Court of Appeals,[10] are as follows:
On 18 June 1993, petitioner received a memorandum from
Islamic Bank [AIIBP] Chairman Roberto F. De Ocampo charging
him with Dishonesty in the Performance of Official Duties and/or
Conduct Prejudicial to the Best Interest of the Service and
preventively suspending him.

In his memorandum dated 8 September 1993, petitioner informed accordance with the Civil Service Commissions Memorandum
the Investigating Committee that he could not submit himself to Circular No. 30, Series of 1989.
the jurisdiction of the Committee because of its alleged partiality.

For his failure to appear before the hearing set on 17 September On 13 December 1993, the Board of Directors of the Islamic Bank
1993, after the hearing of 13 September 1993 was postponed due [AIIBP] adopted Resolution No. 2309 finding petitioner guilty of
to the Manifestation of even date filed by petitioner, the Dishonesty in the Performance of Official Duties and/or Conduct
Investigating Committee declared petitioner in default and the Prejudicial to the Best Interest of the Service and imposing the

penalty of Dismissal from the Service.

prosecution was allowed to present its evidence ex parte.
On 08 December 1993, the Investigating Committee rendered a On reconsideration, the Board of Directors of the Islamic Bank
[AIIBP] adopted the Resolution No. 2332 on 20 February 1994
decision, the pertinent portions of which reads as follows:
reducing the penalty imposed on petitioner from dismissal to

In view of respondent SAWADJAANS abject failure to perform his suspension for a period of six (6) months and one (1) day.
duties and assigned tasks as appraiser/inspector, which resulted On 29 March 1994, petitioner filed a notice of appeal to the Merit

to the prejudice and substantial damage to the Bank, respondent System Protection Board (MSPB).
should be held liable therefore. At this juncture, however, the On 11 August 1994, the CSC adopted Resolution No. 94-4483
Investigating Committee is of the considered opinion that he dismissing the appeal for lack of merit and affirming Resolution
could not be held liable for the administrative offense of No. 2309 dated 13 December 1993 of the Board of Directors of

dishonesty considering the fact that no evidence was adduced to Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574
show that he profited or benefited from being remiss in the
denying petitioners Motion for Reconsideration.
performance of his duties. The record is bereft of any evidence
On 16 June 1995, the instant petition was filed with the
which would show that he received any amount in consideration
Honorable Supreme Court on the following assignment of errors:
for his non-performance of his official duties.
This notwithstanding, respondent cannot escape liability. As
I. Public respondent Al-Amanah Islamic Investment Bank of
adverted to earlier, his failure to perform his official duties
the Philippines has committed a grave abuse of discretion
resulted to the prejudice and substantial damage to the Islamic
amounting to excess or lack of jurisdiction when it initiated and
Bank for which he should be held liable for the administrative
conducted administrative investigation without a validly
offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF
promulgated rules of procedure in the adjudication of
THE SERVICE.
administrative cases at the Islamic Bank.
Premises considered, the Investigating Committee recommends
II. Public respondent Civil Service Commission has
that respondent SAPPARI SAWADJAAN be meted the penalty of
committed a grave abuse of discretion amounting to lack of
SIX (6) MONTHS and ONE (1) DAY SUSPENSION from office in
jurisdiction when it prematurely and falsely assumed jurisdiction

of the case not appealed to it, but to the Merit System Protection business and all matters related to personnel organization, office
Board.
functions and salary administration. (Italics ours)
III. Both the Islamic Bank and the Civil Service Commission
erred in finding petitioner Sawadjaan of having deliberately On the other hand, Item No. 2 of Executive Order No. 26 (1992)
reporting false information and therefore guilty of Dishonesty and entitled Prescribing Procedure and Sanctions to Ensure Speedy
Conduct Prejudicial to the Best Interest of the Service and Disposition of Administrative Cases directs, all administrative
penalized with dismissal from the service.

agencies to adopt and include in their respective Rules of

Procedure

provisions

designed

to

abbreviate

administrative

On 04 July 1995, the Honorable Supreme Court En Banc referred proceedings.

this petition to this Honorable Court pursuant to Revised The above two (2) provisions relied upon by petitioner does not

Administrative Circular No. 1-95, which took effect on 01 June require the Islamic Bank [AIIBP] to promulgate rules of procedure
1995.
before administrative discipline may be imposed upon its
We do not find merit [in] the petition.
employees. The internal rules of procedures ordained to be
Anent the first assignment of error, a reading of the records would adopted by the Board refers to that necessary for the conduct of
reveal that petitioner raises for the first time the alleged failure of its Islamic banking business and all matters related to personnel
the Islamic Bank [AIIBP] to promulgate rules of procedure organization, office functions and salary administration. On the
governing the adjudication and disposition of administrative cases contrary, Section 26 of RA 6848 gives the Board of Directors of

involving its personnel. It is a rule that issues not properly the Islamic Bank the broadest powers to manage the Islamic
brought and ventilated below may not be raised for the first time Bank. This grant of broad powers would be an idle ceremony if it
on appeal, save in exceptional circumstances (Casolita, Sr. v. would be powerless to discipline its employees.

Court of Appeals, 275 SCRA 257) none of which, however, obtain The second assignment of error must likewise fail. The issue is
in this case. Granting arguendo that the issue is of such raised for the first time via this petition for certiorari. Petitioner
exceptional character that the Court may take cognizance of the submitted himself to the jurisdiction of the CSC. Although he
same, still, it must fail. Section 26 of Republic Act No. 6848 could have raised the alleged lack of jurisdiction in his Motion for
(1990) provides:
Reconsideration of Resolution No. 94-4483 of the CSC, he did not
do so. By filing the Motion for Reconsideration, he is estopped
Section 26. Powers of the Board. The Board of Directors shall from denying the CSCs jurisdiction over him, as it is settled rule
have the broadest powers to manage the Islamic Bank, x x x The that a party who asks for an affirmative relief cannot later on

Board shall adopt policy guidelines necessary to carry out impugn the action of the tribunal as without jurisdiction after an
effectively the provisions of this Charter as well as internal rules adverse result was meted to him. Although jurisdiction over the
and regulations necessary for the conduct of its Islamic banking subject matter of a case may be objected to at any stage of the
proceedings even on appeal, this particular rule, however, means

that jurisdictional issues in a case can be raised only during the appraiser/investigator because he lacked the necessary training
proceedings in said case and during the appeal of said case and expertise, and therefore, should not have been found
(Aragon v. Court of Appeals, 270 SCRA 603). The case at bar is a dishonest by the Board of Directors of Islamic Bank [AIIBP] and
the CSC. Petitioner himself admits that the position of
petition [for] certiorari and not an appeal.
But even on the merits the argument must falter. Item No. 1 of appraiser/inspector is one of the most serious [and] sensitive job
CSC Resolution No. 93-2387 dated 29 June 1993, provides:
in the banking operations. He should have been aware that
accepting such a designation, he is obliged to perform the task at
and hand by the exercise of more than ordinary prudence. As
employees of the civil service appealable to the Commission appraiser/investigator, he is expected, among others, to check the
Decisions

in

administrative

cases

involving

officials

pursuant to Section 47 of Book V of the Code (i.e., Administrative authenticity of the documents presented by the borrower by
Code of 1987) including personnel actions such as contested comparing them with the originals on file with the proper
appointments shall now be appealed directly to the Commission government office. He should have made it sure that the technical
and not to the MSPB.

In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it

was categorically held:
. . . The functions of the MSPB relating to the determination of
administrative disciplinary cases were, in other words, reallocated to the Commission itself.

descriptions in the location plan on file with the Bureau of Lands

of Marikina, jibe with that indicated in the TCT of the collateral
offered by CAMEC, and that the mortgage in favor of the Islamic
Bank was duly annotated at the back of the copy of the TCT kept
by the Register of Deeds of Marikina. This, petitioner failed to do,
for which he must be held liable. That he did not profit from his
false report is of no moment. Neither the fact that it was not
deliberate or willful, detracts from the nature of the act as

Be that as it may, (i)t is hornbook doctrine that in order `(t)o dishonest. What is apparent is he stated something to be a fact,
ascertain whether a court (in this case, administrative agency) when he really was not sure that it was so.
WHEREFORE, above premises considered, the instant Petition is
has jurisdiction or not, the provisions of the law should be
DISMISSED, and the assailed Resolutions of the Civil Service
inquired into. Furthermore, `the jurisdiction of the court must
Commission are hereby AFFIRMED.
appear clearly from the statute law or it will not be held to exist.
(Azarcon v. Sandiganbayan, 268 SCRA 747, 757) From the
provision of law abovecited, the Civil Service Commission clearly

On 24 March 1999, Sawadjaans counsel notified the court a

quo of his change of address, [11] but apparently neglected to notify

has jurisdiction over the Administrative Case against petitioner.

his client of this fact. Thus, on 23 July 1999, Sawadjaan, by
Anent the third assignment of error, we likewise do not find merit
himself, filed a Motion for New Trial[12] in the Court of Appeals
in petitioners proposition that he should not be liable, as in the
based on the following grounds: fraud, accident, mistake or
first place, he was not qualified to perform the functions of
excusable negligence and newly discovered evidence. He claimed

that he had recently discovered that at the time his employment unconscionably harsh and/or excessive penalty; and vi) in failing
was terminated, the AIIBP had not yet adopted its corporate by- to consider newly discovered evidence and reverse its decision
laws. He attached a Certification[13] by the Securities and accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent
Exchange Commission (SEC) that it was only on 27 May 1992
that the AIIBP submitted its draft by-laws to the SEC, and that its Motion for Additional Extension of Time to File a Reply (to the
registration was being held in abeyance pending certain Comments of Respondent Al-Amanah Investment Bank of the
[17]
corrections being made thereon. Sawadjaan argued that since the Philippines), Reply (to Respondents Consolidated Comment,)
[18]
and Reply (to the Alleged Comments of Respondent Al-Amanah
AIIBP failed to file its by-laws within 60 days from the passage of
[19]
Rep. Act No. 6848, as required by Sec. 51 of the said law, the Islamic Bank of the Philippines). On 13 October 2000, he
bank and its stockholders had already forfeited its franchise or informed this Court that he had terminated his lawyers services,

charter, including its license to exist and operate as a corporation, and, by himself, prepared and filed the following: 1) Motion for
[20]
[14]
and thus no longer have the legal standing and personality to New Trial; 2) Motion to Declare Respondents in Default and/or
Having Waived their Rights to Interpose Objection to Petitioners
initiate an administrative case.
Sawadjaans counsel subsequently adopted his motion, but Motion for New Trial;[21] 3) Ex-Parte Urgent Motions to Punish
requested that it be treated as a motion for reconsideration. Attorneys Amado D. Valdez, Elpidio J. Vega, Alda G. Reyes,
[15]
This motion was denied by the court a quo in its Resolution of Dominador R. Isidoro, Jr., and Odilon A. Diaz for Being in
15 December 1999.[16]
Contempt of Court & to Inhibit them from Appearing in this Case
Still disheartened, Sawadjaan filed the present petition Until they Can Present Valid Evidence of Legal Authority; [22] 4)
for certiorari under Rule 65 of the Rules of Court challenging the Opposition/Reply (to Respondent AIIBPs Alleged Comment);
above Decision and Resolution of the Court of Appeals on the

[23]

5) Ex-Parte Urgent Motion to Punish Atty. Reynaldo A. Pineda

ground that the court a quo erred: i) in ignoring the facts and for Contempt of Court and the Issuance of a Commitment
evidences that the alleged Islamic Bank has no valid by-laws; ii) in Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To the
ignoring the facts and evidences that the Islamic Bank lost its Formal Notice of Withdrawal of Undersigned Counsel as Legal
juridical personality as a corporation on 16 April 1990; iii) in Counsel for the Respondent Islamic Bank with Opposition to
ignoring the facts and evidences that the alleged Islamic Bank Petitioners Motion to Punish Undersigned Counsel for Contempt

and its alleged Board of Directors have no jurisdiction to act in of Court for the Issuance of a Warrant of Arrest); [25] 7)
the manner they did in the absence of a valid by-laws; iv) in not Memorandum for Petitioner;[26] 8) Opposition to SolGens Motion
correcting the acts of the Civil Service Commission who for Clarification with Motion for Default and/or Waiver of
erroneously rendered the assailed Resolutions No. 94-4483 and Respondents to File their Memorandum; [27] 9) Motion for
No. 95-2754 as a result of fraud, falsification and/or Contempt of Court and Inhibition/Disqualification with
misrepresentations committed by Farouk A. Carpizo and his Opposition to OGCCs Motion for Extension of Time to File
group, including Roberto F. de Ocampo; v) in affirming an Memorandum;[28] 10) Motion for Enforcement (In Defense of the

Rule of Law);[29] 11) Motion and Opposition (Motion to Punish

It is settled that a special civil action for certiorari will not lie

OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G. as a substitute for the lost remedy of appeal, [37] and though there
Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt are instances[38] where the extraordinary remedy ofcertiorari may
of Court and the Issuance of a Warrant for their Arrest; and be resorted to despite the availability of an appeal,[39] we find no
Opposition to their Alleged Manifestation and Motion Dated special reasons for making out an exception in this case.
Even if we were to overlook this fact in the broader interests of
February 5, 2002);[30] 12) Motion for Reconsideration of Item (a) of
Resolution dated 5 February 2002 with Supplemental Motion for justice and treat this as a special civil action for certiorari under
[40]
Contempt of Court;[31] 13) Motion for Reconsideration of Portion of Rule 65, the petition would nevertheless be dismissed for
Resolution Dated 12 March 2002; [32] 14) Ex-Parte Urgent Motion failure of the petitioner to show grave abuse of discretion.
for Extension of Time to File Reply Memorandum (To: CSC and Petitioners recurrent argument, tenuous at its very best, is
AIIBPs Memorandum);[33] 15) Reply Memorandum (To: CSCs premised on the fact that since respondent AIIBP failed to file its
Memorandum) With Ex-Parte Urgent Motion for Additional by-laws within the designated 60 days from the effectivity of Rep.
Extension of time to File Reply Memorandum (To: AIIBPs Act No. 6848, all proceedings initiated by AIIBP and all actions
Memorandum);[34] and 16) Reply Memorandum (To: OGCCs resulting therefrom are a patent nullity. Or, in his words, the
AIIBP and its officers and Board of Directors,
Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for
. . . [H]ave no legal authority nor jurisdiction to manage much
its procedural and substantive flaws.

The general rule is that the remedy to obtain reversal or less operate the Islamic Bank, file administrative charges and

modification of the judgment on the merits is appeal. This is true investigate petitioner in the manner they did and allegedly passed
even if the error, or one of the errors, ascribed to the court Board Resolution No. 2309 on December 13, 1993 which is null
rendering the judgment is its lack of jurisdiction over the subject and void for lack of an (sic) authorized and valid by-laws. The
matter, or the exercise of power in excess thereof, or grave abuse CIVIL

SERVICE

COMMISSION

was

therefore

affirming,

of discretion in the findings of fact or of law set out in the erroneously, a null and void Resolution No. 2309 dated December
decision.[36]
13, 1993 of the Board of Directors of Al-Amanah Islamic
The records show that petitioners counsel received the Investment Bank of the Philippines in CSC Resolution No. 94Resolution of the Court of Appeals denying his motion for 4483 dated August 11, 1994. A motion for reconsideration thereof
reconsideration

on

27

December

1999.

The

fifteen

day was denied by the CSC in its Resolution No. 95-2754 dated April
reglamentary period to appeal under Rule 45 of the Rules of 11, 1995. Both acts/resolutions of the CSC are erroneous,
Court therefore lapsed on 11 January 2000. On 23 February resulting from fraud, falsifications and misrepresentations of the
2000, over a month after receipt of the resolution denying his alleged Chairman and CEO Roberto F. de Ocampo and the alleged
motion for reconsideration, the petitioner filed his petition Director Farouk A. Carpizo and his group at the alleged Islamic
for certiorari under Rule 65.
Bank.[41]

Nowhere in petitioners voluminous pleadings is there a saristore, it is an undisputed fact that AIIBP is the petitioners
showing that the court a quo committed grave abuse of discretion employer.

AIIBP

chose

to

retain

his

services

during

its

amounting to lack or excess of jurisdiction reversible by a petition reorganization, controlled the means and methods by which his
for certiorari. Petitioner already raised the question of AIIBPs work was to be performed, paid his wages, and, eventually,
corporate existence and lack of jurisdiction in his Motion for New terminated his services.[47]
And though he has had ample opportunity to do so, the
Trial/Motion for Reconsideration of 27 May 1997 and was denied

by the Court of Appeals. Despite the volume of pleadings he has petitioner has not alleged that he is anything other than an
submitted thus far, he has added nothing substantial to his employee of AIIBP. He has neither claimed, nor shown, that he is
a stockholder or an officer of the corporation. Having accepted
arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main employment from AIIBP, and rendered his services to the said

office where it conducts business, has shareholders, corporate bank, received his salary, and accepted the promotion given him,
officers, a board of directors, assets, and personnel. It is, in fact, it is now too late in the day for petitioner to question its existence
here represented by the Office of the Government Corporate and its power to terminate his services. One who assumes an
Counsel,

the

principal

law

office

of

government-owned obligation to an ostensible corporation as such, cannot resist

corporations, one of which is respondent bank.[42] At the very performance thereof on the ground that there was in fact no
least, by its failure to submit its by-laws on time, the AIIBP may corporation.[48]
Even if we were to consider the facts behind petitioner
be considered a de facto corporation[43] whose right to exercise

corporate powers may not be inquired into collaterally in any Sawadjaans dismissal from service, we would be hard pressed to
find error in the decision of the AIIBP.
private suit to which such corporations may be a party. [44]
As appraiser/investigator, the petitioner was expected to
Moreover, a corporation which has failed to file its by-laws
within the prescribed period does not ipso facto lose its powers as conduct an ocular inspection of the properties offered by CAMEC
such. The SEC Rules on Suspension/Revocation of the Certificate as collaterals and check the copies of the certificates of title

of Registration of Corporations,[45] details the procedures and against those on file with the Registry of Deeds. Not only did he
remedies that may be availed of before an order of revocation can fail to conduct these routine checks, but he also deliberately

be issued. There is no showing that such a procedure has been misrepresented in his appraisal report that after reviewing the
documents and conducting a site inspection, he found the
initiated in this case.
In any case, petitioners argument is irrelevant because this CAMEC loan application to be in order. Despite the number of
case is not a corporate controversy, but a labor dispute; and it is pleadings he has filed, he has failed to offer an alternative
an employers basic right to freely select or discharge its explanation for his actions.
When he was informed of the charges against him and
employees, if only as a measure of self-protection against acts

inimical to its interest.[46] Regardless of whether AIIBP is a directed to appear and present his side on the matter, the
corporation, a partnership, a sole proprietorship, or a sari- petitioner sent instead a memorandum questioning the fairness

and impartiality of the members of the investigating committee Antipolo, Rizal covered by TCT No. N-130671 and which is one of
and

refusing

to

recognize

their

jurisdiction

over

him. the properties offered as collateral by CAMEC for its P5 Million

Nevertheless, the investigating committee rescheduled the hearing loan in 1988. If he only visited and verified with the Register of
to give the petitioner another chance, but he still refused to Deeds of Marikina the authenticity of TCT No. N-130671 he could
appear before it.
have easily discovered that TCT No. N-130671 is fake and the
Thereafter, witnesses were presented, and a decision was property described therein non-existent.
rendered finding him guilty of dishonesty and dismissing him . . .
from service. He sought a reconsideration of this decision and the This notwithstanding, respondent cannot escape liability. As

same committee whose impartiality he questioned reduced their adverted to earlier, his failure to perform his official duties
recommended penalty to suspension for six months and one day. resulted to the prejudice and substantial damage to the ISLAMIC
The board of directors, however, opted to dismiss him from BANK for which he should be held liable for the administrative
offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF
service.
On

appeal

Sawadjaans

to

failure

the
to

CSC,

the

perform

Commission

his

official

found

duties

that THE SERVICE.[49]

greatly

prejudiced the AIIBP, for which he should be held accountable. It

held that:

From the foregoing, we find that the CSC and the court a
quo committed no grave abuse of discretion when they sustained
Sawadjaans dismissal from service. Grave abuse of discretion

. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was implies such capricious and whimsical exercise of judgment as
remiss in the performance of his duties as appraiser/inspector. equivalent to lack of jurisdiction, or, in other words, where the
Had respondent performed his duties as appraiser/inspector, he power is exercised in an arbitrary or despotic manner by reason of
could have easily noticed that the property located at Balintawak, passion or personal hostility, and it must be so patent and gross
Caloocan City covered by TCT No. C-52576 and which is one of as to amount to an evasion of positive duty or to a virtual refusal
the properties offered as collateral by CAMEC is encumbered to to perform the duty enjoined or to act at all in contemplation of
Divina Pablico. Had respondent reflected such fact in his law.[50] The records show that the respondents did none of these;
appraisal/inspection report on said property the ISLAMIC BANK they acted in accordance with the law.
WHEREFORE, the petition is DISMISSED. The Decision of
would not have approved CAMECs loan of P500,000.00 in 1987
and CAMECs P5 Million loan in 1988, respondent knowing fully the Court of Appeals of 30 March 1999 affirming Resolutions No.
well the Banks policy of not accepting encumbered properties as 94-4483 and No. 95-2754 of the Civil Service Commission, and
its Resolution of 15 December 1999 are hereby AFFIRMED. Costs
collateral.
Respondent SAWADJAANs reprehensible act is further aggravated against the petitioner.
when he failed to check and verify from the Registry of Deeds of
Marikina the authenticity of the property located at Mayamot,

SO ORDERED.

