BUENAFLOR C. UMALI, et. al vs. COURT OF APPEALS, BORMAHECO, INC.

and
PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC
The Castillos are the owners of a parcel of land which was given as security for a loan from
the DBP. However the same were foreclosed due to failure of payment. Santiago Rivera,
nephew of Mauricia Castillo, proposed to them the conversion into subdivision of the 4
parcels of land adjacent to the mortgaged property to raise the necessary fund. It was
accepted by the Castillos and a MOA was executed by and between Slobec Realty and
Development, Inc., represented by its President Santiago Rivera and the Castillo family.
Rivera promised to pay the Castills P70,000.00 after the execution of the agreement and an
additional P400,000 after it has been converted. Rivera purchased from Mr. Modesto
Cervantes, President of Bormaheco 2 tractors.
Bormaheco, Inc. and Slobec represented by Rivera, executed a Sales Agreement over 1 unit
of Caterpillar Tractor. Slobec, through Rivera, executed in favor of Bormaheco a Chattel
Mortgage over the said equipment as security for the payment of a remaining balance of
P180k. As further security of the balance, Slobec obtained from Insurance Corporation of the
Phil. a Surety Bond. The surety bond was secured by an Agreement of Counter-Guaranty
with Real Estate Mortgage executed by Rivera as president of Slobec and Mauricia Castillo
and her children, as mortgagors and ICP as mortgagee. In giving the bond, ICP required that
the Castillos mortgage to them the properties in question.
Meanwhile, for violation of the terms and conditions of the Counter-Guaranty Agreement, the
properties of the Castillos were foreclosed by ICP As the highest bidder. ICP sold to PM
Parts the 4 parcels of land. .
On 1976, Buenaflor M. Castillo Umali as the appointed administratrix of the properties in
question filed an action for annulment of title. Plaintiffs impleaded Santiago M. Rivera as a
party plaintiff. They contended that all the transactions are void for being entered into in
fraud and without the consent and approval of the Court of First Instance of Quezon, before
whom the administration proceedings has been pending.
ISSUE: Whether or not the veil of corporate fiction should be pierced.
RULING: NO. (If na discuss na to sa unang cases, so you can skip this part na.) Under the
doctrine of piercing the veil of corporate entity, when valid grounds exist, the legal fiction that
a corporation is an entity with a juridical personality separate and distinct from its members
or stockholders may be disregarded. In such cases, the corporation will be considered as a
mere association of persons. The members or stockholders of the corporation will be
considered as the corporation, that is, liability will attach directly to the officers and
stockholders. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is made as a shield to
confuse the legitimate issues or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.
In this case piercing the veil of corporate entity is not the proper remedy in order that the
foreclosure proceeding may be declared a nullity under the circumstances obtaining in the
legal case at bar.

First, the legal corporate entity is disregarded only if it is sought to hold the officers and
stockholders directly liable for a corporate debt or obligation. Petitioners do not seek to
impose a claim against the individual members of the corporations involved; on the contrary,
it is these corporations which desire to enforce an alleged right against petitioners. Assuming
that petitioners were indeed defrauded by private respondents in the foreclosure of the
mortgaged properties, this fact alone is not, under the circumstances, sufficient to justify the
piercing of the corporate fiction, since petitioners do not intend to hold the officers and/or
members of respondent corporations personally liable therefor. Petitioners are merely
seeking the declaration of the nullity of the foreclosure sale, which relief may be obtained
without having to disregard the aforesaid corporate fiction attaching to respondent
corporations. Secondly, petitioners failed to establish by clear and convincing evidence that
private respondents were purposely formed and operated, and thereafter transacted with
petitioners, with the sole intention of defrauding the latter.
The mere fact 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.