G.R. No. L-26649

July 13, 1927
THE GOVERNMENT OF THE PHILIPPINE ISLANDS (on relation
of
the
Attorney-General), plaintiff,
vs.
EL HOGAR FILIPINO, defendant.
Attorney-General Jaranilla and Solicitor-General Reyes for plaintiff.
Fisher, DeWitt, Perkins and Brady; Camus, Delgado and Recto and
Antonio
Sanz
for
defendant.
Wm. J. Rohde as amicus curiae.
STREET, J.:
This is a quo warranto proceeding instituted originally in this
court by the Government of the Philippine Islands on the relation
of the Attorney-General against the building and loan association
known as El Hogar Filipino, for the purpose of depriving it of its
corporate franchise, excluding it from all corporate rights and
privileges, and effecting a final dissolution of said corporation.
The complaint enumerates seventeen distinct causes of action, to
all of which the defendant has answered upon the merits, first
admitting the averments of the first paragraph in the statement of
the first cause of action, wherein it is alleged that the defendant
was organized in the year 1911 as a building and loan association
under the laws of the Philippine Islands, and that, since its
organization, the corporation has been doing business in the
Philippine Islands, with its principal office in the City of Manila.
Other facts alleged in the various causes of action in the
complaint are either denied in the answer or controverted in legal
effect by other facts.
After issue had been thus joined upon the merits, the attorneys
entered into an elaborate agreement as to the fact, thereby
removing from the field of dispute such matters of fact as are
necessary to the solution of the controversy. It follows that we are
here confronted only with the legal questions arising upon the
agreed statement.
On March 1, 1906, the Philippine Commission enacted what is
known as the Corporation Law (Act No. 1459) effective upon April
1 of the same year. Section 171 to 190, inclusive, of this Act are

devoted to the subject of building and loan associations, defining

their objects making various provisions governing their
organization and administration, and providing for the
supervision to be exercised over them. These provisions appear to
be adopted from American statutes governing building and loan
associations and they of course reflect the ideals and principles
found in American law relative to such associations. The
respondent, El Hogar Filipino, was apparently the first
corporation organized in the Philippine Islands under the
provisions cited, and the association has been favored with
extraordinary success. The articles of incorporation bear the date
of December 28, 1910, at which time capital stock in the
association had been subscribed to the amount of P150,000 of
which the sum of P10,620 had been paid in. Under the law as it
then stood, the capital of the Association was not permitted to
exceed P3,000,000, but by Act No. 2092, passed December 23,
1911, the statute was so amended as to permit the capitalization
of building and loan associations to the amount of ten millions.
Soon thereafter the association took advantage of this enactment
by amending its articles so as to provide that the capital should
be in an amount not exceeding the then lawful limit. From the
time of its first organization the number of shareholders has
constantly increased, with the result that on December 31, 1925,
the association had 5,826 shareholders holding 125,750 shares,
with a total paid-up value of P8,703,602.25. During the period of
its existence prior to the date last above-mentioned the
association paid to withdrawing stockholders the amount of
P7,618,257,.72; and in the same period it distributed in the form
of dividends among its stockholders the sum of P7,621,565.81.
First cause of action. The first cause of action is based upon the
alleged illegal holding by the respondent of the title to real
property for a period in excess of five years after the property had
been bought in by the respondent at one of its own foreclosure
sales. The provision of law relevant to the matter is found in
section 75 of Act of Congress of July 1, 1902 (repeated in
subsection 5 of section 13 of the Corporation Law.) In both of

these provisions it is in substance declared that while

corporations may loan funds upon real estate security and
purchase real estate when necessary for the collection of loans,
they shall dispose of real estate so obtained within five years after
receiving the title.
In this connection it appears that in the year 1920 El Hogar
Filipino was the holder of a recorded mortgage upon a tract of
land in the municipality of San Clemente, Province of Tarlac, as
security for a loan of P24,000 to the shareholders of El Hogar
Filipino who were the owners of said property. The borrowers
having defaulted in their payments, El Hogar Filipino foreclosed
the mortgage and purchased the land at the foreclosure sale for
the net amount of the indebtedness, namely, the sum of
P23,744.18. The auction sale of the mortgaged property took
place November 18, 1920, and the deed conveying the property to
El Hogar Filipino was executed and delivered December 22, 1920.
On December 27, 1920, the deed conveying the property to El
Hogar Filipino was sent to the register of deeds of the Province of
Tarlac, with the request that the certificate of title then standing
in the name of the former owners be cancelled and that a new
certificate of title be issued in the name of El Hogar Filipino. Said
deed was received in the office of the register of deeds of Tarlac on
December 28, 1920, together with the old certificate of title, and
thereupon the register made upon the said deed the following
annotation:
The foregoing document was received in this office at 4.10
p. m., December 28, 1920, according to entry 1898, page
50 of Book One of the Day Book and registered on the back
of certificate of title No. 2211 and its duplicate, folio 193 of
Book A-10 of the register of original certificate. Tarlac,
Tarlac, January 12, 1921. (Sgd.) SILVINO LOPEZ DE
JESUS, Register of Deeds.
For months no reply was received by El Hogar Filipino from the
register of deeds of Tarlac, and letters were written to him by El
Hogar Filipino on the subject in March and April, 1921,
requesting action. No answer having been received to these

letters, a complaint was made by El Hogar Filipino to the Chief of

the General Land Registration Office; and on May 7, 1921, the
certificate of title to the San Clemente land was received by El
Hogar Filipino from the register of deeds of Tarlac.
On March 10, 1921, the board of directors of El Hogar Filipino
adopted a resolution authorizing Vicente Bengzon, an agent of the
corporation, to endeavor to find a buyer for the San Clemente
land. On July 27, 1921, El Hogar Filipino authorized one Jose
Laguardia to endeavor to find a purchaser for the San Clemente
land for the sum of P23,000 undertaking to pay the said
Laguardia a commission of 5 per centum of the selling price for
his services, but no offers to purchase were obtained through this
agent or through the agent Bengzon. In July, 1923, plans of the
San Clemente land were sent to Mr. Luis Gomez, Mr. J. Gonzalez
and Mr. Alfonso de Castelvi, as prospective purchasers, but no
offers were received from them. In January, 1926, the agent not
having succeeded in finding a buyer, the San Clemente land was
advertised for sale by El Hogar Filipino in El Debate, La
Vanguardia andTaliba, three newspapers of general circulation in
the Philippine Islands published in the City of Manila. On March
16, 1926, the first offer for the purchase of the San Clemente
land was received by El Hogar Filipino. This offer was made to it
in writing by one Alcantara, who offered to buy it for the sum of
P4,000, Philippine currency, payable P500 in cash, and the
remainder within thirty days. Alcantara's offer having been
reported by the manager of El Hogar Filipino to its board of
directors, it was decided, by a resolution adopted at a meeting of
the board held on March 25, 1926, to accept the offer, and this
acceptance was communicated to the prospective buyer.
Alcantara was given successive extensions of the time, the last of
which expired April 30, 1926, within which to make the payment
agreed upon; and upon his failure to do so El Hogar Filipino
treated the contract with him as rescinded, and efforts were made
at once to find another buyer. Finally the land was sold to Doa
Felipa Alberto for P6,000 by a public instrument executed before a
notary public at Manila, P. I., on July 30, 1926.

Upon consideration of the facts above set forth it is evident that

the strict letter of the law was violated by the respondent; but it is
equally obvious that its conduct has not been characterized by
obduracy or pertinacity in contempt of the law. Moreover, several
facts connected with the incident tend to mitigate the offense. The
Attorney-General points out that the respondent acquired title on
December 22, 1920, when the deed was executed and delivered,
by which the property was conveyed to it as purchaser at its
foreclosure sale, and this title remained in it until July 30, 1926,
when the property was finally sold to Felipa Alberto. The interval
between these two conveyances is thus more than five years; and
it is contended that the five year period did not begin to run
against the respondent until May 7, 1921, when the register of
deeds of Tarlac delivered the new certificate of title to the
respondent pursuant to the deed by which the property was
acquired. As an equitable consideration affecting the case this
contention, though not decisive, is in our opinion more than
respectable. It has been held by this court that a purchaser of
land registered under the Torrens system cannot acquire the
status of an innocent purchaser for value unless his vendor is
able to place in his hands an owner's duplicate showing the title
of such land to be in the vendor (Director of Lands vs. Addison,
49, Phil., 19; Rodriguez vs. Llorente, G. R. No. 266151). It results
that prior to May 7, 1921, El Hogar Filipino was not really in a
position to pass an indefeasible title to any purchaser. In this
connection it will be noted that section 75 of the Act of Congress
of July 1, 1902, and the similar provision in section 13 of the
Corporation Law, allow the corporation "five years after receiving
the title," within which to dispose of the property. A fair
interpretation of these provisions would seem to indicate that the
date of the receiving of the title in this case was the date when the
respondent received the owner's certificate, or May 7, 1921, for it
was only after that date that the respondent had an unequivocal
and unquestionable power to pass a complete title. The failure of
the respondent to receive the certificate sooner was not due in
any wise to its fault, but to unexplained delay on the part of the

register of deeds. For this delay the respondent cannot be held

accountable.
Again, it is urged for the respondent that the period between
March 25, 1926, and April 30, 1926, should not be counted as
part of the five-year period. This was the period during which the
respondent was under obligation to sell the property to Alcantara,
prior to the rescission of the contract by reason of Alcantara's
failure to make the stipulated first payment. Upon this point the
contention of the respondent is, in our opinion, well founded. The
acceptance by it of Alcantara's offer obligated the respondent to
Alcantara; and if it had not been for the default of Alcantara, the
effective sale of the property would have resulted. The respondent
was not at all chargeable with the collapse of these negotiations;
and hence in any equitable application of the law this period
should be deducted from the five-year period within which the
respondent ought to have made the sale. Another circumstance
explanatory of the respondent's delay in selling the property is
found in the fact that it purchased the property for the full
amount of the indebtedness due to it from the former owner,
which was nearly P24,000. It was subsequently found that the
property was not salable for anything like that amount and in the
end it had to be sold for P6,000, notwithstanding energetic efforts
on the part of the respondent to find a purchaser upon better
terms.
The question then arises whether the failure of the respondent to
get rid of the San Clemente property within five years after it first
acquired the deed thereto, even supposing the five-year period to
be properly counted from that date, is such a violation of law as
should work a forfeiture of its franchise and require a judgment to
be entered for its dissolution in this action of quo warranto. Upon
this point we do not hesitate to say that in our opinion the
corporation has not been shown to have offended against the law
in a manner that should entail a forfeiture of its charter.
Certainly no court with any discretion to use in the matter would
visit upon the respondent and its thousands of shareholders the

extreme penalty of the law as a consequence of the delinquency

here shown to have been committed.
The law applicable to the case is in our opinion found in section
212 of the Code of Civil Procedure, as applied by this court
in Government of the Philippine Islands vs. Philippine Sugar
Estates Development Co. (38 Phil., 15). This section (212), in
prescribing the judgment to be rendered against a corporation in
an action of quo warranto, among other things says:
. . . When it is found and adjudged that a corporation has
offended in any matter or manner which does not by law
work as a surrender or forfeiture, or has misused a
franchise or exercised a power not conferred by law, but not
of such a character as to work a surrender or forfeiture of
its franchise, judgment shall be rendered that it be outset
from the continuance of such offense or the exercise of
such power.
This provision clearly shows that the court has a discretion with
respect to the infliction of capital punishment upon corporation
and that there are certain misdemeanors and misuses of
franchises which should not be recognized as requiring their
dissolution. In Government of the Philippine Islands vs. Philippine
Sugar Estates Development Co. (38 Phil., 15), it was found that the
offending corporation had been largely (though indirectly)
engaged in the buying and holding or real property for speculative
purposes in contravention of its charter and contrary to the
express provisions of law. Moreover, in that case the offending
corporation was found to be still interested in the properties so
purchased for speculative at the time the action was brought.
Nevertheless, instead of making an absolute and unconditional
order for the dissolution of the corporation, the judgment of
ouster was made conditional upon the failure of the corporation
to discontinue its unlawful conduct within six months after final
decision. In the case before us the respondent appears to have rid
itself of the San Clemente property many months prior to the
institution of this action. It is evident from this that the
dissolution of the respondent would not be an appropriate remedy

in this case. We do not of course undertake to say that a

corporation might not be dissolved for offenses of this nature
perpetrated in the past, especially if its conduct had exhibited a
willful obduracy and contempt of law. We content ourselves with
holding that upon the facts here before us the penalty of
dissolution would be excessively severe and fraught with
consequences altogether disproportionate to the offense
committed.
The evident purpose behind the law restricting the rights of
corporations with respect to the tenure of land was to prevent the
revival of the entail (mayorazgo) or other similar institution by
which land could be fettered and its alienation hampered over
long periods of time. In the case before us the respondent
corporation has in good faith disposed of the piece of property
which appears to have been in its hands at the expiration of the
period fixed by law, and a fair explanation is given of its failure to
dispose of it sooner. Under these circumstances the destruction of
the corporation would bring irreparable loss upon the thousand
of innocent shareholders of the corporation without any
corresponding benefit to the public. The discretion permitted to
this court in the application of the remedy of quo warranto forbids
so radical a use of the remedy.
But the case for the plaintiff supposes that the discretion of this
court in matters like that now before us has been expressly taken
away by the third section of Act No. 2792, and that the
dissolution of the corporation is obligatory upon the court a mere
finding that the respondent has violated the provision of the
Corporation Law in any respect. This makes necessary to examine
the Act last above-mentioned with some care. Upon referring
thereto, we find that it consists of three sections under the
following style:
No. 2792. An Act to amend certain sections of the
Corporation Law, Act Numbered Fourteen hundred and
fifty-nine, providing for the publication of the assets and
liabilities of corporations registering in the Bureau of
Commerce and Industry, determining the liability of the

officers of corporations with regard to the issuance of stock

or bonus, establishing penalties for certain things, and for
other purposes.
The first two section contain amendments to the Corporation Law
with respect to matters with which we are not here concurred.
The third section contains anew enactment to be inserted as
section 190 (A) in the corporation Law immediately following
section 190. This new section reads as follows:
SEC. 190. (A). Penalties. The violation of any of the
provisions of this Act and its amendments not otherwise
penalized therein, shall be punished by a fine of not more
than one thousand pesos, or by imprisonment for not more
than five years, or both, in the discretion of the court. If
the violation being proved, be dissolved by quo
warranto proceedings instituted by the Attorney-General or
by any provincial fiscal, by order of said Attorney-General:
Provided, That nothing in this section provided shall be
construed to repeal the other causes for the dissolution of
corporation prescribed by existing law, and the remedy
provided for in this section shall be considered as
additional to the remedies already existing.
The contention for the plaintiff is to the effect that the second
sentence in this enactment has entirely abrogated the discretion
of this court with respect to the application of the remedy of qou
warranto, as expressed in section 212 of the Code of Civil
Procedure, and that it is now mandatory upon us to dissolved any
corporation whenever we find that it has committed any violation
of the Corporation Law, however trivial. In our opinion in this
radical view of the meaning of the enactment is untenable. When
the statute says, "If the violation is committed by a corporation,
the same shall, upon such violation being proved, be dissolved
by quo warranto proceedings . . .," the intention was to indicate
that the remedy against the corporation shall be by action of quo
warranto. There was no intention to define the principles
governing said remedy, and it must be understood that in
applying the remedy the court is still controlled by the principles

established in immemorial jurisprudence. The interpretation

placed upon this language in the brief of the Attorney-General
would be dangerous in the extreme, since it would actually place
the life of all corporate investments in the official. No corporate
enterprise of any moment can be conducted perpetually without
some trivial misdemeanor against corporate law being committed
by some one or other of its numerous employees. As illustrations
of the preposterous effects of the provision, in the sense
contended for by the Attorney-General, the attorneys for the
respondent have called attention to the fact that under section 52
of the Corporation Law, a business corporation is required to keep
a stock book and a transfer book in which the names of
stockholders shall kept in alphabetical order. Again, under section
94, railroad corporations are required to cause all employees
working on passenger trains or at a station for passengers to wear
a badge on his cap or hat which will indicate his office. Can it be
supposed that the Legislature intended to penalize the violation of
such provisions as these by dissolution of the corporation
involved? Evidently such could not have been the intention; and
the only way to avoid the consequence suggested is to hold, as we
now hold, that the provision now under consideration has not
impaired the discretion of this court in applying the writ of quo
warranto.
Another way to put the same conclusion is to say that the
expression "shall be dissolved by quo warrantoproceedings" means
in effect, "may be dissolved by quo warranto proceedings in the
discretion of the court." The proposition that the word "shall" may
be construed as "may", when addressed by the Legislature to the
courts, is well supported in jurisprudence. In the case of Becker
vs. Lebanon and M. St. Ry. Co., (188 Pa., 484), the Supreme Court
of Pennsylvania had under consideration a statute providing as
follows:
It shall be the duty of the court . . . to examine, inquire
and ascertain whether such corporation does in fact
posses the right or franchise to do the act from which such
alleged injury to private rights or to the rights and

franchises of other corporations results; and if such rights

or franchises have not been conferred upon such
corporations, such courts, it exercising equitable
power, shall, by injunction, at suit of the private parties or
other corporations, restrain such injurious acts.
In an action based on this statute the plaintiff claimed injunctive
relief as a matter of right. But this was denied the court saying:
Notwithstanding, therefore, the use of the imperative
"shall" the injunction is not to be granted unless a proper
case for injunction be made out, in accordance with the
principles and practice of equity. The word "shall" when
used by the legislature to a court, is usually a grant of
authority and means "may", and even if it be intended to be
mandatory it must be subject to the necessary limitation
that a proper case has been made out for the exercise of
the power.
Other authorities amply sustain this view (People vs. Nusebaum,
66 N. Y. Supp., 129, 133; West Wisconsin R. Co.vs. Foley, 94 U.
S., 100, 103; 24 Law. Ed., 71; Clancy vs. McElroy, 30 Wash., 567;
70 Pac., 1095; State vs. West, 3 Ohio State, 509, 511; In re Lent,
40 N. Y. Supp., 570, 572; 16 Misc. Rep., 606; Ludlow vs. Ludlow's
Executors, 4 N. J. Law [1 Sothard], 387, 394; Whipple vs. Eddy,
161 Ill., 114;43 N. E., 789, 790; Borkheim vs. Fireman's Fund
Ins. Co., 38 Cal., 505, 506; Beasley vs. People, 89 Ill., 571, 575;
Donnelly vs. Smith, 128 Iowa, 257; 103 N. W., 776).
But section 3 of Act No. 2792 is challenged by the respondent on
the ground that the subject-matter of this section is not
expressed in the title of the Act, with the result that the section is
invalid. This criticism is in our opinion well founded. Section 3 of
our organic law (Jones Bill) declares, among other things, that
"No bill which may be enacted into law shall embrace more than
one subject, and that subject shall be expressed in the title of the
bill." Any law or part of a law passed by the Philippine Legislature
since this provision went into effect and offending against its
requirement is necessarily void.

Upon examining the entire Act (No. 2792), we find that it is

directed to three ends which are successively dealt with in the
first three sections of the Act. But it will be noted that these three
matters all relate to the Corporation Law; and it is at once
apparent that they might properly have been embodied in a single
Act if a title of sufficient unity and generality had been prefixed
thereto. Furthermore, it is obvious, even upon casual inspection,
that the subject-matter of each of the first two sections is
expressed and defined with sufficient precision in the title. With
respect to the subject-matter of section 3 the only words in the
title which can be taken to refer to the subject-matter of said
section are these, "An Act . . . establishing penalties for certain
things, and for other purposes." These words undoubtedly have
sufficient generality to cover the subject-matter of section 3 of the
Act. But this is not enough. The Jones Law requires that the
subject-matter of the bill "shall be expressed in the title of the
bill."
When reference is had to the expression "establishing penalties
for certain things," it is obvious that these words express nothing.
The constitutional provision was undoubtedly adopted in order
that the public might be informed as to what the Legislature is
about while bills are in process of passage. The expression
"establishing penalties for certain things" would give no definite
information to anybody as to the project of legislation intended
under this expression. An examination of the decided cases
shows that courts have always been indulgent of the practices of
the Legislature with respect to the form and generality of title, for
if extreme refinements were indulged by the courts, the work of
legislation would be unnecessarily hampered. But, as has been
observed by the California court, there must be some reasonable
limit to the generality of titles that will be allowed. The measure of
legality is whether the title is sufficient to give notice of the
general subject of the proposed legislation to the persons and
interests likely to be affected.
In Lewis vs. Dunne (134 Cal., 291), the court had before it a
statute entitled "An Act to revise the Code of Civil Procedure of the

State of California, by amending certain sections, repealing

others, and adding certain new sections." This title was held to
embrace more than one subject, which were not sufficiently
expressed in the title. In discussing the question the court said:
* * * It is apparent that the language of the title of the act
in question, in and of itself, express no subject whatever.
No one could tell from the title alone what subject of
legislation was dealt with in the body of the act; such
subject so far as the title of the act informs us, might have
been entirely different from anything to be found in the act
itself.
We cannot agree with the contention of some of
respondent's counsel apparently to some extent
countenanced by a few authorities that the provision of
the constitution in question can be entirely avoided by the
simple device of putting into the title of an act words which
denote a subject "broad" enough to cover everything. Under
that view, the title, "An act concerning the laws of the
state," would be good, and the convention and people who
framed and adopted the constitution would be convicted of
the folly of elaborately constructing a grave constitutional
limitation of legislative power upon a most important
subject, which the legislature could at once circumvent by
a mere verbal trick. The word "subject" is used in the
constitution embrace but "one subject" it necessarily
implies what everybody knows that there are
numerous subjects of the legislation, and declares that
only one of these subjects shall embraced in any one act.
All subjects cannot be conjured into one subject by the
mere magic of a word in a title.
In Rader vs. Township of Union (39 N. J. L., 509, 515), the
Supreme Court of New Jersey made the following observation:
* * * It is true, that it may be difficult to indicate, by a
formula, how specialized the title of a statute must be; but
it is not difficult to conclude that it must mean something
in the way of being a notice of what is doing. Unless it does

not enough that it embraces the legislative purpose it

must express it; and where the language is too general, it
will accomplish the former, but not the latter. Thus, a law
entitled "An act for a certain purpose," would embrace any
subject, but would express none, and, consequently, it
would not stand the constitutional test.
The doctrine properly applicable in matters of this kind is, we
think, fairly summed up in a current repository of jurisprudence
in the following language:
* * * While it may be difficult to formulate a rule by which
to determine the extent to which the title of a bill must
specialize its object, it may be safely assumed that the title
must not only embrace the subject of proposed legislation,
but also express it clearly and fully enough to give notice of
the legislative purpose. (25 R. C. L., p. 853.)
In dealing with the problem now before us the words "and for
other purposes "found at the end of the caption of Act No. 2792,
must be laid completely out of consideration. They express
nothing, and amount to nothing as a compliance with the
constitutional requirement to which attention has been directed.
This expression "(for other purposes") is frequently found in the
title of acts adopted by the Philippine Legislature; and its
presence in our laws is due to the adoption by our Legislature of
the style used in Congression allegation. But it must be
remembered that the legislation of Congress is subject to no
constitutional restriction with respect to the title of bills.
Consequently, in Congressional legislation the words "and for
other purposes" at least serve the purpose of admonishing the
public that the bill whose heading contains these words contains
legislation upon other subjects than that expressed in the title.
Now, so long as the Philippine Legislature was subject to no
restriction with respect to the title of bills intended for enactment
into general laws, the expression "for other purposes" could be
appropriately used in titles, not precisely for the purpose of
conveying information as to the matter legislated upon, but for
the purpose ad admonishing the public that any bill containing

such words in the title might contain other subjects than that
expressed in the definitive part of the title. But, when congress
adopted the Jones Law, the restriction with which we are now
dealing became effective here and the words "for other purposes"
could no longer be appropriately used in the title of legislative
bills. Nevertheless, the custom of using these words has still been
followed, although they can no longer serve to cover matter not
germane to the bill in the title of which they are used. But the
futility of adding these words to the style of any act is now
obvious (Cooley, Const. Lims., 8th ed., p. 302)
In the brief for the plaintiff it is intimated that the constitutional
restriction which we have been discussing is more or less of a
dead letter in this jurisdiction; and it seems to be taken for
granted that no court would ever presume to hold a legislative act
or part of a legislative act invalid for non-compliance with the
requirement. This is a mistake; and no utterance of this court can
be cited as giving currency to any such notion. On the contrary
the discussion contained in Central Capiz vs. Ramirez (40 Phil.,
883), shows that when a case arises where a violation of the
restriction is apparent, the court has no alternative but to declare
the legislation affected thereby to be invalid.
Second cause of action. The second cause of action is based
upon a charge that the respondent is owning and holding a
business lot, with the structure thereon, in the financial district
of the City of Manila is excess of its reasonable requirements and
in contravention of subsection 5 of section 13 of the corporation
Law. The facts on which this charge is based appear to be these:
On August 28, 1913, the respondent purchased 1,413 square
meters of land at the corner of Juan Luna Street and the Muelle
de la Industria, in the City of Manila, immediately adjacent to the
building then occupied by the Hongkong and Shanghai Banking
Corporation. At the time the respondent acquired this lot there
stood upon it a building, then nearly fifty years old, which was
occupied in part by the offices of an importing firm and in part by
warehouses of the same firm. The material used in the
construction was Guadalupe stone and hewn timber, and the

building contained none of the facilities usually found in a

modern office building.
In purchase of a design which had been formed prior to the
purchase of the property, the directors of the El Hogar Filipino
caused the old building to be demolished; and they erected
thereon a modern reinforced concrete office building. As at first
constructed the new building was three stories high in the main,
but in 1920, in order to obtain greater advantage from the use of
the land, an additional story was added to the building, making a
structure of four stories except in one corner where an additional
story was place, making it five stories high over an area of 117.52
square meters. It is admitted in the plaintiffs brief that this "noble
and imposing structure" to use the words of the AttorneyGeneral "has greatly improved the aspect of the banking and
commercial district of Manila and has greatly contributed to the
movement and campaign for the Manila Beautiful." It is also
admitted that the competed building is reasonably proportionate
in value and revenue producing capacity to the value of the land
upon which it stands. The total outlay of the respondent for the
land and the improvements thereon was P690,000 and at this
valuation the property is carried on the books of the company,
while the assessed valuation of the land and improvements is at
P786,478.
Since the new building was completed the respondent has used
about 324 square meters of floor space for its own offices and has
rented the remainder of the office space in said building,
consisting of about 3,175 square meters, to other persons and
entities. In the second cause of action of the complaint it is
supposed that the acquisition of this lot, the construction of the
new office building thereon, and the subsequent renting of the
same in great part to third persons, are ultra vires acts on the
part of the corporation, and that the proper penalty to be
enforced against it in this action is that if dissolution.
With this contention we are unable to agree. Under subsection 5
of section 13 of the Corporation Law, every corporation has the
power to purchase, hold and lease such real property as the

transaction of the lawful business of the corporation may

reasonably and necessarily require. When this property was
acquired in 1916, the business of El Hogar Filipino had developed
to such an extent, and its prospects for the future were such as to
justify its directors in acquiring a lot in the financial district of
the City of Manila and in constructing thereon a suitable building
as the site of its offices; and it cannot be fairly said that the area
of the lot 1,413 square meters was in excess of its
reasonable requirements. The law expressly declares that
corporations may acquire such real estate as is reasonably
necessary to enable them to carry out the purposes for which
they were created; and we are of the opinion that the owning of a
business lot upon which to construct and maintain its offices is
reasonably necessary to a building and loan association such as
the respondent was at the time this property was acquired. A
different ruling on this point would compel important enterprises
to conduct their business exclusively in leased offices a result
which could serve no useful end but would retard industrial
growth and be inimical to the best interests of society.
We are furthermore of the opinion that, inasmuch as the lot
referred to was lawfully acquired by the respondent, it is entitled
to the full beneficial use thereof. No legitimate principle can
discovered which would deny to one owner the right to enjoy his
(or its) property to the same extent that is conceded to any other
owner; and an intention to discriminate between owners in this
respect is not lightly to be imputed to the Legislature. The point
here involved has been the subject of consideration in many
decisions of American courts under statutes even more restrictive
than that which prevails in this jurisdiction; and the conclusion
has uniformly been that a corporations whose business may
properly be conducted in a populous center may acquire an
appropriate lot and construct thereon an edifice with facilities in
excess of its own immediate requirements.
Thus in People vs. Pullman's Palace-Car Co. (175 Ill., 125; 64 L. R.
A., 366), it appeared that the respondent corporation owned and
controlled a large ten-story business block in the City of Chicago,

worth $2,000,000, and that it occupied only about one-fourth

thereof for its own purposes, leasing the remainder to others at
heavy rentals. The corporate charter merely permitted the holding
of such real estate by the respondent as might be necessary for
the successful prosecution of its business. An attempt was made
to obtain the dissolution of the corporation in a quo
warranto proceeding similar to that now before us, but the
remedy was denied.
In Rector vs. Hartford Deposit Co., a question was raised as to the
power of the Deposit Company to erect and own a fourteen-story
building containing eight storerooms, one hundred suites of
offices, and one safety deposit vault, under a statute authorizing
the corporation to possess so much real estate "as shall be
necessary for the transaction of their business." The court said:
That the appellee company possessed ample power to
acquire real property and construct a building thereon for
the purpose of transacting therein the legitimate business
of the corporation is beyond the range of debate. Nor is the
contrary contended, but the insistence is that, under the
guise of erecting a building for corporate purposes, the
appellee company purposely constructed a much larger
building than its business required, containing many
rooms intended to be rented to others for offices and
business purposes, among them, the basement rooms
contracted to be leased to the appellant, and that in so
doing it designedly exceeded its corporate powers. The
position off appellant therefore is that the appellee
corporation has flagrantly abused its general power to
acquire real estate and construct a building thereon . . . It
was within the general scope of the express powers of the
appellee corporation to own and possess a building
necessary for its proper corporate purposes. In planning
and constructing such a building, as was said in People vs.
Pullman's Palace Car Co., supra, the corporation should not
necessarily be restricted to a building containing the
precise number of rooms its then business might require,

and no more, but that the future probable growth and

volume of its business might be considered and
anticipated, and a larger building, and one containing
more rooms than the present volume of business required
be erected, and the rooms not needed might be rented by
the corporation, provided, of course, such course should
be taken in good faith, and not as a mere evasion of the
public law and the policy of the state relative to the
ownership of real estate by corporations. In such state of
case the question is whether the corporation has abused or
excessively and unjustifiably used the power and authority
granted it by the state to construct buildings and own real
estate necessary for its corporate purposes.
In Home savings building Association vs. Driver (129 Ky., 754),
one of the questions before the court was precisely the same as
that now before us. Upon this the Supreme Court of Kentucky
said:
The third question is, has the association the right to erect,
remodel, or own a building of more than sufficient capacity
to accommodate its own business and to rent out the
excess? There is nothing in the Constitution, charter of the
association, or statutes placing any limitation upon the
character of a building which a corporation may erect as a
home in which to conduct its business. A corporation
conducting a business of the character of that in which
appellant is engaged naturally expects its business to grow
and expand from time to time, and, in building a home it
would be exercising but a short-sighted judgment if it did
not make provision for the future by building a home large
enough to take care of its expanding business, and hence,
even if it should build a house larger and roomier than its
present needs or interests require, it would be acting
clearly with the exercise of its corporate right and power.
The limitation which the statute imposes is that proper
conduct of its business, but it does not attempt to place
any restriction or limitation upon the right of the

corporation or association as to the character of building it

shall erect on said real estate; and, while the Constitution
and the statutes provide that no corporation shall engage
in any business other than that expressly authorized by its
charter, we are of opinion that, in renting out the
unoccupied and unused portions of the building so
erected, the association could not be said to engaged in any
other business than that authorized by its charter. The
renting of the unused portions of the building is a mere
incident in the conduct of its real business. We would not
say that a building association might embark in the
business of building houses and renting or leasing them,
but there is quite a difference in building or renting a
house in which to conduct its own business and leasing
the unused portion thereof for the time being, or until such
time as they may be needed by the association, and in
building houses for the purpose of renting or leasing them.
The one might properly be said to be the proper exercise of
a power incident to the conduct of its legitimate business,
whereas the other would be a clear violation of that
provision of the statute which denies to any corporation
the right to conduct any business other than that
authorized by its charter. To hold otherwise would be to
charge most of the banking institutions, trust companies
and other corporations, such as title guaranty companies,
etc., doing with violating the law; for it is known that there
are few of such institutions that do not, at times, rent out
or lease the unneeded portions of the building occupied by
them as homes. We do not think that in so doing they are
violating any provisions of the law, but that the renting out
of the unused or unoccupied portions of their buildings is
but an incident in the conduct of their business.
In Wingert vs. First National Bank of Hagerstown, Md. (175 Fed.,
739, 741), a stockholder sought to enjoin the bank from building
a six-story building owned by the bank in the commercial district
of Hagerstown of which only the first story was to be used by the

bank, the remaining stories to be rented out for offices and places
of business, on the theory that such action was ultra vires and in
violation of the provisions of the national banking act confining
such corporations to the holding, only, of such real estate "as
shall be necessary for its immediate accommodation in the
transaction of its business."
The injunction was denied, the court adopting the opinion of the
lower court in which the following was said:
'The other ground urged by the complainant is that the
proposed action is violative of the restriction which permits
a national bank to hold only such real estate as shall be
necessary for its immediate accommodation in the
transaction of its business, and that, therefore, the
erection of a building which will contain offices not
necessary for the business of the bank is not permitted by
the law, although that method of improving the lot may be
the most beneficial use that can be made of it. It is matter
of common knowledge that the actual practice of national
banks is to the contrary. Where ground is valuable, it may
probably be truly said that the majority of national bank
buildings are built with accommodations in excess of the
needs of the bank for the purpose of lessening the bank's
expense by renting out the unused portion. If that were not
allowable, many smaller banks in cities would be driven to
become tenants as the great cost of the lot would be
prohibitive of using it exclusively for the banking
accommodation of a single bank. As indicative of the
interpretation of the law commonly received and acted
upon, reference may be made to the reply of the
Comptroller of the Currency to the injury by the bank in
this case asking whether the law forbids the bank
constructing such a building as was contemplated.
'The reply was follows: "Your letter of the 9th instant
received, stating that the directors contemplate making
improvements in the bank building and inquiring if there is
anything in the national banking laws prohibiting the

construction of a building which will contain floors for

offices to be rented out by the bank as well as the banking
room. Your attention is called to the case of Brown vs.
Schleier, 118 Fed., 981 [55 C. C. A, 475], in which the
court held that: 'If the land which a national bank
purchases or leases for the accommodation of its business
is very valuable it may exercise the same rights that belong
to other landowners of improving it in a way that will yield
the largest income, lessen its own rent, and render that
part of its funds which are invested in realty most
productive.'" This seems to be the common sense
interpretation of the act of Congress and is the one which
prevails.'
It would seem to be unnecessary to extend the opinion by lengthy
citations upon the point under consideration, but Brown vs.
Schleier (118 Fed., 981), may be cited as being in harmony with
the foregoing authorities. In dealing with the powers of a national
bank the court, in this case, said:
When an occasion arises for an investment in real property
for either of the purposes specified in the statute the
national bank act permits banking associations to act as
any prudent person would act in making an investment in
real estate, and to exercise the same measure of judgment
and discretion. The act ought not to be construed in such
as way as to compel a national bank, when it acquires real
property for a legitimate purpose, to deal with it otherwise
than a prudent land owner would ordinarily deal with such
property.
In the brief of the Attorney-General reliance is place almost
entirely upon two Illinois cases, namely Africani Home Purchase
and Loan Association vs. Carroll (267 Ill., 380), and First Methodist
Episcopal Church of Chicago vs. Dixon (178 Ill., 260). In our
opinion these cases are either distinguishable from that now
before us, or they reflect a view of the law which is incorrect. At
any rate the weight of judicial opinion is so overwhelmingly in
favor of sustaining the validity of the acts alleged in the second

cause of action to have been done by the respondent in excess of

its powers that we refrain from commenting at any length upon
said cases. The ground stated in the second cause of action is in
our opinion without merit.
Third cause of action. Under the third cause of action the
respondent is charged with engaging in activities foreign to the
purposes for which the corporation was created and not
reasonable necessary to its legitimate ends. The specifications
under this cause of action relate to three different sorts of
activities. The first consist of the administration of the offices in
the El Hogar building not used by the respondent itself and the
renting of such offices to the public. As stated in the discussion
connected with the second cause of action, the respondent uses
only about ten per cent of the office space in the El Hogar
building for its own purposes, and it leases the remainder to
strangers. In the years 1924 and 1925 the respondent received as
rent for the leased portions of the building the sums of
P75,395.06 and P58,259.27, respectively. The activities here
criticized clearly fall within the legitimate powers of the
respondent, as shown in what we have said above relative to the
second cause of action. This matter will therefore no longer detain
us. If the respondent had the power to acquire the lot, construct
the edifice and hold it beneficially, as there decided, the beneficial
administration by it of such parts of the building as are let to
others must necessarily be lawful.
The second specification under the third cause of action has
reference to the administration and management of properties
belonging to delinquent shareholders of the association. In this
connection it appears that in case of delinquency on the part of
its shareholders in the payment of interest, premium, and dues,
the association has been accustomed (pursuant to clause 8 of its
standard mortgage) to take over and manage the mortgaged
property for the purpose of applying the income to the obligations
of the debtor party. For these services the respondent charges a
commission at the rate of 2 per centum on sums collected. The
case for the government supposes that the only remedy which the

respondent has in case of default on the part of its shareholders

is to proceed to enforce collection of the whole loan in the manner
contemplated in section 185 of the Corporation Law. It will be
noted, however, that, according to said section, the association
may treat the whole indebtedness as due, "at the option of the
board of directors," and this remedy is not made exclusive. We see
no reason to doubt the validity of the clause giving the
association the right to take over the property which constitutes
the security for the delinquent debt and to manage it with a view
to the satisfaction of the obligations due to the debtor than the
immediate enforcement of the entire obligation, and the validity of
the clause allowing this course to be taken appears to us to be
not open to doubt. The second specification under this cause of
action is therefore without merit, as was true of the first.
The third specification under this cause of action relates to
certain activities which are described in the following paragraphs
contained in the agreed statements of facts:.
El Hogar Filipino has undertaken the management of some
parcels of improved real estate situated in Manila not
under mortgage to it, but owned by shareholders, and has
held itself out by advertisement as prepared to do so. The
number of properties so managed during the years 1921 to
1925, inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the
persons whose properties are so managed for them became
shareholders only to enable them to take advantage
thereof.
The services rendered in the management of such
improved real estate by El Hogar Filipino consist in the
renting of the same, the payment of real estate taxes and
insurance for the account of the owner, causing the

necessary repairs for upkeep to be made, and collecting

rents due from tenants. For the services so rendered in the
management of such properties El Hogar Filipino receives
compensation in the form of commissions upon the gross
receipts from such properties at rates varying from two and
one-half per centum to five per centum of the sums so
collected, according to the location of the property and the
effort involved in its management.
The work of managing real estate belonging to nonborrowing shareholders administered by El Hogar Filipino
is carried on by the same members of the staff who attend
to the details of the management of properties
administered by the manager of El Hogar Filipino under
the provisions of paragraph 8 of the standard mortgage
form, and of properties bought in on foreclosure of
mortgage.
The practice described in the passage above quoted from the
agreed facts is in our opinion unauthorized by law. Such was the
view taken by the bank examiner of the Treasury Bureau in his
report to the Insular Treasurer on December 21, 1925, wherein
the practice in question was criticized. The administration of
property in the manner described is more befitting to the
business of a real estate agent or trust company than to the
business of a building and loan association. The practice to which
this criticism is directed relates of course solely to the
management and administration of properties which are not
mortgaged to the association. The circumstance that the owner of
the property may have been required to subscribe to one or more
shares of the association with a view to qualifying him to receive
this service is of no significance. It is a general rule of law that
corporations possess only such express powers. The management
and administration of the property of the shareholders of the
corporation is not expressly authorized by law, and we are unable
to see that, upon any fair construction of the law, these activities
are necessary to the exercise of any of the granted powers. The
corporation, upon the point now under the criticism, has clearly

extended itself beyond the legitimate range of its powers. But it

does not result that the dissolution of the corporation is in order,
and it will merely be enjoined from further activities of this sort.
Fourth cause of action. It appears that among the by laws of the
association there is an article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an
absolute majority of its members, is empowered to cancel
shares and to return to the owner thereof the balance
resulting from the liquidation thereof whenever, by reason
of their conduct, or for any other motive, the continuation
as members of the owners of such shares is not desirable.
This by-law is of course a patent nullity, since it is in direct
conflict with the latter part of section 187 of the Corporation Law,
which expressly declares that the board of directors shall not have
the power to force the surrender and withdrawal of unmatured
stock except in case of liquidation of the corporation or of
forfeiture of the stock for delinquency. It is agreed that this
provision of the by-laws has never been enforced, and in fact no
attempt has ever been made by the board of directors to make use
of the power therein conferred. In November, 1923, the Acting
Insular Treasurer addressed a letter to El Hogar Filipino, calling
attention to article 10 of its by-laws and expressing the view that
said article was invalid. It was therefore suggested that the article
in question should be eliminated from the by-laws. At the next
meeting of the board of directors the matter was called to their
attention and it was resolved to recommend to the shareholders
that in their next annual meeting the article in question be
abrogated. It appears, however, that no annual meeting of the
shareholders called since that date has been attended by a
sufficient number of shareholders to constitute a quorum, with
the result that the provision referred to has no been eliminated
from the by-laws, and it still stands among the by-laws of the
association, notwithstanding its patent conflict with the law.
It is supposed, in the fourth cause of action, that the existence of
this article among the by-laws of the association is a
misdemeanor on the part of the respondent which justifies its

dissolution. In this view we are unable to concur. The obnoxious

by-law, as it stands, is a mere nullity, and could not be enforced
even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an
invalid provision in the by-laws of a corporation; and if there were
such, the hazards incident to corporate effort would certainly be
largely increased. There is no merit in this cause of action.
Fifth cause of action. In section 31 of the Corporation Law it is
declared that, "at all elections of directors there must be present,
either in person or by representative authorized to act by written
proxy, the owners of the majority of the subscribed capital stock
entitled to vote. . . ." Conformably with this requirement it is
declared in article 61 of the by-laws of El Hogar Filipino that, "the
attendance in person or by proxy of shareholders owning one-half
plus one of the shareholders shall be necessary to constitute a
quorum for the election of directors. At the general annual
meetings of the El Hogar Filipino held in the years 1911 and
1912, there was a quorum of shares present or represented at the
meetings and directors were duly elected accordingly. As the
corporation has grown, however, it has been fond increasingly
difficult to get together a quorum of the shareholders, or their
proxies, at the annual meetings; and with the exception of the
annual meeting held in 1917, when a new directorate was elected,
the meetings have failed for lack of quorum. It has been foreseen
by the officials in charge of the respondent that this condition of
affairs would lead to embarrassment, and a special effort was
made by the management to induce a sufficient number of
shareholders to attend the annual meeting for February, 1923. In
addition to the publication of notices in the newspapers, as
required by the by-laws, a letter of notification was sent to every
shareholder at his last known address, together with a blank form
of proxy to be used in the event the shareholder could not
personally attend the meeting. Notwithstanding these special
efforts the meeting was attended only by shareholders, in person
and by proxy, representing 3,889 shares, out of a total of 106,491
then outstanding and entitled to vote.

Owing to the failure of a quorum at most of the general meetings

since the respondent has been in existence, it has been the
practice of the directors to fill vacancies in the directorate by
choosing suitable persons from among the stockholders. This
custom finds its sanction in article 71 of the by-laws, which reads
as follows:
ART. 71. The directors shall elect from among the
shareholders members to fill the vacancies that may occur
in the board of directors until the election at the general
meeting.
The person thus chosen to fill vacancies in the directorate have, it
is admitted, uniformly been experienced and successful business
and professional men of means, enjoying earned incomes of from
P12,000 to P50,000 per annum, with an annual average of
P30,000 in addition to such income as they derive from their
properties. Moreover, it appears that several of the individuals
constituting the original directorate and persons chosen to supply
vacancies therein belong to prominent Filipino families, and that
they are more or less related to each other by blood or marriage.
In addition to this it appears that it has been the policy of the
directorate to keep thereon some member or another of a single
prominent American law firm in the city.
It is supposed in the statement of the fifth cause of action in the
complaint that the failure of the corporation to hold annual
meetings and the filling of vacancies in the directorate in the
manner described constitute misdemeanors on the part of the
respondent which justify the resumption of the franchise by the
Government and dissolution of the corporation; and in this
connection it is charge that the board of directors of the
respondent has become a permanent and self perpetuating body
composed of wealthy men instead of wage earners and persons of
moderate means. We are unable to see the slightest merit in the
charge. No fault can be imputed to the corporation on account of
the failure of the shareholders to attend the annual meetings; and
their non-attendance at such meetings is doubtless to be
interpreted in part as expressing their satisfaction of the way in

which things have been conducted. Upon failure of a quorum at

any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and
qualified. Unless the law or the charter of a corporation expressly
provides that an office shall become vacant at the expiration of
the term of office for which the officer was elected, the general
rule is to allow the officer to holdover until his successor is duly
qualified. Mere failure of a corporation to elect officers does not
terminate the terms of existing officers nor dissolve the
corporation (Quitman Oil Company vs. Peacock, 14 Ga. App.,
550; Jenkins vs. Baxter, 160 Pa. State, 199; New York B. & E. Ry.
Co. vs. Motil, 81 Conn., 466; Hatch vs. Lucky Bill Mining
Company, 71 Pac., 865; Youree vs.Home Town Matual Ins.
Company, 180 Missouri, 153; Cassell vs. Lexington, H. and P.
Turnpike Road Co., 10 Ky. L. R., 486). The doctrine above stated
finds expressions in article 66 of the by-laws of the respondent
which declares in so many words that directors shall hold office
"for the term of one year on until their successors shall have been
elected and taken possession of their offices."
It results that the practice of the directorate of filling vacancies by
the action of the directors themselves is valid. Nor can any
exception be taken to then personality of the individuals chosen
by the directors to fill vacancies in the body. Certainly it is no fair
criticism to say that they have chosen competent businessmen of
financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not
disqualify a man for filling positions of responsibility in corporate
affairs.
Sixth cause of action. Under the sixth cause of action it is
alleged that the directors of El Hogar Filipino, instead of serving
without pay, or receiving nominal pay or a fixed salary, as the
complaint supposes would be proper, have been receiving large
compensation, varying in amount from time to time, out of the
profits of the respondent. The facts relating to this cause of action
are in substance these:

Under section 92 of the by-laws of El Hogar Filipino 5 per centum

of the net profit shown by the annual balance sheet is distributed
to the directors in proportion to their attendance at meetings of
the board. The compensation paid to the directors from time to
time since the organization was organized in 1910 to the end of
the year 1925, together with the number of meetings of the board
held each year, is exhibited in the following table:
Compensation
Year

paid directors
as a whole

Number
of
meetings
held

Rate per
meeting
as
a
whole

1911 ........................
P 4,167.96
..........

25

P
166.71

1912 ........................
10,511.87
..........

29

362.47

1913 ........................
15,479.29
..........

27

573.30

1914 ........................
19,164.72
..........

27

709.80

1915 ........................
24,032.85
..........

25

961.31

1916 ........................
27,539.50
..........

28

983.55

1917 ........................
31,327.00
..........

26

1,204.8
8

1918 ........................
32,858.35
..........

20

1,642.9
1

1919 ........................ 36,318.78

21

1,729.4

..........

1920 ........................
63,517.01
..........

28

2,268.4
6

1921 ........................
36,815.33
..........

25

1,472.6
1

1922 ........................
43,133.73
..........

25

1,725.3
4

1923 ........................
39,773.61
..........

27

1,473.0
9

1924 ........................
38,651.92
..........

26

1,486.6
1

1925 ........................
35,719.27
..........

26

1,373.8
1

It will be note that the compensation above indicated as accruing

to the directorate as a whole has been divided among the
members actually present at the different meetings. As a result of
this practice, and the liberal measure of compensation adopted,
we find that the attendance of the membership at the board
meetings has been extraordinarily good. Thus, during the years
1920 to 1925, inclusive, when the board was composed of nine
members, the attendance has regularly been eight meeting with
the exception of two years when the average attendance was
seven. It is insisted in the brief for the Attorney-General that the
payment of the compensation indicated is excessive and
prejudicial to he interests of the shareholders at large. For the
respondent, attention is directed to the fact that the liberal policy
adopted by the association with respect to the compensation of
the directors has had highly beneficial results, not only in
securing a constant attendance on the part of the membership,
but in obtaining their intelligent attention to the affairs of the
association. Certainly, in this connection, the following words

from the report of the government examiners for 1918 to the

Insular Treasurer contain matter worthy of consideration:
The management of the association is entrusted to men of
recognized ability in financial affairs and it is believed that they
have long foreseen all possible future contingencies and that
under such men the interests of the stockholders are duly
protected. The steps taken by the directorate to curtail the influx
of unnecessary capital into the association's coffers, as
mentioned above, reveals how the men at grasp the situation and
to apply the necessary remedy as the circumstances were found
in the same excellent condition as in the previous examination.
In so far as this court is concerned the question here before us is
not one concerning the propriety and wisdom of the measure of
compensation adopted by the respondent but rather the question
of the validity of the measure. Upon this point there can, it seems
to us, be no difference of intelligent opinion. The Corporation Law
does not undertake to prescribe the rate of compensation for the
directors of corporations. The power to fixed the compensation
they shall receive, if any, is left to the corporation, to be
determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this
authority the compensation for the directors of El Hogar Filipino
has been fixed in section 92 of its by-laws, as already stated. The
justice and property of this provision was a proper matter for the
shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the
amount paid as compensation to the directors has increased
beyond what would probably be necessary to secure adequate
service from them is matter that cannot be corrected in this
action; nor can it properly be made a basis for depriving the
respondent of its franchise, or even for enjoining it from
compliance with the provisions of its own by-laws. If a mistake
has been made, or the rule adopted in the by-laws meeting to
change the rule. The remedy, if any, seems to lie rather in
publicity and competition, rather than in a court proceeding. The
sixth cause of action is in our opinion without merit.

Seventh cause of action. It appears that the promoter and

organizer of El Hogar Filipino was Mr. Antonio Melian, and in the
early stages of the organization of the association the board of
directors authorized the association to make a contract with him
with regard to the services him therefor. Pursuant to this
authority the president of the corporation, on January 11, 1911,
entered into a written agreement with Mr. Melian, which is
reproduced in the agreed statement of facts and of which the
important clauses are these:
1. The corporation "El Hogar Filipino Sociedad Mutua de
Construccion y Prestamos," and on its behalf its president,
Don Antonio R. Roxas, hereby confers on Don Antonio
Melian the office of manager of said association for the
period of one year from the date of this contract.
2. Don Antonio Melian accepts said office and undertakes
to render the services thereto corresponding for the period
of one year, as prescribed by the by-laws of the
corporation, without salary.
3. Don Antonio Melian furthermore undertakes to pay for
his own account, all the expenses incurred in the
organization of the corporation.
4. Don Antonio Melian further undertakes to lend to the
corporation, without interest the sum of six thousand
pesos (P6,000), Philippine Currency, for the purpose of
meeting the expense of rent, office supplies, etcetera, until
such time as the association has sufficient funds of its own
with which to return this loan: Provided, nevertheless, That
the maximum period thereof shall not exceed three (3)
years.
5. Don Antonio Melian undertakes that the capital of the
association shall amount to the sum of four hundred
thousand pesos (P400,000), Philippine currency, par value,
during the first year of its duration.
6. In compensation of the studies made and services
rendered by Don Antonio Melian for its organization, the
expenses incurred by him to that end, and in further

consideration of the said loan of six thousand pesos

(P6,000), and of the services to be rendered by him as
manager, and of the obligation assumed by him that the
nominal value of the capital of the association shall reach
the sum of four hundred thousand pesos (P400,000)
during the first year of its duration, the corporation 'El
Hogar Filipino Sociedad Mutua de Construccion y
Prestamos' hereby grants him five per centum (5%) of the
net profits to be earned by it in each year during the period
fixed for the duration of the association by its articles of
incorporation;Provided, that this participation in the
profits shall be transmitted to the heirs of Seor Melian in
the event of his death; And provided further, that the
performance of all the obligations assumed by Seor
Melian in favor of the association, in accordance with this
contract, shall and does constitute a condition precedent to
the acquisition by Seor Melian of the right to the said
participation in the profits of the association, unless the
non-performance of such obligations shall be due to a
fortuitous event or force majeure.
In conformity with this agreement there was inserted in section
92 of the by-laws of the association a provision recognizing the
rights of Melian, as founder, to 5 per centum of the net profits
shown by the annual balance sheet, payment of the same to be
made to him or his heirs during the life of the association. It is
declared in said article that this portion of the earnings of the
association is conceded to him in compensation for the studies,
work and contributions made by him for the organization of El
Hogar Filipino and the performance on his part of the contract of
January 11, 1911, above quoted. During the whole life of the
association, thus far, it has complied with the obligations
assumed by it in the contract above- mentioned; and during the
years 1911 to 1925, inclusive, it paid to him as founder's royalty
the sum of P459,011.19, in addition to compensation received
from the association by him in to remuneration of services to the
association in various official capacities.

As a seventh cause of action it is alleged in the complaint that

this royalty of the founder is "unconscionable, excessive and out
of all proportion to the services rendered, besides being contrary
to and incompatible with the spirit and purpose of building and
loan associations." It is not alleged that the making of this
contract was beyond the powers of the association (ultra vires);
nor it alleged that it is vitiated by fraud of any kind in its
procurement. Nevertheless, it is pretended that in making and
observing said contract the respondent committed an offense
requiring its dissolution, or, as is otherwise suggested, that the
association should be enjoined from performing the agreement.
It is our opinion that this contention is entirely without merit.
Stated in its true simplicity, the primary question here is whether
the making of a (possibly) indiscreet contract is a capital offense
in a corporation, a question which answers itself. No possible
doubt exists as to the power of a corporation to contract for
services rendered and to be rendered by a promoter in connection
with organizing and maintaining the corporation. It is true that
contracts with promoters must be characterized by good faith; but
could it be said with certainty, in the light of facts existing at the
time this contract was made, that the compensation therein
provided was excessive? If the amount of the compensation now
appears to be a subject of legitimate criticism, this must be due to
the extraordinary development of the association in recent years.
If the Melian contract had been clearly ultra vires which is not
charged and is certainly untrue its continued performance
might conceivably be enjoined in such a proceeding as this; but if
the defect from which it suffers is mere matter for an action
because Melian is not a party. It is rudimentary in law that an
action to annul a contract cannot be maintained without joining
both the contracting parties as defendants. Moreover, the proper
party to bring such an action is either the corporation itself, or
some shareholder who has an interest to protect.
The mere fact that the compensation paid under this contract is
in excess of what, in the full light of history, may be considered
appropriate is not a proper consideration for this court, and

supplies no ground for interfering with its performance. In the

case of El Hogar Filipino vs. Rafferty (37 Phil., 995), which was
before this court nearly ten years ago, this court held that the El
Hogar Filipino is contract with Mr. Melian did not affect the
association's legal character. The inference is that the contract
under consideration was then considered binding, and it occurred
to no one that it was invalid. It would be a radical step indeed for
a court to attempt to substitute its judgment for the judgment of
the contracting parties and to hold, as we are invited to hold
under this cause of action, that the making of such a contract as
this removes the respondent association from the pale of the law.
The majority of the court is of the opinion that our traditional
respect for the sanctity of the contract obligation should prevail
over the radical and innovating tendencies which find acceptance
with some and which, if given full rein, would go far to sink
legitimate enterprise in the Islands into the pit of populism and
bolshevism. The seventh count is not sustainable.
Eight cause of action. Under the fourth cause of action we had
case where the alleged ground for the revocation of the
respondent's charter was based upon the presence in the by-laws
of article 10 that was found to be inconsistent with the express
provisions of law. Under the eight cause of action the alleged
ground for putting an end to the corporate life of the respondent
is found in the presence of other articles in the by-laws, namely,
articles 70 and 76, which are alleged to be unlawful but which, as
will presently be seen, are entirely valid. Article 70 of the by-laws
in effect requires that persons elected to the board of directors
must be holders of shares of the paid up value of P5,000 which
shall be held as security may be put up in the behalf of any
director by some other holder of shares in the amount stated.
Article 76 of the by-laws declares that the directors waive their
right as shareholders to receive loans from the association.
It is asserted, under the eight cause of action, that article 70 is
objectionable in that, under the requirement for security, a poor
member, or wage-earner, cannot serve as director, irrespective of
other qualifications and that as a matter of fact only men of

means actually sit on the board. Article 76 is criticized on the

ground that the provision requiring directors to renounce their
right to loans unreasonably limits their rights and privileges as
members. There is nothing of value in either of theses
suggestions. Section 21 of the Corporation Law expressly gives
the power to the corporation to provide in its by-laws for the
qualifications of directors; and the requirement of security from
them for the proper discharge of the duties of their office, in the
manner prescribed in article 70, is highly prudent and in
conformity with good practice. Article 76, prohibiting directors
from making loans to themselves, is of course designed to prevent
the possibility of the looting of the corporation by unscrupulous
directors. A more discreet provision to insert in the by-laws of a
building and loan association would be hard to imagine. Clearly,
the eighth cause of action cannot be sustained.
Ninth cause of action. The specification under this head is in
effect that the respondent has abused its franchise in issuing
"special" shares. The issuance of these shares is allege to be
illegal and inconsistent with the plan and purposes of building
and loan associations; and in particular, it is alleged and
inconsistent with the plan and purposes of building and loan
associations; and in particular, it is alleged that they are, in the
main, held by well-to-wage-earners for accumulating their modest
savings for the building of homes.
In the articles of incorporation we find the special shares
described as follows:
"Special" shares shall be issued upon the payment of 80
per cent of their par value in cash, or in monthly dues of
P10. The 20 per cent remaining of the par value of such
shares shall be completed by the accumulation thereto of
their proportionate part of the profits of the corporation. At
the end of each quarter the holders of special shares shall
be entitled to receive in cash such part of the net profits of
the corporation corresponding to the amount on such date
paid in by the holders of special shares, on account
thereof, as shall be determined by the directors, and at the

end of each year the full amount of the net profits available
for distribution corresponding to the special shares. The
directors shall apply such part as they deem advisable to
the amortization of the subscription to capital with respect
to shares not fully paid up, and the remainder of the
profits, if any, corresponding to such shares, shall be
delivered to the holders thereof in accordance with the
provision of the by-laws.
The ground for supposing the issuance of the "special" shares to
be unlawful is that special shares are not mentioned in the
Corporation Law as one of the forms of security which may be
issued by the association. In the agreed statement of facts it is
said that special shares are issued upon two plans. By the
second, the shareholder, upon subscribing, pays in cash P10 for
each share taken, and undertakes to pay P10 a month, as dues,
until the total so paid in amounts to P160 per share. On
December 31, 1925, there were outstanding 20,844 special
shares of a total paid value (including accumulations ) of
P3,680,162.51. The practice of El Hogar Filipino, since 1915, has
been to accumulate to each special share, at the end of the year,
one-tenth of the divident declared and to pay the remainder of the
divident in cash to the holders of shares. Since the same year
dividend have been declared on the special and common shares
at the rate of 10 per centum per annum. When the amount paid
in upon any special share plus the accumulated dividends
accruing to it, amounts to the par value of the share (P200), such
share matures and ceases to participate further in the earning.
The amount of the par value of the share (P200) is then returned
to the shareholder and the share cancelled. Holders of special and
ordinary shares participate ratably in the dividends declared and
distributed, the part pertaining to each share being computed on
the basis of the capital paid in, plus the accumulated dividends
pertaining to each share at the end of the year. The total number
of shares of El Hogar Filipino outstanding on December 31, 1925,
was 125,750, owned by 5,826 shareholders, and dividend into
classes as follows:

Preferred shares .................................. 1,503

Special shares ..................................... 20,884
Ordinary shares .................................. 103,363
The matter of the propriety of the issuance of special shares by El
Hogar Filipino has been before this court in two earlier cases, in
both of which the question has received the fullest consideration
from this court. In El Hogar Filipino vs. Rafferty (37 Phil., 995), it
was insisted that the issuance of such shares constituted a
departure on the part of the association from the principle of
mutuality; and it was claimed by the Collector of Internal Revenue
that this rendered the association liable for the income tax to
which other corporate entities are subject. It was held that this
contention was untenable and that El Hogar Filipino was a
legitimate building and loan association notwithstanding the
issuance of said shares. In Sevireno vs. El Hogar Filipino (G. R. No.
24926),2 and the related cases of Gervasio Miraflores and Gil
Lopes against the same entity, it was asserted by the plaintiffs
that the emission of special shares deprived the herein responded
of the privileges and immunities of a building and loan
association and that as a consequence the loans that had been
made to the plaintiffs in those cases were usurious. Upon an
elaborate review of the authorities, the court, though divided,
adhered to the principle announced in the earlier case and held
that the issuance of the special shares did not affect the
respondent's character as a building and loan association nor
make its loans usurious. In view of the lengthy discussion
contained in the decisions above-mentioned, it would appear to
be an act of supererogation on our part to go over the same
ground again. The discussion will therefore not be repeated, and
what is now to be said should be considered supplemental
thereto.
Upon examination of the nature of the special shares in the light
of American usage, it will be found that said shares are precisely
the same kind of shares that, in some American jurisdictions, are
generally known as advance payment shares; in if close attention

be paid to the language used in the last sentence of section 178 of

the Corporation Law, it will be found that special shares where
evidently created for the purpose of meeting the condition cause
by the prepayment of dues that is there permitted. The language
of this provision is as follow "payment of dues or interest may be
made in advance, but the corporation shall not allow interest on
such advance payment at a greater rate than six per centum per
annum nor for a longer period than one year." In one sort of
special shares the dues are prepaid to the extent of P160 per
share; in the other sort prepayment is made in the amount of P10
per share, and the subscribers assume the obligation to pay P10
monthly until P160 shall have been paid.
It will escape notice that the provision quoted say that interest
shall not be allowed on the advance payments at a greater rate
than six per centum per annum nor for a longer period than one
year. The word "interest " as there used must be taken in its true
sense of compensation for the used of money loaned, and it not
must not be confused with the dues upon which it is
contemplated that the interest may be paid. Now, in the absence
of any showing to the contrary, we infer that no interest is ever
paid by the association in any amount for the advance payments
made on these shares; and the reason is to be found in the fact
that the participation of the special shares in the earnings of the
corporation, in accordance with section 188 of the Corporation
Law, sufficiently compensates the shareholder for the advance
payments made by him; and no other incentive is necessary to
induce inventors to purchase the stock.
It will be observed that the final 20 per centum of the par value of
each special share is not paid for by the shareholder with funds
out of the pocket. The amount is satisfied by applying a portion of
the shareholder's participation in the annual earnings. But as the
right of every shareholder to such participation in the earnings is
undeniable, the portion thus annually applied is as much the
property of the shareholder as if it were in fact taken out of his
pocket. It follows that the mission of the special shares does not

involve any violation of the principle that the shares must be sold
at par.
From what has been said it will be seen that there is express
authority, even in the very letter of the law, for the emission of
advance-payment or "special" shares, and the argument that
these shares are invalid is seen to be baseless. In addition to this
it is satisfactorily demonstrated in Severino vs. El Hogar Filipino,
supra, that even assuming that the statute has not expressly
authorized such shares, yet the association has implied authority
to issue them. The complaint consequently fails also as regards
the stated in the ninth cause of action.
Tenth cause of action. Under this head of the complaint it is
alleged that the defendant is pursuing a policy of depreciating, at
the rate of 10 per centum per annum, the value of the real
properties acquired by it at its sales; and it is alleged that this
rate is excessive. From the agreed statement it appears that since
its organization in 1910 El Hogar Filipino, prior to the end of the
year 1925, had made 1,373 loans to its shareholders secured by
first mortgages on real estate as well as by the pledge of the
shares of the borrowers. In the same period the association has
purchased at foreclosure sales the real estate constituting the
security for 54 of the aforesaid loans. In making these purchases
the association has always bid the full amount due to it from the
debtor, after deducting the withdrawal value of the shares pledged
as collateral, with the result that in no case has the shareholder
been called upon to pay a deficiency judgement on foreclosure.
El Hogar Filipino places real estate so purchased in its inventory
at actual cost, as determined by the amount bid on foreclosure
sale; and thereafter until sold the book value of such real estate is
depreciated at the rate fixed by the directors in accordance with
their judgment as to each parcel, the annual average depreciation
having varied from nothing to a maximum of 14.138 per cent. The
sales thereof, but sales are made for the best prices obtainable,
whether greater or less than the book value.
It is alleged in the complaint that depreciation is charged by the
association at the rate of 10 per centum per annum. The agreed

statement of facts on this point shows that the annual average

varies from nothing to a maximum of something over 14 per
centum. We are thus left in the dark as to the precise
depreciation allowed from year to year. It is not claimed for the
Government that the association is without power to allow some
depreciation; and it is quite clear that the board of directors
possesses a discretion in this matter. There is no positive
provision of law prohibiting the association from writing off a
reasonable amount for depreciation on its assets for the purpose
of determining its real profits; and article 74 of its by-laws
expressly authorizes the board of directors to determine each year
the amount to be written down upon the expenses of installation
and the property of the corporation. There can be no question
that the power to adopt such a by-law is embraced within the
power to make by-laws for the administration of the corporate
affairs of the association and for the management of its business,
as well as the care, control and disposition of its property (Act No.
1459, sec. 13 [7]). But the Attorney-General questions the
exercise of the direction confided to the board; and it is insisted
that the excessive depreciation of the property of the association
is objectionable in several respects, but mainly because it tends
to increase unduly the reserves of the association, thereby
frustrating the right of the shareholders to participate annually
and equally in the earnings of the association.
This count for the complaint proceeds, in our opinion, upon an
erroneous notion as to what a court may do in determining the
internal policy of a business corporation. If the criticism
contained in the brief of the Attorney-General upon the practice
of the respondent association with respect to depreciation be well
founded, the Legislature should supply the remedy by defining
the extent to which depreciation may be allowed by building and
loan associations. Certainly this court cannot undertake to
control the discretion of the board of directors of the association
about an administrative matter as to which they have legitimate
power of action. The tenth cause of action is therefore not well
founded.

Eleventh and twelfth causes of action. The same comment is

appropriate with respect to the eleventh and twelfth causes of
action, which are treated together in the briefs, and will be here
combined. The specification in the eleventh cause of action is that
the respondent maintains excessive reserve funds, and in the
twelfth cause of action that the board of directors has settled
upon the unlawful policy of paying a straight annual dividend of
10 per centum, regardless of losses suffered and profits made by
the corporation and in contravention of the requirements of
section 188 of the Corporation Law. The facts relating to these
two counts in the complaint, as set forth in the stipulation, are
these:
In article 92 of the by-laws of El Hogar Filipino it is provided that
5 per centum of the net profits earned each year, as shown by the
annual balance sheet shall be carried to a reserve fund. The fund
so created is called the General Reserve. Article 93 of the by-laws
authorizes the directors to carry funds to a special reserve,
whenever in their judgment it is advisable to do so, provided that
the annual dividend in the year in which funds are carried to
special reserve exceeds 8 per centum. It appears to have been the
policy of the board of directors for several years past to place in
the special reserve any balance in the profit and loss account
after the satisfaction of preferential charges and the payment of a
dividend of 10 per centum to all special and ordinary shares (with
accumulated dividends). As things stood in 1926 the general
reserve contained an amount equivalent to about 5 per centum of
the paid-in value of shared. This fund has never been drawn upon
for the purpose of maintaining the regular annual dividend; but
recourse has been had to the special reserve on three different
occasions to make good the amount necessary to pay dividends. It
appears that in the last five years the reserves have declined from
something over 9 per cent to something over 7.
It is insisted in the brief of the Attorney-General that the
maintenance of reserve funds is unnecessary in the case of
building and loan associations, and at any rate the keeping of
reserves is inconsistent with section 188 of the Corporation Law.

Moreover, it is said that the practice of the association in

declaring regularly a 10 per cent dividend is in effect a guaranty
by the association of a fixed dividend which is contrary to the
intention of the statute.
Upon careful consideration of the questions involved we find no
reason to doubt the right of the respondent to maintain these
reserves. It is true that the corporation law does not expressly
grant this power, but we think it is to be implied. It is a fact of
common observation that all commercial enterprises encounter
periods when earnings fall below the average, and the prudent
manager makes provision for such contingencies. To regard all
surplus as profit is to neglect one of the primary canons of good
business practice. Building and loan associations, though among
the most solid of financial institutions, are nevertheless subject to
vicissitudes. Fluctuations in the dividend rate are highly
detrimental to any fiscal institutions, while uniformity in the
payments of dividends, continued over long periods, supplies the
surest foundations of public confidence.
The question now under consideration is not new in
jurisprudence, for the American courts have been called upon
more than once to consider the legality of the maintenance of
reserves by institutions of this or similar character.
In Greeff vs. Equitable Life Assurance Society, the court had under
consideration a charter provision of a life insurance company,
organized on the mutual plan, in its relation to the power of the
company to provide reserves. There the statute provided that "the
officers of the company, within sixty days from the expiration of
the first five years, from December 31, 1859, and within the first
sixty days of every subsequent period of five years, shall cause a
balance to be struck of the affairs of the company, which shall
exhibit its assets and liabilities, both present and contingent, and
also the net surplus, after deducting a sufficient amount to cover
all outstanding risks and other obligations. Each policy holder
shall be credited with an equitable share of the said surplus."
The court said:

No prudent person would be inclined to take a policy in a

company which had so improvidently conducted its affairs
that it only retained a fund barely sufficient to pay its
present liabilities, and, therefore, was in a condition where
any change by the reduction of interest upon, or
depreciation in, the value of its securities, or any increase
of mortality, would render it insolvent and subject to be
placed in the hands of a receiver. The evident purpose of
the provisions of the defendant's charter and policy relating
to this subject was to vest in the directors of the
corporation a discretion to determine the proportion of its
surplus which should be dividend each year.
In a friendly suit tried in a circuit court of Wisconsin in 1916,
entitled Boheman Bldg. and Loan Association vs. Knolt, the court,
in commenting on the nature of these reserves, said:
The apparent function of this fund is to insure the
stockholders against losses. Its purpose is not unlike that
of the various forms of insurance now in such common
use. This contribution is as legitimate an item of expense
as are the premiums paid on any insurance policy.
(See Clarks and Chase, Building and Loan Association,
footnote, page 344.)
In commenting on the necessity of such funds, Sundheim says:
It is optional with the association whether to maintain
such a fund or not, but justice and good business policy
seem to require it. The retiring stockholder must be paid
the value of his stock in cash and leave for those remaining
a large number of securities and perhaps some real estate
purchased to protect the associations interest. How much
will be realized on these securities, or real estate, no
human foresight can tell. Further, the realizing on these
securities may entail considerable litigation and expense.
There are many other contingencies which might cause a
shrinkage in the association's assets, such as defective
titles, undisclosed defalcations on the part of an officer, a
miscalculation of assets and liabilities, and many other

errors and omissions which must always be reckoned

within the conduct of human affairs.
The contingent fund is merely insurance against possible
loss. That losses may occur from time to time seems almost
inevitable and it is, therefore, inequitable that the
remaining stockholders should be compelled to accept all
securities at par, so, to say the least, the maintenance of
this fund is justified. The association teaches the duty of
providing for the proverbial rainy day. Why should it not
provide for the hour of adversity? The reserve fund has
protected the maturing or withdrawing member during the
period of his membership. In case of loss it has or would
have reimbursed him and, at all times, it has protected him
and given strength and standing to the association. Losses
may occur, after his membership ceases, that arose from
some mistake or mismanagement committed during the
period of his membership, and in fairness and equity the
remaining members should have some protection against
this. (Sundheim, Law of Building and Loan Association,
sec. 53.)
The government insists, we thing, upon an interpretation of
section 188 of the Corporation Law that is altogether too strict
and literal. From the fact that the statute provides that profits
and losses shall be annually apportioned among the shareholders
it is argued that all earnings should be distributed without
carrying anything to the reserve. But it will be noted that it is
provided in the same section that the profits and losses shall be
determined by the board of directors: and this means that they
shall exercise the usual discretion of good businessmen in
allocating a portion of the annual profits to purposes needful to
the welfare of the association. The law contemplates the
distribution of earnings and losses after other legitimate
obligations have been met.
Our conclusion is that the respondent has the power to maintain
the reserves criticized in the eleventh and twelfth counts of the
complaint; and at any rate, if it be supposed that the reserves

referred to have become excessive, the remedy is in the hands of

the Legislature. It is no proper function of the court to arrogate to
itself the control of administrative matters which have been
confided to the discretion of the board of directors. The causes of
action under discussion must be pronounced to be without merit.
Thirteenth cause of action. The specification under this head is,
in effect, that the respondent association has made loans which,
to the knowledge of the associations officers were intended to be
used by the borrowers for other purposes than the building of
homes. In this connection it appears that, though loans have
been made by the association exclusively to its shareholders, no
attempt has been made by it to control the borrowers with respect
to the use made of the borrowed funds, the association being
content to see that the security given for the loan in each case is
sufficient. On December 31, 1925, the respondent had five
hundred forty-four loans outstanding secured by mortgages upon
real estate and by the pledge of the borrowers' shares in an
amount sufficient at maturity to amortize the loans. With respect
to the nature of the real estate upon which these loans were made
it appears that three hundred fifty-one loans were secured by
mortgages upon city residences, seven by mortgages upon
commercial building in cities, and three mortgages upon
unimproved city lots. At the same time one hundred eighty-three
of the loans were secured by mortgages upon groves, sugar land,
and rice land, with a total area of about 7,558 hectares. From
information gathered by the association from voluntary
statements of borrowers given at the time of application with
respect to the use intended to be made of the borrowed funds, it
appears that the amount of P693,200 was borrowed to redeem
real property from existing mortgages or pactos de retro, P280,800
to buy real estate, P449,100 to erect buildings, P24,000 to
improve and repair buildings, P1,480,900 for agricultural
purposes, while the amount of P5,763,700 was borrowed for
purposes not disclosed.
Upon these facts an elaborate argument has been constructed in
behalf of the plaintiff to the effect that in making loans for other

purposes than the building of residential houses the association

has illegally departed from its character and made itself amenable
to the penalty of dissolution. Aside from being directly opposed to
the decision of this court in Lopez and Javelona vs. El Hogar
Filipino and Registrar of Deeds of Occidental Negros (47 Phil., 249),
this contention finds no substantial support in the prevailing
decisions made in American courts; and our attention has not
been directed to a single case wherein the dissolution of a
building and loan association has been decreed in a quo
warranto proceeding because the association allowed its
borrowers to use the loans for other purposes than the
acquisition of homes.
The case principally relied upon for the Government appears to
be Pfeister vs. Wheeling Building Association (19 W. Va., 676,
716),which involved the question whether a building and loan
association could recover the full amount of a note given to it by a
member and secured by a mortgage from a stranger. At the time
the case arose there was a statute in force in the State of West
Virginia expressly forbidding building and loan associations to
use or direct their funds for or to any other object or purpose
than the buying of lots or houses or in building and repairing
houses, and it was declared that in case the funds should be
improperly directed to other objects, the offending association
should forfeit all rights and privileges as a corporation. Under the
statute so worded the court held that the plaintiff could only
recover the amount actually advanced by it with lawful interest
and fines, without premium; and judgment was given accordingly.
The suggestion in that case that the result would have been the
same even in the absence of statute was mere dictum and is not
supported by respectable authority.
Reliance is also placed in the plaintiff's brief upon McCauley vs.
Building & Saving Association. The statute in force in the State of
Tennessee at the time this action arose provided that all loans
should be made to the members of the association at open stated
meetings and that the money should be lent to the highest bidder.
Inconsistently with this provision, there was inserted in the by-

laws of the association a provision to the effect that no loan

should be made at a greater premium than 30 per cent, nor at a
less premium than 29 7/8 per cent. It was held that this by-law
made free and open competition impossible and that it in effect
established a fixed premium. It was accordingly held, in the case
cited, that an association could not recover such part of the loan
as had been applied by it to the satisfaction of a premium of 30
per centum.
We have no criticism to make upon the result reached in either of
the two decisions cited, but it is apparent that much of the
discussion contained in the opinions in those cases does not
reflect the doctrine now prevailing in the United States; and much
less are those decisions applicable in this jurisdiction. There is no
statute here expressly declaring that loans may be made by these
associations solely for the purpose of building homes. On the
contrary, the building of homes is mentioned in section 171 of the
Corporation Law as only one among several ends which building
and loan associations are designed to promote. Furthermore,
section 181 of the Corporation Law expressly authorities the
Board of directors of the association from time to time to fix the
premium to be charged.
In the brief of the plaintiff a number of excerpts from textbooks
and decisions have been collated in which the idea is developed
that the primary design of building and loan associations should
be to help poor people to procure homes of their own. This
beneficent end is undoubtedly served by these associations, and
it is not to be denied that they have been generally fostered with
this end in view. But in this jurisdiction at least the lawmaker has
taken care not to limit the activities of building and loan
associations in an exclusive manner, and the exercise of the
broader powers must in the end approve itself to the business
community. Judging from the past history of these institutions it
can be truly said that they have done more to encourage thrift,
economy and saving among the people at large than any other
institution of modern times, not excepting even the saving banks.
In this connection Mr. Sundheim, in a late treatise upon the

subject of the law of building and loan associations, makes the

following comment:
They have grown to such an extent in recent years that
they no longer restrict their money to the home buyer, but
loan their money to the mere investor or dealer in real
estate. They are the holder of large mortgages secured
upon farms, factories and other business properties and
rows of stores and dwellings. This is not an abuse of their
powers or departure from their main purposes, but only a
natural and proper expansion along healthy and legitimate
lines. (Sundheim, Building and Loan Associations, sec. 7.)
Speaking of the purpose for which loans may be made, the same
author adds:
Loans are made for the purpose of purchasing a
homestead, or other real estate, or for any lawful purpose
or business, but there is no duty or obligation of the
association to inquire for what purpose the loan is
obtained, or to require any stipulation from the borrower
as to what use he will make of the money, or in any
manner to supervise or control its disbursement.
(Sundheim, Building and Loan Association, sec. 111.)
In Lopez and Javelona vs. El Hogar Filipino and Registrar of Deeds
of Occidental Negros, this court had before it the question whether
a loan made by the respondent association upon the security of a
mortgage upon agricultural land, where the loan was doubtless
used for agricultural purposes, was usurious or not; and the
case turned upon the point whether, in making such loans, the
association had violated the law and departed from its
fundamental purposes. The conclusion of the court was that the
loan was valid and could be lawfully enforced by a nonjudicial
foreclosure in conformity with the terms of the contract between
the association and the borrowing member. We now find no
reason to depart from the conclusion reached in that case, and it
is unnecessary to repeat what was then said. The thirteenth
cause of action must therefore be pronounced unfounded.

Fourteenth cause of action. The specification under this head is

that the loans made by the defendant for purposes other than
building or acquiring homes have been extended in extremely
large amounts and to wealthy persons and large companies. In
this connection attention is directed to eight loans made at
different times in the last several years to different persons or
entities, ranging in amounts from P120,000 to P390,000 and to
two large loans made to the Roxas Estate and to the Pacific
Warehouse Company in the amounts of P1,122,000 and
P2,320,000, respectively. In connection with the larger of the two
after this loan was made the available funds of El Hogar Filipino
were reduced to the point that the association was compelled to
take advantage of certain provisions of its by-laws authorizing the
postponement of the payment of claims resulting from
withdrawals, whereas previously the association had always
settled these claims promptly from current funds. At no time was
there apparently any delay in the payment of matured shares; but
in four or five cases there was as much as ten months delay in
the payment of withdrawal applications.
There is little that can be said upon the legal aspects of this
cause of action. In so far, as it relates to the purposes for which
these loans were made, the matter is covered by what was said
above with reference to the thirteenth cause of action; and in so
far as it relates to the personality of the borrowers, the question
belongs more directly to the discussion under the sixteenth cause
of action, which will be found below. The point, then, which
remains for consideration here is whether it is a suicidal act on
the part of a building and loan association to make loans in large
amount. If the loans which are here the subject of criticism had
been made upon inadequate security, especially in case of the
largest two, the consequences certainly would have been
disastrous to the association in the extreme; but no such fact is
alleged; and it is to be assumed that none of the ten borrowers
have defaulted in their contracts.
Now, it must be admitted that two of these loans at least are of a
very large size, considering the average range of financial

transaction in this country; and the making of the largest loan

was followed, as we have already see, with unpleasant
consequences to the association in dealing with current claims.
Nevertheless the agreed statement of facts shows that all of the
loan referred to are only ten out of a total of five hundred fortyfour outstanding on December 31, 1925; and the average of all
the loans taken together is modest enough. It appears that the
chief examiner of banks and corporations of the Philippine
Treasury, after his examination of El Hogar Filipino at the end of
the year 1925, made a report concerning this association as of
January 31, 1926, in which he criticized the Pacific Warehouse
Company loan as being so large that it temporarily crippled the
lending power of the association for some time. This criticism was
apparently justified as proper comment on the activities of the
association; but the question for us here to decide is whether the
making of this and the other large loans constitutes such a
misuser of the franchise as would justify us in depriving the
association of its corporate life. This question appears to us to be
so simple as almost to answer itself. The law states no limit with
respect to the size of the loans to be made by the association.
That matter is confided to the discretion of the board of directors;
and this court cannot arrogate to itself a control over the
discretion of the chosen officials of the company. If it should be
thought wise in the future to put a limit upon the amount of
loans to be made to a single person or entity, resort should be
had to the Legislature; it is not a matter amenable to judicial
control. The fourteenth cause of action is therefore obviously
without merit.
Fifteenth cause of action. The criticism here comes back to the
supposed misdemeanor of the respondent in maintaining its
reserve funds, a matter already discussed under the eleventh
and twelfth causes of action. Under the fifteenth cause of action it
is claimed that upon the expiration of the franchise of the
association through the effluxion of time, or earlier liquidation of
its business, the accumulated reserves and other properties will
accrue to the founder, or his heirs, and the then directors of the

corporation and to those persons who may at that time to be

holders of the ordinary and special shares of the corporation. In
this connection we note that article 95 of the by-laws reads as
follows:
ART. 95. The funds obtained by the liquidation of the
association shall be applied in the first place to the
repayment of shares and the balance, if any, shall be
distribute in accordance with the system established for
the distribution of annual profits.
It will be noted that the cause of action with which we are now
concerned is not directed to any positive misdemeanor supposed
to have been committed by the association. It has exclusive
relation to what may happen some thirty-five years hence when
the franchise expires, supposing of course that the corporation
should not be reorganized and continued after that date. There is
nothing in article 95 of the by-laws which is, in our opinion,
subject to criticism. The real point of criticism is that upon the
final liquidation of the corporation years hence there may be in
existence a reserve fund out of all proportion to the requirements
that may then fall upon it in the liquidation of the company. It
seems to us that this is matter that may be left to the prevision of
the directors or to legislative action if it should be deemed
expedient to require the gradual suppression of the reserve funds
as the time for dissolution approaches. It is no matter for judicial
interference, and much less could the resumption of the franchise
on this ground be justified. There is no merit in the fifteenth
cause of action.
Sixteenth cause of action. This part of the complaint assigns as
cause of action that various loans now outstanding have been
made by the respondent to corporations and partnerships, and
that these entities have in some instances subscribed to shares in
the respondent for the sole purpose of obtaining such loans. In
this connection it appears from the stipulation of facts that of the
5,826 shareholders of El Hogar Filipino, which composed its
membership on December 31, 1925, twenty-eight are juridical
entities,
comprising
sixteen
corporations
and fourteen

partnerships; while of the five hundred forty-four loans of the

association outstanding on the same date, nine had been made to
corporations an five to partnerships. It is also admitted that some
of these juridical entities became shareholders merely for the
purpose of qualifying themselves to take loans from the
association, and the same is said with respect to many natural
persons who have taken shares in the association. Nothing is said
in the agreed statement of facts on the point whether the
corporations and partnerships that have taken loans from the
respondent are qualified by law governing their own organization
to enter into these contracts with the respondent.
In section 173 of the Corporation Law it is declared that "any
person" may become a stockholder in building and loan
associations. The word "person" appears to be here used in its
general sense, and there is nothing in the context to indicate that
the expression is used in the restricted sense of both natural and
artificial persons, as indicated in section 2 of the Administrative
Code. We would not say that the word "person" or persons," is to
be taken in this broad sense in every part of the Corporation Law.
For instance, it would seem reasonable to say that the
incorporators of a corporation ought to be natural persons,
although in section 6 it is said that five or more "persons",
although in section 6 it is said that five or more "persons," not
exceeding fifteen, may form a private corporation. But the context
there, as well as the common sense of the situation, suggests that
natural persons are meant. When it is said, however, in section
173, that "any person" may become a stockholder in a building
and loan association, no reason is seen why the phrase may not
be taken in its proper broad sense of either a natural or artificial
person. At any rate the question whether these loans and the
attendant subscriptions were properly made involves a
consideration of the power of the subscribing corporations and
partnerships to own the stock and take the loans; and it is not
alleged in the complaint that they were without power in the
premises. Of course the mere motive with which subscriptions are
made, whether to qualify the stockholders to take a loan or for

some other reason, is of no moment in determining whether the

subscribers were competent to make the contracts. The result is
that we find nothing in the allegations of the sixteenth cause of
action, or in the facts developed in connection therewith, that
would justify us in granting the relief.
Seventeenth cause of action. Under the seventeenth cause of
action, it is charged that in disposing of real estates purchased by
it in the collection of its loans, the defendant has no various
occasions sold some of the said real estate on credit, transferring
the title thereto to the purchaser; that the properties sold are
then mortgaged to the defendant to secure the payment of the
purchase price, said amount being considered as a loan, and
carried as such in the books of the defendant, and that several
such obligations are still outstanding. It is further charged that
the persons and entities to which said properties are sold under
the condition charged are not members or shareholders nor are
they made members or shareholders of the defendant.
This part of the complaint is based upon a mere technicality of
bookkeeping. The central idea involved in the discussion is the
provision of the Corporation Law requiring loans to be
stockholders only and on the security of real estate and shares in
the corporation, or of shares alone. It seems to be supposed that,
when the respondent sells property acquired at its own
foreclosure sales and takes a mortgage to secure the deferred
payments, the obligation of the purchaser is a true loan, and
hence prohibited. But in requiring the respondent to sell real
estate which it acquires in connection with the collection of its
loans within five years after receiving title to the same, the law
does not prescribe that the property must be sold for cash or that
the purchaser shall be a shareholder in the corporation. Such
sales can of course be made upon terms and conditions approved
by the parties; and when the association takes a mortgage to
secure the deferred payments, the obligation of the purchaser
cannot be fairly described as arising out of a loan. Nor does the
fact that it is carried as a loan on the books of the respondent

make it a loan in law. The contention of the Government under

this head is untenable.
In conclusion, the respondent is enjoined in the future from
administering real property not owned by itself, except as may be
permitted to it by contract when a borrowing shareholder defaults
in his obligation. In all other respects the complaint is dismissed,
without costs. So ordered.
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT

CO.,

INC., plaintiff-

appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
Arsenio
P.
Dizon
for

appellant.

Sumulong, Lavides and Sumulong for appellee.

LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance
of Manila absolving the defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land
situated in the barrio of Linao, town of Aparri, Province of
Cagayan, as evidenced by transfer certificate of title No. 217 of the
land records of Cagayan, a copy of which is in evidence as Exhibit
1. To guarantee the payment of a loan in the sum of P8,000,
Manuel Tabora, on August 14, 1929, executed in favor of the
Philippine National Bank a first mortgage on the four parcels of
land above-mentioned. A second mortgage in favor of the same
bank was in April of 1930 executed by Tabora over the same
lands to guarantee the payment of another loan amounting to
P7,000. A third mortgage on the same lands was executed on
April 16, 1930 in favor of Severina Buzon to whom Tabora was
indebted in the sum of P2,9000. These mortgages were registered
and annotations thereof appear at the back of transfer certificate
of title No. 217.

On May 31, 1930, Tabora executed a public document entitled P25,300, with interest at legal rate from the date of the filing of
"Escritura de Transpaso de Propiedad Inmueble" (Exhibit A) by the complaint, and the costs of the suits. After trial, the court
virtue of which the four parcels of land owned by him was sold to below, on December 18, 1934, rendered judgment absolving the
the plaintiff company, said to under process of incorporation, in defendant, with costs against the plaintiff. Plaintiff presented a
consideration of one peso (P1) subject to the mortgages in favor of motion for new trial on January 14, 1935, which motion was
the Philippine National Bank and Severina Buzon and, to the denied by the trial court on January 19 of the same year. After
condition that the certificate of title to said lands shall not be due exception and notice, plaintiff has appealed to this court and
transferred to the name of the plaintiff company until the latter makes an assignment of various errors.
has fully and completely paid Tabora's indebtedness to the In dismissing the complaint against the defendant, the court

below, reached the conclusion that Exhibit B is invalid because of

Philippine National Bank.
The plaintiff company filed its article incorporation with the vice in consent and repugnancy to law. While we do not agree
Bureau of Commerce and Industry on October 22, 1930 (Exhibit with this conclusion, we have however voted to affirm the
2). A year later, on October 28, 1931, the board of directors of judgment appealed from the reasons which we shall presently
said company adopted a resolution (Exhibit G) authorizing its state.
president, Jose Ventura, to sell the four parcels of lands in The transfer made by Tabora to the Cagayan fishing Development

question to Teodoro Sandiko for P42,000. Exhibits B, C and D Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit
were thereafter made and executed. Exhibit B is a deed of sale A) and the actual incorporation of said company was affected
executed before a notary public by the terms of which the plaintiff later on October 22, 1930 (Exhibit 2). In other words, the transfer
sold ceded and transferred to the defendant all its right, titles, was made almost five months before the incorporation of the

and interest in and to the four parcels of land described in company. Unquestionably, a duly organized corporation has the
transfer certificate in turn obligated himself to shoulder the three power to purchase and hold such real property as the purposes
mortgages hereinbefore referred to. Exhibit C is a promisory note for which such corporation was formed may permit and for this
for P25,300. drawn by the defendant in favor of the plaintiff, purpose may enter into such contracts as may be necessary (sec.

payable after one year from the date thereof. Exhibit D is a deed 13, pars. 5 and 9, and sec. 14, Act No. 1459). But before a
of mortgage executed before a notary public in accordance with corporation may be said to be lawfully organized, many things
which the four parcels of land were given a security for the have to be done. Among other things, the law requires the filing of
payment of the promissory note, Exhibit C. All these three articles of incorporation (secs. 6 et seq., Act. No. 1459). Although

there is a presumption that all the requirements of law have been

instrument were dated February 15, 1932.
The defendant having failed to pay the sum stated in the complied with (sec. 334, par. 31 Code of Civil Procedure), in the
promissory note, plaintiff, on January 25, 1934, brought this case before us it can not be denied that the plaintiff was not yet
action in the Court of First Instance of Manila praying that incorporated when it entered into a contract of sale, Exhibit A.
judgment be rendered against the defendant for the sum of The contract itself referred to the plaintiff as "una sociedad en

vias de incorporacion." It was not even a de facto corporation at were, a child in ventre sa mere. This is not saying that under no
the time. Not being in legal existence then, it did not possess circumstances may the acts of promoters of a corporation be
juridical capacity to enter into the contract.
ratified by the corporation if and when subsequently organized.
Corporations are creatures of the law, and can only come There are, of course, exceptions (Fletcher Cyc. of Corps.,
into existence in the manner prescribed by law. As has permanent edition, 1931, vol. I, secs. 207 et seq.), but under the
already been stated, general law authorizing the formation peculiar facts and circumstances of the present case we decline to
of corporations are general offers to any persons who may extend the doctrine of ratification which would result in the
bring themselves within their provisions; and if conditions commission of injustice or fraud to the candid and unwary.
precedent are prescribed in the statute, or certain acts are (Massachusetts rule, Abbott vs. Hapgood, 150 Mass., 248; 22 N.
required to be done, they are terms of the offer, and must E. 907, 908; 5 L. R. A., 586; 15 Am. St. Rep., 193; citing English
be complied with substantially before legal corporate cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; 78 N.
existence can be acquired. (14 C. J., sec. 111, p. 118.)
E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass.,
That a corporation should have a full and complete 171; 65 N. E., 54.) It should be observed that Manuel Tabora was

organization and existence as an entity before it can enter the registered owner of the four parcels of land, which he
into any kind of a contract or transact any business, would succeeded in mortgaging to the Philippine National Bank so that
seem to be self evident. . . . A corporation, until organized, he might have the necessary funds with which to convert and
has no being, franchises or faculties. Nor do those engaged develop them into fishery. He appeared to have met with financial

in bringing it into being have any power to bind it by reverses. He formed a corporation composed of himself, his wife,
contract, unless so authorized by the charter there is not a and a few others. From the articles of incorporation, Exhibit 2, it

corporation nor does it possess franchise or faculties for it appears that out of the P48,700, amount of capital stock
or others to exercise, until it acquires a complete existence. subscribed, P45,000 was subscribed by Manuel Tabora himself
(Gent vs. Manufacturers and Merchant's Mutual Insurance and P500 by his wife, Rufina Q. de Tabora; and out of the

Company, 107 Ill., 652, 658.)

P43,300, amount paid on subscription, P42,100 is made to
Boiled down to its naked reality, the contract here (Exhibit A) was
appear as paid by Tabora and P200 by his wife. Both Tabora and
entered into not between Manuel Tabora and a non-existent
His wife were directors and the latter was treasurer as well. In
corporation but between the Manuel Tabora as owner of the four
fact, to this day, the lands remain inscribed in Tabora's name.
parcels of lands on the one hand and the same Manuel Tabora,
The defendant always regarded Tabora as the owner of the lands.
his wife and others, as mere promoters of a corporations on the
He dealt with Tabora directly. Jose Ventura, president of the
other hand. For reasons that are self-evident, these promoters
plaintiff corporation, intervened only to sign the contract, Exhibit
could not have acted as agent for a projected corporation since
B, in behalf of the plaintiff. Even the Philippine National Bank,
that which no legal existence could have no agent. A corporation,
mortgagee of the four parcels of land, always treated Tabora as
until organized, has no life and therefore no faculties. It is, as it
the owner of the same. (SeeExhibits E and F.) Two civil suits (Nos.

1931 and 38641) were brought against Tabora in the Court of THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and
First Instance of Manila and in both cases a writ of attachment AMER
MACAORAO
BALINDONG, petitioners,

against the four parcels of land was issued. The Philippine vs.
National Bank threatened to foreclose its mortgages. Tabora PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG,
approached the defendant Sandiko and succeeded in the making
HADJI HASAN MACARAMPAD, FREDERICK V. DUJERTE
him sign Exhibits B, C, and D and in making him, among other
MONDACO ONTAL, MARONSONG ANDOY, MACALABA INDAR
things, assume the payment of Tabora's indebtedness to the
LAO. respondents.
Philippine National Bank. The promisory note, Exhibit C, was
L.
Amores
and
R.
Gonzales
for
petitioners.
made payable to the plaintiff company so that it may not attached
Jose W. Diokno for respondents.
by Tabora's creditors, two of whom had obtained writs of
CASTRO, J.:
attachment against the four parcels of land.
The petitioner Amer Macaorao Balindong is the mayor of
If the plaintiff corporation could not and did not acquire the four
Malabang, Lanao del Sur, while the respondent Pangandapun
parcels of land here involved, it follows that it did not possess any
Bonito is the mayor, and the rest of the respondents are the
resultant right to dispose of them by sale to the defendant,
councilors, of the municipality of Balabagan of the same province.
Teodoro Sandiko.
Balabagan was formerly a part of the municipality of Malabang,
Some of the members of this court are also of the opinion that the
having been created on March 15, 1960, by Executive Order 386
transfer from Manuel Tabora to the Cagayan Fishing Development
of the then President Carlos P. Garcia, out of barrios and sitios 1 of
Company, Inc., which transfer is evidenced by Exhibit A, was
the latter municipality.
subject to a condition precedent (condicion suspensiva), namely,
The petitioners brought this action for prohibition to nullify
the payment of the mortgage debt of said Tabora to the Philippine
Executive Order 386 and to restrain the respondent municipal
National Bank, and that this condition not having been complied
officials from performing the functions of their respective office
with by the Cagayan Fishing Development Company, Inc., the
relying on the ruling of this Court inPelaez v. Auditor
transfer was ineffective. (Art. 1114, Civil Code; Wise & Co. vs.
General 2 and Municipality of San Joaquin v. Siva. 3
Kelly and Lim, 37 Phil., 696; Manresa, vol. 8, p. 141.) However,
In Pelaez this Court, through Mr. Justice (now Chief Justice)
having arrived at the conclusion that the transfer by Manuel Concepcion, ruled: (1) that section 23 of Republic Act 2370

Tabora to the Cagayan Fishing Development Company, Inc. was [Barrio Charter Act, approved January 1, 1960], by vesting the
null because at the time it was affected the corporation was non- power to create barrios in the provincial board, is a "statutory
existent, we deem it unnecessary to discuss this point.lawphil.net denial of the presidential authority to create a new barrio [and]
The decision of the lower court is accordingly affirmed, with costs
implies a negation of thebigger power to create municipalities,"
against the appellant. So Ordered.
and (2) that section 68 of the Administrative Code, insofar as it
G.R. No. L-28113
March 28, 1969
gives the President the power to create municipalities, is
unconstitutional (a) because it constitutes an undue delegation of

legislative power and (b) because it offends against section 10 (1) by any one whose rights or interests ate affected thereby,
of article VII of the Constitution, which limits the President's including the citizens of the territory incorporated unless they are
power over local governments to mere supervision. As this Court estopped by their conduct from doing so. 6
And so the threshold question is whether the municipality of
summed up its discussion: "In short, even if it did not entail an

undue delegation of legislative powers, as it certainly does, said Balabagan is a de facto corporation. As earlier stated, the claim
section 68, as part of the Revised Administrative Code, approved that it is rests on the fact that it was organized before the
7
on March 10, 1917, must be deemed repealed by the subsequent promulgation of this Court's decision inPelaez.
Accordingly, we address ourselves to the question whether a
adoption of the Constitution, in 1935, which is utterly

statute can lend color of validity to an attempted organization of a

incompatible and inconsistent with said statutory enactment."
On the other hand, the respondents, while admitting the facts municipality despite the fact that such statute is subsequently
alleged in the petition, nevertheless argue that the rule declared unconstitutional.lawphi1.et
This has been a litigiously prolific question, sharply dividing
announced in Pelaez can have no application in this case because
unlike the municipalities involved inPelaez, the municipality of courts in the United States. Thus, some hold that ade
Balabagan is at least a de facto corporation, having been facto corporation cannot exist where the statute or charter

organized under color of a statute before this was declared creating it is unconstitutional because there can be no de
8
unconstitutional, its officers having been either elected or facto corporation where there can be no de jure one, while others

appointed, and the municipality itself having discharged its hold otherwise on the theory that a statute is binding until it is
9
corporate functions for the past five years preceding the condemned as unconstitutional.
An early article in the Yale Law Journal offers the following
institution of this action. It is contended that as a de
analysis:
facto corporation, its existence cannot be collaterally attacked,
It appears that the true basis for denying to the
although it may be inquired into directly in an action for quo
corporation a de facto status lay in the absence of any
warranto at the instance of the State and not of an individual like
legislative act to give vitality to its creation. An examination
the petitioner Balindong.
of the cases holding, some of them unreservedly, that a de
It is indeed true that, generally, an inquiry into the legal
facto office or municipal corporation can exist under color
existence of a municipality is reserved to the State in a proceeding
of an unconstitutional statute will reveal that in no
for quo warranto or other direct proceeding, and that only in a few
instance did the invalid act give life to the corporation, but
exceptions may a private person exercise this function of
that either in other valid acts or in the constitution itself
government. 4 But the rule disallowing collateral attacks applies
the office or the corporation was potentially created....
only where the municipal corporation is at least a de
The principle that color of title under an unconstitutional
facto corporations. 5 For where it is neither a corporation de
statute can exist only where there is some other valid law
jure nor de facto, but a nullity, the rule is that its existence may
under which the organization may be effected, or at least
be, questioned collaterally or directly in any action or proceeding

an authority in potentia by the state constitution, has its the consideration that there was some other valid law giving
counterpart in the negative propositions that there can be corporate vitality to the organization. Hence, in the case at bar,
no color of authority in an unconstitutional statute that the mere fact that Balabagan was organized at a time when the
plainly so appears on its face or that attempts to authorize statute had not been invalidated cannot conceivably make it a de
the ousting of a de jure or de facto municipal corporation facto corporation, as, independently of the Administrative Code
upon the same territory; in the one case the fact would provision in question, there is no other valid statute to give color
imply the imputation of bad faith, in the other the new of authority to its creation. Indeed, in Municipality of San Joaquin
organization must be regarded as a mere usurper....
v. Siva, 11 this Court granted a similar petition for prohibition and
As a result of this analysis of the cases the following nullified an executive order creating the municipality of Lawigan
principles may be deduced which seem to reconcile the in Iloilo on the basis of the Pelaez ruling, despite the fact that the

apparently conflicting decisions:

municipality was created in 1961, before section 68 of the
I. The color of authority requisite to the organization Administrative Code, under which the President had acted, was
of a de facto municipal corporation may be:
invalidated. 'Of course the issue of de facto municipal corporation
1. A valid law enacted by the legislature.
did not arise in that case.
2. An unconstitutional law, valid on its face,
In Norton v. Shelby Count, 12 Mr. Justice Field said: "An
which has either (a) been upheld for a time by
unconstitutional act is not a law; it confers no rights; it imposes
the courts or (b) not yet been declared
no duties; it affords no protection; it creates no office; it is, in legal
void; provided that a warrant for its creation
contemplation, as inoperative as though it had never been
can be found in some other valid law or in the
passed." Accordingly, he held that bonds issued by a board of
recognition of its potential existence by the
commissioners created under an invalid statute were
general laws or constitution of the state.
unenforceable.
II. There can be no de facto municipal corporation
Executive Order 386 "created no office." This is not to say,
unless either directly or potentially, such a de
however, that the acts done by the municipality of Balabagan in
jurecorporation is authorized by some legislative fiat.
the exercise of its corporate powers are a nullity because the
III. There can be no color of authority in an
executive order "is, in legal contemplation, as inoperative as
unconstitutional statute alone, the invalidity of
though it had never been passed." For the existence of Executive,
which is apparent on its face.
Order 386 is "an operative fact which cannot justly be ignored."
IV. There can be no de facto corporation created to take
As Chief Justice Hughes explained in Chicot County Drainage
the place of an existing de jure corporation, as such
District v. Baxter State Bank: 13
organization would clearly be a usurper.10
The courts below have proceeded on the theory that the
In the cases where a de facto municipal corporation was
Act of Congress, having been found to be unconstitutional,
recognized as such despite the fact that the statute creating it
was not a law; that it was inoperative, conferring no rights
was later invalidated, the decisions could fairly be made to rest on

and imposing no duties, and hence affording no basis for MARIANO

the challenged decree. Norton v. Shelby County, 118 U.S. vs.

A.

ALBERT, plaintiff-appellant,

425, 442; Chicago, I. & L. Ry. Co. v. Hackett, 228 U.S. 559, UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
566. It is quite clear, however, that such broad statements Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
as to the effect of a determination of unconstitutionality Aruego, Mamaril & Associates for defendant-appellees.
must be taken with qualifications. The actual existence of a BENGZON, J.P., J.:
statute, prior to such a determination, is an operative fact No less than three times have the parties here appealed to this
and may have consequences which cannot justly be Court.
ignored. The past cannot always be erased by a new In Albert vs. University Publishing Co., Inc., L-9300, April 18,
judicial declaration. The effect of the subsequent ruling as 1958, we found plaintiff entitled to damages (for breach of
to invalidity may have to be considered in various aspects contract) but reduced the amount from P23,000.00 to

with respect to particular relations, individual and P15,000.00.

Then in Albert vs. University Publishing Co., Inc., L-15275,
corporate, and particular conduct, private and official.
October 24, 1960, we held that the judgment for P15,000.00
Questions of rights claimed to have become vested, of
which had become final and executory, should be executed to its
status of prior determinations deemed to have finality and
full amount, since in fixing it, payment already made had been
acted upon accordingly, of public policy in the light of the
considered.
nature both of the statute and of its previous application,
Now we are asked whether the judgment may be executed against
demand examination. These questions are among the most
Jose M. Aruego, supposed President of University Publishing Co.,
difficult of those which have engaged the attention of
Inc., as the real defendant.
courts, state and federal, and it is manifest from numerous
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued
decisions that an all-inclusive statement of a principle of
University Publishing Co., Inc. Plaintiff allegedinter alia that
absolute retroactive invalidity cannot be justified.
defendant was a corporation duly organized and existing under
There is then no basis for the respondents' apprehension that
the laws of the Philippines; that on July 19, 1948, defendant,
the invalidation of the executive order creating Balabagan would
through Jose M. Aruego, its President, entered into a contract
have the effect of unsettling many an act done in reliance upon
with plaintifif; that defendant had thereby agreed to pay plaintiff
the validity of the creation of that municipality. 14
ACCORDINGLY, the petition is granted, Executive Order 386 is P30,000.00 for the exclusive right to publish his revised
declared void, and the respondents are hereby permanently Commentaries on the Revised Penal Code and for his share in
restrained from performing the duties and functions of their previous sales of the book's first edition; that defendant had
undertaken to pay in eight quarterly installments of P3,750.00
respective offices. No pronouncement as to costs.
G.R. No. L-19118

January 30, 1965

starting July 15, 1948; that per contract failure to pay one

installment would render the rest due; and that defendant had countered by filing, through counsel (Jose M. Aruego's own law
failed to pay the second installment.
firm), a "manifestation" stating that "Jose M. Aruego is not a party
Defendant admitted plaintiff's allegation of defendant's corporate to this case," and that, therefore, plaintiff's petition should be
existence; admitted the execution and terms of the contract dated denied.
July 19, 1948; but alleged that it was plaintiff who breached their Parenthetically, it is not hard to decipher why "University
contract by failing to deliver his manuscript. Furthermore, Publishing Co., Inc.," through counsel, would not want Jose M.
defendant counterclaimed for damages.1wph1.t
Aruego to be considered a party to the present case: should a
Plaintiff died before trial and Justo R. Albert, his estate's separate action be now instituted against Jose M. Aruego, the
administrator, was substituted for him.
plaintiff will have to reckon with the statute of limitations.
The Court of First Instance of Manila, after trial, rendered The court a quo denied the petition by order of September 9,
decision on April 26, 1954, stating in the dispositive portion
1961, and from this, plaintiff has appealed.
IN VIEW OF ALL THE FOREGOING, the Court renders The fact of non-registration of University Publishing Co., Inc. in
judgment in favor of the plaintiff and against the defendant the Securities and Exchange Commission has not been disputed.
the University Publishing Co., Inc., ordering the defendant Defendant would only raise the point that "University Publishing
to pay the administrator Justo R. Albert, the sum of Co., Inc.," and not Jose M. Aruego, is the party defendant;
P23,000.00 with legal [rate] of interest from the date of the thereby assuming that "University Publishing Co., Inc." is an

filing of this complaint until the whole amount shall have existing corporation with an independent juridical personality.
been fully paid. The defendant shall also pay the costs. The Precisely, however, on account of the non-registration it cannot be
counterclaim of the defendant is hereby dismissed for lack considered a corporation, not even a corporation de facto (Hall vs.

of evidence.
Piccio, 86 Phil. 603). It has therefore no personality separate from
As aforesaid, we reduced the amount of damages to P15,000.00, Jose M. Aruego; it cannot be sued independently.
to be executed in full. Thereafter, on July 22, 1961, the court a The corporation-by-estoppel doctrine has not been invoked. At
quo ordered issuance of an execution writ against University any rate, the same is inapplicable here. Aruego represented a
Publishing Co., Inc. Plaintiff, however, on August 10, 1961, non-existent entity and induced not only the plaintiff but even the
petitioned for a writ of execution against Jose M. Aruego, as the court to believe in such representation. He signed the contract as

real defendant, stating, "plaintiff's counsel and the Sheriff of "President" of "University Publishing Co., Inc.," stating that this
Manila discovered that there is no such entity as University was "a corporation duly organized and existing under the laws of
Publishing Co., Inc." Plaintiff annexed to his petition a certification the Philippines," and obviously misled plaintiff (Mariano A. Albert)
from the securities and Exchange Commission dated July 31, into believing the same. One who has induced another to act
1961, attesting: "The records of this Commission do not show the upon his wilful misrepresentation that a corporation was duly
registration of UNIVERSITY PUBLISHING CO., INC., either as a organized and existing under the law, cannot thereafter set up
corporation or partnership." "University Publishing Co., Inc."

against his victim the principle of corporation by estoppel one's person or property" (Lopez vs. Director of Lands, 47 Phil. 23,
(Salvatiera vs. Garlitos, 56 O.G. 3069).
32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be
"University Publishing Co., Inc." purported to come to court, amiss to mention here also that the "due process" clause of the
answering the complaint and litigating upon the merits. But as Constitution is designed to secure justice as a living reality; not to
stated, "University Publishing Co., Inc." has no independent sacrifice
it
by
paying
undue
homage
to
formality.

personality; it is just a name. Jose M. Aruego was, in reality, the For substance must prevail over form. It may now be trite, but
one who answered and litigated, through his own law firm as none the less apt, to quote what long ago we said in Alonso vs.
counsel. He was in fact, if not, in name, the defendant.
Villamor, 16 Phil. 315, 321-322:
Even with regard to corporations duly organized and existing
A litigation is not a game of technicalities in which one,
under the law, we have in many a case pierced the veil of
corporate

fiction

to

administer

the

ends

of

justice. And
*

in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person

acting or purporting to act on behalf of a corporation which has
no valid existence assumes such privileges and obligations and
becomes personally liable for contracts entered into or for other
acts performed as such agent." Had Jose M. Aruego been named
as party defendant instead of, or together with, "University
Publishing Co., Inc.," there would be no room for debate as to his
personal liability. Since he was not so named, the matters of "day
in court" and "due process" have arisen.
In this connection, it must be realized that parties to a suit are

more deeply schooled and skilled in the subtle art of

movement and position, entraps and destroys the other. It
is, rather, a contest in which each contending party fully
and fairly lays before the court the facts in issue and then,
brushing

side

as

wholly

trivial

and

indecisive

all

imperfections of form and technicalities of procedure, asks

that Justice be done upon the merits. Lawsuits, unlike
duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves
scant consideration from courts. There should be no vested

rights in technicalities.
"persons who have a right to control the proceedings, to make The evidence is patently clear that Jose M. Aruego, acting as
defense, to adduce and cross-examine witnesses, and to appeal representative of a non-existent principal, was the real party to
from a decision" (67 C.J.S. 887) and Aruego was, in reality, the the contract sued upon; that he was the one who reaped the
person who had and exercised these rights. Clearly, then, Aruego benefits resulting from it, so much so that partial payments of the
had his day in court as the real defendant; and due process of law consideration were made by him; that he violated its terms,
has been substantially observed.
thereby precipitating the suit in question; and that in the
By "due process of law" we mean " "a law which hears before it litigation he was the real defendant. Perforce, in line with the

condemns; which proceeds upon inquiry, and renders judgment ends of justice, responsibility under the judgment falls on him.
only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as this We need hardly state that should there be persons who under the
Court has said, " "Due process of law" contemplates notice and law are liable to Aruego for reimbursement or contribution with

opportunity to be heard before judgment is rendered, affecting respect to the payment he makes under the judgment in question,

he may, of course, proceed against them through proper remedial Mabalacat, Pampanga, petitioner and private respondent agreed
measures.
to consolidate their respective associations and form the Unified
PREMISES CONSIDERED, the order appealed from is hereby set Mabalacat-Angeles Jeepney Operators' and Drivers' Association,
aside and the case remanded ordering the lower court to hold Inc. (UMAJODA); petitioner and private respondent also agreed to
supplementary proceedings for the purpose of carrying the elect one set of officers who shall be given the sole authority to
judgment into effect against University Publishing Co., Inc. collect the daily dues from the members of the consolidated
and/or Jose M. Aruego. So ordered.
association; elections were held on October 29, 1995 and both
[G.R. No. 125221. June 19, 1997]

petitioner and private respondent ran for president; petitioner

won; private respondent protested and, alleging fraud, refused to

recognize the results of the election; private respondent also

REYNALDO M. LOZANO, petitioner, vs. HON. ELIEZER R. DE refused to abide by their agreement and continued collecting the
LOS SANTOS, Presiding Judge, RTC, Br. 58, Angeles dues from the members of his association despite several
City; and ANTONIO ANDA,respondents.

DECISION
PUNO, J.:

demands to desist. Petitioner was thus constrained to file the

complaint to restrain private respondent from collecting the dues
and to order him to pay damages in the amount of P25,000.00
and attorney's fees of P500.00.[1]
Private respondent moved to dismiss the complaint for lack of

jurisdiction, claiming that jurisdiction was lodged with the

This petition for certiorari seeks to annul and set aside the Securities and Exchange Commission (SEC). The MCTC denied
decision of the Regional Trial Court, Branch 58, Angeles City the motion on February 9, 1996.[2] It denied reconsideration on

which ordered the Municipal Circuit Trial Court, Mabalacat and March 8, 1996.[3]
Magalang, Pampanga to dismiss Civil Case No. 1214 for lack of
Private respondent filed a petition for certiorari before the
jurisdiction.
Regional Trial Court, Branch 58, Angeles City. [4] The trial court
The facts are undisputed. On December 19, 1995, petitioner found the dispute to be intracorporate, hence, subject to the

Reynaldo M. Lozano filed Civil Case No. 1214 for damages against jurisdiction of the SEC, and ordered the MCTC to dismiss Civil
respondent Antonio Anda before the Municipal Circuit Trial Court Case No. 1214 accordingly.[5] It denied reconsideration on May 31,
(MCTC), Mabalacat and Magalang, Pampanga. Petitioner alleged 1996.[6]
that he was the president of the Kapatirang Mabalacat-Angeles

Jeepney Drivers' Association, Inc. (KAMAJDA) while respondent

Hence this petition. Petitioner claims that:

Anda was the president of the Samahang Angeles-Mabalacat "THE RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF
Jeepney Operators' and Drivers' Association, Inc. (SAMAJODA); in DISCRETION AMOUNTING TO LACK OR EXCESS OF
August 1995, upon the request of the Sangguniang Bayan of JURISDICTION AND SERIOUS ERROR OF LAW IN CONCLUDING

THAT THE SECURITIES AND EXCHANGE COMMISSION HAS the corporation, partnership or association possesses sufficient
JURISDICTION

OVER

HEADS/PRESIDENTS

CASE

OF

DAMAGES

BETWEEN property to cover all its debts but foresees the impossibility of

OF

TWO

(2)

ASSOCIATIONS

WHO meeting them when they respect very fall due or in cases where

INTENDED TO CONSOLIDATE/MERGE THEIR ASSOCIATIONS the corporation, partnership or association has no sufficient
BUT NOT YET [SIC] APPROVED AND REGISTERED WITH THE assets to cover its liabilities, but is under the management of a
SECURITIES AND EXCHANGE COMMISSION."[7]
The jurisdiction of the Securities and Exchange Commission

Rehabilitation

Receiver

or

Management

Committee

created

pursuant to this Decree."

(SEC) is set forth in Section 5 of Presidential Decree No. 902- The grant of jurisdiction to the SEC must be viewed in the light of
A. Section 5 reads as follows:

its nature and function under the law. [8] This jurisdiction is

determined by a concurrence of two elements: (1) the status or

"Section 5. x x x [T]he Securities and Exchange Commission [has] relationship of the parties; and (2) the nature of the question that
original and exclusive jurisdiction to hear and decide cases is the subject of their controversy.[9]

involving:
The first element requires that the controversy must arise out
(a) Devices or schemes employed by or any acts of the board of of intracorporate or partnership relations between and among
directors, business associates, its officers or partners, amounting stockholders, members, or associates; between any or all of them
to fraud and misrepresentation which may be detrimental to the and the corporation, partnership or association of which they are
interest of the public and/or of the stockholders, partners, stockholders, members or associates, respectively; and between
members of associations or organizations registered with the such corporation, partnership or association and the State in so

Commission.
far as it concerns their individual franchises. [10] The second
(b) Controversies arising out of intracorporate or partnership element requires that the dispute among the parties be
relations, between and among stockholders, members or intrinsically connected with the regulation of the corporation,
associates; between any or all of them and the corporation, partnership or association or deal with the internal affairs of the
partnership or association of which they are stockholders, corporation, partnership or association.[11] After all, the principal
members, or associates, respectively; and between such function of the SEC is the supervision and control of
corporation, partnership or association and the state insofar as it corporations, partnerships and associations with the end in view

concerns their individual franchise or right to exist as such entity. that investments in these entities may be encouraged and
(c) Controversies in the election or appointment of directors,
protected, and their activities pursued for the promotion of
trustees, officers or managers of such corporations, partnerships
economic development.[12]
or associations.
There is no intracorporate nor partnership relation between
(d) Petitions of corporations, partnerships or associations to be
petitioner and private respondent. The controversy between them
declared in the state of suspension of payments in cases where
arose out of their plan to consolidate their respective jeepney

drivers' and operators' associations into a single common persons assume to form a corporation and exercise corporate
association. This

unified

association

was,

however,

still

a functions

and

enter

into

business

relations

with

third

proposal. It had not been approved by the SEC, neither had its persons. Where there is no third person involved and the conflict
officers and members submitted their articles of consolidation in arises only among those assuming the form of a corporation, who
accordance with

Sections 78 and 79 of the Corporation therefore know that it has not been registered, there is no

Code. Consolidation becomes effective not upon mere agreement corporation by estoppel.[20]
IN VIEW WHEREOF, the petition is granted and the decision
of the members but only upon issuance of the certificate of
consolidation by the SEC.[13] When the SEC, upon processing and dated April 18, 1996 and the order dated May 31, 1996 of the
examining the articles of consolidation, is satisfied that the Regional Trial Court, Branch 58, Angeles City are set aside.The
consolidation of the corporations is not inconsistent with the Municipal Circuit Trial Court of Mabalacat and Magalang,
provisions of the Corporation Code and existing laws, it issues a Pampanga is ordered to proceed with dispatch in resolving Civil
certificate of consolidation which makes the reorganization Case No. 1214. No costs.
official.[14] The new consolidated corporation comes into existence
and the constituent corporations dissolve and cease to exist.[15]
The KAMAJDA and SAMAJODA to which petitioner and

SO ORDERED.

September 11, 1924

private respondent belong are duly registered with the SEC, but G.R. No. 22106
BANKING
CORPORATION, plaintiff-appellee,
these associations are two separate entities. The dispute between ASIA
petitioner and private respondent is not within the KAMAJDA nor vs.
STANDARD PRODUCTS, CO., INC., defendant-appellant.
the SAMAJODA. It is between members of separate and distinct
Charles
C.
De
Selms
for
appellant.
associations. Petitioner and private respondent have no
Gibbs & McDonough and Roman Ozaeta for appellee.
intracorporate relation much less do they have an intracorporate
OSTRAND, J.:
dispute. The SEC therefore has no jurisdiction over the This action is brought to recover the sum of P24,736.47, the
complaint.
balance due on the following promissory note:
[16]
The doctrine of corporation by estoppel advanced by private
P37,757.22
respondent
cannot
override
jurisdictional
MANILA, P. I.,
Nov. 28, 1921.
requirements. Jurisdiction is fixed by law and is not subject to

the agreement of the parties. [17] It cannot be acquired through or

waived, enlarged or diminished by, any act or omission of the
parties, neither can it be conferred by the acquiescence of the
court.[18]
Corporation by estoppel is founded on principles of equity and
is designed to prevent injustice and unfairness.[19] It applies when

MANILA, P. I., Nov. 28, 1921.

On demand, after date we promise to pay to the Asia
Banking Corporation, or order, the sum of thirty-seven
thousand seven hundred fifty-seven and 22/100 pesos at
their office in Manila, for value received, together with
interest at the rate of ten per cent per annum.
No. ________ Due __________

THE STANDARD PRODUCTS CO., INC.

By
(Sgd.) GEORGE H. SEAVER
By

President

The court below rendered judgment in favor of the plaintiff for the
sum demanded in the complaint, with interest on the sum of
P24,147.34 from November 1, 1923, at the rate of 10 per cent per
annum, and the costs. From this judgment the defendant appeals
to this court.
At the trial of the case the plaintiff failed to prove affirmatively the
corporate existence of the parties and the appellant insists that
under these circumstances the court erred in finding that the
parties were corporations with juridical personality and assigns
same as reversible error.
There is no merit whatever in the appellant's contention. The
general rule is that in the absence of fraud a person who has
contracted or otherwise dealt with an association in such a way
as to recognize and in effect admit its legal existence as a
corporate body is thereby estopped to deny its corporate existence
in any action leading out of or involving such contract or dealing,
unless its existence is attacked for cause which have arisen since
making the contract or other dealing relied on as an estoppel and
this applies to foreign as well as to domestic corporations. (14 C.
J., 227; Chinese Chamber of Commerce vs. Pua Te Ching, 14
Phil., 222.)
The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making
partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it
was unnecessary for the plaintiff to present other evidence of the
corporate existence of either of the parties. It may be noted that
there is no evidence showing circumstances taking the case out of
the rules stated.
The judgment appealed from is affirmed, with the costs against
the appellant. So ordered.

G.R. No. L-11442

MANUELA
T.

May 23, 1958

VDA.
DE
SALVATIERRA, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the
Court of First Instance of Leyte, Branch II, and SEGUNDINO
REFUERZO, respondents.
Jimenez,
Tantuico,
Jr.

and

Tolete

for

petitioner.

Francisco Astilla for respondent Segundino Refuerzo.

FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de
Salvatierra seeking to nullify the order of the Court of First
Instance of Leyte in Civil Case No. 1912, dated March 21, 1956,
relieving Segundino Refuerzo of liability for the contract entered
into between the former and the Philippine Fibers Producers Co.,
Inc., of which Refuerzo is the president. The facts of the case are
as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a
parcel of land located at Maghobas, Poblacion, Burauen, Teyte.
On March 7, 1954, said landholder entered into a contract of
lease with the Philippine Fibers Producers Co., Inc., allegedly a
corporation "duly organized and existing under the laws of the
Philippines, domiciled at Burauen, Leyte, Philippines, and with
business address therein, represented in this instance by Mr.
Segundino Q. Refuerzo, the President". It was provided in said
contract, among other things, that the lifetime of the lease would
be for a period of 10 years; that the land would be planted to
kenaf, ramie or other crops suitable to the soil; that the lessor
would be entitled to 30 per cent of the net income accruing from
the harvest of any, crop without being responsible for the cost of
production thereof; and that after every harvest, the lessee was
bound to declare at the earliest possible time the income derived
therefrom and to deliver the corresponding share due the lessor.

Apparently, the aforementioned obligations imposed on the No

appeal

therefrom

having

been

perfected

within

the

alleged corporation were not complied with because on April 5, reglementary period, the Court, upon motion of plaintiff, issued a
1955, Alanuela T. Vda, de Salvatierra filed with the Court of First writ of execution, in virtue of which the Provincial Sheriff of Leyte
Instance of Leyte a complaint against the Philippine Fibers caused the attachment of 3 parcels of land registered in the name
Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, of Segundino Refuerzo. No property of the Philippine Fibers
rescission and damages (Civil Case No. 1912). She averred that Producers Co., Inc., was found available for attachment. On
sometime in April, 1954, defendants planted kenaf on 3 hectares January 31, 1956, defendant Segundino Refuerzo filed a motion
of the leased property which crop was, at the time of the claiming that the decision rendered in said Civil Case No. 1912
commencement of the action, already harvested, processed and was null and void with respect to him, there being no allegation in
sold by defendants; that notwithstanding that fact, defendants the complaint pointing to his personal liability and thus prayed
refused to render an accounting of the income derived therefrom that an order be issued limiting such liability to defendant
and to deliver the lessor's share; that the estimated gross income corporation. Over plaintiff's opposition, the Court a quo granted
was P4,500, and the deductible expenses amounted to P1,000; the same and ordered the Provincial Sheriff of Leyte to release all
that as defendants' refusal to undertake such task was in properties belonging to the movant that might have already been
violation of the terms of the covenant entered into between the attached, after finding that the evidence on record made no
plaintiff and defendant corporation, a rescission was but proper.
mention or referred to any fact which might hold movant
As defendants apparently failed to file their answer to the personally liable therein. As plaintiff's petition for relief from said
complaint, of which they were allegedly notified, the Court order was denied, Manuela T. Vda. de Salvatierra instituted the
declared them in default and proceeded to receive plaintiff's instant action asserting that the trial Judge in issuing the order
evidence. On June 8, 1955, the lower Court rendered judgment complained of, acted with grave abuse of discretion and prayed
granting plaintiff's prayer, and required defendants to render a that same be declared a nullity.
complete accounting of the harvest of the land subject of the From the foregoing narration of facts, it is clear that the order

proceeding within 15 days from receipt of the decision and to sought to be nullified was issued by tile respondent Judge upon
deliver 30 per cent of the net income realized from the last motion of defendant Refuerzo, obviously pursuant to Rule 38 of
harvest to plaintiff, with legal interest from the date defendants the Rules of Court. Section 3 of said Rule, however, in providing
received payment for said crop. It was further provide that upon for the period within which such a motion may be filed, prescribes
defendants' failure to abide by the said requirement, the gross that:
income would be fixed at P4,200 or a net income of P3,200 after
deducting the expenses for production, 30 per cent of which or

SEC.

3.

WHEN

PETITION

FILED;

CONTENTS

AND

VERIFICATION. A petition provided for in either of the

P960 was held to be due the plaintiff pursuant to the

preceding sections of this rule must be verified, filed within

aforementioned contract of lease, which was declared rescinded.

sixty days after the petitioner learns of the judgment, order,

or other proceeding to be set aside, and not more than six

months after such judgment or order was entered, or such allegation which would hold him liable personally, for while it was
proceeding was taken; and must be must be accompanied stated therein that he was a signatory to the lease contract, he
with affidavit showing the fraud, accident, mistake, or did so in his capacity as president of the corporation. And this
excusable

negligence

relied

upon,

and

the

facts allegation was found by the Court a quo to be supported by the

constituting the petitioner is good and substantial cause of records. Plaintiff on the other hand tried to refute this averment
action or defense, as the case may be, which he may prove by contending that her failure to specify defendant's personal
liability was due to the fact that all the time she was under the
if his petition be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after impression that the Philippine Fibers Producers Co., Inc.,
petitioner learns of the judgment, and not more than 6 months represented by Refuerzo was a duly registered corporation as
after the judgment or order was rendered, both of which must be appearing in the contract, but a subsequent inquiry from the
satisfied. As the decision in the case at bar was under date of Securities and Exchange Commission yielded otherwise. While as
June 8, 1955, whereas the motion filed by respondent Refuerzo a general rule a person who has contracted or dealt with an
was dated January 31, 1956, or after the lapse of 7 months and association in such a way as to recognize its existence as a
23 days, the filing of the aforementioned motion was clearly made corporate body is estopped from denying the same in an action
beyond the prescriptive period provided for by the rules. The arising out of such transaction or dealing, (Asia Banking
remedy allowed by Rule 38 to a party adversely affected by a Corporation vs. Standard Products Co., 46 Phil., 114; Compania
decision or order is certainly an alert of grace or benevolence Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.;
intended to afford said litigant a penultimate opportunity to vs. Steamship Pompey, 49 Phil., 117), yet this doctrine may not be
protect his interest. Considering the nature of such relief and the held to be applicable where fraud takes a part in the said
purpose behind it, the periods fixed by said rule are non- transaction. In the instant case, on plaintiff's charge that she was
extendible and never interrupted; nor could it be subjected to any unaware of the fact that the Philippine Fibers Producers Co., Inc.,
condition or contingency because it is of itself devised to meet a had no juridical personality, defendant Refuerzo gave no
condition or contingency (Palomares vs. Jimenez,* G.R. No. L- confirmation or denial and the circumstances surrounding the
4513, January 31, 1952). On this score alone, therefore, the execution of the contract lead to the inescapable conclusion that
petition for a writ of certiorari filed herein may be granted. plaintiff Manuela T. Vda. de Salvatierra was really made to believe
However, taking note of the question presented by the motion for that such corporation was duly organized in accordance with law.
relief involved herein, We deem it wise to delve in and pass upon There can be no question that a corporation with registered has a
juridical personality separate and distinct from its component
the merit of the same.
Refuerzo, in praying for his exoneration from any liability members or stockholders and officers such that a corporation
resulting from the non-fulfillment of the obligation imposed on cannot be held liable for the personal indebtedness of a
defendant Philippine Fibers Producers Co., Inc., interposed the stockholder even if he should be its president (Walter A. Smith
defense that the complaint filed with the lower court contained no Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or

member cannot be held personally liable for any financial Provincial Sheriff of Leyte to release any and all properties of
obligation

be,

the

corporation

in

excess

of

his

unpaid movant therein which might have been attached in the execution

subscription. But this rule is understood to refer merely to of such judgment, is hereby set aside and nullified as if it had
registered corporations and cannot be made applicable to the never been issued. With costs against respondent Segundino
liability of members of an unincorporated association. The reason Refuerzo. It is so ordered.
August 4, 1910
behind this doctrine is obvious-since an organization which G.R. No. L-5827
before the law is non-existent has no personality and would be THE CHINESE CHAMBER OF COMMERCE, plaintiff-appellee,
incompetent to act and appropriate for itself the powers and vs.
attribute of a corporation as provided by law; it cannot create PUA TE CHING, ET AL., defendants-appellants.
and
De
Witt,
for
agents or confer authority on another to act in its behalf; thus, O'Brien

appellants.

those who act or purport to act as its representatives or agents do Chicote and Miranda, for appellee.
so without authority and at their own risk. And as it is an ARELLANO, C.J.:
elementary principle of law that a person who acts as an agent In the Court of First Instance of Manila, the plaintiff had

without authority or without a principal is himself regarded as prosecuted three suits against Pua Te Ching, registered under
the principal, possessed of all the rights and subject to all the Nos. 6347, 6348 and 6349, all for the recovery of a sum of money.
liabilities of a principal, a person acting or purporting to act on The court decided them by judging that Pua Te Ching should pay
behalf of a corporation which has no valid existence assumes the amounts claimed. Pua Te Ching, for the purpose of staying

such privileges and obligations and comes personally liable for the execution of the judgments rendered, during the pendency of
contracts entered into or for other acts performed as such, agent his appeal, presented as sureties in the three aforesaid cases, Pua

(Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Ti, of Calle Rosario No. 150, and Jose Temprado Yap Chatco, of
Commercial Laws of the Philippines, Fifth Ed., P. 689-690). Calle Sagasta, San Fernando, Pampanga, executed the proper
defendant Refuerzo, as president of the bonds: In case No. 6347, for P3,784; in No. 6348, for P4.00; and
unregistered corporation Philippine Fibers Producers Co., Inc., in No. 6349, for P1,000, "for which payments well and truly
was the moving spirit behind the consummation of the lease made," the bond reads, "we, the appellant and the sureties, jointly
Considering that

agreement by acting as its representative, his liability cannot be and severally bind ourselves," it being expressly stipulated "that
limited or restricted that imposed upon corporate shareholders. the appellant and the sureties are held and firmly bound to the
In acting on behalf of a corporation which he knew to be appellee, jointly and severally, in the sum expressed in each bond,
unregistered, he assumed the risk of reaping the consequential to secure the fulfillment and payment of the judgment so

damages or resultant rights, if any, arising out of such appealed, together with the costs, in case the same should be
affirmed, in whole or in part, or in case the judgment should
transaction.
Wherefore, the order of the lower Court of March 21, 1956, become effective on account of the appellant's having abandoned
amending its previous decision on this matter and ordering the

or withdrawn the appeal, or in case it should be dismissed or Article 1822, invoked by the appellant, provides that "if the surety
declared to be improperly allowed.
binds himself jointly with the principal debtor, the provisions of
The appeal having been heard by this court, which rendered a section fourth, chapter third, title first, of this book shall be
decision affirming the judgment of the lower court and, while the observed," that is, of book fourth of the Civil Code. Section fourth
latter was about to proceed with the execution of the said of the chapter, title, and book mentioned provides that "a creditor
judgment, the sureties Jose Tempardo Yap Chatco and Pua Ti set may sue any of the joint debtors or all of them simultaneously."

forth: That Pua Te Ching died intestate on September 2, 1909, (art. 1144), In conformity having bound themselves in
and the decision of this court was rendered after his death; that solidum (jointly and severally) with the principal debtor Pua Te
the estate of the late Pua Te Ching was in the course of Ching, the creditor, that is, the Chinese Chamber of Commerce,
administration; and that, therefore, the decision of the Supreme may sue any of them or all of them simultaneously: which is what
Court was null and of no value, it having been pronounced the Chinese Chamber of Commerce did in filing suit against the

against a person already dead, and that an execution thereof joints and several debtors.
could not be issued against the said Pua Te Ching.
But the basis of appellant's argument in alleging error because of
The lower court decided that, notwithstanding the death of the the application of this provision of the law, is the benefit granted

principal surety, the sureties who subscribed the bond were liable by articles 1148 and 1853.
for the amount of the judgment entered "that the judgment Article 1853, which is one of the provisions made in the matter of
entered in these cases against the defendant Pua Te Ching and in bonds and is a reproduction of article 1148 or joint and several
favor of the plaintiff shall be extensive against the sureties who obligations in general, reads as follows:
A surety may set up against the creditor all the exceptions
subscribed the bond, named Pua Ti and Jose Temprado Yap
Chatco, jointly and severally, and execution shall issue on the

which pertain to the principal debtor and which may be

said judgments.
These sureties filed notice of appeal and, having forwarded their

inherent to the debt; but not those which may be purely

personal to the debtor.

The
whole
question which this court has to decide is whether the
bill of exceptions, alleged error against the judgment appealed
from it that therein the execution of a judgment was ordered sureties Pua Ti and Yap Chatco have set up against the creditor
notwithstanding the death of the appellant which occurred before any exception which pertains to the principal debtor, Pua Te
the affirmation of the decision of the lower court. In support of Ching, and which may beinherent to the debt. If the exception
their allegation they invoke sections 119 and 448 of the Code of which pertains to the principal debtor, Pua Te Ching, is purely
Civil Procedure, the provisions of which, especially those of personal to him, it is evident that the sureties of Pua Te Ching
sections 448, may be invoked by the sureties in their favor by can not set it up against the creditor.
virtue of the provisions of articles 1148 and 1853, in relation to Exceptions of the principal debtor which the surety may utilize
article 1822, of the Civil Code.

and which may be inherent to the debt, are all those connected
with the obligation secured by the bond, all those which may

contribute

to

weaken

or

destroy

thevinculum

juris existing They are all defenses to oppose an execution against the estate of

between them creditor and the principal debtor, all means of Pua Te Ching, as the appellants say, and all of them are against
defense which may invalidate the original contract from which the the execution of the obligation, but not against the obligation
right or the action of the creditor arises against the surety, such itself. They are not even personal defenses of the principal debtor
as the exceptions of fraud or of violence, which annul consent, against the obligation; still less are they defenses inherent to the
that of sine atione agis founded on a payment already made, that debt itself, which are the only ones that, as pertaining to the
of res adjudicata that of prescription, that of nullity of the loan principal debtor, may be utilized by the sureties.
made to a minor child, and others of the same class. (12 It is useless to allege the impropriety of an execution of a

judgment against the estate of a person deceased when it is not a

Manresa, Civil Code, 363.)
The exceptions which, according to the appellants, pertains to the question of such an execution against the estate of a deceased
principal debtor Pua Te Ching inasmuch as he died, is that person.
provided by sections 119 and 448 of the Code of Civil Procedure. It is useless to allege how the payment of money should be sued
Section 119 relates to the continuance of the action by or against against the estate of a deceased person, when it is not a question
the executor, administrator or other legal representative of the of a suit of this kind, nor of any other, but of the execution of a

deceased, and, if the action is for the recovery of money, the judgment against certain sureties who bound themselves jointly
payment of a debt or of damages, to its discontinuance and and severally to pay the amount of the obligation concerned in

prosecution in the proceeding instituted for the settlement of the the case at bar "in case the judgment should be affirmed in whole
estate of the deceased; and section 448 provides that, or in part." The judgment sentencing the principal debtor Pua Te
notwithstanding the death of a party after the judgment, Ching to pay the amounts claimed, having been wholly affirmed,
"execution thereon may be issued, or one already issued may be the case now stands for execution to issue against the sureties for

enforced as follows:(1) In case of the death of the judgment securing payment of the said amounts by them in place of Pua Te
creditor, upon the application of his executor or administrator or Ching or with Pua Te Ching, as they had bound themselves to do.

successor in interest; (2), in case of the death of the judgment The creditor having chosen alone without Pua Te Ching, they
debtor, if the judgment be for the recovery of real or personal alone, without Pua Te Ching and without reference whatever to
property, or the enforcement of a lien thereon." All these the estate of Pua Te Ching, must be compelled to pay by means of
provisions concern the manner of execution relative to the judicial compulsion through execution.
obligation against the estate of Pua Te Ching, but in nowise effect The provisions contained in articles 1148 and 1853 of the Civil
the validity and force of the obligation contracted by Pua Te Ching Code do not apply to the sureties, the appellants; and the
toward the Chinese Chamber of Commerce in such a way as to judgment of the trial court, which finds the sureties liable for the

serve the joint and several sureties of Pua Te Ching as a defense payment of the debt, put into execution by virtue of final decision,
inherent to the latter's debt to be set up against the execution, is entirely in accord with the law.
now that they are the judgment debtors made liable for payment.

The record does not show that it is a question of the execution of of lack of jurisdiction over the subject matter of the action (Annex
a judgment entered after the death of the principal debtor. No B). The Court denied the motion and directed the defendant to
proof whatever exists of this fact, nor even of the fact of the death answer the complaint within ten days from receipt of a copy of the
of the principal debtor.
order (Annex C). As the defendant failed to answer the complaint
The lower court, on the truth of this hypothesis, decided that, as directed, upon motion of the plaintiffs (Annex D) the Court
notwithstanding the death of the principal obligor, the sureties declared it in default and set the case for hearing on 30

are compelled to pay the amount set forth in the judgment September 1949 (Annex E). The defendant filed a motion to set
rendered.
aside the order of default (Annex F) which was denied (Annex I). A
That this court should not render a decision affirmatory or that of motion for reconsideration of the previous order (Annex J) was
the lower court on account of the death of the defendant, is a likewise denied (Annex K). The defendant filed a petition for a writ
point that absolutely does not concern this incident of the of certiorari with preliminary injunction in this Court to annul
execution of judgment, nor was evidence adduced to show and set aside the order of default, which was dismissed for the

anything specific against the rendering of such an affirmatory reason that appeal was the proper remedy (Annex L). 1 The trial
decision.
court then proceed to hear the plaintiffs' evidence and after the
The judgment appealed from is affirmed, with the costs of this
hearing it rendered judgment dismissing the plaintiffs' complaint
instance against the appellants. So ordered.
upon the sole ground that the plaintiffs failed to prove that the
G.R. No. L-8431
October 30, 1958
defendant is a corporation duly organized and existing under the
MADRIGAL
SHIPPING
COMPANY,
INC., petitioner,
laws of the Philippines. A motion was filed praying that plaintiffs
vs.
be allowed to submit evidence to prove that the defendant is a
JESUS G. OGILVIE, SALVADOR ORTILE, MIGUEL M. FERMIN,
duly organized and existing corporation under the laws of the
ANTONIO
C.
MILITAR
and
THE
COURT
OF
Philippines (Annex O), which was granted (Annex P). After hearing
APPEALS, respondents.
the additional evidence presented by the plaintiffs showing that
Bausa
and
Ampil
for
petitioner.
the defendant is an organized and existing juridical entity under
Luis Manalang and Flor Garcia-Manalang and Galang, Angeles
the laws of the Philippines, the trial court dismissed the
and Galang for respondents.
complaint on the ground that the evidence was not new but
PADILLA, J.:
forgotten (Annex Q). The plaintiffs appealed to the Court of
Jesus G. Ogilvie, Salvador Ortile, Miguel M. Fermin and Antonio
Appeals. The judgment appealed from was reversed and the
C. Militar brought an action in the Court of First Instance of
defendant was ordered to pay Jesus G. Ogilvie the sum of
Manila to collect from the Madrigal Shipping Company, Inc., the
P3,226.50 and Salvador Ortile, Miguel M. Fermin and Antonio C.
aggregate sum of P12,104.50 for salaries and subsistence from 19
Militar the sum of P2,934 each. The defendant has brought the
March to 30 September 1948 (Civil No. 8446, Annex A). The
case to this Court by way of certiorari to have the judgment of the
defendant moved for the dismissal of the complaint on the ground
Court of Appeals reviewed.

The respondents herein, appellants in the Court of Appeals, did

event he is entitled to notice of all further proceedings."

not furnish the herein petitioner, defendant in the court of first

That a defendant in default can not be heard in the suit,

instance, with a copy of their brief in the Court of Appeals for the

not only in the trial court but also in the final hearing, that

reason that as the petitioner had been declared in default by the

is, on appeal which is part of the proceedings in a suit, is

trial court it had lost its standing in court and hence was not

the

entitled to service of appellants' brief on appeal. In a special

practitioners by this Court in the case of Velez vs. Ramos,

ruling

laid

down

for

guidance

of

courts

and

40 Phil., 787, . . . . (Lim To Co vs. Go Fay, supra, p. 169.)

and one dissenting upheld the respondents contention that the And the remedy available to a party who was declared in default
case was deemed submitted and ready for disposition or to regain his standing in court and be entitled once more to notice
judgment, and proceeded to determine the case on appeal without of the proceedings is to move for the setting aside of the order of
division of five justices of the Court of Appeals, a majority of four

the petitioner's brief, a view now assailed by the petitioner who default under section 2, Rule 38 and to appeal therefrom if
denied.3
claims that it had been deprived of its day in court.
In Lim To Co vs. Go Fay, 80 Phil. 166, interpreting section 9, Rule Counsel argue that an order of default being interlocutory, the
petitioner could not appeal therefrom. True, but from a denial of a
27, which provides:
No service of papers shall be necessary on a party in motion to set aside an order of default, as the petitioner's "urgent
default except when he files a motion to set aside the order motion to set aside order of default" (Annex F), which may be
of default, in which event he is entitled to notice of all deemed to fall under section 2, Rule 38, the petitioner could have
further proceedings, this Court held that "a defendant in appealed. Instead of taking an appeal from such denial, the
default is not entitled to notice of the proceedings until the petitioner chose to bring the matter to this Court by petition for a
final termination of the case, and therefore he has no right writ of certiorari with a prayer for a writ of preliminary injunction
to be heard or file brief or memoranda on appeal."2
which was correctly dismissed for the remedy was an appeal from
A defendant in default loses his standing in or is the order denying the motion to set aside the order of default
considered out of Court, and consequently can not appear entered against the petitioner because of mistake or excusable

in court; adduce evidence; and be heard, and for that neglect. Not having appealed from the order denying the motion to
reason he is not entitled to notice. If he is not entitled to set aside the order of default under section 2, Rule 38, the order
notice of the proceedings in the case and to be heard, he of default remained in force with all the consequences that the
can not appeal from the judgment rendered by the court on party against whom it had been entered must suffer. One of them
the merits, because he can not file a notice of appeal, and is the loss of the right to be served with the brief of the herein
file an appeal bond and the record on appeal, for approval respondents, appellants in the Court of Appeals.
by the court. The only exception provided by law is when Turning now to the merits of the case, the Court of Appeals found

the defendant in default files a motion to set aside the that the services of Jesus G. Ogilvie, Salvador Ortile, Antonio C.
order of default on the grounds stated in Rule 38 "in which Militar

and

Miguel

M.

Fermin

were

engaged

by

Manuel

Mascuana, master or captain employed by the petitioner Bridge nor disavow the authority of Manuel Mascuana, its
Madrigal Shipping Company, Inc., to man and fetch the vessel captain, to engage the services of the respondents. More, in the
"S.S. Bridge" from Sasebu, Japan, as evidenced by a contract answer of the petitioner (Annex H) attached to its "urgent motion
executed on 24 December 1947 in Manila (Exhibit A), the to set aside order of default" (Annex F), the averments under its
pertinent provision of which is as follows:
(a) The several persons whose

names

are

special defenses substantially admit the allegations of the

hereto respondents' complaint. The termination of the services of the

subscribed, and whose descriptions are contained herein, respondents as members of the crew was not due to their fault.
engaged as seamen, hereby agree to serve on board Upon the ship's arrival in Hongkong it was found that repairs had

the S.S. Bridge of which M. MASCUANA is master, in the to be made on her before she could proceed on her voyage to
several capacities expressed against their respective Manila. A motion to dismiss an action must include all the

names, on a voyage from THE CREW WILL ENPLANE grounds available at the time of its filing, and all grounds not so
FROM MANILA TO JAPAN. IN JAPAN THE CREW WILL included are deemed waived, except lack of jurisdiction over the
MAN THE SHIP TO MANILA. THIS CONTRACT EXPIRES subject matter.4 In the same motion to dismiss the complaint the

ON THE ARRIVAL OF THIS BOAT AT THE PORT OF petitioner, defendant in the court of first instance, alleged that
MANILA. EXTENSION OF THIS CONTRACT IS VALID ONLY "On the date of the execution of the service contract between the
WHEN SIGNED BY THE OFFICIAL SKIPPER.
plaintiff and the defendant (January 7, 1948), the subject vessel
On 7 January 1948, another contract of similar terms and was in Sasebu, Japan, . . .," thereby implying that the petitioner
conditions was executed in Manila before the Consul General of in truth and in fact contracted the service of the respondents,
the Republic of Panama (Exhibit A-1) for the reason that the S.S. plaintiffs in the court of first instance, to man its vessel.
Bridge was registered under the laws of that Republic. Pursuant Furthermore, Moises J. Lopez, manager of the defendant shipping

thereto the respondents were flown to Sasebu, Japan, and they company, testified that he recalled having contracted the services
manned the vessel out of the port of Sasebu. On 16 March 1948, of several persons to form a crew to man theS.S. Bridge belonging
when the vessel reached Hongkong, the respondents were to the petitioner. How could the latter now disclaim ownership of
dismissed and replaced by a crew of Chinese nationality. The the S.S. Bridge and the authority of Manuel Mascuana, its
respondents were flown back to Manila and paid their respective captain, to engage the services of the respondents?
salaries up to the date of their dismissal. The total sum of Granting that the petitioner may not be sued for lack of juridical
P12,104.50 which the respondents seek to collect represents personality, as held by the trial court, and pressed by its counsel
salaries and subsistence allowance from 17 March 1948 to 30 in this Court, it is now estopped from denying the existence of
September 1948 when the vessel arrived in the port of Manila.
such personality to evade responsibility on the contract it had
In its motion to dismiss the complaint the petitioner invoked and entered into, because it has taken advantage of the respondents'

relied solely upon lack of jurisdiction of the court over the subject services and has profited thereby. Moreover, the trial court
matter of the action and did not deny ownership of the S.S. committed an error when it refused to take into account the

evidence presented by the respondents to prove that the petitioner Not having been discharged for any of the causes enumerated in
was a corporation duly organized and existing under the laws of the foregoing article, the respondents are entitled to the amounts
the Philippines, the documents showing that fact having been they respectively seek to collect from the petitioner.
reconstituted only after the first hearing of the case, upon the The petition is denied, with costs against the petitioner.
sole ground that it was not new but forgotten evidence. Such G.R. No. L-58028 April 18, 1989
KAI
SHEK
SCHOOL, petitioner,
ground could be relied upon to deny a motion for new trial, but CHIANG

not after the motion had been granted, for official or public vs.
documents presented to show or prove the juridical personality or COURT OF APPEALS and FAUSTINA FRANCO OH, respondents.
entity of a party to an action not known or available at the first
hearing could not be ignored. The trial court could not close its

CRUZ, J.:
An unpleasant surprise awaited Fausta F. Oh when she reported

eyes to reality.
Again, granting that it was not the Madrigal Shipping Company, for work at the Chiang Kai Shek School in Sorsogon on the first
Inc., that owned the S.S. Bridge but the Madrigal & Company, a week of July, 1968. She was told she had no assignment for the
corporation with a juridical personality distinct from the former, next semester. Oh was shocked. She had been teaching in the
yet as the former was the subsidiary of the latter, and that the school since 1932 for a continuous period of almost 33 years. And

former was a business conduit of the latter, as found by the Court now, out of the blue, and for no apparent or given reason, this
of Appeals, the fiction of corporate existence may be disregarded abrupt dismissal.
Oh sued. She demanded separation pay, social security benefits,
and the real party ordered to pay the respondents their just due.
The services of the respondents were engaged by the petitioner to salary differentials, maternity benefits and moral and exemplary
man its vessel for a determinate time or voyage, with an express damages. 1 The original defendant was the Chiang Kai Shek

stipulation that "this contract expires on the arrival of this boat School but when it filed a motion to dismiss on the ground that it
at the port of Manila." Article 605 of the Code of Commerce could not be sued, the complaint was amended. 2 Certain
officials of the school were also impleaded to make them solidarily
provides:
If the contracts of the captain and members of the crew liable with the school.
with the ship agent should he for a definite period or The Court of First Instance of Sorsogon dismissed the
voyage, they may not be discharged until after the complaint. 3 On appeal, its decision was set aside by the
fulfillment of their contracts except by reason of respondent court, which held the school suable and liable while
insubordination in serious matters, robbery, theft, habitual absolving the other defendants. 4 The motion for reconsideration
drunkenness, or damage caused to the vessel or its cargo having been denied, 5 the school then came to this Court in this
through malice or manifest or proven negligence.
petition for review on certiorari.
The issues raised in the petition are:

1. Whether or not a school that has not been incorporated may be in existence even earlier than 1932. The petitioner cannot now
sued by reason alone of its long continued existence and invoke its own non-compliance with the law to immunize it from
recognition by the government,
the private respondent's complaint.
2. Whether or not a complaint filed against persons associated There should also be no question that having contracted with the
under a common name will justify a judgment against the private respondent every year for thirty two years and thus
association itself and not its individual members.
represented itself as possessed of juridical personality to do so,
3. Whether or not the collection of tuition fees and book rentals the petitioner is now estopped from denying such personality to
will make a school profit-making and not charitable.
defeat her claim against it. According to Article 1431 of the Civil
4. Whether or not the Termination Pay Law then in force was Code, "through estoppel an admission or representation is

available to the private respondent who was employed on a year- rendered conclusive upon the person making it and cannot be
to-year basis.
denied or disproved as against the person relying on it."
5. Whether or not the awards made by the respondent court were As the school itself may be sued in its own name, there is no need
warranted.
to apply Rule 3, Section 15, under which the persons joined in an
We hold against the petitioner on the first question. It is true that
association without any juridical personality may be sued with
Rule 3, Section 1, of the Rules of Court clearly provides that "only
such association. Besides, it has been shown that the individual
natural or juridical persons may be parties in a civil action." It is
members of the board of trustees are not liable, having been
also not denied that the school has not been incorporated.
appointed only after the private respondent's dismissal. 6
However, this omission should not prejudice the private
It is clear now that a charitable institution is covered by the labor
respondent in the assertion of her claims against the school.
laws 7 although the question was still unsettled when this case
As a school, the petitioner was governed by Act No. 2706 as
arose in 1968. At any rate, there was no law even
amended by C.A. No. 180, which provided as follows:
Unless exempted for special reasons by the then exempting such institutions from the operation of the labor
Secretary of Public Instruction, any private school or laws (although they were exempted by the Constitution from ad

college recognized by the government shall be valorem taxes). Hence, even assuming that the petitioner was a
incorporated under the provisions of Act No. 1459 charitable institution as it claims, the private respondent was

known as the Corporation Law, within 90 days after nonetheless still entitled to the protection of the Termination Pay
the date of recognition, and shall file with the Law, which was then in force.
While it may be that the petitioner was engaged in charitable
Secretary of Public Instruction a copy of its
works, it would not necessarily follow that those in its employ
incorporation papers and by-laws.
Having been recognized by the government, it was under were as generously motivated. Obviously, most of them would not
obligation to incorporate under the Corporation Law within 90 have the means for such charity. The private respondent herself
days from such recognition. It appears that it had not done so at was only a humble school teacher receiving a meager salary of
the time the complaint was filed notwithstanding that it had been Pl80. 00 per month.

At that, it has not been established that the petitioner is a

University for 28 years and who occupies a high

charitable institution, considering especially that it charges

administrative position in addition to teaching

tuition fees and collects book rentals from its students. 8 While

duties could not possibly be a temporary employee

or a casual.
The applicable law is the Termination Pay Law, which provided:
weaken its claim that it is a non-profit entity.
SECTION 1. In cases of employment, without a
The petitioner says the private respondent had not been illegally
definite period, in a commercial, industrial, or
dismissed because her teaching contract was on a yearly basis
this alone may not indicate that it is profit-making, it does

and the school was not required to rehire her in 1968. The
argument is that her services were terminable at the end of each
year at the discretion of the school. Significantly, no explanation
was given by the petitioner, and no advance notice either, of her
relief after teaching year in and year out for all of thirty-two years,

agricultural

establishment

or

enterprise,

the

employer or the employee may terminate at any time

the employment with just cause; or without just
cause in the case of an employee by serving written
notice on the employer at least one month in

the private respondent was simply told she could not teach any

advance, or in the case of an employer, by serving

more.
The Court holds, after considering the particular circumstance of

such notice to the employee at least one month in

advance or one-half month for every year of service

Oh's employment, that she had become a permanent employee of

of the employee, whichever, is longer, a fraction of at

the school and entitled to security of tenure at the time of her

least six months being considered as one whole year.

The employer, upon whom no such notice was

dismissal. Since no cause was shown and established at an

appropriate hearing, and the notice then required by law had not
been given, such dismissal was invalid.
The private respondent's position is no different from that of the
rank-and-file employees involved in Gregorio Araneta University
Foundation v. NLRC, 9 of whom the Court had the following to
say:

Undoubtedly, the private respondents' positions as

deans and department heads of the petitioner

served in case of termination of employment without

just

cause

may

hold

the

employee

liable

for

damages.
The employee, upon whom no such notice was
served in case of termination of employment without
just cause shall be entitled to compensation from
the date of termination of his employment in an I
amount

equivalent

to

his

salaries

or

wages

correspond to the required period of notice. ... .

Moreover, all the private respondents have been The respondent court erred, however, in awarding her one month
serving the university from 18 to 28 years. All of pay instead of only one-half month salary for every year of
them rose from the ranks starting as instructors service. The law is quite clear on this matter. Accordingly, the
university are necessary in its usual business.

until they became deans and department heads of separation pay should be computed at P90.00 times 32 months,
the university. A person who has served the for a total of P2,880.00.

Parenthetically, R.A. No. 4670, otherwise known as the Magna respondent court did not err in awarding her exemplary damages
Carta for Public School Teachers, confers security of tenure on because the petitioner acted in a wanton and oppressive manner
the teacher upon appointment as long as he possesses the when it dismissed her. 15
required qualification. 10 And under the present policy of the The Court takes this opportunity to pay a sincere tribute to the
Department of Education, Culture and Sports, a teacher becomes grade school teachers, who are always at the forefront in the
permanent and automatically acquires security of tenure upon battle against illiteracy and ignorance. If only because it is they

who open the minds of their pupils to an unexplored world awash

completion of three years in the service. 11
While admittedly not applicable to the case at bar, these I rules with the magic of letters and numbers, which is an extraordinary
nevertheless reflect the attitude of the government on the feat indeed, these humble mentors deserve all our respect and
protection of the worker's security of tenure, which is now appreciation.
WHEREFORE, the petition is DENIED. The appealed decision is
guaranteed by no less than the Constitution itself. 12
We find that the private respondent was arbitrarily treated by the AFFIRMED except for the award of separation pay, which is
petitioner, which has shown no cause for her removal nor had it reduced to P2,880.00. All the other awards are approved. Costs
given her the notice required by the Termination Pay Law. As the against the petitioner.
respondent court said, the contention that she could not report This decision is immediately executory.
SO ORDERED.
one week before the start of classes is a flimsy justification for
replacing her.13 She had been in its employ for all of thirty-two
years. Her record was apparently unblemished. There is no G.R. No. 109272 August 10, 1994
showing of any previous strained relations between her and the GEORG
GROTJAHN
GMBH
&
CO.,
petitioner,
petitioner. Oh had every reason to assume, as she had done in vs.
previous years, that she would continue teaching as usual.
HON. LUCIA VIOLAGO ISNANI, Presiding Judge, Regional
It is easy to imagine the astonishment and hurt she felt when she Trial Court, Makati, Br. 59; ROMANA R. LANCHINEBRE; and
was flatly and without warning told she was dismissed. There was TEOFILO A. LANCHINEBRE, respondents.
not even the amenity of a formal notice of her replacement, with A.M. Sison, Jr. & Associates for petitioner.
perhaps a graceful expression of thanks for her past services. She Pedro L. Laso for private respondents.
was simply informed she was no longer in the teaching staff. To

PUNO, J.:
put it bluntly, she was fired.
Petitioner impugns the dismissal of its Complaint for a sum of
For the wrongful act of the petitioner, the private respondent is
money by the respondent judge for lack of jurisdiction and lack of
entitled to moral damages. 14 As a proximate result of her illegal capacity to sue.
dismissal, she suffered mental anguish, serious anxiety, wounded The records show that petitioner is a multinational company
feelings and even besmirched reputation as an experienced organized and existing under the laws of the Federal Republic of
teacher for more than three decades. We also find that the Germany. On July 6, 1983, petitioner filed an application, dated

July 2, 1983, 1 with the Securities and Exchange Commission

(SEC) for the establishment of a regional or area headquarters in
the Philippines, pursuant to Presidential Decree No. 218. The
application was approved by the Board of Investments (BOI) on
September 6, 1983. Consequently, on September 20, 1983, the
SEC issued a Certificate of Registration and License to petitioner.
2
Private respondent Romana R. Lanchinebre was a sales
representative of petitioner from 1983 to mid-1992. On March 12,
1992, she secured a loan of twenty-five thousand pesos
(P25,000.00) from petitioner. On March 26 and June 10, 1992,
she made additional cash advances in the sum of ten thousand
pesos (P10,000.00). Of the total amount, twelve thousand one
hundred seventy pesos and thirty-seven centavos (P12,170.37)
remained unpaid. Despite demand, private respondent Romana
failed to settle her obligation with petitioner.
On July 22, 1992, private respondent Romana Lanchinebre filed
with the Arbitration Branch of the National Labor Relations
Commission (NLRC) in Manila, a Complaint for illegal suspension,
dismissal and non-payment of commissions against petitioner. On
August 18, 1992, petitioner in turn filed against private
respondent a Complaint for damages amounting to one hundred
twenty thousand pesos (P120,000.00) also with the NLRC
Arbitration Branch (Manila). 3 The two cases were consolidated.
On September 2, 1992, petitioner filed another Complaint for
collection of sum of money against private respondents spouses
Romana and Teofilo Lanchinebre which was docketed as Civil
Case No. 92-2486 and raffled to the sala of respondent judge.
Instead of filing their Answer, private respondents moved to
dismiss the Complaint. This was opposed by petitioner.
On December 21, 1992, respondent judge issued the first
impugned Order, granting the motion to dismiss. She held, viz:
Jurisdiction over the subject matter or nature of the action is
conferred by law and not subject to the whims and caprices of the
parties.

Under Article 217 of the Labor Code of the Philippines, the Labor
Arbiters shall have original and exclusive jurisdiction to hear and
decide, within thirty (30) calendar days after the submission of
the case by the parties for decision, the following cases involving
all workers, whether agricultural or non-agricultural:
(4) claims for actual, moral, exemplary and other forms of
damages arising from an employer-employee relations.
xxx xxx xxx
(6) Except claims for employees compensation, social security,
medicare and maternity benefits, all other claims arising from
employer-employee relations, including those of persons in
domestic or household service, involving an amount exceeding
five thousand pesos (P5,000.00) regardless of whether or not
accompanied with a claim for reinstatement.
In its complaint, the plaintiff (petitioner herein) seeks to recover
alleged cash advances made by defendant (private respondent
herein) Romana Lanchinebre while the latter was in the employ of
the former. Obviously the said cash advances were made
pursuant to the employer-employee relationship between the
(petitioner) and the said (private respondent) and as such, within
the original and exclusive jurisdiction of the National Labor
Relations Commission.
Again, it is not disputed that the Certificate of Registration and
License issued to the (petitioner) by the Securities and Exchange
Commission was merely "for the establishment of a regional or
area headquarters in the Philippines, pursuant to Presidential
Decree No. 218 and its implementing rules and regulations." It
does not include a license to do business in the Philippines. There
is no allegation in the complaint moreover that (petitioner) is
suing under an isolated transaction. It must be considered that
under Section 4, Rule 8 of the Revised Rules of Court, facts
showing the capacity of a party to sue or be sued or the authority
of a party to sue or be sued in a representative capacity or the
legal existence of an organized association of persons that is made
a party must be averred. There is no averment in the complaint
regarding (petitioner's) capacity to sue or be sued.

Finally, (petitioner's) claim being clearly incidental to the

occupation or exercise of (respondent) Romana Lanchinebre's
profession, (respondent) husband should not be joined as party
defendant. 4

On March 8, 1993, the respondent judge issued a minute Order

denying petitioner's Motion for Reconsideration.
Petitioner now raises the following assignments of errors:
I
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE
REGULAR COURTS HAVE NO JURISDICTION OVER DISPUTES
BETWEEN AN EMPLOYER AND AN EMPLOYEE INVOLVING THE
APPLICATION PURELY OF THE GENERAL CIVIL LAW.
II
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT
PETITIONER HAS NO CAPACITY TO SUE AND BE SUED IN THE
PHILIPPINES DESPITE THE FACT THAT PETITIONER IS DULY
LICENSED BY THE SECURITIES AND EXCHANGE COMMISSION
TO SET UP AND OPERATE A REGIONAL OR AREA
HEADQUARTERS IN THE COUNTRY AND THAT IT HAS
CONTINUOUSLY OPERATED AS SUCH FOR THE LAST NINE (9)
YEARS.
III
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE
ERRONEOUS INCLUSION OF THE HUSBAND IN A COMPLAINT
IS A FATAL DEFECT THAT SHALL RESULT IN THE OUTRIGHT
DISMISSAL OF THE COMPLAINT.
IV
THE TRIAL COURT GRAVELY ERRED IN HOLDING THAT THE
HUSBAND IS NOT REQUIRED BY THE RULES TO BE JOINED AS
A DEFENDANT IN A COMPLAINT AGAINST THE WIFE.
There is merit to the petition.
Firstly, the trial court should not have held itself without
jurisdiction over Civil Case No. 92-2486. It is true that the loan
and cash advances sought to be recovered by petitioner were

contracted by private respondent Romana Lanchinebre while she

was still in the employ of petitioner. Nonetheless, it does not
follow that Article 217 of the Labor Code covers their relationship.
Not every dispute between an employer and employee involves
matters that only labor arbiters and the NLRC can resolve in the
exercise of their adjudicatory or quasi-judicial powers. The
jurisdiction of labor arbiters and the NLRC under Article 217 of
the Labor Code is limited to disputes arising from an employeremployee relationship which can only be resolved by reference to
the Labor Code, other labor statutes, or their collective bargaining
agreement. In this regard, we held in the earlier case of Molave
Motor Sales, Inc. vs. Laron, 129 SCRA 485 (1984),viz:
Before the enactment of BP Blg. 227 on June 1, 1982, Labor
Arbiters, under paragraph 5 of Article 217 of the Labor Code had
jurisdiction over "all other cases arising from employer-employee
relation, unless expressly excluded by this Code." Even then, the
principal followed by this Court was that, although a controversy
is between an employer and an employee, the Labor Arbiters have
no jurisdiction if the Labor Code is not involved. In Medina vs.
Castro-Bartolome, 116 SCRA 597, 604 in negating jurisdiction of
the Labor Arbiter, although the parties were an employer and two
employees, Mr. Justice Abad Santos stated:
The pivotal question to Our mind is whether or not the Labor
Code has any relevance to the reliefs sought by plaintiffs. For if
the Labor Code has no relevance, any discussion concerning the
statutes amending it and whether or not they have retroactive
effect is unnecessary.
xxx xxx xxx
And in Singapore Airlines Limited vs. Pao, 122 SCRA 671, 677,
the following was said:
Stated differently, petitioner seeks protection under the civil laws
and claims no benefits under the Labor Code. The primary relief
sought is for liquidated damages for breach of a contractual
obligation. The other items demanded are not labor benefits
demanded by workers generally taken cognizance of in labor
disputes, such as payment of wages, overtime compensation or

separation pay. The items claimed are the natural consequences

flowing from breach of an obligation, intrinsically a civil dispute.
xxx xxx xxx
In San Miguel Corporation vs. NLRC, 161 SCRA 719 (1988), we
crystallized the doctrines set forth in the Medina, Singapore
Airlines, and Molave Motors cases, thus:
. . . The important principle that runs through these three (3)
cases is that where the claim to the principal relief sought is to be
resolved not by reference to the Labor Code or other labor
relations statute or a collective bargaining agreement but by the
general civil law, the jurisdiction over the dispute belongs to the
regular courts of justice and not to the Labor Arbiter and the
NLRC. In such situations, resolutions of the dispute requires
expertise, not in labor management relations nor in wage
structures and other terms and conditions of employment, but
rather in the application of the general civil law. Clearly, such
claims fall outside the area of competence or expertise ordinarily
ascribed to Labor Arbiters and the NLRC and the rationale for
granting jurisdiction over such claims to these agencies
disappears.
Civil Case No. 92-2486 is a simple collection of a sum of money
brought by petitioner, as creditor, against private respondent
Romana Lanchinebre, as debtor. The fact that they were employer
and employee at the time of the transaction does not negate the
civil jurisdiction of the trial court. The case does not involve
adjudication of a labor dispute but recovery of a sum of money
based on our civil laws on obligation and contract.
Secondly, the trial court erred in holding that petitioner does not
have capacity to sue in the Philippines. It is clear that petitioner
is a foreign corporation doing business in the Philippines.
Petitioner is covered by the Omnibus Investment Code of 1987.
Said law defines "doing business," as follows:
. . . shall include soliciting orders, purchases, service contracts,
opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors who are domiciled in
the Philippines or who in any calendar year stay in the

Philippines for a period or periods totalling one hundred eighty

(180) days or more; participating in the management, supervision
or control of any domestic business firm, entity or corporation in
the Philippines, and any other act or acts that imply a continuity
of commercial dealings or arrangements and contemplate to that
extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of
the business organization. 5

There is no general rule or governing principle as to what

constitutes "doing" or "engaging in" or "transacting" business in
the Philippines. Each case must be judged in the light of its
peculiar circumstances. 6 In the case at bench, petitioner does
not engage in commercial dealings or activities in the country
because it is precluded from doing so by P.D. No. 218, under
which it was established. 7 Nonetheless, it has been continuously,
since 1983, acting as a supervision, communications and
coordination center for its home office's affiliates in Singapore,
and in the process has named its local agent and has employed
Philippine nationals like private respondent Romana Lanchinebre.
From this uninterrupted performance by petitioner of acts
pursuant to its primary purposes and functions as a
regional/area headquarters for its home office, it is clear that
petitioner is doing business in the country. Moreover, private
respondents are estopped from assailing the personality of
petitioner. So we held in Merrill Lynch Futures, Inc. vs. Court of
Appeals, 211 SCRA 824, 837 (1992):
The rule is that a party is estopped to challenge the personality of
a corporation after having acknowledged the same by entering
into a contract with it. And the "doctrine of estoppel to deny
corporate existence applies to foreign as well as to domestic
corporations;" "one who has dealth with a corporation of foreign
origin as a corporate entity is estopped to deny its corporate
existence and capacity." The principle "will be applied to prevent a

person contracting with a foreign corporation from later taking

advantage of its noncompliance with the statutes chiefly in cases
where such person has received the benefits of the contract, . . .
(Citations omitted.)
Finally, the trial court erred when it dismissed Civil Case No. 922486 on what it found to be the misjoinder of private respondent
Teofilo Lanchinebre as party defendant. It is a basic rule that
"(m)isjoinder or parties is not ground for dismissal of an action." 8
Moreover, the Order of the trial court is based on Section 4(h),
Rule 3 of the Revised Rules of Court, which provides:
A married woman may not . . . be sued alone without joining her
husband, except . . . if the litigation is incidental to the
profession, occupation or business in which she is engaged,

Whether or not the subject loan was incurred by private

respondent as an incident to her profession, occupation or
business is a question of fact. In the absence of relevant evidence,
the issue cannot be resolved in a motion to dismiss.
IN VIEW WHEREOF, the instant Petition is GRANTED. The
Orders, dated December 21, 1992 and March 8, 1993, in Civil
Case No. 92-2486 are REVERSED AND SET ASIDE. The RTC of
Makati, Br. 59, is hereby ordered to hear the reinstated case on
its merits. No costs.
SO ORDERED.